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TMFEditorsDesk (< 20)

Investing's Biggest Loser?

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July 10, 2009 – Comments (6)

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?

 

-- Eric 

 

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)

 

6 Comments – Post Your Own

#1) On July 10, 2009 at 11:20 AM, TMFEditorsDesk (< 20) wrote:

I'm almost immune to the hypocrisy these days, but this story broke through to me today. Great stuff, Eric!

-Anand

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#2) On July 10, 2009 at 11:22 AM, dudemonkey (38.41) wrote:

I'm going to vote for the American taxpayer.  They got screwed by Merriwhether (creator of the current moral hazard), the crop of bank & insurance executives that got bailed out by TARP, and the shareholders in the banks and companies that should have failed but didn't.

I think shareholders get off too easy in some of these messes.  My opinion is that Goldman Sachs shareholders should suffer the same criminal penalties that the bank should inevitably suffer.

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#3) On July 10, 2009 at 11:27 AM, chk999 (99.97) wrote:

He'll be back with another fund.

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#4) On July 10, 2009 at 11:49 AM, assafer (< 20) wrote:

I second chk999. 

He also seems to be VERY well liked by his business colleagues.  

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#5) On July 10, 2009 at 12:18 PM, PDTBiotech (91.77) wrote:

Much smaller scale, but I'll go with Victor Niederhoffer (here's a great article on him).  Hell on wheels until 1997, when a huge one day drop caught him with his pants down short a massive pile of puts.  Liquidated everything, fund died.  He had kept a painting of the Titanic up on his wall to remind him of the risk of not having "life rafts", but leveraged himself to the hilt and paid for it.  He had just published a book, which is written in an extremly cocky tone.  Started again, this time with another painting of a famous ship from a true story of a guy who lost a ship, convinced investors to get him another one, and then lost that one, and was ruined.  After a couple good years he published another book, this time with a slightly less (but still) cocky tone, which offered up a lot of wackadoo advice.  Of course he got caught with too much leverage again in 2007 and went belly-up a second time.  Now he runs a terrible website, probably hasn't concluded that he has no business managing money in the market, and I keep a picture of him up on my wall to remind me that if there's leverage to be had I want it working for me, not against me.

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#6) On July 10, 2009 at 12:37 PM, TMFRhino (97.93) wrote:

Thanks for this PDT, I wasn't familiar with Victor Niederhoffer. Since it's a bit longer read I saved the New Yorker piece and am planning on reading it in a bit.

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