“Seeing no options left the Federal Reserve Bank of New York organized a bailout of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets….The fear was that there would be a chain reaction as the company liquidated its securities to cover its debt, leading to a drop in prices, which would force other companies to liquidate their own debt creating a vicious cycle.”
Most of America isn’t even aware how close we came to a financial meltdown. No I’m not talking about the the ’07-’08 crisis, but rather the very stealthy one that occurred in late 1998 . Fewer still are aware of how the current Governor of New Jersey, John Corzine is alleged to have behaved during the crisis which threatened to bring misery and suffering to every person in America !
If you’re left scratching your head don’t worry , you aren’t alone and in fact the crisis was well covered up by media, after all how could they allow you the public to know that Clinton’s “economic miracle” almost came to an abrupt and sudden collapse and dragged the entire world down the drain. ( Of course the Dot-com collapse happened but by then the media could obfuscate the issue and blame Bush)
John Corzine, the head of Goldman Sachs allegedly employed dirty and perhaps illegal tactics as tried to make a profit when the US financial markets teetered on the edge of the abyss
This rather obscure slide to the edge of the precipice occurred as the result of the demise of the equally obscure Long Term Capital Management fund.
The link above takes you to Wikipedia’s a very adequate synopsis of the fund and its short but significant history.
A few very notable things to know are that the fund was the brain child of one of the true financial innovators of our era the legendary John Meryweather.
A very private man, Meryweather, is safe to say, probably has had as strong an impact on America’s and the world’s economy than probably any other living human being. Legend has it that while flying over the Midwest he came up with the idea of packaging individual mortgages into tranches and thus unleashing one of the most powerful financial instruments of our times the CMO ( Collateralized Mortgage Obligation). A very rough description of CMOs can be seen here and the Wiki version here is generally accurate except that it doesn’t mention John Meryweather.
John Meryweather’s fund Long Term Capital Management (LLTC) was staffed by the brightest minds of the financial world at that time and it is safe to assume some of them will be regarded as such throughout history. Among them would be Myron Scholes, one half of the team for whom the “Black-Scholes” option valuation model is named and Robert C. Metron. Metron improved upon the Balck-Scholes model which renamed the Black-Scholes -Metron model, became the basis for the two men sharing the Nobel Prize in Economics ( Fischer Sheffey Black passed away in 1995)
A quick note here to illustrate the clear and timeless wisdom of Fischer Black. In 1972 Mr balck wrote the following as a rebuke to the Keynesians of the time :
In the U.S. economy, much of the public debt is in the form of Treasury bills. Each week, some of these bills mature, and new bills are sold. If the Federal Reserve System tries to inject money into the private sector, the private sector will simply turn around and exchange its money for Treasury bills at the next auction. If the Federal Reserve withdraws money, the private sector will allow some of its Treasury bills to mature without replacing them.
The purpose of the John Meryweather’s fund, Long Term Capital Management was to exploit discrepancies in the gigantic bond markets and reap the rewards afforded as the markets moved to correct these anomalies. Initially the fund returned huge profits with what seem like minimal risk. As other players entered the market and sought to get a piece of the pie the fund ended up putting on an ever increasing amount of risk. In 1998 LLTC faced the “perfect storm” of investors dumping Japanese and European bonds in the wake of the Russian financial crisis and illiquid markets , due in part to the exit from the arbitrage business of Meryweather’s former employer Solomon Brothers the fund became insolvent .
Because the fund’s positions were so intertwined with the financial welfare of just about all the major financial firms on the planet and becasue the markets were already skittish due to the Russian financial crisis the Fed, correctly, understood that a haphazard unwinding of the Long Term Capital Management’s positions would cause a worldwide financial collapse. To try to avoid this disaster the Federal Reserve encouraged LTCM to find buyers or investors to provide much needed capital. One of the people to whom LTCM, and the FED, turned to was Meriwether’s former Chicago University Graduate School of Economics colleague and former employee, the then head of Goldman Sachs John Corzine. Corzine had agreed to lend LTCM $1Billion dollars of Goldman Sach’s own and its clients money and then it also agreed to help LTCM raise another billion. The condition was, of course, that Goldman get a look at the trades and positions that LTCM had on its books at that time. That’s an absolutely normal request and it made sense that anyone looking to invest over a billion dollars would want to see what they’re buying.
This is when things got really dicey for LTCM and for the nation’s financial markets. As Roger Lowenstein in his book “When Genius Failed ” describes the situation , Goldman Sachs personnel descended upon LTCM like locusts and rifled trough LTCM’s files, “according to witnesses Goldfield [ a Goldman Sachs trader] appeared to be downloading Long-Term’s positions ..directly into an over sized laptop. Meanwhile, Goldman’s traders in New York sold some of the very same positions. At the end of the day when the fund’s postions were worth a good deal less some Goldman traders in Long-term’s office sauntered up to the trading desk and offered to buy them. Brazenly playing both sides of the street [Corzine’s ] Goldman represented investment banking at its ugliest” Source When Genius Failed: The Rise and Fall of Long-Term Capital Management
To put things in simple English, John Corzine promised that he would help avert a financial disaster that could drag the world into a massive collapse. Corzine promised that he would help fund LTCM and asked to see their books before writing the check . Nothing doing! As soon as they saw the books the Goldman traders, allegedly, took advantage of the inside information they gained to make matters worse and make themselves and Corzine a lot of money. Here is Lowenstein again ” rumors that Goldman was selling LTCM’s positions in swaps and junk bonds were all over Wall Street. In fact its [ John Corzine’s Goldman Sachs] high-yield traders were said to be bragging about it” Source
Sure the transactions were complicated an lay people and Mom-and-Pop USA weren’t even aware how close to the financial precipice we got much less understand how and why. The one thing however that we can take form this is that when history called on John Corzine to step up and be a responsible financier he chose to instead, allegedly, lie and cheat and line his own pockets- the country be damned. Is it any wonder that a man who would so quickly and so willingly push the nation into a financial abyss to line his own pockets would do the disastrous job that he has done as Governor of New Jersey?
New Jersey haven’t you had enough?