The banks and brokerages bailing out Long-Term Capital Management LP said Friday that they are seizing control of the beleaguered hedge fund.
In a joint statement, the consortium of 14 financial institutions said representatives from a previously named oversight committee would try to reduce the fund's risk and return money to investors over the next three years.
The committee would have "authority over investment strategy, capitalization structure, credit and market risk management, compensation policy, hires and terminations, and other significant decisions," according to the statement.
The oversight committee includes Goldman, Sachs & Co., Merrill Lynch & Co., J.P. Morgan & Co., Morgan Stanley, Dean Witter & Co., Travelers Group Inc., and Union Bank of Switzerland.
Each of these companies will have a representative on-site at Long-Term Capital's Greenwich, Conn., headquarters.
"They're taking over control from John Meriwether and his group," said Steven A. Lonsdorf, president of Van Hedge Fund Advisors Inc. in Nashville. "It's a total vote of no confidence."
Mr. Meriwether, a former Salomon Brothers vice chairman, and his team will be kept on to execute trades but will answer to the oversight committee, a consortium member said.
Long-Term Capital nearly collapsed last week from losses on more than $90 billion invested in global financial markets. The Federal Reserve Bank of New York helped facilitate a rescue plan with 14 banks and brokerages.
In addition to members of the oversight committee, eight financial institutions agreed to put up $100 million to $300 million in exchange for an equity stake in the fund. That list includes Bankers Trust Corp., Barclays PLC, Chase Manhattan Corp., Credit Suisse First Boston, Deutsche Bank AG, Lehman Brothers Holdings Inc., Paribas, and Societe Generale.
"We're a part of it, but it's not something we're exactly proud of," said a loan executive at a major European bank in the consortium.
As for the fund, Mr. Lonsdorf said the decision to "trade their way out of it" in three years is a recognition by the consortium that Long-Term Capital is not likely to survive.
On Friday banks continued to measure their exposure to hedge funds. Stephen Biggar, an analyst at Standard & Poor's, said he expects bank internal controls to stiffen immediately.
"They'll create stricter underwriting standards or greater provisioning" against losses, Mr. Biggar said. "Unfortunately, it only helps from here on out. In terms of existing problems all they can do is what they've done."
One bank that clearly has an exposure to Long-Term Capital is Chase, which syndicated a $900 million unsecured loan to 24 banks for Long-Term Capital in May. That loan, a 364-day credit facility to cover margin calls, was heavily drawn upon, but no defaults were reported, according to Fitch IBCA Inc. Chase declined to comment.
House Banking Committee Chairman Jim Leach, R-Iowa, said Friday that the committee will hold a hearing late this week on the risks posed to the global economy and banking system by hedge funds. Federal Reserve Chairman Alan Greenspan is expected to attend.
Mr. Lonsdorf said, "There's no question regulators are going to be taking a very hard look at this, and my guess is they'll change the rules."