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When Wall St. takes risks
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September 30, 1998: 9:59 a.m. ET
Investors shouldn't worry because banks lent billions to a risky hedge fund
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NEW YORK (CNNfn) - It might have come as a surprise to some people that a group of the world's top investment and commercial banks would lend billions of dollars to save an ultra-risky hedge fund for the super rich.
But personal finance experts said small investors with accounts at those banks shouldn't worry about the Federal Reserve's effort to organize a $3.6 billion bailout of the fund, Long-Term Capital Management of Greenwich, Conn.
Experts say the Fed took action to avoid a global market meltdown -- and it's not your money that's at stake.
"Long-Term Capital went way out on the risk spectrum," said Jeffrey Franklin, a certified financial planner and president of J.M. Franklin Inc. in New York. "The whole thing could have created if not a financial crisis, then a crisis of confidence."
Overall, banks are getting hit hard by hedge fund losses. Another Long-Term Capital lender, Chase Manhattan Corp., the nation's largest bank, this week said $3.2 billion of its portfolio is exposed to hedge funds.
Why shouldn't you be worried?
For one reason, the Securities Investors Protection Corp. (SIPC), a non-profit private agency created by a federal law, insures up to $500,000 of your money at a brokerage. The Federal Deposit Insurance Corp. insures up to $100,000 in banks.
"You have to be practical and not just have a panic reaction," said Adriane Berg, editor of the newsletter Wealthbuilder Inc. in Maplewood, N.J.
The chances any of those banks will go under are small, especially since the bailout may give Long-Term Capital enough time to become profitable again.
"The Fed acted swiftly and brilliantly," said Charles Gradante, chief investment strategist at Hennessee Hedge Fund Advisory Group. (325K WAV) or (325K AIFF)
News that top executives of one of the lenders, Merrill Lynch, invested millions of their own money, also shouldn't be cause for worry, experts said.
"My 16-year-old son has all of his college money invested in stock with Merrill," Berg said. "He's not in hedge funds. His money is in AT&T."
Efforts to reach Merrill Lynch and Chase Manhattan for comment were unsuccessful.
Franklin acknowledged that many investors probably feel outraged that banks would lend to a hedge fund that would risk so much -- and jeopardize world markets -- because of greed. It's likely the Fed will establish new guidelines for institutions who lend to hedge funds as a result, he said.
"If the public really understood what happened, the outrage would be even greater," Franklin said. 
-- by staff writer Martine Costello
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