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October 2, 1998

John Meriwether: Hedge Fund Wizard or Wall St.

Gambler Run Amok?
By GRETCHEN MORGENSON

ohn William Meriwether was the consummate trader. He knew when to hold,
he knew when to fold. But as the chairman of Long-Term Capital
Management L.P., he failed to recognize that his luck and his money were fast
running out.

Last week they did, as a consortium of big international banks and brokerage
firms agreed to inject $3.6 billion into Long-Term Capital, the giant hedge fund
that Alan Greenspan, chairman of the Federal Reserve, worried would disrupt the
global financial markets if it failed.

A quiet, introverted man with a head for numbers and a love of chance,
Meriwether by all accounts was deemed most likely to succeed by those who
worked with him over the years. A student of the bond markets, he knew their
anomalies -- and how to play them -- better than anyone. But in his previous
work as a bond trading star at Salomon Brothers, Meriwether had something he
would sorely come to need at Long-Term Capital: the backing of a big firm with
the deep pockets that can let a trader ride out almost any market storm.

Throughout the very public bailout of recent weeks, Meriwether has remained a
man of mystery. He has given only a couple of interviews over the years and is
rarely seen on the celebrity charity circuit in New York, unlike other men and
women of fortune on Wall Street. He has even bought up most of the
photographs taken of him in recent years.

So what kind of a man is Meriwether? And how could such a reputedly brilliant
trader who had chalked up so many successes over the last 25 years wind up
decimating his partners and nearly bankrupting his firm?

Meriwether is not talking about his past, present or future. But conversations
with people who have worked with him in his years on Wall Street reveal a man,
revered by those around him, who nonetheless remained remote, even lonely. A
man always hunting for the edge that would make his bets -- whether in bonds, at
the race track or on a Chicago Cubs game -- more calculated than wild.
A man co-workers describe as scrupulously honest, yet who has been associated
with two of the biggest disasters in Wall Street history: the 1991 attempt by a
Meriwether underling to rig the market in two-year Treasury notes and now the
fall of Long-Term Capital Management.

People who have never met Meriwether may remember him as the man featured
at the start of Michael Lewis's book, "Liar's Poker." As recounted there,
Meriwether supposedly challenged John H. Gutfreund, then the chairman of
Salomon Brothers, to up the ante from $1 million to $10 million in a game of "I
dare you" played with serial numbers on a dollar bill. Gutfreund, no pansy
himself, walked away, according to the book.

This story almost certainly helped forge the romantic view of Meriwether as a
Wall Street cowboy, willing to make a bet that even his rich boss shrank from.
Only trouble is, it never happened. According to people who were there, it was
not Meriwether who made the challenge. It was John O'Grady, a gregarious and
blustery Salomon partner who ran technical support for the traders. O'Grady died
in 1989. ( Lewis was traveling and not available for comment.)

According to those who know him well, the story is also out of character,
because Meriwether only made the most calculated of bets, both personally and
for the firm. He loved to bet on Chicago Cubs games, for example, but would not
do so until he had first received the weather report to see which way and how
hard the wind was blowing at Wrigley Field. That way he could better guess how
the Cubs home-run hitters might do against the opposing pitchers. "These weren't
big bets," said a person who had knowledge of them at the time. "He just liked to
have a lot of things he could analyze." More often than not, he came away a
winner.

From Golf Caddie To Club Owner

orn in Chicago in 1947, Meriwether grew up on the city's South Side. Like
another famed money manager -- Peter Lynch of Fidelity -- Meriwether
caddied at a nearby golf course to earn money. Friends believe Meriwether is an
only child.

In 1969, he received a bachelor's degree in business from Northwestern

University. He earned an M.B.A. from the University of Chicago in 1973.

The next year he came to New York, a 27-year-old recruit in Salomon Brothers'
vaunted management training program. Another member of that program recalls
that Meriwether was friendless in New York and roomed at a Manhattan athletic
club. His first assignment was on the desk that arranged financing for the firm's
customers, called the repurchase or repo department.

It was there that Meriwether first made his mark. The desk was a fairly limited
operation and acted as a service function for the Government bond desk. "It had
never been a money-making proposition," said a person who was there at the
time. "But John Meriwether turned it into that."

Meriwether's second assignment was to trade short-term agency securities, such

as those backed by the Federal Intermediate Credit Bank. Aided by what people
who worked alongside him called a near-photographic memory, Meriwether took
this backwater of the bond market and made it spectacularly profitable. He
understood better than others the proper differences, or spreads, between the
yields on agencies and those on Treasuries, which are backed by the full faith and
credit of the Government.

In a precursor to this summer's events, spreads on agency securities began to

widen dramatically in the mid-1970's. What caused the change? A near-bankrupt
New York City propelled investors out of anything that looked at all risky for the
relative safety of Treasuries. Meriwether knew two things: that the widening in
the spreads was an aberration and that the agency securities he traded, while not
formally backed by the Government, were still good.

He was right. "He bought every single one he could, with the acknowledgment of
the senior partners," recalled a former associate. "He rode out the bad bumps.
Boy, did it work well."

Then, in the late 1970's, Meriwether had an even better idea. Through dealing
with Salomon Brothers' customers, he saw the beginnings of a business that
would prove extremely profitable for the firm. It was the bond arbitrage business,
the ability to capitalize on small discrepancies in prices between specific bonds
and the newly developed futures contracts that were based on them. The business
was in the infant stages -- a bank in Cleveland was good at it and some of the
Wall Street dealers were getting better. Why not Salomon Brothers?

He approached the firm's partners -- it was still a partnership, not yet a public
company. "Why should we be executing these trades for some of these new arb
firms when we can do them ourselves?" he asked. Meriwether was given the go-
ahead.

Deja Vu, of Sorts, But Different

he story of Meriwether's first home run on the arbitrage desk is eerily

similar to the Long-Term Capital story now unfolding. But there is a big
difference: Meriwether did the bailing out then and he, as the banks and Wall
Street firms that poured billions into Long-Term Capital now hope to do, later
capitalized on the comeback of a troubled portfolio.

A big player in the Treasury futures market was a firm called J. F. Eckstein &
Company, which had made a big bet that a disparity in prices between Treasury
bill futures and the underlying security would converge. But in a brief two
weeks, the prices of the bills rocketed. Eckstein, who expected prices to fall, was
quickly depleting capital, struggling to meet margin calls.

"It was the first real period of turmoil in the fledgling financial futures markets
and Meriwether understood it," Eckstein recalled yesterday. Almost alone in the
market as a willing buyer, Meriwether took over a good part of Eckstein's
portfolio. "The Treasury bills loosened up and the prices converged," one trader
said. "Meriwether made a fortune."

Eighteen years later, Meriwether finds himself in a similiar position. Unlike

Eckstein, however, Meriwether is still running his firm.

Looking back, it is easy to see how Meriwether might later have been felled by
thinking that when spreads widen, they always come back. After all, with spreads
on emerging market debt, junk bonds and mortgage-backed securities much
wider this spring than in years, they had to narrow, didn't they? Once they did,
anyone willing to take the gamble would generate a windfall.
There is one big difference, however. At Salomon Brothers, when Meriwether
asked for the necessary capital to make a huge trade or additional money to cover
it when it temporarily lost value he always got it. At Long-Term Capital
Management he was not so lucky.

Indeed, when he went to his clients in early September with hat in hand, he did
so still a staunch believer that his money-losing trades would come back. Never
mind that the paper losses in these roughly $90 billion in positions had eroded his
capital to just $600 million from $4.8 billion at the start of 1998. Convinced the
trades would work out in the end, he asked for more money to shore up his
capital and allow him to keep the positions. Salomon Brothers might have given
it to him. But this time, he was turned down.

Back at Salomon Brothers, Meriwether made partner in 1980. As his prominence

in the firm grew, so did his ability to take greater risk. Indeed, he thrived on it,
former colleagues say. "He liked to be involved with chance," one said. "But it
was always calculated."

A Natural Gambler, But a Careful One

eriwether was a natural gambler. He would take his group to Atlantic City
roughly twice a year. Department meetings would sometimes be held at
the Meadowlands race track in nearby New Jersey.

Meriwether's love of horses extends beyond the track. He houses several

thoroughbreds on his property in the northern reaches of Westchester County.
And he is a trustee of the New York Racing Association, which operates Belmont
Park, Aqueduct and Saratoga. Meriwether's wife, the former Mimi Murray, is a
rider who trained for the Olympic team.

In 1982, Salomon Brothers was bought by Philipp Brothers, a commodity trading

firm known on the Street as Phibro. Some sources who were at Salomon Brothers
at the time say that one reason it took place was that top partners worried about
what might happen if Meriwether's big trades went bad, wiping out the
partnership. With the takeover, their own money was no longer on the line
backing his bets.

Yet Meriwether's bigger and bigger bets kept paying off during the 1980's,
generating bigger and bigger profits for the firm.

By today's standards, Meriwether did not earn an outsized paycheck at Salomon

Brothers. In 1989 he took home roughly $8 million; the next year he received
$10 million.

But in 1991, disaster struck. A trader on Meriwether's desk, Paul Mozer, tried to
corner the market in an issue of two-year United States Treasury notes. While
Meriwether reported the infractions to his superiors, the violations were not
reported to the Treasury until much later.

The scandal shook Salomon Brothers to its core. Gutfreund and Thomas W.
Strauss, the president, left when Warren E. Buffett, a big owner of Salomon
stock, took over to help clean up the mess. Meriwether resigned. He later settled
an administrative proceeding with the Securities and Exchange Commission in
which he neither admitted nor denied that he had been negligent as a supervisor.
He agreed to a three-month suspension and a $50,000 fine.
 By this time, Meriwether was wealthy. But it was his investment in his new firm,
Long-Term Capital Management, that brought him true riches. Although his net
worth is a secret, former colleagues estimate that at the peak, he was probably
worth more than $200 million.

One Calculation Left Undone

or years, Meriwether lived humbly. From 1981 until 1993, home was the
same small apartment on York Avenue, on Manhattan's Upper East Side.

While he lived relatively modestly, he had expensive tastes in golf clubs, joining
three of the most prestigious in America: Shinnecock Hills on eastern Long
Island, Winged Foot Golf Club in Westchester and Cypress Point, near Pebble
Beach, Calif. He is said to shoot in the 70's. He even owns a golf course in
Waterville, Ireland, with some partners.

Meriwether is a deeply private man who lets in only a handful of people. These
people are, in return, very protective. "He is a very quiet person, even
introverted," one former Salomon partner said.

At Salomon, he was known to be always available to people who wanted to

bounce an idea off him. "One of the reasons he inspired the loyalty he did was
that he would not try to take the credit," said Stephen Modzelewski, a former
colleague of Meriwether's who now runs a hedge fund. "Usually the managers
would steal the ideas of subordinates."

Among his colleagues, his integrity was never in doubt. He would suddenly
remember, on occasion, to pay up on a bet long since forgotten by everyone else.

Stunned by the recent unfolding of events at Long-Term Capital Management,

former colleagues cannot help but wonder how such a bad thing could have
happened to such a brilliant person. Apparently neither Meriwether nor any of his
associates, including two Nobel laureates in economics, had bothered to do a
worst-case scenario on their trades. If they had, these people believe, the firm
would never have been leveraged to the degree that it was.

At Salomon, recalled a former trader there who worked with Meriwether, "we
would always do what we called the 'yield-to-worst' calculation, which took into
effect the world going down."

Apparently, yield-to-worst was one calculation Meriwether either ignored or

forgot to do.

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