The US writer Hunter S Thompson once wrote of the “high and beautiful wave” of optimism building in the 1960s on the west coast of the US and that some years later, standing on a hill in Las Vegas and with “the right kind of eyes”, it was almost possible “to see the high-water mark – that place where the wave finally broke and rolled back”.
An appropriately placed observer in Hong Kong or Tokyo might now see a similar phenomenon at work in Asia, for the wave of enthusiasm about the continent that has been building in the past few years in the financial community seems now to be breaking.
Much of the retreat westwards is driven by necessity. AIG, which is auctioning two Japanese life insurance units; Citi, which is selling its recently purchased Japanese retail brokerage Nikko Cordial; and RBS, which has hired Morgan Stanley to help it dispose of Asian assets acquired from ABN Amro, can reasonably be said to be in urgent need of the capital that these cutbacks will unlock.
Several of the world’s largest private equity firms are scaling back in the region as well: Cerberus has been reported to be closing down its Hong Kong office, and 3i has announced that it will close its Hong Kong and Shanghai branches to concentrate on Beijing.
The firms making these cutbacks might argue, as Cerberus has, that they are the best alignment of resources to opportunities in the present market. Private equity funds such as Cerberus and 3i can probably move their teams of dealmakers to more enticing regional hubs more deftly and cheaply than banks, which have more infrastructure to shift and by the nature of their business perhaps greater reputational risk from being seen to waver on their commitment to the region.
Shareholders are entitled to ask if decisions to so swiftly reverse recent acquisitions in Asia are a sign of a quick and logical response to the crisis. These pre-crisis purchases in Asia, often trumpeted by the banks as proof of their commitment to the region, were not cheap: RBS paid more than £10 billion for various ABN Amro assets, including a brokerage in India and banking capabilities in Hong Kong and Indonesia, while Nikko Cordial cost Citi more than $10 billion. Neither of them is likely to recoup its costs, let alone make a profit.
There is nothing wrong with bank executives reversing the follies of their predecessors and retreating from markets the firm was never meant to compete in. But when markets recover, and Asia is once again universally regarded as a financial hotspot where banks need to be, shareholders in the banks surfing into the region again will be justified in asking: ‘How much are we spending? And do we mean it this time?’
