When Genius Failed: The Rise and Fall of Long-Term Capital Management

by Roger Lowenstein

Long-Term did have one escape hatch: the revolving credit it had obtained in 1996 from the bank syndicate led by Chase. The $900 million revolver (raised from $500 million initially) was a standby facility that Long-Term could tap when it wanted. Usually, such facilities terminate automatically if the borrower suffers a sharp deterioration, known as a “material adverse change.” But in its eagerness to deal with Long-Term, Chase had omitted the material-adversechange clause. The revolver was cancelable if, at the end of any accounting period, Long-Term’s equity fell by more than half. And the banks were squawking that the fund’s losses had freed them of their obligation to fund. But the last “accounting period” had ended on July 31—at which time Long-Term had still had plenty of equity. So technically, the banks were on the hook. Thanks to Chase’s sloppy drafting, the banks would have to lend $900 million to an insolvent.