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When Genius Failed: Lowenstein Talks LTCM

Brett D. Fromson: Lower tolerance?

Roger Lowenstein: Yes.

Brett D. Fromson: In retrospect, looking at the returns for the risks, I know that they were fantastically successful when they were successful, but overall, it doesn't look like the returns were that good.

Roger Lowenstein: You mean the cash returns or the overall returns?

Brett D. Fromson: I mean the overall returns. I want to know what you think, because on the one hand they certainly made a ton of money using enormous leverage, and then they lost it all.

Roger Lowenstein: If you look at the cycle, if you put a dollar on LTCM, it rose, before fees, to about $4.11 -- it was in the book but I think that was the exact figure, at the peak -- then it fell to about 32 or 33 cents. So, $1 from start to finish turned into 33 cents at a time when the stock market was doubling.

Brett D. Fromson: Is that roughly what the stock market did over this period of time?

Roger Lowenstein: Yes.

Brett D. Fromson: It doubled?

Roger Lowenstein: Yes.

Brett D. Fromson: And this is the period of time from 1994 through when?

Roger Lowenstein: 1994 to 1998. The end of 1998.

Brett D. Fromson: Great time to be in stocks. Pretty good time.

Roger Lowenstein: Yes, it was a great time. It was a good time to be in bonds, too. It was a great time to be in anything but LTCM. And if you'd done it on a fee basis, you went from $1 to close to $3 then down to 23 cents. You never come back from that because the next year they made 10%, and that was the 32 cents back to 36 cents and 23 cents back to 25 cents. You never come back from that loss. Many outside investors were cashed out against their will, before the fall. But many of the outside investors made money.

Brett D. Fromson: Ironically.

Roger Lowenstein: Very ironic. "They're not super-rich any more. Now they're just plain, ordinary rich."

Brett D. Fromson: They must have been complaining that they were booted out.

Roger Lowenstein: They were screaming. They were jumping up and down and screaming. Then there were a few, you know, Jimmy Kane was one at Bear Stearns, who prevailed in the long term having special status to leave more of the money in. He ended up one of the losers.

Brett D. Fromson: Because Bear was their clearing broker.

Roger Lowenstein: Bear was their clearing broker.

Brett D. Fromson: So he had...

Roger Lowenstein: He was favored, yes.

Brett D. Fromson: I can think of a few things to say about being favored in that particular way.

Roger Lowenstein: He'll survive.

Brett D. Fromson: I'm sure he will. How much money did the partners end up making or losing? I mean, at the end of the day, did these guys basically blow it all?

Roger Lowenstein: They blew it except for the tiny tip of the iceberg. They had $1.9 billion in the fund, the 16 of them, the great bulk of that held by four or five people -- Larry Hillebrand, Meriwether, probably Victor Agani and Eric Rosenfeld. Those four, then Greg Hawkins and everyone else and it was a steep slope down. Hillebrand had close to half a billion and these others had low hundreds of millions.

Brett D. Fromson: So they put this money, this $1.9 billion with the equity at the peak...

Roger Lowenstein: Yes. And that was all lost.

Brett D. Fromson: Right. This was taken out of salaries or bonuses or cash?

Roger Lowenstein: Yes, they used the partnership as a checking account. They wrote money against, they had virtually all of their investments in the fund.

Brett D. Fromson: Right.

Roger Lowenstein: Larry Hillebrand, as best as I can tell, was broke and had to rely on his bank. His wife is on Wall Street and she has ample funds in her name and they still live well. The others weren't leveraged personally to the same degree at all.

Brett D. Fromson: What about Meriwether?

Roger Lowenstein: No. I'm not aware that he had any personal leverage. And he still has his estate.

Brett D. Fromson: He's back in business.

Roger Lowenstein: He's back in business. They haven't disputed the figure of losing 90% or more of their money. It's something in the order of hundreds of millions. I don't know the exact figures.

Brett D. Fromson: So, from the average person's point of view, they're still quite comfortable.

Roger Lowenstein: No, they're still totally comfortable. But they're not super-rich any more. Now they're just plain, ordinary rich.
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