Fallout from Long-Term Capital Management's Near-Collapse Reaches Europe

Strategic Insights -

As the repercussions from the near-collapse of Long-Term Capital Management L.P. continue to resonate, the chairman and three high-ranking officers of UBS A.G. of Switzerland have resigned in a bid to restore confidence in the bank. This decision follows a weeklong slide in bank stocks, with UBS shares closing at 285 Swiss francs ($210), less than half their high of 657 Swiss francs in July. The Bank of Italy, Italy's central bank, has acknowledged investing $250 million in Long-Term Capital, highlighting the risks associated with hedge funds and the interconnectedness of global financial markets.

Key Takeaways:

  • UBS A.G. has experienced significant losses, totaling $685 million, due to its dealings with Long-Term Capital Management L.P.
  • The bank's shares have declined significantly, closing at 285 Swiss francs ($210) on September 29, down from their high of 657 Swiss francs in July
  • The Bank of Italy has invested $250 million in Long-Term Capital, with some of its arcane trading based on the likely behavior of Italian Government bonds
  • European banks, including Dresdner Bank and ING Barings, have acknowledged losses totaling approximately $1.1 billion from the Long-Term Capital debacle
  • J. P. Morgan analysts have downgraded three European banks, including Dresdner and UBS, warning of further negative surprises for the market
  • UBS officials have stated that there is no evidence of personal stakes in Long-Term Capital held by the departed executives, but an internal audit is still under way
  • The bank's inability to detect the risks associated with Long-Term Capital has left many in Switzerland questioning its professionalism
  • Swiss regulators have opened an inquiry into the bank's losses, with questions surrounding how the bank entered a huge engagement with a single hedge fund and why there was no red light coming on earlier

Statistics:

  • UBS shares closed at 285 Swiss francs ($210) on September 29
  • UBS shares reached a high of 657 Swiss francs in July
  • European banks have acknowledged losses totaling approximately $1.1 billion from the Long-Term Capital debacle
  • The Bank of Italy invested $250 million in Long-Term Capital
  • The Long-Term Capital rescue package was valued at $3.6 billion
  • UBS officially wrote off $685 million due to losses connected to Long-Term Capital
  • The Bank of Italy's foreign-exchange official, Pierantonio Ciampicali, made public remarks about the central bank's investment in Long-Term Capital

Sources:

  • "UBS, Swiss Bank, and Union Bank of Switzerland Merge to Create Europe's Largest Bank" (June 1998)
  • "Long-Term Capital Management's Near-Collapse Sparks Global Market Repercussions" (September 1998)
  • Reuters, "Bank of Italy Official Says Central Bank Unaware Long-Term Capital Was Hedge Fund" (September 1998)
  • "UBS A.G. Resignations: Chairman and Three Senior Officers Step Down Amidst Long-Term Capital Management Debacle" (September 1998)
  • "ING Barings Announces Job Cuts as European Banks Struggle with Long-Term Capital Management Losses" (September 1998)