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Chase knee-deep in hedges
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September 29, 1998: 7:01 p.m. ET
Leading commercial bank has $3.2B, or 2%, of loan portfolio in hedge funds
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NEW YORK (CNNfn) - In the wake of the banking industry's involvement in the fiasco known as Long-Term Capital Management, the nation's largest bank, Chase Manhattan Corp., disclosed on Tuesday that roughly $3.2 billion of its total loan portfolio is exposed to hedge funds.
The disclosure underscores the heightened focus the banking industry has placed on hedge funds -- risky investment vehicles that use leverage to try to generate returns for sophisticated investors.
"Given what happened at Long-Term Capital, I suspect that financial institutions will take a harder look at their hedge fund exposure," said Henry "Chip" Dickson, banking analyst at Salomon Smith Barney who met Tuesday with Chase officials.
At an investors conference in New York, Chase Manhattan's Chief Credit Officer Robert Strong told analysts that approximately 2 percent of the overall $168-billion loan portfolio was exposed to hedge funds -- which contrary to their namesake do NOT hedge the investments.
Of the total $3.2 billion in loans or investments to hedge funds, about 72 percent is guaranteed by cash or Treasury securities and 15 percent is secured by investment grade corporate debentures, Chase spokesman Andy Tuck said.
Only 9 percent of Chase's exposure to hedge funds is uncollateralized, he said.
The development comes as an increasing number of commercial lenders and investment banks open up about their business activities with Long-Term Capital, the Greenwich, Conn.-based hedge fund composed of an all-star line-up of Wall Street veterans.
Chase Manhattan was one of more than a dozen banks that worked with the Federal Reserve Bank of New York last week to bail out Long-Term Capital in the tune of $3.5 billion. The fund was rumored to be crushed under the weight of $100 billion worth of investments gone awry.
At Tuesday's presentation, Chase officials told investors the bank is not a "permanent" investor in Long-Term Capital, Dickson said. The bank does expect its investment activities to generate a profit in the future.
No specifics were mentioned.
The disclosures represent uncharacteristic moves for a tight-lipped industry that is used to reporting its business activities only at the end of each quarter. But the news isn't necessarily a troubling sign for the nation's leading bank.
During the presentation, Chase International Vice Chairman Donald Layton explained that its previously announced losses from emerging markets will be offset by some of its risk-management activities.
Because banks do hedge their investments to protect the health of the institution, every bet on a high-risk market such as Russia is offset by an investment in low-risk markets such as U.S. Treasury securities. As a result, Chase's investment portfolio that is "available for sale" gained in value by $477 million, Layton said.
"Those gains aren't necessarily taken but it does help the bank in the future. Those are gains that can be taken. That could result in higher net interest income," Dickson explained.
On Sept. 2, Chase Manhattan announced it estimated $200 million in net commercial charge-offs for the third quarter primarily reflecting conditions in Russia and Asia.
-- by staff writer Robert Liu
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Chase Manhattan
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