Bear Stearns' $500m call triggered LTCM crisis

Hedge fund rescue: `We will never know how close we came to financial Armageddon'

THE $3.75bn rescue of the US hedge fund Long-Term Capital Management was triggered after the investment bank Bear Stearns called in a $500m payment on Tuesday, it emerged last night.

Bear Stearns, which handled all the settlements of LTCM's dealings in bonds and derivatives, acted over the margin call after fears that the fund was about to go under with huge losses. The fund had been in technical breach of its banking covenants since the end of June.

As banks around the world disclosed the extent of their exposure, stock markets fell sharply, led by a retreat among banking stocks. Far from reassuring financial markets, the bail-out of LTCM has raised fears about the collapse of more hedge funds.

Up to $100bn worth of derivative positions in the financial markets could have unravelled had LTCM not been rescued, producing a domino effect that could have triggered multiple bankruptcies among secondary banks.

One senior UK banker said: "We will never know quite how close we came to financial Armageddon."

Dresdner Bank, Germany's third largest bank, disclosed that it expected to write off DM240m this year because of investments it had made in the struggling LTCM.

Deutsche Bank said it planned to contribute $300m to the bail-out but said it had not made any unsecured funds available to LTCM and had not suffered any loss. The giant Swiss banking group UBS has already written off $440m on its shareholding in the fund.

In London, the FTSE-100 index of leading shares fell 106.6 points to 5061, as bank shares fell sharply. Barclays, which is also contributing $300m to the bail-out and has an additional unspecified exposure, was the worst hit, falling 72p, a decline of 7 per cent.

Abbey National, Standard Chartered and HSBC all admitted to having had trading relationships with LTCM. Standard Chartered said its exposure was about pounds 5m while NatWest's exposure is understood to be $2m-$3m.

In Paris, trading in shares in Paribas and Societe Generale was suspended for a time after electronic circuit-breakers came into effect following sharp falls in the stocks. Both companies are talking part in the LTCM bail-out.

The ripples from the near collapse of LTCM were felt as far afield as Taiwan, as Chinatrust Commercial Bank, part of the Koo conglomerate, said it would suffer an unspecified loss on its exposure to LTCM.

LTCM, which is based in Greenwich, Connecticut with offices in London and run by the former Salomon bond king John Meriwether and two Nobel laureates, is estimated to have lost some $4bn by ill-timed bets in the bond markets.

It has also emerged that Goldman Sachs, ING Barings and the legendary US investment guru Warren Buffett offered to take over LTCM before Tuesday night's rescue deal. The bail-out was co-ordinated by the US Federal Reserve and supported by 15 international banks and securities firms.

The knock-on effect of allowing the fund to go into liquidation would have severely dented profits of the banks which agreed to participate in the bail-out.

The dramatic events in New York helped depress share prices throughout Asia but also provoked considerable glee from the region where hedge funds are held primarily responsible for triggering the current Asian financial crisis.

Share prices fell yesterday, primarily because of a general fear that Wall Street would tumble after the close of the trading day in the region and because of concerns that big international fund managers would be forced to withdraw funds from Asian markets to cover exposed positions elsewhere.

Asian banks, unlike their counterparts in Europe and North America, do not have much exposure to hedge funds; nor is there much local hedge fund activity. Most of the funds active in Asian markets are controlled by overseas companies.

This has helped to make hedge funds public enemy number one in the minds of many Asian governments and in the eyes of public opinion. The Chinese press, for example, regularly refers to them as "crocodiles" and "sharks".

An adviser to Hong Kong's Chief Executive, Tung Chee-hwa, could hardly contain his glee yesterday when asked to comment on the collapse of LTCM. He said: "Now these people are finally having to pay the bill for what they did to us".

Start your day with The Independent, sign up for daily news emails
News
Keith Fraser says we should give Isis sympathises free flights to join Isis (AFP)
news
Life and Style
Google celebrates the 126th anniversary of the Eiffel Tower opening its doors to the public for the first time
techGoogle celebrates Paris's iconic landmark, which opened to the public 126 years ago today
News
Cleopatra the tortoise suffers from a painful disease that causes her shell to disintegrate; her new prosthetic one has been custom-made for her using 3D printing technology
newsCleopatra had been suffering from 'pyramiding'
News
people
Arts and Entertainment
Coachella and Lollapalooza festivals have both listed the selfie stick devices as “prohibited items”
music
Sport
Nigel Owens was targeted on Twitter because of his sexuality during the Six Nations finale between England and France earlier this month
rugbyReferee Nigel Owens on coming out, and homophobic Twitter abuse
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Ashdown Group: Trainee Consultant - Surrey/ South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Recruitment Genius: Client Services Assistant

£18000 - £20000 per annum: Recruitment Genius: A Client Services Assistant is ...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor