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Third Time's the Charm?
Back in 1998, Long Term Capital Management, the most famous hedge fund on the planet, blew up and nearly took all of Wall Street down with it. It was pretty spectacular. But what was even more spectacular was what happened next: less than a year after LTCM's collapse, its founder, John Meriwether, started up a new fund. And people invested in it!
Well, fine. It was a more innocent time, after all, and there were people who really believed that LTCM had just run into a once-in-a-century spell of bad luck. Can't blame a guy for that. But last year Meriwether's new fund went belly up too. So that's twice. He must really be a pariah now, right? Right?
Hedge fund manager and arbitrageur, John Meriwether, is setting up his third fund, The Financial Times reported. The man behind Long-Term Capital Management is making the move just three months after he chose to close his second fund manager, JWM Partners.
I guess you saw that coming, didn't you? But it's even worse than you think:
JWM Partners closed last year after losing 44% amidst the market turmoil of 2008. Hedge funds typically have "high water marks" which means that investors don't pay performance fees to the fund manager in subsequent years unless the fund surpasses its highest point. Thus, the solution for fund managers whenever they have a bad year is to liquidate, wait a bit, and form a new fund?!?! Anyone who was invested in the old fund and the new fund thus pays fees twice: you paid when JWM Partners reached its high water mark, and now you'll pay again if/when Meriweather Cubed (not the real name) manages to make money — the same money JWM Partners effectively lost after reaching its high water mark.
Damn. Words fail. Via Felix Salmon.
Here's a word
Plutocracy.
Plutocracy
I just spent five minutes trying to come up with a better word. No luck
P L U T O C R A C Y
The 44% loss during the last
The 44% loss during the last market crash is not that unusual -- the S&P 500 and NASDAQ lost more than 50% from the high of 2007 to the low of 2009.
The LTCM failure in the late 90s was a more unusual event, as it did not happen in the middle of a market crash, and was more extensive.
As for managers closing funds that have had a big downturn so they can charge new fees and get away from the bad performance history -- it's a common practice.
Thersites, I'm not sure how "plutocracy" applies here. If you think rich people investing in Meriwether are stupid -- sit back, relax, and watch: it's the rich losing their shirt for once.
JS, Remember IOKIYAR - it
JS,
Remember IOKIYAR - it used to mean "It's okay if you are Republican." That was not exactly true though. A much better meaning is "It's okay if you are rich."
Put another way, plutocracy.
Put another way, "The one with the gold makes the rules."
Tripp
take a good look at that shirt...
I have no inside details on Meriwether's 3rd fund, but I really wonder if it's really the rich losing their shirt on this. How much of the funds are really personal investments of rich folks, and how much is institutional investing? I suspect what you're seeing with Meriwether is a bunch of money managers reaping huge fees by investing peoples pensions in very high-risk investments.
It's a simple and common scam. Some adviser at an investment bank invests huge portions of a public pension fund into something crazy like a Meriwether fund, justifying the huge advisor fees by the amount the fund is making a year (of course I'm worth $50M, your pension is making 20% a year). The high-risk fund scratches the bank's back by periodically using the fund to do some useful price manipulation of junk bonds or IPOs (chinese wall? you're joking, right?). And when it all falls apart, the adviser and the fund manager have gotten rich, the retirees get their pension cut, while the investment bank gets a bailout and starts the whole thing over again.
It's not that capitalism sucks, it's that this has no resemblance to capitalism.
OK, what then should be done
OK, what then should be done about this and by whom?
I believe that Kevin's main point was that it's amazing there are investors who will keep investing in someone who has failed so much in the past. I am surprised too' and I think they are crazy. But it's the responsibility of the investor, no? If there are corrupt pension fund managers, then it seems to me that the problem is with the pension funds. Unless you think there should be a law that says that failed money managers should be forbidden to start new funds.
JS I think the plutocracy
JS I think the plutocracy comment refers to the lack of consequences.
Accountability is something that seems to be reserved for pregnant teenagers and young men who worked in industries that were off-shored. Big time financiers, not so much.
If investors are dumb enough
If investors are dumb enough to keep handing sacks of money to these douchbags, they deserve to end up broke.
Just as long as the taxpayer isn't on the hook for any of it, pass the popcorn.
Just as long as the taxpayer isn't on the hook for any of it
Yeah, you see, that's kinda the problem. We workin' folk are actually paying for his screwups on a regular basis.
hehe, you can recommend your own comments, that's broken.
no comment.
When was taxpayer money
When was taxpayer money spent on Meriwether's screwups? In the earlier failure, he was bailed out by a bunch of big companies that made money on the bailout. (The FED did mediate the bailout, but AFAIK did not put public money in it). His investors, all very rich, lost a lot of money in both failures.
I can see a valid concern about hedge funds that become so big that their failure can bring down the whole market and the economy. That was true of Meriwether's first venture. I don't think it was true of the second. As usual, my comment about this is: if there is a risk to the system, congress should regulate. But if Meriwether is breaking no laws, and a lot of rich people keep investing in him and losing their money, I'm not going to blame him for anything. Let rich people have their casinos and gamble their money and lose it. If you think these casinos are getting too large and are a risk to the economy, regulate them. If you feel strongly about this, direct your anger to your congressperson, it seems to me.
JS: "if there is a risk to
JS: "if there is a risk to the system, congress should regulate"
Which of course is exactly what didn't happen after the LTCM debacle, and isn't happening even now. In fact, at about the time of the LTCM debacle they were loosening the rules even further. And people were willing to jump in with both feet because they saw the "invisible hand" of the Fed bailing out the well-to-do screwups.
Result: the taxpayers are paying for the current much bigger screwup.
Nobody has called for Meriwether's head on a pike because it doesn't look like he did anything illegal. But the fact that this overpaid serial screwup is back in the game says how well the excessive risk taking has been contained. It also says something about the market's valuation of "talent".
That's pretty much the point
That's pretty much the point I am trying to make, Alex. A lot of people (here and elsewhere) direct their anger at the bank CEOs and the Meriwethers. I think that as long as, as you say, congress has failed to regulate all these things, the correct progressive position is to put pressure on congress. If you can endanger the system without breaking any laws, the the problem is not you -- it's the laws.
Agreed. Not that I have any
Agreed.
Not that I have any problem with the sport of lampooning the financial genyuses lauded by the business press, but the value of doing so is limited to personal satisfaction, and, at best making a small cry for the truth.
However, people willing to take risks with other people's money will always be with us. Ultimately the only solution is the one that worked for several generations after the Great Depression - better regulation. And the biggest impediment to that is not a lack of good ideas, but the fact that our government is bought and paid for (with taxpayer money no less).
I talked about the importance of campaign finance reform for so many years that I got tired of it. Unfortunately it doesn't seem to be much of an issue for any part of the political spectrum. And Obama is the last guy who's going to try and stop the bribery.
PeakVTs brilliant comment
And finally we get back to PeakVTs brilliant comment to start us off - Plutocracy, rule by the rich.
We all know the problem. We all have heard, a zillion times, all the different problems that happen in a plutocracy. Those with the gold game the system to favor themselves at the expense of others, whether the others are taxpayers or working stiffs thinking their pensions are safe with Prudential or whatever.
We know the problem and we know the root causes. The real question is this - is there anything we peons can do about it?
All the good solutions I have heard so far have been thwarted by the rich.
Where is this DIY book: "'How to Take Back Power from the Rich' for Dummies?"
Tripp
Now see, that is the problem
Now see, that is the problem we need to solve. The taxpayers need to stop bankrolling the gamblers.
The president, the Sec. of
The president, the Sec. of Treasury and the Chairperson of the Federal Reserve think John Meriwether is the type of 'entrepreneur' who creates economic wealth. The way the economy has been manipulated by finance, Meriwether represents the type who wrings the remaining value out of our economic wealth.
What?!? A hedge fund blew
What?!? A hedge fund blew up and almost took down Wall Street under a Democratic president?
Get the hell out!
I thought that only happened because of the incompetence of Bush! It's Bushes fault that Wall Street failed. Derivatives and all that - Bush's fault!
How on earth did that happen under Clinton?
...
1) Clinton didn't run Meriwether's fun.
2) Congress was Republican controlled in 1998.
3) Congress makes the laws.
4) Administrations don't.
Clinton led the bailout of LTCM
Clinton led the bailout of LTCM, but never used the power of his office to seek regulatory change to prevent the next too big to fail financial firm crisis. The administration runs the regulatory agencies, and they were not tasked with using current laws to reign in the finance industry under Clinton. Edwards was a Democratic Senator during the LTCM crisis, and not only did he fail to offer any legislation to prevent another similar crisis, he went to work for a hedge fund that owned two sub prime mortgage companies after his failed VP run. There is plenty of blame to go around, and the big shots of the Democratic Party deserve their share. In some ways the Democrats' shit stinks even worse than the Republicans, because Democrats claim to work for the benefit of the people.
For any of you who remember...
...the brilliant opening of Liar's Poker, John Meriwether is the guy who ups the bet to $10 Mil.
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Failure? What failure?
"someone who has failed so much in the past" -
What do you mean? The guy's net worth is probably in the hundreds of millions, at least.
How is that failure? :)
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