Updates On Credit Situation

The ECB has worked much harder than the Fed over the last few days to neutralise the tightening situation. Last Thursday the ECB injected 94.8 billion euros, and on Friday the ECB topped it up with another 61 billion euros. Not satisfied, the ECB injected another 47.67 billion euros. The strong persistent stance by the ECB showed speculators that the ECB is not to be messed with. The aggressive and compounding action by the ECB probably drove away traders and vultures trying to feed on the weak.

Other central banks chipped in by injecting some liquidity, just to show some solidarity. BOJ injected a token 600 billion yen (US$5 billion) while the Reserve Bank of Australia pumped in A$1.52 billion. The Fed put in another US$2 billion into their financial system. The amount shows that the US side is not showing much vulnerability. The rest of Asia's central banks have made statements that liquidity is ample but will be ready to act if anyone tries to mess with the system. Financial institutions in Asia, excluding Japan, have at least US$258 billion worth of bonds outstanding as at the end of March, according to the Bank for International Settlements. By comparison, institutions in the United States have US$4.12 trillion in outstanding debt. The credit tightening issue is not affecting Asia by and large, but still have to wait for the typhoon to pass through the system.

Even when you are Goldman Sachs, you are not invincible with the best financial brains money can buy. Last week Goldman shares were sold down aggressively as investors worried that market turmoil had generated significant losses at two Goldman-managed hedge funds: the flagship US$8 billion Global Alpha and North American Equity Opportunities. Goldman Sachs executives said risk and leverage in those funds had also been reduced. Global Alpha has fallen 27 percent this year, with half of that decline coming last week. Yesterday, AIG's Greenberg together with Goldman Sachs and other investors will pump US$3 billion into Goldman Sach's Global Equity Opportunities fund, thus becoming the third Goldman Sachs hedge fund to be battered. However, the swift response and injection of funds probably hinted that problems are under controlled. Have to clarify that the injection of funds is not a rescue but a recapitalisation or reinvestment by investors.

What's happening now? While some hedge funds have put their "no redemptions" clause into action, most are deleveraging, hence the volatility due to the unwinding process. Many hedge funds may be down 10%-30% ytd but the fear in redemptions will cause them to deleverage from say 2x-4x back to 1x just to cash up for future redemptions. The other type of unwinding will be the yen carry trade, hence the intermittent selling in Asia's most popular markets have been more severe than most: e.g. Singapore, Malaysia and Hong Kong; needless to say the less popular markets to foreign funds have seen lesser volatility, such as Japan and Thailand. To stress the point further, why has Shanghai been able to brush aside the subprime worries - a) little or no yen carry trade invested in China stock hence no unwinding; b) little access for foreign hedge funds or even mutual funds to direct Chinese shares (with a few exceptions).