Stiglitz: hedge funds are crony capitalism

[Robert Weissman <rob@essential.org>]

World Bank chief economist cites Asia, LTCM fund problems
Date: Mon Oct 19 15:05:44 CDT 1998
                                         
   GENEVA, Oct 19 (AFP) - World Bank chief economist Joseph
Stiglitz charged on Monday that problems blamed for the financial
crisis in Asia were also rife at troubled US-hedge fund Long-Term
Capital Management. 
   Stiglitz, speaking at the annual board meeting of the UN
Conference on Trade and Development, said woes blamed for Asia's
turmoil, such as crony capitalism, conflicts of interest and high
debt levels, were also hallmarks of the fund. 
   LTCM, a once high-flying and sophisticated hedge fund,
narrowly avoided collapse last month with a 3.5 billion dollar
bailout by 14 firms, including some sharehoders, led by the US
Federal Reserve Bank. 
   Stiglitz charged that "therewas at least an appearance of
crony capitalism" at LTCM, where "one of the principals was a
former vice chairman of the Fed, which led the rescue effort." 
   While South Korea, Thailand and Indonesia were heavily
criticized for acquiring mountains of debt, the "magnitude of
debt (at LTCM) was unbelievable," Stiglitz said. 
   LTCM had an exposure of "somewhere between one to one and a
half trillion dollars based on a capital of between three to five
billion dollars," he said.
    "And American and Swiss banks were lending to this higly leveraged hedge
fund." 
   There was much talks in East Asia about (lack of) competition,
he said. "And yet what's remarkable here is the concentration of
economic power, the fact that the actions ofone firm could have a
systemic effect on global capital markets," which was one
justification for the bailout. 
   Stiglitz, in a 90-minute speach to UNCTAD delegates, focussed
on the flaws of what he called the "Washington consensus" such as
its number crunching singlemindedness and on outlining a new
development plan taking into account social and psychological
realities. 
  Friction between the World Bank and International Monetary Fund
surfaced at their annual meeting in Washington at the beginning
of October. 
   World Bank president James Wolfensohn told world finance
officials it was now time "to go beyond financial stabilization"
to engage in a debate "where mathematics will not dominate
humanity, where the need for often drastic change can be balanced
with protecting the interests of the poor."