Money for Nothing

Stop me if you have heard this before:  A giant financial crisis caused by speculative bets by financial wizards going bad all at once threatens to bring down the entire world economy until a combination of desperate measures and luck saves the world.  The year is:  1998.

1998: the financial crisis nobody noticed.  There is an excellent book about it too.  Indeed, it is one of the best books in the "Kiss and tell stories about Financial Firms gone bad" genre.  Roger Lowenstein's When Genius Failed is, as the subtitle says, the story of "The Rise and Fall of Long-Term Capital Management."  (Oddly, the subtitle is printed above the title on the cover--does that make it a supertitle?.)

The book is excellent at telling a gripping story (well, at least if you are the sort who finds the idea of people making and losing staggerings amounts of wealth to be gripping).  Lowenstein is great at the character sketch part of books like this--the people in the book, who could easily have been drawn as "Generic Wall Street Type" all end up seeming like different people.  And as for the hubris of these guys?  Truly Shakespearean hubris.  Oedipus-style hubris. 

The book is a bit weak on the details of the financial assets these guys were constructing--going light on the technical details helps make the book vastly more readable, but I assume it would be frustrating if you really wanted to understand what exactly these guys were doing.  Then again, figuring out things like that is why Google was invented, I suppose.

My favorite story line in the book was about the two Nobel Laureates who were part of LTCM.  (The fact that there were two, not one, but two Nobel winners on the LTCM board was one of the things about which LTCM liked to brag.)  Merton and Scholes were funny--classic academics who were suddenly wealthy, very wealthy.  And not only that, they were wealthy because they were so smart they figured out how to get really wealthy and then there were the Wall Street guys who did the sort of thing they said someone should do and it worked.  It really, really worked!  Well, until it didn't.

The moral of the story:  People always want a Get Rich Quick scheme.  And the funny thing is that people believe there is such a thing.  Sometimes people do get rich quickly.  Sometimes people win at roulette too. But, for some reason if someone tells people they have a scientific means of predicting the number which will turn up on a roulette wheel, everyone is skeptical, but if someone says the same thing about picking what will happen to financial assets, people believe them.  Why?  Why do people believe that those who make a fortune on Wall Street did so by superior knowledge rather than a combination of a) working really, really, long hours and b) being lucky.  And it is both parts of those that are interesting--those rich guys on Wall Street did not get that way by working 40 hours a week.  They work insane hours; they get called back from vacations and have to go to work right away.  They get calls in the middle of the night and have to go to work.  And it is stressful work--really stressful.  Most of them fail.  Some of them get fabulously wealthy.  But, it can all turn around in a a few weeks--and they all know it.  There is something impressive about the Wall Street types, but it is not that they have some secret insight and knowledge or some magic ability to make money grow on trees. 

So, the moral?  If you work really hard and you get really lucky, you can become worth billions.  But, you will probably fail.

I assigned this book in my Money and Banking class this semester--I suspect many of the students will learn a different lesson from it.  What will they learn?  "I can make a fortune by being really smart and not repeating the stupid mistakes those guys at LTCM made."

But. if you really want a Get Rich Quick Scheme:  Here is the best one about which I know. (Ah, the early years of MTV...)