octubre 16, 2004

How Meriwether started his team

As I explained about Meriwether in a previous post, the founder of Long Term Capital Management started most of his team at Salomon Brothers.

Meriwether had become a partner at Salomon by being a savvy trader, particularly in one instance. A different firm had taken a position that was nearly certain to pay off in the long run, but was declining and thus threatening the firm's leverage. Meriwether saw that the trade had to pay off in the long run and convinced the Salomon bosses to make the trade, for tens of millions at a time when total firm capital was only $200 million.

As Keynes said, "in the long run, we're all dead." And in fact, the trade continued to lose money for the next few weeks. The Salomon partners watched the downward progress of the trade. Meriwether insisted that they would eventually make money. The managing partner replied, "We better, or you'll be fired."

The trade eventually won money, and Meriwether became partner the next year.

Meriwether understood -- or so Lowenstein imputes to him -- that the heart of trading is gambling. It's simply finding bets where you have a positive expectation, and then rolling the dice. Successful gamblers look for bets where they have an edge, and then they exploit them as much as possible.

Meriwether's genius is that his edge was hiring the best. At a time when he was at the top of his field, he decided to recruit people even better than him. He hired academics who studied the subjects, but who no firm had ever thought to hire. He assembled a team that were the best. Two of his team -- Merton and Scholes -- eventually won a Nobel Prize for economics for the Black-Scholes theorem (which they had invented pre-Meriwether's recruitment of academics).

Meriwether liked to say that he never hired anyone who wasn't smarter than he was. Per Lowenstein:
One time, a trader named Andy who was losing money on a mortgage trade asked for permission to double up, and [Meriwether] gave it rather offhandedly. "Don't you want to know more about this trade?" Andy asked. Meriwether's trusting reply deeply affected the trader. J.M. said, "My trade was when I hired you."

Meriwether saw that trading at the time was dominated by intuition. As most gamblers -- and casinos! -- will tell you, intution can sometimes be very costly. Meriwether helped end the days of the intuitive bond traders. His vision helped turn trading into a model-based, rigorous analytical field.

octubre 15, 2004

Samuel Adams a Ukrainian?

Director Mitch writes of a story that claims Samuel Adams was Ukrainian.

I know the claim is all in good fun -- I think so, anyway -- so I don't know why I have to be the spoilsport. But what can I say, I am a spoilsport.

Research does not suggest that Samuel Adams was a Ukrainian:
ADAMS, Samuel, born in Boston, Massachusetts, 27 September 1722; died there, 2 October 1803. Among the grandsons of Henry Adams, the emigrant from Devonshire, were Joseph Adams, of Braintree, and John Adams, of Boston, a sea captain. The former was grandfather of President John Adams; the latter was grandfather of Samuel Adams, the statesman. The second son of Captain John Adams, born 6 May 1689, was named Samuel, and in 1713 married Mary Fifield. Of their twelve children, only two, besides the illustrious Samuel, survived their father. The elder Samuel Adams was a man of wealth and influence, tie owned a large estate on Purchase Street, with a noble mansion fronting on the harbor, and here the younger Samuel Adams was born.
I could be wrong, but I don't think there is a Devonshire in the Ukraine.

octubre 14, 2004

US makes it to finals of World Cup qualifying

The US beat Panama to assure themselves a place in the final qualifiers for the next World Cup, Germany '06.

Landon Donovan showed why he is a world-class player, with 2 opening goals.

Then Eddie Johnson came on as a sub, and scored 3 goals! The first US hat trick in qualifying since 1968. And as a sub in only his second appearance with the National Team!

The US will be a force to be reckoned with very soon in the world soccer scene.

octubre 13, 2004


Robert Rubin reports that Keynes once reportedly said: markets can remain irrational longer than you can remain solvent.

LTCM forgot that.

octubre 12, 2004

Two other books I picked up

Two other books I pick up that are tangential to LTCM are Robert Rubin's recently published memoir and Michael Lewis' Moneyball.

I didn't realize all three were related when I picked them up. Lewis dealt with Meriweather -- head of LTCM -- in his first book Liar's Poker, while Rubin was part of Clinton's team that seemingly bailed out anyone and everyone, including LTCM.

Long Term Capital Management

Last night I read Roger Lowenstein's book on the rise and fall of Long Term Capital Management. I didn't intend to, but I started it and I couldn't put it down.

Long Term Capital Management was a hedge fund started by former Salomon Arbitrage Group head John Meriweather. Meriweather was one of the stars of Michael Lewis' Liars Poker, a book about the author's years at Salomon.

Frankly, the book -- especially the beginning -- made me want to go work for a hedge fund. I've emailed some friends with some questions, so we'll see where this takes me. I've dabbled in the market before, but I'm a bit of a dilettante.

Anyway, Meriweather was a bond trader at Salomon who became a partner by buying out someone else's big risk and then having that risk pan out well. He eventually recruited academics to Salomon, who brought financial models with them and relied heavily on the models. The academics were a big success, and Meriweather ran a loose ship at Salomon. He gave his former academics free reign, and eventually a rogue trader caused him trouble with the SEC.

After a 3 month suspension of his license, Meriweather started his own hedge fund, Long Term Capital Management. He brought along his most of his old Salomon group. These guys were very loyal to him, and all very big names. They were able to raise $1.25 billion, and started with a leverage to assets ratio of 30. Their goal: exploit market inefficiences wherever they found them.

They did very well, running that $1.25 billion way up, to the point where they had to give money back to their original investors. Eventually though, they took some foolish risks and went broke. The fall of LTCM is much less interesting than the rise -- they had to get the Fed Reserve to push 25 Wall Street banks to bail them out.

Meriweather and group are now in a new hedge fund. If at first you don't succeed...well, in this case start a new hedge fund and raise $250 million.

Fascinating story. I imagine this will inspire some other posts.

octubre 11, 2004

Clutch City! Bring on the Cards!

The Houston Astros win their first series!

Yeah, the franchise is 43 years old, but it's still sweet. It was the deciding game, the Braves had narrowed the game to a 1 run lead...and then the Astros scored 9 consecutive runs.

The Killer B's -- Beltran, Bagwell, Biggio and Berkman -- were all clutch. Beltran had 5 RBIs and homered on two consecutive at bats.

I'm not much of a baseball fan, but it's exciting to see the Astros play the Cards. The Astros are really a feel good story right now -- written off for dead, they ended the season 36-10 to squeak into the playoffs.

And the Yankees are playing the RedSox. That's an intense rivalry. Having been to Boston around the beginning of the season, it was amazing to me how intensely Bostonians loved their RedSox.

octubre 10, 2004

Go Astros!

The Houston Astros beat the Atlanta Braves on Saturday, setting the stage for Sunday's game. It's a chance for the Astros to win their first playoff series in franchise history.

Go Astros!

The presidential campaign signs

John Moore posts about Scott Dadrich's New York Times editorial. Dadich admits that, while he's a Democrat, Bush's campaign logo is much better, while the "Kerry logo displays the same inconsistency that his opponents accuse him of. . . No wonder some voters think he's a vacillating wimp."

Kerry's signs really are bad. Of course, in a presidential campaign the signs aren't as important -- in lesser races, yard signs are a primary way to raise a candidate's name ID -- but they are many voters' daily exposure to

Ouch. Of course, it's even worse when he spent four weeks mulling that logo.