A recent Forbes article rightly noted that when it comes to hedge funds, nobody on Wall Street 'wants to kill the golden goose.' But the near collapse and subsequent rescue of Long-Term Capital Management (LTCM) by the Federal Reserve has certainly brought the goose out of its secretive nest and into the prime time. Interest hasn't been so great since George Soros cleaned up on the UK pound.
Hedge funds are risky, virtually unregulated types of investment funds that cater to wealthy, sophisticated investors. The risks can be tremendous, however, and, as the $3.6 billion 'bailout' of LTCM by 14 Wall Street banks and brokerage houses demonstrated, even one fund can be large enough to shake the confidence that holds together the world's financial markets.
Following the bailout, however, the Fed was criticized in the media by politicians and others for its readiness to lend a helping hand to the 'masters of the universe' on Wall Street, while business owners on Main Street are left to fend for themselves. And a closer look at the media coverage of LTCM's near collapse provides a valuable lesson in crisis communications preparation.
To much of the public, the Fed's action was transparent: yet another case of taxpayer dollars being used to protect the super-rich. Wrong.
No public money, outside the Fed official's salaries, was used to bail out LTCM. The 14 chief executives that Fed president McDonough brought to the table each ponied up $100 to $350 million of their own firm's cash to save LTCM from collapse.
But never mind the real story. In the days following the debacle, LTCM shut itself off from the media; Alan Greenspan delivered his somber address; and the take-away by much of the public was 'this just ain't right.'
To be fair, it's difficult to ascribe traditional crisis response analysis to LTCM's situation. John Meriwether, LTCM's genious bond trader, has always been a recluse, so it would be unrealistic to expect him to have welcomed the salivating media's interviews. And the 'government-bails-out-fat cats' angle was all too compelling for much of the mass media to resist, regardless of any crisis plan that LTCM might have put in place.
But the lessons are there, and the Fed and LTCM could have done a better job at managing their messages. LTCM should have had a media-trained spokesperson readily available, given the risky operation they were running. As for the Fed, more op-eds, editorials, and strategic quotes were needed to convince the masses that they were acting in the interests of the public at large.
When Congress reconvenes in January, it is due to look at increased regulation of hedge fund operations. Media and investor scrutiny is sure to follow, and hedge funds must be prepared. At minimum, funds must adopt some basic crisis preparedness policies - as any sophisticated business would.