By ANITA RAGHAVAN and MATT MURRAY Staff Reporters of THE WALL STREET JOURNAL
NEW YORK -- The casualties from Russia's financial crisis hit two more big financial firms, Chase Manhattan Corp. and Donaldson, Lufkin & Jenrette Inc., while Long-Term Capital Management, a highflying hedge fund run by former Salomon Brothers Inc. Vice Chairman John W. Meriwether said it had losses of more than $2 billion last month alone.
Chase, the nation's biggest bank, said trading revenue totaled about $160 million in July and August, suggesting that revenue for the entire quarter will probably fall several hundred million dollars short of recent quarters. Chase reported $517 million in trading revenue for the second quarter and $647 million for the year-earlier third quarter.
Donaldson, Lufkin & Jenrette said it had $40 million in pretax income in the first two months of the third quarter ending Sept. 30. The lower-than-expected third-quarter net income reflected adverse trading
conditions in the global marketplace and turmoil in Russia.
Meanwhile, Long-Term Capital, based in Greenwich, Conn., said the value of its portfolio fell 44% in August, to $2.3 billion, bringing its year-to-date drop to 52% as a result of mark-to-market losses in
global bond and stock positions. "Losses of this magnitude are a shock to us as they surely are to you," Mr. Meriwether wrote in a letter to investors.
The firm was hurt in late August as investors shifted out of less tradable securities and into more liquid government bonds, both in the U.S. and abroad. For instance, Long-Term racked up losses on an
arbitrage trade where the hedge fund was taking bullish bets on the London interbank offered rate and bearish bets on government securities in various markets around the world, traders say. The hedge fund also incurred losses on its positions in mortgage bonds. Long Term, in the U.S. and in countries such as Denmark, was bullish on mortgage securities and bearish on Treasury bonds.
To finance its core trading strategies, Long-Term in recent weeks liquidated securities, particularly some of its emerging-markets positions, adding to the losses.
The disclosure came as some Wall Street securities firms received inquiries from the New York Stock Exchange about whether Long-Term was meeting its margin calls, which require investors to
immediately put up more cash to offset declines in the value of their portfolios. The firms told the Big Board that the hedge fund was meeting its margin calls. The firm in its letter to investors said its
financing is in place, including secured and unsecured term debt and long-dated contractual agreements.
In an interview Wednesday, Big Board Chairman Richard Grasso said the inquiry about Long-Term was part of a broader sweep to see whether big brokerage-firm clients were meeting their margin calls. Long-Term's name "may have come up in a conversation, but I can tell you the sweep is a routine sweep we do whenever there are dislocating markets," Mr. Grasso said. "Any inference that people are making that the New York Stock Exchange is concerned about Long-Term Capital is inaccurate."
Still, the Big Board's inquiries raised eyebrows, especially as Long-Term said it was reducing its risk positions and asking investors for more money at discounted fees. Long-Term has never broadly offered
investors discounted fees and has been closed to new investment since July 1995.
In his letter, Mr. Meriwether blamed 82% of the losses on "relative-value trades," a form of arbitrage where traders seek to exploit price discrepancies between different types of securities and different types of markets, while 18% of the losses were the result of Long-Term making outright bets on the direction of a market. Within emerging markets, holdings involving Russia account for less than 10% of total losses, the letter said. "Large divergences in August occurred in many of our key trading strategies that resulted in large losses," Mr. Meriwether told investors. "The use of leverage accentuated these losses."
Chase, meanwhile, estimated commercial charge-offs for the quarter at $200 million, an amount that will come directly off the bottom line. Chase reported only $82 million in charge-offs for the second quarter
and just $1 million a year ago. The company attributed the increase primarily to loans in Russia and Asia, but didn't provide specifics on them.
Also, Chase, not known as a major player in stock-related businesses, said it had no gains in July and August in its venture-capital operation. That operation, which has been generating revenue of about $90 million a month, is entirely unrelated to Russia. But the shortfall stemmed from the overall slowdown in stock markets.
Chase was the last big commercial bank to report damage from Russia. "The hit related to Russia is a one-time event," said Diane Glossman, a bank analyst at Lehman Brothers. "How much damage will be
done to trading revenues and capital-markets revenues going forward will be dictated by how quickly the markets rebound." At the least, she added, the market plunge is "a change in the very dramatic positive revenue trends that a number of these companies have been showing."
Even after the actions, Chase said its total exposure to Russia would stand at about $250 million, including $50 million in securities, $140 million in lending and other trade finance and $60 million in
ruble-denominated interbank deposits. Chase also has $210 million in loans and other exposure to institutional investors and investment funds collateralized by ruble-denominated Russian treasury
securities.
In New York Stock Exchange composite trading, Chase was unchanged at $54.875 while Donaldson, Lufkin & Jenrette rose $1.75, or 5.4%, to $34.125.
Also Wednesday, both Standard & Poor's and Moody's Investors Service placed some ratings for Bankers Trust Corp. on review for possible downgrades. On Tuesday, Bankers Trust said it expects to post a loss for the third quarter following trading losses of $350 million in July and August. Moody's said its review would focus on Bankers Trust's emerging-market exposure but "will also consider the extent to
which the long-term earnings profile of the company may be adversely affected by turmoil in financial markets more broadly."
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