John, as we pointed out over a year ago on this thread, once again it all depends on who you are. While everybody is equal before the law, some people are a h*ll of a lot more equal than the rest of us when it comes to government regulators and law makers.
++++++++
Hush-hush hedge funds coming out
Copyright © 1998 Nando.net
Copyright © 1998 The Associated Press
NEW YORK (October 2, 1998 12:56 p.m. EDT
nandotimes.com) -- The partners in the Long-Term
Capital Management fund had marquee names -- a
legendary Wall Street trader, two Nobel laureate
economists, a top banking regulator. It helped them
gain access to the world's largest banks and other
coveted investors.
Now the names are tainted by a near-collapse that
required a Federal Reserve-sponsored corporate
rescue. And Wall Street analysts say investors will
likely demand an end to the secrecy that kept them in
the dark about what was happening to their money.
"I think you'll see a lot of these funds being less
secretive than in the past," said Hunt Taylor of Tass
Management, a hedge fund advisory service. "The
marketplace will demand it."
Long-Term Capital Management -- effectively an
unregulated mutual fund for rich investors -- got into
trouble after its managers used their door-opening
pedigrees to borrow lavish sums and then made
spectacular gambles. Because lax regulation allows
so-called hedge funds to cloak their investment
strategies in secrecy, investors who now fear
staggering losses had little to go on.
"It's what I call betting on the jockey," said Robert
Stovall, president of Stovall/Twenty-First Advisers.
"They had that global network of contacts and they
looked so impressive that they got the money from
banks and others without people doing their
homework."
The fund had about $2.2 billion in capital from its
investors, but it borrowed money from financial
institutions to buy securities worth more than $90
billion. Fund managers then used those securities as
collateral to make speculative bets representing
$1.25 trillion.
Among those to plunk down a minimum investment of
$10 million was the government of China. It's hard to
tell who contributed because hedge funds aren't
required to disclose investor names or their
strategies -- even to investors themselves.
Even investment bankers -- who usually rely on their
own expertise to pick their bets -- subcontracted their
investments to Long-Term Capital.
The reputations of the fund managers were
apparently enough. Looming above the firm's
larger-than-life figures was John Meriwether, the
fund's chief executive officer. He was a top bond
trader at Salomon Brothers, one of Wall Street's
most prestigious investment firms, in the 1980s.
"They had pedigree," Taylor said. "Meriwether came
into this this game as a very rarefied elite ... These
guys were considered to be cutting edge, the crème
de la crème in the world."
On Wall Street, Long-Term Capital's partners are
known as "friends of Alan," a reference to Fed
Reserve Chairman Alan Greenspan. One Long-Term
Capital partner, David Mullins Jr., is a former Fed
vice chairman.
When Meriwether left Salomon's trading floor
following a 1991 bond scandal, so many of the
investment firm's managers joined him in the
tree-lined suburb of Greenwich, Conn.; Wall Street
regulars referred to it as Salomon North.
Meriwether has long drawn attention with his sporting
blood.
During a golfing trip to California, he once bought a
dozen lobsters at a restaurant, taped numbers to
their backs and called out the race as Long-Term
Capital partners placed bets, according to a 1994
Business Week report. The 1989 book, "Liar's
Poker" describes how Meriwether and former
Salomon boss John Gutfreund once placed a $10
million bet on the serial number of a dollar bill, a story
Meriwether has denied.
"There clearly was a panache both to Meriwether and
the (economists)," Princeton University's economics
professor Burton G. Malkiel said. "Undoubtedly they
did get access to more credit and to different people
around the world than others might have."
Creating the complex mathematical formulas that
traders call "rocket science" were Robert Merton and
Myron Scholes, who won the Nobel Prize in
economics in 1997 for their work on options pricing.
When Long-Term Capital's rocket scientists
discovered they'd overextended themselves, New
York Fed officials feared the collapse of the fund
would lead to a selloff that could devalue stocks all
along Wall Street and leave depleted banks unable
to extend credit.
Fed officials gathered financial institutions --
including such fund investors as Merrill Lynch and
Goldman Sachs -- for a $3.6 billion bailout in which
the firms would buy 90 percent of the fund.
In the fallout, federal regulators might find themselves
adding monitoring hedge funds to their job, though
Greenspan on Thursday urged Congress not to
require it. But Brooksley Born, head of the
Commodity Futures Trading Commission, called the
fund's meltdown a wake-up call that "highlighted an
immediate and pressing need to address whether
there are unacceptable regulatory gaps relating to
hedge funds."
Many on Wall Street say big investors won't wait.
Chase Manhattan Corp. and Bankers Trust this week
became the first major banks to give investors details
about the banks' investments in hedge funds, which
are limited by law to fewer than 500 investors with
investments worth $5 million apiece.
The banks, in turn, are expected to press funds for
more information on what they're doing.
By JOHN HENDREN, AP National Writer
+++++++++
Hedge fund questions and answers
Copyright © 1998 Nando.net
Copyright © 1998 The Associated Press
WASHINGTON (October 2, 1998 12:56 p.m. EDT
nandotimes.com) -- Hedge funds are under close
scrutiny because of the $3.6 billion private bailout last
week of Long-Term Capital Management LP,
facilitated by the Federal Reserve Bank of New York.
Outside of Wall Street, little is known about these
secretive and largely unregulated investment funds.
Here, in question and answer form, is a look at
hedge funds.
------
Q: What are hedge funds?
A: They're investment funds that make sophisticated
financial bets with money from wealthy investors.
Hedge funds often use the money to speculate on
relative differences in interest rates among
securities.
------
Q: How do they do that?
A: They use computer modeling and derivatives --
often-complex financial instruments whose value is
derived from an underlying security, commodity or
asset -- in hopes of producing a profit, no matter
which direction stock prices or interest rates move as
a whole.
------
Q: How many hedge funds are there?
A: Nobody knows for sure. Experts estimate there
are as many as 4,000 domestic and offshore hedge
funds controlling as much as $400 billion in investor
equity.
They are not subject to the same kind of strict
disclosure and oversight rules as mutual funds
because high-rolling investors presumably have the
resources to look after themselves. The government
doesn't require hedge funds to disclose investors'
names or investment strategies -- even to investors
themselves.
------
Q: How wealthy do investors have to be to
participate?
A: Federal securities laws limit participation in each
fund to 500 investors. Individuals must have incomes
of at least $200,000 in each of the past two years
($300,000 for couples) or a net worth of at least $1
million.
------
Q: Why should we be concerned about hedge funds?
A: The collapse of a major hedge fund could damage
the banking system and the economy. The banks and
brokerage firms lending to the fund would face huge
losses, and unwinding of the fund's positions could
spur panic selling and losses for other investors.
In the case of Long-Term Capital, three of the
companies that joined together to rescue the fund
and take control of it -- Bankers Trust, Chase
Manhattan and J.P. Morgan -- are banks that benefit
from the taxpayer-financed deposit insurance fund.
Some critics suggest that puts ordinary taxpayers at
risk, and that banks that lend money to troubled
hedge funds may pass the costs on to consumers.
------
Q: How did Long-Term Capital make its financial
bets and what went wrong?
A: It was a two-step process. The fund received
about $2.2 billion in capital from its original investors
and it also borrowed money from financial institutions
to buy securities worth more than $90 billion. Fund
managers then used those securities as collateral to
make speculative bets representing $1.25 trillion.
Among those making a minimum investment of $10
million was the government of China. Other countries
may also have contributed, but it's hard to tell
because of the lack of disclosure rules.
Unfortunately for the fund and its investors,
Long-Term Capital's investment models failed to
account for the sudden collapse of the Russian ruble
in late August or the dramatic intensification of the
global financial crisis, which has widened the spread
between interest paid on U.S. Treasury securities
and other less-safe securities.
------
Q: Who was running Long-Term Capital when it got
into trouble?
A: The 4-year-old fund's chairman, John Meriwether,
is one of Wall Street's most celebrated traders. His
senior partners include two Nobel laureate
economists and a former vice chairman of the
Federal Reserve. The fund is based in Greenwich,
Conn.
------
Q: What happened in the past few weeks when
Long-Term Capital nearly collapsed?
A: A group of major banks and brokerage firms
began talks about chipping in to save it, with officials
of the Federal Reserve Bank of New York acting as
facilitators and providing office space.
At one point, the fund's managers reportedly turned
down a $250 million buyout offer by legendary
investor Warren Buffett, American International Group
Inc. and Goldman Sachs. The offer was conditioned
on Meriwether being ousted.
When it was over, the group of banks and brokerage
houses had agreed to put up $3.6 billion to rescue
Long-Term Capital and take control of it. In addition
to the three banks mentioned above, the group also
includes brokerage houses Merrill Lynch & Co.,
Morgan Stanley Dean Witter, Goldman Sachs,
Salomon Smith Barney and several big European
banks.
------
Q: Why did the Federal Reserve get involved?
A: Federal Reserve Chairman Alan Greenspan
testified at a congressional hearing Thursday that the
central bank stepped in to avert potential damage to
the U.S. and world economies.
By MARCY GORDON, AP Business Writer |
