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To: Amelia Carhartt who wrote (27218)	1/28/1999 3:09:00 PM
From: Alex	Read Replies (3) \| Respond to of 116764

Basle Committee criticizes LTCM, urges controls By Isabelle Clary NEW YORK, Jan 28 (Reuters) - The Basle Committee for Banking Supervision on Thursday urged banks to better evaluate and limit risks when dealing with high-stake clients such as Long-Term Capital Management (LTCM) whose poor strategies put the world economy at risk. ''Given the very turbulent markets that existed within 24 hours of the LTCM collapse, the danger to the world economy of these very large market positions being thrown on already turbulent markets would have resulted in danger to the economic growth of this and other countries,'' said William McDonough, Chairman of the Basle Committee that commissioned the ''Report on Highly Leveraged Institutions (HLI)'' in the wake of LTCM's near-collapse last fall. The report used the ''HLI'' appellation rather than hedge fund because not all speculative investment firms are highly leveraged. McDonough, who also is President of the Federal Reserve Bank of New York, orchestrated on September 23 the 11th-hour, $3.6 billion recapitalization of LTCM. The rescue efforts, which did not involve any public funds, helped avert a full-fledged crisis in the U.S. and world financial systems. The Basle Committee's report called for sound risk management practices among lenders to HLIs rather than new layers of regulations for the complex hedge fund industry that often operates from off-shore locations with no supervision. ''The LTCM case may have been unique in terms of the combination of risks undertaken,'' McDonough said. ''But these events underscore the particular challenges these banks face in managing risk tied to that particular industry.'' Asked if he still believed the Fed's role in aiding the bailout of LTCM was justified, McDonough replied: ''If I had known then what I know now, I would have done the same.'' The implications of an LTCM default for world markets and economies might have been huge, given the fact the firm had an estimated $125 billion in trades on its books and ''well over $1 trillion in off-balance-sheet positions.'' This reflected LTCM's global involvement in ''government, corporate and emerging market bonds, equities, futures with positions in over a dozen futures exchanges worldwide, derivatives... with about 50 counterparties, and options, with volatility positions in a number of markets,'' the report said. McDonough explained that LTCM's real exposure was difficult to quantify at the time because turbulent markets prevented an exact evaluation of capital at risk in the $1-trillion-plus off-balance-sheet positions. As a comparison, U.S. Gross Domestic Product is $7.5 trillion. The report also faulted LTCM's management which tried to control a global investment empire with a relatively small staff from its Greenwich, Conn., headquarters. The report further noted the high profile of LTCM partners -- a former Wall Street bond trading wizard, a former Fed vice chairman, and two Nobel Prize laureates -- encouraged overconfidence in the firm's ability to manage assets. ''A notable feature of LTCM was the extremely secretive nature of its dealings with counterparties and investors... None of the LTCM's counterparties appear to have had a comprehensive view of...its major risk positions or its risk profile,'' said the report that added LTCM undertook strategies just too complex for its ''risk management systems.'' The Basle Committee report stressed the importance of banking's golden rule, ''sound internal risk management'' as ''essential to the prudent operation of banks.'' It said this may also help ensure ''HLIs do not assume excessive risks and leverage,'' and ''contribute to greater stability in the financial system.'' The report also issued basic guidelines to deal with hedge funds, such as evaluating their leverage and risk exposure, appraising collateral and setting credit limits. One U.S. bank regulator, the Office of the Comptroller of the Currency (OCC), urged banks to follow the Basle Committee guidelines ''to manage their credit exposure in a safe and sound manner.'' The Basle Committee acknowledged the possibility that regulating hedge funds may be needed ''should these indirect measures, together with enhanced market transparency, prove to be insufficient.'' But it stressed that regulating the hedge fund industry ''would clearly extend beyond the competency of bank supervisors and would require a political initiative'' and would not prevent all loopholes. biz.yahoo.com