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As I was driving out of the office parking lot towards a client’s house, my boss drove up from the opposite direction, stopped, and rolled down his window.
“You know the house you’re going to? It’s the same plot of land where the Moxley murder happened. They finally tore down the house a few years ago, but it’s the same place. Anyway, have fun.”
Whoopedydoo. I drove to the house and there met an extremely nice lady with a broken computer. I helped fix it, then returned to the office. No big deal. Just a little murder two decades ago.
But the story doesn’t end there, though. I mean, come on. Would I really post something without mentioning economics or politics? Or, more specifically, just economics? I think the answer is rhetorical, but I’ll make it blindingly clear:
Boss just called me up to give me another interesting tidbit. A guy who used to live at this house was responsible for endangering the economy of many nations, including but not limited to that of the United States. The guy apparently runs (or ran) a hedge fund named Long Term Capital Management. What, you ask, is a hedge fund?
A private investment partnership, owned by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including short selling, leverage, program trading, swaps, arbitrage and derivatives. (definition here)
Because hedge funds get their money from the wealthy, the government does require their regulation. They tend to operate in secret, making high risk bets that net them hefty returns.
This fund in particular had made bets adding up to 1.25 trillion dollars. They started with 2.2 billion dollars in capital, using that to buy 125 billion dollars of government securities. With the government securities as backing, they then pulled in 1.25 trillion in — I can’t even figure out what the right term is — financial transactions, says one news article. (Yeah, I called them “bets” earlier in the paragraph. I’m not sure that’s even the proper wording.)
How on earth did they work their magic? A New York Time article (Now for $$$) reveals:
In essence, the fund placed bets that tiny deviations in the traditional relationships between the prices of various securities would eventually return to normal. For example, the interest rate on a medium-quality corporate bond is usually about one percentage point more than the rate on a 30-year Treasury bond, reflecting the greater risk of lending to a company than to the U.S. government. If the gap, called the spread, widened to more than one percentage point, the Meriwether team could bet with confidence that the relationship would ultimately revert to normal. Myron S. Scholes and Robert C. Merton, who shared a Nobel prize in economics, helped program powerful computers to recognize countless similar profit opportunities.
The stategy paid of initially, but then a series of the fund’s bets began to fail. On the verge of collapse, the fund attempted to secure more captial. The failure of the fund would have made major shocks throughout the world markets. When no one came forward with the dough, the U.S. Federal Reserve stepped in and negotiated a buyout. All was well, but the events still spooked analysts of the trading markets and called into question the practices of many hedge funds — and the Fed’s inability to regulate them. (source 1, source 2)
Anway. The woman at the house was very nice. I suppose this Meriweather fellow can no longer show his face in Greenwich, since he nearly fucked over pretty much everything. Which is why I fixed the computer of some nice lady, and not the computer of some rich gambler.
Ah. What a town.
July 18th, 2004 at 9:16 pm
John Meriwether used to work at Salomon Brothers, where they did all kinds of crazy, exciting stuff. If you feel like reading, Liar’s Poker by Michael Lewis is a great account of the 80’s culture of Wall Street.
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