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Strategies & Market Trends : Asia Forum

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To: Tundra who wrote (6738)	9/26/1998 12:34:00 PM
From: Ramsey Su	Read Replies (2) of 9980

Tundra, thanks for articles on LTCM. May be I am just too cynical but something is terribly wrong with this "not a bail out" of LTCM. Let us try to examine a potential chain of events. As of a few weeks ago, a Fed rate decrease became imminent. LTCM realized that they have made some very bad bets and was about to lose their shirt. So they called around hunting for new capital to keep their opened positions afloat. When that failed, they went to the Feds for help. The Feds first said no way but then said "holy smokes" when LTCM explained the "systemic" failure that could result. So the Feds called in all potentially related parties and "worked out" this $3.75 Billion package. Who are the parties in this NY Fed conference room? - the who's who of the banking world. What do they know? - all the trades of LTCM and the exposure. Who else is in the room? - the Feds. Who can decide the fate of the LTCM trades? - the Feds. What is result? - each of the bankers (most anyway) wrote a check for $300 million before they left the room. Would YOU write a check for $300 million without some idea what may happen to it? What type of promises did the Feds make to entice the signing of these checks? What is the magnitude of the problem which prompted this quick action on the part of one huge Federal and two dozen private financial giants? Do they already know or are assured of the outcome of next week's FOMC meeting? Something smells very bad here. I guess come Tuesday I would know the answer. If the Fed makes a surprise move, such as a cut of 500 basis points or more, which will cause the total bankruptcy of the LTCM, with the new capital, then I take back everything I said here. If on the other hand, the Fed made a move that would benefit LTCM's positions, my skepticism would be confirmed. Most suspicious would be if the Fed leaves the rate unchanged at this time. The market crashes and LTCM has time to unwind all their positions. Then the Fed drops the rate by 500 or more at the next meeting. Ramsey

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