International Herald Tribune, Saturday, September 26, 1998Markets Rattled After Fund Rescue
Banks Warn Of Exposure
By Jonathan Gage International Herald TribunePARIS - The near collapse of one of Wall Street's most highly reputed hedge funds sent shudders through global financial markets for a second day Friday as more banks warned of losses, share prices tumbled in Asia and Europe, and regulators questioned why some investors roam so free of oversight.
On Wall Street and in other financial centers, shock competed with a growing fear that the near-death experience of Long-Term Capital Management LP, one of the most aggressive but respected of the so-called hedge funds, would trigger a spiral of damage through the international financial markets.
''Wall Street is in shock,'' said David Hale, chief economist at Kemper Zurich Investments. ''There is no doubt the damage has been tremendous.''
Mr. Hale added: ''What we have to worry about now is other hedge funds that have kept their losses hidden.''
LTCM, as it is known, was saved only after the U.S. Federal Reserve Bank of New York summoned officials of 14 leading financial institutions and pushed them to cobble together a $3.7 billion rescue package Wednesday that kept the fund afloat but which does not guarantee its survival.
On Friday, Credit Suisse, Europe's sixth-biggest bank, said it would be forced to write off $55 million in losses connected with LTCM. And in Frankfurt, Dresdner Bank forecast a revenue loss of 240 million Deutsche marks ($142.6 million) from an investment in the hedge fund.
Their announcements came a day after UBS, the world's second-largest bank, disclosed that it would record a loss of up to 1 billion Swiss francs ($718.9 million) because of investments in emerging markets and fallout from the failure of LTCM. On Friday, shares of UBS plunged to a 11-month low, as bank shares across Europe plummeted.
''There is worse to come,'' Matthew Czepliewicz, a bank analyst at Salomon Smith Barney Inc. in London, told Bloomberg News. ''We are going to see a fairly steady stream of announcements of warnings, problems and retrenchments in coming quarters.''
Another thing that seemed likely to come, according to analysts and regulatory officials, were tougher rules on hedge funds and other investment vehicles that have proliferated in international financial markets. Hedge funds use borrowed money - often bank money - to place bets on movements in bond and stock markets and currencies. Profits can be huge, as LTCM's usually were, but losses can spin out of control.
In Zurich, the Swiss Federal Banking Commission demanded that UBS provide details of its involvement in LTCM. ''What leads serious banks to involve themselves to such a degree in such a vehicle?'' asked the commission's director, Daniel Zuberbuehler.
Britain's market regulator, the Financial Services Authority, ordered 55 banks and other financial institutions to disclose their exposure to hedge funds in general and LTCM in particular.
''Fed supervision is likely to become much tougher on hedge funds,'' said Mr. Hale. ''And banks themselves are going to become more cautious; Let's face it, they've taken a big hit.''
''Ironically, LTCM's good reputation gave them greater access to huge quantities of money,'' said Mr. Hale, ''and greater exposure.'' The hedge fund's managers include John Meriwether, one of Wall Street's most famed bond traders; two Nobel laureates in economics; and David Mullins, a former senior Treasury official and former vice chairman of the Federal Reserve Board.
Even before the LTCM rescue became known, Britain and France had called in recent days for an overhaul of the international financial system. German officials, however, appeared to reject those proposals on Friday.
''We don't need new institutions and we need to keep flexible relations between currencies,'' said the German economics minister, Guenther Rexrodt, as he arrived in Vienna for a meeting of European Union finance ministers.
''We don't need a new architecture or new organizations, we need new accents in policy,'' said Hans Tietmeyer, president of the Bundesbank. He called for greater transparency of banking structures and economic policies.
Mr. Rexrodt was standing in for the German finance minister, Theo Waigel, who was due to arrive Saturday, when the International Monetary Fund's managing director, Michel Camdessus, was also due to join the discussions on how to tame the turmoil that has shaken the world's markets for the past 14 months.
One banker involved in the rescue talks Wednesday told The Washington Post that many of the banks and investment houses had agreed to join the rescue only after Fed officials had warned that failure would result in ''chaos'' in financial markets and could damage economic growth worldwide.
The banker said the Fed officials were concerned about the prospect of a ''domino effect'' if the sell-off of about $100 billion in market bets placed by LTCM triggered a new wave of losses and forced sales of assets by other institutions.
Germany's largest bank, Deutsche Bank, said Friday that it would contribute about $300 million to the LTCM bailout, even though it had no stake in the hedge fund, to prevent further turbulence in the international markets.
Bank shares in Paris were particularly hard hit. Societe Generale closed down 8.06 percent, Paribas fell 7.97 percent, and Banque Nationale de Paris, plummeted 7.59 percent. At one stage shares in the banks were suspended from trading after they dropped more than 10 percent. Both Paribas and Societe Generale have confirmed they will contribute to the LTCM bailout.
Fitch IBCA, the London-based credit rating organization, said Friday that the exposure of the major U.S. securities firms and commercial banks appeared to be ''manageable'' following the rescue.
''While the potential for losses had been high, the plan appears to have stabilized the situation and the exposures appear to be manageable at this point,'' the agency said.