From Volume 7, Issue 17 of EIR Online, Published Apr. 22, 2008

U.S. Economic/Financial News

Some People Never Learn: The Case of LTCM's Meriwether

April 17 (EIRNS)—The name John Meriwether may not mean much to you, but it is well known in the annals of financial catastrophe, for Mr. Meriwether was the founder of Long-Term Capital Management (LTCM), the hedge fund which collapsed in 1998 and spread panic across the financial world. Founded in 1994, the fund lasted only four years—only on Wall Street could that be considered "long-term"—and LTCM was not Meriwether's first brush with disaster. As vice-chairman of Salomon Brothers at the time it was caught manipulating the market for Treasury securities, Meriwether was fined $50,000 and left the company.

LTCM, whose partners included a couple of Nobel Prize-winning economists, Robert Merton and Myron Scholes, was the epitome of a quant shop, making huge bets according to arcane mathematical formulae which turned out to have no correlation to reality. LTCM crashed in September 1998, when Russia postponed some of its debt and sent the derivatives world into a panic. The Fed orchestrated a bailout of LTCM to protect the derivatives market, and the firm was quietly put to sleep.

Now Mr. Meriwether is in trouble again, this time with his JWM Partners, whose main fund is down 28% for the year, and facing a run by his "investors." At least this time, surrounded by much bigger and more bankrupt institutions, Meriwether doesn't have to worry about being accused of blowing up the financial markets. That job has already been done.

New York AG Subpoenas Banks in Probe of Criminal Speculation

April 18 (EIRNS)—New York Attorney General Andrew Cuomo subpoenaed 18 banks and securities firms in an investigation into the collapse of the $330 billion auction-rate bond market which could lead to criminal indictments.

The prominent place of JPMorgan Chase on Cuomo's subpoena list is probably related to the bond default crisis of Jefferson County and Birmingham, Alabama, according to one New York financial source, who said that Cuomo had received critical information about this case. Jefferson County, the population and political center of Alabama, has technically defaulted for the past two months on $3.2 billion in debt, as a result of a Chase "advisor's" negligent and perhaps criminal speculation with the county's debt. The bank drew the county into large-scale derivatives contract speculation—which its officers did not understand, and on which it lost heavily—on its own debt now totalling $4.6 billion.

Lyndon LaRouche on April 11 recommended an investigation of JPMorgan Chase by the State of Alabama and perhaps the Federal government as well, and officials are discussing his proposal. During the default crisis, both the Alabama legislature and the Birmingham City Council passed resolutions calling for LaRouche's Homeowners and Bank Protection Act (HBPA), the first step out of the destruction caused by the global financial crash. reported today that "Cuomo is also asking for information about how bankers persuaded borrowers to issue the [auction rate municipal] bonds, and how the banks came to decide when to stop bidding in mid-February."

Others subpoenaed include Merrill Lynch, UBS, Bear Stearns, Goldman Sachs, RBC, Citigroup, and Bank of America. Cuomo, along with state attorneys and regulators in nine other states have formed a task force.

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