http://www.nytimes.com/yr/mo/day/news/financial/hedgefund-wizards.html November 14, 1998 Teachings of Two Nobelists Also Proved Their Undoing By GRETCHEN MORGENSON and MICHAEL M. WEINSTEIN Two months ago Myron S. Scholes made a sentimental journey to the steel-manufacturing city of Hamilton, Ontario, to be honored as a local boy made good. He had recently been awarded, with Robert C. Merton, the Nobel award in economics, for breakthrough work in finding a way to value risky financial investments known as options. Those formulas, devised 25 years ago, made sophisticated investing more of a science and less of an art, encouraging the growth of a host of new securities markets. Many people made millions. The trip home was one of a number of personal appearances that amounted to, in Scholes's words, a victory lap. As the star guest at a party in Hamilton, he described his trip to Sweden to accept the Nobel and spoke fondly of the local people who had looked after him in his youth. At the end, he nearly broke down in tears. Certainly, it was an emotional moment. But there was something else. Back home in Greenwich, Conn., the situation was grave. The giant investment fund in which Scholes and Merton were partners, Long-Term Capital Management, was on the edge of financial ruin. The fund had made a variety of big, risky bets that had gone terribly wrong. The Federal Reserve Bank of New York would within a week organize a private takeover to prevent the fund's outright failure and a rout in the world's financial markets. [ snip ] "A series of events occurred that were outside the norm," said Martin Gruber, Nomura Professor of Finance at N.Y.U.'s Stern School and a friend of both men. "These catastrophes happen. The fault isn't with the models." [ snip. See the rest at http://www.nytimes.com/yr/mo/day/news/financial/hedgefund-wizards.html Jay ------------------------- COMING SOON TO A LOCATION NEAR YOU! http://dieoff.com/page1.htm
