"Long-Term Capital Starts Asset Sales"
Friday September 25 6:06 PM EDT
Long-Term Capital Starts Asset Sales
By Apu Sikri
NEW YORK (Reuters) - Long-Term Capital Management LP, on life support with a $3.5 billion capital infusion, began
selling off assets Friday in a bid to stay alive, but bankers warned the liquidation will be a long and tortuous process.
The Greenwich, Conn.-based fund, run by bond whiz and former Salomon Brothers Vice Chairman John Meriwether, put
its most liquid assets on the block, selling Danish government and mortgage bonds and other European securities.
A consortium of 14 banks overseeing the fund and reorganizing its portfolio said in a statement that they aim ''over time, to
reduce excessive risk exposures and leverage, return capital to the participants and to realize the potential value of the
portfolio.''
Financial stocks from Zurich to New York fell on concern that the full extent of the damage -- both to Long-Term
Capital's creditors and to other hedge funds that followed similar strategies -- was not yet known.
Early Friday, credit rating agencies Moody's Investors Service Inc. and Standard & Poor's Corp. said they were
reviewing all major U.S. and European banks for possible downgrade.
''We're scrutinizing every bank with emerging markets exposures, hedge fund exposures and other types of risky assets
that could be impacted by these huge market movements,'' said Christopher Mahoney, managing director at Moody's.
Long-Term's troubles raised concerns banks would pull back from all but the highest-quality borrowers, triggering a
worldwide liquidity crunch.
''The credit cycle has definitely turned,'' said Tanya Azarchs, director at Standard & Poor's.
Standard & Poor's took the first shot at banks Friday by cutting its rating on Bankers Trust Corp. senior debt to A-minus
from A. It cited the bank's heavy dealings with riskier clients.
As banks and brokerages realign their securities portfolios to reflect a risk-averse global financial environment, major
western bond markets seem to be holding strong.
U.S. Treasuries were also higher late Friday.
''There was an ongoing small liquidation centering around Denmark from sales clearly associated with the (Long-Term)
fund,'' said Neil Ellerbeck, portfolio manager at Chase Asset Management in London. But ''overall, the European bond
markets are in good shape and can absorb the supply,'' he said.
Several European banks have already taken hits from investments in Long-Term Capital. Dresdner Bank AG said it
would take a charge of $144 million from a stake in the fund. CS Group said it had a loss of $55 million from
counterparty exposure in a trading position.
The announcements came after UBS AG said it had lost $685 million from its equity stake in Long-Term.
The greatest difficulty in disposing of the assets of Long-Term Capital will be in equity derivatives. Long-Term made
aggressive bets on financial contracts linked to stock market indices, such as Japan's Nikkei-225 index, bankers said.
''The greatest worry on Wall Street is the fund's equity derivatives portfolio,'' said a banker who did not want to be
identified.
But even as the fund and its bankers struggled to contain the damage, a fierce debate was raging in U.S. financial markets
about the wisdom of a rescue package that raises questions about the integrity of free markets and ultimately may succeed
only in prolonging the agony of the hedge fund and the financial markets at large.
''It sends very questionable signals about our markets. We tell other countries that capital cronyism is bad and then we do
something similar,'' said Richard Schwartz, who oversees $22 billion in bonds at New York Life Asset Management.
''We would have had some dislocation for a month or two, but then the markets would have returned to normal,'' he said.
Long-Term suffered large losses in the last two months amid market turmoil aggravated by Russia's default on domestic
debt last month.
As the fund's losses neared 90 percent of a capital base of nearly $5 billion, the Federal Reserve Bank of New York
convened a meeting of top banks to provide the hedge fund with a new infusion of capital. The bank regulator feared a
domino effect with huge losses among the largest banks.
The fund's partners include Nobel laureate economists Myron Scholes and Robert Merton and former Federal Reserve
Vice Chairman David Mullins.
(http://dailynews.yahoo.com/headlines/bs/story.html?s=v/nm/19980925/bs/longterm_3.html) |
