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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Ramsey Su who wrote (6678)	9/24/1998 4:25:00 PM
From: Henry Volquardsen	Read Replies (2) \| Respond to of 9980

Ramsey, You make several interesting points. You point out that LTC was playing interest rate sensitive instruments and the Fed could influence interest rates. True but LTC was in fact playing interest rate spreads so they had interest rate exposure on both sides of the transaction. It is much more difficult for the Fed to try and influence price movements in one instrument vs another. Their tools are not that precise. My speculation is that LTC's largest position was long mortgage backed securities 'hedged' with short Treasury positions on an extremely high leverage. It is difficult for the Fed to directly impact the price of 10 year Treasuries relative to mortgages. Did the Fed play Mr Nice Guy? I don't really think so. The Fed knew that LTC had these huge treasury repo positions. If they just went bust it would cause real headaches in the market as the repo was all sorted out. Part of the Fed's responsibility is to maintain orderly markets. In this light they had an interest in making sure LTC was wrapped up efficiently with the minimum of fuss and muss. So they sit down with the banks and suggest 'ok guys work together on this' and they probably made certain structural changes. But they didn't do LTC any favors. If LTC had been able to work out loans they would have stayed in business and these positions would eventually turn around. Instead they got wiped out and lost all their capital. And the Fed put in not one penny. I think it is a real misnomer to refer to this as a bailout. It was a wipeout and LTC went bankrupt. The Fed just used it's moral suasion to get the banks to work together and use a structure that would allow for an orderly liquidation without significant market turmoil. You ask it is it possible that the Fed is trying to punish these hedge funds. This is in fact something I've been wondering about. I don't believe this is what happened in the case of LTC but I think it is quite possible in the currency markets that the central banks are looking for away to put the speculative genie back in its bottle for awhile. The best way to do this is find out where they are over extended and attack there. So, yes, it is possible. Henry