Presents the complete story of the collapse of the Long-Term Capital Management (LTCM) hedge fund in September, 1998.

In the story of Long-Term Capital Management the facts speak for themselves.

* December 1992, former Salomon Brothers' Vice-Chairman John Meriwether teams up with two Nobel laureates - Myron Scholes and Robert Merton - together with his team of huge-earning arbitrage traders to found LTCM

* in both 1995 and 1996 LTCM returns net profits of over 40%

* in November 1997 LTCM hands back US$2.7 billion "excess capital" to investors

* in early 1998 LTCM increased its portfolio of assets to US$130 billion and commanded a derivatives portfolio with a notional value of US$1.25 trillion

* in August/September 1998 the total value of assets on the world's markets declines by US$3 trillion

* by September 1998 LTCM loses 900f its value and has to be bailed out to the tune of US$3.6 billion

* from September 1998 to the present day, the ripples of this collapse continue to be felt across the globe.

But try to look behind these bald facts, and the picture becomes shrouded in mystery. The diverse nature of LTCM's trading, which only allowed insiders to know the full picture, has confused many onlookers seeking to piece together the puzzle. It has been described as the equivalent to three blind men standing by an elephant: the first grabs the tail and thinks it's a snake, the second leans against it and thinks it's a wall and the third reaches out to the trunk and believes it to be a branch. In Inventing Money Nicholas Dunbar strips away the shroud of mystery and complexity to tell the complete story of this most public of financial disasters in a captivating and accessible style. Inventing Money is in equal measure the story of the strategy and people behind the collapse of one of the world's largest hedge funds, an explanation of how the modern world of finance functions and a walk through the historical development of this multi-billion dollar industry.



The Washington Post described the collapse of the massive hedge fund Long-Term Capital Management as "one of the biggest financial missteps ever to hit Wall Street." The Wall Street Journal called the fund "one of [Wall Streets] most aggressive offspring" and the Financial Times described it as "the fund that thought it was too smart to fail". Business Week put the collapse down to the fact that "Long-Term Capitals rocket science exploded on the launchpad". LTCM was built on genius. Its founding partners included John Meriwether, the once legendary king of bond trading on Wall Street and Robert Merton and Myron Scholes, Nobel laureates in economics who between them (together with the late Fischer Black) all but invented modern finance through their theory on pricing options. Between 1994 and April 1998 LTCM seemed able to turn this genius into staggering profits. At its peak it commanded funds of US$130 billion and a derivatives portfolio with a notional value equivalent to the entire annual budget of the US Government, making fortunes for those who invested in it. Until suddenly it all went very wrong. Incredibly, it was the assumptions buried deep in the small print of Scholes and Mertons theory on option pricing that had begun to break down, and during that fateful summer of 1998 this breakdown was further aggravated by the regulatory-approved risk management systems designed to avert such a disaster. Based on extensive research and interviews, Inventing Money takes the reader on a fascinating journey. Beginning in Ancient Babylon, Nicholas Dunbar steers a path encompassing the American Civil War, an obscure French mathematician, the chance meeting of Merton and Scholes in the late 1960s, Meriwethers brilliant bond coup in the 1980s, up to and beyond the dark days of collapse and rescue in September 1998. As the story moves towards its incredible climax, the layers of LTCMs trading activities are stripped bare to reveal brilliance and controversy. Merton, Scholes and Meriwether are at the con of this captivating story but as it unfolds, the reader is introduced to legendary characters in the world of finance, moments of groundbreaking scientific discovery and a clear explanation of the seemingly complex seeds of ultimate collapse - options, futures and derivatives. Finance



Table of contents

The Theory of Speculation.

The Science of Fear and Greed.

Trading in Time.

The Garden of Forking Paths.

The Warning.

The Dream Team.

Out of Control.

The Song of a Martingale.

Aftermath.

Sources and Further Reading.

Index.



About the Author

NICHOLAS DUNBAR studied physics in the UK at Manchester and Cambridge and finally in the US at Harvard University, where he gained a Master's degree in earth and planetary sciences. During this period his interests ranged from quantum mechanics and black holes to evolution and the history of global climate change. His teachers included Stephen Hawking at Cambridge and Stephen Jay Gould at Harvard. In 1990, Dunbar decided to leave academia. He spent the next few years working in feature films and television, in a wide range of capacities. In 1996, after launching the television production company Flicker Films, a chance encounter with some old Harvard friends set him on a new path of finance and science writing, focusing on the derivatives industry. In 1998, he joined Risk magazine as technical editor. He is 33 and lives in London.