John Meriwether. The Fateful Fall
John Meriwether is a renowned trader who became famous for his extraordinary rise, as well as one of the most tragic falls in history.
John Meriwether was considered a master of hedging risks and building positions based on neutral positioning, profiting from the so-called spread.
Incidentally, John Meriwether was one of the largest investors in Russian securities, specifically debt bonds, which ultimately led to his downfall after the world-famous default of 1998.
He managed billions of dollars, and his team included the best mathematicians and economists, which allowed John to remain at the top of the Olympus for a very long time.
The Early Role of a Future Wall Street Star:
John was born in 1947 in Chicago. From childhood, John was an exceptionally capable young man, able to see anything he undertook through to completion. He was a top student in his class, an accomplished golfer, and a passionate scholar.
It is worth noting that John Meriwether was a gambler from childhood, which played a significant role in his future development as a trader.
Radical changes
John Meriwether was a very ambitious young man, and life on the salary of an ordinary teacher did not suit him at all.
Having earned an MBA, his opportunities expanded significantly, so he made the fundamental decision to give up teaching and joined Salomon Brothers.
John Meriwether's career at Salomon Brothers progressed so rapidly that by the age of 30 he was a senior manager and head of the hedging department.
The unique approach that John and his team developed was to buy undervalued assets and sell overvalued ones, with a high degree of leverage between them correlations and the position had minimal risk, but at the same time there were high interest rate accruals.
Over the years, John and his team have earned the firm over $100 million, while achieving the highest commissions for himself and his team – 15 percent of the team’s profits.
The team and the pursuit of percentages
The annual bonus payment of 15 percent for each trader encouraged some team members to take on extremely high-risk, unscheduled trades.
John, having learned of the antics of some traders, reported it to his management, but because the information leaked to the media, journalists blew it up into a huge scandal, the basis of which was manipulation of auctions for treasury bonds.
Public pressure forced Salomon Brothers to get rid of the goose that laid the golden eggs, so John Meriwether and his team were fired.
John Meriwether and the First Hedge Fund
John took the hit with pride and subsequently founded his own fund, Long-Term Capital Management. Meriweather was a very talented manager and organizer, so in a short time, the entire progressive team from Salomon Brothers transferred to his company.
As in his previous job, the strategy was based on hedging and neutral positioning, which was constantly improved by scientists from his team.
Beginning in 1994, the fund began actively trading and in its first year generated a phenomenal return of 43 percent, when the risk on transactions did not reach the five percent mark.
The high profitability generated a lot of popularity, and after two years of operation and a stable profitability of around 40 percent for three years, it led to the management
The fund had over 7 billion dollars, and by the beginning of 1998 the total assets amounted to 120 billion.
Alarm bell
The company's rapid growth, constant investment, and continued strong positioning led to it owning one-twentieth of the global market. John Meriwether actively invested in the Russian economy and purchased debt securities.
Having accumulated enormous positions, the unexpected happened: a default in Russia and, as a result, a moratorium on debt payments. This was the first blow, but not the most severe.
A loss of 300 million is not a problem for a huge company, however, due to low liquidity and falling demand, LTCM was unable to get rid of unnecessary assets, and neutral positioning and a sharp change in payments on open positions simply ate up investors' money.
The End of the Meriwether Era
The enormous turnover in open positions during the company's collapse could not only have harmed investors but also brought down the entire global financial system. To prevent this, the US Federal Reserve and major banks purchased 90 percent of LTCM shares and used the proceeds for working capital, allowing them to maintain open positions and close them with minimal losses.
In 2000, having paid off all creditors and investors, LTCM ceased to exist, and John Meriwether opened a new fund 10 years later with assets of $30 million, which allows him to exist comfortably to this day.
