On the anniversary of Long Term Capital Management:; From WSJ

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LTCM: Don't Call It a Bailout, Ok!

If there is one word that can rile former Long-Term Capital Management partners in discussions about their place in history, especially now, it is "bailout."

Ten years ago today, a consortium of Wall Street banks agreed to pool $3.6 billion to inject into Long-Term, a big hedge-fund firm, after it posted $4 billion of losses in less than two months. The accord was monumental for its time, hashed out in a series of tense meetings inside the Federal Reserve Bank of New York in Lower Manhattan. Long-Term's troubles turned the market's eye on its founder, John Meriwether, and spurred Congressional hearings about the risks being taken by hedge-fund managers in their quest for big profits.

Fast forward to March 2008 and the months since: the federal government's nearly $30 billion backstop in J.P. Morgan Chase's takeover of Bear Stearns; the government's takeover of Fannie Mae and Freddie Mac; the Treasury Department plan to rescue banks and the economy by buying $700 billion in toxic assets tied to mortgages.

How small does $3.6 billion look these days?

In 1998, Wall Street executives said they wanted to head off a forced sale of Long-Terms complex derivative positions. The banks and regulators worried that desperate selling could cause a cascade of losses for them and other institutions and markets around the world. Propping up Long-Term would enable its holdings to be sold off gradually.

Now, as former Treasury Secretary Lawrence Summers noted during an interview last week at a Greenwich, Conn., hedge-fund conference, Long-Term looks like a blip on the screen of Wall Street history.

Mr. Summers took part in discussions about Long-Term a decade ago, in the heat of the crisis. He says he didn't recall in "any way, shape or form" serious consideration of using taxpayer money directly to prop up the hedge fund or any entity created to take over its investments.

In the end, more than $2 billion lost in Long-Term's demise belonged not to outside investors but to partners who ran the hedge fund. The consortium banks largely ran the show after their agreement took effect. Today, the most prominent hold-out in the 1998 accord, Bear Stearns, no longer exists. And it is fair to say that banks have hardly been in control in 2008.

"Nobody bailed us out," says Eric Rosenfeld, a central figure in the Long-Term story who was a close confidant of Mr. Meriwether and a founding partner of the hedge fund. "The Fed wasn't there to bail out us or the investors. It was there to help who they were regulating, the banks, which could have lost money on a quick, massive unwind of an illiquid portfolio."

Of course, Long-Term was in danger of defaulting on its bank credit lines. Had the banks enforced the terms, the outcome could have been dire.

Still, there is a prevailing view of the term "bailout" that former LTCMersmany of whom remain in touchdon't easily let go of. It came up frequently in more than a dozen conversations in recent weeks with Mr. Rosenfeld's former colleagues, often without prompting. Mr. Meriwether himself has talked in recent weeks that as history is told, the events surrounding Lehman Brothers Holdings and American International Group will overshadow Long-Term Capital Management, according to a person familiar with the discussions.

"'Bailout' made it sound more spectacular than it otherwise would have been," another top former LTCM executive said. "If we had sold to Warren Buffett it would have been a different story."

-Jenny Strasburg

Comments: http://blogs.wsj.com/deals/2008/09/23/the-bailout-of-ltcm-whats-in-a-word?mod=djemWDB&reflink=djemWDB&reflink=djemWDB

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