Rescue Plan in the Works for Failing Investment Fund
A huge private investment fund run by Wall Street legend John Meriwether and two Nobel Prize-winning economists teetered on the verge of collapse Wednesday as losses mounted on more than $100 billion of bets it made in financial markets around the world.
In an attempt to avoid a new bout of global market turmoil that might be caused by a fire sale of the fund’s assets, chief executives and other top officials from two dozen of the world’s largest banks and brokerage firms spent six hours hammering out a preliminary agreement Wednesday at the Federal Reserve Bank of New York to provide a rescue plan of more than $3.5 billion for the Greenwich, Conn.-based fund called Long-Term Capital Management.
The money is not a bailout of the firm’s investors but rather a takeover of the firm by its creditors, who are attempting to buy time so they can recover some of its losses.
The negotiations at the New York Fed underscored the seriousness with which regulators regard the turmoil surrounding Long-Term Capital. The fund, like many similar hedge funds on Wall Street, used a complex, computer-based strategy to invest in bonds and currencies around the globe--and officials fear that its demise could reverberate well beyond Wall Street. Traders said banks, in response to the crisis, are already tightening credit, which eventually could affect loans to individuals and small businesses.
The high-level negotiations are likely to cast further attention on the largely unregulated business of hedge funds, which use borrowed money to wager on the direction of financial markets. Their web of international transactions has played a key role in linking financial crises in one part of the globe to seemingly unrelated markets elsewhere.
A source close to the negotiations described hedge funds as “the connectors of the global economy.” The leaders of many developing countries, such as Malaysia, have placed the blame for a regional economic collapse at the feet of hedge fund managers.
