The Story of the Long-Term Capital Management Fund (L.T.C.M.).
There are many things to be learned from the failures and successes of others. LTCM was the start of the 90s of the investment world, but it was short-lived and it didn’t bring its goals to fruition.
Until 1991, John William Meriwether (born in 1947) was a bond trader at Salomon Brothers, one of the five biggest investment banks in the US at that time. This company was so influential that Salomon’s CEO was named “the King of Wall Street”.
During his time there, John W. Meriwether was the head of the firm’s bond trading desk until the company, through Paul Mozer who worked in Merithether’s office, was involved in a bond trading scandal, in which Salomon Brothers, a primary dealer between the US government and other market participants, bided multiple times for bonds, in order to obtain more US bonds, which were at demand at that time, ignoring the limit set by the US treasury to prevent market monopolization.
It’s worth to be noted that Meriwether’s group was responsible for 80% to 100% of Salomon’s global total earnings during the 1980s. Their differentiation from other similar offices was that they were more scientific that the others and they were using statistics and probability very heavily.
Due to this scandal, Salomon Brothers were fined $190'000'000, and the legendary value investor Warren Buffet, who owned 12% of the company then, had to step in as a CEO for the short-term and settle the situation.
Meriwether was charged a $50'000 charge in civil penalties and left the Salomon Brothers.
Founding Long-Term Capital Management
Two years after, in 1993, John W. Meriwether founded LTCM and recruited well-known financial experts and finance academics like Robert C. Merton and Myron Scholes, two out of three creators of the Black-Scholes model for pricing options contracts and Nobel laureates, David Wiley Mullins Jr, who was the 14th Vice Chair of the Federal Reserve from 1991 to 1994, and various other former Harvard Business School professors and Salomon’s employees. By simply announcing these names, the LTCM has all the respect and trust needed.