In the space of three days last week the US Federal Reserve had to throw an additional US$200 billion at a tottering US financial system and organize the rescue of the Bear Stearns investment bank. It is a humiliation bigger even than the Bank of England suffered with the bail-out of Northern Rock – and with far bigger international implications.
But there will be plenty of embarrassment in Asia too, particularly for officials from the sovereign wealth funds of China, Singapore and the Gulf who had been such enthusiastic investors in western financial institutions, both before the crisis broke and when riding prematurely to the rescue of balance sheets ravaged by massive loan write-offs.
Asia Sentinel warned three months ago that the sovereign wealth funds had become too easy a touch for US financial giants. Their investments in the likes of Citibank, Morgan Stanley, UBS, Merrill Lynch and Blackstone, intended to gain seats in the sancta sanctorum of western finance, would probably come back to haunt them. And so it transpires as prices of the whole financial sector continue to plummet.
Financial crises are always worse than their players and the responsible central banks like to believe. Whether from refusal to face facts, or deliberate distortion of the facts, new investors get sucked in long before the losses have peaked or the full damage is known. Asian investors should have known better, remembering the sequence of events in the Thai banking sector in 1997-99, or in Japan in the early 1990s.
Over the past three months the prices of all these companies have fallen steeply and may yet have much further to fall. For big names such as Merrill Lynch, Citi, Blackstone and UBS the fall has been between 30% and 45% in this period alone. Every major financial crisis claims at least one major institution and lots of lesser ones. Those that survive will have to draw in their horns. Some may be on official life-support for months if not years.
The foreign funds were flattered that the US (and even the Swiss) needed them and thought that helping the west would soften burgeoning opposition to sovereign wealth funds. But decisions made on the basis of politics or emotion seldom make the best commercial sense. Perhaps they have learned their lesson and can leave rescuing US financial institutions to those who created the mess – primarily the Federal Reserve through neglect – and instead buy some real US assets, companies in information technology, engineering and retailing that have global markets and unsurpassed know-how.
But embarrassment over the premature bailout efforts may not be the only reason for Asian wealth funds to be feeling miserable. The unanswered question now is how big their losses will be from investing in the myriad opaque structured-investment vehicles, debt funds and leveraged buyout funds. It could well be huge. Last month, the Standard Chartered-sponsored Whistlejacket went down with losses so severe that the bank refused (unlike HSBC and Citi) to bring the fund onto its own books and take a direct hit. Stanchart weaseled out.
This month it was the turn of Carlyle Capital, a highly leveraged mortgage debt fund run by the secretive, private Carlyle Group. That Carlyle, with its huge array of political connections, and with Abu Dhabi owning 7.5 percent, could not arrange the fund’s rescue said a lot about how (with good reason) few in the financial sector trust each other any more. They would rather wait for another fly-past by “Helicopter Ben” Bernanke, the chairman of the US Federal Reserve, to deliver more cheap Treasury credit in return for dodgy mortgage-backed paper.
It is inevitable that much of the investment, both debt and equity, in vehicles like Carlyle Capital and Whistlejacket came from big name Asian investors – they were the ones with cash to be burn – and, it turns out, be burned. More will be hit by the demise of other Special Purpose Vehicles that invested in high-sounding but low-grade paper. Hedge funds are disappearing by the day, some such as Drake in the US and Peloton in the UK getting publicity, other disappearing silently, either being liquidated or halting withdrawals.
Of Asian investing funds, Temasek is a particularly interesting case. Under Chief Executive Ho Ching, the wife of Prime Minister Lee Hsien Loong, it had become quite adventurous under the influence of bullish Masters of the Universe from Wall Street and Zurich (UBS was always a favorite in Singapore). In the face of abundant global liquidity, Temasek was in no hurry last year to rein in the growth of its balance sheet, using cash to chase not only costly banking acquisitions but betting heavily on investments in private equity and buyout firms. In 2006, according to its annual report, it set up a special purpose vehicle named Astrea to hold investments in no less than 45 private equity and buyout funds. Astrea then raised US$810 million in securitized debt. The names and balance sheets of those funds would make interesting reading.
Temasek is at least partially transparent. Most of the other big Asian funds are not. So we may never know who lost what. But given the size of Asian dollar holdings and the sway that the US investment banks that distributed the paper have throughout the region (with the partial exception of Japan), the losses from the US financial debacle could eventually total $1 trillion (as now seems very possible). Asia’s share is likely to be at least 25 percent.
On top of that they will have to bear the brunt of the decline of the dollar boosted by Bernanke’s decision to attempt to cure the disease brought on by excess credit by further cheapening the currency. Asian creditors must now live with the likelihood that the legacy of former Fed Chairman Alan Greenspan and Bernanke will do even more lasting damage to the power and reputation of the US than George W Bush’s Iraq war.