John Meriwether Is Back - Risk Must Be Too

John Meriwether, the 62-year old former Salomon bond trader and LTCM wizard is back for, what is this, his fourth go round.

For those of you who don’t remember the 1980s, John Meriwether was the biggest of the ‘big swinging dicks’ on Wall Street, leading Salomon Brothers to huge profits in its fixed income division. Lionized in the eponymous book “Liar’s Poker” and inspiration for Bonfire of the Vanities, Meriwether and Salomon’s rise marked the change from a bulge bracket culture dominated by deal makers and IBD (Investment Banking Division) white shoe bankers to one dominated by the foul-mouthed traders and math geek quants of fixed income. The change at Goldman Sachs (GS) from a firm dominated by IBD to one dominated by trading is testament to this. Unfortunately for Meriwether, his career path since reaching the top has been rather rocky.

First there was the enormous Treasury bond scandal, in which Meriwether subordinate Paul Mozer put in fake Treasury bids on behalf of clients in an attempt to corner the market for on-the-run securities. Lax oversight got Meriwether a $50,000 fine and Salomon a $290 million fine, the largest ever to that date. Salomon head John Gutfreund resigned and Warren Buffett came in to serve as Chairman (Phibro which was recently offloaded to Occidental Petroleum by Citigroup is a Salomon Brothers company, by the way). Meriwether left.

Soon, Meriwether was back at it at Long-Term Capital Management, the Greenwich-based hedge fund he founded in 1993 and which was famously leveraged 100 to 1, not including derivatives exposure of $1 trillion on a capital base of $5 billion. This company produced spectacular 40+% profits year after year before going spectacularly bust in 1998 after Russia devalued its currency and defaulted on its debt (see Frontline’s recent video which has a part on LTCM).

Meriwether miraculously was able to start again, literally the next year, helped by a bubble in shares which increased appetite for risk. He started JWM Partners in 1999. After years of gains, this fund too produced staggering losses (44% last year) and was liquidated.

Now that shares are up some 60% in US markets, guess what, John W. Meriwether is back… and he’s taking investors. This one is called JM Advisors Management, also based in Greenwich.

The fund is expected use the same strategy as both LTCM and JWM to make money: so-called relative value arbitrage, a quantitative investment strategy Mr. Meriwether pioneered when he led the hugely successful bond arbitrage group at Salomon Brothers in the 1980s.

The strategy, described by the Nobel Prize-winning economist Myron Scholes as being akin to a giant vacuum cleaner “sucking up nickels from all over the world”, can be highly successful in periods following market dislocations.

Relative value trades profit by betting on unusual pricing relationships between securities, anticipating a return to an historically modelled “normal” state between them.

I bet the money is pouring in.

Sources

Meriwether setting up new hedge fund – Sam Jones, FT (also with the FT Alphaville Team)

Meriwether – FT Lex

Comments

[untrusting ...:]

Good article. Sounds like lots more trouble on the way in the coming years.

If they would just enforce the Rico laws, then the John Merriweathers might be a lot more cautious in the future.

Oct 23 04:26 AM

[halamok:]

The strategy, described by the Nobel Prize-winning economist Myron Scholes as being akin to a giant vacuum cleaner “sucking up nickels from all over the world”

The strategy is better described as "picking up nickels in front of a train and being run over by the train once a few years".

Oct 23 08:45 AM

[Graham and ...:]

The 2000 market top was signalled when "Who Wants to Marry a Multimillionaire" (a crazy show) was aired. Same with Tiny Tim's wedding (December, 1969) and the 1970s bear market.

When something this crazy (Meriwhether) is allowed to air time, this is the signal of another top.

Oct 23 09:08 AM

[buyitcheap:]

If an advisor were to put client money into this guy's fund, is it automatically a fiduciary breach? :-)

Oct 23 09:29 AM

[Ricard:]

Every time I see that name, I think to myself - short term bull, long term disaster...

Oct 23 10:33 AM

[Cambrian Ca...:]

Good article. Most people who recount the history of Merriweather, the serial-market-killer, have already forgotten how he inflicted what ultimately turned into a mortal wound to Salomon Brothers. In the 1980's, Salomon was THE white shoe firm on the Street--as prestigious and arguably more prestigious than Goldman. Not only did he torch the P&L of the company, but he also annihilated the most valuable asset a major wirehouse has--its reputation.

I like to think that America is a meritocracy, but Merriweather's horror-flick-like returns to the marketplace continues to weaken my grounds for such a conclusion. He is obviously a very bright man, but his obvious lack for an appreciation for risk controls should be enough to bar him from running other people's money for the rest of his life.

Oct 23 04:16 PM

[Ricard:]

I think what articles speak more about is not Merriweather, but rather the people who entrust their money with him.


On Oct 23 04:16 PM Cambrian Capitalist wrote:

> Good article. Most people who recount the history of Merriweather,
> the serial-market-killer, have already forgotten how he inflicted
> what ultimately turned into a mortal wound to Salomon Brothers. In
> the 1980's, Salomon was THE white shoe firm on the Street--as prestigious
> and arguably more prestigious than Goldman. Not only did he torch
> the P&L of the company, but he also annihilated the most valuable
> asset a major wirehouse has--its reputation.
>
> I like to think that America is a meritocracy, but Merriweather's
> horror-flick-like returns to the marketplace continues to weaken
> my grounds for such a conclusion. He is obviously a very bright man,
> but his obvious lack for an appreciation for risk controls should
> be enough to bar him from running other people's money for the rest
> of his life.

Oct 23 06:27 PM

[prudentinve...:]

So why should'nt investors pour billions into a fund run by a known failure? After all, shareholders keep re-electing directors and CEO's who nearly bankrupted their companies; politicians keep re-appointing treasury secretaries and fed chairmen who created financial calamities; and the public keep re-electing politicians who passed laws that had disastrous consequences.

We have sadly reached a point where failure is routinely rewarded, and productivity and prudence routinely penalised.

Oct 23 06:37 PM

[The Hammer:]

This blowup artist can raise money from the suckers with ease. More losers rewarded with fortunes.
What a rigged system.

Oct 23 08:56 PM

[Chimin Sang:]

At least the investors should have the right expectation this time. John Merriwether is honest about his strategy; it is a fair deal.

Oct 24 08:20 PM

[FloridaBoy2:]

Thanks for the article.

If you have enough money and friends in the right places.....

There were about a dozen Kingpins that controlled and collapsed the entire system the last go round.

Oct 25 12:27 PM

[Joseph L. S...:]

Every time I read about people being sucked into yet another hedge fund disaster, I promise myself I'm going to write an article on just doing it yourself and saving the ridiculous fees, the contracts that give them the use of your money for too long, and then being locked in whether you like it or not.

Thanks, Edward. This was the final straw, seeing so many fooled yet again. How many times does Lucy have to pull the football away before Charlie Brown figures out he's being had? This was a good reminder and now I've gotten around to writing it...

Oct 25 01:25 PM

[Options Tra...:]

Why does people keep believing in those who has NEVER won in their lives??? make a few million today just to go bust tomorrow ISN'T profiting!

Oct 25 11:34 PM