X-WebTV-Signature: 1 ETAsAhQ80QeXFbNgMutxri8tzCTZdDwCGAIUH/tb067RLY0D0P3NB+8YVVC5VJ4= From: xcruz@webtv.net (Robert Chavez) Date: Thu, 1 Oct 1998 03:10:02 -0600 (MDT) To: Labor-Rap@csf.colorado.edu Subject: The Hedge Fund Debacle (fwd) From:    janet@wwpublish.com To:    "Workers World News Service" Subject:    The Hedge Fund Debacle Date:    Wed, Sep 30, 1998, 10:46pm (MDT+1) Sender:    listserv@wwpublish.com THE HEDGE FUND DEBACLE: MASSIVE BAILOUT REVEALS FEARS OF FINANCIAL OLIGARCHY By Fred Goldstein While the capitalist media are keeping public attention focused on the Clinton scandal and the Republican attempt to dislodge the Democrats from the White House, the ruling class is fixated on the turmoil in the financial markets and the growing symptoms of an emerging world capitalist crisis. Clinton is staying afloat mainly because the capitalist economy in the United States is still booming--but also because there is disgust among the masses over the witch-hunt tactics of Kenneth Starr, Newt Gingrich and Henry Hyde. Furthermore, sections of the ruling class are undoubtedly working behind the scenes to ease what is really a relatively superficial political crisis, caused by a partisan struggle over the spoils of government. It has become an obstacle to dealing effectively with the far more dangerous and profound problems flowing from the deepest contradictions of the profit system. NEAR-COLLAPSE SHAKES FINANCIERS' CONFIDENCE A dramatic demonstration of how the economic crisis can hit home has now shaken the confidence of U.S. finance capital and the bankers of the world. Long-Term Capital Management, a Wall Street "hedge" fund, nearly collapsed. It was saved only by a hasty and massive rescue effort. Hedge funds are giant gambling operations for the super- rich. In the latest Wall Street boom, their numbers have mushroomed to about 3,000. The various currency speculations of billionaire George Soros, for example, have been through hedge funds. Hedge funds are unregulated private partnerships. An individual must invest at least $5 million to join one; an institution must kick in $25 million. Other than that, there are no rules. The theory is that the super-rich won't let themselves be taken in by shady practices. The original 1940 law that established hedge funds free of regulation allowed them to accept up to 99 investors. The super-rich in the United States have multiplied in the 1990s with the intensified plunder of the globe. To accommodate them, in 1996 the government expanded the number of investors allowed in hedge funds to 499--Alan Greenspan's comments about "irrational exuberance" aside. The name hedge fund implies low risk and a lower rate of profit. A hedge works like a pair of bets. The speculators make simultaneous bets on things that tend to balance each other out. They tend to win on one and lose on the other. So they either win a little or lose a little on each bet. That's the theory. But in truth these high-rolling gamblers take enormous risks, on everything from foreign currency to stocks to bond prices to interest rates to various stock indexes. They are total parasites who will bet on anything if they think it will turn them a profit. BEATING DOWN CURRENCIES These funds have played a significant role, directly and indirectly, in destroying the currencies of the oppressed countries, particularly in Asia. But they have also figured in the inter-imperialist currency wars--such as Soros' raids on the British pound, which forced it out of the European monetary union. While they enjoy the legal privilege of secrecy, the hedge funds are really fronts for the biggest bankers and financiers. This has emerged in bold relief in the latest crisis. As recently as last July, Long-Term Capital Management had $150 billion in assets on its books and an estimated $1.2 trillion in projected trade transactions. Yet on Sept. 23 it was hours from collapse. That's when 16 of the capitalist world's biggest commercial and investment banks stepped in, under the aegis of the Federal Reserve Board of New York, to ante up $3.65 billion for a last-minute bailout. When the bailout took place it was revealed that the $150 billion in assets was backed up by only $2.3 billion in capital. The rest was all borrowed money--borrowed from the giants of finance capital. What a trauma for the bankers! LTCM was one of the most prestigious hedge funds on Wall Street. Its head, John Meriwether, was well known there. On his team at LTCM were two Nobel Prize laureates in economics. Meriwether, however, was also a known swindler. He had been forced to leave the Salomon Brothers investment house in 1991 when a bond trader under him, Paul Mozer, was caught making false bids on U.S. government bonds. Meriwether had been in line to take over Salomon. He was regarded as one of the "masters of the universe" before he was forced to resign and settle up with the Securities and Exchange Commission. He retreated to Greenwich, Conn. There he teamed up with Nobel Prize winners Myron Scholes and Robert Merton. Scholes, of Stanford University and the Massachusetts Institute of Technology, won his prize for inventing a mathematical method of pricing stock options in the 1970s. It led to a whole new area of gambling called the stock options industry. Merton, of Harvard Business School, shared the prize with Scholes in 1997 for similar work. LTCM also hired an insider, David Mullins. In 1994 he quit as vice-chair of the Federal Reserve Board to join the hedge fund. As assistant secretary of the treasury, Mullins had been assigned to investigate the 1987 stock market crash to make sure it wouldn't happen again! Scholes and Merton were in charge of creating computer programs to track all sorts of financial instruments and figure out how to make money off trends in interest rates on bond and stock prices. Their computer programs seemed to be working magic. They made billions of dollars for themselves and their clients. The problem was that their computer programs did not take into account a crisis of capitalist overproduction, with the totally predictable ensuing defaults in government bonds and volatility of the stock market. Their projections were based on capitalist stability, not capitalist crisis. `MASTERS OF UNIVERSE´ MEET RUSSIAN DEFAULT The big shock came in August when the Russian capitalist government defaulted on its bonds. That sent shock waves through the bond markets. Speculators dumped bonds from the oppressed countries and corporate bond prices dropped for fear of an economic slump. Those dumping corporate bonds rushed to buy low-risk U.S. treasury bonds and German government bonds. LTCM had bet the other way. But not only in bonds. According to the Sept. 25 Wall Street Journal, "The fund also had huge positions in stocks _ essentially assuming that the markets would become more stable." By Sept. 15 its assets had shrunk from $150 billion to $80 billion and its capital to $600 million. The "masters of the universe" had met the laws of capitalist development, and they were reeling. At that point the big banks rushed in to protect their loans and investments. Jon Corzine, co-director of Goldman Sachs, got on the phone with the New York Federal Reserve and top executives of Merrill Lynch, Union Bank of Switzerland and J.P. Morgan. What resulted was the Sept. 23 meeting in which Bankers Trust, J.P. Morgan, Barclays, Goldman Sachs, Chase, Merrill Lynch, Deutsche Bank, Credit Suisse First Boston, UBS, Morgan Stanley Dean Witter and Salomon Smith Barney put up $300 million each, Societe Generale put up $125 million, and three other banks each put up $100 million. Of course, the banks took over 90 percent of the company on the spot, without even lip service to the bourgeois legal process. The had their own lightning bankruptcy hearing without benefit of courts, judges, trustees, etc. When they left the room, they were the owners. Against charges of a bailout, the bankers claimed they did it all to protect the world financial structure. But, in fact, they were protecting their loans. Many of the banks had invested in the company; some were owed money by LTCM. Others were protecting their own positions because they imitated or "piggy-backed" on LTCM's speculation. Furthermore, they were protecting investments in other spheres that would be threatened if the company were liquidated and massive amounts of its bonds and stocks were sold. So much for the transparent, arms-length, free-market, pristine capitalism that U.S. bankers have preached so hypocritically to the oppressed countries and Japan. As for transparency, this company wouldn't accept less than $10 million per investor and the money couldn't be withdrawn for three years. If anyone--other than the big bank insiders--wanted to know what was being done with their money, they were told "none of your business." As for reckless lending, the biggest and most "respectable" of all banks in the entire capitalist world were lending money at low interest, with no questions asked, to high-leverage speculators who had an unheard-of asset-to- capital ratio of 54 to one. As for so-called "crony capitalism," the biggest cronies of all--J.P. Morgan, Chase, Bankers Trust, Goldman Sachs, Deutsche Bank, Barclays, Societe Generale--were in a completely illicit relationship, lending money to a firm in which they invested and for which they traded. Some of the directors even had personal money in LTCM. Many of these same bankers had sat around conference tables with government officials and financiers from south Korea, Indonesia, Thailand and Japan, telling them to let firms that made bad investments fail. That's free-market discipline, they said. Never mind the masses of workers who would suffer, the middle classes that would go bankrupt, and the social catastrophe that would follow. These imperialist financial officials want transparency for everyone but themselves, so they can get in and take advantage of inside information. They have no objection to "crony capitalism" as long as they are the cronies. What their pressure on other countries has done is break up structures that impeded imperialist plunder--nothing more. They are against bailouts for everyone but their own ruling classes. THE FED AND INTEREST RATES The LTCM crisis has affected the Federal Reserve Board. Chair Greenspan has reversed his recent position and dropped interest rates. This is an attempt to further extend capitalist overproduction beyond its current limits. But this attempt will likely fail because it is coming at the end of the cycle when overproduction is too far advanced. This is partly because Greenspan and his advisers fear that this latest trauma involving wild lending will send a chill to the bankers, slowing down lending. The hope is that lowering interest rates will tend to promote lending. The LTCM affair is another signal that the underground channels of finance capital, which operate anarchically, have grown so convoluted that the ruling class has no idea where the next eruption will come from. But they know it is coming and could threaten a collapse. Easing credit is their antidote. But easing credit does not work at the end of the capitalist cycle. The later stages of a capitalist boom can be taken to great heights by credit. Karl Marx observed long ago that credit allows the capitalist system to break through its natural limits and extend overproduction to a higher precipice. Speculation is always present in the capitalist system, but it grows wildly in the later phases of the capitalist cycle. The enormous wealth that the bosses and bankers have acquired cannot sit idle. To them, as Marx observed, the most urgent thing in the world is to acquire money. But the next most important thing is to take that acquired money and make more money from it. Sitting idle, it is of no use to them. In the early phases of a capitalist upswing, this can be done easily by investing in businesses--that is, by exploiting the workers, appropriating the lion's share of the new wealth they create. In the case of banks, the newly created wealth is appropriated in the form of interest on business loans, as opposed to currency trading and other forms of speculation where no new wealth is created. But as capitalist overproduction grows and it becomes ever more difficult to find markets, the lust for wealth must be channeled more and more into pure speculation. The banks of all types, taken together, control the money capital of society and fuel the engine of speculation. The more recklessly they fuel it, the more they threaten the well- being of the working class and the oppressed--those who suffer the most when capitalism crashes. The workers cannot sit idly by and let these gambling parasites risk their lives and their material well-being. The only real answer is to fight for an end to the profit system, which drives this mad scramble, and establish collective socialist ownership by the workers in place of dog-eat-dog capitalism.                                                  - END - (Copyright Workers World Service)