CFTC Knew of Hedge Fund’s Huge Debts

A top federal regulator knew a Connecticut investment fund was highly leveraged months before that firm’s near-collapse threatened to disrupt world financial markets in September, but she failed to act on the information or alert other regulators. The regulator, Commodity Futures Trading Commission Chairwoman Brooksley Born, defended her actions Tuesday, saying the financial information her agency had about the fund--Long-Term Capital Management L.P.--was too old by the time it could have been helpful last summer to commercial and investment bank regulators. In any case, Born said, the law prevents CFTC officials from sharing information with other federal regulators unless those regulators initiate a request for the information. Born confirmed she knew of the fund’s financial condition after the Washington Post obtained a copy of a nonpublic document Long-Term Capital filed with the CFTC earlier this year showing that it had borrowed $25 for every $1 of its equity capital. According to the document, which was filed in mid-March, Long-Term Capital had borrowed $125 billion on capital of just $4.7 billion as of Dec. 31, 1997. The fund used that borrowed money to place bets on financial instruments around the world. Government officials at other agencies familiar with the events surrounding Long-Term Capital said they believe that if Born’s staff had shared its knowledge about the company with banking regulators in July and August, it might have caused them to investigate if the fund’s debt level was still so high. Lawmakers also said the CFTC’s decision not to disclose the information was troublesome. “I would think it would be natural for them to discuss with the other regulators circumstances of this nature,” said House Banking Committee Chairman Jim Leach (R-Iowa).