The last section of the book containing the said chapters is both thought-provoking and insightful. These chapters cover the course of decline of LTCM (Long-Term Capital Management) from its heady days of exponentially growing profits, customer base and stock prices. This section of the book encapsulates the systemic causes that precipitate financial crises and stock market collapses with predictable recurrence. At the same time, author Lowenstein takes cognizance of how individual businesses are agents that trigger such crises.
Roger Lowenstein throws light on the human psychological factors behind the bankruptcy of investment firms. The dubiousness of capitalist adage ‘greed is good’ is questioned by the author. Often, behind most financial market collapses is the unsavory and unwarranted history of excessive leveraging of capital by investment firms. Tied to excessive risk taking is the phenomenon of neglecting systemic risk. In other words, since most banks and investment firms survive on the basis of trust placed upon them by customers and clients, the bankruptcy of one firm leads to an environment of distrust over the entire industry. Mass panic ensues and most financial activity, except for the most essential transactions, get withdrawn, reversed or postponed for safer times. This has a crippling effect on the economy as a whole, for finance is the heart of most economic activity. Lowenstein is scathing of the LTCM management in particular, as well as its peers that displayed similar disregard for systemic risk. These firms had no concern for the risk their actions posed for the economy and country at large. Lowenstein laments how such blindfolded pursuit of individual profit is written into the capitalist system.
The recklessness with which LTCM was operating was illustrated by their lack of rigorous criteria to offering loans. The terms of borrowing were incredibly easy on the borrower. Behind this tendency was the mistaken belief that such lending was relatively risk free. Moreover, the reputation of Wall Street bankers as geniuses and virtuosos with money made customers less scrupulous.
The role of the Federal Reserve is critically evaluated by Lowenstein in the context of the LTCM fiasco. Instead of functioning as a neutral and detached driver of monetary policy, the Fed had morphed its role as a savior for reckless investment banks. It is in this spirit that it organized a $4 billion bailout plan for saving LTCM. The compromised actions of the then Fed Chief Alan Greenspan is treated disapprovingly by Lowenstein.
In the final chapter, Lowenstein ponders possible solutions to prevent such bankruptcies in the future. He emphasizes the importance of regulation to mitigate the frequent cycles of booms, busts, bankruptcies and collapses that have become hallmarks of capitalist economies. Policy making on the government end and corporate governance standards on the business end have to be made robust. Unfortunately, with short-term profit motives looming larger than long-term concerns of sustainability or prudence are forced to take a backseat. While such behavior is written into the subtext of organizational behavior of private firms, there is no compulsion for the political class to be in connivance. If there is one major advice that When Genius Failed offers to politicians, it is the imperativeness of government regulation over financial activity.