Most prominently is China’s Citic Securities decision to call off plans for the planned US$1B cross-investment in Bear Stearns. The deal was originally announced in October of last year as part of a strategic alliance across Asia. In a previous post we talked about how the deal was good for Citic, as it gave them access to a previously great brand name and reach into the rest of Asia, which they didn’t have before. For Bear, it was a chance to crack the Chinese market where Citic is strong.
When the deal was announced in October, Bear’s stock was trading at about $120 which meant the billion dollar deal included an exchange of 2% of Citic and 6% of Bear Stearns ownership. As late as February 27th, 2008, the firms were still in talks and were renegotiating the stakes as both stocks had fallen – Citic by half and Bear by about 40%. The terms on the table would have increased the 2% of Citic and 6% of Bear to 7.5% and 9.9% respectively, which up until a week ago, would have meant that Citic would have been Bear’s largest shareholder.
Citic’s change of heart makes a lot of sense. While the $1B (if it were cash) would have almost just been enough to buy Bear outright at the recent price levels, with the sensitivities of the market in the US and toughening stance towards sovereign wealth funds, it would have been incredibly unlikely that the deal would have been approved. Imagine the ire of stockholders if the company not only sold at the original price of $2/share, but if it was being sold to a Chinese investment house for $2/share.
Bear’s presence in Asia was relatively limited and most Asian financial firms have indicated that they have very little exposure to Bear or indeed the types of credit derivatives that caused its implosion, but the implosion has banks questioning their own risk exposure in case other banks go the same way. This has helped avoid any significant knock-on effects from its collapse and has certainly helped Citic as they would have been stuck with a incredibly bad investment had the deal actually gone through. (Ironically, the delay in the tie-up was predominantly down to regulatory delays on the Chinese side.)
The Asian bank with one of the largest exposures to the credit derivatives market is the Bank of China, who has rapidly unloading these products through write-offs. They started investing in sub-prime in 2002 and grew the investment to over US$10B by 2006. Tuesday the bank said that they had reduced the exposure to just under US$5B and had set aside another US$1.3B to cover potential losses. Bank of China's has weathered the storm far better than others like Japan’s Shinsei Bank Ltd. whose stock has tumbled in the wake of having to sell its headquarters due to its subprime exposure.
While the risks in Asia are limited, CDOs have not only taught Asian banks that that lunch isn’t free, but that risk management practices are key as well as up to date systems that they have in place to manage that complex risk. It’s something that should have been done years ago, and some banks and countries have made good progress, but for many, it’s only the start.