OT re LTC: The system works, in the U.S.:
(my comment:the market disciplines; actions have consequences; people who lose risky bets get punished, in a very personal way; lessons are taught that will be remembered; and, as I said before, no taxpayer money is used)
McKinsey Partners, Ovitz Were on List
Of Long-Term Capital's Elite Investors
By MICHAEL SICONOLFI
Staff Reporter of THE WALL STREET JOURNAL
To find big losses in the bail-out of Long-Term Capital Management LP, look no further than the big bosses of Wall Street.
The personal portfolios of several Wall Street executives have taken some of the biggest hits in the near-collapse of the Greenwich, Conn., hedge fund. The rescue plan, made final last week, resulted in investors' stakes in the once-highflying fund being worth less than 10% of what they were earlier this year. That has left some of the savviest executives on Wall Street -- from Merrill Lynch & Co. to Bear Stearns Cos. to PaineWebber Group Inc. -- with personal losses.
Diverging Yields Pose Challenge for Hedge Fund
The investors weren't confined to Wall Street, of course. Entertainment executive Michael Ovitz personally invested in Long-Term Capital before cashing out late last year, Wall Street executives said. A handful of McKinsey & Co. partners also hold personal stakes in the fund, although they got some of their money back last year, a person familiar with the matter said. Laurence Tisch got hit indirectly through a $10 million Long-Term Capital investment through his Loews Corp., though he still gushes that Long-Term Capital, led by founder John Meriwether, "is as great an aggregate of brain power ever put together under one roof."
Among those who sidestepped disaster were lesser-known investors such as Terry Sullivan. The president of a Shaker Heights, Ohio, financial concern cashed out $10 million of his clients' stake in Long-Term Capital in June after discovering the hedge fund had been investing in risk-arbitrage positions in the stock market. Said Mr. Sullivan: "We dodged a bazooka."
Some of the shells naturally have hammered major financial institutions, such as Credit Suisse Group to UBS AG, which recently have announced losses tied to their exposure to the struggling hedge fund. More corporate hits are expected in coming weeks. But it's the personal losses suffered by individual investors in the fund that is a hot topic on Wall Street these days.
In all this is an irony: When Long-Term Capital returned $2.7 billion to investors in December -- saying there weren't attractive opportunities in the markets -- many investors were furious. Now those investors who received back their capital are gloating about their good fortune at having escaped financial whiplash.
That isn't the case at Merrill, the nation's largest brokerage firm. The 123 Merrill executives who had invested a total of $22 million of their deferred pay earlier this year into Long-Term Capital now have a stake valued at less than $2 million. Indeed, Merrill executives point to this decline to dismiss suggestions that the firm had any self-interest in helping to orchestrate the Long-Term Capital bailout; they say their sole focus in the rescue plan was avoiding a calamity in the global financial markets.
Merrill -- which invested $15 million of its own capital before selling most of its principal stake to its deferred-compensation program and has repurchase agreements or swaps with Long-Term Capital totaling $1.4 billion -- contributed $300 million to the bailout by a consortium of 14 banks and securities firms.
"Our own investment was cratered when we shifted 90% of the future upside in the fund from the original investors to the consortium," says David Komansky, Merrill's chairman and chief executive officer. Mr. Komansky, who had personally invested $800,000 into Long-Term Capital through Merrill's deferred-pay plan, adds: "With the new structure that we supported, the chances are very slim that we'll get more than a small fraction of our money back."
At Bear Stearns, Chief Executive James Cayne and Executive Vice President Warren Spector each had more than $10 million in Long-Term Capital at the time of the bailout -- stakes that now are valued at less than $1 million, people on Wall Street say. The impact: Net losses for the two Bear Stearns executives even though they each had substantial profits before this year.
At PaineWebber, Chairman and Chief Executive Donald Marron was a bit more fortunate. After investing at least $10 million in 1995, Mr. Marron cashed out some of his holdings in December, and ended up about break-even for his personal investment, people on Wall Street said. His firm made out even better: PaineWebber more than doubled its initial 1995 investment of $100 million of its own capital before being given its money back in December.
Some cashed out because they were concerned that Long-Term Capital was investing far afield from its expertise in the bond market. Mr. Sullivan said he grew worried when he discovered that the hedge fund was making risk-arbitrage bets on takeovers in the stock market. "My antenna went up -- we wanted fixed-income arbitrage" -- not stock-market bets, Mr. Sullivan said. "I knew a dozen other people I could talk to for risk arbitrage."
Mr. Sullivan, among others, isn't happy that Long-Term Capital kept them in the dark about its investments. "If you change your investment focus, you need to inform people what you're doing so investors can make a rational decision" about keeping their holdings, Mr. Sullivan said.
Defenders of Long-Term Capital say the fund's documents gave it the authority to engage in risk-arbitrage, and that investors knew from the fund's inception that there wouldn't be a lot of discussion about its investments.
Meanwhile, Mr. Tisch's indirect holdings stemmed from Loews's 1995 purchase of Continental Insurance of New York, which had invested $10 million in Long-Term Capital in 1994. Mr. Tisch says his firm received an $18.25 million payout in December, with the $10 million remaining in the fund. That stake now is valued at less than $1 million. "We had received our money back, in a sense," Mr. Tisch said. But he said "everybody came away with the same lesson: If you get into this kind of leverage, any little thing that goes wrong can become very dangerous."
What about Long-Term Capital's future? Predicts Mr. Tisch: "Once the crisis is past, if they're still in business, they'll do well."
--Joann S. Lublin contributed to this article.
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