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

To: DMaA who wrote (6769)	9/28/1998 11:11:00 AM
From: Tundra	Read Replies (1) \| Respond to of 9980

Thread, FYI Fed Involvement in LTCM Sets a Complex Example: David DeRosa New York, Sept. 28 (Bloomberg) -- The U.S. Federal Reserve had to make a difficult decision last week on what to do about John Meriwether's hedge fund, Long-Term Capital Management LP. In the end, the Fed chose to organize a rescue effort by coaxing Meriwether's creditors and investors to pony up $3.5 billion to keep the fund from immediately sinking. LTCM got some breathing room though its group of sixteen partners, led my Meriwether, lost control of the company. The banks now are in the driver's seat but they had to agree to pump hundreds of millions of dollars each into LTCM, raising their level of involvement past anything they would have ever dreamed of committing. And the truth is the end may not yet be in sight. All fingers are crossed that the $3.5 billion won't come to symbolize a singularly memorable example of throwing good money after bad. Even if the episode ends for the good by some miraculous turn of events, the LTCM rescue is a clear violation of Ogden Nash's dictum to bankers: never lend money unless ''they don't need it.'' For its part, the Fed has by twisting a lot of arms prevented LTCM from turning into instant Bangkok. Fed Chairman Alan Greenspan could make the case that the last thing the world needs right now is a multibillion-dollar hedge fund in forced liquidation. But the Fed, and by extension, the entire economic policy team of the U.S. government, will have less credibility the next time they want to preach the favored laissez-faire advice to broken-down Asian countries and Russia. Darwin Can Wait Greenspan, for one, was an open critic of the Hong Kong Monetary Authority's plan to stabilize the stock market. Of course, the Fed would be quick to stress that unlike in Hong Kong, no public funds were used for LTCM. Still, the Fed sponsored and arranged the bailout. Presumably it took some measure of implied threats and a lot of cajoling. To Hong Kong, LTCM probably looks like the epitome of Fed hypocrisy. Then there were all those barbs from various Washington officials accusing Asia of practicing ''crony capitalism.'' It won't be lost on Asia that LTCM partner David Mullins is a former Fed official. Sitting here in New York, it's easy to wave this off. Nobody with his or her head screwed on right would believe Mullins and LTCM got preferential treatment because of past Fed service. But try to sell that in Indonesia, Malaysia or Korea and you would be laughed out of town. Let's also not forget the high-level advice America has been dishing out to Japan to let unsuccessful private financial institutions fail and get on with things. Darwin knows best? Better not try to pass that by former executives and employees of Yamaichi Securities Co., Japan Leasing Corp. or Long-Term Credit Bank of Japan Ltd. (Come to think of it, there probably won't be a big rush for quite some time to name new companies ''Long-Term'' anything). Conspiracy Theory What must really be sending some people up the wall is that LTCM is a hedge fund. In Asia, people such as Prime Minister Mahathir of Malaysia, former President Suharto of Indonesia, and Financial Secretary Donald Tsang of Hong Kong have publicly expressed the belief that hedge funds are nothing less than the devil's own device. All their economic misery comes from hedge funds, so they've said. That analysis is certainly incorrect but they and many others think like that anyway. It wouldn't be hard to guess that Asia's reaction would be negative to news that the Fed conducted the LTCM restructuring in its own board room. In some circles this is highly symbolic. It might look as though the Fed and the hedge funds are part of a big conspiracy to ruin Asia? Cool minds would reject that out of hand. But then there are people like Mahathir who are definitely not in a cool mood. Meanwhile, we are left with the question of why the Fed became so pro-active in the LTCM case. Obviously, size matters. That didn't do much for Godzilla at the box office this summer but it may have bridged the day for LTCM. One thing to remember is that very few people know exactly how large is the LTCM portfolio, much less what kinds of toxins it may contain. Hence it's difficult to judge precisely how dangerous an LTCM collapse would have been, at least at this time. Perhaps the best explanation is that Greenspan, who only recently started to come around to the danger of the crisis that began in Asia, may be developing a heightened sensitivity to financial mayhem.