Cablegate: Skittish Depositors Line Up Outside Bank of East Asia

VZCZCXRO0407
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #1776/01 2681122
ZNR UUUUU ZZH
R 241122Z SEP 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 5870
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 001776

SIPDIS

STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: SKITTISH DEPOSITORS LINE UP OUTSIDE BANK OF EAST ASIA
BRANCHES

REF: A. HONG KONG 1737; B. HONG KONG 1762

1. Summary: A rumor from undetermined sources spread throughout Hong
Kong on September 24 that two local retail banks have "excessive
exposures" to Lehman Brothers-backed structured finance products.
The rumor, which named only the Bank of East Asia (BEA), resulted in
hundreds of local depositors lining up to withdraw their funds from
BEA throughout the afternoon at BEA branches across the city. These
latest difficulties for BEA followed the bank's disclosure on
September 18 that its earnings required restatement, due to
"unauthorized manipulation" of its credit derivatives portfolio (ref
A). Senior HKG and BEA officials strongly denounced the rumors, and
declared the bank's asset base and liquidity position fundamentally
sound. Hong Kong Monetary Authority (HKMA) Chief Executive Joseph
Yam promised his organization's "full support" for BEA. Meanwhile,
Nomura International stated it will not assume the liabilities
related to structured finance products arranged or sold by Lehman
Brothers entities in Hong Kong; these include the highly
controversial Lehman-arranged "minibonds" to be liquidated as part
of Lehman's bankruptcy (ref B). Disgruntled investor
representatives met with HKMA officials and delivered formal
complaints lodged by 660 individual minibond investors. End
summary.

Background on BEA, Local Deposit Insurance Program
--------------------------------------------- -----

2. As of June 30, 2008, BEA had total assets of USD 51 billion (HKD
397 billion), with capital levels in excess of international
standards. BEA's self-described exposure to Lehman Brothers and AIG
totals USD 54 million (HKD 423 million) and USD 6.4 million (HKD 50
million), respectively. If BEA's statements are true, loss reserves
related to those exposure amounts would be material -- but not
dangerous -- for the bank to absorb. In addition, Hong Kong's
depository institutions such as BEA remain somewhat shielded from
customer panic by Hong Kong's deposit insurance program administered
by the HKG. Similar in form and purpose to the Federal Deposit
Insurance Corporation (FDIC) in the United States, Hong Kong's
retail bank insurance program protects an individual's deposits,
albeit up to only USD 12.8 thousand (HKD 100 thousand). The program
was established after the Asian financial crisis of 1997-98. Since
inception, it has not been obligated to reimburse any depositors of
a failed institution.

Chronology of a Mini-Run
------------------------

3. BEA branches on Hong Kong Island and in Kowloon faced an
increasing volume of depositor withdrawals on September 24, as
rumors intensified about the bank's financial health. Lines soon
formed on the streets outside the branches, despite a heavy local
rainstorm. Local staff of the Consulate General confirmed that the
police showed up at several BEA branches to ensure maintenance of
order, although the queued depositors appeared unagitated.

4. In response to local depositors' reactions to the market rumors,
the HKMA issued a statement in the early afternoon. The HKMA said,
"The rumors about Bank of East Asia's financial situation are
groundless. The Hong Kong banking system is safe, healthy and in
good operating condition. The local banks have sufficient capital
and liquidity, and the quality of their assets is good." The office
of the Financial Secretary also issued a statement at 1500 HRS local
time, stating that the Hong Kong banking system "is stable and
healthy, with sufficient capital." The statement also described the
BEA rumors as "groundless."

5. At 1530 HRS local time, Joseph Pang, Bank of East Asia's Deputy
Chief Executive, held a press conference and reassured the public
that BEA had "no troubles." He said BEA would allow customers to
withdraw their time deposits in advance of maturity, if they
desired. Pang said all branches of Bank of East Asia extended their
working hours by half an hour on September 24, in order to "meet the
demands of customers."

6. In the HKG's latest response to the situation, HKMA Chief
Executive Joseph Yam held a press conference at 1630 HRS local time.
Yam told reporters that BEA has no liquidity problem and has only
"limited" exposure to Lehman and AIG. He said the rumors "would
sabotage confidence," and he called upon the people of Hong Kong to
remain calm. He said, "The equity ratio of BEA is over 14 percent,
compared with the minimum requirement of 8 percent. BEA's liquidity
ratio is about 40 percent, greatly surpassing the minimum
requirement of 25 percent. Both BEA's asset quality and operation
are fine." Yam said he the HKMA would fully support BEA, including
provision of liquidity to the bank, if necessary.

HONG KONG 00001776 002 OF 002

Nomura Rejects Support for Lehman-Issued "Minibonds"
--------------------------------------------- -------

7. As purchaser of various Lehman Brothers assets and operations in
Hong Kong, Nomura International told Apple Daily newspaper on
September 24 that it will not assume Lehman's liabilities on
structured finance products sold or arranged by Lehman in Hong Kong.
Nomura explicitly mentioned it will assume no obligations related
to the approximately USD 1.6 billion of Lehman-arranged "minibonds"
sold to retail investors here.

Minibond Complaints Delivered to HKMA
-------------------------------------

8. A newly-elected Legco member from the Democratic Party (DP), Kam
Nai-wai, joined 50 Lehman minibond holders in a September 23 meeting
with HKMA officials. The disgruntled investors handed over
documents detailing 660 complaint cases involving HKD 686 million of
Lehman-arranged minibonds. A spokesman for Hong Kong's financial
secretary told Apple Daily that the HKG was still reviewing the
applicable regulatory mechanisms governing the packaging and sale of
the minibonds. The spokesman cautioned that this review process
"would not help the minibond investors for the time being." These
latest steps followed a DP-organized gathering on September 22 of
800 irate investors in Lehman-arranged minibonds.

DONOVAN

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