Submitted by Edward Harrison of Credit Writedowns
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 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.
Traders say the strategy has the potential to deliver huge returns in the current market, with many banks’ proprietary trading desks having scaled back their operations and far fewer hedge funds in existence.
I bet the money is pouring in.
The timing here is interesting given what is happening in mortgages and banking. Meriwether was at the center of the creation of the mortgage-backed securities market with his colleague Lewis Ranieri. Franklin Bank Corp., a bank run by Ranieri was recently seized by the FDIC as it ran into difficulties in the financial crisis due to poor lending. The seizure cost taxpayers $1.6 billion.
However, the much more important tidbit on the mortgages front comes in terms of foreclosure activity. Because of an August ruling by the Kansas Supreme Court (Yves linked out to a story on this today), we could be seeing some major changes in the way foreclosures happen. A post at Credit Writedowns, “Why mortgages aren’t modified and what a ruling stopping foreclosures means” chronicles the case in greater detail.
Meriwether setting up new hedge fund – Sam Jones, FT (also with the FT Alphaville Team)
Meriwether – FT Lex