LTCM, Maverick, MIT hedge fund vets chosen for U.S. financial stability committee

By Lawrence Delevingne

Mon Dec 3, 2012

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Robert Merton, Steve Galbraith and Andrew Lo to advise the new Office of Financial Research.

Clockwise: Robert Merton, Steve Galbraith and Andrew Lo (Photo: Bloomberg, Alpha, MIT)
One is known for the most spectacular blow up in hedge fund history. Another helped guide one of the best known firms to some big gains--and big losses. And another is one of the industry's most outspoken watchdogs. They've all been selected to try to prevent the next financial crisis.

Long-Term Capital Management co-founder Robert Merton, former Maverick Capital chief macroeconomic strategist Steve Galbraith and Massachusetts Institute of Technology's Andrew Lo were recently named by the U.S. Treasury to serve on the Financial Research Advisory Committee of the Office of Financial Research.

The Dodd-Frank Act established the OFR within Treasury to "serve the Financial Stability Oversight Council, its member agencies, and the public by improving the quality, transparency, and accessibility of financial data and information; conducting and sponsoring research related to financial stability; and promoting best practices in risk management," according to a Treasury statement.

Part of that mandate extends to hedge funds. The Financial Stability Oversight Council has the ability to order that the Federal Reserve take control of a large non-bank financial institution that it deems systemically importantly. The exact thresholds for hedge funds have not been determined.

More than 150 people applied to be on the 30 person committee, which is mostly made up of financial industry executives or academics with ties to it. The three hedge fund industry representatives straddle both.

Merton, now a professor at MIT and Harvard University, won the 1997 Nobel Prize in Economics with LTCM co-founder Myron Scholes for their work on the value of derivatives. The next year, highly-levered LTCM was bailed out by the government following massive losses related to Russia's debt default; it shut in early 2000. The biography of Merton released by Treasury makes no mention of LTCM.

Galbraith was a partner at Lee Ainslie's Maverick from 2004 to October when he left to prepare a firm that he has yet to launch. Galbraith also served as an adjunct professor at Columbia University and as Morgan Stanley's chief U.S. investment strategist. Maverick mostly produced strong returns during Galbraith's tenure, but its flagship fund also lost 26.7% in 2008 and 14.85% in 2011.

Lo has been a vocal hedge fund critic, particularly regarding the quant meltdown of 2007 and the financial crisis of 2008. Lo also runs one: he's founder and chief scientific officer of AlphaSimplex Group, a quantitative investment management company.

The potential dangers of the committee's strong ties to the financial services industry generally was raised by ProPublica's Jesse Eisinger. "[The committee has] thirty big names charged with giving the fledgling operation direction and gravitas. But these same people have also compromised it," he wrote in a recent column.

"We were not looking for critics or proponents. That wasn't the goal," said deputy secretary of the Treasury Neal Wolin in response to Eisinger's claim. "We were looking for people with a range of perspectives who understand keenly the systemic risks in the financial system."

A Treasury spokesperson did not immediately respond to a request for additional comment. Merton, Galbraith and Lo did not respond to requests. Their first meeting is December 5.

See also: The hunt for the next LTCM | Ex-Maverick partner Steve Galbraith preps major launch

ISSN: 2151-1845 / CDC10004H

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