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Fall of Big Brokerage Is a Cautionary Tale for Asia

Was a high-flying Hong Kong firm an innocent victim or an imprudent investor?

When Hong Kong-based Peregrine Investment Holdings, one of Asia's largest independent investment banks, was forced to close its doors Jan. 12, it blamed its demise on the Asian financial crisis. But many market watchers say Peregrine also didn't take enough precautions, and they warn that other companies doing business in Asia haven't been much more careful.

Amid the hubbub of Hong Kong's return to China last July, Hong Kong's stock market was flying high and so was Peregrine.

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Big international investors were practically tripping over each other to invest in companies like Peregrine. It was one of the biggest sponsors of "red chip" companies, so named because of their ties with China.

Peregrine wasn't bullish just on China. With offices in every major East Asian capital (as well as some outposts like North Korea), it was an active player throughout the region, specializing in helping small companies raise money in the markets.

For example, it lent $260 million to an Indonesian taxi firm, Steady Safe, which had dreams of becoming a transportation conglomerate.

But then the Asian currency crisis struck. Many Indonesians lost confidence in their currency, the rupiah, and began to switch their money into hard currencies. At the time of Hong Kong's handover to China last July, 2,400 rupiah purchased a dollar. Before a panic set in at the beginning of 1998, the rupiah was trading at 5,000. Then in a matter of days, capital flight left the rupiah at 11,000 to the dollar.

This massive depreciation made it almost impossible for companies like Steady Safe, whose earnings are in local currency, to repay their debts in dollars.

"What happened was really a complete meltdown in [Indonesia]," Peregrine chairman Philip Tose said Jan. 13. "Nobody in his right mind would have even factored in 5,000 [rupiah to the dollar] in his calculations."

But not everyone agrees.

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"It's hard to believe that a bank could rise to prominence as quickly as it did, only to fold after six months of bear market, unless they basically had no internal risk control going on," says an analyst with a New York-based investment bank.

While the complete collapse of the Indonesian currency surprised just about everyone, Peregrine's critics say it fell into an all-too-common trap - it was too cheap to take precautions. "They got lax in oversight," says Marshall Mays, chief strategist at Nikko Research Center here. Peregrine could have purchased US dollars in the forwards market. This is a common practice used by companies to reduce risk. But many firms, Peregrine included, aren't willing to spend the money needed for this sort of hedging, Mr. Mays says.

While analysts say that Peregrine was a bit more of a cowboy when it came to investing in high-risk, high-yield projects, they say there's a good chance other brokerages might also go belly up. At least three others are believed to be in serious financial straits, according to market sources.

One problem at many Asian investment houses is that research teams aren't independent, and at times may not feel free to give opinions that run contrary to their bosses' views.

Foreign investors, meanwhile, fearing that other brokerages could fold, sold off shares across Asia Jan 13.

As Peregrine liquidates assets, it will be forced to sell off its share holdings, and analysts say this will drive shares even lower.

Ripples from Peregrine's liquidation will be felt far outside Asia. It now owes even larger banks an estimated $1 billion. "Virtually every major bank had extended some level of credit to Peregrine," says a Peregrine employee.

The biggest creditor is thought to be First Chicago, which reportedly lent it $100 million. Others include Citibank, DeutscheBank, Hongkong Bank, Standard Chartered, and Socit Genrale. These financial institutions will have to wait in line to try to get their money back.

"Heads are definitely going to roll at First Chicago," says one analyst, adding that for a bank that doesn't do much business in Asia, its exposure to Peregrine was unusually high. "Citibank will be lucky to see 5 cents on the dollar on the deal," Mays adds.

China, meanwhile, is anxiously watching Hong Kong's financial difficulties. Publicly, it has praised Hong Kong Chief Executive Tung Chee Hwa for his handling of the crisis and downplayed the recent volatility.

But privately, Chinese officials have to be very concerned. Mainland stock markets are following Hong Kong's lead and have taken a sharp turn south. The crisis will make it difficult for China to raise the capital it needs to reform its own ailing state-run industries.

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