New York Times, October 2, 1998


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New York Times, October 2, 1998

Hedge-Fund Wizard or Wall Street Gambler?
By Gretchen Morgenson


NEW YORK -- John William Meriwether was the consummate trader. He knew when to hold, he knew when to fold. But as the chairman of Long-Term Capital Management LP, he failed to recognize that his luck and his money were fast running out.

Last week they did run out, as a consortium of big international banks and brokerage firms agreed to inject $3.65 billion into Long-Term Capital, the giant hedge fund that Alan Greenspan, chairman of the Federal Reserve Board, worried would disrupt the global financial markets if it failed.

A quiet, introverted man with a head for numbers and a love of chance, Meriwether by all accounts was deemed most likely to succeed by those who worked with him over the years. A student of the bond markets, he knew their anomalies -- and how to play them -- better than anyone.

But in his previous work as a bond-trading star at Salomon Brothers, Meriwether had something he would sorely come to need at Long-Term Capital: the backing of a big firm with the deep pockets that can let a trader ride out almost any market storm.

Throughout the very public bailout of recent weeks, Meriwether has remained a man of mystery. He has given only a couple of interviews over the years and is rarely seen on the celebrity charity circuit in New York, unlike other men and women of fortune on Wall Street. He has even bought up most of the photographs taken of him in recent years.

So what kind of a man is Meriwether? And how could such a reputedly brilliant trader who had chalked up so many successes over the last 25 years wind up nearly bankrupting his firm?

Meriwether is not talking about his past, present or future. But conversations with people who have worked with him in his years on Wall Street reveal a man revered by those around him, who nonetheless remained remote, even lonely; a man always hunting for the edge that would make his bets -- whether in bonds, at the race track or on a Chicago Cubs game -- more calculated than wild.

He is a man whom co-workers describe as scrupulously honest, yet who has been associated with two of the biggest disasters in Wall Street history: the 1991 attempt by a Meriwether underling to rig the market in two-year Treasury notes and now the fall of Long-Term Capital Management.

People who have never met Meriwether may remember him as the man featured at the start of Michael Lewis' book "Liar's Poker." As recounted there, Meriwether supposedly challenged John Gutfreund, then the chairman of Salomon Brothers, to up the ante from $1 million to $10 million in a game of "I dare you" played with serial numbers on a dollar bill. Gutfreund, no pansy himself, walked away, according to the book.

This story almost certainly helped forge the romantic view of Meriwether as a Wall Street cowboy, willing to make a bet that even his rich boss shrank from. The only trouble is, it never happened.

According to people who were there, it was not Meriwether who made the challenge. It was John O'Grady, a gregarious and blustery Salomon partner who ran technical support for the traders. O'Grady died in 1989. (Lewis, who is traveling, was not available for comment.)

According to those who know him well, the story is also out of character, because Meriwether made only the most calculated of bets, both personally and for the firm.

He loved to bet on Chicago Cubs games, for example, but would not do so until he had first received the weather report to see which way and how hard the wind was blowing at Wrigley Field. That way he could better guess how the Cubs home-run hitters might do against the opposing pitchers.

"These weren't big bets," said a person who had knowledge of them at the time. "He just liked to have a lot of things he could analyze." More often than not, he came away a winner.

From Golf Caddie to Club Owner

Born in Chicago in 1947, Meriwether grew up on the city's South Side. Like another famed money manager -- Peter Lynch of Fidelity -- Meriwether caddied at a nearby golf course to earn money. Friends believe Meriwether is an only child.

In 1969, he received a bachelor's degree in business from Northwestern University. He earned an MBA from the University of Chicago in 1973.

The next year he moved to New York, a 27-year-old recruit in Salomon Brothers' vaunted management-training program. Another member of that program recalls that Meriwether was friendless in New York and roomed at a Manhattan athletic club. His first assignment was on the desk that arranged financing for the firm's customers, called the repurchase or repo department.

It was there that Meriwether first made his mark. The desk was a fairly limited operation and acted as a service function for the government bond desk. "It had never been a money-making proposition," said a person who was there at the time. "But John Meriwether turned it into that."

Meriwether's second assignment was to trade short-term agency securities, such as those backed by the Federal Intermediate Credit Bank. Aided by what people who worked alongside him called a near-photographic memory, Meriwether took this backwater of the bond market and made it spectacularly profitable.

He understood better than others the proper differences, or spreads, between the yields on agencies and those on Treasuries, which are backed by the full faith and credit of the government.

In a precursor to this summer's events, spreads on agency securities began to widen dramatically in the mid-1970s. What caused the change? A near-bankrupt New York City propelled investors out of anything that looked at all risky for the relative safety of Treasuries. Meriwether knew two things: that the widening in the spreads was an aberration and that the agency securities he traded, while not formally backed by the government, were still good.

He was right. "He bought every single one he could, with the acknowledgment of the senior partners," recalled a former associate. "He rode out the bad bumps. Boy, did it work well."

Then, in the late 1970s, Meriwether had an even better idea. Through dealing with Salomon Brothers' customers, he saw the beginnings of a business that would prove extremely profitable for the firm. It was the bond arbitrage business, the ability to capitalize on small discrepancies in prices between specific bonds and the newly developed futures contracts that were based on them. The business was in the infant stages -- a bank in Cleveland was good at it and some of the Wall Street dealers were getting better. Why not Salomon Brothers?

He approached the firm's partners -- it was still a partnership, not yet a public company. "Why should we be executing these trades for some of these new arb firms when we can do them ourselves?" he asked. Meriwether was given the go-ahead.

Deja Vu, of Sorts, but Different

he story of Meriwether's first home run on the arbitrage desk is eerily similar to the Long-Term Capital story now unfolding. But there is a big difference: Meriwether did the bailing out then and he -- as the banks and Wall Street firms that poured billions into Long-Term Capital now hope to do -- later capitalized on the comeback of a troubled portfolio.

A big player in the Treasury futures market was a firm called J.F. Eckstein & Co., which had made a big bet that a disparity in prices between Treasury bill futures and the underlying security would converge. But in a brief two weeks, the prices of the bills rocketed. Eckstein, who expected prices to fall, was quickly depleting capital, struggling to meet margin calls.

"It was the first real period of turmoil in the fledgling financial futures markets, and Meriwether understood it," Eckstein recalled Thursday. Almost alone in the market as a willing buyer, Meriwether took over a good part of Eckstein's portfolio. "The Treasury bills loosened up and the prices converged," one trader said. "Meriwether made a fortune."

Eighteen years later Meriwether finds himself in a similar position. Unlike Eckstein, however, Meriwether is still running his firm.

Looking back, it is easy to see how Meriwether might later have been felled by thinking that when spreads widen, they always come back. After all, with spreads on emerging market debt, junk bonds and mortgage-backed securities much wider this spring than in years, they had to narrow, didn't they? Once they did, anyone willing to take the gamble would generate a windfall.

There is one big difference, however. At Salomon Brothers, when Meriwether asked for the necessary capital to make a huge trade, or additional money to cover it when it temporarily lost value, he always got it. At Long-Term Capital Management he was not so lucky.

Indeed, when he went to his clients in early September with hat in hand, he did so still a staunch believer that his money-losing trades would come back.

Never mind that the paper losses in these roughly $90 billion in positions had eroded his capital to just $600 million from $4.8 billion at the start of 1998. Convinced the trades would work out in the end, he asked for more money to shore up his capital and allow him to keep the positions. Salomon Brothers might have given it to him. But this time, he was turned down.

A Natural Gambler, but a Careful One

Back at Salomon Brothers, Meriwether made partner in 1980. As his prominence in the firm grew, so did his ability to take greater risk. Indeed, he thrived on it, former colleagues say. "He liked to be involved with chance," one said. "But it was always calculated."

Meriwether was a natural gambler. He would take his group to Atlantic City, N.J., roughly twice a year. Department meetings would sometimes be held at the Meadowlands race track in New Jersey.

Meriwether's love of horses extends beyond the track. He houses several thoroughbreds on his property in the northern reaches of Westchester County. And he is a trustee of the New York Racing Association, which operates Belmont Park, Aqueduct and Saratoga Springs. Meriwether's wife, the former Mimi Murray, is a rider who trained for the Olympic team.

In 1982, Salomon Brothers was bought by Phillip Brothers, a commodity trading firm known on the Street as PhiBro. Some sources who were at Salomon Brothers at the time say one reason it took place was that top partners worried about what might happen if Meriwether's big trades went bad, wiping out the partnership. With the takeover, their own money was no longer on the line backing his bets.

Yet Meriwether's bigger and bigger bets kept paying off during the 1980s, generating bigger and bigger profits for the firm.

By today's standards, Meriwether did not earn an outsized paycheck at Salomon Brothers. In 1989 he took home roughly $8 million; the next year he received $10 million.

But in 1991, disaster struck. A trader on Meriwether's desk, Paul Mozer, tried to corner the market in an issue of two-year U.S. Treasury notes. While Meriwether reported the infractions to his superiors, the violations were not reported to the Treasury until much later.

The scandal shook Salomon Brothers to its core. Gutfreund and Thomas Strauss, the president, left when Warren Buffett, a big owner of Salomon stock, took over to help clean up the mess. Meriwether resigned. He later settled an administrative proceeding with the Securities & Exchange Commission in which he neither admitted nor denied that he had been negligent as a supervisor. He agreed to a three-month suspension and a $50,000 fine.

By this time, Meriwether was quite wealthy. But it was his investment in his new firm, Long-Term Capital Management, that brought him true riches. Although his net worth is a secret, former colleagues estimate that at the peak, he was probably worth more than $200 million.

One Calculation Left Undone

For years, Meriwether lived humbly. From 1981 until 1993, home was the same small apartment on York Avenue, on Manhattan's upper East Side.

While he lived relatively modestly, he had expensive tastes in golf clubs, joining three of the most prestigious in the United States: Shinnecock Hills on eastern Long Island, Winged Foot Golf Club in Westchester County and Cypress Point, near Pebble Beach, Calif. He is said to shoot in the 70s. He even owns a golf course in Waterville, Ireland, with some of his partners.

Meriwether is a deeply private man who lets in only a handful of people. These people are, in return, very protective. "He is a very quiet person, even introverted," said one former Salomon partner.

At Salomon, he was known to be always available to people who wanted to bounce an idea off him. "One of the reasons he inspired the loyalty he did was that he would not try to take the credit," said Stephen Modzelewski, a former colleague of Meriwether who now runs a hedge fund. "Usually the managers would steal the ideas of subordinates."

Among his colleagues, his integrity was never in doubt. He would suddenly remember, on occasion, to pay up on a bet long since forgotten by everyone else.

Stunned by the recent unfolding of events at Long-Term Capital Management, former colleagues cannot help but wonder how such a bad thing could have happened to such a brilliant person. Apparently neither Meriwether nor any of his associates, including two Nobel laureates in economics, had bothered to do a worst-case scenario on their trades. If they had, these people believe, the firm would never have been leveraged to the degree that it was.

At Salomon, recalled a former trader there who worked with Meriwether, "we would always do what we called the 'yield-to-worst' calculation, which took into effect the world going down."

Apparently, yield-to-worst was one calculation Meriwether either ignored or forgot to do.

Indecisive traders will always produce inconsistent behavior, and consequently inconsistent profits.

- - John Hayden - ;