Haven't We Met Before? It's Looking a Lot Like the '97-'98 Asian Crisis

Deja Vu All Over Again, Reprise

SAN FRANCISCO -- Yes, indeed, it's beginning to look a lot like 1997-98 again, as I suggested Monday.

As was the case through many sessions in that era, traders arrived at work today to find equity futures down sharply amid rampant rumors of various financial institutions in dire straights. Stocks opened this morning to reflect the fear and consternation about developments abroad, then appeared to stabilize but plummeted again as the rumors continued to swirl and the anxiety level increased. Such a pattern was evident many times during the Asian financial crisis of 1997-1998.

Major averages were off session lows at day's end, but the Dow Jones Industrial Average was down 3.1% to 9973.46, its first close below 10,000 since October. The S&P 500 shed 2.6% and the Nasdaq Composite lost another 2.1%.

The rumor du jour today featured speculation that a distressed Japanese financial institution sought to unload a large basket -- $2 billion worth -- of U.S. equities via a European counterparty, with Salomon Smith Barney mentioned as a likely candidate.

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A Salomon spokesman in London declined to comment. But various sources here said there is at least a logical connection to the scuttlebutt, as opposed to many others.

First, nobody denies that many Japanese financial institutions are struggling. Today, credit-rating agency Fitch placed ratings of 19 Japanese banks on watch with negative implications, including the massive Fuji Bank and Sanwa Bank. Given Japanese banks will have to "mark to market" their holdings at the March 31 fiscal year-end, it's not surprising that one or more of them might seek to raise cash by selling their potentially still profitable U.S. equities to offset Japanese holdings that are likely deep underwater. Japan's Nikkei 225 managed to rise 0.2% today but is still trading near 16-year (yes, year) lows.

Second, the Salomon connection comes via its 49% ownership of Nikko Salomon Smith Barney, a firm established in early 1999 by combining the core operations of Nikko Securities with Salomon's Tokyo operations.

Salomon Smith Barney certainly isn't the only U.S.-based financial institution with deep connections in Japan. For example, Merrill Lynch (MER Quote) acquired Yamaichi Securities in 1998. In part reflecting concern about their exposure to Japanese financial institutions -- as well as German banks after Goldman Sachs cut ratings on a host of names there -- shares of major U.S. banks and brokers were clobbered today. The Philadelphia Stock Exchange/KBW Bank Index fell 5.4% while the American Stock Exchange Broker/Dealer Index lost 3.9%.

Still, most of the chatter today was about Salomon, and its parent Citigroup (C Quote) fell nearly 7%.

"Solly has the will and the capital to do a trade like that" being rumored, said one West Coast trader, who claimed no specific knowledge if it did indeed occur. The trader, who requested anonymity, said it was unlikely Salomon would have placed the trade in the hours before the U.S. market opened "because it screws your own trade up" by affecting the futures. But the tumbling futures might have reflected a situation where "they tried to shop it to the wrong people and word of the trade got out," he said.

Whatever the cause, the action this morning was unnerving to anyone hoping yesterday's bounce would prove more than a one-day reprieve.

"I think people felt OK because the market closed at its high yesterday and felt like maybe the momentum would be on the upside," said Bob Basel, director of listed trading at Salomon Smith Barney in New York. "People were definitely taken by surprise this morning when they came in and saw the futures down so much."

Basel declined to comment on the rumors regarding Salomon's European trading.

Something Old, Something New

Meanwhile, other traders said the rumors about financial institutions being in distress are commonplace in times of market upheaval, and that concerns about Japanese banks are particularly old news. One trader noted the action in European markets today -- where bourses closed off their early lows but London's FT-SE 100 fell 1.7%, Germany's DAX lost 2.8%, and the Paris' CAC fell 1.4% -- was what "should" have happened Tuesday after Wall Street's rout Monday.

"Our feeling is it's just a market of fear," said Ned Collins, executive vice president of U.S. stocks at Daiwa Securities America, which is a unit of Sumitomo Bank & Trust. (I point that out because Daiwa Bank, which Collins' firm has no relationship with, was one of the institutions rumored to be in distress.) "So many people are afraid, but these rumors [about Japanese banks] have been around for 12 years. I don't think they're rumors. It's a fact banks are in trouble there."

So old is that story that Collins did not think the developments overseas had "any real bearing" on U.S. markets today.

"We're in a situation where the fear is out there -- there's margin selling -- and there doesn't seem to be anything that's going to make people go out and buy stocks," he said. "Until there's something more substantial, I don't see what's going to cause the market to turn around."

Even the possibility of aggressive action by the Federal Reserve when it meets next Tuesday isn't likely to propel a sustained rally, he said, suggesting it's going to take a real improvement in earnings to reinvigorate buyers.

Regardless, the fed funds futures contract priced in a higher likelihood of a 75 basis-point ease by the Fed on Tuesday, and there's even talk of a possible 100 basis-point move. Reflecting the potential for a Fed ease -- as well as the carnage in equities -- U.S. Treasuries rallied sharply today.

Which brings us back to the point first made here Friday, that we could soon witness a coordinated easing effort by central banks around the world to alleviate what is looking more and more like Contagion II: The Wrath of Contagion. But unlike the original, ground zero is here, as it's the slowing U.S. economy that's causing havoc around the globe. That being the case, don't expect the same "happy" ending this time around.

Parting Thoughts

I'm off for a few days of "R&R" in the Big Easy and plan to be back on Monday. Before I go, a few thoughts, for whatever they're worth: I do believe monetary policy has the ability to reinvigorate the market and the economy. That is, I do not think we will end up like Japan, despite the wilting consumer confidence and the negative wealth effect caused by each down day on Wall Street.

That said, the old Wall Street saw about "don't try to catch a falling knife" seems particularly prescient in these increasingly troubling times.