Open Letter to the Fed
September 24, 1998
Messrs. Alan Greenspan and William McDonough
Board of Governors Federal Reserve System
Washington, DC 20551
Gentlemen:
It was with great pleasure that we read in this morning's Wall Street
Journal of your decision to help alleviate the unfortunate and
unnecessary loss incurred by the investors and creditors of Long Term
Capital Management LP. The rapid and unforeseen decline in global
markets has made it hard for all of us to master this universe. Your
decision to intervene yesterday will certainly help Long Term Capital
raise the funds necessary to buy into this unusually large dip.
Americans everywhere are thankful for having such a thoughtful and
forward-looking Federal Reserve System.
We are writing you to inform you of our own investment losses of late
(though, most unfairly, our losses have not been on the cover of
BusinessWeek). The following is a list of reasons for this loss, which,
we think, is not unlike that of Long Term's:
•We owned a large sum of derivatives, fully convinced of the smooth and
continuous pricing of the markets. Our blind faith in Black Scholes
models remains intact. Our models are perfect. It is the market's fault
for not following them, not ours.
•We were clueless regarding the nature of gamma risk. We are still a
little fuzzy on this.
•We have never lived through a bear market, nor do we think we need one
now.
•We have never read anything written by Nicolai Kondratieff, Sidney
Homer, Benjamin Graham, Alexander Dana Noyes, Robert Rhea, Ralph
Elliott, or anyone else with a sense of history. History is a waste of
time.
•We invested heavily in junk bonds, especially those issued by countries
which cannot be located on a map by our crack research department. We
never understood why people called them junk to begin with.
•We think you're doing a great job, and we think you'll cut rates (wink,
wink, nudge, nudge). We think this will be pure gravy for all of us, and
we can't wait to buy more junk bonds on margin.
Enclosed you will find a more detailed list of our losses since
mid-summer. Please enclose your check (payable to TheGreaterFool.com
LLC) in the self-addressed stamped envelope provided.
Sincerely,
TheGreaterFools
P.S. Do you have the IMF's address?
Enclosures
Cc: Mr. David Komansky, chairman, Merrill Lynch & Co.
Mr. Sanford I. Weill, chairman, Travelers Group
Mr. Jon Corzine, senior partner, Goldman Sachs & Co.
Mr. Douglas Warner, chairman, J. P. Morgan & Co.
Mr. John Merriwether, general partner, Long Term Capital Management LP
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