Belatedly, thanks to the Daily Star's online website. I have come across Shawkat All and Nahid Rahman's "Nobel Scapegoats for 'Blood on Wall Street' " (Nov 22. 1998).

, In the opening paragraph, they wrote:

"Naeem Mohaiemen's recent article on LTCM (DS. Nov 8 . 1998) is a classic example of popular misconception about modern financial theory. Recent fall of Long Term Capital Limited (LTCM). a US-based investment concern, and its multi-billion dollar bail-out has led the popular press to find a quick answer to what went wrong. What better place to put the blame than on Fischer Black. Myron Scholes and Robert Merton, whose pioneering academic work in finance gave birth to widely used risk management techniques that are highly mathematical and often beyond the grasp of average investors."

They also wrote:

"The fall of LTCM came as a vindication to many people, in-

eluding some in the financial press, who always viewed Wall Street’s new innovations with scepticism."

If the preceding were true, how odd that one of the first negative reports on the bailout came from the WALL STREET JOURNAL, hardly an institution that views Wall Street with "scepticism". It was a JOURNAL reporter who first wrote about the argument that broke out during the bailout meeting— between the heavy-hitters led by Merill Lynch, and other banks that refused to join in the bailout.

Ali and Rahman also stated:

To most academics and Wall Street practitioners this seemed like blaming the builders of Titanic rather than its crew for hitting the iceberg."

But in this case, the builders of the ship were also on duty as the crew. Mvron Scholes and

Robert Merton were both prominent pa rtners in Long-Term Capital. They were hired by former students who had made it big on Wall Street. The explicit reason for.the recruiting was to ad< 1 star power and credibility to the hedge fund. This strategy s' ucceeded, attracting big investors, lenders and trading partne rs.

After ioiniir ig the fund. Myron Scholes di< a not take a backseat to refine 1 ils academic theories. Rather he became an aggressive sale: iman for LTCM. traveling frequently to help raise money. Over a few months. Scholes raised $1 billion for the fui id.

All and Rahman are partially correct in stating that. Scholes and Merton were not directly Involved in day-to-day trading decisions. Even though It was their theories that laid the basis for the hedge funds

bets, it was the traders of LTCM who made refinements to their models in order to place their bets.

. On this front, one might accuse the two theorists of dereliction of duty. It was their name in marquee lights that attracted big money investors, but both kept themselves somewhat distant from daily details. In fact. Robert Merton stayed at his Harvard office for most of the year— venturing to LTCM's offices about twice a month.

But in spite of this hands-off approach, both the professors were members of LTCM's risk management committee. As such, they were empowered to question trades and review the size of various positions. At some point last summer, speculative positions with massive downside passed their review. At that time, both the theorists failed to apply common sense to call a halt to the carnival and say, "Stop for a moment. 1 know this Is based on my Nobel-wln- , nine theories, but something smells rotten In Connecticut."