Investing's Biggest Loser?
Sure, you could go the easy route and pick a Bernie Madoff, or any of the other notable crooks from this financial crisis, but how about someone who's spanned crisis to crisis? Who not only was almost singularly responsible for a previous crisis, but also failed horribly in the current one.
Many familiar with investing literature could recognize the man I'll humbly suggest: John Meriwether.
If you're not on of those initiated few who I just referenced, he's notable for being the founder of Long Term Capital Management (LTCM), which was a brain trust of academics and star-Wall Streeters that overlevered itself and tried profiting from small pricing inefficiencies within the bond industry.
The resulting collapse of the hedge fund almost sucked Wall Street into a black hole. The thought was that liquidating the company's positions would cause prices of the securities they traded in to drop, which would cause liquidations from other companies debts, rinse, lather, repeat until economic collapse. Order was restored only after the Federal Reserve of New York hastily organized a bailout of the company that was sponsored by numerous Wall Street banks.
There's a lot of parallels between the forces that overcame LTCM and what led to the current Wall Street panic. For one, Bear Stearns was one of the few banks who refused to offer support to the fund, insisting they suffer the natural fate of an institution that failed to understand its risks. Funny how Bear Stearn's position on this issue would change so much just eleven years later.
Another more obvious parallel is that the fund was levered at least 25:1 (debt to equity), and had far more exposure than that figure due to positions in over a trillion dollars in derviatives (notional value). As competition became more fierce and their strategies unable to generate the same returns, the company levered up to juice returns.
In true Wall Street fashion, the founder of the fund, the aforementioned John Meriwether, didn't take long to get back on his feet. Almost collapsing the world economic system? Mere trivialness! Shortly after LTCM's collapse he started back up with JWM Partners and it was wildly successful... for awhile. However, once again, as time wore on his strategies proved more unable to find profits in his relative value trades. The fund, according to Bloomberg, "returned an average of 1.46 percent a year with his new fund since opening in 1999, compared with 2.4 percent for the Credit Suisse/Tremont Hedge Fixed-Income Arbitrage Index."
But it looked like his strategies couldn't handle a crisis once again, and his fund lost over 44% between September 2007 and February 2009. All these losses from a "more conservatives approach."
So, it's not like he threatened the economic system itself again, but it'll go down as another long-run failure for Mr. Meriwether.
Who wants to bet he'll be back up with another fund sometime early next year?
Since links don't work, I'll paste some additional reading in:
The wiki on LTCM: http://en.wikipedia.org/wiki/Long-Term_Capital_Management
Meriwether shutting down fund: http://online.wsj.com/article/SB124705676394911301.html#mod=testMod (May require subscription)
http://www.bloomberg.com/apps/news?pid=20601087&sid=aN2lwUiCKGMM (Won't require subscription)