It's amazing that 4 people at the top of UBS had to resign for betting on LTMC (see: dailynews.yahoo.com )-- yet, John Meriwether gets to stay on. And, it's interesting that the rescuers find him indispensibe (see article below). Buffett's offer required that the current principals be removed, but the Fed arranged a rescue on more favorable terms. Buffett had indicated no need on his part to have LTCM "rocket scientists" tell him how to trade bonds.
Down and Out at the Hedge Fund?
Maybe, but Don't Bet on It
By JOSEPH KAHN and PETER TRUELL -- October 3, 1998
Can John W. Meriwether, the founder of Long-Term
Capital Management and the man behind the hedge
fund's crumbling tower of multibillion-dollar bets on
world financial markets, make another comeback?
In 1991, Mr. Meriwether, then a top executive and a
star bond trader at Salomon Brothers, was ousted after
a subordinate sought to corner the market on sales of
United States Government bonds. Three years later, he
raised $1.5 billion from Wall Street colleagues and
founded Long-Term Capital, which became one of the
world's most aggressive and profitable hedge funds.
The near-collapse of Long-Term Capital last month
nearly wiped out the stakes of Mr. Meriwether, his 16
partners and outside investors, and made him synonymous
with speculative excess.
"His obituary has already been written," a long-time
friend said. "The man who nearly broke the world."
But such judgments may be premature, others say. The
consortium of 14 financial firms that pumped $3.6
billion into Long-Term Capital, rescuing it from
certain bankruptcy, agreed to keep Mr. Meriwether, his
partners and his management team intact as a condition
of the deal. He and his partners still control 3.3
percent of the equity in the fund. And Wall Street
executives involved in the bailout say that Mr.
Meriwether and his 180-member team will be paid 1
percent of assets as a management fee and a 12.5
percent share of annual profits over a hurdle level.
If the banks and brokerage houses that rescued
Long-Term Capital are right, and its bets on world bond
and equity markets eventually pay off, Mr. Meriwether
and company can quickly pocket tens of millions of
dollars under that incentive plan.
"Of course people are angry at him; they blame him for
this," said a brokerage firm executive involved in the
bailout. "But as far as I know, no one suggested that
he should go -- that you should break up the
partnership. Put it this way: If he does well, we all
do well."
The potential for Mr. Meriwether to make a comeback has
already begun to raise questions among critics of the
Long-Term Capital bailout, which was brokered by the
Federal Reserve Bank of New York. Some critics have
questioned whether the effort to save the fund was
necessary, and whether it might send the wrong message
to other big speculative funds.
At Congressional hearings to discuss the Long-Term
Capital rescue Thursday, there were also questions
raised as to why the deal backed by the Federal Reserve
was more favorable to Mr. Meriwether than an
alternative proposal put forward by private investors,
including Goldman, Sachs & Company.
"Perhaps the only smart deal of the month that
Long-Term Capital did was they played the Fed off
against another party," said Representative Jim Leach,
the Iowa Republican who is chairman of the House
Banking Committee, referring to Mr. Meriwether's
rejection of the Goldman deal and his acceptance of the
terms offered by the bank consortium.
Long-Term Capital is not certain to return to
profitability, of course. The continued sharp rise of
the United States Government bond market is unfavorable
to Long-Term Capital's positions, traders say, and may
be causing deeper losses for the fund now. There is no
prospect of returning to profits until the worldwide
investor flight to quality eases, relieving the stress
on riskier securities that Long-Term Capital owns.
The Wall Street firms that now control the hedge fund
have installed six derivatives, bond and risk
management experts at Long-Term Capital responsible for
looking over Mr. Meriwether's shoulder each day -- and
making the ultimate calls of key investment and
management decisions. The firms could also decide to
liquidate Long-Term Capital positions and essentially
dismantle the fund, leaving Mr. Meriwether and his
colleagues with little.
Moreover, people who work for Long-Term Capital say
that 3 or 4 of the 16 partners borrowed heavily from
banks to finance their equity stakes in the fund, and
now face the prospect of personal bankruptcy.
Still, there are signs that the worst is over for
Long-Term Capital's principals. The fund's new
investors have de-emphasized their early goal of an
"orderly liquidation" of Long-Term Capital's positions.
Most now talk of a three-year time frame for managing
the fund. Many bank executives familiar with
Long-Term's gambles also see them as fundamentally
sound, if highly overleveraged, and talk about making
big profits when markets come back.
Most important, a consensus has emerged among the
consortium members that Mr. Meriwether should stay. For
one, he is the person most familiar with Long-Term
Capital's complex derivatives positions. And in his
absence, the 14 consortium members, already prone to
disputes, might find it difficult to agree on a
successor.
"It would be foolish for us to get rid of him and then
try to agree on someone else," said the Wall Street
executive involved in the bailout. "Our best bet was to
give him the incentives to do well."
Long-Term Capital partners who face possible bankruptcy
might also get some relief. There are now attempts to
negotiate agreements with their creditors, which
include Bear, Stearns and Crédit Lyonnais, that would
prevent them from having to file for personal
bankruptcy. One alternative explored in recent days
would give creditors a claim on the future earnings of
these hard-pressed managing partners.
Some people associated with the fund have also
speculated that some of the managing partners who are
in better financial circumstances may help others who
now face bankruptcy as a way of maintaining the
Long-Term Capital team.
Copyright 1998 The New York Times Company |
