Asia's Top Tycoons Take a Haircut

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It appears that Wall Street investment banks doing business in Asia are about to reap another whirlwind in the form of lawsuits from irate tycoons who have lost billions on so-called "financial accumulators" – bundled derivative contracts that offer investors the ability to buy currencies or securities at a fixed price over a fixed period of time. When currencies or securities go sour, for instance, it is possible to lose billions.

The accumulators — famously dubbed "I-kill-you-laters" by Hong Kong’s bruised financial community — were the latest feature by the investment banks to lure Asia’s fast-growing wealthy community to their private banking facilities. They are among a wide range of enormously complicated, high-risk, structured financial products that are extremely lucrative in rising markets. The Hong Kong Securities and Futures Commission puts the total volume at about US$23 billion. With only Robert Kuok, Joseph Lau, Lee Shau-kee and a few others named publicly so far, that means a lot of other big names are fated to surface as annual reports are filed.

Like all futures contracts, accumulators and decumulators can go bad in a hurry. For instance, the Australian dollar was on a seemingly unstoppable rise against the US dollar until mid-July, when it became apparent that commodity markets — Australia’s most important exports — were turning against the currency. It dived from a high of US$.979¢ to a low of US$.607¢ in October before recovering slightly — a loss of a 41 percent of its value. With the tycoons locked into forward contracts up to two years, they have wrought enormous financial damage, and will continue to do so if the currency continues to fall.

econ-xratesgraph

Source: X-rates.com

The poster child so far is CITIC Pacific, the Hong Kong-based investment arm of the state-owned Citic Group, which announced on Dec. 3 that it had realized and potential losses of US$2.4 billion on betting wrong on the Australian dollar – losses that have the potential to grow even further as the Australian currency sinks against the US dollar and the renminbi.

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But there are rumored to be plenty more, according to widespread reports in Chinese-language newspapers and magazines in Hong Kong. The Jimmy Lai-owned Next Magazine, in a November 20 article, detailed what it said were extensive losses by property tycoons, their children and spouses.

Among them, according to the article, is Robert Kuok, the ailing patriarch and head of Kerry Holdings, the main investment arm of the Kuok Group. Kuok also controls the South China Morning Post, which might explain the newspaper’s silence on the issue. Kuok, according to Next, faces losses of HK$1.035 billion (US$135.6 million) on 12 stocks, all but two of them in lock-up periods ranging from six months to two years. That included HK$234 million worth of shares for HK$13.50 in Alibaba, China’s biggest business-to-business website, which rose 192 percent to HK$39.50 per share on its first day of trading but since then collapsed back to HK$4.77.

Other major losers, according to Next, were Joseph Lau, chairman of Chinese Estates Holdings, at HK$878 million, Lee Shau-kee, who controls Henderson Land, at more than HK$2 billion, as well as Wu Man-san, the son of Gordon Wu, the chairman of Hopewell Holdings, who according to Next, lost more than HK$1 billion. In late November, the magazine said, Hopewell announced a special 2009 dividend of HK$3.3 a share, in addition to one of HK$1.5 announced. The special dividend netted Gordon, his wife and son HK$2.4 billion, according to the magazine.

On October 31, Kowloon Development reported losses of HK$3.7 billion from “over-the-counter contingent forward agreements,” causing the property company’s stock to drop 42 percent in a single day.

Some of the tycoons, Next reported, are demanding that the investment banks settle their debts or risk losing their business. In early November, Robert Kuok, David Li, chairman of the Bank of East Asia and Secretary for Justice Wong Yan-lung had lunch in an up-market restaurant in Wanchai with Tim Dattels, former managing director of Goldman Sachs, to discuss the losses.

It isn’t just in Hong Kong. Merrill Lynch, according to the Wall Street Journal, is in a legal squabble with an Indonesian private banking client, Prem Harjani, who is suing Merrill for US$90 million in damages for allegedly selling shares without his knowledge. Merrill, the Journal said, countersuing Harjani, the owner of a Jakarta-based investment bank, in a Singapore court in an effort to recoup $12 million that it says Harjani failed to repay. This week, the bank won a court order freezing Harjani’s assets in Singapore. In addition, the Journal’s Internet-based Law Blog reported that an Indonesian couple is seeking $8.6 million in damages from UBS in a Singapore court, claiming they weren’t told of the risks involved when currency accumulators go bad. In Hong Kong, a local businesswoman, Joyce Tsang, is also suing Goldman Sachs for allegedly trading accumulators for her account without her authorization.

Related articles:

Kerry and the Credit Juggernaut

Protecting China's Red Princes

CITIC Pacific: Are there More Coming?