MERTON MILLER
1923-2000

By Leo Melamed

Memorial Service
University of Chicago-Rockerfeller Chapel
October 14, 2000

It was love at first sight—I’m not speaking of Merton Miller’s love affair with Katherine, that is a private matter that needs no public review. I am speaking of Merton Miller’s love affair with financial futures.

Indeed, from the moment back in May of 1972 when financial futures were launched with the opening of the International Monetary Market, the IMM, to the day he left the Merc’s boardroom for the ultimate futures market in the great beyond, Merton Miller remained passionately in love with our markets. So enamored was he with the IMM that in 1986 he unabashedly nominated financial futures as “the most significant financial innovation of the last twenty years.”

He was fond of saying that if one of Rip Van Winkle’s descendants fell asleep in 1970 and awoke two decades later, he would not be able to grasp what had happened in financial markets. In Merton’s words: “So rapid has been the pace of innovation in financial instruments over the past 20 years that nothing could have prepared him to understand the myriad of innovations, from eurodollars to swaptions.” Merton embraced these instruments as if they were members of his personal family. In a sense they were.

All the more reason Merton found it so exasperating that someone had to come to their defense. “Futures markets get no respect,” he would say in Rodney Dangerfield fashion, and proceeded to do battle for their honor. This became his mission, his personal crusade, his academic assignment, his raison d’etre.

He even found it objectionable that our markets were called derivatives. “What are we, second-class citizens?” he would ask rhetorically. “Why are we not considered the real markets?” he demanded. Then he would use one of his homegrown analogies to emphasize the point: “Like maybe the derivatives market is a parasite market, living off the prices in the cash market, like ivy on an oak tree, sucking out its vital juice and undermining its strength.” Stuff and nonsense, he would say with a wave of the hand, leaving no room for doubt. “Our markets have succeeded because they provide a valuable service cheaper than its competition.”

Notorious for speaking his mind, Merton personified intellectual honesty. No matter what the issue, no matter what the politics, no matter who the players, no matter how complex the subject matter, Merton Miller told it as it was. Whether the matter was philosophical or academic, whether it pertained to the private sector or public, whether it was about an entity as amorphous as a government agency or as specific as its chairman, let the chips fall as they may, let the feathers be ruffled as they might, other considerations be damned, the truth will be stated. When others might attempt to be diplomatic, to find words that would assuage an opposing view, if in doing so it caused a compromise to the underlying truth, Merton Miller would have none of it.

When the spate of so-called derivatives disasters shook up the corporate world several years ago—be it Procter & Gamble, Metallgesellschaft, Orange County, or Barings Bank—Merton held fast to the underlying reality: “These were swaps,” he reminded the corporate world. “You entered into them voluntarily.” Then, using one of his irrepressible analogies, he would drive the point home—I can still hear the echo of his words: “A swap is not a robbery, guys! It’s not like someone stuck a gun into your ribs and asked for your wallet.”

One of Merton’s defining moments occurred in the aftermath of the 1987 Stock Market Crash—during a time that could have meant a death knell to futures. As he saw it, it was a battle between New York against Chicago. And above all else, Merton was a supreme Chicago patriot—and not just for the Chicago Bears. It was then that some of the most powerful forces in the financial establishment were joined by some of the most influential members of the media and gained the attention of some of the most prominent officials of government in their attempt to place blame for the crash on Chicago’s futures markets. Merton Miller’s credentials and uncompromising logic stood in their way.

The most contentious issue of that day was volatility. Index futures were accused of causing volatility in the equities markets, thereby driving away the small investor. Merton took to this challenge with gusto. Imitating the rhetoric of a former well-known mayor of Chicago, he mimicked, “I am going to deny those allegations and defy the allegators.” Then Merton would ask in all innocence: “Are we academics like that fabled soldier during a parade who believed that everyone was out of step but him? Arrogant as it may seem,” he would reply, “I will argue here that we academics are not out of step. It is the public and some parts of the financial press that are out of step on this issue.”

At one point in the fracas, when Merton was asked by the press when he would stop fighting Treasury Secretary Nicholas Brady’s demand for margin control over futures, Merton replied, Never! Then, as if thinking it over, he would quip: “But I will make the Secretary a deal: If he will resign, I will too.” When Brady didn’t, Merton initiated a campaign to find an ambassadorship for the secretary.

Nor was Merton afraid to take on the traders or heavyweights within our futures industry. Time and again he openly lambasted those CME board members who would resist the advancement of technology. He also minced no words in placing most of the blame on the Chicago Board of Trade for dragging its feet in the creation of a Common Clearing entity among the Chicago exchanges. And as for the overcrowded conditions in the pits, he had a simple solution: “Auction it off.” Let each parcel of pit space go to the highest bidder instead of traders getting it for free. Somehow, our traders didn’t appreciate this aspect of free enterprise.

But Merton reserved his most stinging invectives on regulatory authority, specifically for the CFTC. During a memorable moment, one that captured Merton’s shy and retiring nature, he said to the chairperson of our agency who was on a fact-finding tour of the Merc, “Madam chairman, now hear this: the CFTC is an anachronism—a classic example of an agency that never had an economic purpose.” It left the chairperson momentarily speechless.

Indeed, he compared financial regulation with that of being a dermatologist. As Merton saw it, dermatology was by far the best medical specialty; the patients never die, but they never get well either. Similarly, the mission for regulators, he would say, was never to kill the industry they regulate but never to have it get well either.

Often referring to the CFTC as Keystone Cops, he would tell the Merc board that as long as the agency was around, “the industry’s operating costs will continue to be higher, its size smaller and it growth rate lower.” A most comforting thought.

And in case we didn’t fully get the picture, Merton underscored his message with a story that compared the CFTC to a referee at a boxing match. It seems that a prizefighter was taking a terrible pounding from his opponent, but when he finally staggered back to his corner at the end of the round, his manager encouraged him by saying “Don’t worry, he hasn’t laid a glove on you.” At which point the fighter gasped, “Well, then keep an eye on the referee because somebody is sure beating the hell out of me.” It was vintage Merton Miller.

Thus, for futures markets, the loss of Merton Miller is immeasurable. Who will replace his wit, his candor, his earthy analogies? And who in academia will mount the barricades in the next attack? Not only have our markets lost its most authoritative voice, we lost our academic seer, our intellectual Muhammad Ali, our Horatio at the Gate, our Émile Zola, our Clarence Darrow.

Farewell, old friend, we will miss you dearly.

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