Yeah, well:
The Genius mentioned in the title refers to Robert Merton and Myron Scholes. Nine months before LTCM failed 1997, Merton and Scholes shared the Nobel prize in economics. Merton, Scholes and Stanford’s William Sharp (famous for developing the sharp ratio to measure risk) are some of the founders of modern finance, which attempts to apply quantitative techniques to market analysis. Merton and Scholes jumped at the chance to join LTCM where they could not only apply their theoretical work but make a great deal of money.
Backing up a few years:
In 1991, when John Meriwether [Big Swinging Dick from Michael Lewis book "Liar's Poker"] was the head of the Salomon Brothers fixed income security desk, a US Treasury bond trader in Meriwether’s department at Salomon falsified a US Treasury bill bid. The scandal that ensued when this came to light put Salomon in danger of losing their status as a Treasury bill broker. The head of Salomon, John Gutfreund was forced out and Meriwether went along with him.
This left John Meriwether unemployed and very wealty. … In 1993 Meriwether took the first steps toward founding the Long-Term Capital Management (LTCM) hedge fund. As befits a Big Swinging Dick market trader, LTCM was to be a Big Swinging Dick of a Hedge fund, capitalized with two and a half billion dollars. For the privilege of having their money managed by Masters of the Universe, LTCM would also charge investors over double the usual management fees.
A hedge fund is an investment fund for wealthy individuals and institutions like banks and pension funds. The number of investors in a hedge fund is limited and they are restricted, in theory, to only those who can afford the risks which may be associated with the hedge fund. Unlike mutual funds, hedge funds are unregulated.
The last paragraph is important. It reveals the lie behind the argument that the trading benefited Main Street. It most certainly did not. The trading was designed – by intent – to benefit Wall Street and it’s patrons.
As told by the story of LTCM. Ten years later, The Mortgage Sequel.
