The Militant(logo) 
    Vol.62/No.36           October 12, 1998 
 
 
Federal Reserve Bank Of N.Y. Organizes Bailout Of Speculative Fund To Forestall Wider Collapse  

BY MAURICE WILLIAMS
The Federal Reserve Bank of New York arranged a $3.5 billion bailout September 23 of the speculative fund Long Term Capital Management to halt its collapse, which investors feared would have caused massive disruption in markets around the world.

Some 16 major banks and investment firms were involved in the deal, including J.P. Morgan, Chase Manhattan, UBS of Switzerland, Merrill Lynch, Morgan Stanley Dean Witter, and Goldman Sachs. The financial institutions agreed to put up roughly $100-$300 million each in return for an equity stake in Long Term Capital Management.

LTCM had a massive portfolio of stocks and bonds, which totaled up to $1.25 trillion. It made hedges, or bets, on this scale with loans that amounted to between 50 and 100 times its capital. The crisis was provoked when all bets began going the wrong way at once.

"The recent turmoil in financial markets, particularly the collapse in Russia, led to staggering losses for Long-Term Capital," the New York Times reported September 25. The hedge fund lost 44 percent of its net asset value in August following Moscow's announcement that it would default on some of its foreign debt and devalue its currency. Some 18 percent of LTCM's losses came from investments in "emerging markets," which included Russia. Moscow's total foreign debt is estimated at $158 billion.

At a September 28 news conference U.S. secretary of treasury Robert Rubin tried to reassure investors that the near- bankruptcy of Long Term Capital would not provoke a deeper financial crisis. Meanwhile, Congressional hearings are scheduled for October 1 to investigate how the speculative fund threatened the stability of the entire financial system.

In the wake of Long Term's financial disaster, Morgan Stanley Dean Witter & Company announced September 24 a 5 percent drop in net income. UBS A.G., Europe's largest bank, reported that same day that it expected a third-quarter loss of $721 million related to Long-Term's near-collapse.

"We were reminded in the most eye-opening manner of what happens in a financial crisis," remarked Hugh Johnson, chief investment officer of the First Albany Corporation. "This is one of the ways financial crises can get transmitted around the globe."

 
 
 
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