THE BEST WAY TO UNDERSTAND THE GLOBAL FINANCIAL SYSTEM 167
stocks on my own, but compared to these geniuses, what do I
know?” So I put all of my money with them.
At the time I was making a million dollars a year. I was
one of the highest paid lawyers on Wall Street. Well, you prob-
ably know how the story ended. In 1998 that fund went down
ninety-two percent and we all got back eight cents on the dol-
lar. I was wiped out financially for the second time in my life,
first time when I was 12, second time when I was 47 years old.
I had to pick myself up again and rebuild things. Once
again, I didn’t blame anybody. I made the decision so I wasn’t
going to point fingers. But I was dissatisfied intellectually.
I felt I did my job, but the PhDs didn’t do their jobs. They
were the risk managers. They were the modelers. They were the
inventors of modern finance. Why didn’t their models work?
That’s when I decided to set out on a kind of intellectual
odyssey to understand what went wrong.■ When Genius Failed
To be clear, LTCM was not just another hedge fund failure. We had
$1.3 trillion of swaps when we were bailed out at the last minute.
As I mentioned, we were given eight cents on the dollar for us.
Wall Street put in $4 billion of cash to take over our bal-
ance sheet. I like to tell people, they didn’t bail us out. They
bailed themselves out because the next step would’ve been
when LTCM went to zero; all those trades would’ve gone back
to the counterparties and would’ve been no good from their
point of view. Then they would’ve failed too.
It’s interesting; we all knew that Lehman Brothers was the
next firm to fail in 1998. Then, it ultimately did fail in 2008.
It was literally hours away from failing in 1998, though, along
with Morgan Stanley and all the other banks.
It was sort of like a plane coming in for a nosedive and
about to hit the ground, then somebody grabbed the joystick