Business Professor's Investment Firm Loses $100 Billion

The private investment firm of Nobel laureate Robert C. Merton, Baker professor of business, last week lost more than $100 billion that were invested in various worldwide financial markets, the Associated Press reported.

Long-Term Capital Management L.P. (LTCM) nearly collapsed last Wednesday after a transaction between LTCM and UBS Securities Inc. failed.

UBS had wanted to buy a significant portion of the hedge fund, while the LTCM partners had wanted to change foreign interest income in some of their off-shore accounts into financial gains.

The two companies structured a multi-million dollar deal that was intended to fulfill each of their interests, but instead resulted in the dramatic loss.

Merton, who won the 1997 Nobel Prize in Economic Sciences for his work on a formula that calculates the risk and value of given economic decisions, was one of 16 partners of the investment group and was directly affected by the collapse.

Another partner who was affected was Merton's Nobel prize co-winner, Stanford professor emeritus Myron Scholes.

The loss has far-reaching consequences due to the fund's 80 outside investments--each of at least $10 million--from such well-known groups as Merrill Lynch & Co. and Bear Stearns & Co.

Merton and John W. Meriwether, a former bond arbitrage specialist at Salomon Brothers who created and runs the Greenwich, Conn.-based firm, could not be reached for comment at press time.

But Peter Rosenthal, the spokesperson for the firm since its formation in 1994, said "there hadn't been a significant [loss for the firm], for any long period".

The fund had experienced yearly financial increases of 19, 40, 40 and 18 percent before losing 52 percent--$2.5 billion--through the end of August.

In an effort to rescue the fund and ensure the stability of an economic market that would be greatly affected by its collapse and to calm anxious creditors, the Federal Reserve Bank of New York intervened to organize a rescue of LTCM.

Officials from some of the world's largest banks and brokerage firms convened at the Reserve Bank to create the plan, which is worth more than $3.5 billion.

Firms including Goldman Sachs & Co. lent money to the hedge fund to aid in its recovery, and by doing so, they became 90-percent owners and are entitled to that percentage of the proceeds from its eventual sale.