John Meriwether lost $4.6 billion via 3 companies dealing with fixed income arbitrage

John MeriwetherPhoto by DocChewbacca

John Meriwether is an American hedge fund executive, seen as a pioneer of fixed income arbitrage.

After graduation, Meriwether moved to New York City, where he worked as a bond trader at Salomon Brothers. At Salomon, Meriwether rose to become the head of the domestic fixed income arbitrage group in the early 1980s and vice-chairman of the company in 1988. In 1991, Salomon was caught in a Treasury securities trading scandal perpetrated by a Meriwether subordinate, Paul Mozer. Meriwether then teamed with Salomon CEO John Gutfreund and Salomon’s general counsel as they all agreed the firm should report it to the Treasury Department but nothing happened for four months as the partners, including Gutfreund, “went around” issues of who should call whom, what to say, and when. Mozer was left at his desk and submitted another false bid, this time resulting in an SEC investigation, Gutfreund’s resignation, Buffett’s intervention, and Meriwether’s $50,000 civil penalty. Meriwether decided to leave Salomon. Three years later he founded LTCM, leading to Wall Street’s next crisis.

ON August 29, 1994, Business Week ran a feature article entitled “Dream Team”. It was about John Meriwether and the team of brilliant quants he had gathered around him to conduct what the magazine called “the biggest gamble of his life”. The gamble was to see whether, in a partnership calling itself Long Term Capital Management (LTCM), they could outperform his old firm, Salomon Brothers, in the bond markets, with a fraction of Salomons’ capital and staff.

LTCM

John Meriwether founded the Long-Term Capital Management hedge fund in Greenwich, Connecticut in 1994.

At the beginning of 1998, LTCM had $4.7 billion in capital, of which $1.9 billion belonged to the partners. It had ridden out the Asian financial crisis of late 1997 with barely a jolt. It had $100 billion in assets, virtually all borrowed, but through thousands of derivative contracts linking it to every bank on Wall Street, it had over $1 trillion worth of exposure.

Long-Term Capital Management collapsed four years later, in 1998.

JWM Partners

A year after LTCM’s collapse, in 1999, John Meriwether founded JWM Partners LLC. The Greenwich, Connecticut hedge fund opened with $250 million under management in 1999 and by 2007 had approximately $3 billion. The Financial crisis of 2007-2009 badly battered Meriwether’s firm. From September 2007 to February 2009, his main fund lost 44 percent. On July 8, 2009, Meriwether closed the fund.

The funds posted gains for several years, but in the first quarter of 2008 posted losses, of 14% in the Global Macro Fund, and 31% in the flagship Relative Value Opportunity bond fund. Together with redemptions, this cut the capital base significantly.

The fund claimed to use the same model as LTCM with more rigorous and better risk management. It also claimed a leverage ratio of 15 to 1.

On July 7, 2009 it was announced that the fund would be closed after suffering a loss of 44% in the main fund between September 2007 and February 2009

JM Advisors

Another year later, John Meriwether opened his third hedge fund venture, named JM Advisors Management, also based in Greenwich, Connecticut, in 2010. The fund was expected to use similar strategies as both LTCM and JWM, namely highly leveraged “relative value arbitrage”. By March 2011, however, the JM Advisors Macro Fund had raised only $28.85 million.

The financial impact

The financial loss for the investors through the three companies founded by John Meriwether is estimated to be over $4.6 billon.

Photo by DocChewbacca

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