Saturday, October 31, 1998
Firms got early peek into secret LTCM books
Mary Kelleher
New York, Oct 30: Several Wall Street firms got a sneak preview of Long-Term Capital Management's books prior to a decision by a group of banks to bail out the troubled hedge fund for $3.5 billion, sources said.
Goldman Sachs, J.P. Morgan & Co. Inc. and Merrill Lynch and Co. Inc., which are each ponying up $300 million to keep LTCM afloat, talked with the fund about its risk positions and losses in late summer, sources familiar with the situation said.
Two billionaire investors -- George Soros and Warren Buffett -- also got reports on the fund's positions in August, with an eye towards making bids that never came about, sources said.
LTCM's losses and its sudden bailout, led by the US Federal Reserve Bank, rocked the world's markets in September.
The fund, run by former star Salomon Brothers bond trader John Meriwether and other top Wall Street minds, was already struggling with losses by August and talked with parties, including Goldman, J.P. Morgan, Soros and Buffett, about raising equity, a sourcefamiliar with the situation said.
LTCM said on September 2 its net asset value had fallen by 50 per cent since the start of the year. Then, on September 23, came the shocking disclosure that a group of 14 banks, at the behest of the Fed, would inject more than $3.5 billion into LTCM because the fund's collapse would have been too much for world markets.
Merrill, which said it first saw LTCM's documents detailing its holdings on September 21, said later that on September 9 its corporate credit department paid a visit to the fund's Greenwich headquarters, disturbed by the fund's losses.
"On September 9 we had a meeting in Greenwich that was a credit due diligence meeting to discuss credit issues and the status of the trading relationship," a Merrill spokesman said.
"Other firms that did business with them had identical meetings with them the same week for the same reasons."
Merrill, which has a fully collateralized exposure of $1.4billion to LTCM, said it had no meetings with the fund in August,denying a report in Britain's Financial Times that its staff as well, as J.P. Morgan's, visited LTCM's Greenwich offices then.
"There was contact," a Merrill spokesman said. "There was an ongoing client relationship with which we had more than $1 billion in positions, but there were no meetings."
Goldman, which tried to buy LTCM with Buffett and American International Group, as well as J.P. Morgan had advance access to LTCM's trading information through meetings with the fund, sources said.
Goldman denied comment, as did J.P. Morgan. Morgan said it had adequate firewalls in place within the firm to prohibit one part of the firm from discussing confidential information with another part of the company.
Spokesmen for LTCM and for the consortium of banks involved in the rescue also declined comment. A Soros spokesman and Buffett were not immediately available for comment.
The finer details of the fund's positions have been kept secret by the 14 firms involved in the bailout, and barriers have been setup for fear that traders, learning of LTCM's positions, might try to front-run the market.
Several sources familiar with the situation said Goldman and Buffett talked with LTCM about its positions in late August.
However, one source familiar with the situation said Meriwether first tried to call Goldman chairman Jon Corzine about raising money on either September 10 or 11, but Corzine was not in the country.
Goldman then sent staff to up to Greenwich on September 13 to review information about the fund's positions and risks, the source said. On September 17, Meriwether came down to Goldman's New York headquarters to discuss options and over that weekend Corzine made calls to other firms, starting the ballrolling on the big capital infusion, the source said.
On September 21, Merrill, Union Bank of Switzerland, Goldman and J.P. Morgan sent teams up to LTCM headquarters to review the books. The next day Deutsche Bank AG joined in and gradually the consortium formed, a source said.
J.P. Morgan was alsoapproached by LTCM about helping the fund raise equity in mid-August, sources familiar with the situation said. While LTCM approached different parties about getting capital, the markets continued to deteriorate and the fund's positions worsened to the point of near-collapse.
The consortium now has six representatives directly overseeing the trading strategy and working in Greenwich with Meriwether and his recently reduced staff, as well as a larger board of directors made up of 14 representatives from the different financial firms.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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