From tsupport@bellhowell.infolearning.com Wed Dec 13 23:40:33 2000 Date: Tue, 7 Nov 2000 19:24:11 -0500 (EST) From: ProQuest To: galka@umich.edu Subject: south china morning post The following article has been sent by a user at UNIVERSITY OF MICHIGAN via ProQuest, a Bell & Howell information service. Winding up LTCM's positions threatens market's morals South China Morning Post Hong Kong Oct 18, 1998 -------------------------------------------------------------------------------- Authors: Michael Lewis Pagination: 9 Abstract: ONE of the more interesting subplots of the Long-Term Capital Management (LTCM) bailout will be the unwinding of the firm's positions, many of which are large enough that, if disclosed, will move markets. The price of gold rose in Tokyo immediately after the hedge fund's rescue on speculation that LTCM needed to cover a short position of 100 tonnes of gold. It is probable that most who acted on the speculation had no idea whether the fund was short on gold. As long as no one is sure what LTCM holds, any speculation, however absurd, will be taken seriously. The six firms that now run LTCM - Goldman Sachs, Merrill Lynch, Citigroup (formed by the merger of Citibank and Travelers), JP Morgan, Morgan Stanley and UBS - want to divest some securities without alerting the markets to the details. If the market gets wind that the LTCM portfolio contains, say, $10 billion of French Government bonds, those bonds will slide. No one at these six firms - nor the other eight banks and investment banks that now own the hedge fund - wants that to happen. Copyright South China Morning Post Ltd. Oct 18, 1998 Full Text: ONE of the more interesting subplots of the Long-Term Capital Management (LTCM) bailout will be the unwinding of the firm's positions, many of which are large enough that, if disclosed, will move markets. The price of gold rose in Tokyo immediately after the hedge fund's rescue on speculation that LTCM needed to cover a short position of 100 tonnes of gold. It is probable that most who acted on the speculation had no idea whether the fund was short on gold. As long as no one is sure what LTCM holds, any speculation, however absurd, will be taken seriously. The LTCM portfolio is said to control the equivalent of US$1 trillion in market positions. Whatever the number, its portfolio is huge and unstable. And the presence of such a portfolio will trigger all sorts of strange market reactions. Speculation about LTCM's portfolio will continue to move markets, mainly because some of the speculation will be true. On the face of it, everyone who knows the actual contents of the portfolio has a strong interest in keeping them secret. The six firms that now run LTCM - Goldman Sachs, Merrill Lynch, Citigroup (formed by the merger of Citibank and Travelers), JP Morgan, Morgan Stanley and UBS - want to divest some securities without alerting the markets to the details. If the market gets wind that the LTCM portfolio contains, say, $10 billion of French Government bonds, those bonds will slide. No one at these six firms - nor the other eight banks and investment banks that now own the hedge fund - wants that to happen. However, the interests of the group differ from the interests of the individual firms. The group is a kind of cartel of financial information. The forces pulling it apart are the forces that pull apart any cartel. Those who cheat can get rich quick. And those who don't cheat run the risk of being cleaned out by those who do. If LTCM is long $10 billion of French Government bonds, the head of Goldman Sachs Jon Corzine knows it. With that information, Mr Corzine can do one of two things. He can sit on the information and hope everyone else in the cartel does the same. Or he can instruct one of his traders quietly to sell short French Government bonds, in anticipation of the great unwinding. If you were Mr Corzine, what would you do? Of course, spokesmen for some of the firms have insisted there is a Chinese wall between the LTCM bailout and their traders. This is, of course, nonsense. The firms have not merely the right, but the responsibility, to use their inside knowledge for financial gain. The goal of the bailout is to spread the risk of the LTCM portfolio, with a view to shrinking it to nothing. If the firms that now own this risk are able to offset it through discreet actions of their own, all the better. Mr Corzine probably could not control his traders even if he wanted to. A slow, deliberate unwinding of LTCM is almost impossible. We live in the age of free agency, when the interests of the firm and the interests of its traders are not identical. In theory, of course, the Goldman Sachs trader does not wish to see his firm lose a lot of money on the LTCM portfolio. In practice, though, he is concerned mainly with the bottom line of his own trading books. Once the Goldman trader has established his short position in French Government bonds he will want others to follow, quickly. After all, what good is it betting on the panic that follows the news that $10 billion of French Government bonds are about to be sold if the news never materialises? So the Goldman trader will leak the news to his favourite reporter, the reporter will print it, and the LTCM portfolio will be exposed, a piece at a time, coaxed out by people who stand to gain at its expense. All of which will make the boffins of Greenwich, Connecticut, look even more foolish than they now do. Michael Lewis is the author of Liar's Poker: Rising Through the Wreckage on Wall Street (Penguin USA, US$12.95) and other books. The opinions expressed are his own. Bloomberg Reproduced with permission of the copyright owner. Further reproduction or distribution is prohibited without permission. =============================== End of Document ================================