Financial Genius

Peter Brimelow takes a look at the 1998 Fed-orchestrated bailout of Long-Term Capital Management hedge fund, and sees some similarities to today.

From Another case of collusion? by Peter Brimelow:

LTCM was the current bailout in microcosm.

I was fascinated by the LTCM bailout. I couldn't figure out why the Fed needed to rescue a relatively small firm. But two excellent books "When Genius Failed" and "Inventing Money," respectively by Roger Lowenstein and Nicholas Dunbar (who really do deserve to be rich and famous) provided a lot of damning detail, albeit without drawing conclusions.

Bottom line: LTCM seems to have been bailed out because it was well-connected. Its connections were significantly to Goldman Sachs, which in turn was extremely well-connected to federal government. Its former CEO, Robert Rubin, was Treasury Secretary at the time.

By an amazing coincidence, another former Goldman CEO, Henry Paulsen, is orchestrating the current bailout.

You can find more information on When Genius Failed here.

Let’s take a look at John Meriwether. After graduating from college he worked as a bond trader at Salomon Brothers. He left Salomon in 1991 after being involved in a Treasury securities trading scandal. He was forced to pay a $50,000 civil penalty. Long-Term Capital Management (a hedge fund) was founded in 1994 by John Meriwether. For some reason his work at Salomon inspired Nobel Prize winners Myron Scholes and Robert C. Merton to join the board of directors of LTCM. They also found investors willing to part with $1,011,060,243. They did very well for awhile. They used highly leveraged positions and derivatives. Sound familiar? Then they tanked. They tanked so badly that the Federal Reserve Bank of New York organized a bailout of $3.625 billion to avoid a wider collapse in the financial markets. Sound familiar?

Are you wondering what became of John Meriwether? Did he go to jail? Was he banned from the financial markets?

John Meriwether runs another hedge fund called JWM Partners, LLC.

What is it they say about a fool and his money?

Are we now bailing out the financial system to keep it afloat so that the same people who got us into this mess can get us into another mess in the future?

For a system filled with accountants, where is the accountability?

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