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Published on March 18, 2008

After the bail-out of Bear Stearns, is the worst over for Wall Street investment banks? What will be its impact on Thailand?

"Directly, Thailand is not going to be affected by the collapse of Bear. Thai financial institutions have no direct link to the US institution," said Dr Supavud Saicheua, managing director of Phatra Securities.

"Moreover, Bear's portfolio, about 45 per cent of which is comprised of mortgage-backed securities, is exposed largely to the US market.

"Indirectly, we have to accept the prospect that exports to the US might slow. We have first to see how Europe or Japan are affected by the fallout before we get a better idea of what will happen here.

"To offset the coming slow-down, Thailand will need to make sure it can adequately

stimulate its domestic economy to maintain [strong] growth."

The worst is probably far from over on Wall Street, local observers say.

Investors are also watching financial results to be posted by Goldman Sachs and Lehman Brothers today. Morgan Stanley will post its results tomorrow.

But JP Morgan's takeover of Bear for just $2 (Bt63) a share, or $236.2 million, is a spectacular move indeed.

Bear has been facing a financial run by institutional investors and creditors who have panicked over its large exposure to delinquent sub-prime mortgages.

The US Treasury and Federal Reserve stepped in at the weekend to bail out Bear.

The Fed will guarantee $30 billion of Bear's illiquid assets, making JP Morgan's takeover of Bear risk-free.

The financial crisis is unravelling because nobody knows where the bottom is.

The prices of US homes have been falling by 7-8 per cent. Many say prices need to drop further by 15-20 per cent, perhaps more.

As a result, it is impossible to correctly value mortgage-backed securities or any derivatives linked to the US housing market, which is worth about $13 trillion.

Virtually all financial instruments linked to the underlying US housing market are plummeting.

A conservative estimate puts the mortgage-backed securities linked to home loans at $30trillion to $40 trillion, not to mention other derivatives valued at several trillion dollars.

Dr Kobsak Pootrakul, executive director at SET Research Institute, said this marks the first time in 80 years that the Federal Reserve had injected public money to bail out a financial institution.

"The US is not just facing a recession problem but a [full-blown] financial crisis. The Fed's intervention reflects a growing concern that the damage at Bear might spill over to other financial assets in the US," he said.

Investment in emerging markets might be redeemed to meet the financial needs in the US market. In this respect, Kobsak said countries such as China, Vietnam, India and Indonesia were more vulnerable to capital outflow than Thailand, which has received much less inflow in the past few years. Besides, the Thai corporate sector has repaid most of its debt, bringing its debt to equity ratio to 1:1.

Bank of Thailand deputy governor Atchana Waiquamdee said the US authorities aimed to halt the vicious cycle from the Bear fallout rather than worrying about the moral hazard issue, which argues against using public money to rescue reckless financial institutions.

"I think moral hazard is not a priority issue [for the authorities]. The key objective is to halt a snowball effect," said the deputy governor.

Mortgage-backed securities and other derivative holders have witnessed wider spreads because trading has been frozen.

At the same time, investors holding other assets must sell their assets because of mark-to-market losses.

The sub-prime fiasco teaches us that issuers should identify clearly which parts of the assets are backed and which are not, Atchana added.

Money Reporters

The Nation