Funding fears

Chris Jeffery

Asian institutions appear to have had relatively low exposure to the latest dramatic development on Wall Street - the blow-up of investments managed by Bernard Madoff, now indicted for allegedly running a $50 billion ponzi scheme, which pays old investors with money raised from new ones.

There are exceptions. HSBC says it has exposures of up to $1 billion to clients that invested in Madoff funds, and Nomura unveiled credit and derivatives trading losses from Madoff exposures of Yen32.3 billion ($360 million) for the third quarter. Great Eastern, the insurance arm of Singapore's OCBC Bank, meanwhile, said it had an indirect exposure of about S$64 million ($44 million) to Madoff funds.

By this reckoning, Asian institutions look set to be able to comfortably manage their exposures to Madoff, as they did with their positions with Lehman Brothers. Again, the biggest negative affect looks likely to centre on the distribution of now-worthless investments to investors. For example, Lion Fairfield Capital Management, a joint venture between Great Eastern's fund management arm and Fairfield Greenwich, sold $45 million worth of funds with exposure to Madoff.

The scandal will fuel controversy as to the extent institutions choose, or - with the possible introduction of new rules - are permitted, to expose themselves and their clients to investments that lack transparency. Which may, in turn, put further pressure on the beleaguered hedge fund industry, as well as the structured product business.

But the ability for Asian institutions to continue to ride out the financial crisis relatively unscathed is still very much in the balance. The biggest immediate challenge is linked with the ability of companies to refinance their short- and medium-term debt. With offshore capital markets remaining closed to all but the most highly rated corporates and foreign banks unwilling - or unable - to lend, the weight of the refinancing burden looks set to fall on local banks.

Some government agencies are moving to head off problems in this area. The Bank of Japan (BoJ), for example, plans to buy up to Yen3 trillion of outstanding commercial paper (CP) to help ease the funding pressure suffered by Japanese corporates. Total outstanding CP underwritten by banks in Japan fell 15% year-on-year to Yen13.5 trillion in the last quarter of 2008, according to the BoJ.

This and other similar moves to bolster liquidity should help ease the pressure on banks. But more will be needed throughout the region, as domestic financial institutions look set to take further defensive measures by serving only their existing clients. Corporates beware.

Christopher Jeffery.

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