Bear Stearns' $500m call triggered LTCM crisis

Hedge fund rescue: `We will never know how close we came to financial Armageddon'
Click to follow
The Independent Online
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".