Senator Harry Reid (Dem NV)
Senator Richard Bryan (Dem NV)
Rep. Shelley Berkley (Dem NV)
Rep. Henry Waxman (Dem CA)

December 19, 1999

Dear Senators and Congresspersons:

Thanks to the Wall Street Journal (Friday, December 17), it has come to my attention that Long Term Capital Management (LTCM) founder, John Meriwether, is now back in business with a new hedge fund, the Relative Opportunity Fund, already capitalized with some $250 million of new investments.

Just to refresh your memory, John Meriwether is the very same individual responsible for the LTCM financial crisis back in Fall of '98. LTCM employed a number of aggressive derivatives investment strategies whereby a mere $2 billion of investment capital was leveraged into over $1 trillion of investment assets. When the bond market turned against LTCM investment positions, the resultant LTCM crisis snowballed into even greater weakness in the financial markets, ultimately requiring Fed Reserve chairman Greenspan to intervene and arrange an emergency bailout of LTCM by various creditors/investors - - a "Who's Who" of Wall Street investment houses and banks. Moreover, there is every reason to believe that the three rapid interest rate cuts of Fall, '98 were arranged solely for the purpose of providing sufficient liquidity to resuscitate the collapsing bond and equities markets, thereby once again allowing LTCM an escape route from complete financial ruin. At the time, the public was informed that all these various "emergency measures" were enacted in order to preclude a financial market meltdown. Greenspan justified his unusual efforts on the grounds that America could have faced systemic collapse.

As a result of Greenspan's interventions in the financial markets, LTCM survived and soon will repay its various Wall Street investment house/bank creditors the entirety of their emergency bail-out plus a good deal of their original investment capital. In a swell of investor euphoria immediately following the bail-out, small investors poured more money into the financial markets, leveraging their investments via increased borrowings on real estate and credit card lines.

These investors did so without fear, now fully convinced that the stock market verticality of this past decade will continue indefinitely since the government seems committed to expunging ALL risk from the stock/bond markets.

Unfortunately, those bonds / equities short speculators and gold investors who took a less than sanguine perspective of the financial markets back in Fall, '98 suffered huge losses on account of Greenspan's market interventions. They were denied the financial reward for their astute, correct, market analyses solely due to Greenspan's extraordinary interference in the financial markets.

Giving Greenspan the benefit of the doubt as to the imperative of such extraordinary measures during Fall, '98, then one is compelled to ask the following questions:

1) Why are US market financial regulators (most notably, the SEC) allowing Meriwether an opportunity to create yet another new financial crisis in America? After all, according to the Wall Street Journal, "Mr. Meriwhether plans to pursue the same investment strategies as his old fund." Moreover, LTCM utilized extremely high leverage (a 25:1 ratio of assets to investment capital). Now, Meriwhether's new hedge fund "projects leverage typically in the range of 10:1 to 15:1." Such leverage is "far higher than the typical hedge fund, which limits borrowings to a dollar or two for each dollar of investment capital." Shouldn't the US market regulators step in immediately and prevent Meriwhether from conducting any kind of leveraged investments lest he harm both the country and himself again? It seems that allowing Meriwhether to operate another highly leveraged hedge fund is analogous to allowing a convicted drunk driver to get behind the wheel again BEFORE he has been cured of alcoholism. Is it worth the risk to society?

2) Since the LTCM crisis first arose in Fall '98, Meriwhether has gone on the record in the Wall Street Journal, stating that at no time did LTCM's problems truly threaten the US financial system. If that is true, then why did Greenspan intervene in the financial markets to save LTCM and its powerful Wall Street investment house creditors/investors? Is Greenspan guilty of practicing "cronyism" whereby favored friends of the Federal Reserve receive special treatment and a safety net, thereby precluding them from suffering any notable financial losses -- whilst other investors outside the Wall Street inner circle are left to drown in their losses?

3) Now that LTCM and its investment partners have had their financial fortunes "stabilized," will Greenspan provide a special bail-out for all those short speculators or gold investors who suffered huge losses owing to his sudden, arbitrary market interventions at their expense during the Fall '98? Is it fair to provide a special bail-out to one set of harmed investors at the expense of another? In the absence of an analogous special bail-out for financially devastated market contrarians, isn't Greenspan facilitating "moral hazard" in the financial markets? If such moral hazard now exists in American financial markets, then why should any sensible, realistic person take any future contrarian positions in the markets knowing full well that the Fed Reserve Chairman is ready to intervene on a moment's notice to afford special favors and treatment to market bulls?

4) Since Greenspans's abrupt intervention in the financial markets during Fall '98 contributed notably to the weakness in the gold price, the resultant bankruptcies of numerous gold producers, plus the financial devastation of thousands of gold miners thrown into the streets, will the Federal Reserve undertake to make these various harmed parties whole again? Is Greenspan so determined to protect the high tech financial bubble that he will do so upon the corpse of the entire gold industry?

In essence, why has Greenspan been allowed to subvert the allegedly free American financial markets, thus creating a "New Era" of fearless investors who no longer believe in the possibility of market risk? Why have the financial regulators and politicians in America looked in the other direction while Greenspan created this most dangerous financial bubble?

Senators and Congresspersons, it simply is NOT right for market bulls alone to be spared any real negative consequences for incorrect or over-zealous investment decisions. Surely contrarian investors and gold industry participants should be entitled to special bail-outs too.

In conclusion, unless the US government quickly redresses its errors/lapses of judgement in market supervision these past few years and affords equal treatment to all investors, then it is virtually certain that a new class of extremely alienated, hostile citizens will be created who are committed to overturning the current eco-socio-politico status quo.

Unfortunately, it is difficult to remain optimistic since it seems quite obvious that, in allowing the formation of LTCM, Part II, the regulators and the politicians remain asleep at the wheel in the guidance of national economic/financial policy.

Very Truly,

David Cohen

soulmates@lvcm.com