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Thank you for taking the time to answer my questions, Robert. I'll pass
your response on to the List as I'm quite certain several others will be
interested in hearing your thoughts.
Dave
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Date: Thu, 01 Oct 1998 23:03:40 +1000
To: dlmiller@xxxxxxxxxxxxx
From: Robert Bianchi <R.Bianchi@xxxxxxxxx>
Subject: Re: LTCM - The spread trade that blew up!
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Hi Dave,
At 10:00 AM 9/30/98 -0700, you wrote:
>Robert,
>
>I'm confused. I *assume* that the banks dealing with unwinding LTCM's
>positions are some of the very banks which had supplied funds in one
>form or another to LTCM in the first place.
Dave, there are banks that have added more EQUITY into the company. Now,
these banks are majority shareholders of LTCM. As majority shareholders
they will TELL Mr. Meriwether to unwind some or all of the spread position.
>Take, for example, UBS AG, parent to the newly merged Swiss Bank Corp.
>and the former Union Bank of Switzerland which has taken a $685.9
>million loss so far (according to the WSJ). 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.
Dave, I think that UBS's component of the loss will not be regained from
taking the opposite position. I think the loss is too big. By taking the
opposite position, they virtually GUARANTEE that they will never get any
money back from LTCM. If they are injecting more money into LTCM then it
means that they do not plan to take the opposite position. Why throw good
money after bad...
>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?
NOTHING. These banks and hedge funds could virtually do anything they want.
>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.
>
>I find that hard to believe, however, given the state of Un-regulated
>Freedom these Hedge Funds currently enjoy plus the fact that all of the
>above would likely take place off-shore, out of reach of American
>banking laws and regulators.
Dave, most of the largest hedge funds are incoporated in safe haven
countries in order to be able to do want they want, when they want to.
>
>So call me cynical, but personally, I can't help but feel the American
>Taxpayer is going to end up eating this un-ordered desert sometime
>before the table is cleared. It happened in the past with the S&L's
>and, unless someone can show me differently, I'm having a difficult time
>seeing how we shouldn't expect to end up in essentially the same
>situation this time around the Mulberry Bush.
No, the people funding this humble pie are basically the banks themselves.
the American TaxPayer would end up funding this if the Fed began to step in
to bail out one of these banks. If banks pay for their cock-ups then fine,
but if too many banks cock-up then the American TaxPayer will end up eating
it. However, unlike, the S&L fiasco, this is now a global banking problem.
>Anyone know exactly *who* is unwinding LTCM's positions??? Any way of
>finding out???
The boys and girls at LTCM will be doing the actual unwinding by asking for
prices in various bonds. They will ring up Goldmans, Salomons, Merrills
etc and ask them for prices as they would all be market makes in these bond
markets.
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