The Bull Market part 3
The four core banks met at 7pm and reviewed a term sheet which had been drafted by Merrill Lynch. Then at 8.30 bankers from nine more institutions showed. They represented: Bankers Trust, Barclays, Bear Stearns, Chase, Credit Suisse First Boston, Deutsche Bank, Lehman Brothers, Morgan Stanley, Credit Agricole, Banque Paribas, Salomon Smith Barney, Societe Generale. David Pflug, head of global credit risk at Chase warned that nothing would be gained a) by raking over the mistakes that had got them in this room, and b) by arguing about who had the biggest exposure: they were all in this equally and together.
The delicate question was how to preserve value in the LTCM portfolio, given that banks around the room would be equity investors, and yet, at the same time, they would be seeking to liquidate their own positions with LTCM to maximum advantage. It was clear that John Meriwether and his partners would have to be involved in keeping such a complex portfolio a going concern. But what incentive would they have if they no longer had an interest in the profits? Chase insisted that any bailout would first have to return the $470 million drawn down on the syndicated standby facility. But nothing could be finalized that night since few of the representatives present could pledge $250 million or more of their firm's money.
The meeting resumed at 9.30 the next morning. Goldman Sachs had a surprise: its client, Warren Buffett, was offering to buy the LTCM portfolio for $250 million, and recapitalize it with $3 billion from his Berkshire Hathaway group, $700 million from AIG and $300 million from Goldman. There would be no management role for Meriwether and his team. None of LTCM's existing liabilities would be picked up, yet all current financing had to stay in place. Meriwether had until 12.30 to decide.
By 1pm it was clear that Meriwether had rejected the offer, either because he didn't like it, or, according to his lawyers, because he couldn't do so without consulting his investors, which would have taken him over the deadline.
The bankers were somewhat flabbergasted by Goldman's dual role. Despite frequent requests for information about other possible bidders, Goldman had dropped no hint at previous meetings that there was something in the pipeline. Now the banks were back to the consortium solution. Since there were only 13 banks, not 16, they'd have to put in more than $250 million each. Bear Stearns offered nothing, feeling that it had enough risk as LTCM's clearing agent. [Their special relationship may have been the source of some acrimony: LTCM had an $18 million equity stake in Bear Stearns, matched by investments in LTCM of $10 million each by Bear Stearns principals James Cayne and Warren Spector]. Lehman Brothers also declined to participate . In the end 11 banks put in $300 million each, Societe Generale $125 million, and Credit Agricole and Paribas $100 million each, reaching a total fresh equity of $3.625 billion. Meriwether and his team would retain a stake of 10% in the company. They would run the portfolio under the scrutiny of an oversight committee representing the new shareholding consortium.
The message to the market was that there would be no fire-sale of assets. The LTCM portfolio would be managed as a going concern.
In the first two weeks after the bail-out, LTCM continued to lose value, particularly on its dollar/yen trades, according to press reports which put the loss at $200 million to $300 million. There were more attempts to sell the portfolio to a single buyer. According to press reports the new LTCM shareholders had further talks with Buffett, and with Saudi prince Alwaleed bin talal bin Abdelaziz. But there was no sale. By mid-December, 1998 the fund was reporting a profit of $400 million, net of fees to LTCM partners and staff.
In early February, 1999 there were press reports of divisions between banks in the bailout consortium, some wishing to get their money out by the end of the year, others happy to "stay for the ride" of at least three years. There was also a dispute about how much Chase was charging for a funding facility to LTCM. Within six months there were reports that Meriwether and some of his team wanted to buy out the banks, with a little help from their friend Jon Corzine, who was due to leave Goldman Sachs after its flotation in May, 1999.
By June 30, 1999 the fund was up 14.1%, net of fees, from last September. Meriwether's plan approved by the consortium, was apparently to redeem the fund, now valued at around $4.7 billion, and to start another fund concentrating on buyouts and mortgages. On July 6, 1999, LTCM repaid $300 million to its original investors who had a residual stake in the fund of around 9%. It also paid out $1 billion to the 14 consortium members. It seemed Meriwether was bouncing back. |
