The New York office was only one of the branches of the bank; it specialized in gold trad-ing and underwrittrad-ing of some securities issues but remained a small operation until World W
Trang 1L
laissez-faire A French term meaning “allow
to do,” it was transformed into an economic
the-ory stating that business should be allowed to
operate with as little government interference as
possible In economics, laissez-faire generally has
been taken to mean hands off and to be the direct
opposite of mercantilism, which suggested
strong government interference in the private
sector in the 18th and 19th centuries
Laissez-faire succeeded mercantilism in the
19th century as the economies of the United
States and Europe began to industrialize Its
best known exponents were from the British
classical school, led by economist Adam Smith,
who maintained that humans are most
produc-tive when they are motivated by unfettered
eco-nomic self-interest, free of outside control
Competition flourishes when government
influ-ence is minimal, and a full array of goods and
services will follow, subject only to the demands
of the market
The doctrine became very popular in the
United States, especially during the period of
rapid industrialization in the 19th century
Busi-ness developed at a much faster pace than
gov-ernment’s ability to keep pace with it, and the
term became a synonym for a government’s gen-erally lax industrial policy But even during peri-ods when laissez-faire economics appeared to be working, some protectionist government policies still intervened, such as the TARIFFS imposed against imports
In the late 19th and early 20th centuries, the policies of progressivism began to attack the lenient attitude of government toward business The administration of William McKinley was the last in which a hands-off policy toward business was evident—until the 1920s when Republicans controlled the White House and Congress But stronger antitrust policies that began with the administration of Theodore Roosevelt, the found-ing of the FEDERALRESERVE, and the regulations passed during the NEWDEAL all signaled a less permissive atmosphere for business than was the case in the 19th century Similarly, the founding
of many government-sponsored enterprises between the 1930s and the 1970s demonstrated that various administrations were not willing to allow certain sectors of the economy such as res-idential housing, the financing of higher educa-tion, and farm financing to be left totally to the private sector
Trang 2After the 1930s, the term was used to describe
the lack of government interference in the
market-place rather than a specific economic policy It is
still used today to denote a general hands-off
atti-tude of government toward business
See also ANTITRUST; DEREGULATION
Further reading
Faulkner, Harold U The Decline of Laissez Faire,
1897–1917 New York: Harper & Row, 1968.
Fried, Barbara H The Progressive Assault of Laissez
Faire Cambridge, Mass.: Harvard University Press,
2001.
Lamont, Thomas W. (1870–1948) banker
Born in upstate New York, Lamont’s father was a
Methodist minister Thomas was sent to private
boarding school at Phillips Exeter Academy and
graduated from Harvard in 1892 After
gradua-tion, he went to New York City and became a
newspaperman at the New York Tribune, where he
rose to become assistant city editor
Not satisfied with journalism, Lamont invested
in a food processing company, but it ran into
financial difficulties in 1898 He then
reorgan-ized it with his brother-in-law Charles Corliss,
and the new firm became known as Lamont,
Corliss & Company As a result of the
reorgani-zation, Lamont came to the attention of many
New York bankers, one of whom was Henry
Davison, who invited him to work for the newly
formed Bankers Trust Co in 1903 In 1909, he
moved to a senior post at the First National Bank
of New York After serving as the bank’s secretary
and treasurer, he was lured away by J P Morgan
with an offer to become a partner in Morgan’s
bank in 1911 After becoming Morgan’s youngest
partner, he remained with the bank for the rest of
his career
After arranging large loans for Britain and
France during World War I, Lamont was chosen
to represent the U.S Treasury at the Paris Peace
Conference in 1918 He subsequently worked on
German war reparations and became a supporter
of the League of Nations In the same year, he
also purchased a controlling interest in the New
York Evening Post He played a central role in the
terms and conditions of the peace negotiations as well as the reparations placed on Germany after the war He also was sent to Japan as a financial delegate in the 1920s to discuss Japan’s role in Manchuria and its role in international financial affairs The period was notable for financial diplomacy especially, led mainly by J P Morgan
Jr and his partners
Lamont was involved in most of the other major international financial transactions and international diplomatic events of the 1920s, including the Dawes plan, named after Charles
DAWES, and the plan to stabilize the French franc At the time of the stock market crash of
1929, he helped organize a market stabilization plan while at J P Morgan & Company, but the plan failed despite the efforts of senior bankers
In 1931, he helped organize the Bank for Inter-national Settlements
Lamont became chairman of J P Morgan &
Co after the death of J P Morgan Jr in 1943 The bank went public in 1940, and Lamont became the major shareholder After 1943, his role in actively managing the bank was limited During his lifetime, he was a major benefactor to many charities and to Harvard College and Phillips Exeter as well He is best remembered as
a major figure in American banking in the 20th century who provided the Morgan bank with leadership during a time of transition
See also MORGAN, JOHN PIERPONT; MORGAN,
JOHNPIERPONT, JR
Further reading
Carosso, Vincent The Morgans: Private International Bankers, 1854–1913 Cambridge, Mass.: Harvard
University Press, 1987.
Chernow, Ron The House of Morgan: An American Banking Dynasty and the Origins of Modern Finance New York: Simon & Schuster, 1990 Lamont, Edward M The Ambassador from Wall Street: The Story of Thomas W Lamont, J P Morgan’s Chief Executive Lanham, Md.: Madison Books, 1994.
242 Lamont, Thomas W.
Trang 3Land, Edwin H. (1909–1991) physicist,
inven-tor, and manufacturer Born in Bridgeport,
Connecticut, Land studied at Harvard, where he
became interested in the physics of polarized
light After leaving college without a degree, he
developed a polarizing material that was
inex-pensive and easy to manufacture From an early
age, Land was preoccupied with the idea of
polarized light, and he opened a laboratory in his
home while still a college student In 1929, he
applied for a patent for a polarizer that resembled
a sheet of glass In 1932, he announced at a
Har-vard conference that he had developed a
com-plete solution for polarizing light
Building on this success, he opened the
Land-Wheelwright Laboratories in collaboration with
George Wheelwright in Boston and began selling
his products to the Eastman Kodak Company In
1937, he and Wheelwright founded the Polaroid
Corporation, which began producing polarized
products for civilian and military use When
World War II broke out, the company’s sales
soared as it began selling rifle sights, filters,
periscope filters, and goggles to the military
After the war, the company’s sales plunged, and
Land began seeking new uses for his inventions
In 1943, he conceived the idea of a camera
whose pictures could be developed within 60
sec-onds The first Polaroid camera produced
sepia-tone photographs quickly after being taken In
1950, black and white pictures were available,
and in 1963, the camera was adapted to produce
color pictures As a result, the company became
one of the best-known American success stories
of the immediate post–World War II period
The Polaroid camera underwent several
gen-erations of development In the early 1970s, the
SX-70 model was able to produce a fully finished,
or laminated, photograph within a minute of
being taken Land went on to collect more than
500 patents during his lifetime before retiring
from the company in 1980 He was active in the
3-D movie process that was developed to great
fanfare in the early 1950s One of his later ideas,
that of instant movies, proved a failure and never
saw the light of day During his retirement, he devoted his time to the Rowland Institute of Sci-ence, an organization he founded in 1960 Although Land never graduated from college,
he later became a professor at the Massachusetts Institute of Technology and also lectured at Har-vard He was inducted into the National Inven-tors Hall of Fame in 1977 The Polaroid Corporation became one of Wall Street’s favorite stocks in the 1960s and was one of the 50 most popular among investors because of its cutting edge technology Despite the introduction of new models, the company began to lose market share and fell out of favor on Wall Street Develop-ments in digital photography put the company under further pressure, and it filed for Chapter
11 bankruptcy protection in 2001
See also EASTMAN, GEORGE
Further reading
McElheny, Victor K Insisting on the Impossible: The Life
of Edwin Land New York: Perseus, 1999 Olshaker, Mark Instant Image: Edwin Land and the Polaroid Experience New York: Stein & Day, 1978.
Lazard Freres An INVESTMENT BANKING com-pany founded in New Orleans in 1848 by
Lazard Freres 243
Edwin H Land (LIBRARY OF C ONGRESS )
Trang 4Alexandre, Lazare, and Simon Lazard, originally
as a dry goods store The three had emigrated
from France in that year but a year later were
forced to move the business to San Francisco
because of a citywide fire in New Orleans The
gold rush had just begun in California, and the
business soon began trading gold Four years
later, they opened a branch in Paris, now firmly
established in the gold business
By the end of the Civil War, Lazard was a
full-fledged international bank specializing in gold
trading A London branch was also established,
and in 1880, a New York office was opened by
Alexandre Weill; it became known as Lazard
Freres The New York office was only one of the
branches of the bank; it specialized in gold
trad-ing and underwrittrad-ing of some securities issues
but remained a small operation until World War
II During the war, Andre Meyer arrived in New
York after working in the firm’s Paris office
Meyer already had a substantial background in
finance, although he was not from an old family,
as were the Weills He took control of the office
After the war Lazard Freres emerged as a
special-ist in MERGERSand acquisitions as well as
main-taining its business in underwriting
The firm benefited from the postwar merger
boom in the United States Meyer and a younger
partner, Felix Rohatyn, aligned themselves with
Harold GENEEN at the ITT Corporation, and
Lazard became ITT’s major merger banker The
firm helped the corporation with many of its
major acquisitions as it built itself into a
con-glomerate and also served other companies
Much of the firm’s success in the 1960s and
1970s was built around the relationship with
ITT Meyer died in 1979, and Lazard remained
primarily a merger specialist but was also a
part-nership through the late 1990s, when most other
investment banks had gone public
In the late 1990s, the firm began to suffer a
loss of rank and prestige on Wall Street because
of its small size and limited capital base It was
reorganized by Bruce Wasserstein, a Wall Street
merger specialist who became the senior partner
of the firm in 2001 The firm remained private, being the last of the traditional Wall Street pri-vate partnerships choosing not to sell shares to the public It finally went public in 2005
Further reading
Geisst, Charles R The Last Partnerships: Inside the Great Wall Street Money Dynasties New York:
McGraw-Hill, 2001.
Reich, Cary Financier: The Biography of Andre Meyer.
New York: William Morrow, 1983.
Lee, Ivy L. (1877–1934) public relations
expert Lee is generally considered the father of modern public and corporate relations Born in Georgia, Lee attended Emory University and graduated from Princeton in 1898 After doing postgraduate work at Harvard Law School he dropped out when his money ran out He then
became a newspaperman at the New York Times and the New York World, specializing in business
and finance while studying English at Columbia, before opening his own public relations firm Along with George Parker, he opened the pub-lic relations firm of Parker & Lee in 1904 He then worked on assignment from the Democratic National Committee as a publicist and writer Lee provided the creative side of the business, while Parker provided the connections and clients Rec-ognizing a market for corporate public relations
in the era of the MUCKRAKERS, Lee began providing the public with the business and industry side of business and social issues as a way of countering the attacks of writers in the press and in books His method was to provide facts rather than advertising, in the hope that newspaper and jour-nal editors would print both sides of a financial or business story In 1906, he joined the staff of the Pennsylvania Railroad as a full-time executive in charge of the company’s public relations, which were not in the best of shape He continued to work for the railroad until 1914
In 1915, Lee began working for John D Rockefeller Sr after the “Ludlow Massacre” in
244 Lee, Ivy L.
Trang 5Colorado The assignment proved successful,
and the Rockefellers, like the Pennsylvania
Rail-road before them, adopted a new, more
straight-forward public relations policy than in the past
In 1916, Lee opened a new firm After World
War I, his reorganized firm took on many diverse
assignments He worked during the 1920s for
greater acceptance of the Soviet Union, believing
that a free flow of ideas and greater international
understanding of Russia would lead to the
demise of communism He wrote several books
on the Soviet Union and on the use of statistics
Throughout this period, he worked for many of
the most visible financiers and the largest
compa-nies in the country
During the early 1930s, his firm worked for
several Wall Street investment houses that were
being investigated at the Pecora hearings in 1933
about the causes of the stock market crash of
1929 A year later, work he had done on an
assignment for a German company controlled by
the Nazis led to his being investigated by the
House Un-American Activities Committee He
died of a brain tumor in 1934 at age 57
Further reading
Ewen, Stuart PR!: A Social History of Spin New York:
Basic Books, 1996.
Goldman, Eric Two Way Street: The Emergence of the
Public Relations Counsel New York: Bellman
Pub-lishing, 1948.
Hiebert, Ray E Courtier to the Crowds: The Story of Ivy
Lee and the Development of Public Relations Ames:
Iowa State University Press, 1966.
Lehman Brothers An INVESTMENT BANKING
house founded by Henry Lehman in
Mont-gomery, Alabama, in 1845 as a dry goods
mer-chandiser Lehman was born in Germany in 1821
and immigrated to Alabama, where he established
his general merchandise store Lehman died in
1854, and the store passed to his two brothers
Emanuel Lehman opened an office in New York
City in 1858, trading in cotton Another brother,
Mayer, had close ties with the Confederate gov-ernment in Richmond, and the company pros-pered before the Civil War supplying the Confederate Army They became so prosperous trading commodities that they were able to loan the state of Alabama $100,000 after the war
In 1868, the New York City office continued
to prosper, but the firm remained primarily a commodities trading firm until the 1890s It was
a member of many of the futures exchanges in New York, including the New York Cotton Exchange and Coffee Exchange It was also a member of the NEWYORKSTOCKEXCHANGE, hav-ing joined in 1887 The firm began turnhav-ing its attention toward investment banking when Philip Lehman entered the firm in 1882 Born and educated in New York City, he became a partner five years later
In the 1890s, Lehman Brothers began estab-lishing banks in New York, the best-known of which was the Trust Company of America, founded in 1899 After the turn of the century, the firm began a rapid entry into the investment banking business It underwrote stocks of newly emerging companies in growing industries, notably retailing Before World War I, it joined with GOLDMANSACHSin underwriting many new issues, the best known of which was for SEARS,
ROEBUCK& CO in 1906
The first nonfamily member of the firm was not admitted to a partnership until 1924 Most of the partners were members of the Lehman family The best-known outside of banking circles was Herbert Lehman, who became a partner in 1908 and retired in 1928 Subsequently he was elected governor of New York and a U.S senator from New York
In the first quarter of the century, Lehman underwrote new stock issues for companies such
as the Underwood Corp., the Studebaker Corp., and the F W Woolworth Corp After the Glass-Steagall Act was passed in 1933, Lehman Broth-ers became purely an investment banking firm and remained a partnership in the post–World War II years From 1928, the firm was run by
Lehman Brothers 245
Trang 6Robert “Bobbie” Lehman, the son of Philip
Lehman, who was responsible for shaping the
firm for the remainder of the 20th century
In the 1970s, Peter G Peterson became
chairman of the firm He helped reorganize it
after several years of poor performance and was
succeeded by Lewis Glucksman In 1977, the
firm acquired KUHN LOEB & CO., and in 1984,
merger talks were held with Shearson American
Express Lehman Brothers was acquired by
Shearson, and the company changed its name to
Shearson Lehman American Express, becoming
the second-largest securities house on Wall
Street In the mid-1990s, AMERICAN EXPRESS
began to restructure itself, and Lehman
Broth-ers was spun off as a public company, assuming
its original name It remains one of Wall Street’s
best-known and oldest investment banking
firms
Further reading
Auletta, Ken Greed and Glory on Wall Street: The Fall
of the House of Lehman New York: Random
House, 1986.
Geisst, Charles R The Last Partnerships: Inside the
Great Wall Street Money Dynasties New York:
McGraw-Hill, 2001.
Levittown A suburban town on Long Island,
New York, that was the first purpose-built
sub-urb in the United States The town was built by
Levitt & Sons, a family-run firm founded in 1929
that first conceived the idea in 1947 The firm
was headed by William J Levitt, who got into the
real estate and building business when he sold a
home for his brother The success of the small
transaction encouraged them, and Levitt & Sons
was formed
The firm first attempted a large-scale housing
development in Norfolk, Virginia, in 1945, when
it built 1,600 small houses The marketing for
the homes was unsuccessful during the war The
company did not make a profit for its efforts, but
it did not abandon the concept William Levitt
realized that the millions of returning service-men discharged after the war would need hous-ing Using knowledge acquired from other small developments built during the war, the idea of Levittown was born
After purchasing a 1,000-acre farm located midway between New York City and the Long Island towns where major defense contractors were located, the company proceeded to build more than 17,000 ranch-style homes on the site Each unit averaged about 750 square feet and had amenities built in that were not often used in mass housing, such as built-in storage units, appliances, and kitchens located in the front of the house rather than the rear The homes sold for $7,990 each, considerably less than competi-tors’ homes But they still made a profit for the company because of the quantity built
Levittown marketed its homes to whites only and lured city dwellers from Brooklyn and Queens The community contributed to the urban flight that characterized the 1950s and 1960s and was a major factor in the rapid subur-banization of Long Island It also indirectly applied pressure on New York banking laws, which until that time prohibited New York City banks from crossing county lines Many banks lobbied for changes in the laws so that they could follow the exodus
In 1967, Levitt & Sons was sold for $92 mil-lion to conglomerate ITT, which viewed Levitt’s communities as a potential customer for many
of its diverse products The suburban concept was imitated many times around the country as builders adopted the marketing concept of building many units at smaller profit margins than on larger houses For future generations, the name Levittown became a metaphor for the advantages and disadvantages of suburban liv-ing in America and was also the model for hun-dreds of similar projects around the country that capitalized on the post–World War II demand for new housing
See also CONGLOMERATES
246 Levittown
Trang 7Further reading
Kelly, Barbara M Expanding the American Dream:
Building and Rebuilding Levittown Albany: State
University of New York Press, 1993.
Sobel, Robert The Great Boom, 1950–2000: How a Generation of Americans Created the World’s Most Prosperous Society New York: St Martin’s Press,
2001.
Levittown 247
Aerial view of Levittown, 1954 (LIBRARY OF C ONGRESS )
Trang 8Lewis, John L. (1880–1969) labor leader
Born in Iowa to Welsh immigrant parents, Lewis
became a miner while still in his teens In his late
20s, he began serving in the UNITEDMINEWORK
-ERS OF AMERICA (UMWA) and became acting
president of the union in 1919 Also, in 1911 he
became an organizer for the AMERICAN FEDERA
-TION OFLABOR(AFL) He was elected president of
the UMWA in 1920, holding the job until he
retired in 1960 In his 40 years as head of the
union, he often clashed with other unions and
embarked on long strikes
His bitterest clash with other unions occurred
when he split with the American Federation of
Labor and formed the Committee for Industrial
Organization, or CIO, in 1935 Unions that joined
Lewis were expelled from the AFL, stirring great
animosity within the union movement His new
efforts were successful, however, because by the
late 1930s the CIO had more members than the
AFL In 1938, the CIO changed its name to the Congress of Industrial Organizations and began organizing unions in the heavy manufacturing, mass-production industries
Originally a Republican, Lewis became a sup-porter of Franklin Roosevelt and endorsed him
in 1932 and 1936 Lewis decided to support Wendell Willkie for president in 1940 and threat-ened to resign from the CIO if the president stood again and won reelection Lewis then made good on his promise and resigned as president of the CIO after Roosevelt won the election; two years later the UMWA withdrew from the CIO During World War II, the public became increasingly disillusioned with the miners because of many strikes called during wartime Most were successful, however, in winning increased wages In 1946, immediately after the war, the UMWA again joined the CIO but broke away the following year Congress responded to the uneasy labor situation by passing the TAFT
-HARTLEYACTin 1947
A coal strike in 1948 during the Truman administration led to a crisis in industrial rela-tions and finally led to a moderation in Lewis’s tactics Lewis also helped create the UMWA Wel-fare and Retirement Fund in conjunction with the federal government, and it was signed into law during the Truman administration The fund provided health care to coal workers He retired from the union in 1960, administering the fund until his death in 1969
See also GOMPERS, SAMUEL; MEANY, GEORGE
Further reading
Alinsky, Saul John L Lewis: An Unauthorized Biogra-phy New York: G P Putnam’s Sons, 1949 Dobofsky, Melvyn, and Warren Van Tine John L Lewis Urbana: University of Illinois Press, 1977.
Wechsler, James A Labor Baron: A Portrait of John L Lewis New York: William Morrow, 1944.
Livingston, Robert R. (1746–1813)
diplo-mat Robert Livingston was born in New York City on November 27, 1746, the scion of an
248 Lewis, John L.
John L Lewis (LIBRARY OF C ONGRESS )
Trang 9influential colonial family with roots dating to
the 17th century Raised in an aristocratic
envi-ronment, Livingston was well educated privately
and graduated from Kings College (now
Colum-bia University) in 1765 He was admitted to the
bar three years later and commenced a lucrative
business in concert with his partner, John Jay At
that time, the first rumblings of revolution were
manifested against such British policies as the
Stamp Act Livingston urged caution, but once
hostilities finally commenced in 1775 he
reluc-tantly endorsed independence as a necessary
evil That year, Livingston attended the Second
Continental Congress as a New York delegate,
where he was appointed to serve with the
com-mittee drafting the Declaration of Independence
Returning to New York, he subsequently took an
active role in drafting the New York constitution
of 1777 and was rewarded with an appointment
as chancellor of the Court of Chancellory
Liv-ingston resumed his seat in Congress two years
later, and after independence he functioned as
secretary for foreign affairs In 1788 he attended
the constitutional convention in Philadelphia as
a delegate, and the following year Livingston
administered the oath of office to the new
presi-dent, George Washington, in the temporary
capi-tal of New York City
Though conservative by nature and nominally
a Federalist, Livingston felt increasingly at odds
with the faction headed by Alexander HAMILTON
and its promotion of the Jay Treaty, which he felt
sold out to Great Britain In concert with Thomas
Jefferson’s newly emerging Democratic
Republi-can Party, Livingston was strongly disposed to
support the French Revolution This made him a
pariah in conservative circles, but in 1801 the
new president, Jefferson, appointed him minister
to France It was in this capacity that Livingston
made indelible contributions to the United States
by successfully negotiating the purchase of the
Louisiana Territory from First Consul Napoleon
Bonaparte in 1803 This virtually doubled the size
of the young republic and, by dint of acquiring
New Orleans, facilitated internal trade via the
Mississippi River It proved one of the greatest diplomatic coups in history and a crucial step in the economic viability of the young nation Liv-ingston remained in Paris two more years before returning home to his estate at Clermont, New York, to engage in scientific farming He was especially interested in the breeding of Merino sheep and penned several noted tracts on that subject and on agricultural progress in general Livingston’s reputation as a leading economic figure in American history dates to 1797, when
he became actively involved in steam navigation The nascent technology seemed promising but had proved untenable after many failed experi-ments at building a viable steamship It was not until 1802 that he agreed to underwrite noted inventor Robert FULTON in a similar endeavor Many years of trial and error lapsed before the
steamship Clermont finally made its historic
pas-sage up the Hudson River in 1807 This voyage ushered in the age of steam navigation in Amer-ica, along with the rise of monopolies to control its employment Livingston never obtained the national celebrity of Fulton, but his extensive backing proved instrumental to their mutual suc-cess He then used his political leverage to acquire a monopoly for shipping on both the Hudson and Mississippi Rivers But despite the promise of profit, the limitations of the new steam technology remained legion and failed to produce the windfall anticipated, although the practice of states granting steamship monopolies was vanquished by the U.S Supreme Court in
1824 By the time Livingston died at his estate at Clermont on February 26, 1813, his varied, far-ranging, and multifaceted career in politics, diplomacy, and science had proved of consider-able importance to the young republic He also provided an undeniable impetus to the commer-cial applications of steam technology, which suc-cessfully matured a few decades after his passing
Further reading
Brandt, Clare An American Aristocracy: The Livingstons.
Garden City, N.Y.: Doubleday, 1986.
Livingston, Robert R 249
Trang 10Dangerfield, George Chancellor Robert R Livingston of
New York, 1746–1813 New York: Harcourt, Brace,
1960.
Wiles, Richard C., and Andrea K Zimmermann, eds.
The Livingston Legacy: Three Centuries of
Ameri-can History Annandale-on-Hudson, N.Y.: Bard
College, 1987.
John C Fredriksen
Long-Term Capital Management A giant
hedge fund in Greenwich, Connecticut, the
near-collapse of which in September 1998 shook Wall
Street and drew public attention to the role of
hedge funds in the marketplace The fund was
established in 1994 by John W Meriwether, a
bond trader at SALOMONBROTHERSwho had hired
a team of mathematicians and economists from
academia to give his unit an edge in the fierce
competition for arbitrage opportunities
When Meriwether left Salomon Brothers in
1994 after a trader he supervised was caught
manipulating bids on TREASURY BONDS, most of
his intensely loyal traders followed him to
Long-Term Capital He also recruited, as partners,
Robert C Merton and Myron S Scholes, who
later were awarded the 1997 Nobel Memorial
Prize in economic science, and David W Mullins,
a former vice chairman of the Federal Reserve
Board As a group, the fund’s partners believed
passionately in rational, efficient markets, and
their trading strategies reflected those beliefs
The celebrity-studded fund, whose investors
included top banks and institutions from around
the world, was enormously successful at first
Trading largely with borrowed money, the fund
produced returns, net of its own fees, of 43
per-cent in 1995 and 41 perper-cent in 1996 But in 1997,
as arbitrage opportunities faded and Asian
cur-rency devaluations roiled markets, it earned just
17 percent after its own fees As that year ended,
the fund’s still-optimistic partners decided to
return roughly $2.3 billion to their outside
investors, paring the fund’s capital to about $4.7
billion, from roughly $7 billion at its peak
It was an ill-timed decision The fund’s core strategy was to bet that volatile security prices in markets around the world would gradually become more stable But in 1998 global markets grew ever more treacherous By August, when Russia defaulted on its debt, risk-averse investors were buying only the most liquid Treasury bonds, driving down the prices of virtually every-thing else Meriwether’s capital, which totaled
$3.7 billion at mid-August, was simply melting away By mid-September, the fund was on the brink of collapse Since it owed money to almost every major bank on Wall Street, its dire condi-tion drew the attencondi-tion of the Federal Reserve Bank, which feared that the fund’s failure would trigger a marketwide panic On September 23,
1998, after long negotiating sessions at the Fed-eral Reserve Bank of New York, a consortium of
14 American and European investment firms agreed to inject $3.6 billion into the fund, in exchange for most of the partners’ equity By that point, every dollar invested in the fund had shrunk to 23 cents, net of fees
The rescue, which drew widespread public criticism, kept the fund afloat for another year, but its returns were meager The stock and bond markets became very unsettled during the months following the collapse, and GOLDMAN
SACHS, one of the fund’s trading partners, had to postpone its initial public offering as a result By early 2000, the consortium had retrieved its cap-ital, and the fund was essentially liquidated By then, Meriwether and many of his partners were once again managing other people’s money from their offices in Greenwich
Further reading
Dunbar, Nicholas Inventing Money: The Story of Long-Term Capital Management and the Legends Behind
It New York: John Wiley & Sons, 2000.
Lowenstein, Roger When Genius Failed: The Rise and Fall of Long-Term Capital Management New York:
Random House, 2000.
Diana B Henriques
250 Long-Term Capital Management