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strategy, for Long-Term did each set of trades with the bank that boasted the most specific expertise. But Long-Term thus forfeited the benefits of a closer, ongoing relationship. J. P. Morgan, for one, was extremely curious about Long-Term and eager to develop a closer working alliance, but it couldn’t get past the fund’s unwillingness to share confidences. “How can you propose ideas to them without knowing what their appetite is?” wondered the head of risk management at a major Wall Street firm. As arbitrageurs, the partners tended to see every encounter as a discrete exchange, with tallyable pluses and minuses. Every relationship was a “trade”—renegotiable or revocable if someone else had a better price. The partners’ only close ties were within Long-Term, mimicking the arrangement within their beloved group at Salomon.

      They were a bred type—intellectual, introverted, detached, controlled. It didn’t work to try to play one off against the other; they were too much on the same wavelength. Andrew Siciliano, who ran the bond and currency departments at Swiss Bank Corporation, was stunned by their uncanny closeness. One time, Siciliano called Victor Haghani, the head of the London office, and followed up in Greenwich with J.M. and Eric Rosenfeld a month or two later. The American-based partners didn’t miss a beat; Siciliano had the eerie feeling that he was continuing the same conversation he’d had with Haghani.

      Not that there weren’t tensions within the firm. A small group—J.M., Hilibrand, Rosenfeld, and Haghani—dominated the rest. As at Salomon, compensation was skewed toward the top, with the inner circle garnering more than half the rewards. This group also had voting control. Lesser partners such as Myron Scholes were forever angling for more money, as well as more authority. But the inner circle had been together for years; as in a family, their exclusive and inbred alliance had became second nature.

      If the firm could have been distilled into a single person, it would have been Hilibrand. While veteran traders tend to be cynical and insecure, the result of years of wrong guesses and narrow escapes, Hilibrand was cool and maddeningly self-confident. An incredibly hard worker, he was the pure arbitrageur; he believed in the models, stuck to his prices, was untroubled by doubt. Rosenfeld hated to hedge by selling a falling asset, as theory prescribed; Hilibrand believed and simply followed the form. Hilibrand’s colleagues respected him immensely; inevitably, they turned to him when they needed a quick read. He was highly articulate, but his answers were like unrefined crystals, difficult for novices to comprehend. “You could refract the light with Larry’s mind,” said Deryck Maughan of Salomon Brothers. Like the other partners, but to a greater degree, Hilibrand saw every issue in black and white. He was trustworthy and quick to take offense at perceived wrongdoing but blind to concerns outside his narrow sphere. His Salomon colleagues used to joke that, according to the libertarian Hilibrand, if the street in front of your home had a pothole you ought to pave it yourself. But money probably meant less to him than to any of them. He found his passion in the intellectual challenge of trading. Aside from his family, he showed interest in little else. If anyone brought Hilibrand out of himself a bit, it was J.M. Hilibrand had a filial attachment to the chief, perhaps stemming from his close relationship to his own father. Rosenfeld had a similar devotion to Meriwether.

      Outsiders couldn’t quite explain J.M.’s hold on the group. He was an unlikely star, too bashful for the limelight. He spoke in fragments and seemed uncomfortable making eye contact.¹⁴ He refused to talk about his personal life, even to close friends. After organizing Long-Term, J.M. and his wife moved out of Manhattan, to a $2.7 million, sixty-eight-acre estate in North Salem, in Westchester County—complete with a 15,000-square-foot heated indoor riding ring for Mimi.¹⁵ The estate was set back three quarters of a mile on a private drive that the Meriwethers shared with their only neighbor, the entertainer David Letterman. As if to make the property even more private, the Meriwethers did extensive remodeling, fortifying the house with stone. J.M. liked to control his private life, as if to shelter it, too, from unwanted volatility.

      Though he attended a church near home and made several visits to Catholic shrines, J.M. didn’t speak about his faith, either. His self-control was implacable. Nor did he open up among his traders. At firm meetings he was mostly quiet. He welcomed frank debates among the partners, but he usually chimed in only at the very end or not at all.

      The firm’s headquarters were the ground floor of a glassy four-story office complex, on a street that ran from the shop-lined center of affluent Greenwich past a parade of Victorian homes on Long Island Sound. Several dozen of Long-Term’s growing cadre of traders and strategists worked on the trading floor, where partners and nonpartners sat elbow to elbow, cramped around a sleek, semicircular desk loaded with computers and market screens. The office had an elaborate kitchen that had been put in by a previous tenant, but the partners lunched at their desks. Food meant little to them.

      J.M., Merton, and Scholes (the latter two because they didn’t trade) had private offices, but J.M. was usually on the trading floor, a mahogany-paneled room that looked out through a full-length picture window to the water, resplendent and often speckled with sailboats. Aside from the natty Mullins, the partners dressed casually, in Top-Siders and chinos. The room hummed with trader talk, but it was a controlled hum, not like the chaos on the cavernous New York trading floors. Only occasionally did the partners revert to their past life for a few rounds of liar’s poker.

      Besides the Tuesday risk meetings, which were for partners only, Long-Term had research seminars on Wednesday mornings that were open to associates and usually another meeting on Thursday afternoons, when partners would focus on a specific trade. Merton, usually in Cambridge, would join in by telephone. The shared close quarters fostered a firm togetherness, but the associates and even some of the partners knew they could never be part of the inner circle. One junior trader perpetually worried that his trades would be found out by the press, which he feared could cost him his job. Associates in Greenwich, even senior traders, were kept so much in the dark that some resorted to calling their London counterparts to find out what the firm was buying and selling. Associates were never invited back to the partners’ homes—there seemed to be an unwritten rule against partners and staff fraternizing. Leahy, a college hockey player, exchanged the normal office banter with the employees, but most of the partners treated the staff with cool formality. They were polite but interested only in one another and their work. The analysts and legal and accounting staffs were second-class citizens, shunted to a room in the back, where the pool table was.

      Like everyone else on Wall Street, Long-Term’s employees made good money. The top staffers could make $1 million to $2 million a year. There was subtle pressure on the staff to invest their bonuses in the fund, but most of them were eager to do so anyway—ironically, it was considered a major perk of working at Long-Term. And so, the staff confidently reinvested most of their pay.

      Just as predicted, Long-Term’s on-the-run and off-the-run bonds snapped back quickly. Long-Term made a magical $15 million—magical because it hadn’t used any capital. As Scholes had promised, Long-Term had scooped up a nickel and, with leverage, turned it into more. True, many other firms had done the same kind of trade. “But we could finance better,” an employee of Long-Term noted. “LTCM was really a financing house.”

      Long-Term preferred to reap a sure nickel than to gamble on making an uncertain dollar, because it could leverage its tiny margins like a high-volume grocer, sucking up nickel after nickel and multiplying the process thousands of times. Of course, not even a nickel bet was absolutely sure. And as Steinhardt, the fund manager, had recently been reminded, the penalty for being wrong is infinitely greater when you are leveraged. But in 1994, Long-Term was almost never wrong. In fact, nearly every trade it touched turned to gold.

      Long-Term dubbed its safest bets convergence trades, because the instruments matured at a specific date, meaning that convergence appeared to be a sure thing. Others were known as relative value trades, in which convergence was expected but not guaranteed.¹⁶

      The bond market turmoil of 1994 seeded the ground for a huge relative value trade in home mortgage securities. Mortgage securities are pieces of paper backed by the cash flow on pools of mortgages. They sound boring, but

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