Now They're Bailing Out Hedge Funds?
This is from tomorrow's Financial Times. Just where does it all end?
Fed mounts hedge fund rescue
Banks urged to extend credit lines to Meriwether's struggling Long-Term
Capital Management, report William Lewis, Richard Waters and Tracy
Corrigan in New York
The Federal Reserve Bank of New York was yesterday mounting a rescue of
one of the largest US hedge funds, amid signs that global financial
contagion had begun to disrupt New York's financial markets.
It remained unclear whether the financial lifeboat would be enough to
save Long-Term Capital Management, which is headed by John Meriwether,
the veteran Wall Street bond trader.
Long-Term Capital disclosed earlier this month that it had lost $2bn
this year during the global market turbulence. It is thought to have
total investments worth far in excess of that sum.
The Fed's intervention came amid reports of growing pressures in New
York credit markets during the morning. The Fed had stepped in to
"facilitate" negotiations between Long-Term Capital and several US
commercial banks, according to one New York banker. The Fed had not
suggested using its own resources to back a bail-out.
The Fed is understood to have called a meeting of commercial banks in a
bid to persuade them to extend new lines of credit to the struggling
fund. The authorities are thought to have been concerned about the
disruption that a forced sale of the fund's investments would have on
the New York financial markets.
At the beginning of September Long-Term had capital of more than $2.3bn.
However, the fund's total market position will be far more because hedge
funds leverage the size of their investments through borrowings and the
use of derivative instruments. Investment banks and commercial banks
could have exposures to the fund of several billion dollars each.
John Meriwether is one of the best-known hedge fund managers and enjoys
a glittering reputation on Wall Street. Many of Long-Term Capital's
investments are thought to be in markets that have fallen heavily since
Russia defaulted on its foreign debt last month, leaving the fund with
the need to raise cash to stave off illiquidity.
In recent weeks Long-Term has been seeking to raise new funds from
clients. But according to people close to the fund it has failed to
attract sufficient funds.
Over the past few weeks Wall Street traders say the fund has been
selling assets to meet margin calls from financial institutions it has
borrowed from.
Yesterday the Fed and Long-Term Capital both declined to comment.
However, people close to the fund said it was engaged in a "last-ditch
attempt" to raise new funds and lines of credit from banks.
Long-Term Capital, based in Greenwich, Connecticut, specialises in bond
arbitrage, using complex formulas in an attempt to exploit price
discrepancies among different types of securities.
Mr Meriwether was formerly vice chairman of Salomon Brothers, the
investment bank now joined with Smith Barney and owned by Travelers
Group. He was responsible for forming Salomon's US bond arbitrage unit,
recently closed down by Travelers.
A number of high profile hedge funds have in recent weeks disclosed
substantial losses as a result of the turbulence in global markets.
Earlier this month, Long-Term told clients it was down 44 per cent in
August. Mr Meriwether wrote that "losses of this magnitude are a shock
to us as they surely are to you". He also wrote that "our financing is
in place", including secured and unsecured term debt and long term debt
and long-dated contractual arrangements.
"These term arrangements provide time to reduce our positions, if
needed, as markets become more settled. We continue to work closely with
counterparts," he wrote.
Yesterday there were signs that the liquidity of the US Treasury repo
market, which hedge funds use to help finance their positions, was under
pressure. Banks said they were becoming increasingly reluctant to extend
further credit to hedge funds. |
