Crash They Seemed like the Masters of the Universe, the Gods of Investment Banking. but with Long Term Capital Management's Multi- Billion Dollar Fall from Grace, We Are All Being Martyred for Our Banks' Blind Faith

Article excerpt

The financial markets are good at many things. One of them, it might seem from the last few weeks, is humbling the mighty. Predictions made in good times, many of them backed by large amounts of hard cash, have turned sour. Senior executives at UBS and IMG Barings have fallen on their swords; the thundering herd of redundancies on Tuesday at Merrill Lynch are only the front-runners for thousands of downsized jobs. The marketmeisters of New York and the economic overlords of Washington alike have been left with plenty of egg on their faces.

Sadly, there was little humility on show last week, as the International Monetary Fund and the World Bank convened their annual meetings. There was quite a bit of hurt pride and some back-stabbing, but a sense of failure amongst all those pin-striped suits and highly polished black Oxfords? Get real.

Being right is at the heart of financial market culture. It is a world where victory is everything, and there are no prizes for second place: that is the self-projected image of investment banking, and Long-Term Capital Management, the hedge fund based in small town Greenwich, Connecticut, which had to be bailed out in a $4bn US government-led lifeboat two weeks ago, was in many ways the epitome of that culture. Established by John Meriwether, a former Salomon's bond analyst who was regarded as little less than a deity by many, it traded on the microscopic differences that opened up between securities. A hedge fund like LTCM is trading for professionals: it is an esoteric business that carries allure and glamour, but also mystique. Its 150 employees were known as rocket scientists, a testimony to the mathematics which, in theory, they substituted for the less precise judgements of their peers. This was gambling as physics, and its protagonists had big balls and bigger brains. With their capital of $4bn as security they borrowed another $120bn, then used that to borrow around $1trillion - a sum roughly equivalent to the gross domestic product of China. If the myth behind LTCM was powerful while it was alive, then in death it has become even more resonant. Here is a classical tragedy, according to the Authorised Version: a company run by intellectual giants, reduced to nothing overnight by a sudden and incomprehensible earthquake in the markets. There is something about the company that was very American. Its foundation was science, a kind of fundamentalist rationalism that placed ultimate faith in the fusion of science and markets. And it had a peculiarly American faith in its own judgements. This is a country that has not lost a war, which emerged into the world proclaiming itself to be a city on a hill, which saw its dominance underpinned by victory in the Second World War and then doubly underlined by the end of the Soviet Union. Putting up your hands and admitting that you got things wrong, that somehow you finished up on the losing side of an argument, is not part of the culture. At its best, this translates into a fierce and vital optimism that disdains risk in the name of enterprise. At its worst, it is a fatal arrogance. Long-Term Capital Management - the very name tempts fate, with its solid,reliable promise of a safe pair of hands - was powered by arrogance. It gave out an aura of assurance that was, in its last months, almost its only asset. Its underlying premise was that science, mathematics plus economics, had discovered the secrets of the financial universe, the underlying truths that drove markets. If one security went up, it was a sure bet that another, linked one would go down. Of course, it was far more complicated than that. You wouldn't understand. Give us the money and we'll turn it into a fortune. Trust us. We are winners. And winners they were: there were two Nobel prize-winners in economics on the board, for instance. Nobel prizes, for goodness sake! How can you go wrong? In the first place, they weren't such wizards, even in the good times. …