The Domino Effect

Before the turn of the decade, 2 events have already earned their place in the history books: the 9/11 terrorist attacks and the end of an era for investment banking. The current crisis has yet to be played out, and it remains to be seen how this tragedy from the world of high finance impacts the everyman world we live in. The volatility index, the so-called "fear factor", are at levels not seen since World war II. The signs have been there for a while. Dow Jones have been swinging up and down with the regularity of a roller-coaster ride since the start of 2008. As of now, it appears, government attempts to save the world have succeeded in placating the markets quite a bit. The cost of saving these financial institutions have effectively been transferred to the everyman taxpayer. If there ever were a game that goes "heads I win, tails you lose", this is it. The bankers who wrote the CDOs in the subprime boom may have lost their jobs, but they had already made their hay while the sun was still shining, hay that would take the rest of the populace a few lifetimes to make.

Such is the moral quandry facing the Fed. AIG have been described as having "tentacles all over the world". The collapse of AIG would leave gaping holes so large that the world would just implode on its own. With US$1 trillion in counterparty assets, this is no exaggeration. Even Freddie Mac and Fannie Mae have exposures to the tune of some US$8 billion in bonds bought by Bank of China and various other Asian banks. The Fed bailout of these firms, thus guaranteeing the securitised loans, have somewhat sheltered Asia from the financial storm. So far it seems, only Lehman Brothers have filed for the dreaded Chapter 11 bankruptcy. We can only observe with baited breath the fallout following the collapse of the 4th largest investment bank in the world. Not as spectacular as what an AIG collapse would induce --it's more fun reading about the Great Depression than living it--but still worth a look.

List of Counterparties and exposure to Lehman Brothers:

JAPAN

Aozora Bank $463 mln Loan
Mizuho Trust $382 mln "
Shinsei Bank $231 mln "
UFJ Bank $185 mln "
Sumitomo Mitsub Bk $177 mln "
Chuo Mitsui Trust $144 mln "
Shinkin Central $93 mln "
Nippon Life Ins $46 mln "

TAIWAN

Investments

Shin Kong Fin (2888.TW: Quote, Profile, Research, Stock Buzz) $78 mln
Cathay Fin (2882.TW: Quote, Profile, Research, Stock Buzz) $33 mln
Central Reins (2851.TW: Quote, Profile, Research, Stock Buzz) $32 mln
Entie Bank (2849.TW: Quote, Profile, Research, Stock Buzz) $24 mln
Bk of Kaohsiung $18 mln
Polaris Securities $11 mln
SinoPac Fin $2 mln

Bank loans

Hua Nan Fin (2880.TW: Quote, Profile, Research, Stock Buzz) $59 mln
First Financial (2892.TW: Quote, Profile, Research, Stock Buzz) $25 mln
Bank of Taiwan (unlisted) $25 mln
Fubon Fin (2881.TW: Quote, Profile, Research, Stock Buzz) $10 mln

AUSTRALIA

Commonwealth (CBA.AX: Quote, Profile, Research, Stock Buzz) Below $123 mln Range of products
ANZ (ANZ.AX: Quote, Profile, Research, Stock Buzz) $120 mln Mostly to subsidiaries
Westpac (WBC.AX: Quote, Profile, Research, Stock Buzz) Below $8 mln
NAB (NAB.AX: Quote, Profile, Research, Stock Buzz) Below $81 mln

HONG KONG

Citibank (C.N: Quote, Profile, Research, Stock Buzz) HK branch $275 mln Loan

CHINA

Bank of China New York $50 mln Loan

(3988.HK: Quote, Profile, Research, Stock Buzz) (601988.SS: Quote, Profile, Research, Stock Buzz)

SOUTH KOREA

The Bank of Korea said the country's financial institutions had exposure of a combined $1.34 billion to Lehman and Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz) as of Aug 31.

THAILAND

Central bank said Thailand's 14 commercial banks had only $124 mln of direct exposure to Lehman and more than that in foreign exchange contracts. Bangkok Bank BBL.BK said it holds $101 million in senior, unsecured bonds.

SINGAPORE

DBS (DBSM.SI: Quote, Profile, Research, Stock Buzz)^ Insignificant
UOB (UOBH.SI: Quote, Profile, Research, Stock Buzz) Very small
Bank of Nova Scotia(BNS.TO: Quote, Profile, Research, Stock Buzz) $93 mln loan
(Singapore branch)

PHILIPPINES

The Philippines' two biggest banks -- Metropolitan Bank and Trust Co. (MBT.PS: Quote, Profile, Research, Stock Buzz) and Banco de Oro Unibank (BDO.PS: Quote, Profile, Research, Stock Buzz) -- on Tuesday set aside nearly $100 million to cover exposure to Lehman Brothers but the central bank said the total exposure of the local financial sector was small.

What exciting times we live in!