"Long-Term Capital Pulls Up, Raises Liquidity Fears"
Thursday September 24 1:22 PM EDT
Long-Term Capital Pulls Up, Raises Liquidity Fears
By Isabelle Clary
NEW YORK (Reuters) - The multibillion-dollar bailout of hedge fund Long-Term Capital Management L.P. highlights
Wall Street's fears that a credit crunch may be looming for U.S. investment funds suffering losses due to global market
turmoil.
The bailout, in which 15 firms took an equity stake in Long-Term Capital by committing $3.75 billion to the fund
managers for three years, comes at a time that America is awash in capital from global safe-haven flows.
Long-Term Capital late Wednesday said it reached the agreement in principle after all-day talks with commercial and
investment banks and that the capital injection would raise the net asset value of its portfolio to more than $4 billion.
The marathon talks included a meeting at the Federal Reserve Bank of New York, the Fed's regulatory arm for the
banking industry.
''It is a watershed event. The Fed is pressuring commercial and investment banks to bail out a hedge fund because of
concern about a financial market meltdown,'' said Joan Solotar, securities analyst at Donaldson, Lufkin and Jenrette.
While Long-Term Capital did not immediately disclose the details of the agreement, market sources told Reuters 15 U.S.
and foreign commercial and investment banks would contribute a total of $3.75 billion in installments of $100 million to
$300 million each with a commitment to keep the money in for three years.
A Long-Term Capital spokesman stressed the injection of capital was ''new equity, not a loan.''
But a market source said Long-Term Capital's acknowledgment of a capitalization of about $4 billion after an injection of
$3.75 billion indicated the hedge fund had all but ran out of money.
Long-Term Capital Chief Executive Officer John Meriwether said the hedge fund he founded after leaving Salomon
Brothers in 1991 ''greatly appreciates the willingness of the consortium to provide capital which we are confident will
stabilize our funds and enable us to continue to be active in the marketplace.''
The very survival of Long-Term Capital came into question Wednesday as market players questioned whether
Meriwether -- once called a ''Master of the Universe'' as the successful head of Treasury trading at Salomon Brothers --
could raise the funds to save his firm, said to have lost 80 percent or more of its capital, which was estimated at $4.8
billion early this year.
''With the people they have there, it's almost unthinkable that Long-Term Capital could go under. But that was the talk
Wednesday,'' said one bond trader at a European brokerage firm.
The trader noted the 30-year Treasury bond markedly underperformed the Treasury market Wednesday, a sign that
''people were trying to raise cash for Long-Term Capital'' by selling the U.S. benchmark.
All other Treasury maturities rallied Wednesday as Fed Chairman Alan Greenspan indicated to a Senate committee a
federal funds rate cut may be on the horizon.
Meriwether's strategy was based on arbitrage on market spreads -- a seemingly prudent approach that led former Fed
Vice Chairman David Mullins to join Long-Term Capital in 1994.
''Risk management is the key to success,'' Mullins said in an interview soon after joining the firm that also attracted
luminaries such as Nobel-prize winners Myron Scholes and Robert Merton.
But Long-Term Capital did not remain immune to the turmoil engulfing many financial markets around the world. On Sept.
2, the fund reported losing 50 percent of its net asset value, leaving it with only about $2.3 billion.
The firm attributed the losses -- about 10 percent of which were tied to Russia -- to ''the significant market dislocations
resulting from volatility and liquidity shifts.''
Long-Term Capital said the bank consortium would set up an oversight committee including ''representatives of Goldman
Sachs, Merrill Lynch, Morgan Stanley Dean Witter, Travelers group, and UBS'' to ''direct LTCM'S overall strategy and
the implementation of its risk-reduction objectives.''
David Resler, managing director at Nomura Securities International, noted the pessimism now dominating the global
financial industry ''may make it difficult for many companies, even those without significant problems, to have access to
liquidity as they used to.''
''The American consumer certainly does not have a liquidity problem. But access to liquidity is becoming a problem for
the financial industry,'' Resler added.
Chris Turner, managing director at the advisory firm I.D.E.A., acknowledged ''it is worrisome if partners at LTCM, with
their background, can understate global emerging market risks and their impact on spreads.''
''What does this mean for many less sophisticated funds around the world?'' added Turner. ''This reflects what the
attitude toward risk is going to be as we heard credit lines were being pulled for the larger institutions that were merely
rumored to have problems.''
(http://dailynews.yahoo.com/headlines/bs/story.html?s=v/nm/19980924/bs/longterm_1.html) |
