Myron Scholes eventually won a Nobel prize for his work (co-author Fischer Black unfortunately died too soon). In his Nobel acceptance speech he noted that he once came across a Texas Instruments calculator that ran the Black-Scholes equation. Inquiring about royalties, he was told that TI considered Black-Scholes as “public domain.” When he asked about a free calculator, they told him to buy one retail.
But Scholes was hardly the naïve scholar that he pretended to be for his high-brow friends in Stockholm. Years before he won the Nobel, Scholes helped form the now notorious Long-Term Capital Management hedge fund, whose basic operating principle, according to Savage, was that people like themselves were making the financial markets more efficient, causing, among other things, the prices of differing types of debt to become equivalent—financial instruments would no longer be under or over valued for irrational reasons.
As is well-known, LTCM fell victim to the old truism “the market can stay irrational longer than you can stay solvent,” particularly when you’ve leveraged your ass through the ceiling. To save Wall Street if not humanity, the Federal Reserve arranged for a bailout, which Savage describes in elaborately colorful and deliberately vague terms—stuff about an 800-pound gorilla in a sailboat, which hardly goes to the root of the matter. According to Wikipedia, less colorful and more precise, when things started to go bad for LTCM, the fund engaged in “high risk” tax avoidance practices, ultimately disallowed by a federal court. Also according to Wikipedia, Scholes was intimately involved in what could be uncharitably be called a tax scam and sought to defend himself by claiming that he wasn’t an expert on tax law, despite having written a textbook on the subject, a textbook that, sneers Wikipedia, “contains chapters on both economic substance and step transactions, which are the two concepts under which the tax loss was disallowed by the IRS.”
Hey, Myron, have you got a formula for getting a camel through the eye of a needle? I hear it can be done, but it’s not easy.
