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Friday, 10 July 2009

If this is success, what do you have to do to fail?

John Meriwether worked as a bond trader at Salomon Brothers. At Salomon, Meriwether rose to become the head of the domestic fixed income arbitrage group in the early 1980s and vice-chairman of the company in 1988, when aged 41. Well it was the days of Liar's Poker and big swinging dicks, and nobody's dick swung bigger than Meriwether's.

Three years later Salomon was caught up in a Treasury securities trading scandal perpetrated by a Salomon employee, and Meriwether was stuck with a $50,000 civil penalty.

Figuring he could make more money elsewhere without such hassle Meriwether decided to leave the Salomon and founded the Long-Term Capital Management hedge fund in Greenwich, Connecticut in 1994. Long-Term Capital Management collapsed in 1998, proving that if you think you are smarter than the market, you probably aren't. LTCM was built on leveraged bond arbitrages. The trouble was that as it got bigger, the number of valuable arbitrages diminishes relative to the capital base. I guess it shows that in a liquid market, arbitrage is a niche business. Anyway, the upshot was that the highly leveraged fund had to be bailed out to the tune of $3.6 billion.

Undismayed Meriwether took a break and then started started JWM artners LLC with initial capital of $250 million with loyal quants and traders. As of April 2008, the company had around $1.6 billion in management. But then it all went horribly wrong. Between September 2007 and February 2009 Meriwether's main fund at JWM Partners underperformed the Masterley Black Sock Fund (stuff cash into a sock and leave it at the back of your draw) by 44%.

It seems there is a never ending supply of mugs who want to give away their money, but what is more astonishing is that after serial failure, Meriwether is seen by some as a doyen of the US financial services industry. It seems that to be real villain you have to be sent down for 150 years.

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