John Meriwether is back, risk must be too

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

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


    1. James Hunt

      Relative value trades are basically short volatility and convexity so you are correct. Hey maybe third time’s the charm! Oh wait.. he used that one up already.. Anyway fixed income arb works until it doesnt, then you give back everything you ever made and then some, but he gets to keep his part. Sweet deal if you can get it.

  1. Zap

    Spectacular 40% profits year after year?

    Very unspectacular 0.4% profits year after year considering the leverage, no?

    Same crap they are doing on the Street now, with our money, lever up, turn tiny incremental gains into outsized gains and skiiiiim for the bonus pool, until it all blows up in OUR faces of course.

  2. Skippy

    Nothing left to cannibalize now, but our selves.

    On this little economic life raft (presently full of holes) a meal must be had and a load must be lightened, exertion requires energy and it must come from some where. So for the good of the life raft I present my arm, then the other, if needed legs and lastly my corpse.

    Beware not to eat my brain though for it is filled with tribal silliness and could adversely affect your survival out comes. Long live the takers of this world, truly our species only hope of continuation, unabated in the necessity’s required to thrive in any environment, unburdened by ethos, morality, tears of mortal loss.

    We the givers will lay down upon your plate, offering ourselves up freely, for we understand that we are too weak and feeble to enact the hard choices required by nature. A mass plot for our broken gnawed bones, unadorned so memory fades quickly, our remembrance should never compete with your glory’s or conquests.

    Maybe, Ayr Rand was right and this is only the markets correction, too consume the impediment of government, to rightly reflect its true nature as *number one* in all manner of things. As Catkiller says “Capital chases Talent” so is the unencumbered *equal to talent*, well to-date that would seem so.

    Let the feast begin! survival situations, those that keep up their protein intake from day one fair better than those challenged by taste or whats on the menu.

  3. Robert Dudek

    Wouldn’t is be quicker and simpler for his investors to use a Martingale strategy at the casino?

    Same result.

  4. JG

    The inmates are running the asylum. John Meriwether should be the poster boy for the multitude of financial types who should no longer be allowed to work in financial services of any kind. Why is he not in jail? Does he have a casino license? This is a clusterfuck nation that allows this fraud to occur!

  5. Hubert

    Thanks Ed, the Headline made my day.

    Great time to take George Carlins advice and look at this as the greatest comedy ever played.

  6. Cassandra

    My obit in verse here evidently was hasty. It would be fascinating to hear the DD one-on-one’s:

    Relative Value FI Analyst (nervously looking askance due to the reputation of the man before him): SO Mr Meriwether, what exactly is your “edge…??!?”

    JWM (bespokely Saville-suited + Hermes tie, drawing a breath as he removes the well-chewed pencil from between his lips): “You see, son” (he condescendingly begins as the analyst is clearly young enough to be his offspring), when you’ve been through the wringer as many times as I have, you hopefully learn things that successful managers can’t possibly have learned…”

    Relative Value FI Analyst (somewhat sheepishly): “…errrr must one really incinerate ones investors to learn such lessons? I mean, can’t one extrapolate from the historical misfortunes of others..?!?

    JWM: No. Categorically not.

    Relative Value FI Analyst (sighing): I suppose you’ll be providing investors with complete transparency??

    JWM: THat depends upon what you precisely mean by “complete” and “transparency”…

    One must wonder whether his pitchbook will increasingly resemble a treadless tire in the snow…

    1. Edward Harrison Post author

      That’s a good one, Cassandra! I’ll have to link to that post. Meriwether must have nine lives. This gives him five more cracks at this sticky wicket.

  7. Siggy


    Pardone, I spent a lot of time in the investment banking business and don’t ever recall that Goldman was an Investment Bank. My memory is that they were a trading house, they brought liquidity to the table. It is also my sense that they didn’t get large in Investment Banking until they went corporate and started playing with other peoples money.

    That aside, Meriwether is back at the trough? Why not, its what he does. Consider his performance from Salomon to present. What I see is an incredible talent for ultimate failure. Call it hubris, call it balls, the guy does have nerve. What is disconcerting is that there are people who will pony-up the lucre for his coming debacle. That is what is both puzzling and troubling.

    1. Edward Harrison Post author

      That IS what is puzzling. Call it appetite for risk, which is why I say risk is back. And, Goldman has always been in the bulge bracket in Investment Banking. They were never a pure trading shop as the revenue mix attests (1/3 trading at IPO in 1999). Remember, Goldman has always ranking high on all the Advisory and M&A league tables just like Morgan Stanley.

  8. Chris

    The real shame is that he will probably raise a billion plus. Here’s how the conversation will go at the consulting firm or fund of funds:

    “No way he can be wrong a third time!! We have a rare opportunity to add this really smart guy to our stable of managers. Let’s give him $250 mil.”

  9. Pradeep

    How many times are you supposed to fail before investors realize you are not a “master of the universe” anymore.

    This piece should belong on the website!!!!

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