O.T. - The Fed thinks that Long Term Capital Management is sort of like the Hunt Brothers in early 1980 :
September 24, 1998
Banks Try To Rescue $90B Hedge Fund
Filed at 5:03 a.m. EDT
By The Associated Press
NEW YORK (AP) -- The Federal Reserve Bank of New York helped
orchestrate the rescue of a large private investment fund which nearly
collapsed from losses on more than $90 billion invested in financial markets
around the world, according to published reports.
Chief executives and other top officials from 16 of the world's largest banks
and brokerage firms spent six hours Wednesday at the New York offices of
the Fed hammering out a preliminary plan to provide more than $3.5 billion to
shore up the Long-Term Capital Management LP fund, The New York Times
and The Wall Street Journal reported today.
The Greenwich, Conn.-based hedge fund uses borrowed money to speculate
in high-risk trades in global markets. It is run by John Meriwether, a former
bond arbitrage specialist at Salomon Brothers. Partners include Nobel
prize-winning economists Robert Merton and Myron Scholes.
Bankers from institutions such as Goldman Sachs & Co., Merrill Lynch &
Co., Morgan Stanley Dean Witter and UBS Securities Inc. agreed to put up at
least $250 million each in return for equity in the fund, the Times said.
The consortium of banks lending the money will now own 90 percent of
equity in Long-Term Capital, the Washington Post reported. They will also
form an oversight committee to direct the fund's overall strategy and limit its
exposure to certain markets.
Negotiations among Long-Term Capital's lenders, dealers and the Fed began
last weekend as it became increasingly apparent that the hedge fund was in
danger of foundering, the Journal reported. Global speculator George Soros
was reportedly approached for assistance but declined.
Hedge funds are largely unregulated investment funds. While the Federal
Reserve has no jurisdiction over hedge funds, it does have a responsibility for
the nation's banks, which would likely be harmed by the collapse of such a
fund like Long-Term Capital.
Many of the bankers discussed whether the collapse of Long-Term Capital
would put the nation's entire financial system at risk, the Journal reported.
In a statement late Wednesday, Long-Term Capital said it believed the help
would enable it to manage its investments, and hopefully recover some of its
losses.
Earlier this month, Long-Term Capital said it had lost $2.5 billion or 52
percent of its net assets, in trading so far this year. As of Sept. 2, Long-Term
Capital was said to have $2.3 billion in assets with about $90 billion in trading
positions, the Times said.
Market sources told the Post some of the losses were related to the Russian
bond market and the defaulting of ruble currency hedges by Russian banks.
Copyright 1998 The New York Times Company
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