Don't repeat hedge fund rescue, Fed told
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by LAUREN CHAMBLISS in Washington
NEW YORK Federal Reserve president William McDon-ough has been warned by irate members of Congress that a government-led rescue of any other potentially troubled hedge-fund would be ill-advised.
To avoid another last-minute rescue like that of Long-Term Capital Management last month, Banking Committee chairman James Leach has urged the Fed to prepare bankruptcy court recommendations to cope with another hedge fund collapse.
Because Congress adjourns this week, lawmakers will not have time to propose legislation to regulate hedge funds but are expected to revisit the issue early next year. Reg-ulators will continue to examine Long-Term Capital while Congress is in recess.
The Justice Department is reviewing the anti-trust implications of the consortium, made up of 14 rival commercial banks and securities houses, now co-managing the fund. Rivals have complained that a parent firm could receive advance knowledge of any unwinding or potential market-moving activities by LTCM.
Fed officials continue to fend off criticism that they should have pursued other strategies for LTCM than the bailout by a consortium of banks and brokers. Two alternatives - an offer from billionaire investor Warren Buffett and bankruptcy court protection with former Fed chairman Paul Volcker identified as a possible trustee - were rejected during the hectic Fed-led LTCM rescue.
Congress' anger has not dimmed since McDonough and his boss, Fed chairman Alan Greenspan, were hauled before Congress last week. If anything, criticism has intensified as the level of involvement between the fund and many of the world's largest banks and investment houses comes to light.
Members of the US House of Representatives Banking Committee, investigating the debacle, believe Buffett's offer to take over the fund and inject a reported $3.75 billion was too quickly dismissed.
Buffett's proposal was vetoed by fund founder John Meriwether, whose resignation would have been required as part of it, sources have confirmed. A Fed spokesman, however, said other legal and financial considerations were involved.
The other option, bank-ruptcy, was not fully explored because it would have taken time to investigate whether US bankruptcy laws could be applied to the Cayman Islands-chartered LTCM.
© Associated Newspapers Ltd., 08 October 1998
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