I keep thinking about the "close call" we had the other day with Meriwether's hedgefund- Long-Term Capital. I don't know about other cities, but here in Houston VERY little was said and there was even less news coverage. There was an article in the NYTimes which I printed out, but now when I type in the URL it is not accessible. Everything about it was hush-hush. I'm sure to avoid panic because Wall Street is already "nervous." Here is a small excerpt from the NYTimes article about a bailout meeting:

"There were angry arguments and resentful speeches, reflecting the tensions the men faced. Each executive knew that if its firm seized its collateral from the firm and fled, only a few of them would reach the exit before the roof fell in. But taking collective action was difficult for such natural competitors, even with the Fed's brooding oversight. Executives for Bear Stearns insisted, successfully, that their risks as the fund's clearing broker should exempt them from further contributions. Executives from three foreign banks initially balked at contributing anything, provoking a lecture from a senior Wall Street executive. The trio huddled privately, and announced they would participate after all. In the end, 14 firms committed $100 million to $350 million each." (some of the firms mentioned- Merrill Lynch, Union Bank of Switzerland, J. P. Morgan, Goldman, Sachs & Co., Morgan Stanley Dean Witter and the Travelers Group. The meeting was held at the New York Fed's Italianate headquarters on Maiden Lane, a few blocks from Wall Street.)

Another interesting thing mentioned in the article was that at first they thought Warren Buffet would step in to "buy" Long-Term Capital just as he had rescued Salomon Brothers in 1991, but he balked.

The last paragraph of the article: "But regulators and others are left pondering how a small band of traders could threaten the confidence that knits together the world's financial markets."

If this is just the beginning rumblings from the stock market's decline, what else do we have in store? I was just wondering if any one else followed this news and what they thought?

-- Gayla Dunbar (privacy@please.com), September 28, 1998

Answers

Gayla,

This was front-page news in The Washington Post, and there have been stories about it all weekend. Try their web-site--no subscription needed like the NY Times.

I'm no expert on these matters, but my impression is that these guys were playing with fire all along. Their strategies only worked while there was a constant bull market. They were trading on huge margins too. Their short-term speculation strategies don't work for the long-term. For them, very bad outcome. For the investment firms involved, a drop in the bucket.

-- Buddy Y. (buddy@bellatlantic.net), September 28, 1998.

One point the news story I read made, in the very last paragraph, was that this hedge fund handles the money of the wealthiest investors, with the obvious implication that, without the weight of some very heavy hitters in action, the Fed might not have been so eager to bail out the fund. Also, why is the Fed bailing out a hedge fund in the first place, or is this a case of a financial entity being "too big to fail" again? Makes you wonder what else is happening in the financial markets that doesn't get reported.

-- J.D. Clark (yankeejdc@aol.com), September 28, 1998.

Friday's Wall Street Journal had it on the front page as "Bailout Blues". I personally was quite taken aback by the news of the bailout, as it seems such a blatant repudiation of the free market approach. Hedge funds are only for the really big dogs, after all, and they should certainly be able to take their lumps. My mistake - now we've got the Fed brokering bailouts for billionaires. Some "free market..." The same WSJ issue has more details on the history of both this bailout and others (such as Continental Illinois back in 1984.) Interesting reading.

-- Mac (sneak@lurk.com), September 28, 1998.

My wife is a stockbroker with one of the major firms. This really shook her up. Oh, and its NOT over, the bailout just covered the initial "margin" calls. The total leveraged paper wealth involved is 1.25 TRILLION (thats right trillion not billion - see N.Y. Times) This is just a tremor before the major meltdown. Interesting that Japan Leasing Corp failed just after. I'm just speculating but its possible that one or more of the Japanese banks got caught up in LTCM then panicked and tried to call in the bad loan at JLC.

-- R. D..Herring (drherr@erols.com), September 28, 1998.

Do a library search to find either a book or article entitled "The day we ran out of money" which is the story of the Penn Central Bankruptcy case. then fast forward to the last serious bank "failure" (S&L Bailout Even the Rich got theirs. The supposed $100K "limit" somehow was made to go away). Fast foreward to LTCM and see that even the "Informed Investors" are now being given theirs back. these folks, when classed as Informed Investors, are supposed to just go ahead and take their lumps, lick their wounds and go on to Sardi's. They are supposed to be able to aford the losses. I found the stories REALLY interesting in light of our State Dept or Fed diplomat (whichever) saying that the Japanese govt "Must not simply print yen for a bailout of investors" in the failing banks in Japan. that it must not be a stockholder bailout.

Gee- - - Ollie- - - If it works for us, howcome it don't work for them??

cr

ps Watch this carefully, as the stated interest rate goes down in the next 24 hours, if we get some more of these the actual interest rate will go UP by a WHOLE BUNCH and we will see a repeat of 1929 in that the margin calls will start to kill people, only now it'll be BIG Corporations, and not individuals jumping out of windows.

-- Chuck a Night Driver (rienzoo@en.com), September 29, 1998.

I agree this is just the previews, our feature presentation is about to begin. Warren Buffet is sitting on 1 billion in silver and 8-9 billion in cash, they don't call him the "Oracle of Omaha" for nothing.

-- Bill (bill@microsoft.com), September 29, 1998.

Chuck -

I appreciate your observations, but I lost your train of thought in that last paragraph - rumors now have it that interest rates will go down today, maybe tommorrow.

So what is the impact? Which way is worse? Are long term/short term affects different?

-- Robert A. Cook, P.E. (Kennesaw, GA) (cook.r@csaatl.com), September 29, 1998.

Sure enough, here it is:

http://www.msnbc.com/news/200654.asp

-- Gayla Dunbar (privacy@please.com), September 29, 1998.

Two things:

I know Buffet, through Berkshire Hathaway, bought a few boatloads of silver some time ago. However, I thought I read that he had since unloaded a sizable percentage of that silver. Anyone have any info on that?

Second, a lot of people watch Buffet like he's some kind of Oracle. Well, maybe he is, but I don't think so. What he does seem to be is a person with both a focus on long-term thinking and a better than average understanding of the trends that might predict part of that long-range future. However, he isn't always right. His success lies in the fact that he is right more often than he is wrong. Don't get me wrong, Buffet bears watching. He didn't get to be as rich as he is without knowing what he's doing. Just don't use him as the only indicator of what's going on.

While we are on the subject of Buffet, a lot of people are talking about bailing out of the stock market due to the recent downturn combined with Y2K. Some months ago I altered my own retirement fund allocations to focus on less risky investments (which I would be doing without Y2K, BTW). But if you are a Buffet groupie (and I will admit to being one), I remind you of one of his favorite maxims for investing in stocks: "If you don't plan on owning a stock for at least ten years, you shouldn't own it for a day." Don't give up your long term plans for the problems of today. That should apply to a lot of areas of life, not just investing. Y2K preparation, for instance.

-- Paul Neuhardt (neuhardt@ultranet.com), September 29, 1998.

Paul,

Not to be pedantic but "buffet" is where you get all da free eats at; "Buffett" (two T's) is how Warren tends to spell his name (Jimmy too, for that matter).

-- Smorgasbord (take@allyouwant.com), September 29, 1998.

If someone was a "Buffett groupie," wouldn't you think he could at least be able to spell his name right? It just goes to show ya, some people spend more time eating than they do reading? How does one become a Buffett groupie? That is just plain silly!! Pendantic is a good thing.

-- Warren (Eats@Buffet.com), September 30, 1998.

Not to be pedantic, but it's "pedantic."

-- sameguy (me@again.com), September 30, 1998.

Like I said, Podantic is a good thing. hehehe hahaha hohohoho Time to eat! Eat this!

-- Warren (eats@buffet.com), September 30, 1998.

My .02 worth. AS a history freak would say, it's time to brush up on the past. In 1929, numerous "trusts" created phony paper profits by building huge pyramid schemes hooking everyone into the market by reporting dramatic results do to highly leveraged investments. People I have a history lesson for you. LEVERAGE WORKS IN REVERSE TOO. At no point in time has the American public ever been so heavily invested in the stock market. Look at the numbers (over 49% in the last survey) and think about this October which begins tommorrow. Y2K will be blamed in part, just wait and see. But the real earthquake will be the unwinding of the highly leveraged markets in Latin America. Asia was just a 5.0 on the Richter scale. Latin America will be a 10. If I had the guts, I would short so many stocks it wouldn't even be funny as the prescription for disaster has been written by the Harvard doctors (hmmm, I remember their B.S. in the 1930's too...). When Latin America experiences reverse leverage, the U.S. banks will be hit and hard AND on two fronts. The Japanese banks are heavily invested in Ecuador, Peru, Venezuela, and Mexico. So what happens to the value of their currencies when Brazil finally devalues (this is an eventuality as they are spending $1 Billion per day to prop up their currency and only have $50 B in reserves). Think people. That's right, the Japanese will get zapped and severely. But the U.S. financial markets will pay the price. AS the loans are being wiped off of the books of the major U.S. banks, the Japanese will incite another deflationary spiral as they unload their U.S. holdings. The 30 year bond has a historically low yield of 4.98 % as of the moment I am writing this. To escape the tanking stock market, American investors will scoop up this supply of paper. I don't know how low it will go in October but IMHO 15-20% MORE does not seem unreasonable based on history. And if you refer to the WSJ article about the Long Term Capital hedge fund you will see the proverbial "tip of the iceberg." There are other "hedge" (or "trust" just change the dates and phrases and you'll see the meaning) that are VERY highly leveraged. This is your Y2K warm up. Duck and cover. And stay aware.

-- John Galt (jgaltfla@hotmail.com), September 30, 1998.

Bob,

Sorry I got cryptic. Probably has to do with the time stamp... I was referring to the margin calls that the "hedge" funds are about to receive in the next few weeks. I was also referring to the attempt, by Greenspan et al, to "jawbone" the markets of the world, and to try to satisfy theem with the smallest bump they could give our rates. I think that there was a rate they could have gone to to at least slow the slide, but I think that the window for that is closing rapidly, in a matter of hours to days. I also think that there is a point that we will reach where chasing the "right" interest rate to slow the "world" slide will result in a dose of hyperinflation, at about the time the "hedgies" get hammered, since the two (the slide and the margin calls) will heterodyne for these funds, as they did in '29-'32 for the small investor,

Ii think it is interesting to note that either the margin rules were suspended for Harvsrd Professors, or the fund found a way around them. Seriously interesting and begs the question, "How many other funds found the same loop-hole to leverage themselves?"

Hopefully clearer (better time stamp), though more pessimistic.

CR

-- Chuck a Night Driver (rienzoo@en.com), October 01, 1998.

<>

Not if they happen to be a crappy typist, which I am.

-- Paul Neuhardt (neuhardt@ultranet.com), October 01, 1998.

While we are on the subject of being a crappy typist, I left a word out of the sentence that is being so badly flamed. That word is "not." I am NOT a WB groupie. I mean really, would I say on one hand they guy's not some prescient oracle on one hand and them proclaim myself to be a devout follower who hangs on his every word and action?

He's a pretty bright guy, and were I to decide to make a career out of investing I would certainly follow him more closely. Since that is not the case, I stick pretty much to what is published in the paper about him. Beyond that, I don't much care.

-- Paul Neuhardt (neuhardt@ultranet.com), October 01, 1998.

Paul, you're too hard on your self = you are not a cr**py typist, you are a "skippy" typist. A cr**py typist like myself can't spell, keeps hiiting the d**m space bar in the wrong order, and reverses letters, when they don't leave them off all together.

A skippy typist, on the other hand, loses whole words betwixt mind and keys.

To the subject at hand:

If "rumors" of a interest rate change affect the market by 3-6% in less than a week, what will happen when "investors" actually see losses in earnings (internaltional market losses or Y2K or anything else?) IMHO, the market will go down and stabilize around 4500-5000. There's no rational reason for it to have gotten to 9000+ this year other than yuppie 401K money chasing other 401K money.

-- Robert A. Cook, P.E. (Kennesaw, GA) (cook.r@csaatl.com), October 01, 1998.

Here is an article about Greenspan defending the bailout of LTCM. He said it was to avert global disruption:

http://www.msnbc.com/news/201255.asp

-- Gayla Dunbar (privacy@please.com), October 01, 1998.