Shallow money is made by being in the right place at the right time, or by guessing correctly when the market goes up or down. Deep money is made from major shifts in the world, by people who jump in early and encourage the new circumstances. The distinction has less to do with the amounts of money involved than by how it is made. The guy who has been "long" on the US stock market for the past six years is a shallow money person. He may become rich, but his business will always be dull.
Michael Milken and Lewie Ranieri were deep money. They became rich without experiencing a dull moment in their days. The reason is that they were changing not only their bank accounts but the world - Milken through junk bonds, Ranieri through mortgage-backed securities. Their influence was as much intellectual as financial.
John Meriwether was also a deep money person. The financial markets today value a different kind of intelligence from the financial markets of yore. And for that John Meriwether is largely responsible.
Meriwether, the Liar's Poker champion of Salomon Brothers, recently confirmed that his money management firm, Long-Term Capital Management, lost 11 per cent of its funds in June, putting the firm down 16 per cent on the year. The losses in 1998 follow a weak 1997, when Long-Term Capital returned only 17 per cent on assets, compared with a 31 per cent rise in the Standard & Poor's 500 Index. This compares poorly with the firm's past performance - it gained 40 per cent in both 1995 and 1996.
It also compares poorly with the returns of other so-called hedge funds, which serve institutions and the wealthy, and where the high-rolling techniques of the fund managers are openly disdained by Meriwether's intellectually sophisticated traders. Julian Robertson's Tiger Management is up 27 per cent for the year. George Soros's Quantum Fund is up 17 per cent.
The obvious explanation for Meriwether's troubles is that the financial markets have become more efficient. At least, that was the explanation offered by Travelers Group earlier this month when it closed down the Salomon Brothers bond arbitrage business that Meriwether created. (Travelers acquired Salomon Brothers last year, merging it with its Smith Barney unit to form Salomon Smith Barney.) The Eighties were a period of rapid financial innovation. A lot of complicated instruments were created on Wall Street, and then traded by customers who didn't fully understand them. Their stupidity was an opportunity to be exploited by the mathematically gifted traders hired by Meriwether at Salomon Brothers.
The Nineties have been a period of rapid financial consolidation as the customers have come to understand the new financial instruments and have gained access to the information they needed to trade them intelligently. As the stupid people wised up, opportunity dried up.
But Meriwether's situation is
more interesting than the simple story of market efficiency conveys. For the markets became efficient only by adopting Meriwether's world view. Meriwether's legacy is not merely the billions he made for himself and others but a style of trading once alien to Wall Street. In a word, the financial markets became rigorous. They learned to eschew traders who flew by the seat of their pants in favour of those who understood second derivatives. They learned to accept a new character as their lord and master: the nerd.
Meriwether himself was not a nerd. His genius was not for the maths but for the people who could do it. More than anyone else on Wall Street, he was willing to abandon the idea of the trader as a real man with a great deal of chest hair and nurture the idea of the trader as pinhead.
At Salomon Brothers, Meriwether hired and exploited people who, until very recently, had they turned up on Wall Street would have been suspended from the highest tree by the elastic of their tight, white underpants. The many young men who made $20m in a single year trading the arbitrage books at Salomon Brothers were Meriwether's inventions. Without him they would not exist.
But once Meriwether showed the markets the way, the markets, as usual, followed. Other big Wall Street firms hired their own maths jockeys. As these firms became bloated corporations, the maths jockeys left to start their own small firms. Investors who had long craved a piece of their action handed them billions to play with.
By the time Meriwether left Salomon Brothers he no longer needed Salomon Brothers. He could attract billions of dollars to his own business without effort. And that, in a way, was a bad sign. The markets were on to his secrets.
Meriwether made his mark on Wall Street, but not in the usual way. He was an arbitrager of people: he found unconventional intelligence and used it to exploit market conventions. He saw profits in nerds that others failed to see. He saw market potential in the nerds that even the nerds themselves didn't appreciate.
At Salomon Brothers people said that Meriwether hired people smarter than himself - much of the credit was given to the maths jockeys. It was more true to say that Meriwether played the game on a different level from the people he hired.
Myron Scholes and the late Fischer Black - two people who came to work for Meriwether - were obviously smart. After all, it isn't a trivial achievement to invent the world's first options pricing model. But until Meriwether came along, they had no inclination to use their model to make money. And that's pretty stupid.