China's brief infatuation with Wall Street is well and truly over. At the weekend, Citic Securities said it 'cannot guarantee' it will finalise its October deal to invest US$1 billion in United States investment bank Bear Stearns. 'We haven't signed any formal agreement and we haven't paid any money,' the mainland brokerage said in a statement.
Citic's managers must be mightily relieved that they had not yet handed over any cash. When they first agreed to invest in Bear Stearns back in October, US$1 billion would have bought them a 6 per cent stake in the Wall Street firm. After last week's crisis of confidence and the collapse of Bear Stearns' share price, it could have bought a 25 per cent stake.
When they agreed to buy into Bear Stearns, Citic's bosses thought they were getting a bargain. Then, the US firm's shares were priced at about US$120, down 30 per cent from their peak in January last year after two of its hedge funds ran into trouble (see chart).
But the balance sheet of the investment bank itself was sound and its capital position strong, executives insisted. Even better, the tie-up with Citic offered Bear Stearns a privileged entry into China's lucrative capital markets, promising to boost future earnings from Asia. Citic, meanwhile, would benefit from access to Bear Stearns' expertise in risk management and structuring complex financial instruments like credit derivatives.
Today, that much-vaunted expertise is looking pretty thin. In the last five months, the fallout from the subprime crisis has turned out to be far worse than anyone had imagined. Hopes that banks' losses would be limited to about US$100 billion have evaporated. So far, banks have written off almost twice that, and analysts warn that financial losses could ultimately exceed US$1 trillion.
Bear Stearns has been on the sharp end of the deterioration. Last week, confidence in the investment bank's creditworthiness as a counterparty crumbled entirely, forcing the US Federal Reserve and JP Morgan to throw it an emergency lifeline to prevent a meltdown of the entire financial system.