Honoring Leo

Chicago History Museum Honors Leo Melamed

Unfortunately, I won’t be able to attend tonight’s festivities at the Chicago History Museum. My wife was a member of their board back in the day. The board she was on oversaw some growth and innovation. Before, it was kind of static.

Chicago would be a grease spot on the prairie if it weren’t for the warehouse receipt that made grain fungible and led to the founding of the Chicago Board of Trade in 1848. Chicago would be a backwater if it weren’t for Leo Melamed and the creation of financial futures in 1971.

I was great friends with Leo.

I learned a lot from Leo. I am glad he is still around at age 92. He almost didn’t make it to age 7. His father took his family and escaped the Holocaust. Poland’s loss was our gain. Leo most certainly would be a name in a book at Auschwitz if his father hadn’t left. The rest of his extended family was.

I used to love to tease Leo. “Hey Melamed”, I’d say. “You know, there are two sides to a trading card the red side and the blue side. You’ve only been using the red side all these years.” Leo loved to go short because statistically, markets that break move a lot more and a lot faster than markets that rally.

I am pretty sure he is still trading.

He’s written books and they are interesting. I never did read his sci-fi books. The interesting thing for me about the fact he wrote a sci-fi book is that if you want to innovate, you have to think out of the box and sci-fi is out of the box.

It was Milton Friedman who put his stamp of approval on Leo’s ideas. But, the real story there is Leo’s willingness to take a chance and call Friedman. Leo didn’t know him and he didn’t know what to expect. He took a calculated risk. It worked.

What is sort of interesting is how Leo got to CME. He says he answered an ad for Merrill Lynch Fenner and Pierce thinking it was a law firm. But, they didn’t send him to the CBOT. You see, the CME was considered the “Jewish Exchange” in Chicago. Leo being Jewish, was sent to the CME floor. If he had been sent to the CBOT where the Irish ruled, he might have found the wall of discrimination so high and intense he would have chucked it all and just been a lawyer.

Another interesting tidbit of exchange lore is this. Back in the day, the CME boys wanted to utilize the CBOT clearinghouse. It was a separate entity from the exchange, but controlled by CBOT. The BOTCC told the CME to piss off. CME had to form its own internal clearinghouse and that was the most prized strategic asset CME had when it went public.

To give you context. In 1998 when I joined the board, the total value of CME memberships was around $150MM. Blackstone tried to buy us with our money in 1999 for about $110MM. CME went public in November of 2002 for $20 billion and today is worth $80+ billion. It’s the largest and most powerful exchange in the world.

What I enjoyed about being around Leo was watching him chew on an issue. We had a fair amount of them in my limited time on the CME board. We were going from non-profit to for-profit, and from a private membership-run mutually organized company to a demutualized public company.

There were a lot of thorns to clip to get to the roses. I don’t think people realize how hard it truly was and I know that I am not allowed to be called an “operator” in the venture community but as board members then, that’s exactly what we did.

Seeing him ask questions and to try and figure things out was enlightening. Leo often thought out loud. When we started to go through an issue, you’d think he was going this way and all of a sudden he’d go the other. Then, he’d be back again.

I was privileged to be part of a lengthy discussion on regulation with him and a Congressman who chaired the House Financial Services Committee. We had a forty-minute discussion. I mostly listened. At the end, Leo looked at me and said, “Well, that doesn’t happen very often.” It was rare for him to get that much time in front of a Congressperson to go through an issue despite how many times he’d been in DC.

Jack Sandner was different than Leo. Very different. I suppose in the 70s and 80s it’s why they made a good team. They split up in the 90s.

Today, if Leo did what he did at CME he’d be a multi-billionaire. He not only created financial futures but, more importantly, executed on them. He created the live cattle contract and the live hog contract. It was the first time live animals were traded. Everything before was inanimate.

Leo made it possible for thousands of people to create fortunes for themselves. Not only that, financial futures eliminated a lot of friction in financial markets. They make world trade go smoother. The mortgage you pay on your house is cheaper because of them. Stock futures were envisioned because of foreign currency and interest rate futures. The stock market is more efficient because of them.

However, when Leo assumed control of CME the world didn’t look at all like it does today. It’s not just the contracts that Leo and the Young Turks he led thought up. The futures industry was the wild west and it was impossible to govern. Frauds, market corners, and other nefarious acts plagued it. Futures had a bad name, especially in the pin-striped board rooms where money was allocated back in New York. Leo created the NFA, helped create the CFTC, and brought respectability to the futures markets. Without that, financial futures never would have worked.

If you look at history, New York City is where the center of the financial futures universe should be. It still sticks in their craw that a bunch of upstarts from Chicago beat them on futures and options. There is, and always will be, a rivalry between the cities. Chicago is the futures and options capital but alas, because of a lot of things there isn’t one big bank left in Chicago.

Leo is a great believer in free markets. We commiserated a lot over that. I think one of my favorite board meetings ever was the debate we had over interjecting a poison pill in our documents to go public. Professor Merton Miller and I voted against it. Leo grudgingly voted for it because of strategy and not principle. Professor Miller said, “For a bunch of free market capitalists, you guys certainly are protectionist.” We had a good laugh over that one.

One day, Leo will pass away. He made a pretty big dent in the universe and I am glad the history museum is honoring him this evening. I wish I could be there.