Friday, October 2, 1998 Published at 05:06 GMT 06:06 UK
Business: The Economy
Greenspan defends hedge-fund bail-out
Complicated futures contracts contributed to LTCM's downfall
The Chairman of the US Federal Reserve Bank, Alan Greenspan, has defended the publicly organised bail-out of Long-Term Capital Management (LTCM), a hedge fund specialising in large-scale speculation.
Speaking to the banking committee of the US House of Representatives, Mr Greenspan said a failure of LTCM's failure could have caused substantial damage to banks and investors and might have impaired the economies of many nations, including the United States.
Mr Greenspan insisted that for LTCM's bailout "no Federal Reserve funds were put at risk, no promises were made by the Federal Reserve, and no individual firms were pressured to participate."
The "fragile" condition of the markets had prompted the Federal Resevere to act quicker than usual, he said, promising that the bail-out would be a "rare occasion."
US lawmakers raised critical questions about the fund's rescue. Jim Leach, chairman of the House Banking Committee, called on the Justice Department to make an antitrust review of the group of big banks and brokerage firms involved.
The rescue raised "troubling questions of financial concentration and antitrust," Mr Leach said at the hearing. "As a group working together, the new owners can have a greater impact on markets than in competition with one another."
Representative Bernard Sanders of Vermont, the House's lone independent, called it a "bailout for billionaires" that rewarded "the gambling practices of the Wall Street elites."
Mr Greenspan described LTCM's clients as "a small number of highly sophisticated, very wealthy individuals" who had tried to get high rates of return.
However, after several years of success changed market conditions made it more and more difficult for LTCM tor repeat its good performance. According to the Fed's chairman, the fund then tried to get high returns by taking higher risks "just as financial market uncertainty ... began to rise rapidly around the world."
He said that this risk had produced "stunning losses" of about half the firm's capital base.
Mr Greenspan suggested that it would have been wrong to let LTCM go under. The unwinding of the fund's "complicated portfolio" would have been very risky, and could have seriously distorted financial markets around the world.
At the same time he ruled out direct regulation of hedge funds, saying it was possible to monitor the fund's activity and act when necessary.
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