biz.yahoo.com
Sunday September 27, 2:35 am Eastern Time
CORRECTED - CORRECTED -
CORRECTED-Asia grim as hedge
fund wins bailout
In Sept 25 story headlined ''Asia grim as U.S. hedge fund wins
bail-out'' please delete part of analysts' quotes in paragraph 17
and all of paragraph 18 which incorrectly estimated bank capital
at risk and as a percentage of U.S. gross domestic product.
A corrected repetition follows:
By Sarah Davison
HONG KONG, Sept 25 (Reuters) - A huge U.S. bank bailout for a major U.S. hedge fund threw
salt in Asia's financial wounds on Friday, where economies continue to collapse due to lack of cash.
''There's no denying the system works in favour of the advantaged,'' said Peter Perkins, strategist at
Daiwa Research Institute. ''At the end of the day, the big boys get to say what the rules are.''
At the behest of the Federal Reserve Bank of New York, a group of mainly Wall Street banks
coughed up $3.5 billion for Long-Term Capital Management after a bet went badly wrong.
LTCM is believed to have borrowed as much as US$100 billion, threatening losses exceeding the
entire foreign debt of Thailand or nearly two-thirds of that of South Korea, once the world's 11th
largest economy.
The banks agreed to recapitalise LTCM, a hedge fund typical of those that fuelled the Asian crisis,
while Asia struggles to negotiate debt writedowns from many of the same banks.
''Merrill Lynch or Citibank, they have more flexibility because not many of those guys can go before
the whole system crumbles,'' said Perkins. ''But the further out on the periphery you are, the most
expendible you are, and places like Thailand are out on the periphery.''
LTCM is already being called a watershed for its dramatic reminder of the force of the global
financial crisis, and the severity of the global credit crunch it portends.
Once burned by LTCM, banks will be twice shy about investing in hedge funds -- or anything else,
for that matter.
And the fears of another ticking timebomb a la LTCM will add to that reluctance to lend, fuelling an
already critical credit squeeze in those parts of the world worst affected by this global financial crisis.
''Banks will begin to look (more warily) at hedge funds again and we'll have a contraction in global
liquidity. We were going to have that anyway, but this will speed it up,'' said another strategist, who
declined to be identified.
Andy Xie, economist at Morgan Stanley Dean Witter, estimates at least 20 percent of $380 billion in
total foreign loans to Asia will go bad, and Europe is especially exposed.
So far, banks are rolling over foreign debt and refusing to accept writedowns, but soon writedowns
will become inevitable.
''These companies just cannot pay back these loans,'' Xie told Reuters Television. ''As soon as you
recognise this, that you are not going to be paid back, you have to write it down. It will take a huge
bite out of your capital.''
But the unnamed strategist argued that while credit will certainly become even more scarce in Asia,
this region now has less to lose than other regions and could, therefore, benefit.
''Bizarrely, Asia one of better places to be because how can you contract credit any further here?
We don't even have a banking system,'' he said. ''The only thing that can happen from here is to
rebuild capital and the lending process from here.''
Using Bank for International Settlement figures, this strategist estimated that the world's biggest
banks lent more than 129 percent of their capital to global emerging markets, and so far about 30
percent of those loans are non-performing.
''If it's 30 percent, we've just wiped out half the world's bank capital,'' he said, to stress the severity
of the impending credit crunch.
Asian analysts said U.S. banks bailed out LTCM because they were told to by the Federal Reserve
Bank of New York, which abides by a strictly domestic mandate.
There is no-one capable of forcing a similar recapitalisation in Asia.
''What the Federal Reserve coordinated was sensible from a U.S. point of view,'' said Dong Tao,
economist at Credit Suisse First Boston. ''And the banks have to listen to the Fed.''
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