Fed Tells Banks to Tighten Standards
                   For Loans They Extend to Hedge Funds

                   By MATT MURRAY
                   Staff Reporter of THE WALL STREET JOURNAL

                   The Federal Reserve Board told banks to toughen their standards for
                   lending to hedge funds, saying some institutions focus too much on easy
                   profits while ignoring the credit risks posed by some funds.

                                          In a letter sent to bank examiners Monday,
                                          the central bank also issued guidelines to
                                          regulators for assessing bank lending to
                                          hedge funds, suggesting that, among other
                   steps, banks should insulate themselves from possible losses by limiting
                   their loans to hedge funds and improve their models for measuring credit
                   risks.

                   The new, sterner guidelines come a little more than four months after the
                   near-collapse of Long-Term Capital Management LP, a giant hedge fund
                   that was rescued in a $3.625 billion bailout by 14 banks and securities
                   firms last September after rapidly piling up losses during the
                   global-markets upheaval of the preceding weeks. Though the Fed didn't
                   mention Long-Term Capital by name, the bailout, which was orchestrated
                   by the Federal Reserve Bank of New York, spurred calls for tighter
                   restrictions on hedge funds, which are largely unregulated investment pools
                   that seek outsized returns.

                   The Fed blamed some of the problem on
                   banks' lax lending standards, noting that
                   "competitive pressures, pursuit of earnings and
                   over-reliance on customer reputation may have led to substantive lapses in
                   fundamental risk-management principles" in loans to hedge funds. Among
                   other lenders, Chase Manhattan Corp. had led a $900 million syndicated
                   loan to Long-Term Capital.

                   The Fed letter came on the heels of similar guidelines issued last month by
                   the Comptroller of the Currency, which regulates nationally chartered
                   banks, and recommendations for monitoring risk that were proposed last
                   week by a leading group of international bankers.

                   The Fed's guidelines should carry wider impact, however, as it regulates all
                   state-chartered banks, including most of the major New York banks that
                   lent to Long-Term Capital and other hedge funds, including Chase
                   Manhattan, J.P. Morgan & Co. and the bank-holding unit of Citigroup
                   Inc. Spokesmen at those three banks declined comment late Monday.

                   But the effects of greater Fed scrutiny on loans to hedge funds could still
                   be limited since it doesn't affect New York securities firms such as
                   Goldman, Sachs & Co. and Merrill Lynch & Co. Those and other Wall
                   Street firms also aggressively extended loans and other financial contracts
                   to hedge funds, helping fuel the very mania for profits and lax practices that
                   the Fed criticized.

                   A number of the institutions involved in the bailout, including Goldman
                   Sachs, Merrill and Morgan Stanley Dean Witter & Co., last month formed
                   an industry group to develop risk standards for financial institutions
                   extending credit in global markets.

                   As for the Fed guidelines, they are intended for examiners to keep in mind
                   when scrutinizing banks. For the most part, they re-emphasize existing
                   risk-management policies, such as ensuring that banks' actual lending
                   practices conform with their stated policies and that they "stress-test" their
                   credit risks adequately. The Fed examines the banks under its purview at
                   least once a year.

                   At the same time, the letter also criticized some existing standards at
                   banks, noting that "basic credit risk-management policies, procedures and
                   internal controls were insufficient at some banks to address the risks of
                   new, fast-growing or evolving ... products and activities."

                   The Fed also noted that some banks limited their assessment of risks to
                   direct credit exposures, without accounting for contingent liabilities carried
                   in derivatives or other financial instruments. Such assessments might be
                   "entirely insufficient" when dealing with borrowers, such as hedge funds,
                   who use high levels of leverage, the Fed said.