HOW MICHAEL LEWIS FORETOLD THE FINANCIAL CRISIS IN 1989. Michael Lewis has had some wonderful articles about the financial crisis, but I have been thinking that his book LIARS POKER had perhaps the most important insight about what was going to happen in the next 20 years: there were traders who were willing to take enormous risks and they were in a position to take them even if the existence of their institution was threatened. I posted here in April 2010 about a wager proposed by the CEO of Salomon Brothers to one of his mortgage bond traders. I did not identify the bond trader in the post, but I now realize that the name was very important. Here is the wikisummary (which has disappeared from the link in the earlier post): “Michael [Lewis] witnessed a classic bluff and re-bluff between John Gutfreund (chairman of Salomon Brothers) and John Meriwether (board member + bond trader). Gutfreund challenged Meriwether to ‘One million dollars. No tears’, to which Meriwether replied, after seconds of thought, ‘No, I’d rather play for real money. Ten million dollars. No Tears!'” The significance of John Meriwether’s name is that in 1993, John Meriwether created Long-Term Capital Management as a hedge fund and in 1998—9 years after Lewis told the story about the bet—John Meriwether’s firm became the “first too big to fail” financial institution that had to be rescued. (wikipedia article here).
John Corzine, who knew Meriwether well and was involved in the Long-Term Capital Management bailout (see this article by Roger Lowenstein on Bloomberg), placed the bet of over $6 billion dollars on Italian and Spanish bonds that led to the MF Global bankruptcy.