The Brightest and the Brokest

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In a Sept. 2 letter to investors, Meriwether called for patience and said the fund was "seeking to raise additional capital." Among those reportedly approached was George Soros, head of the $10 billion Quantum hedge fund, who spurned a request for a $500 million cash infusion. It was also rumored that billionaire investor Warren Buffett might help.

With the fund collapsing, a Who's Who of Wall Street bankers and brokers feverishly huddled for two days on the 10th floor of the Federal Reserve Bank of New York City last week to draw up a rescue package. Among the princes present: Merrill Lynch chairman David Komansky, Travelers Group chairman Sanford Weill, and Goldman Sachs senior partner Jon Corzine.

In the end the banks and investment firms had little choice but to put up the money. Bert Ely, president of a financial consulting firm that bears his name, observes that the lenders "want to avoid a fire sale" of fund assets.

Some congressional leaders were clearly uncomfortable with the lack of disclosure of the dangers posed by bank lending to hedge funds. Says House banking chairman Jim Leach, who plans to hold hearings in the next week or two: "The question that remains for the economy is what other risk exists in the hedge-fund and derivatives industries." The answer, of course, is of vital interest to U.S. taxpayers as well as to investors. Talk of "moral hazard" will thus remain a hot issue from Washington to Wall Street and Main Street.

--Reported by Bernard Baumohl/New York and Adam Zagorin/Washington