A Nobel Prize Summary and Analysis

"Whether Long-Term wanted to admit it or not, the secret of bond arbitrage was out. By the late 1990s almost every investment bank of Wall Street had, to some degree, gotten into the game. Most had separate arbitrage desks, with traders specifically assigned to look for opportunities in every nook and cranny of the business. Lured by the scent of the fantastic profits being earned in Greenwich, other banks were reaching for the same nickels as Long-Term. Inevitably, they whittled away the very spreads that had attracted them; thus do free markets punish success" (Chap. 6, p. 96). It was harder to find good profit opportunities because of the number of people doing arbitrage trades.

Meriwether was encouraging his people to look for new territory. The firm with more than five billion dollars in equity in 1997 had to find...