<LTCM>"You got to know when to hold'em.. know when to fold'em.. know when to walk way and know when to run.."
Hi Pat check this out,all about Meriwether..obviously the dude didn't know how to hold,fold,walk away or run,eh? Oh well at least I get to buy some stocks on the cheap.<vbg>
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(courtesy: Bloomberg)
Long-Term Capital's Meriwether: a Passion for Betting
New York, Oct. 12 (Bloomberg) -- Eleven days after the hedge fund he managed collapsed and threatened to destabilize the world's banking system, John Meriwether went to a party.
In a ballroom last Sunday at New York's Pierre Hotel across from Central Park, a tuxedoed Meriwether led his wife, Mimi, around the dance floor, chatted up friends and mingled with the 100 or so other guests.
It was the wedding for Myron Scholes, a Nobel laureate and partner in Long-Term Capital Management LP, the hedge fund that Meriwether founded four years ago. Many of the firm's 14 other partners were in attendance.
But the evening wasn't carefree. Meriwether and his partners had been working seven days a week since Sept. 23, when Long-Term Capital revealed that it had lost almost all of the $4.8 billion in capital that it had had at the start of the year. The partners had once controlled, through leverage, a trillion dollars in positions; now they were working for the 14 lenders who bought control of the firm for $3.6 billion.
Most of the Long-Term Capital partners left the Pierre before dessert was served. ''They knew they had work ahead of them,'' said one guest, William Griffo, who's a friend and physician to several of the men.
For 24 years, work for Meriwether, 51, has meant making big financial wagers, a job that has been his passion, first as a bond trader and vice chairman at Salomon Inc., and later at Long- Term Capital.
While he had been best known for making winning, or at least well-calculated bets -- whether on bonds or baseball -- this time his wagers, mostly backed with borrowed money, went so wrong that the U.S. Federal Reserve helped arrange the firm's takeover by its lenders to shield the world's financial markets.
Always a Gambler
If the commercial and investment banks had been forced to sell Long-Term Capital's $90 billion in positions, already weak markets from Hungary to Brazil might well have plunged, bankers say.
Meriwether, who declined requests for interviews, has always been a gambler. He didn't seem interested in the money, per se, though. While earning millions of dollars a year at Salomon, he ate simple lunches of bologna sandwiches and shared with two roommates a walk-up apartment in Manhattan before marrying in 1981 and moving with Mimi to a large house in North Salem, New York.
Rather than the money, it was the winning bets that drove him -- the bigger the wagers the better.
At a Wall Street Christmas party a dozen years ago, Meriwether chose to unwind by betting thousands of dollars in a craps game. ''He was shooting dice, rolling up his sleeves . . . cool, calm and collected,'' said Jerry Paolillo, a former senior managing director at Bear Stearns Cos., Long-Term Capital's clearing agent.
Meriwether wouldn't take just any bet. At Salomon, a colleague once boasted -- with a wagerattached -- that, given 30 minutes, he could memorize the serial numbers on 15 dollar bills. Sensing the eagerness of his colleague, Meriwether refused the bet.
Finding Anomalies
Meriwether joined Salomon in 1974 after he completed a masters of business administration at the University of Chicago and was assigned to the unit that helped traders finance their bets in the bond market. He turned the repurchase agreement, or repo, desk into a profit center for the firm by investing the firm's extra capital.
He was rewarded for his earnings with more and more power at Salomon, now part of Citigroup Inc.'s Salomon Smith Barney unit. At Wall Street's biggest bond trading firm, he was given control over more money than any other trader.
As head of bond trading in the 1980s, he rejected conventional gut-instinct trading and sought an academic edge instead. Meriwether hired mathematicians and Ph.D.s to design options and computer programs to find price anomalies for securities, pioneering fixed-income arbitrage.
Among his recruits was Scholes, a University of Chicago finance professor who later won a Nobel prize for helping to develop the Black-Scholes model for pricing options.
While Meriwether became responsible for all of fixed- income, his top recruits, a group of about a dozen traders, became Salomon's most profitable employees, earning billions of dollars for the firm. One of his traders -- Lawrence Hilibrand, who later helped form Long-Term Capital -- collected a $23 million paycheck in 1991 for the profits he generated.
Eventually, Salomon gave Meriwether's proprietary trading group half the firm's equity to trade. And though he sometimes lost money, he was responsible for as much as 60 percent of Salomon's profit in any given year.
Control over capital was the key at Salomon, since the size of a trader's profits were determined by the amount he could wager. Meriwether's access to equity gained him enemies at the firm, including the former head of government bond trading, the late Bill Voute.
Ever Bigger Bets
In the process, Meriwether was placing ever-bigger bets in the market. At one point, for example, Salomon owned most of Italy's external government bond debt.
When bets went against his traders, they generally increased them, figuring the profit would be that much greater when the market turned in their favor. One year at Salomon, Meriwether leveraged his portfolio 40 times.
After Salomon's bond scandal in 1991 -- in which one of Meriwether's subordinates was found to be rigging Treasury auctions -- the Securities and Exchange Commission banned Meriwether from the securities industry for three months. He resigned from Salomon.
When he and 11 partners opened Long-Term Capital's headquarters in Greenwich, Connecticut in 1994, they were able to raise $1 billion. Investors included Merrill Lynch & Co., Bank Julius Baer of Switzerland, and Banco de Investimentos Garantia SA, Brazil's largest investment bank. Wealthy individuals signed on, too, including James Cayne, chief executive of Bear Stearns.
A Three-Year Lockup
Long-Term Capital required investors to keep their money at the firm for at least three years, longer than most hedge funds require.
''They were a very well structured fund with a unique three- year lockup,'' said Alain De Coster, who was an executive at Garantia, which invested more than $25 million in the fund. ''They were eager to prove they were at the top of their business.''
Meriwether kept the firm's cards close to his vest. To keep rivals from discerning any of his strategies, Meriwether sometimes would make meaningless trades to throw them off, Paolillo said.
Investors were told they wouldn't be informed about Long- Term Capital's holdings. It was a condition they willingly accepted as the fund produced annual returns of more than 40 percent in its first two full years.
Investor attitudes began changing late last year when Meriwether returned money to them after generating 17 percent returns, saying there weren't enough opportunities in the market to deploy the capital in the size of bets to which Long-Term Capital was accustomed.
Clients now say Meriwether and his partners were lying, that the real reason for returning the money was that they had determined that the best way to generate fat returns for themselves was to borrow heavily against their existing equity.
The Bad News
Then, this past August, the fund had lost 52 percent of assets for the year. In a Sept. 2 letter to investors, Meriwether delivered the bad news and asked them to kick in more money. The offer was refused. Three weeks later, Long-Term Capital announced the takeover by its lenders.
Away from the markets, Meriwether has kept his personal life just as quiet as his trades. Since 1994, the Meriwethers have lived in North Salem, New York, about 40 miles north of New York City. Town records show that their five-bedroom, 8,479- square-foot house with an indoor pool was purchased in Mimi Meriwether's name for $2.7 million. They have no children.
In an area that is also home to CBS talk show host David Letterman, Meriwether is an anonymous neighbor. ''I know all my neighbors but I don't know him,'' said Sharon Brownridge, who lives a few doors down the street.
It is a long way from where Meriwether grew up on the south side of Chicago. His leisure time now revolves around thoroughbred horses, which he owns (his wife is an equestrian), and golf. Meriwether shot a hole in one at the fourth hole at Augusta National Golf Course in Georgia, site of the Masters tournament, and in 1987, he bought Waterville, a tournament- quality course in Ireland, with some friends.
Faith
Meriwether and his wife give money to Catholic charities, such as Catholic Big Brothers, and make pilgrimages to such shrines as the one in Medjugordje, Yugoslavia.
Some investors still have faith in Meriwether.
''I would put money with John Meriwether tomorrow,'' said Lee Thomas, a managing director at Pacific Investment Management Co. in Newport Beach, California, which manages about $229 billion in assets for institutions and individuals.
Others have been shaken.
''The lesson for Wall Street is that it can happen to anyone,'' said Dan Bernstein, head of research at Bridgewater Associates Inc., which manages assets of $11 billion in Wilton, Connecticut. ''If you have had a strategy that worked in the past, it isn't always going to continue to work.''
And for Meriwether, the calculating gambler, a financial party that lasted for years, is finally over. |
