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Suprise! Looks like LTCM isn't the only one having problems. Check
out:
http://www.businessweek.com/today.htm
9/24/98 "MORGAN STANLEY'S CLOSE ENCOUNTER WITH A MARGIN CALL"
To quote the first two paragraphs:
"Morgan Stanley Dean Witter was forced in the third quarter to inject
capital into a failing emerging-markets debt fund to meet its margin
call obligations to creditors, according to industry sources. The
leveraged market debt portfolio fund, which lost almost $300 million, is
in the process of being closed down, the sources say.
Morgan Stanley reported in its third-quarter earnings statement,
released earlier, that it lost $174 million on 'investments.' That's
down from a gain of $206 million a year ago, as well as a gain of $101
million last quarter. A spokesman for Morgan Stanley declined to comment
on the fund's losses and its future. However, Chief Financial Officer
Bob Scott revealed the losses on a closed conference call with analysts
held earlier today. Analysts who participated on the call, but who
declined to be identified, confirmed details provided to Bridge News
earlier."
This all the more interesting since Morgan Stanley was one of the
"contributors" to the LTCM bailout last Wednesday according to the above
source (ref. 09/25/98: "Inside the Long Term Capital Management
Bailout").
MS's problems make me wonder even more so about Bear Sterns' actions as
reported in the same article: "Then the big moment of truth arrived. One
by one, in alphabetical order, they went around the table and firms
declared what amount of money they would put up. The big surprise: Bear
Stearns, which finances some of LTCM's positions, put up nothing. When
all was done, the total fell short. So the firms that had put in $250
million each raised their contributions to $300 million."
What I really enjoyed, however, was the classic use of understatement in
the article, as if we were watching some sort of Grey Poupon commercial
instead of reading about a bunch of crooks sitting around the
table..."in a big, wood-paneled room with pictures of past Federal
Reserve presidents on the wall"... discussing how they were going to
minimize the damage from a Deal Gone Bad.
Business Week reported, for example that: "They talked about systemic
risk issues...".
A more accurate report might have read something like: Having agreed
that allowing LTCM to default on it's impending margin call would result
in a $90B Fire Sale which would drive them all into bankrupcy...not to
mention significantly increasing the risk of a Global Recession...the
group quickly arrived at a no-brainer consensus that kicking a measly
$3.5B back to the Kitty that afternoon would prove to be a Wise
Investment as long as everyone solemnly promised to go right home and
spend the rest of the week in fervent prayer that the emerging-market
situation would not turn more volatile.
Business Week also reported that: "There was some resentment toward
Meriwether, since as an experienced trader, he knew what he was getting
into."
This might have been better reported as: Three hundred New York police
and four Marine Corps divisions had to be called up in order to prevent
approximately 50 heavily-armed CEO's and CFO's from the nation's largest
commercial and investment banks, led by William McDonough, head of the
New York Federal Reserve, from castrating Meriwether on the spot for
pissing several billion dollars of their client's money down the drain.
Only problem, of course, is that every one of these people are every bit
as much to blame as Meriwether for taking such a gamble. Meriwether was
just the dealer; the Good Ole Boys were the casino; and individual
investors were unwitting players betting, once more, against an
already-rigged House...if things went well, everyone would Win Big (the
Draw); if things turned South, individual investors would bear the brunt
of the blow (the Rig).
If it were up to me, I'd toss the whole damn bunch of them into Prison.
They're nothing but a herd of White-collar Con Artists with Ph.D.'s
hiding behind their Grey Poupon...and I don't buy it. And as far as I'm
concerned, none of them cut the mustard when it comes to living up to
their obligation as Stewards of the Public Trust.
How in the world could they have sat around the table cutting Meriwether
a new *-hole because he "knew what he was getting into"??? OF COURSE HE
KNEW!!! AND SO DID EVERYONE ELSE SITTING AROUND THAT TABLE LAST
WEDNESDAY AFTERNOON.
I think you're absolutely correct, Earl in talking about financial
institutions "too big to fail"...there should be no one, however, "too
big to jail".
Dave
Earl Adamy <eadamy@xxxxxxxxxx> wrote:
> The bankers seem to manage to be at the forefront of virtually every misuse
> of leverage imaginable. Just when the regulators think they've got the
> bankers nailed down on international lending, the bankers manage to screw up
> in the real estate sector, and about the time the real estate sector gets
> nailed down, the bankers are into derivatives and hedge funds. As I
> remember, none of these banking messes were cleaned up in a few weeks, or
> even a few months, and I very much doubt this one will be either.
>
> Neither were they cleaned up without the use of substantial public funds and
> I expect a repeat. While Mr. Greenspan is lauded for his management of the
> economy, few seem to realize that millions of savers were raped of billions
> in investment income when Mr. Greenspan lowered interest rates to
> recapitalize (read subsidize) the banking system which was about to go
> under. This, of course, was far more palatable to voters than taking money
> out through the government's front door to save the banking system.
>
> Few seem to take issue with dismantling the barriers between banking and
> securities which were erected after the 29 crash - Mssrs Greenspan and Rubin
> are champions of this effort along with our PAC-fed politicians. We seem to
> have a cycle in banking regulation where regulation and oversight is
> greatest at the bottom of economic cycles when it is least needed, and
> oversight is too casual at the top of economic cycles when most needed.
>
> So we can sleep well knowing that our leaders will be able to identify those
> institutions which are "too big to fail" and that the financial system,
> along with at least some of the financiers, will always be saved with public
> money.
>
> Earl
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