Silent Partner

The Story of Long-Term Capital Management and the Legends Behind It

By Nicholas Dunbar
John Wiley & Sons 245pp $29.95

The downfall of Long-Term Capital Management was one of the most dramatic financial events of the late 1990s. It could have dragged down the world's money centers, had not a consortium of investment banks rescued LTCM in a Federal Reserve-brokered bailout. But the near-demise of LTCM has resisted exploration in book form for a simple reason: the stoic silence of its principals, particularly the shadowy former Salomon Brothers bond-trading guru John Meriwether.

That, alas, is the problem facing Nicholas Dunbar in Inventing Money, his brave effort to explore the LTCM fiasco, its origins, and its ramifications. Dunbar is a former academician and journalist, making him an ideal writer to explore the theoretical origins of LTCM. After all, as Dunbar correctly notes, LTCM was very much a product of the academic hothouses of the 1970s, particularly Massachusetts Institute of Technology. The author excels with his affectionate portrait of financial-theory giants such as the late Fischer Black. This book is a good source of information on the theoretical underpinnings of modern arbitrage.

Indeed, there is too much theory, much of it dense and not always well explained. More than half the book (not counting the bibliography and index) is spent in the pre-LTCM days--beginning, literally, with Hammurabi. What remains is not especially new or revealing.

Any readers who make it through the book to the early 1990s, when LTCM was created, are in for a disappointment. We never get a feeling for what Meriwether and the other LTCM honchos were actually like. And that's a shame, given the overly reverential, carefully orchestrated press coverage the principals received during their heyday.

There are intriguing little snippets, such as Larry Hilibrand, LTCM's cofounder, being ''said to dabble in far-right libertarian politics.'' That certainly is a departure from the ''oh boy, what geniuses these guys are'' puffery that has appeared on these rocket scientists. But that sentence is all Dunbar has to offer on the subject.

Even apart from its controversial bailout, the LTCM crisis had some provocative aspects--personal investments in the fund by brokerage execs, and a peculiarly timed asset transfer by Meriwether at the height of the crisis. Dunbar sheds no new light on any of this. Nor does he relate the LTCM events into the general malaise suffered by other hedge funds--or show very much insight into that subject. For example, he makes it seem as if Meriwether had some kind of brainstorm when he ''decided'' to farm out routine clerical tasks to Bear Stearns & Co. ''Called 'prime brokerage,' the service would play a key role in opening up the OTC derivatives market to hedge funds,'' Dunbar says breathlessly. In fact, all hedge funds use ''prime brokerages,'' and did so long before LTCM.

The LTCM crisis and its origins and aftermath would make for a fine book. But so long as John Meriwether holds his tongue, there's no way that story can be told.


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Silent Partner

PHOTO: Cover, ``Inventing Money''

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