LTCM traded Russian government bonds in 1990s using this info

March 1, 2014

This post considers the hypothesis that Long Term Capital Management (LTCM) traded Russian government bonds knowing that Russia had leverage over Stanley Fischer and Larry Summers.

Losses included: “$430 mn in Russia and other emerging markets”

John W. Meriwether Former vice chair and head of bond trading at Salomon Brothers; MBA, University of Chicago
Robert C. Merton Leading scholar in finance; Ph.D., Massachusetts Institute of Technology; Professor at Harvard University
Myron S. Scholes Co-author of Black–Scholes model; Ph.D., University of Chicago; Professor at Stanford University
David W. Mullins Jr. Vice chairman of the Federal Reserve; Ph.D. MIT; Professor at Harvard University; was seen as potential successor to Alan Greenspan
Eric Rosenfeld Arbitrage group at Salomon; Ph.D. MIT; former Harvard Business School professor
William Krasker Arbitrage group at Salomon; Ph.D. MIT; former Harvard Business School professor
Gregory Hawkins Arbitrage group at Salomon; Ph.D. MIT; worked on Bill Clinton‘s campaign for Arkansas state attorney general
Larry Hilibrand Arbitrage group at Salomon; Ph.D. MIT
James McEntee Bond-trader
Dick Leahy Executive at Salomon
Victor Haghani Arbitrage group at Salomon; Masters in Finance, LSE

Around 1992, arbitrage trader Larry Hilibrand was the top-paid trader at Salomon Brothers. As one of the most mathematically astute traders, Hilibrand became the youngest managing director in Salomon Brothers history. Subsequently, he became a partner at a hedge fund, Long-Term Capital Management, the failure of which almost caused an apocalypse on the Street.

Hilibrand currently lives in Greenwich with his family.

The traders were professors and Ph.D.s from MIT and Harvard to a large degree.  They knew about Russia having used the plagiarism kompromat already in the 1970s to get Nobel Prize nominations.  They knew Russia had this over Larry Summers and Stanley Fischer.  They likely also knew Boris Berezovsky was a math Ph.D. at Institute of Control Sciences in Moscow before his rise to power and that he could have learned of the 1970s kompromat pressure there.

The research with Paul on warrant pricing introduced me to the expected utility maxim and its application to optimal portfolio selection in a static framework. As a consequence of that effort, I began to think about combining the static theory of portfolio selection with the intertemporal optimization of lifetime consumption under certainty found in the growth-model literature. Ignorant of the important work underway by Nils Hakansson and Hayne Leland, then graduate students elsewhere (false), I attacked the problem of dynamic portfolio theory in a continuous-time framework without having the benefit of their discrete-time formulations. Despite all the mathematics courses that I had taken, l had seen neither stochastic dynamic programming nor the Ito calculus, both of which turned out to be key mathematical tools needed for this research. Instead, driven by “need,” I found them and learned them on my own. Presented first at a Harvard-MIT graduate student seminar in November 1968, my paper on lifetime consumption and portfolio selection under uncertainty was published the following August as a companion paper to one by Paul investigating the effect of age on portfolio risk tolerance.

Notice that Robert Merton is talking about Nils Hakansson in his Nobel Prize autobiography as having did work before him that Merton published, as he claims independently.  Hakansson got his Ph.D. in 1966 and was at Yale.  His Yale working paper on uncertain lives somehow ended up as chapter 5 of Fischer’s thesis.

Hakansson is not on the list.  Nor is Leland.

Some who are on the list:

(*) MARTIN J. BECKMANN, Department of Economics, Brown University, Box B, Providence, RI 02912 USA (1958).

PETER A. DIAMOND, Department of Economics, Massachusetts Institute of Technology, E52-344, 50 Memorial Drive, Cambridge, MA 02139 USA (1968).

J. DARRELL DUFFIE, Graduate School of Business, Stanford University, 518 Memorial Way, Stanford, CA 94305-5015 USA (1995).

(*) STANLEY FISCHER, Bank of Israel, P.O.Box 780, Jerusalem, 91007 Israel (1977).

(*) PETER C. FISHBURN, P.O. Box 309, Basking Ridge, NJ 07920-0309 USA (1974).

(*) FRANKLIN M. FISHER, Department of Economics, Massachusetts Institute of Technology, E52-274, 50 Memorial Drive, Cambridge, MA 02139 USA (1963).

(*) DAVID LEVHARI, Department of Economics, Hebrew University of Jerusalem, Mount Scopus, Jerusalem, 91905 Israel (1971)

KARL SHELL, Department of Economics, Cornell University, 402 Uris Hall, Ithaca, NY 14853-7601 USA (1972).

ANDREI SHLEIFER, Department of Economics, Harvard University, Littauer M-9, Cambridge, MA 02138 USA (1993).

(*) T. N. SRINIVASAN, Economic Growth Center, Yale University, Box 208269, 27 Hillhouse Avenue, New Haven, CT 06520-8269 USA (1970).

MARTIN L. WEITZMAN, Department of Economics, Harvard University, Littauer 313, Cambridge, MA 02138 USA (1976).

(*) LAWRENCE H. SUMMERS, Office of the President, Harvard University, Massachusetts Hall, Cambridge, MA 02138 USA (1985).

Merton’s Nobel Prize was in 1997.  Russia was going full blast in getting IMF loans and LTCM going full blast.  Then in another year it fell apCart.  LTCM had its back office trading done by Bear Stearns.   The street was able to put together some info on LTCM’s positions.  Russia probably knew the large position in its bonds at Bear Stearns were held for LTCM.  This can all be investigated even at this date.

“Eric R. Rosenfeld is a Senior Lecturer in Finance at the MIT Sloan School of Management.”

All those involved should be interviewed.

The above is speculation and hypotheses.  Please restate as questions.  All other disclaimers apply.


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