The Smartest Guys on Wall Street
LTCM's extraordinary founding team — John Meriwether's star Salomon Brothers traders plus two Nobel Prize-winning economists — and why it looked like an unbeatable combination.
Long-Term Capital Management was founded in 1994 by John Meriwether, the legendary former head of Salomon Brothers' bond arbitrage desk, who assembled a founding team almost unmatched in finance history: several of his most talented former Salomon traders, a former vice chairman of the Federal Reserve, and — most strikingly — Myron Scholes and Robert Merton, who would jointly win the 1997 Nobel Prize in Economics for their foundational work on options pricing (the Black-Scholes-Merton model) while actively serving as LTCM partners.
Lowenstein frames this pedigree as central to both the fund's meteoric initial success and its ultimate undoing: the sheer concentration of quantitative talent and academic credibility made LTCM's risk models and trading strategies feel almost unimpeachable to outside investors, counterparties, and lenders alike — few people on Wall Street felt qualified to seriously question a strategy co-designed by literal Nobel laureates in the exact mathematical finance the strategy depended on, a dynamic that let the fund secure both enormous capital and, critically, unusually favorable leverage terms from its banks.
| Member | Background |
|---|---|
| John Meriwether | Former head of Salomon Brothers' bond arbitrage desk |
| Myron Scholes | Co-creator of the Black-Scholes options pricing model; 1997 Nobel laureate |
| Robert Merton | Extended options pricing theory; 1997 Nobel laureate |
| David Mullins | Former vice chairman of the U.S. Federal Reserve |
| Former Salomon arbitrage traders | Meriwether's most trusted former team members |
The book's opening chapters plant a seed that pays off later: the founders' extraordinary credibility didn't just help raise capital, it actively suppressed the kind of skeptical scrutiny that might otherwise have questioned the fund's growing leverage and concentration risk. Banks competed to extend LTCM unusually generous financing terms specifically because of who was running it, and few of LTCM's own investors or counterparties felt positioned to challenge risk assumptions built by the very people who had literally written the academic theory those assumptions rested on — a specific, human version of the epistemic arrogance problem covered in this Book Club's The Black Swan course, here reinforced rather than checked by everyone else's deference to genuine, exceptional expertise.
- LTCM was founded by John Meriwether with a team including his top former Salomon Brothers traders and Nobel laureates Myron Scholes and Robert Merton.
- This extraordinary pedigree helped LTCM raise enormous capital and secure unusually favorable leverage terms from its banks.
- The founders' credibility also suppressed the kind of skeptical scrutiny that might otherwise have questioned the fund's growing leverage and risk concentration.