The long discussed but fiercely denigrated possibility may just have started to happen.
w3.ttnn.com
I did a rough translation …
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Taipei Today News Agency
June 31st, 2001 8:45am
Yong Lung Asset Management Corporation is believed to be in intractable solvency difficulty following its recent failed effort to anticipate the direction of the Tokyo stock market.
Yong Lung is an investment entity backed by many Taiwan-based industrialists made wealthy by the Republic’s export-led economic growth. The company is mainly a vehicle to take leverage positions in the global financial markets so as to earn a return on its backers’ excess funds. The company was able to play in the world financial derivatives market by utilizing its relationships with several top Taiwan banks, and through the good office of these banks.
At this moment, it is not clear what the company’s assets and liabilities are, but certain sources have indicated that the notional value of the company’s financial derivative positions may exceed the island’s annual GDP, and that, more alarmingly, above and beyond the company’s derivative obligations, it is also a major customer of many top banks in the region.
The gross and net asset allocation of the company is not know at this time, as the company is not under the supervision of banking regulators or any other regulatory authority in Taiwan or abroad. It is believed that the company had at times taken positions in US credit, various foreign exchange and gold derivatives.
The Taiwan government is at this time refusing to comment on the Yong Lung matter, but people close to the situation comment that if the notional value of the derivative is as large as rumored, and matched by a likely large at-risk amount, then it is beyond the Taiwan government’s power to mount a rescue attempt.
The full possible affects of the Yong Lung development is difficult to estimate, as the company carries a large book of derivative positions, with numerous counter parties, in many legal jurisdictions, and the total leverage at-risk positions can easily dwarf the total foreign exchange reserve of Taiwan.
According to the Bank for International Settlements (BIS), total notional derivative positions currently exceed US$ 95 trillion (world GDP is approximately US$ 30 trillion). Of this notional amount, there is US$ 33 trillion of total commercial bank interest rate derivatives. JP Morgan Chase is believed to be the largest player with US$ 24.5 trillion of notional derivative positions.
The risk of the Yong Lung affair is that the company is counter-party to many other financial institutions, and the possibly well-balanced hedge book of these other parties may be badly upset by Yong Lung’s suddenly disappearance as counter-party.
It is believed that the Taiwan government is in emergency consultation with regional and US central banks over the weekend, hoping to find a solution before the start of workweek. The situation is made more complicated by the long weekend holidays in many parts of the world.
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