Leo Melamed: In the middle of the action from the beginning

Agents of Change

Government

Perhaps a larger gamble was Melamed’s insistence to bring the government into their markets. There were no legal requirements for the CME to seek approval of its launch of financial futures by the government but Melamed though it would be a good idea.

Melamed says there were two reasons to engage the government. “First of all I didn’t want a negativism from the high offices of government to flow against our markets. Clearly if you had a negative flow of comments coming from Federal Reserve Chairman or secretary of Treasury, it was going to be difficult so from a practical point of view, I thought it was a wise thing to meet with them and hopefully gain their acquiescence,” Melamed says.

The second reason he says, was even more important. “If the IMM was in fact as big an idea as I thought it was, then it required, it demanded, that government, whose instruments of finance we were going to trade, understood how big of an idea it was. It was imperative that I go to Arthur Burns (Federal Reserve Board Chairman),  go to Alan Greenspan (Chairman of the Council of Economic Advisors); I would even have to go to the President, to advance the concept of what we were doing in Chicago.”

He didn’t meet with President Nixon but with Treasury Secretary George Schultz. “I wanted them to understand that our mission in Chicago was a big a deal and it was a mission that would serve their best interest because it would become a tool of the economic fabric of this nation.”

Fed Chairman Arthur Burns, said of the concept, “what a terrific tool for the Federal Reserve system,” and the gamble paid off.

Competition

The economic powers at the time didn’t view the CME as a serious threat. “They viewed this whole idea as sort of ridiculous by people with no business in [their] neck of the woods,” Melamed says, noting that one prominent New York banker said, “What we are going to trust finance to pork belly traders.”

In retrospect Melamed says they may have benefited from the arrogance of New York bankers, who may have had the power to kill the idea if they saw it as a serious threat. When they did recognize the potential and made a challenge, “it was maybe a decade later and a decade too late.”

At the time, however, Melamed feared someone would beat him to the punch. “During the year 1970, as I lived with the idea of financial futures it was burning inside of me. I always was looking over my shoulder — somebody is going to beat me to the idea. I was clearly worried about the 900 pound gorilla New York Stock Exchange and I was watching for the CBOT, which was the similar 900 pound gorilla in Chicago; I mean as little as the [CME] was; it was so far in second to the Board of Trade it wasn’t even on the map. Here were these two giant organizations and I was deftly afraid that they were on to us.”

While the Board of trade may have been working on their own financial instruments, no one beat the CME to the punch. A year later the CBOT launched equity options but the long bond was a way off.

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