Rescue effort for US hedge fund LTCM is broadened

The effort to rescue Long-Term Capital Management (LTCM), the US hedge fund, has been broadened to include about 35 other financial institutions.

According to people close to the fund, the institutions have agreed to extend liquidity to it through a variety of means, including a $900 million syndicated loan. Others have agreed to waive margin calls temporarily.

A 14-strong consortium yesterday took control of the troubled fund. It has agreed to inject $3.6 billion of equity to save it from going into liquidation.

The bail-out deal was signed late on Monday night, but only after about 35 financial institutions outside the consortium had been persuaded to extend credit and other liquidity to the fund.

About nine members of the rescue consortium are also members of a 24-strong $900m loan syndicate arranged two years ago by Chase Manhattan.

LTCM's attempt to draw down part of the loan facility two weeks ago is said by people close to the fund to have been one of the immediate catalysts for sending it into a liquidity crisis. A number of syndicate members refused to provide loan facilities to the fund.

The consortium now owns 90 per cent of the fund. Original investors are likely to own two-thirds of the remaining 10 per cent, with the fund's partners holding the remainder.

The partners will continue to receive fees from the management company.

While known primarily for its bond arbitrage expertise - attempting to exploit differences between bond prices to make a profit - the fund is also known to have substantial equity arbitrage investments.

One person close to the fund said it had built up about four main equity arbitrage positions, notionally worth up to $20 billion each. This included a "substantial" short position in the S&P 500 contract.

Merrill Lynch, a member of the rescue consortium, confirmed yesterday that its executives invested a total of $22 million of their own money in the fund.