Who will be the next victims of the subprime crisis?

“When the US sneezes, Asia catches cold,” traders say.

But what Asia got last week was worse than just colds following the turbulence in the US financial markets that left two Wall Street icons in the throes of death and one American insurance giant gasping for breath, all casualties in a financial crisis that grew out of troubles in the US subprime, or higher-risk, mortgage sector last year.

The collapse of investment giants Merrill Lynch and Lehman Brothers, which survived the Great Depression, roiled markets worldwide and had analysts wondering whether they would be the last of the dominoes to fall in the continuing subprime saga.

Despite the US government’s rescue of Bear Stearns in March, the financial storm whipped up by the subprime crisis seemed to have gathered pace on Wall Street and is unlikely to stop at the doors of American International Group.

The latest failures have prompted the US government to come up with the biggest rescue package in history—a US$700 billion fund—to buy the mountain of ‘toxic’ debts which have clogged the US financial system and squeezed credit dry.

But the fund, dubbed as the ‘mother of all bailouts’ has encountered stiff opposition from American taxpayers and even from market players who responded by dumping stocks and the US dollar.

US President George Bush, who announced the multibillion dollar rescue fund, has made it clear that the fund is critical and not doing so could result in dire consequences for the US and global financial system.

But a Singapore sovereign wealth fund believes the worst of the US financial crisis may not be over even with the $700 billion bailout.

Government of Singapore Investment Corporation deputy chairman and executive director Tony Tan said the rescue package should stabilise the markets to some extent.

“But we should not assume the worst is over. Financial markets and the economic situation have deteriorated significantly in the last five months,” Tan said.

Billionaire New York Mayor Michael Bloomberg warns that the “next wave” of financial crisis may come from overseas if foreign entities stop buying US debt.

“It may very well be that the next wave is going to come back and bite us,” he said.

He said that with a crisis of confidence on Wall Street, it’s not clear who would continue buying US debt.

Bloomberg, who made a fortune from a financial information company that bears his name, said the US credit crisis may scare off foreign investors that, until now, have been willing to buy debt that the US uses to maintain a deficit.

Indeed, rattled Asian investors are now pulling out of the US and stashing their money in safe havens such as gold and government bonds.

Asian investors—from central banks to industrial corporations to hedge funds to individuals queueing up to withdraw their money from AIG—are now questioning the wisdom of having invested in the US in the first place.

For years, the asset management operations of US banks have lured many Asian investors into American securities and investment products they do not fully understand such as derivatives.

Finance officials are now struggling to restore confidence in the markets.

Analysts said Asia’s loss of confidence in US financial institutions could have dire consequences for both the US government and American taxpayers.

Even before last week’s financial turmoil, Asian investors were already hesitant to invest in the US. Now, that wariness has grown and is unprecedented in recent memory.

The collapse of the two giant investment banks has stoked panic among investors across Asia who are now rushing to bring their money home.

“I do not believe in US financial institutions anymore; I don’t think any US bank is safe anymore,” said a Hong Kong investor.

But some experts say that with Asia’s phenomenal economic growth, savings are piling up so quickly that those funds will inevitably start flowing again to the US once the crisis is over.

The US has relied heavily on these funds to finance its deficit spending. But these funds are now drying up.

Investors are hoarding their money amid mounting concern more banks will follow Lehman Brothers into bankruptcy.

“There’s a complete lack of faith in the markets,” said Jim O’Neill, chief economist at Goldman Sachs in London. “There’s a lot of cash-hoarding and people losing trust in banks, so the central banks are acting to relieve that. This might not be the last time they have to act.”
Central banks all over the world have so far pumped in $300 billion in a coordinated bid to ease financial markets facing their worst crisis since the 1920s.

The US Federal Reserve’s $85 billion bailout of AIG has provided a temporary lifeline to the ailing global insurance giant which has been teetering on the brink of collapse, weighed down by mortgage-related losses.

While rebuffing beleaguered Lehman Brothers and letting it fall, the US Federal Reserve rushed to save AIG.

With a total of 116,000 employees and 74 million individual policyholders in 130 countries worldwide, the US government feared the collapse of AIG could set off a global financial catastrophe of colossal proportions, given the large counterparty agreements AIG has with other banks and insurers worldwide.

But despite news of AIG’s rescue, thousands of panicky policyholders rushed to AIG offices in Singapore, Hong Kong, South Korea and Taiwan to terminate their insurance policies amid fears AIG would follow Lehman Brothers into bankruptcy.

Only after repeated assurances that there were enough funds to meet their obligations were the clients calmed down.

Some worried AIA policyholders however remained unconvinced.

“Even with the bailout by the US government, everything is still so uncertain,” Singaporean Karen Tan, 45, told The Straits Times.

At least 2,000 policyholders in Singapore surrendered their policies while more than 2,000 people cancelled their insurance policies in Hong Kong.

While it is too early to tell what the fallout will be for AIG in Asia or elsewhere, the initial reaction from consumers is worrisome, analysts said.

For now, AIG’s Asian units have responded by trying to distance themselves from the parent company.

Asia accounts for 40 per cent of AIG’s total revanues for life insurance premiums and retirement services. Japan, where AIG employs 26,000 people, is the insurer’s single largest market outside the US.

The US bailout of AIG has provided its nervous employees temporary relief.

At Merrill Lynch, employees were still edgy and left guessing over their fates after the Wall Street icon was bought by Bank of America for $50 billion.

Employees of Lehman Brothers are already packing their bags across Asia where the mood has turned sombre after the once venerable Wall Street firm failed to clinch a deal with Bank of America and had to declare bankruptcy.

Lehman has 3,000 employees in Asia, excluding the India back office, in 10 offices—roughly 1,300 in Tokyo, 800 in Hong Kong and 250 in Singapore.

One employee of the 158-year-old investment bank said he felt like he had been handed the death penalty.

“Now I know what it feels like to be handed down the death sentence,” said one American employee of Lehman’s Tokyo unit.

But some are still hoping for something positive to come out.

After Barclays Bank agreed to buy Lehman’s US business, there were expectations it would also buy all or part of Lehman’s Asia business.

Lehman, once the fourth largest US investment bank, sold its Asian and Australian operations to Nomura, Japan’s largest brokerage house, for $225 million. Barclays is not a major player in Asia, while Lehman has aggressively built its investment banking presence in the region.

Employees were not the only shell-shocked victims of Lehman’s collapse.

Thousands of investors and ordinary shareholders fear they might not be able to recover their lifetime savings.

In Singapore, DBS Bank warned some investors of a product linked to bankrupt Lehman Brothers that their entire stake may be wiped out.

The product - DBS High Notes 5 - is a 5 1/2 year structured product linked to eight underlying shares, including Goldman Sachs, Morgan Stanley, Merrill Lynch, Macquarie Bank and Lehman.

Customers who invested in Notes 5 now just want their money back. (By NOEL ADLAI O VELASCO In Bangkok/ ANN/ AsiaNews)

With reports from ANN members