Tag: derivatives

Yes, the big banks on Wall Street support the endless national discussion across the United States over health care reform because the longer such legislation is debated and delayed, the less chance any banking regulation will get through Congress and that’s great as far as Wall Street bankers are concerned.

For Wall Street, the longer it takes to get legislation passed the better. As stock market values and the economy improve, anger at banks is likely to subside.

So while most everyone is distracted, Bloomberg News reports that Wall Street’s “stealth lobby” is working “to protect one of its richest fiefdoms” and keep derivatives from being regulated.

What the fucking fuck???  Say it ain’t so!

Zero Hedge is reporting that the Fed has been betting its shit on the big crap table.

One-point-some-odd trillion in March alone.

Box cars working, people.

WTFF??

If true, this is government on drugs, flying saucer, four-way-window-pane.

Today, the United States will do something which it hasn’t done since the New Deal: it will nationalize a corporation.  Bear Stearns is the new Tennessee Electric Power Company.

After a weekend of intense negotiations, the Federal Reserve approved a $30 billion credit line to help JPMorgan Chase acquire Bear Stearns, one of the biggest firms on Wall Street, which had been teetering near collapse because of its deepening losses in the mortgage market.

In a highly unusual maneuver, Fed officials said they would secure the loan by effectively taking over the huge Bear Stearns portfolio and exercising control over all major decisions in order to minimize the central bank’s own risk.

President George Bush is responding to the disasters of one of Wall Street’s most reckless firms by echoing the actions which he has so passionately criticized in Evo Morales and Hugo Chavez.  When the high-stakes financial gamblers of derivatives trading are exposed, the true face of Bush Republicanism has been revealed: they are nothing less than communists.

Part Three: The Rise of Long-Term Capital Management and the Superportfolio

This is an extremely compressed version of the story of Long-Term Capital Management, perhaps the most written about corporate failure besides Enron of the last two decades.  If you wish to learn more, I highly recommend Lowenstein’s book When Genius Failed, linked below.

John Meriwether launched the limited partnership of Long-Term Capital Management in 1994.  Limited partnerships are the actual name of the entities commonly known as “hedge funds”.  The name hedge fund is in fact a misnomer; they originally developed that name because the funds were designed to “hedge” against losses by being more conservative than mutual funds, but have developed into the opposite.  The appeal of such funds is that limitations on the number of partners and the overall wealth of those allowed to join (no more than 99 people or entities of a total value of over $1 million, or 500 people or entities worth over $5 million – with those worth less entirely excluded) are coupled with a nearly total lack of government regulation.  Mutual funds are forced to disclose their portfolios and to maintain certain levels of diversification and leverage; limited partnerships are not.

Joining Meriwether as the partners of LTCM were former Salomon arbitrage group members Larry Hilibrand, Eric Rosenfeld, Victor Haghani, Greg Hawkins, and three very notable additions: economists Robert Merton and Myron Scholes, and David Mullins, who was the number-two at the Federal Reserve under Alan Greenspan and had previously been considered his heir apparent.  With such a roster, LTCM launched with capital of $1.4 billion, the largest such launch in financial history.  It had such disparate investors as the national bank of Italy and the President of Merril Lynch, and had an elegant and innovative structure, with the company that employed the partners and traders being a Delaware-registered management services company employed by a Cayman Islands partnership (the fund itself) financed by six international dummy corporations from whom investors in different nations would buy their shares.

Part Two: John Meriwether and the rise of Arbitrage

In the first entry of this narrative, we paid attention to the story of Lewis Ranieri and the Salomon Brothers mortgage desk in the 1980s.  We will now focus on another major player at Salomon in the 1980s, one whose fame and influence is even greater than Ranieri’s, and who is as different from Ranieri as could possibly be.  That man is John Meriwether.

Ranieri was a loud, fat, New York-born Italian who started in the Salomon mail room and had never gone to college.  Meriwether, on the other hand, was famous for his quiet and reserve.  Michael Lewis, in his book Liar’s Poker, opens with a famous story about Meriwether that even he has admitted is probably apocryphal: the game of Liar’s Poker, a modified game of poker played using the serial numbers on dollar bills, was vastly popular at Salomon at the time, and the inscrutable Meriwether was the firm’s best player.  The story goes that Salomon’s managing partner, John Gutfreund, challenged Meriwether to a single hand of liar’s poker for the sum of one million dollars, and Meriwether responded that he would only play if the sum for the hand was ten million (Gutfreund turned him down, which Lewis says was the intent).  

His first notable trade at Salomon was a classic bit of arbitrage; a trader named J.F. Eckstein’s firm was failing in 1979, and tried to get Meriwether to buy out his position.  Eckstein had sold millions in US Treasury bills, while buying millions in Treasury bill futures (futures are a contract where two parties agree to the sale of a commodity at a set price at a predetermined moment in the future).  At the time, treasury futures were selling at a discount compared to the actual bills.  What Eckstein had done was place a two hundred million dollar bet that the prices of the bills and the futures would eventually converge, but the longer that took, the more his equity value was disappearing.  If he didn’t sell his position, he would be ruined long before the prices converged.