Friday, October 7, 2016

When Genius Failed (Chapter 10)

Long-Term’s financial crisis called for the Feds to intervene. The fear was that if Long-Term failed, many others would go tumbling down with them. Peter Fisher, who ran the trading desk for the Feds, went to Long-Term’s offices. There, he was shown the “risk aggregator” which was kept a secret from many of the Long-Term employee and showed the amount of exposure that Long-Term showed. Fisher then realized that all of the trades that Long-Term made were linked together. The partners thought of solutions to end the downfall of the firm and the effects it would have on the market. Bankruptcy was one possibility, but Rickards said it wouldn’t change anything. The potential loss of $3-5 billion between 17 banks didn’t concern the Feds and they thought the losses would be tolerable. The banks had put their own shareholders money at risk so it was their own fault. Fisher made the heads of all the private banks involved meet to see if they could work out a solution, but they were not happy with one another and lobbied for the best interests of their own bank. The Feds continued to have meetings for the banks to figure out a solution and then Warren Buffet sent in his offer of $250 million and Meriwether had an hour to accept the offer. The only issue with the bid was that it was worded in a way that Buffet would buy the assets of LTCM, which he did not want to do. Eventually, the Feds bailed LTCM out and the banks would receive 90% of the equity funds. The existing investors would retain the 10% interest that they were receiving. Meriwether‘s reputation had come crashing down after both the Long-Term crisis and his involvement in the Salomon Brother’s scandal. After many lawyers and revisions to a contract, the LTCM’s funds were taken over by 14 banks.

Questions: Even though LTCM was losing millions of dollars per day and John Meriwether’s reputation and career were on the line, he still seemed very calm. How would you have reacted if you were put into Meriwether’s position?


  1. I think part of the reason that JM was able to remain calm was because he knew everything was out of his control at this point in time. Had I been in his position, I think I would have felt horrible not only because of the decline in my net worth and the fact my reputation was ruined, but also because of the investors I let down. It’s hard to say how exactly I would have reacted, but it is impressive JM appeared to keep his cool.

  2. I would have laughed out loud that America was known as a capitalist country, then in 2008 I would have rolled on the ground laughing even harder that it happened again on a larger scale. And in 2017 I will roll on the ground laughing in tears when the Federal Reserve blames Congress and vice versa.

  3. I think your discussion question gets at one of the aspects of human behavior that I think puts the majority of people at a disadvantage while making economic/investment decisions. Before I delve into my viewpoint, I would like to make it clear that this is not a criticism of people, but rather something that an investor should keep in mind while investing: human emotion usually gets in the way of making sound investment decisions.

    I'm currently taking a portfolio management class right now where we get to invest real money into the stock market. The professor of the class shared with us that sometimes investors get too caught up in the loss of money that they act irrationally to try to win back any losses that they endured. This usually comes in the form of taking unnecessary risk with the hope of reeling in an impressive return. In reality, this type of behavior usually leads to even more losses and, in turn, even riskier behavior to try to regain the lost capital.

    Getting back to your discussion question, I think it would have been very hard for me to remain composed while in JM's position. That level of loss on such a consistent basis must have been incredibly taxing on him, and I wonder if his calmness stemmed from his time at Solomon Brothers, where his view of money fundamentally changed from what he thought as a boy.

    Either way, I commend John for maintaining the balance that he did despite such devastating losses on a regular basis.

  4. Although JM maintained his composure through LTCM’s decline, I have a hard time believing that he actually felt the way he seemed. I think a large part of the reason that JM reacted the way that he did goes back to how his character was portrayed in Liar’s Poker. He was known as the King of Liar’s Poker because he could maintain his demeanor even in stressful situations. I think that appearing calm on the outside doesn’t necessarily mean that you are feeling the same way on the inside. I couldn’t imagine being in a situation where my company was millions of dollars each day, but I think that Rex makes a good point in that there comes a point when you are unable to control things that you have to force yourself to let go. It’s hard to know what was going on in his head, however it is commendable that JM was able to maintain his composure given his company’s quick decline.

  5. John Meriweather may have seemed composed through Long Term's failing years, but I have to believe it weighed heavy on his conscience. Meriweather thought he'd found the winning formula to wall street with Long Term, but eventually, it showed that was not the case. If you refer to our previous book, Liar's Poker, he called out Gutfriend on his 1 million dollar game of liars poker and hedged his bet and called him out for 10 million. This composure was what made him great. However failing as large as Long Term would tarnish your ego, confidence, and brand.

    Regarding your question, I would be devastated to put all the time, energy, and capital into the firm and be apart of its failure would be a tough pill to swallow -- especially when you are perceived as the golden standard for your industry. I'd like to believe I would be as composed as Meriweather but one will never know!

  6. Meriweather's composure through the time of losing so much money I think is what made him such a great trader. He was unaffected by losses here and there and did his best to try not to be emotionally invested. Trading without a whole lot of emotion or worry allowed him to work more like a computer and see numbers and trends rather than to see people's money and futures. This is what allowed him to stay composed while his firm was losing so much money because he believed in the long haul that his strategy and formula would eventually pay off and bring back the millions of dollars that he was losing at the time.

    Personally, I do not believe I could be an investment banker or trader because handling other people's money and usually their future as well would be very difficult. Most of the money people invest are their retirement funds they are trying to build in order to retire and not have to work their entire lives. I think I would be too emotionally invested and would be unable to maintain composure like Meriweather or have the guts to get the size of returns he was able to make in his hay day.