Long-Term Capital, in Survival Mode, Begins Selling Assets

Long-Term Capital Management, on life support after a $3.5-billion capital infusion, on Friday began selling off assets in a bid to stay alive, but bankers warned that the liquidation will be a long and tortuous process.

Meanwhile, congressional lawmakers said the Federal Reserve System may not be doing enough to make sure that U.S. financial institutions are operating safely when they make loans and investments in hedge funds.

“If they are looking at it, then there must be more thorough disclosure of the risk associated with these investments,” said Rep. Richard H. Baker, a Louisiana Republican who chairs the House Capital Markets subcommittee.

Baker’s concerns come a week after Federal Reserve Board Chairman Alan Greenspan told Congress that hedge funds do not pose an overall risk to world financial markets.

Only days later, Greenspan’s comments were followed by news that the Federal Reserve Bank of New York was forced to step in and organize Long-Term’s bailout to avoid huge systemic market losses.

“Questions exist as to whether appropriate national and international supervision exists,” House Banking Committee Chairman James A. Leach (R-Iowa) said. “This week’s interim rescue of Long-Term Capital Management has raised numerous macro and micro economic issues, in particular the role of speculative trading in the global economy.”

Leach has asked Greenspan, New York Fed President William McDonough, Treasury Secretary Robert E. Rubin and the heads of other key regulatory agencies to explain how they regulate U.S. investment in hedge funds at a committee hearing next week.

On Friday, Greenwich, Conn.-based Long-Term, run by bond whiz and former Salomon Bros. Vice Chairman John Meriwether, put its most liquid assets on the block, selling Danish government and mortgage bonds and other European securities.

A consortium of 14 banks overseeing the fund and reorganizing its portfolio said in a statement that they aim “over time, to reduce excessive risk exposures and leverage, return capital to the participants and to realize the potential value of the portfolio.”

Earlier Friday, credit rating agencies Moody’s Investors Service Inc. and Standard & Poor’s Corp. said they were reviewing all major U.S. and European banks for possible downgrade.

“We’re scrutinizing every bank with emerging-markets exposures, hedge fund exposures and other types of risky assets that could be impacted by these huge market movements,” said Christopher Mahoney, managing director at Moody’s.

Long-Term’s troubles raised concerns that banks would pull back from all but the highest-quality borrowers, triggering a worldwide liquidity crunch.

“The credit cycle has definitely turned,” said Tanya Azarchs, director at Standard & Poor’s.

Standard & Poor’s took the first shot at banks Friday by cutting its rating on Bankers Trust Corp. senior debt to A-minus from A. It cited the bank’s heavy dealings with riskier clients.

Long-Term suffered large losses in the last two months amid market turmoil aggravated by Russia’s default on domestic debt last month.

Several European banks have already taken hits from investments in Long-Term Capital. Dresdner Bank said it would take a charge of $144 million from a stake in the fund. CS Group said it had a loss of $55 million from counter-party exposure in a trading position.

The announcements came after UBS AG said it had lost $685 million from its equity stake in Long-Term.