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Blowing the bailout
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October 9, 1998: 6:47 a.m. ET
LTCM's decision to pay down debt raises questions about its future
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New York (CNNfn) - Concern is growing among market traders that Long-Term Capital Management LP, the troubled hedge fund manager, reportedly has used up more than half of the $3.625 billion capital injection given over by major financial institutions last week.
According to The Wall Street Journal, market volatility continues to plague LTCM, forcing managers of the Greenwich, Conn.-based fund to spend some $1.9 billion thus far to finance its positions and pay down debt. Included in the outflow is a $483 million payoff to a syndicate of banks led by Chase Manhattan, which provided the fund with a revolving credit facility.
Traders are worried that LTCM, a private partnership that announced in August it had lost $1.8 billion, could run out of cash before it can turn around its money-losing positions and leave its counterparties to absorb the losses.
The decision to pay down the credit facility, approved by an oversight committee of representatives from the institutions funding the bailout, has irked some in the consortium. Those against the move, including Goldman, Sachs & Co. chairman Jon Corzine, argue that LTCM needs as much ready cash as possible to fund its daily operation in uncertain stock and bond markets.
Whether or not to pay down the credit facility, secured at 200 basis points over the London Interbank Offered Rate, was a sticking point that almost wrecked the bailout before it was agreed. But the oversight committee decided after the deal was signed that paying off the Chase-led facility was prudent, given the relatively high rate of interest.
With many of its funding arrangements coming up for review, LTCM partners and committee members are said to be refocusing the business on the core competencies that earned the firm average annual returns of 40 percent in its first few years of operation.
Founded in 1991 by former Salomon Brothers bond guru John Meriwether, LTCM initially specialized in high-volume arbitrage trades between closely linked fixed-income securities. It ran into trouble by spreading into equities and emerging markets when bond yields declined amid low inflation in most developed countries.
The early eye-popping gains, and Meriwether's reputation, made LTCM a Wall Street darling and led many banks, including Chase and Goldman, to invest in the firm. But speculation is rife that LTCM will be hard pressed to replicate the narrow borrowing margins it once enjoyed among financial institutions given continued volatility in world markets.
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Hedge Fund Association
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