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When Genius Failed: Lowenstein Talks LTCM

Brett D. Fromson: In the sort of $5 million to $20 million range.

Roger Lowenstein: They may have less.

Brett D. Fromson: Meriwether's new fund -- all the same cast and crew?

Roger Lowenstein: No. There was a fair amount of animosity among the partners when they split up. If you weren't part of that core group ... it wasn't something you got promoted into. I mean, this group had been together at Salomon for so long. There was antagonism towards a bunch of the other partners, towards Hillebrand and Agani, both because they were the predominant influence in the trading book and because their style didn't tend to be open to dissension. They just weren't open to hearing other ideas, particularly ideas that they were taking too much risk, and so on.

The partners all shared blame equally because they all ran the risk management committee. So it's not to say that Hillebrand had the power to override them but the cohesiveness broke up. Myron Sholes is sort of a hot-tempered Nobel laureate and has no love lost for Larry Hillebrand. Jim McIntee was a long close friend of John Meriwether and urged him to lighten up, but was ignored. He's gone off on his own now.

Brett D. Fromson: Let me ask you, I wrote a column about Meriwether's new fund having gotten offered a prospectus, and I was looking through it. The reason I wrote the column was that I was just struck by how much they were going to charge people for what they said would be 15% to 20% returns.

Roger Lowenstein: Yes.

"You can be illiquid and heavily exposed, or you can be leveraged. But if you're both, all it takes is one bad day and you're dead."

Brett D. Fromson: And I thought it was amazing that they wanted 2%, close to 20% of the profits in order to get someone between 15% to 20%. And I thought that was a shocking statement of continued arrogance. These people are not known winners.

Roger Lowenstein: Right. The 20% is standard, but the 2%, obviously, is not. Their business is a high-expense business for hedge funds.

Brett D. Fromson: Because of what was trading...

Roger Lowenstein: What was trading, because of the computer models, the international -- they have a staff now, of 55 people. I have friends who run hedge funds with about as much money and they have...

Brett D. Fromson: Ten people, maybe?

Roger Lowenstein: Ten, no, it's maybe three guys and a wall, and somebody answering the phones. But 55? So the 2%, I'm not sure.

Brett D. Fromson: What's your takeaway from the role of the Fed here for investors? What's the lesson for investors, that the Fed will come in a crisis and bail out the big boys in order to save the rest of us?

Roger Lowenstein: I think the Fed was just very uneasy about its profile. But I don't want to be the one to tell people, "Well, go jump off a building, the Fed will be there to hold your hand."

Brett D. Fromson: And last question: What did you learn yourself about the nature of financial markets from looking at this so closely?

Roger Lowenstein: Long term? When they told the bank we want better terms than anybody else and we're going to split up our trades so that none of you know where we're going, the banks just fell on themselves to be their partners. Then when they needed help, when they returned capital, people didn't stand it. Then when they needed help, nobody would answer their calls. That line of Jimmy Breslin's, "Power is the reputation of power" -- in financial markets, success is the reputation of success and then, if you accept them as a herd... It's so susceptible to flights of panic.

It gives you a new understanding of the risk of leverage because it means an exposure. It means you can't just count on being right at the end of the day. You have to be right enough, every day, because if you're leveraged, you cannot get to the long term. You can be illiquid and heavily exposed, or you can be leveraged. But if you're both, all it takes is one bad day and you're dead.
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