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

To: Ramsey Su who wrote (6835)	10/1/1998 9:19:00 AM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 9980

Ramsey, I was responding to your initial post that specifically asked about LTC re HK. If you broaden the question to a hypothetical about the Fed theoretically bailing out some hedge fund that was attacking the HK$ and losing then yes that would make the Fed complicit. But that involves making some big assumptions. FWIW I do not characterize the Fed as having bailed out LTC. Second you could say, if anything, the Fed has been aiding various central banks including HKMA in defending their currencies and is therefore responsible for helping perpetuate structrual errors that are leading to the build up of economic excesses. Henry

To: Ramsey Su who wrote (6835)	10/1/1998 10:03:00 AM
From: Sam	Read Replies (1) \| Respond to of 9980

Ramsey, "I am not suggesting LTC was involved, just some xxx hedge fund(s) are. What if they are losing to HKMA and is about to go down? The Fed comes to the rescue a la LTCM. Then would the Fed be responsible for possibly destroying another economy?" I think you are reaching here. The Fed did NOt "come to the rescue" of LTCM. They helped to arranged for added financing so that the positions would not have to be liquidated immediately at firesale prices, and the excess leverage that LTCM used wouldn't create a larger crisis. The partners and investors of LTCM were wiped out. This seems to be an important point that you and the general press miss. All the Fed did was point out to the banks the chain reaction that might happen if LTCM had to liquidate immediately, and it was in the banks' interest that this not happen. If a similar situation occurred with a hedge fund "attacking" HK--that is, if a fund became so bloated from leverage gone sour that it would go over--the Fed wouldn't necessarily step, IMO. They would make a determination about whether a wider crisis might ensue if the positions had to be liquidated quickly. But if they did step in and help arrange for financing, the partners in that fund would also be wiped out, and the fund itself would no longer be "attacking" HK. The positions would be unwound in a way that made a little sense (one hopes, anyway). In fact, HK might even benefit from such a scenario.

To: Ramsey Su who wrote (6835)	10/1/1998 10:04:00 AM
From: shadowman	Read Replies (1) \| Respond to of 9980

An editorial from the NYTimes Oct 1. About AG's favorite hedge fund. EDITORIAL OBSERVER Risking Everything on One Big Gambler By FLOYD NORRIS The more we learn about the collapse of Long-Term Capital Management, the hedge fund run by John Meriwether, the more bizarre it becomes. Here were financial wizards -- self-proclaimed and accepted as such by virtually everyone -- who did not play by the normal rules of investing. When their reckless strategies collapsed, the Federal Reserve had to step in to arrange a rescue. There has been griping that a big investor was not allowed to fail, as lesser investors would have been. But that misses several points. First, the investors in the Long-Term Capital fund are not likely to recover much of their money, because the banks and brokerage firms that rescued the fund by injecting $3.5 billion got a 90 percent stake in the fund in return. In that regard, this is more like a bankrupt company being taken over by its creditors. Second, while the Fed organized the rescue -- and no doubt applied subtle pressure on banks to kick in money -- there are no public funds involved. -------------------------------------------------------------------------------- Neither regulators nor banks understood the risks Meriwether took. -------------------------------------------------------------------------------- No, the important issues raised by this debacle do not stem from the rescue of the fund. They relate to how this fund -- and the financial world -- got to the point where a rescue was needed. They highlight the need for regulatory changes to prevent a recurrence. The Fed stepped in because it appeared that absent a bailout there was a possibility of disaster -- not just for the hedge fund in question, but for financial markets and many other players. Some regulators, speaking privately, are convinced that had the fund been forced to liquidate its huge positions, some large banks might have failed, victims both of bad loans and of plunging prices for securities that they owned. These regulators feared a financial Armageddon. All from one hedge fund, with invested capital of less than $3 billion. The reported figure of $1.25 trillion for the fund's investments is misleading, because it counts many complicated derivative positions at the so-called "nominal value," which is far greater than the maximum possible loss. But even discounting those numbers, it appears that the fund had borrowed more than $50 for every dollar of equity capital. How could anyone be so leveraged? First, there are no government rules limiting loans to buy bonds, which were most of the investments made by Long-Term Capital. Second, many of the investments were supposedly hedged, a fact that made the lenders to the fund feel more secure. That is, the fund had identified two investments that ought to rise or fall together. But due to market dislocations, one had gotten expensive compared with the other. So it bet that the prices would come back together. Normally they probably would have, and perhaps they will in the future. But they did not do so before the fund ran out of capital. Did the lenders understand how leveraged this fund was? That is a question Congress should ask when it begins hearings today. If the lenders knew, how were such loans justified as prudent? If not, were the banks misled or just careless? It may be that the banks simply did not believe there was much risk investing with Mr. Meriwether and his colleagues. Consider the case of UBS, the big Swiss bank. It not only invested directly in the fund, but it entered into a separate transaction with several of the fund's managers that enabled the managers to invest in their own fund without putting up all the money that would have been needed. The managers would get the profits if -- as everyone expected -- the fund did well. But if the fund collapsed, the bank would be left holding the bag. Or consider Merrill Lynch, which also lent money to Long-Term Capital and was a leading player in organizing the rescue, putting up $350 million. The firm itself had been an equity investor in the fund, and about 123 of its senior executives had put a total of $20 million of their own money in the fund. Derivatives are not good or bad, in themselves. But they make it possible to shift risks in ways not possible before, and with great leverage. If this hedge fund could amass positions large enough to threaten the financial markets, then so could others, not to mention many large corporations. It is conceivable that a big company in trouble might choose to take huge risks deliberately, figuring that such a gamble was its only chance to regain financial health before its plight became known. That is, in fact, what the British media baron Robert Maxwell did a few years ago, before his death led to the revelation of widespread fraud. Yet no one is now in a position to assess whether someone is piling up huge exposures. No regulators get such reports, and no banks or brokerage firms know for sure what their competitors are doing. Congress should consider letting some regulators -- perhaps the Fed and the Securities and Exchange Commission -- collect such information on a confidential basis so as to reduce the possibility that something like this will happen again. Alan Greenspan, the Fed chairman, has previously pooh-poohed the idea of possible systemic risk from a rogue speculator. But in this case, he decided not to risk what might happen. That was wise, and it would be hazardous to go back to the old assumption that market discipline will somehow sort everything out. For now, the risk may be reduced simply because the banks have learned a lesson, and are getting more cautious with their credit for hedge funds. But bull-market hubris will not vanish forever even if the 1990's bull market in financial assets does turn out to be over.

To: Ramsey Su who wrote (6835)	10/1/1998 10:49:00 AM
From: Bosco	Read Replies (1) \| Respond to of 9980

G'day all - dear Ramsey, I don't understand much about hedge fund either, so maybe we have a case of the blind talking to the blind about how good looking the girl sitting across the room <VBG>, but 1st LTCM is not a hedge fund in the normal use of the term. Here is the explanation from the Chairman himself about the FED coordination efforts... cbs.marketwatch.com Beyond LTCM, there are different kind of hedge funds, so we have to see them separately. For instance, QF has the tradition of betting big, winning big and losing big. I doubt there is a cry of argentina there. Remember, the FED has provided liquidities to the market after the 87 crash but did nothing for Drexel, so one has to infer things are done on a case by case basis. Finally, back to LTCM, based on the article, it seems that the FED has deemed the disorderly unwinding of LTCM remaining positions can cause such a shockwave to the global markets analogous to the snowball going downhill out of control best, Bosco