That should help...
Long-Term Capital Management Losses Crush Shares of UBS, European Banks
Long-Term Capital Claims Bank Victims, Crushes Stocks (Correct) (Corrects 5th paragraph to show UBS closed 20 francs lower at 345 francs.)
New York, Sept. 25 (Bloomberg) -- Long-Term Capital Management LP claimed more victims as bank stocks plunged in Europe, where two banks acknowledged losses related to the hedge fund's near collapse.
Dresdner Bank AG, Germany's third-largest bank, said it could lose about 240 million deutsche marks ($144 million) and Switzerland's Credit Suisse Group said it expected a $55 million write-off both from equity stakes in the Greenwich, Connecticut- based hedge fund.
Germany's largest bank, Deutsche Bank AG, also said it will contribute about $300 million to the $3.5 billion bailout of the Greenwich, Connecticut hedge fund. The bank's shares dropped 5.7 deutsche marks, or 5.8 percent, to 92. ''There is worse to come,'' said Matthew Czepliewicz, a bank analyst at Salomon Smith Barney Inc. in London. ''We are going to see a fairly steady stream of announcements of warnings, problems and retrenchments in coming quarters.''
Shares of UBS AG, the world's second-largest bank, plunged 20 francs to 345 on the Swiss Exchange, leading the decline in Europe's biggest bank shares. UBS yesterday said it's taking a 950 million Swiss franc charge to earnings as a result of its Long-Term Capital exposure.
The warnings from UBS and Dresdner dealt the latest blow to confidence in the health of the some of the world's biggest banks, many of whom have already warned of losses from activities in emerging markets like Russia and Indonesia and a decline in fees from trading and selling securities as markets have plunged.
Long-Term Capital, headed by former Salomon Inc. Vice Chairman John Meriwether, used loans from banks and derivatives -- financial instruments whose value is based on another security -- to establish a portfolio valued at more than $90 billion.
Losses
UBS was the first bank to disclose damage stemming from Long- Term Capital's $4 billion loss, which prompted the U.S. Federal Reserve to organize the bailout by 14 banks, including UBS. The hedge fund's capital, which earlier this year was $4.8 billion, had shrunk to about $600 million before the bailout.
It was in the banks' interest to rescue Long-Term Capital. Earlier, they'd extended loans estimated at more than $100 billion to Long-Term Capital. The hedge fund used the money to take positions in everything from Danish mortgages to options on U.S. stock indexes.
Bear Stearns Cos. didn't participate in the bailout because, as a major clearing agent for Long-Term Capital, the firm reckoned they already had enough exposure, a person familiar with the firm said.
Long-Term Capital was able to borrow so much in part because of the respect Meriwether and his crew of Ph.D.'s, including Nobel prize winners Myron Scholes and Robert Merton, commanded, demonstrated by its list of high-profile investor. ''I think the banks were comfortable lending to Long-Term Capital because'' the firm's investors were among the biggest banks and securities firms, said Michael Simoff, director of research for Optima Fund Management, a hedge fund investor.
The Meriwether team, which initially raised $1 billion from outside investors in 1994, promised annual returns of 30 percent a year by betting on discrepancies in the prices of related securities -- a practice known as arbitrage. The team said it wouldn't make bets on the direction of markets as billionaire speculator George Soros does.
When Meriwether and many of current partners were traders at Salomon, they dominated the then $2.8 trillion government bond market, and were responsible for as much as 60 percent of Salomon's profits from betting its own money. Lawrence Hilibrand, a former Salomon trader and now partner at Long-Term Capital, helped produce $400 million of Salomon's profits in 1991, when he took home $23 million in salary and bonus.
Long-Term Capital beat expectations returning more than 40 percent on investors' capital during its first two full years. That sank to 17 percent last year.
Oversight Committee
Now, six firms -- Goldman, Sachs & Co., J.P. Morgan & Co., Merrill Lynch & Co., Morgan Stanley Dean Witter & Co., Travelers Group Inc. and UBS -- will oversee Long-Term Capital's investment strategy, capital, risk management, compensation, hiring and firing.
The companies will have representatives at Long-Term Capital's Greenwich office every day to oversee the operations. Meriwether will execute the orders of the group.
Some of Wall Street's top executives have been hurt by Meriwether's wrong-way bets. David Komansky, chairman and chief executive of Merrill Lynch & Co., James Cayne, CEO of Bear Stearns and Donald Marron, head of Paine Webber Group Inc. all have their own money invested in Long-Term Capital, people familiar with the executives said.
Large institutions are also sitting on stakes that have dwindled to almost nothing, including Bank Julius Baer and McKinsey & Co., one of the largest consulting firms in the U.S.
The biggest single losers are Long-Term Capital's 16 partners, who owned more than one-third of the equity in the fund. Some of them have lost most of their wealth in the near collapse, said a person familiar with the fund.
The firm, anticipating losses, have paid employees at least through the end of the year.
Hedge Fund Losses
Analysts said that while some hedge funds might experience losses this month, many more may not post deep losses. For one thing, none of the funds are as large as Long-Term Capital -- and few if any are as highly leveraged.
In August, for example, when Long-Term Capital lost 44 percent of net assets ''the vast majority of (arbitrage) funds were not in the 40 percent loss category,'' said Hunt Taylor, executive director of Tass Management, a hedge fund consultant based in New York in London. ''This isn't a widespread death knell for arbitrage,'' he said.
J.P. Morgan, Bankers Trust Corp., Travelers and Morgan Stanley aren't expected to report losses because they didn't have equity investments in Long-Term Capital, people familiar with the firms said. The companies held cash or U.S. government bonds as collateral for loans or other obligations.
Chase Manhattan Corp. has a $900 million credit line to Long- Term Capital, but much of it was sold to other investors, said Marni Pont O'Doherty, an analyst at Keefe Bruyette & Woods. Chase probably holds less than $100 million of the loan, she said.
Paribas, France's fifth-largest bank, said it had taken a $100 million stake in the bailout. ''Paribas was not until now a shareholder of LTCM,'' said the bank, adding it didn't hold stakes in any other hedge funds.
Paribas said its exposure to Long-Term Capital was as a counter-party for market operations secured by dollars or U.S. treasury bonds, as well as a participation in a syndicated loan with $16.7 million outstanding. ''Paribas has decided to participate in the plan as an act of market solidarity, in order to avoid the risk of a chain reaction that a liquidation of LTCM might cause.'' |
