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A Decade Later, John Meriwether Must Scramble Again

LTCM Founder Has Tough Time Stemming Losses at New Funds;
A Withdrawal Deadline Nears

By JENNY STRASBURG
March 27, 2008; Page C1

Ten years after overseeing a hedge-fund collapse that buckled the world's
financial markets, John Meriwether again is scrambling to stem losses and
keep investors from jumping ship.

Mr. Meriwether is best known as a founder of Long-Term Capital Management,
which in 1998 lost $4 billion. That helped foster a global financial crisis
and triggered both a Wall Street-led bailout and congressional hearings on
the dangers of hedge funds, the freewheeling pools for wealthy investors and
institutions that often trade heavily and rely on borrowed money to bolster
returns.

ROUGH TIMES II

€ The News: Well-known investor John Meriwether has hit a rough patch, with
his largest hedge fund plunging 28% this year.
€ Backdrop: He founded Long-Term Capital Management, a hedge fund that
imploded in 1998, leading to a Wall Street bailout and helping foster a
global financial crisis.
€ What's Next: Some of his investors are restive, and have until Monday to
request withdrawals.
Now, Mr. Meriwether's biggest fund, a bond portfolio, has plunged 28% this
year; another, broader market fund is down 6%. Both had subpar performances
last year.

Some investors in the funds are seeking to get their money out. Mr.
Meriwether and his colleagues at JWM Partners LLC -- which he launched in
1999 with LTCM alumni -- are trying to reassure investors in the two funds
that they have slashed risk and will use their experience to survive this
market crisis, preserving about $1.4 billion in assets.

The struggles represent a warning signal to investors that the perils of the
current crisis aren't over despite lower market values and government
efforts to calm the financial system.

Mr. Meriwether, a 60-year-old former vice chairman of Salomon Brothers, has
seen three decades of market zigzags, recessions and credit contractions.
Yet he can't corral the risks of today's markets and is trying to play it
safe, even though he believes he should be buying securities.

"We have sharply reduced the risk and balance sheet of the portfolio," Mr.
Meriwether told clients in his bond fund, Relative Value Opportunity Fund,
in a March 18 letter. "While the opportunities are among the best we recall,
we continue to balance our need to control risk while attempting to capture
the opportunities we feel are available."

Mr. Meriwether, through a principal at the firm, declined to comment.

His funds' losing positions have included mortgage securities backed by
Fannie Mae and Freddie Mac, trades tied to municipal bonds and
triple-A-rated commercial-mortgage -backed securities, according to the
letter. Those bets have eaten into his returns this year, particularly as
hedge fund Peloton Partners LLP and Carlyle Capital Corp. unloaded many of
the same securities as they spiraled toward demise.
JWM's losses this year have pared the bond fund's assets to less

One of Wall Street's best-known traders, Mr. Meriwether was featured
prominently in the book "Liar's Poker," which depicted the antics of
Salomon's bond traders. His LTCM hedge fund, located in Greenwich, Conn.,
included Nobel Prize winners and math whizzes, but it was undone in 1998 by
massive "leverage," or borrowing -- up to $50 for every dollar invested --
which amplified losses when the markets turned on him.

Mr. Meriwether's recent troubles partly stem from borrowing. His bond fund
had $14.90 in borrowed money for every $1 in equity at the end of February,
according to the March 18 letter. Although far lower than at LTCM, the
fund's risk level, which includes leverage, was still too much for this
year's volatile environment, he and his fund managers have acknowledged in
conversations with investors.

Mr. Meriwether marketed his bond fund as a lower-risk version of LTCM's core
strategy, of identifying the next financial crisis and profiting from it by
buying securities its managers consider underpriced. Investors were told
that the firm would aim to keep borrowings below 15-to-1 even during
less-volatile times. Mr. Meriwether and his colleagues promised to behave
more conservatively, rebuilding their reputations with consistent returns.
His bond fund hasn't had a money-losing year.

Unlike in 1998, Mr. Meriwether isn't a central player in the current crisis.
His firm has about 70 employees, most working in LTCM's former offices in
Greenwich, and some in London. Some LTCM investors invested in JWM when Mr.
Meriwether started the new firm.

His funds' recent performance comes amid comparisons of the collapse of LTCM
and last week's implosion of securities firm Bear Stearns Cos. -- as well as
the market fallout, the government's response and the investment
opportunities created by events. In 1998, as markets throughout the world
seized, the concern was to contain losses with LTCM's trading partners,
which included most of the U.S.'s major securities firms and commercial
banks.

The Federal Reserve orchestrated a controversial $3.63 billion rescue plan
funded by a consortium of 14 Wall Street banks. Global markets were roiled
for weeks, but the Fed pared interest rates and pumped liquidity into the
system. The markets zoomed upward in 1999, leading to a technology-driven
market bubble that popped in 2000.

The current crisis is far broader and deeper. Despite efforts to rein in
systemic risks, the Fed hasn't been able to stem investor panic and market
volatility. More investments than ever are unregulated with opaque pricing,
and there remains the risk that trading partners won't make good on their
trades. Financial firms have written down $150 billion, and more losses are
expected. Several hedge funds have collapsed.

When Bear Stearns teetered, the Fed did more than simply orchestrate a
bailout. It guaranteed $29 billion of the firm's losses and paved the way
for J.P. Morgan Chase & Co. to buy Bear at a rock-bottom price -- moves far
more controversial than in 1998. Investors trying to pick a market bottom
have gotten burned.

JWM's Relative Value bond fund, launched in December 1999, has lost 28% this
year through last week after notching a 5.6% return in 2007, according to
people familiar with the fund. The recent losses further weigh on the fund's
average annualized return since inception of about 7% through February 2008.
The Lehman Brothers U.S. Aggregate Index, a measure of investment-grade bond
performance, has returned an annualized 6.5% during that period.

JWM's bond fund, which seeks to profit from price discrepancies among
stocks, bonds and other securities, trails the 9% average annualized gain of
hedge funds world-wide during that period, according to Hedge Fund Research,
a Chicago research firm.

Moreover, Mr. Meriwether's five-year-old macro fund, JWM Global Macro, which
invests in broad trends through currencies, commodities, stocks and bonds,
was down 6% through February after falling 5.6% in 2007. The fund has gained
about 5.7% per year, on average, since it began trading in 2003. That record
means the macro fund, too, trails its peers, which have gained twice as much
a year, on average, during the same period.

JWM's losses this year have pared the bond fund's assets to less than $1
billion from its peak of more than $1.3 billion, according to people
familiar with the situation. The macro fund has shrunk by at least half, to
about $350 million. JWM managed about $2.3 billion in total assets at the
start of 2008.

Amid the price drops and borrowing, Mr. Meriwether's firm, like others, has
been at risk of receiving margin calls, or demands for additional
collateral, from lenders. JWM has remained in compliance with its lenders,
according to a person familiar with the fund.

The credit crunch and market volatility have roughed up other
multibillion- dollar hedge funds, which on average have lost about 3.35% this
year, according to Hedge Fund Research's daily global performance index.

Platinum Grove Asset Management, the $6 billion hedge-fund firm run by LTCM
alumnus Myron Scholes, has lost 13% this month on credit trades, putting it
10% down for the year, according to a person familiar with the fund. Also,
Farallon Capital Management LLC in San Francisco, which manages about $36
billion, has lost 5.6% this year through last week in its flagship Farallon
Capital Partners fund. And Steven Cohen's SAC Multistrategy Fund is down
about 3% this year through last week, according to investors. The Stamford,
Conn., firm oversees $16 billion.

Mr. Meriwether, in phone calls and letters to clients, has been spreading
the message that he learned his lesson in years past and has been playing it
safe this year since his funds started losing money, according to people who
have spoken with him.

His funds' investors have until Monday to request withdrawals that would
happen at the end of June. Hedge-fund managers have varying rules about such
investor redemptions. In Mr. Meriwether's case, the three-month lag could
buy him some time, in addition to the funds' restrictions allowing clients
to withdraw one-eighth of their capital during any given quarter.

Meanwhile, there is a big disadvantage to reducing how much money they
borrow. Lower leverage cuts into the fund's chances of climbing back from
losses. And it is a steep climb before JWM can start collecting its 20%
performance fee again, in addition to the 2% of assets that the managers
collect.