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Merrill's stake in LTCM
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September 29, 1998: 7:32 a.m. ET
Merrill Lynch execs invested $22M in hedge fund, helped orchestrate bailout
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NEW YORK (CNNfn) - Executives at Merrill Lynch, one of several investment banks that helped orchestrate a $3.6 billion bailout package for cash-strapped Long-Term Capital Management, apparently have some personal interest at stake in the hedge fund's future.
According to the Wall Street Journal, Merrill Lynch executives have a total of $22 million of their own money invested in LTCM.
Merrill Lynch said the 123 executives invested in the fund are involved in a deferred-compensation plan, in which senior Merrill officials can participate in four hedge funds, including LTCM, the Journal reported Tuesday.
Merrill also revealed that its Chairman, David Komansky, invested $800,000 in the plan alone -- double the $400,000 originally disclosed.
Merrill Lynch, the nation's largest brokerage firm, had previously acknowledged its executives were investors in LTCM. But it had not disclosed the amount.
The company told the Journal its executives' ownership stake in LTCM, particularly Komansky's, does not represent a conflict of interest. Komansky owns a much larger stake in Merrill Lynch, about $100 million, according to the proxy.
"Obviously his interests are aligned with the shareholders," a Merrill official told the Journal. "Any suggestion that he would make a decision based on a much smaller interest is ridiculous."
The official told the Journal: "Any suggestion that employees having money in a deferred-compensation plan would lead to a corporate decision on a matter of this magnitude is ludicrous."
Shares of Merrill Lynch (MER) were down 1-9/16 Monday at 50-15/16 on the New York Stock Exchange.
Long-Term Capital Management, a renowned hedge fund, received a $3.5-billion bailout last week from a consortium of major commercial and investment banks - including Goldman Sachs, Merrill Lynch, Morgan Stanley Dean Witter, Travelers Group and UBS Securities.
The firms agreed to provide the equity infusion, which raises the fund's net asset value to more than $4 billion, to save LTCM from collapse.
The hedge fund has been battered since the end of the summer through its arbitrage-trading.
Analyst Vince Farrell, chief investment officer of Spears, Benzak, Salomon and Farrell, said the big banks were wise to step in when they did.
"I think they did exactly the right thing," he said. "They took shareholder money, not public money, and they said: 'If we can allow an orderly liquidation of this it's probably very good for the markets.' If you don't have an orderly liquidation of something that big, you will tank the markets."
Convergence Asset Management, a bond arbitrage fund headed by former Salomon Brothers superstar Andrew Fisher, warned investors Friday that the value of the fund is down 15 percent to 20 percent for the month and 30 percent for the year, the Financial Times of London reported.
Farrell said Convergence will likely not be the last hedge fund to report losses.
"I'm sure we'll see more of them," Farrell said, adding he hopes that LTCM is the largest of the bunch. 
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Merrill Lynch
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