Financial Times SATURDAY SEPTEMBER 26 1998 

INVESTMENT BANKING:
Wall Street firms defend LTCM rescue

By Richard Waters in New York

Some of Wall Street's biggest investment banks sought yesterday to damp down the growing political disquiet over Wednesday's $3.5bn bail-out of hedge fund Long-Term Capital Management, as it emerged that a number of leading Wall Street executives had personal investments in the hedge fund.

Leading Congressmen were preparing to call formal hearings on the matter for next week, however, a move that would put the banks' role - and the size of their individual exposures - under the spotlight.

Merrill Lynch, one of the inner circle of investment banks most closely linked to the fund, confirmed that its chairman, David Komansky, had put $400,000 of his personal wealth into the fund.

It was also revealed that Donald Marron, chairman of PaineWebber, also had a personal stake in the fund, according to that firm.

Merrill Lynch was one of the 11 banks that agreed on Wednesday to invest $300m each in Long-Term Capital Management as part of the bail-out of the struggling fund, though PaineWebber did not participate.

Another firm that did not take part in the bail-out programme, Bear Stearns, refused to comment on a report that James Cayne, its chief executive, was also an investor.

Merrill Lynch said the bank's decision to help support the fund had been taken with the overall stability of the financial system in mind. "Any suggestion that his [Mr Komansky's] very small investment affected the decision is nonsense," it said.

The issue of whether or not the Wall Street executives who stitched together the bail-out had any personal investments in the fund was not raised during the key meeting at the Federal Reserve on Wednesday evening at which the decision was taken, according to Merrill.

Under the terms of the bail-out, Mr Komansky, like other investors, will lose 90 per cent of his investment, but could eventually recover the remaining 10 per cent. His investment was made through a tax-efficient investment plan that Merrill Lynch makes available to employees who earn more than $1m a year - a factor that makes it highly likely that other senior executives at the bank also have money at risk.

James Leach, chairman of the House banking committee, is expected to call hearings on the bail-out next week, a move that is likely to raise serious questions about how the fund was allowed to reach the brink of bankruptcy, and how its rescue was mounted.

The Federal Reserve Bank of New York, which helped steer through the bail-out, yesterday defended its role against the growing political concerns in Washington.

"It was a private sector recapitalisation, done by the firm's own creditors," it said. "There is no governmental money involved."