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Private Investment Fund Bailout Provokes Wide-Ranging Criticism

By Tom Petruno
Los Angeles Times

The massive bailout of a tottering private investment fund, in a deal overseen by the Federal Reserve Bank of New York, triggered a mix of outrage and fear on Wall Street on Thursday and helped send the stock market plunging anew.

The $3.5 billion deal to save Long-Term Capital Management, a fund whose well-heeled investors included two Nobel laureates, was organized by Wall Street's major investment banks - many of which had lent the fund huge sums in its ill-fated pursuit of high-risk trading strategies.

The deal was immediately lambasted by many other investment pros as setting a dangerous precedent, especially given the constant carping by U.S. officials that Japan and other troubled economies must allow their sickly financial companies to die rather than be kept on life support.

Most troublesome to many critics was that the bailout, announced late Wednesday, occurred under the auspices of the New York Fed, with the major meetings of lenders held in the Fed's Manhattan offices.

The rescue was attacked as a bailout for rich investors, a privilege that would never be accorded to the vast majority of smaller investors. And it seemed likely to embolden such well-heeled investors to continue their high-risk ventures, confident they will in the end be protected.

"Shameful," declared Charles Pradilla, strategist at investment group Cowen & Co., echoing the comments of other Wall Street veterans. "They should have let it hang and let the lenders hang."

In unusually pointed remarks, Paul Volcker, who was Fed chairman between 1979 and 1987, commented to reporters in Boston that although he did not know the specific details of Long-Term Capital's bailout, "Why should the weight of the federal government be brought to bear to help out a private investor?"