Troubled times for the king of the nerds

Michael Lewis profiles John Meriwether, the market revolutionary whose day may have passed

THERE are two kinds of money made on Wall Street: shallow money and deep money.

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.

The Banksy image in Folkestone before it was vandalised
Life and Style

Sales of the tablet are set to fall again, say analysts

Brian Harvey turned up at Downing Street today demanding to speak to the Prime Minister

Met Police confirm there was a 'minor disturbance' and no-one was arrested

Arts and Entertainment
George Lucas poses with a group of Star Wars-inspired Disney characters at Disney's Hollywood Studios in 2010

George Lucas criticises the major Hollywood film studios

Chris Grayling, Justice Secretary: 'There are pressures which we are facing but there is not a crisis'

Does Chris Grayling realise what a vague concept he is dealing with?

Life and Style
A street vendor in Mexico City sells Dorilocos, which are topped with carrot, jimaca, cucumber, peanuts, pork rinds, spices and hot sauce
food + drink

Trend which requires crisps, a fork and a strong stomach is sweeping Mexico's streets

Blackpool is expected to become one of the first places to introduce the Government’s controversial new Public Space Protection Orders (PSPOs)

Concerns raised phenomenon is threatening resort's image as a family destination

Life and Style

I Am Bread could actually be a challenging and nuanced title

Nigel Farage has backed DJ Mike Read's new Ukip song
ebooksAn unforgettable anthology of contemporary reportage
The number of children in relative income poverty is currently 2.3 million in the UK

A Brazilian wandering spider
natureIt's worth knowing for next time one appears in your bananas
Life and Style
Time and Oak have developed a product that allows drinkers to customise the flavour and improve the quality of cheaper whiskey
food + drink


Peter Biaksangzuala died from his injuries in hospital on Sunday

Life and Style
The final 12 acts will be facing Simon Cowell, Cheryl Fernandez-Versini, Mel B and Louis Walsh tonight

The X Factor's judges colourful outfit was mocked by Simon Cowell

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Customer Service Executive / Inbound Customer Service Agent

£18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...

ASP.NET Web Developer / .NET Developer

£60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

Operational Risk Manager - Asset Management

£60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

Project Coordinator - 12 month contract

£27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...

Day In a Page

Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album
Hugh Bonneville & Peter James: 'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'

How We Met: Hugh Bonneville & Peter James

'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'
Bill Granger recipes: Our chef's heavenly crab dishes don't need hours of preparation

Bill Granger's heavenly crab recipes

Scared off by the strain of shelling a crab? Let a fishmonger do the hard work so you can focus on getting the flavours right
Radamel Falcao: How faith and love drive the Colombian to glory

Radamel Falcao: How faith and love drive the Colombian to glory

After a remarkable conversion from reckless defender to prolific striker, Monaco's ace says he wants to make his loan deal at Old Trafford permanent
Terry Venables: Premier League managers must not be allowed to dictate who plays and who does not play for England

Terry Venables column

Premier League managers must not be allowed to dictate who plays and who does not play for England
The Inside Word: Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past

Michael Calvin's Inside Word

Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past