Masters of the universe return

The man who set up the LTCM hedge fund is trying to win it back with an old rival. Dan Gledhill reports

When Liar's Poker was published in 1989, Wall Street blushed at the glimpse of unimaginable excess and mind-blowing consumption provided by a book that has become required reading for any young hopeful embarking on a career in the bond markets.

Michael Lewis's work catalogues his experience as a bond salesman with Salomon Brothers, the investment bank which has become a byword for everything that is good - and bad - about life on the trading floor. Lewis's title refers to a high-stakes game of bluff that the traders used to relieve the stress brought on by their high-octane occupation. The book begins by recounting a famous occasion when John Gutfreund, then chairman of Salomons, stunned his underlings by challenging John Meriwether, his star trader, to a game of Liar's Poker for a $1m (pounds 650,000) stake.

When he wasn't competing with his colleagues in games of one-upmanship, Meriwether devoted his energy to out-gunning his rivals at Goldman Sachs, the other great bond trading house. Jon Corzine was the acknowledged star of Goldman's bond team and his duels with Meriwether have gone into the annals of Wall Street history.

Their paths diverged in the early 1990s. Meriwether left Salomons after the bank was accused of attempting to corner the market in US Treasury bonds. But his reputation as a "big swinging dick", a nickname reserved for only the finest traders, was undiminished and in 1994 investors flocked to back his next venture, a hedge fund called Long-Term Capital Management. Two Nobel Prize winning economists were recruited to a team that revelled in the description "Masters of the Universe".

Meriwether, brimming with characteristic confidence, threw a chunk of his own fortune into LTCM and, within three years, the value of the fund had almost trebled.

Meanwhile, Corzine continued his effortless rise up the ranks of Goldman to become joint chairman. He was the driving force behind last year's announcement that the venerable investment bank was planning to shed its out-dated partnership structure in favour of a flotation, which eventually should net Corzine a $200m windfall.

But the last year has been unkind to two men accustomed to effortless success. When investors pulled the plug on Russia last August, the ensuing global meltdown meant that the best-laid plans of LTCM's Nobel Prize-winning minds were upset and the fund collapsed.

Much to his consternation, Meriwether's former employer, Salomon Smith Barney, was among the 14 banks that contributed to a $3.625bn rescue package to salvage his brainchild.

Corzine's reputation was also exposed by the market carnage. As the leading proponent of Goldman's flotation, he took the blame last September when the plunging US stock market forced the bank to postpone its IPO. Although the float should go ahead this year, the collateral damage inflicted by last year's failure forced Corzine on to the sidelines at Goldman and he will soon quit the bank altogether.

But in adversity the two former rivals are on the verge of forming an unlikely alliance. Although sources close to LTCM insist that the talks are at a tentative stage, Meriwether and Corzine appear to be hatching a deal to win back control of the hedge fund.

It is little wonder that Meriwether is keen to be reunited with LTCM. Since last summer's nadir, the fund has made a 20 per cent return even as its backers have been trying to trim its riskier investments. For Corzine, a stake in LTCM would mark a return to his roots in the bond market. Both men are itching for an opportunity to re-establish their reputations after recent reversals.

One seasoned bond market observer says: "Between them they have a lot of brain power and great roller-decks full of contacts. The only question is whether they are on top of their game."

There is sure to be an army of investors willing to take a chance on Meriwether re creating his old magic.

After all, according to Michael Lewis's book, this is the man who responded to Gutfreund's $1m challenge by upping the ante to $10m. Like most people who have taken on John Meriwether, Gutfreund had to walk away.