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David L. Miller wrote:
> If I were UBS, I'd be
> demanding that I take part in unwinding LTCM's positions, and (Chinese
> Firewall or not) I'd be doing just what you said below, placing huge
> opposite positions in order to recoup my money...or, at least
> surreptitiously instructing some other entity to which I had strong (but
> secret) financial ties to be doing the same.
>
> Given that we're talking about a Hedge Fund (which is not required to
> even *register* with the SEC) and an bank operating under infamous Swiss
> banking laws...what prevents such a scenario from taking place?
>
> Are there laws, for example, which would prevent LTCM from giving such
> business to UBS??? If so, then my assumption above is, of course,
> invalid. That would give me the kind of Warm Fuzzy feeling I'm looking
> for.
Dave:
The first problem with demanding any of the business from a fund in trouble is
the agreement a bank would have signed when depositing capital in such a fund:
These agreements are built with the notion that as an investor in such a fund,
the institution might be less than above board and try to front run or piggyback
the fund's positions; therefore, the agreements make an institution pledge that
its trading groups, as well as anyone not involved in the decision to invest in
the fund, will remain ignorant of the fund's positions and P&L.
Second, let's imagine that you are one of the investors[one of the banks that
was a large investor] and as the chairman, you are asked to join the other banks
in funding a 'save the hedge' pool of cash. Of course you would want the
liquidation business, but look across the table: Every person there wants the
business, because then they might get some of their cash back [although it's in
everyone's interest to let this fund and its positions either magically and
quietly be liquidated OR sit pat for now and pray the problem goes away]. So
even though you want the business, you certainly don't want the business to go
to your competitor.
Finally, there are indeed laws that prohibit banks that are under the perusal of
the Fed and the bank examiners from violating the 'chinese walls' that the
institutions have put up. It was a condition they all agreed upon before these
types of investments were allowed by the Fed examinors. Remember--Banks are not
allowed, in their banking company, to trade or hold positions in everything they
want to invest in. The Fed has agreed, with certain prerequisits, to let begin
to invest in more and more products that were outlawed ten years ago. And yes,
if a foreign bank is doing business in the US and the investment is held here,
they also have to meet with the Fed's approval.
This doesn't mean that there aren't people in the loop that won't make trades to
take advantage the situation. As I said a few days ago, this business can be
very incestuous. If a prominent fund is loading up on one type of trade, be
assured there are many other funds that know what that fund is doing and why.
And the other funds are either worrying about their own problem portfolios right
now, or they are tryong to take advantage of the 'safe haven' trades because
they know how many other funds are under water.
Best,
Tim Morge
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