YouSaid · the spoken record

Clay Finck

lines on the record: 76
first: 2025-03-21
most recent: 2025-03-21
sittings or episodes: 1
sources: podcast

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“Shares of IBM dropped sharply from, say, 80 to 60. They assumed that it was more of a step-like function where it would go from 80 to 79 and three quarters to 79.5. With the options market repricing continuously each step along the way. In calm and liquid markets, this might make sense. But an outlier events like the 1987 flash crash, it could be argued that markets were largely discontinuous. At one moment, you could buy shares of IBM at $80, and in the next moment, it traded for $60, with very few, if any trades in between. But long-term based their models on the assumption that markets were efficient and continuous, and it had served them very well to that date. Lonstein writes here, Merton's theories were seductive not because they were mostly wrong, but because they were so nearly often right. As the essayist, G.K. Churston wrote,”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“That the share price will fall over time. And there's the uncertainty of how likely it's going to fall. While Meriwether was acknowledging the risk of the loss of capital, he was disregarding the uncertainty of the world and how us as humans simply can't place probabilities on the future with such certainty. To long term, investing was more of a science than an art as they operated very mathematically. They used academic concepts such as market prices follow a random walk from day to day they would fluctuate in an unpredictable manner and the price changes followed a normal distribution with some volatility around a statistical mean. And they assumed that volatility or risk of an asset was constant over time, just as it had been assumed in the Black Schoals formula. Additionally, likely to have fault, they assume that markets would trade in a continuous manner, without any jumps. So if”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“So Clarman recognized that just a single serious mistake could lead to major impairment of capital for their investors, two major errors at the same time would likely be catastrophic. In the meantime, long-term managed to put up 20% returns for investors in 1994, net of fees, and 28% returns before fees. While the average investor in bonds lost money. Oddly enough, Meriwether wrote in his letters that investors shouldn't expect such a gain each year in roughly 12% of years, they would lose at least 5% of their money and went on to share the odds of losing, say, 10%, 15%, 20%, as if they could forecast the future so precisely, but they didn't highlight any of their trades or investments, nor did they have to. All investments pose a risk and uncertainty. If we buy shares of Amazon today, there's a risk”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Clarman had received an offer to invest in long term, and he was skeptical of their cavalier approach to debt, so he declined the offer. Clarmin, who's very much a deep value investor, would be one that shuns the excessive use of debt, like long-term, would certainly use, in his view. Clarman had wondered how investors could be so certain that markets would always be liquid. Allowing them to get out when they needed to exit their positions, or perhaps when they're forced to sell due to margin calls. Loenstein writes here, He fear that investors were turning a blind eye to the consequences of outlier events, such as sudden disturbances and occasional crashes that historically have always upset the best laid plans of investors. In general, Clarman warned successful investors have positioned themselves to avoid the 100-year flood, end quote.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“And this was actually considered one of the perks of working at the firm. So most people confidently reinvested most of their pay. They like to bet on sure things, and in their first year, just about every trade long-term touched had turned to gold, which were mostly with these convergence trades. These were attractive because there was a maturity date, while the relative value trades offered the potential for convergence, but without a limited timeline. There was one hotly debated trade that wasn't so much a sure thing. One of the partners, Victor Hagani, made a bold bet on Italian sovereign bonds, betting that the country wouldn't default on its debt in light of their economic crisis. Had Italy defaulted, long-term would have lost their shirt on the train, and they didn't disclose that default risk to their investors, of course, or really tell them anything about how or where any of their money was invested. The book shares that Seth”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Across many banks, so none of them could really peer in and see what was happening underneath the surface, as Meriwether didn't want them closely replicating their strategy. Meriwether never talked about his personal life, even with his close friends. After setting up long term, he and his wife moved outside of Manhattan to a $2.7 million 68-acre estate in Westchester County. This allowed him to live even more privately and help shelter himself from the unwanted volatility that you would find in the city. Long term was headquartered in Greenwich, Connecticut, which was located northeast of Manhattan. They had a whole team in the office. There were the partners, some junior and senior traders, as well as the analysts, legal, and accounting professionals. The top employees made anywhere from $1 to $2 million per year, and there was a bit of pressure for the staff to invest their bonuses into the fund, which most of them were just eager to do anyways.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“haircut requirements you'd be a fool to require it otherwise long term simply wouldn't do business with you Meriwether's marketing strategy served him well because he had the banks believing that they were at the mercy of him when in fact it was the opposite long-term strategy of pushing for outsized profits and returns relied on their ability to get favorable financing terms that they wouldn't think to give to anyone else The only reason the banks agreed to such terms is because they believed that they were lending to a new wage financial intermediary that benefited from superior and virtually fail-safe brains and technology. The banks also fell prey to the liking bias as they generally liked Meriwether as a person and wanted to be associated with his excellent reputation. Since many of these banks did similar arbitrage trades themselves, Meriwether operated in this secretive manner and spread out his beds”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Capturing that spread and levering it up over 20 times to earn a satisfactory return that they were looking for. Part of the beauty in their eyes of this transaction was that they could pull off this $2 billion trade without putting up any of its own cash balance because the cash raised from going short could be used to finance the purchase to go long. Most firms would need to pay what's referred to as a haircut, which was to put up some collateral to implement the trade, but Meriwether always looked to eliminate the haircut if possible or substantially reduce it. They would argue with banks that they were the exception to the rule of needing to post additional collateral simply because of who they were. Merrill Lynch agreed to waive its usual haircut requirement and go along, and so did Goldman Sachs, JP Morgan, Morgan Stanley, and just about everyone else. It was sort of this prisoner's dilemma, since the other banks were waving their hair.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Term capital management opened up for business at the end of February 1994, led by Meriwether Rosa. In purchased $10 million worth of workstations from Sun Microsystems to get started deploying their $1.25 billion in AUM, just as the fund launched in 1994, Alan Greenspan, who was a chairman of the Federal Reserve, sensed that the economy was overheated. So he raised interest rates, which led to declining bond prices, which was great for long term. They did better when markets were moving rather than stable, and the opportunities were more abundant. Bond funds were losing hundreds of millions of dollars, leading to forced liquidations and widening spreads for long term to take advantage of. To some extent, long-term was doing a service to the market as a whole because they would help provide liquidity to force sellers who were receiving margin calls. One trade they made was simply shorting the 30-year U.S. Treasury that was yielding 7.24% and going long the 29.5 year Treasury, yielding”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Student of Robert Merton at Harvard. In the connection with him led to commitments from the government of Singapore, the Bank of Taiwan, the Bank of Bangkok, in the Kuwait State Run Pension Fund. They even earned a $100 million commitment from the Foreign Exchange Office of Italy's Central Bank. Lowenstein explained that such entities simply did not invest in hedge funds, but the Italian agency thought of long-term not as a hedge fund per se, but an elite investing organization with a quote-unquote solid reputation. Long-term also secured commitments from a diverse group of celebrities and institutions in the U.S., including Phil Knight from Nike, the consulting firm McKinsey& Company, the CEO of Bear Stearns, among a number of universities, pension funds, and insurance companies. Many were reassured by Meriwether and his partners putting up $146 million of their own money as well. In long-term”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Of Michael Jordan and Muhammad Ali on the same team, end quote. And then once Meriwether was able to point back to his track record at Solomon, he believed that the hedge fund would really just start to sell itself because the concept was proven. Solomon had broken out their earning statement which showed that Meriwether's team was responsible for most of Solomon's previous profits, topping more than $500 million a year during the last five years of the firm. This led to a ton of investor interest who were told that 30% returns to net of fees would not be out of reach, but that wouldn't come without risk, which is why long-term would diversify and spread out their bets so no one bet could pull down the entire fund. To help with marketing, David Mullins, the vice president of the U.S. Federal Reserve, gave Meriwether access to international banks and joined long-term himself. Mollins was also a former”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“would have been happy with just one percent of that. They would charge much higher fees than others. They would charge 25% of profits in addition to 2% of assets, while the typical fund was charging 20% of profits and 1% of assets. And they required a minimum investment of $10 million. Then Meriwether looked to put together an elite team. He hired Robert Merton, who was a leading scholar in finance at Harvard and had trained many Wall Street traders and knew the arbitrage group quite well. Merton also contributed to the creation of the infamous Black Shoals options pricing model, which helped give long-term capital management some instant credibility. Then Meriwether recruited Myron Schoals, who was the second academic star and of course was also involved in the creation of the Black Shoals model. Lowenstein writes here, with two of the most brilliant minds in finance, each said to be on the short list of Nobel candidates, long-term had the equivalent”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“In AUM, and with strong investor demand, Meriwether was just the person to deliver the fund that could deliver returns that were both bold and safe. From the beginning, Meriwether planned to leverage its capital 20 to 30 times to one, or even potentially more. This was a necessary part of his strategy because little was to be made on minuscule spreads closing unless leverage was used. The allure of this strategy is that it increases the upside substantially, but the obvious drawback is that if the trade goes south, the losses are magnified just as quickly. To help alleviate this concern, he insisted that investors commit to at least three years, which was an unheard of lockup period. This would help prevent investors from calling capital at the worst possible time, hence the name long-term capital. He set to raise $2.5 billion while most other funds likely”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Types of assets that suited their desires. But they couldn't partner with more than 99 investors, and each investor had to be worth at least $1 million. And since hedge funds were fairly new at the time, they had this allure due to their exclusivity and high investment minimums. Lowenstein writes, for people of means, for people who summered in the Hamptons and decorated their homes with warholes, for patrons of the arts and charity dinners, investing in a hedge fund denoted a certain status. In inclusion among Wall Street's smartest and savviest. Hedge funds became a symbol of the richest and the best. Paradoxically, the pricey fees that hedge fund managers charged enhanced their allure. For who could get away with such gaudy fees except the exceptionally talented, end quote. At the time, there were around 3,000 hedge funds with $300 billion”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Believed that the market was getting the trade wrong, so we just held on to it and it did eventually come back. The arbitrage group had Buffett and Munger uneasy with the risks that they were taking on, and the Mosier scandal led Meriwether at the age of 45 to set his sights on starting his own firm to implement the tactics that he had used at the arbitrage group within Solomon. Now by this time, we're in the early 90s, and if there was any time to launch a hedge fund, this would have been the time. More Americans owned investments than ever before. Stocks were hitting new all-time highs, and stock screens started to enter the limelight at the gym, at the airports, and in the offices. Hedge funds at the time didn't need to register with the SEC, so for the most part, what was in their portfolios was really up to them and it sort of could be hidden. They could also borrow as much money as they wanted and could buy all sorts of different”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“To the U.S. Treasury to gain an unauthorized share of a government bond auction. This trader was Paul Moser. He was a volatile trader who repeatedly and recklessly broke the rules of Solomon and jeopardized the reputation of Meriwether and the entire firm. The Treasury and the Fed then got involved in this debacle and this sparked a scandal within Solomon and John Goop friend who was the CEO at the time was forced to quit and Warren Buffett became the interim CEO. Meriwether, on the other hand, was known throughout the company as being the firm's top money maker and also as impeccably ethical. So Buffett wanted him to stick around even though he was near the center of the scandal and being blamed for much of the wrongdoings since he didn't properly supervise Moser. Lawrence Hillibrand filled in for Meriwether temporarily and he made a near catastrophic bet in mortgages and he was down $400 million for the firm.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“In 1987, Solomon was the target for a hostile takeover, and Solomon fined off the hostile bidder by selling control of the firm to a distinctly friendly investor named Aaron Buffett, and Buffett would also join the board of Solomon Brothers. That year was also the year of the 1987 flash crash, which led to arbitrage's portfolio dropping by $120 million in just one day, and others at Solomon weren't quite sure what they were up to. But they trusted Meriwether, so they thought that it would just work itself out as it always had before. In 1989, the arbitrage group negotiated that they would get a 15% cut of the group's profits, and they put up a record year as they brought in 23 million dollars for the firm. One trader at Solomon had become furious with the inside deal that they had previously worked with the group, and he confessed to Meriwether that he had submitted a false”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“couldn't learn more about what the group was up to. As the arbitrage group made more and more money, Solomon opened the reins for them to invest more capital in Meriwether gained command over all bond trading, including government bonds, mortgages, high-yield corporate bonds, and more. Soon enough, the arbitrage group was making up a greater and greater share”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Brand, which was probably the smartest of the bunch and had two degrees from MIT. They downloaded all the data they could find on bond prices, and they looked for inefficiencies in that market. Since this was a smart and really logical group, and there were many inefficiencies in the market, they ended up making a ton of money for Solomon. And there was this interesting dynamic where because the arbitrage group had just so much capital behind them and these guys that Meriwether hired were just so smart, they just really didn't fit in with the rest of Wall Street. Meriwether served as the head of the group and sort of shielded them from the rest of the company, almost making everything they did entirely secretive. Despite their amazing ability to find inefficiencies in the market, some of them could barely hold a normal conversation. The secretive dynamic of the arbitrage group fueled resentment from other departments as they”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Which would have the model that long term would use in the 1990s. They would often bet that the spread would close between the spot and the future price and bet that those two prices would eventually converge. By the early 1980s, Meriwether would become one of Solomon's sharpest traders and in fact one of his best skills was his ability to hire traders who were smarter than he was. That was his major edge. This applied both at Solomon and then later at long-term capital management. While most Wall Street execs were mystified by the academic world, Meriwether used it to his advantage. He called Eric Rosenfeld and asked him to recommend students at Harvard Business School that he could look into hiring. Rosenfeld originally wasn't really interested in working with Meriwether, but just 10 days later, he was eventually hired on as Solomon Brothers. Meriwether would hire a number of others from the academic world, including Lawrence Hillip.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Just 10 years earlier. The other big change was the rise of computers, making it easier to quickly price bonds accurately. Meriwether learned the art of arbitrage at Solomon Brothers in the late 1970s. The premise was simple. Let's say you have a U.S. Treasury bill that was trading at a slight discount to the future's price that wasn't that far into the future. The securities dealer, such as Solomon, was simply buy the Treasury, short the future, and simply wait for the two prices to converge as it was reasonable to assume that they ultimately would. Solomon really didn't care whether the price of the US Treasury would go up or go down because it didn't matter. All that mattered was that eventually the relative prices between the spot and the future would ultimately converge, and that was the basic idea of arbitrage. Meriwether would set up his own bond arbitrage group within Solomon in 1977.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Investing early on as he and his brother made money in the stock market. Meriwether attended Northwestern University for his undergrad, then got his business degree at the University of Chicago and graduated in 1973. Then at the age of 27, he was hired on at Solomon Brothers. In the mid-1960s, bond trading was really a dull sport. For the most part, investors would buy bonds and simply hold on to them until maturity while getting a steady income along the way. At this time, managing a bond portfolio or even trading bonds was a foreign concept. This all changed in 1971 when the United States announced that the dollar would be depegged from gold, ushering in a period of currency debasement and inflation, wrecking havoc on bond investors who were accustomed to stability. By the late 1970s, Solomon Brothers were slicing and dicing bonds in ways that would have been unimaginable.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Leaving them open to untenable risks. Financial crises are as old as markets, but derivatives were relatively new, which helped lead to this House of Cards to stack up as high as it did. So how did prominent banks like Goldman Sachs, Lehman Brothers, and Merrill Lynch overexpose themselves to this rather secretive firm? Why do they seem to think that 40% returns using leverage and derivatives were sustainable? This story was well covered in the book when Genius failed by Roger Lowenstein. Now the face of long-term capital management was John Meriwether. Meriwether was born in 1947 and was raised in a tight-knit community on the south side of Chicago. He was a great student, especially in mathematics, which was an indispensable subject if you're going to become a leading bond trader. He was also drawn to gambling, but only when he felt the odds were sufficiently shifted in his favor to give him an edge. He also gotten”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“1994 to 1998, long term capital management had been the envy of Wall Street, putting up eye-popping returns of more than 40% per year with no losing stretches, minimal volatility, and seemingly no risk at all. It was run by a number of geniuses with PhDs who would arbitrage a market and had decades of experience doing so. The fund amassed $100 billion in assets with virtually all of it borrowed from bankers. Worse yet, they entered into thousands of derivative contracts, which made the firm endlessly intertwined with every bank on Wall Street. Since derivatives are another form of leverage, this gave the firm, and thus the banks as well, more than $1 trillion worth of exposure. And if LTCM were to somehow fail, all of the banks would be left holding one side of a contract for which the other side no longer exists.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, PlayFink.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Assumptions triggering a collapse so catastrophic that the Federal Reserve had to step in to prevent a broader financial meltdown. During this episode, we'll also explore the dangers of overconfidence, the illusion of diversification, and why excessive leverage can be a ticking time bomb. Markets don't always behave rationally, and as John Maynard Keynes warned, they can remain irrational longer than you can stay solvent. During the last few minutes of the episode, I'll also be sharing details on a brand new exclusive event that TIP will be hosting in the mountains of Big Sky, Montana in September of 2025. So if small in-person gatherings are eventually, then be sure to stick around until the end to learn more. With that, let's dive right in.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT