The bailout of Long-Term Capital Management LP could not have come at a worse time for Bankers Trust Corp.
Of the institutions that contributed to the $3.5 billion rescue, Bankers Trust is in perhaps the most precarious position, at least proportionally.
The New York company's $300 million share equals 5% of its $6.1 billion capital base. The percentages are much lower at the other banks involved.
And late Thursday, Standard & Poor's Corp. downgraded Bankers Trust's debt. S&P cited the impact of market volatility.
The $174 billion-asset banking company has said it will report a loss for the third quarter. That would reflect $350 million of July and August trading losses disclosed this month.
In addition, analysts are concerned about the bank's ability to build investment banking revenues given the slowdown in deal making.
As of Friday, consensus estimates put Bankers Trust's third-quarter loss at $3.03 a share, or $291.4 million. That compares with profits of $2.25 a share, or $246 million, in last year's third quarter.
"Bankers Trust is going to have to undergo another transformation," succeeding its previous conversion into more of an investment than a commercial bank, said Steve Eisman, an analyst at CIBC Oppenheimer.
It is in a weakened state, agreed Bradley Ball of Credit Suisse First Boston. "They are among the most exposed, and adding that to other problems, it just piles on to what is already a bad situation."
When it announced its downgrade Thursday of short-term Bankers Trust Corp. debt to A2 from A1, S&P was more concerned about the effects of market turmoil on the business lines than about the one-time trading results.
"The dearth of investment banking opportunities in that sector in the wake of market turbulence will reduce earnings potential over the medium term," said the credit agency. "In a protracted period of low business volume, the bank may need to cut back on some of its initiatives."
In an unusual move, Bankers Trust chairman and chief executive officer Frank N. Newman issued a statement late Thursday to dull the blow of the downgrade.
"Despite the recent market turmoil, Bankers Trust is well capitalized, with a strong balance sheet," he said. "Our strategy is on track. We've made substantial progress in our strategic goal of reducing the firm's risk profile, especially in emerging markets."
At June 30, Bankers Trust's Tier 1 capital ratio was 8%, down from 9.2% on the same date in 1997. Its leverage capital ratio was 3.7%, down from 5%.
Regulators want a Tier 1 ratio of 4% of risk-adjusted assets, and a leverage ratio of 3%. S&P said it expected Bankers Trust to rebuild capital through retained earnings next year.
Bankers Trust has a $1.1 billion loan-loss reserve and has been unwinding its emerging markets trading positions. Analysts said they expect Bankers Trust to pull back its operations in emerging markets, with the potential for layoffs this year.
In trying to run with the bigger banks, Bankers Trust finds itself suffering a proportionately larger share of the damage.
"Bankers Trust has tended to take risks equal to other money-center banks, but because their capital base is smaller, those risks end up being greater," Mr. Eisman said.
The $300 million pledged by Chase Manhattan Corp., for example, represents only 1.3% of its capital, compared with Bankers Trust's 5%. J.P. Morgan & Co.'s contribution equaled 2.6% of capital.
Analysts said Bankers Trust had no choice but to participate in the bailout.
"It's a collective effort, and it looks bad if you don't pitch in," said Stephen Biggar at S&P Equity Research. "They all want to go along because the alternative is to create more problems."
Analysts have been trying to quantify the banks' exposure to hedge funds. Bankers Trust said this month that it had accrued a $100 million credit provision during the quarter, which analysts attribute to loan losses from III Associates, a $2.4 billion hedge fund in Florida.
Analyst Carla D'Arista of Friedman Billings Ramsey Inc. said Bankers Trust's exposure to Long Term Capital-in the form of mark-to-market trading assets-will turn out to be less than $300 million.