Bloomberg Online Sun, 27 Sep 1998, 8:31pm EDT

Treasury's Rubin Says U.S. Agencies Will Conduct a Study on Hedge Funds

Washington, Sept. 25 (Bloomberg) -- U.S. government agencies responsible for supervising financial markets will conduct a study on hedge funds and "their relationships with their creditors,'' U.S. Treasury Secretary Robert Rubin said.

Rubin said in a statement released after markets closed today that the Treasury Department has been "closely following'' developments related to the near-collapse of Long-Term Capital Management LP. It also followed an announcement from congressional Republicans that they will hold hearings on the matter.

The Federal Reserve Bank of New York on Wednesday helped broker a deal in which a group of Wall Street firms invested $3.5 billion in new capital so Greenwich, Connecticut-based Long-Term Capital wouldn't have to sell its portfolio of securities. "As chairman of the president's Working Group on Financial Markets, I have asked that the staffs of the constituent agencies prepare a study of the potential implications of the operations of firms such as Long-Term Capital and their relationships with their creditors,'' Rubin said.

The agencies involved in the U.S. review include the Treasury, the Fed, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Deposit Insurance Corporation.

New Rules Needed?

The emergency takeover of LTCM is raising questions about whether new rules or laws are needed for the $30 trillion over- the-counter derivatives market.

Earlier today, Rubin disputed the idea that regulatory changes are needed. "I don't think it's a question of reining people in,'' Rubin told reporter after speaking at a Washington high school event. "There are questions about disclosure and other issues and my guess is there will be a lot of discussion and debate about that.''

While no U.S. banks have reported losses from the hedge fund's near collapse, Dresdner Bank AG, Germany's third-largest bank, said it could lose about 240 million deutsche marks ($144 million) and Switzerland's Credit Suisse Group said it expected a $55 million write-off both from equity stakes in the Greenwich, Connecticut-based hedge fund.

Germany's largest bank, Deutsche Bank AG, also said it will contribute about $300 million to the $3.5 billion bailout of the Greenwich, Connecticut hedge fund. And shares of UBS AG, the world's second-largest bank, plunged as much as 20 francs to 345 on the Swiss Exchange, leading the decline in Europe's biggest bank shares. UBS yesterday said it's taking a 950 million Swiss franc charge to earnings as a result of its Long-Term Capital exposure.

Greenspan Testimony

Fed Chairman Alan Greenspan has been asked to testify to the House Banking committee next week on hedge funds, although the date has not been set. Banking Committee Chairman Representative Jim Leach of Iowa said hearings on Long-Term Capital Management would be held late next week or early the week after.

Long-Term Capital's problems could hurt U.S. companies that aren't direct investors, either through market disruption if the fund had to sell its portfolio, or through defaults on loans and derivative agreements. "Many innocent, non-participants in the hedge fund market could have been adversely affected,'' said Rep. Richard Baker, a Republican from Louisiana who heads the Banking Committee's subcommittee on capital markets.

Banks and other investors in hedge funds should know more about the funds' activities in order to protect themselves, and regulators should have the power to investigate hedge fund disclosures, Baker said "I don't think hedge fund activity on its own is necessarily a bad activity,'' he added.

This summer, Greenspan and Rubin told Congress the derivatives market doesn't need more government oversight. ``Nothing has happened that has changed the chairman's view of derivatives regulation,'' said Lynn Fox, the spokeswoman for the Federal Reserve.

GAO Request

Representative John D. Dingell, the ranking Democrat on the House Commerce Committee, asked for a full report from Greenspan, Rubin, Securities and Exchange Commission Chairman Arthur Levitt, and CFTC head Brooksley Born, on why the fund ran into such troubles that threatened to drag down banks and securities firms. "The question therefore arises what the banks and others who lent to LTCB knew and when they knew it, and why that `market discipline' failed to curb the excesses that caused this debacle,'' Dingell wrote.

Also, Representative Edward Markey, Democrat of Massachusetts, asked the General Accounting Office to investigate the regulatory issues raised by the Long-Term Capital Management troubles. Markey is concerned about whether current regulations and industry practices can assure banks and brokerages "obtained sufficient information from LTCM to understand the risks associated with doing business with the firm.''

Markey also asked the GAO, the investigative arm of Congress, to examine whether there is "any need for increased federal oversight of such funds'' to prevent any potential market meltdowns.

The President's working group was formed after the 1987 stock market crash to coordinate federal response to financial emergencies. In recent years, it has met during the Barings bank collapse, the Orange County, California bankruptcy, and the Salomon Brothers Treasury Bond scandal.

Following the almost 600-point loss in the Dow Jones Industrial Average last Oct. 27, which forced the first-ever suspension of trading on the New York Stock Exchange, the President's working group issued a study proposing the exchange's ``circuit-breakers'' rules be loosened.