Financial Times SATURDAY SEPTEMBER 26 1998 

LTCM had built up exposure of $200bn

By Richard Waters and Will Lewis in New York, Samer Iskandar in Paris and Tony Barber in Frankfurt

Long-Term Capital Management built a total market exposure earlier this year of approximately $200bn, prompting the bail-out of the US hedge fund this week by leading financial institutions to avoid the market chaos its liquidation might have caused.

According to people close to the hedge fund, it still has a total on and off balance sheet exposure of approximately $100bn.

While those on and off balance figures are described as "crude numbers" by people close to the firm, the extent of the hedge fund's previous and current leverage is far more than has previously been recognised.

Once the $3.5bn capital injection from leading financial institutions - expected this weekend - takes place, Long-Term Capital will have equity of approximately $4.5bn. This means it will still remain approximately 20 times leveraged.

Previous estimates of the extent of the hedge fund's exposure have varied between $40bn to $100bn.

On Friday in its first official statement, the consortium of financial institutions that has put together the rescue said that over the next three years it would aim "to reduce excessive risk exposures and leverage, return capital to the participants and to realise the potential value of the portfolio".

It added that "the consortium believes that this recapitalisation will help prevent disruption in global financial markets". The consortium will gain a 90 per cent ownership stake.

Yesterday another shock wave from the bail-out hit stock markets, as banks on both sides of the Atlantic registered the impact from the near-collapse.

The $3.5bn bail-out also threatened to create a political storm in Washington, with leading figures in Congress preparing to call hearings next week into how the stability of the entire New York financial system could have come to rest on a single, highly risky investment fund.

US and European banks that dealt with Long-Term Capital, as well as people close to the fund itself, said that the scale of its exposures overstated the potential losses from a collapse.

Fears about the potential damage to the banking industry from Long-Term Capital - and future hedge fund losses - affected stock markets in Europe.

In Paris, panic selling of French bank shares caused trading in Paribas to be suspended three times after hitting daily fluctuation limits. The sell-off in France was apparently prompted by reports that Paribas and Société Générale were contributing $100m and $125m respectively to the $3.5bn rescue.

Shares in Deutsche Bank, meanwhile, briefly touched their lowest point of the year yesterday at DM90.20 after the bank, Germany's biggest, had agreed to put up $300m for the bail-out.