"We had no idea they would have trouble-these people were known for risk management. They had taught it; they designed it," reflected Dan Napoli, the Merrill risk manager who had so en- joyed golfing with the partners in Ireland. "God knows, we were dealing with Nobel Prize winners!" Ironically, only a very intelligent gang could have put Wall Street in such peril. Lesser men wouldn't have gotten the financing or attracted the following that resulted in such a bubble.
The professors had ignored the truism-of which they were well aware—that in markets, the tails are always fat. Stuck in their glasswalled palace far from New York's teeming trading floors, they had forgotten that traders are not random molecules, or even mechanical logicians such as Hilibrand, but people moved by greed and fear, capable of the extreme behavior and swings of mood so often observed in crowds. And in the late summer of 1998, the bond-trading crowd was extremely fearful, especially of risky credits. The professors hadn't modeled this. They had programmed the market for a cold predictability that it had never had; they had forgotten the predatory acquisitive, and overwhelmingly protective instincts that govern reallife traders. They had forgotten the human factor
Soros, à wily refugee from Communist Hungary, and Meriwether were as different as could be. Soros's Eastern European origins oozed from his every pore. Formal and stiff, he had a tendency to launch into philosophical disquisitions. He looked like a graying owl. Meriwether was informal, unpretentious, midwestern; he could have been the State Farm agent down the street. They represented unlike styles in investing, too. Long-Term envisioned markets as stable systems in which prices moved about a central point of rational equilibrium. “I had a different view," Soros noted.12 The speculator saw markets as organic and unpredictable. He felt they interacted with, and were reflective of, ongoing events. They were hardly sterile or abstract systems. As he explained it, “The idea that you have a bell-shape curve is false. You have outlying phenomena that you can't anticipate on the basis of previous experience.
In May, street rioting forced President Suharto to resign ater thirty-two years in power. The real revolutionaries had been the currency traders, who had forced a currency devaluation and exposed a corrupt autocrat's nepotistic program as a failure.
John Succo, who ran the equity derivatives desk at Lehman Brothers, was among those who felt that the Street was playing with fire, specifically with the unseen leverage in derivatives. At the end of April, Succo was speaking at an investors' conference sponsored by the maverick newsletter publisher James Grant. In response to a question, Succo declared that the senior managements at some possibly all-Wall Street firms had no idea of the risks being run by their twenty-six-year-old traders. He hedged a bit, adding that his management was better informed. But the heresy was accomplished. For suggesting that Wall Street's top brass was uninformed, the prophetic Succo was forced to resign from Lehman.
Always good at reducing high finance to everyday English, Scholes described Long-Term in refreshingly plain terms: “What we do is look around the world for investments that we think are, because of our models, undervalued or overvalued. And then we hedge out the risk of something we don't know, like a market factor."
One time, a trader named Andy who was losing money on a mortgage trade asked for permission to double up, and J.M. gave it rather offhandedly. "Don't you want to know more about this trade?" Andy asked. Meriwether's trusting reply deeply affected the trader. J.M. said, "My trade was when I hired you."