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UP THE VOLGA WITHOUT A CALCULATORAt this point, banks can't figure their exposureThe banks had to say something. As their share prices crumbled in response to Russia's default on Aug. 17, financial institutions around the world have scrambled to come up with numbers for their Russian losses. The revelations are substantial: Barclays Bank PLC, for one, said it took a $418 million charge to cover Russian losses, while Republic New York Corp. said Russia wiped out a full quarter of earnings. But the news isn't nearly as earthshaking as the upheaval in the financial markets seemed to suggest. And that raises a question: Is that all there is? In a word, no. Banks, investment houses, and hedge funds have yet to tell the full story of the emerging-markets rout. They might not even know it. Concerns are growing that Russia could default on hard-currency sovereign debt--$17 billion in debt service falls due next year. There are also rumblings of good news, too, maybe in the form of a better deal for foreign buyers of ruble debt. At this point, banks have surveyed their direct damage in Russia, and although their estimates use different assumptions, their numbers are probably in the ballpark, a senior federal regulator says. But there's still the possibility of a wild card--the blowup of a large leveraged derivative in some out-of-the-way place. Often, ''banks really think they have the full exposure monitored--but don't realize the full exposure until several weeks after the crisis,'' says Leslie Rahl, a partner at Capital Market Risk Advisors, a New York derivatives consultant. ''I think it's going to get worse before it gets better.'' And there are other forms of damage--from other emerging-market assets knocked down by jittery investors or from the closing of currency markets that once promised lucrative trading opportunities. Not only has trade pretty much stopped in the Russian ruble, it's also stopping in the Malaysian ringgit by government order. New losses in Russia are surfacing almost daily--involving everyone from Nomura Securities in Japan to BankAmerica in the U.S. Almost none describe the damage in the same way. Chase Manhattan Corp. reported overall charge-offs of $200 million for July and August. Citicorp reported $200 million in Russia-related losses. Others have released estimates of trading losses--$350 million at Bankers Trust and $150 million net at Salomon Smith Barney, for example. To be fair to the banks, the problems in valuation are staggering. Banks are trying to account for assets that no longer trade, denominated in a currency with no real market value. BT and Republic have marked down their Russian bonds to 15 cents on the dollar. But a federal regulator says other banks are using exchange-rate estimates from 30 cents on the dollar to zero. ''People are using different ruble figures in coming up with the figures they are reporting because there is no ruble,'' says Jake Newman, director at Standard & Poor's Corp. Just as perplexing is how to account for derivatives and hedge fund losses. Capital Market Risk Advisors estimates total Russian derivatives exposure could be $65 billion. Much of the action involved Western investors swapping rubles for dollars to be supplied by Russian banks that are now not paying their debts. UNCLEAR. At least four hedge funds that invested in Russia have failed, says Nicola Meaden, president of TASS, which tracks the industry in London. Charles Gradante, a hedge fund consultant, says several managers removed their currency hedges before the ruble collapsed on the strength of the International Monetary Fund's July loan to Russia. Despite the disclosures this week, the size of many banks' troubles remains unclear. Billions of dollars in Latin American debt on banks' books has tumbled in value, but it is unclear how much of that fall has been reflected in this week's announcements. Says Charles Peabody, banking analyst at Mitchell Securities: ''There are further losses yet to be disclosed.'' Indeed, Russia may be just the tip of the iceberg.
By Gary Silverman in New York, with bureau reports RELATED ITEMS
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Updated Sept. 3, 1998 by bwwebmaster
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