When Genius Failed

As I was going through some things my father filed away, I came across some pages taken from the New York Times Book Review from September 24, 2000.  My guess is that he was attracted to Floyd Norris's review of"When Genius Failed" by Roger Lowenstein.  Although Floyd Norris, the NY Times' chief financial correspondent, was writing about "The Rise and Fall of Long-Term Capital Management" (the subtitle), his comments jump out as prescient:

It is far too early to know what the long-term lessons of the Long-Term saga will be. But it is clear that Wall Street has not learned much. Banks and hedge funds still use complicated derivatives to gain tremendous leverage, just as Long-Term did in placing its ill-fated bets in the stock market. ...

''Greenspan's more serious and longer-running error has been to consistently shrug off the need for regulation and better disclosure with regard to derivative products. Deluded as to the banks' ability to police themselves before the crisis, Greenspan called for a less burdensome regulatory regime barely six months after it.'' He complains that Greenspan has supported the banks in efforts to avoid making meaningful disclosures about their investments in derivatives.

It takes time, but seven years later we had Lehman Brothers, AIG, and the whole sub-prime mess making the scary Long-Term Capital Management fiasco pale by comparison.  As Norris said, there are limits to what academics can do for investors.

I was reminded of an academic discussing his analysis of eastern European's rocky transition from Communism to a market-driven economy.  His results indicated that a quick, painful dislocation produced the best results.  When asked if that is what he would recommend to national leaders, the professor, said that was what the data indicated, but, he was quick to add, he was not an official who would face the wrath of the populace whose life's savings and retirement benefits evaporated.