LTCM rescue `avoided serious disruption'

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The Independent Online
THE COLLAPSE of the hedge fund, Long-Term Capital Management, would have done serious damage to the world economy and America's financial markets, Alan Greenspan said yesterday.

The Chairman of the Federal Reserve was defending his decision to lead a rescue of the fund, which hit severe trouble last week. He spoke to the Senate Banking Committee in unusually frank terms, explaining his concerns which led to both the rescue and the Fed's decision to cut interest rates on Tuesday.

"Had the failure of LTCM triggered the seizing up of markets, substantial damage could have been inflicted on many market participants, including some not directly involved with the firm, and could have potentially impaired the economies of many nations, including our own," he said.

The New York Fed co-ordinated the rescue, bringing in 14 large commercial banks to prop up the fund and help unwind its positions. LTCM had failed to analyse the impact of a catastrophic collapse such as that which hit Russia and Asia, leaving it badly exposed. The rescue "avoided possible serious market dislocations," said Mr Greenspan. In a statement accompanying the interest rate cut, and in Congressional testimony last week, he underlined that - as well as concern about the impact of the global economy on the US - there were serious worries about the lack of liquidity for financial services companies in trouble. Cash has fled to quality investments, taking Wall Street down and raising bond prices to such an extent that US 30- year Treasury bond yields are at their lowest in decades.

The financial markets have continued to fear the collapse of another hedge fund, or serious problems at one of the banks exposed to their trading. But Mr Greenspan warned that the rescue of LTCM was "a rare occasion, warranted because of the potential for serious disruptions to markets".