September 25, 1998

The Honorable Robert E. Rubin
Secretary
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

The Honorable Alan Greenspan
Chairman
Board of Governors of the
Federal Reserve System
20th and Constitution Avenues N.W.
Washington, D.C. 20551

The Honorable Arthur Levitt, Jr.
Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

The Honorable Brooksley Born
Chairperson
Commodity Futures Trading Commission
Three LaFayette Centre
1155 21st Street, N.W.
Washington, D.C. 20581

Dear Secretary Rubin, Chairmen Greenspan and Levitt, and Chairperson Born:

Pursuant to this Committee's Rule X jurisdiction over "securities and exchanges" and in my capacity as Ranking Member, I am writing to request a full report on all of the facts and circumstances surrounding this week's collapse and bailout of Long-Term Capital Management, an unregulated hedge fund, in order to assist us in determining what happened, why it happened, and how such an event can, if possible, be detected and avoided in the future.

Your report or reports should include, in addition to any other matter you deem relevant, a chronology of events; a detailed analysis of the fund, the instruments involved, trading strategies used, and the regulation and transparency of the relevant markets; a description of the fundamental interconnections between the events, the various counterparties, and the response of markets and regulators; the risks to and effect on securities dealers, insured depository institutions, and the safety and soundness of the U.S. financial system and, to the extent known, globally; an outline of the "private" rescue plan engineered by the Federal Reserve Bank of New York; and your conclusions and recommendations.

The term "hedge fund" is not defined or used in the federal securities laws, and has no precise legal definition. It commonly refers to a variety of pooled investment vehicles that are not registered under the federal securities laws and therefore are not subject to the reporting obligations applicable to public corporations, investment companies, or broker-dealers. Hedge funds (which technically fall within the definition of "investment company" under the Investment Company Act of 1940) typically are operated to comply with the private investment company exception in section 3(c)(1) of the Investment Company Act, i.e., that the fund has no more than 100 investors and does not publicly offer its securities, so as to be exempt from the regulations applicable to mutual funds and other pooled investment vehicles. In the last Congress, the National Securities Markets Improvement Act liberalized the Investment Company Act's private fund exception and created a new qualified purchaser pool exception for funds whose shareholders are sophisticated investors. Interests in hedge funds typically are sold privately to sophisticated, high net worth individuals in ways that do not require registration of the interests under the Securities Act of 1933. Hedge funds also claim an exclusion from registration as securities "dealers" under section 15(a) of the Securities Exchange Act of 1934 based on the "trader" exception.

The SEC receives limited information regarding the activities of large market participants, including some hedge funds, through various reports filed in connection with certain stock acquisitions, and reports filed by managers exercising investment discretion over accounts having $100,000,000 or more in equity securities (so-called Schedules 13D and 13G, and Form 13F). This information, however, does not reveal much about the trading activities of hedge funds or the ways in which they raise capital or their risk profiles.

Hedge funds vary in size, trading strategies, degrees of leverage, and market influence. Some control relatively small amounts of capital and, like many individual investors, pursue relatively conservative buy and hold strategies. Others, like LTCM, are larger and more active, using fairly aggressive investment techniques such as arbitrage, leveraging, and hedging. Accordingly, they trade in a broad range of financial products, including equities, government securities, commodities, financial futures, options, foreign currencies, and derivatives.

No one has any reliable numbers on how many funds exist. They are highly mobile. Most of them operate offshore expressly to avoid regulation and maintain secrecy about their operations. We rely on their "creditors" to extract information and impose limitations. The question therefore arises what the banks and others who lent to LTCM knew and when they knew it and why that "market discipline" failed to curb the excesses that caused this debacle.

Sincerely,

JOHN D. DINGELL
RANKING MEMBER

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