When Genius Failed: The Rise and Fall of Long Term Capital Management. Roger Lowenstein

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СКАЧАТЬ often showed a creative spark. With his practical bent, he made a real contribution to Salomon, where he set up a derivative-trading subsidiary. And Scholes was a foremost expert on tax codes, both in the United States and overseas. He regarded taxes as a vast intellectual game: “No one actually pays taxes,” he once snapped disdainfully.¹⁵ Scholes could not believe there were people who would not go to extremes to avoid paying taxes, perhaps because they did not fit the Chicago School model of human beings as economic robots. At Long-Term, Scholes was the spearhead of a clever plan that let the partners defer their cut of the profits for up to ten years in order to put off paying taxes. He harangued the attorneys with details, but the partners tended to forgive his hot flashes. They were charmed by Scholes’s energy and joie de vivre. He was perpetually reinventing himself, taking up new sports such as skiing and—on account of Meriwether—golf, which he played with passion.

      With Scholes on board, the marketing campaign gradually picked up steam. The fund dangled a tantalizing plum before investors, who were told that annual returns on the order of 30 percent (after the partners took their fees) would not be out of reach. Moreover, though the partners stated clearly that risk was involved, they stressed that they planned to diversify. With their portfolio spread around the globe, they felt that their eggs would be safely scattered. Thus, no one single market could pull the fund down.

      The partners doggedly pursued the choicest investors, often inviting prospects back to their pristine headquarters on Steamboat Road, at the water’s edge in Greenwich. Some investors met with partners as many as seven or eight times. In their casual khakis and golf shirts, the partners looked supremely confident. The fact was, they had made a ton of money at Salomon, and investors warmed to the idea that they could do it again. In the face of such intellectual brilliance, investors—having little understanding of how Meriwether’s gang actually operated—gradually forgot that they were taking a leap of faith. “This was a constellation of people who knew how to make money,” Raymond Baer, a Swiss banker (and eventual investor), noted. By the end of 1993, commitments for money were starting to roll in, even though the fund had not yet opened and was well behind schedule. The partners’ morale got a big boost when Hilibrand finally defected from Salomon and joined them. Merton and Scholes might have added marketing luster, but Hilibrand was the guy who would make the cash register sing.

      J.M. also offered partnerships to two of his longtime golfing cronies, Richard F. Leahy, an executive at Salomon, and James J. McEntee, a close friend who had founded a bond-dealing firm. Neither fit the mold of Long-Term’s nerdy traders. Leahy, an affable, easygoing salesman, would be expected to deal with Wall Street bankers—not the headstrong traders’ strong suit. McEntee’s role, though, was a puzzle. After selling his business, he had lived in high style, commuting via helicopter to a home in the Hamptons and jetting to an island in the Grenadines, which had earned him the sobriquet “the Sheik.” In contrast to the egghead arbitrageurs, the Bronx-born McEntee was a traditionalist who traded from his gut. But Meriwether liked having such friends around; bantering with these pals, he was relaxed and even gregarious. Not coincidentally, Leahy and McEntee were fellow Irish Americans, a group with whom J.M. always felt at home. Each was also a partner in the asset that was closest to J.M.’s heart—a remote, exquisitely manicured golf course, on the coast of southwestern Ireland, known as Waterville.

      Early in 1994, J.M. bagged the most astonishing name of all: David W. Mullins, vice chairman of the U.S. Federal Reserve and second in the Fed’s hierarchy to Alan Greenspan, the Fed chairman. Mullins, too, was a former student of Merton’s at MIT who had gone on to teach at Harvard, where he and Rosenfeld had been friends. As a central banker, he gave Long-Term incomparable access to international banks. Moreover, Mullins had been the Fed’s point man on the Mozer case. The implication was that Meriwether now had a clean bill of health from Washington.

      Mullins, like Meriwether a onetime teenage investor, was the son of a University of Arkansas president and an enormously popular lecturer at Harvard. Ironically, he had launched his career in government as an expert on financial crises; he was expected to be Long-Term’s disaster guru if markets came unstuck again. After the 1987 stock market crash, Mullins had helped write a blue-ribbon White House report, laying substantial blame on the new derivatives markets, where the snowball selling had gathered momentum. Then he had joined the Treasury, where he had helped draft the law to bail out the country’s bankrupt savings and loans. As a regulator, he was acutely aware that markets—far from being perfect pricing machines—periodically and dangerously overshoot. “Our financial system is fast-paced, enormously creative. It’s designed to have near misses with some frequency,” he remarked a year before jumping ship for Long-Term. With more omniscience regarding his future fund than he could have dreamed, Mullins argued that part of the Fed’s mission should be saving private institutions that were threatened by “liquidity problems.”¹⁶

      Wry and soft-spoken, the intellectual Mullins dressed like a banker and was thought to be a potential successor to Greenspan. Nicholas Brady, his former boss at Treasury, wondered when Mullins joined Long-Term what he was doing with “those guys.” Investors, though, were soothed by the addition of the congenial Mullins, whose perspective on markets may have been much like their own. Indeed, by snaring a central banker, Long-Term gained unparalleled access for a private fund to the pots of money in quasi-governmental accounts around the world. Soon, Long-Term won commitments from the Hong Kong Land & Development Authority, the Government of Singapore Investment Corporation, the Bank of Taiwan, the Bank of Bangkok, and the Kuwaiti state-run pension fund. In a rare coup, Long-Term even enticed the foreign exchange office of Italy’s central bank to invest $100 million. Such entities simply do not invest in hedge funds. But Pierantonio Ciampicali, who oversaw investments for the Italian agency, thought of Long-Term not as a “hedge fund” but as an elite investing organization “with a solid reputation.”¹⁷

      Private investors were similarly awed by a fund boasting the best minds in finance and a resident central banker, who plausibly would be a step ahead in the obsessive Wall Street game of trying to outguess Greenspan. The list was impressive. In Japan, Long-Term signed up Sumitomo Bank for $100 million. In Europe, it corralled the giant German Dresdner Bank, the Liechtenstein Global Trust, and Bank Julius Baer, a private Swiss bank that pitched the fund to its millionaire clientele, for sums ranging from $30 million to $100 million. Republic New York Corporation, a secretive organization run by international banker Edmond Safra, was mesmerized by Long-Term’s credentials and seduced by the possibility of winning business from the fund.¹⁸ It invested $65 million. Long-Term also snared Banco Garantia, Brazil’s biggest investment bank.

      In the United States, Long-Term got money from a diverse group of hotshot celebrities and institutions. Michael Ovitz, the Hollywood agent, invested; so did Phil Knight, chief executive of Nike, the sneaker giant, as well as partners at the elite consulting firm McKinsey & Company and New York oil executive Robert Belfer. James Cayne, the chief executive of Bear Stearns, figured that Long-Term would make so much money that its fees wouldn’t matter. Like others, Cayne was comforted by the willingness of J.M. and his partners to invest $146 million of their own. (Rosenfeld and others put their kids’ money in, too.) Academe, where the professors’ brilliance was well known, was an easy sell: St. John’s University and Yeshiva University put in $10 million each; the University of Pittsburgh climbed aboard for half that. In Shaker Heights, Paragon Advisors put its wealthy clients into Long-Term. Terence Sullivan, president of Paragon, had read Merton and Scholes while getting a business degree; he felt the operation was low risk.¹⁹

      In the corporate world, PaineWebber, thinking it would tap Long-Term for investing ideas, invested $100 million; Donald Marron, its chairman, added $10 million personally. Others included the Black & Decker Corporation pension fund, Continental Insurance of New York (later acquired by Loews), and Presidential Life Corporation.

      Long-Term СКАЧАТЬ