Barclays joins $3.75bn fund bail-out

Click to follow
The Independent Online
THE CLEARING bank, Barclays, has joined 15 institutions, including Goldman Sachs and Merrill Lynch, in a $3.75bn (pounds 2.2bn) international bail- out of Long-Term Capital Management, the troubled US hedge fund run by a former Wall Street high flyer, John Meriwether.

The rescue was orchestrated by the US Federal Reserve at a secret meeting in New York in the early hours of yesterday amid fears that the collapse of the fund, which had lost around $4bn in the past few weeks, would pose a serious risk to the global financial system.

Union Bank of Switzerland, which owns investment bank SBC Warburg Dillon Read and is also part of the bail-out, called an emergency press conference yesterday to deliver a shock warning to the financial markets that it is heading for big losses this quarter. The bank has had to write off its entire Sfr905m (pounds 400m) investment in the fund.

Following the disclosure that Barclays was participating in the rescue, the Financial Services Authority ordered 55 City institutions to provide details of their hedge fund exposure. Similar steps were taken in Switzerland by the Swiss Banking Commission.

Barclays said it did not expect "a negative impact on its own profit and loss account" because of LTCM. However, senior banking sources said that although its share of the bail-out could reach $300m, virtually all of its lending to Long-Term Capital was fully secured.

"UBS was a hedge fund investor, Barclays was not," said one senior banking source last night. "It is high-quality collateral, G7 government bonds."

Mr Meriwether was chairman of Salomon Brothers, where he is credited with inventing the technique known as arbitrage, before he set up on his own four years ago with a team which included two Nobel Prize-winning mathematicians, Myron Scholes and Robert Merton, and a former vice-chairman of the Federal Reserve.

The fund specialised in borrowing heavily to fund big bets on government bond markets. Because the underlying instruments were seen as safe, banks took these bonds as collateral against which to lend to fund Mr Meriwether's bets.

Howard Davies, the chairman of the FSA, which was alerted to the crisis together with the Bank of England and the Swiss Central Bank, said he was not requiring Barclays to put up any more capital to cover its exposure. Mr Davies said yesterday that Mr Meriwether's fund had "quite large positions" on Liffe, the London Futures and Options market.

Banking sources said that "anybody who was anybody" would have had some exposure to Mr Meriwether. However, banking sources said that those firms in the rescue consortium were clearly the ones with the biggest exposure.

Barclays, understood to have been with Mr Meriwether since the start in 1994, was represented at the meeting by Tom Kolaris, Barclays' chief executive for the Americas, who was in constant contact with chief executive Martin Taylor. The meeting was one of the most high-powered gatherings on Wall Street: among those present were Goldman Sachs co-chairman Jon Corzine, Travelers Group chairman Sandy Weill and David Komansky, chairman of Merrill Lynch.

Barclays' claims to have minimal exposure did little to reassure the City, where its shares fell 35p to 1065p. But the markets were hardest hit by the warning from UBS. The world's second-largest bank saw its stock fall 10 per cent, with other major banks hit on both sides of the Atlantic. "There are a lot of very cross investors out there," said one trader. An angry UBS shareholder had told him earlier: "When they said they were not taking bets on the Russian market I believed them. I did not expect them to be gambling on someone else who was taking bets on Russian bonds."

As well as having to write down nearly Sfr1bn because of the LTCM debacle, UBS chief executive Marcel Ospel said that the bank had also suffered a shortfall in emerging markets income of Sfr630m and a loss of Sfr600m in equity markets.

LTCM was one of the most highly-leveraged hedge funds with debt estimated at around 30 times the value of its capital. It lost an estimated $4bn and saw 90 per cent of its capital wiped out in weeks.