GaWC Research Bulletin 18

The financial crisis in East Asia, which was triggered by the devaluation of the Thai baht in July 1997, had a major impact upon the activities of banks, and in particular investment banks, in Pacific Asia. In the immediate aftermath of the crisis, Standard & Poor's - the United States-based credit-rating agency - estimated that European banks had losses of up to US$200bn on their lending to Asia (Graham, 1998). As a response to specific problems with banks and the general downturn in financial activity, numerous European and North American banks quickly began to downsize, often closing parts of their branch office networks and investment banking activities. Moreover, as turnover began to shrink in the region's financial markets (for example equity and securities trading) and other investment banking activities (for example project finance), job losses became inevitable. Job losses were not just restricted to the giant European, Japanese, and North American banks. The financial crisis also had a severe effect upon the activities of Asian banks, particularly in Thailand and Indonesia, where over 100 banks have been closed or suspended since 1997 (The Economist, 1998a; Euromoney, 1997a; World Bank, 1998).

The major aims of this paper are twofold. First, to discuss how the crisis effected the architecture of the global financial system, with particular reference to investment banking in the region. Second, to analyze how banks, especially European and North American global investment banks (and to a lesser extent Asian banks), responded organizationally to the financial crisis. The plight of banks has so far received little attention in the literature (see Chang et al., 1998; Freeman; Haggard and MacIntyre, 1998; Henderson, 1998b; McLeod and Garnaut, 1998; Miller and Luangaram, 1998; Wade, 1998a and Wade, 1998b). An examination of the organizational responses of European and North American banks to the crisis provides an opportunity to investigate how transnational banks employ different corporate strategies to check major destablilizing events in the international finance system. Accordingly, the paper is organised into three substantive parts. First, we offer a new theoretical appraisal of the East Asian financial crisis, emphasising the ways in which the political economy of the crisis unfolded through a particular spatialization of the financial architecture of the world economy. Second, we discuss the effects of the crisis on both the global financial system and international banking within the region. Third, we analyze how European, North American, and Asian investment banks managed the ensuing turmoil in East Asian markets, through office closure and redundancy programmes. In addition, we also consider the plight of Asian banks, and analyze the collapse of the Hong Kong-based Peregrine Investment Bank. Finally, we conclude the paper by considering the fallout of the Asian crisis for Asian, European, and North American investment banks, and the global financial system itself.

THE EAST ASIAN FINANCIAL CRISIS IN ITS MANIFOLD CONTEXT

While the early to mid-1990s saw a plethora of books expounding the fundamental Lessons of East Asia (Leipziger and Thomas, 1993), proclaiming The East Asian Miracle (World Bank, 1993), announcing Asia Rising (Rohwer, 1995), and preparing for The Pacific Century to come (Borthwick, 1992), the late 1990s have seen innumerable books ringing the region's death knell. East Asia is now routinely figured as Under Siege (Gill, 1998), In Crisis (Corden, 1999; Delhaise, 1998; Pemple, 1999), Falling (Henderson, 1998a), Downsizing (Godement, 1999), and experiencing Meltdown (Flynn, 1999; Gough, 1998). Worse still, there is an Asian Contagion (Jackson, 1999) through which The Asian Crisis Turns Global (Montes and Popov, 1999). For many, the financial crisis that broke in Thailand in the summer of 1997, and came to embroil Indonesia, Malaysia, the Philippines, South Korea, Taiwan, and, to a lesser extent, Hong Kong and Singapore, was an irrefutable demonstration of the rupturing of so-many bubble economies, which had become engorged on the permanent outflow of yen from 1995 onwards following the bursting of the Japanese bubble economy.

From Currency Collapse to Financial Crisis

"[T]he sense of crisis in East Asia in the third quarter of 1997 was generated by the successive collapse of several Southeast Asian currencies" (Garnaut, 1999, p. 93). What was so calamitous about these currency collapses was the fact that the "entire game plan for Southeast Asia was founded on stable exchange rates pegged to the US dollar" (Winters, 1999, p. 89). For export-oriented economies, pegging against the US dollar was attractive because in the late 1980s and early 1990s it was weak relative to the Japanese yen and some European currencies. As the US dollar appreciated export competitiveness declined. However, whilst this decline paved the way for the currency and financial crises, it was arguably other factors that proved to be decisive for the crisis to break as it did. According to Hill (1999, p. 8), "the core technical factors explaining the crisis were fixed or quasi-fixed exchange rates, in the context of rapidly rising short-term debt and shaky financial systems. The result of the first factor was that few overseas loans were hedged. Thus, when currencies began to fall sharply, external debt in domestic currency terms rose sharply." Short-term private-sector debt had become a significant problem owing to:

Consequently, many East Asian banks and corporations borrowed US dollars and converted them into domestic currency for investment in a range of activities. Booming property markets saw much of the inflow. Meanwhile, the long-standing growth and profitability of East Asia in particular, and other emerging markets more generally, meant that the region had been hugely attractive to those investment bankers and fund managers who needed to secure high returns against the background of low interest rates in Europe, Japan, and North America. "Banks, non-bank financial intermediaries and corporations borrowed short term in dollar-denominated form (or in yen) and failed to hedge their debts. Steep depreciations then raised their domestic currency foreign liabilities to unsustainable levels, and in effect bankrupted them" (Corden, 1999, p. 32). Their inability to lend fuelled the deflationary pressure. Of particular concern was the difficulty of securing trade finance, a state of affairs which frustrated the translation of currency depreciation into export growth. In short, the crisis in the domestic financial sectors of East Asia was due to immoderate and imprudent lending, mal-investment, recession, a liquidity crunch, and the huge increase in the foreign liabilities of banks, financial intermediaries, and corporates as a result of significant unhedged currency depreciation.

The 'meltdown' of the Thai baht in July 1997 triggered the East Asian currency and financial crises, by the end of which "the de facto pegs were mostly blown apart, and succeeded by floating currencies" (Garnaut, 1999, p. 94). It spread to other East Asian countries in August 1997. Malaysia was very severely affected despite having little foreign debt exposure and a relatively strong financial system. Its banking system was vulnerable because of the large volume of domestic loans and significant exposure to the property market. When the crisis broke in mid-1997, Malaysia had the highest credit build-up in East Asia: the ratio of outstanding credit to its Gross Domestic Product (GDP) was 160% (Athukorala, 1999, p. 32). Between July 1997 and January 1998, the Malaysian ringgit depreciated 50% against the US dollar, and the all ordinaries index of the Kuala Lumpur Stock Exchange (KLSE) lost 65% of its value (almost US$225 billion): the biggest collapse of the worst affected economies. Hong Kong came under considerable pressure in October 1997, while South Korea was hit hard through November and December.

During January 1998, although Indonesia had appeared to be in a better situation than Thailand, it nevertheless experienced major upheaval. At one point the Indonesian rupiah fell to just one-sixth of its pre-crisis rate. The extent of the paralysis in foreign-exchange (FOREX) dealing in the region can be glimpsed by the fact that at the height of the crisis in Indonesia, the rupiah could fall be 10% on a daily trade volume of a mere 50-million US dollars. Indonesia, South Korea, and Thailand were especially vulnerable because of the size of their short-term foreign liabilities relative to their international reserves.¹ In addition, the fact that capital was now flowing out of East Asia made it increasingly difficult for these countries to repay or refinance short-term loans. Neither Malaysia nor the Philippines had the same degree of international short-term borrowings.²

From July 1997 to early 1998, the Philippines, Taiwan, and Singapore encountered difficulties, although they were much less affected than Indonesia, Malaysia, and Thailand. The early impact on the Philippines was slight because it had only recently returned to strong growth, and so capital inflows had been relatively small. It also had stronger and more independent financial regulation as a result of problems experienced in the mid-1980s. By the middle of 1998, further concerns about the Japanese economy sparked another round of difficulties for the East Asian currencies and stock markets, with sustained pressure on the relatively robust centres of Hong Kong, Singapore, and Taiwan. Moreover, despite the widespread collapse of currencies, the region was not able to increase exports significantly to buy itself out of the crisis, not least because "credit for trade became prohibitively expensive so exports collapsed" (Flynn, 1999, p. 15). To compound the difficulties, Japan - which had been repatriating capital to its own troubled banking system in the run up to the crisis - was "not able to play a 'regional locomotive' role through its trade and investment in the region" (Hill, 1999, p. 10).

Understanding the Spatiality of the Crisis

While some writers have presented the East Asian financial crisis as an essentially home-grown affair, for others it demonstrated the destructive force of fickle, panicky, and madcap global capital amid essentially 'sound' economies. Bello (1998, p. 246) cites "the rush of international capital out of the region in 1997" as the trigger for the crisis, "a movement that was more frenzied than its mad rush to get into the area in earlier years." Bello suggests that the movement of global capital accords to the motion of a 'swinging pendulum,' and implicitly likens the world economy to table skittles. Rather than the sedate image of financial markets oscillating around an equilibrium point, so that all exogenous shocks ultimately dissipate, Soros (1998, p. 136) likens them to "a wrecking ball, swinging from country to country and knocking over the weaker ones. It is difficult to escape the conclusion that the international financial system itself constituted the main ingredient in the melt-down process." So, while many ordinarily see the ebb and flow of capital as the rational response to the changing global topography of risk and opportunity, many others view it as a destructive force. It can become destructive either when perverted by: market psychology; moral hazards; or when it is overly concentrated in time and space.

First, both rational and irrational behaviour can render capital a destructive force. Corden (1999, p. 1) takes it as read that the financial crises in the capital and foreign-exchange markets - oddly separated from what he dubs "the real economy" - were due to "a sudden loss of confidence."Winters (1999, p. 89) writes of "a psychology among investors that inflates an economic bubble and then triggers its collapse." And, according to Delhaise (1998, pp. 14,15), unnecessary panic inflicted far more damage in East Asia than the region's ill-management of growth.

Panic is fed by hedge funds, pension funds, mutual funds, and the absence of viable international bankruptcy proceedings. However, it is a moot point whether some actors, such as hedge funds, are reactive in this sense. It may be the case that certain actors are capable of precipitating even engendering a crisis. Indeed, much of the blame for the financial crisis has been set at the door of the hedge funds with their speculative attacks on selected East Asian currencies from the summer of 1996 onwards. Be that as it may, weaknesses and imbalances in many East Asian economies were widely discussed before the crisis although they were not widely acted upon (e.g., Alatas, 1999; Daly and Logan, 1989; Henderson, 1993; Krugman, 1994).

Second, various 'moral hazards' can result in capital becoming a destructive force. Misplaced trust, and implicit and explicit guarantees against potential loses can distort risk-assessment and risk-management, and lead to what would otherwise be construed as reckless behaviour. Examples of this include the conviction that rapid growth would continue, that central banks and governments would honour their pledges on economic policy, and that collateral would be recoverable in cases of default. Similarly, when crises break and central banks start to provide liquidity to support failing banks "the potential for moral hazards becomes monumental" (Cole and Slade, 1999, p. 109). "If many of the claims on those financial institutions are held by foreigners," as they were in the context of the East Asian financial crisis, "the loss of confidence can contribute to an overwhelming foreign exchange crisis that is essentially funded by central bank credit, as demonstrated forcefully in the Indonesian crisis" (Cole and Slade, 1999, p. 109).

Third, regional concentration can lead to capital becoming a destructive force through the creation of overinflated investment bubbles. "The crisis was one of fundamentals. It is a growth crisis" declares Delhaise (1998, p. 1). "At its core were antiquated financial systems" that could not support the growth. "Everything else was panic", an irrational over-reaction when "what was required were some modest reforms in the financial systems." Or again: "The Asian crisis is a crisis of growth. Everything else is ancillary. The currencies and the stock markets collapsed as a result of panic ... These are the symptoms, not the malady itself" (International Monetary Fund, 1999, p. 7). Finally, temporal concentration can have disproportionate effects - such as futures trading and the build up of short-term debt. Harvey (1982) demonstrated "that capitalism can only live on tick, even if the credit mountains that then pile up must finally crash down upon the fragile built environments that take shape in their shadow" (Corbridge et al., 1994, p. 13).

The East Asian financial crisis broke in the currency markets, and with respect to one currency in particular, the Thai baht. It only later became an East Asian crisis and almost, but not quite, an emerging markets crisis once the effects could no longer be contained within national and then regional frontiers. For example, only in December 1997 did The Banker begin to depict an 'Asian Meltdown' in the graphic form of droplets of blood oozing from Bangkok, Hong Kong, Jakarta, Kuala Lumpur, and Manila set in bas relief upon oceans of lava. Indeed, much of the academic and popular discourse concentrated on isolating the spatial extent of the crisis. Throughout 1997 and 1998, The Banker continued to narrate the unfolding of the crisis in predominantly national frames of reference. For example, the July 1998 edition of The Banker had features on Indonesia, "adrift in a sea of debt"; Hong Kong, "surviving out of the bubble"; and Japan, "closer to disaster". The 'Bottomline' was that "[w]hat started as a virus in Thailand has, one year on, become a cancer that threatens not only to envelop most of Asia but to extend much further."

Despite some concern over the robustness of the global financial architecture especially in the second half of 1998 and the travails of a few major global institutions such as the collapse of Long Term Capital Management (LTCM), with estimated market positions of US$200 billion on a mere US$5 billion of capital there is scant evidence to suggest that the financial crisis made much of an impression on the durability of Western capitalism as such. Godement (1999, p. 63) reminds us that "[w]hile several Southeast Asian economies were drowning in market panic during the summer of 1997, the orchestra never stopped playing on the upper deck, that is, in the Western industrialized countries." And in a report on the impact of the Asian crisis on the United States, Chase Manhattan Bank (1997, p. 4) researchers concluded that "the loss of wealth from the crash in Asian markets has left most American investors unscathed. International stock mutual funds comprise about US$220 billion of the US$2.2 trillion total assets held by American-based equity mutual funds".

While the emphasis on market psychology, especially the contagion of panic, may be used to lend support to the view that neither the crisis itself nor its severity could have been foreseen, Godement (1999) argues that the crisis was neither the lancing of an over-inflated growth bubble engorged on unhedged foreign borrowing, nor the precipitate of irrational panic and moral hazards. Rather, the specificity of the crisis lies in the fact that it occurred during the transition from one institutional regime of financial governance to another: "the Crisis of 1997 was not born in the physical economy of Asia but in the financial arena where regulations were not in place" (Godement, 1999, p. 3). The spatiality of this regime cannot be reduced to a global system overlying a mosaic of nations:

The crisis also occurred at another point of transition. Ironically, just as many Japanese banks became disinclined to roll-over their short-term credits in the first quarter of 1997, many European banks (especially those based in Britain, Germany, and France) saw this as an opportunity and secured a considerable amount of East Asian exposure at this most inopportune moment. In June 1997, BIS-reporting European banks held in excess of 40% of the East Asian debt (BIS, 1998). However, the actual amount of exposure and losses will never be known. Only a portion has been made visible through the statistics that detail bank exposures, syndicated loans, non-performing loans, provisions for losses, write-offs, and realized loses (see later). In addition to all of the rescheduling and recapitalization, much remains off balance sheet and suspended through creative accounting: the distinction between performing and non-performing loans is pliable, as is the valuation of assets. This perpetual suspense has been made all the easier because some of the countries with the greatest indebtedness lack the legal systems to enforce cross-border contracts, debt recovery, and bankruptcy.

Technically-bankrupt corporations and worthless assets may often carry on regardless. There is nothing new in this form of 'technical bankruptcy,' of course. It has plagued the financial systems of Europe, Japan, and the United States. The difficulties come when the suspense can no longer be maintained and the losses must be realized. Through loan syndication and the interlocking of financial institutions this can proffer widespread and systemic failure. When the exposure is highly leveraged and tied to speculative activity - hedging, futures, derivatives, and such like - the systemic risks can be ramified considerably. The two most celebrated cases of this being the failure of Peregrine Investment Bank and the difficulties faced by the LTCM hedge fund.

As we noted above, this is the point at which the Asian financial crisis threatened to become a crisis of the global financial architecture. One should recall that the East Asian financial crisis was quickly accompanied by financial crises in Brazil and Russia. But the instabilities within the global financial system do not end there. In 1996, the IMF reported that over 130 countries had experienced significant banking problems since 1980, and estimated that over US$250 billion had been spent by governments in bailing out banks in the ten years from 1987 to 1997 alone (Euromoney, 1997b, p. 47). So, it is to the spatial architecture of the financial system that we now turn before considering the response of investment banks to the crisis.

TOWARDS A MISSING GEOGRAPHY: UNFOLDING THE SPATIAL ARCHITECTURE OF THE GLOBAL FINANCIAL SYSTEM

The newly-emerging regime for regulating the global financial system has come about as the result of three interrelated tendencies. First, there has been a huge internationalization of banking and the spread of office networks, especially their embedment within foreign banking systems. Second, there has been the phenomenal growth and rising significance of once marginal financial products, such as derivatives (Tickell and Tickell). Third, there has been a disintermediation of money and finance, which has enabled the internationalization and globalization of the financial system (Thrift and Leyshon, 1988). This has been accompanied by a reintermediation of the global financial system, with a marked shift to "market intermediation as opposed to institutional intermediation" (Clark, 2000, p. 81), as new kinds of 'knowledge intermediaries' and 'centres of calculation' emerge which turn the mass of information into applicable knowledge (Leyshon, 2000; Thrift, 1997).

Accordingly, one needs to take the manifold geography of the global financial system seriously. While it is clear that a new 'space of flows' is over-writing and recasting an older 'space of places', to borrow two felicitous phrases from Castells and Castells, this is not to say that we are experiencing what O'Brien (1992) called The End of Geography. For "while the speed of information communication has annihilated space ... it has by no means undermined the significance of location, of place" (Martin, 1994, p. 263). Indeed, while it may be the case that "money, being fungible, will continue to try to avoid, and will largely succeed in escaping, the confines of the existing geography" (O'Brien, 1992, p. 2) - whence the importance of offshore financial centres, which are "essentially 'gaps' in the regulatory map of international finance and important elements in the globalisation of money and money flows," through which "the circuits of fictitious capital meet the circuits of 'furtive money' in a murky concoction of risk and opportunity" (Martin, 1999, p. 23 and Roberts, 1994, p. 92, respectively) -, "[t]he orderly and sensible movement of funds is far from guaranteed, and it is within the nation state that the instabilities of global money appear" (Martin, 1994, p. 274).

As we have seen, the East Asian financial crisis perfectly illustrates the place-specific geography of "the disciplining of money, and the various disciplines imposed by money capital and the community of money" (Corbridge et al., 1994, p. 3). Likewise, financial institutions and financial products have specific histories and geographies (Clark, 2000; Dicken, 1998; French, 2000; Tickell, 2000). To that extent, the unfolding of financial crises is not simply dictated by the rational and irrational calculations of (predominately Western) financial actors. Nor are they played out against essentially national frames of reference. The financial system is articulated by all manner of intermediaries, each of which has a particular spatial configuration that shapes its knowledge, inclination, and practice. It is also articulated on the basis of manifold rhythms that embrace real-time trading, the periodic publication of economic and financial statistics, accounting cycles, and cultures of conduct and life-long patterns of learning for individuals, institutions, and markets.

This, then, is the 'missing geography' in extant accounts of the East Asian financial crisis. It is a geography that has been squeezed out by an overly-narrow fixation on the dispute between those for whom "capital is overcoming the constraints of national economic organization and regulation, subordinating nation states to global markets and forces," and those who maintain "that individual states still exercise substantial independence and authority in the regulation and management of their domestic political economies" (Martin, 1994, p. 254). By introducing the importance of the manifold geography of financial practice we wish to offer an alternative both to the ossified dispute alluded to above and its sublation which argues that globalization will engender 'transnational states' and 'global regulation'.

In what follows, then, we will begin to uncover one aspect of the spatial architecture of the global financial system and how it was affected by "the first widespread crisis of confidence in the 1990's world of securitized global finance" (Chase Securities Inc., 1997, p. 1): the shifting geography of investment banking. However, to begin to unfold the spatial architecture of investment banking we argue that it is necessary to shift analytical attention from the duality of the global financial system and the machinations of particular nations to the networking of innumerable actors. This is why it is important to emphasize that a bank - like any other actor - only exists as a networked formation, as a relational articulation: and that network activity is principally organized through the world-city network. The mistake comes when one separates an advanced producer service sector (such as investment banking) or a world-city from its network formation: which is to say, a sector (as a key actor) or a world-city (as a command and control centre) from the global space economy (Beaverstock et al., 2000).

When one refers to a world-city the prefix 'world' must be taken literally. When Martin (1999, pp. 15,16) cautioned us that although "[g]lobalization may well have annihilated space ... it has by no means undermined the significance of location, of place," one must add that this 'place' is not simply bounded or settled. For each place is splayed out. And it is splayed out across the entire network of relations of which it is a distinct articulation. This is why Thrift (1998, p. 56) writes that "geographers have tended to make activities in bounded spaces like world cities add up, but they don't." Accordingly, "passings are as important as locations, circulation is as important as the site." World-cities should no longer be seen as the hierarchical 'basing points' upon which the global economy rests, but as 'partial sites' of networked formations which "touch ground only in passing" (Thrift, 1998, p. 57). Such is the shift from a static and centred image of a world-city hierarchy manipulating the global economy, to one that is irreducibly de-centred. World-cities, world-city networks, and the global space economy are all dislocated and disseminated: or else they are not. This is the occulted world within which the East Asian financial crisis unfolded and through which the spatial architecture of investment banking played its part and was in turn affected by the recasting of the global financial network.

We are now in a position to approach the spatiality of investment banking cast amid a network of world-cities, but only on condition that "[w]orld cities must not be seen as a succession of bounded states, however heterogeneous, frozen in temporal aspic ... Rather, they need to be seen as always interactive and constantly in process" (Thrift, 1998, pp. 6,7). As such, geography is neither a backdrop nor a container for the events that happen within it. Geography is active, processive, manifold, and polyrhythmic (Doel, 1999). "World cities are constructed in real time. They have to be constantly produced, worked on" and attended to (Thrift, 1998, p. 57). This is also the case for investment banks.

INVESTMENT BANKING EXPOSURE AND EMPLOYMENT CHANGE

In February 1998, Standard & Poor's estimated that European banks' credit exposure in South Korea, Thailand, Indonesia, and Malaysia totalled US$110bn to US$130bn (Graham, 1998). For some, like J.P. Morgan and Deutsche Bank, their exposure has been well publicised: at US$6.1bn and DM1.4bn, respectively. For others, exposure has been documented in a different way, by marked reductions in pre-tax profits. For example, Citicorp had pre-tax profits reduced by US$250m,with at least US$60m lost to reduced activity in Asia and Brazil (Blanden, 1998).

Banks became over exposed in East Asia, and accumulated losses, because of three major factors. First, there was a reduction in turnover and prices in financial markets. Asia's credit crunch quickly dried up trading in most major markets.³ In particular, losses were quickly mounting in securities markets and FOREX as currencies collapsed.⁴ In one case, J.P. Morgan was rumoured to have lost US$150m in FOREX trading in the Thai baht in September 1997, but this was denied by the bank (Sinclair, 1997; Euromoney, 1997c). In another case, Chase Manhattan's vulnerability was very well illustrated by its disclosure of a US$160m pre-tax loss arising from securities trading in October 1997 (Euromoney, 1997c). The slow-down in trading activity was aptly summarised by Lee (1997, pp. 32,33): "The international bond and equity markets have to all intents and purposes closed and will not reopen before the first quarter of next year [1998] ... [D]ealing amounts are tiny, some brokers' screens have gone blank and traders seem to spend more time in the rest room than they do at their desks".

In addition to the slow down in trading activities experienced by many banks in the region, some banks withdrew altogether from traditional investment banking activities. For example, BZW and NatWest Markets ceased to trade in Asia's equity markets, while banks like Schroders, Indosuez W.I. Carr, and J.P. Morgan all undertook major restructuring programmes that entailed retreating from such markets (Ridding, 1998).

Second, there was debt exposure on foreign loans. Many banks tied themselves into loan arrangements with East Asian financial institutions, private enterprise, individual borrowers, and nation-states. Table 1 details the debt exposure of BIS-reporting banks to Asian countries as of June 1997. The highest exposures were to Hong Kong (US$222.3bn) and Singapore (US$211.2bn). These were the two major international financial centres in the region, from which most banks operated their East Asian headquarters and serviced their East Asian clientele - especially if they did not have offices in the worst affected countries (Taylor et al., 2000). European banks bore the greatest burden of loans, totalling US$353.4bn, of which US $118.9 (33%) was held by German banks. In the case of Japanese banks, they were the largest foreign lenders in the region, with an aggregate exposure of US$271bn to the economies caught up in the crisis. They were especially exposed to Hong Kong, Singapore, and South Korea.

If we take the example of exposure to Indonesia, an economy and society which tumbled towards financial and political anarchy following the currency crisis, many foreign banks were exposed to debt burden (Table 2). At the end of 1997, the Bank for International Settlements estimated that Japanese banks were owed US$22bn, German banks US$6.2bn, and British and French banks US$4.5-5.0bn each from Indonesian borrowers (O'Sullivan, 1998). The debt rescheduling agreement reached in Frankfurt on 4 June 1998 made provision for recovery of the credit extended to trade facilities and loans to Indonesian banks, but at least US$70-80bn, lent to the private sector (local corporations), cannot be serviced in interest payments, let alone repaid in full.

Third, the financing of large, infrastructure projects collapsed, especially in Thailand, Malaysia, and Indonesia. As local currencies depreciated, banks all but stopped underwriting sources of finance. The shortage of foreign exchange, required by governments to take on the risk of such projects, further contributed to their escalating costs (Warner, 1998a). Notable projects which have been halted or delayed by the crisis include: Malaysia's M$13.6bn Bakun dam and M$35bn multimedia super-corridor; Thailand's US$3.7bn elevated road and railway in Bangkok; and Indonesia's US$650m 450 MW Serang power station, in which UK's Powergen had a 40% stake (Lucas, 1998). Moreover, the biggest problem now faced by those investment banks who were involved in financing these deals from the outset is to find new investors for the projects to be completed, as other European and North American institutions are now shunning capital projects in Asia (Lucas, 1998).

For almost all banks exposed to the region, the principal organizational response to the collapse of profitability and escalating losses was immediate reductions in employment levels (see Beaverstock, 1996; Jones, 1998; Thrift, 1997; McDowell, 1997). Indeed, the redundancies that followed the East Asian crisis were always considered to be "inevitable" (Luce and Corrigan, 1998, p. 25).

Organizational Restructuring in North American and European Investment Banks: Employment and Office Change

A chronology of banking employment following the crisis is shown in Table 3. While this is not a definitive inventory, it provides a graphic illustration of corporate restructuring and employment change as investment banks adjusted to the crisis in East Asia. As this is a notoriously secretive industry, we may never know the full extent of job losses caused by the East Asian crisis. This problem is exacerbated by the fact that the East Asian crisis merged into a succession of others (Russia, Brazil, and the failing US-based LTCM Hedge Fund), making it difficult to disentangle the motives which drove a roller coaster of hiring and firing between October 1997 and January 1999. During this period, in the financial centres of East Asia, London, and New York, investment bankers were not just "talking about bonuses", but were instead "trying to hold on to [their] jobs" (Luce and Corrigan, 1998, p. 25).

In the data presented up to late 1998, most banks rationalized staff by either downsizing offices (e.g. Schroders), selling assets to rival banks (e.g., Lehman Brothers and Barclays Bank), quitting financial markets (e.g., Banco Santander) or closing East Asian offices all together (e.g. National Westminster Bank) (Table 3). With respect to job loss, the highest magnitudes of redundancies were generated from the worldwide restructuring programmes of the large US banking groups (e.g., Citicorp and J.P. Morgan), and ING Barings, in January 1999. Most staff losses came in October 1998, following the lower than expected annual financial results of Merrill Lynch, who immediately responded by announcing that they would axe 3500 jobs. As losses accrued because of a succession of so-called 'emerging markets' crises - that embraced East Asia, Russia, and Brazil - staff were made redundant in many banks in order to protect profitability and to reduce the December bonus budgets that were going to be need for the most valuable bankers (Luce and Corrigan, 1998).

Against the background of general downsizing by investment banks, three findings stood out from the analysis of job losses following the market turmoil in East Asia. First, the wave of job cuts at the outset of the crisis were initially dismissed by bankers as a "local problem" (Corrigan and Harris, 1998b, p. 26), especially after the collapse of Peregrine Investment Bank, Caspian Securities, and losses at: the UK bank, Flemings; the Spanish bank, Santander Investment; and the Germany bank, Westdeutsche Landesbank. This 'local problem' perception, however, dissipated very quickly as the East Asian crisis began to reduce the volume of business activity in emerging market financial transactions in European and New York city headquartered banks. Restructuring and job losses recorded from October 1998 at Merrill Lynch, Robert Flemings, Salomon Smith Barney and ING Barings were all attributed in some part to the East Asian crisis.

Second, the conjunction of financial turmoil in East Asia and Russia, coupled with the downturn in the USs Dow Jones Index and the UKs FTSE 100 (which lost £2100bn and £160bn respectively between July and October 1998), resulted in a major 'global shake-out of jobs' in investment banking during the last quarter of 1998 (Waples et al., 1998). For example, job losses in London's investment banking and securities community during the last months of 1998 and first few months of January 1999 was estimated to range between 5000 and 10,000 highly-paid and junior posts (Hamilton, 1998). During the same period in Manhattan, an estimated 30,000 bankers, brokers, securities and auxiliary workers (10% of those employed in the city's investment banking and allied industries) were to lose their jobs (The Economist, 1998b).

Third, despite the 'local difficulties' and 'global shake-out' of investment banking, many investment banks retained their fee-earning staff during the period of financial crisis in East Asia. These staff continued to command high salaries and receive bonuses at year-end 1998 (Corrigan and Harris, 1998b; Waples et al., 1998). Moreover, for some of the very big institutions - such as Goldman Sachs, Credit Suisse First Boston and Salomon Smith Barney - staff levels remained relatively constant, and in some cases even expanded, as they were able to take business away from 'distressed' Asian banks and to switch into other business areas, most notably venture capital, and mergers and acquisitions (Montagnon, 1998 and Ridding, 1998).

The Banker's 1997, 1998, and 1999 surveys of non-Asian banks in the seven worst affected Asia crisis countries gives us an indication of the organizational changes which have taken place with respect to both bank and branch turnover before and during the crisis (see Appendix A). Before the crisis ensued, there were 85 non-Asian banks in Singapore, Hong Kong, South Korea, Thailand, Indonesia, the Philippines, and Malaysia, with 212 branches (Warner, 1997 and Warner, 1998c). These surveys showed that the total number of non-Asian banks in these seven countries had continued to increase despite the crisis: 85 were present in 1997; 90 in 1998 (+6% from 1997); and 96 in 1999 (+7% from 1998) (Table 4). However, while the presence of non-Asian banks in Asia was increasing at a significant rate, the data in Table 5 show that there was only a marginal rise in the total number of non-Asian bank branches in the seven East Asian countries worst affected by the crisis: there was a net gain of only one non-Asian bank branch between 1997 and 1998 (an increase of 0.5%); and a net gain of just 4 between 1998 and 1999 (a rise of 2%).

The data also reveal that US, French, German, and UK banks accounted for the highest number of non-Asian banks and non-Asian bank branches in the seven countries (Table 4). If we look in more detail at the locational dynamics of non-Asian bank branches in these seven countries, we can observe that Singapore and Hong Kong consistently have the highest concentrations of non-Asian bank branches (Table 5). Nevertheless, it is also apparent from the data that both of these banking centres lost branches between 1997 and 1998: Singapore had a net lost of 8 branches (11%), while Hong Kong had a net loss of 4 branches (6%). However, the principal collapse in non-Asian bank branch location was in Thailand and Indonesia, where both countries lost half of their non-Asian bank branches. The closure of French and German bank branches was especially significant (Appendix A).

In May 1999, Hong Kong and Singapore had both increased their number of bank branches back to the pre-crisis levels and much of the growth in non-Asian banks in South Korea, the Philippines, and Malaysia was the result of US bank expansion (Table 5 and Table 6). Equally, during 1998, some non-Asian banks were actively seeking to purchase shares in Asian banks, at knock down prices. In total, Asian banks were worth about US$200bn pre-crisis. Many argue that level has now reduced to US$125bn, and is likely to fall (Euromoney, 1997c). For example, Citibank were considering buying a stake in the First Bangkok City Bank in January 1998, but declined after it was taken over by the Financial Institutions Development Fund (FIDF) (Warner, 1998b, p. 5). Likewise, ING Barings declined the purchase of Siam City Bank in December 1997.

The Plight of Asian Banks

"If banking is a battlefield, much of Asia has witnessed a bloodbath in recent months" wrote The Economist (1998a, p. 115). The Economist (1998a) estimates that between the outset of the crisis in July 1997 and April 1998, at least 150 financial institutions have been closed, suspended, nationalised or placed under the wing of government. World Bank (1998) analysis of Asian bank exposure shows this battlefield (Table 6). If we examine Thailand's predicament more closely, the 53 institutions that were closed or suspended had debt exposures estimated at between US$2bnand US$5bn (Euromoney, 1997a; Warner, 1998d), and "resulted in an estimated 100,000 redundancies" (Warner, 1998e, p. 45). Moreover, foreign creditors have turned to the courts in a vain attempt to retrieve their money, hoping that the newly formed Financial Restructuring Agency would aid repayment of bad debts (Euromoney, 1997d).

There were also examples of Asian banks closing in the region because of financial losses accrued as a result of their traditional banking activities being squeezed by the crisis. The first major Asian investment bank to become bankrupt in the region was Peregrine Investment Bank, which employed 1700 staff in 15 Asian countries. Peregrine Investment Bank looked much more exposed in the region than its peers. The banks over-exposure in the region was due to three particular business strategies. First, Peregrine over committed its resources in Asia, with 15 (costly) separate operations - each of which expanded rapidly, and often left the realms of investment banking. For example, it acquired a Burmese prawn-farming venture, which went bust in 1995 (Euromoney, 1997a). Second, and of much greater significance, Peregrine's debt exposure throughout East Asia, and particularly in Indonesia, was very large. For example, it had a loan of approximately US$200million to Steady Safe, an Indonesian taxi and bus firm. The collapse of the rupiah meant that Steady Safe would not be able to repay the loan (The Banker, 1998). Third, Peregrine allowed the Swiss-based Zurich Centre Investments (ZCI) to make plans to buy US$200m of Peregrine equity-linked bonds, which effectively gave ZCI a 24.1% stake in the bank, three of the nine board members, and the right to block both budget and business plans (Euromoney, 1997a).

Not only was it overstretched in Asia, however, it could not offset the impending losses against gains in other regions and markets: as it was a regional, not global bank (Euromoney, 1997a). The Hong Kong-based bank began to lapse in July 1997, following the devaluation of the Thai baht, and suffered further wilt as the crisis in both currencies and confidence that swept through the region in the autumn 1997. It went into liquidation on 12 January 1998, after ZCI cancelled its purchase of the bonds (Warner, 1998d). The bank immediately ceased trading in Asia (including Hong Kong, Kuala Lumpur, and Singapore). This was an extremely important event in the unfolding of the East Asian financial crisis because it powerfully demonstrated the severity of the crisis in East Asian banking systems. However, what made it even more eventful - and globally newsworthy - was the fact that it had occurred to a Hong Kong-based bank, and not one that was located in a more obviously 'distressed' banking system, such as those of Thailand and Indonesia.

As late as March 1999, Asian banks continued to be closed in the region. In a very high profile case, and with the blessing of the International Monetary Fund, Indonesia finally closed a further 38 banks and took seven others into administration on the 13-14 March 1999 (Thoenes, 1999). Thus, since the outset of the crisis and up to March 1999, Indonesia has closed or suspended 54 banks, and taken 62 others into nationalisation or administration.

One crucial point must be addressed when considering the failure of Asian banks in the region, and that concerns the role of credit-rating agencies who singularly failed to take account of the pre-crisis conditions in their debt ratings of Asian financial institutions. Raters, such as the New York headquartered Moody Investment Services (Moody's), Standard & Poor's Ratings Group (S & P), and Duff and Phelps provide investment grades calculated on the probability of borrowers repaying both the principal loan and interest in the time-limit scheduled for the loan agreement (see Sinclair, 1994). All of the credit-rating agencies have been criticised by governments and financial institutions for not predicting the severity of the crisis (The Economist, 1997). Instead of being proactive and providing investors with accurate investment and speculative gradings of institutions in East Asia, Moody's and S & P's have spent most of their time reacting to the crisis. As The Economist (1997, p. 98) suggests, the agencies "are at least guilty of badly misreading Asian politics ... and perhaps, of misunderstanding where some of the real risks in financial markets lie". Essentially, the New York-based agencies did not undertake sufficient research and information collection in Asian economies (Sinclair, 1994) in order to warn investors or re-rate institutions' creditworthiness and their ability to repay debt as the crisis ensued. As the Bank for International Settlements comments: "the performance of the major credit-rating agencies before and during the crisis has illustrated all too well the great difficulties even expert observers had in assessing risk ... [and] ... only several months after the crisis broke did assessments of Indonesia and Thailand radically change" (see BIS, 1998, Table VII, pp. 126, 127).

CONCLUSION

The remit of this paper has been to explore how European and North American investment banks, and to a lesser extent Asian banks, have restructured staffing levels in response to the East Asian financial crisis. Three major conclusions stand out. First, many Asian and non-Asian banks were highly exposed to the crisis-hit region, but particularly to Thailand and Indonesia. With respect to non-Asian banks in East Asia, many European and US institutions were able to offset their East Asian losses against gains in other geographical markets (see The Banker, 1998b). However, banks like HSBC, Standard Chartered, J.P. Morgan, and National Westminster Bank all downsized both business activities and employment in order to rationalize cost structures and protect profitability (Table 3). Second, although both Asian and non-Asian banks have been damaged by the crisis, Asian banks have been disproportionately effected in terms of debt exposure, losses, closures, redundancies, and government intervention. Many Asian banks could not offset losses or raise revenue in other geographical markets because they were so deeply entrenched in East Asia. They were essentially regional and not global banks. The bankruptcy of Peregrine Investment Bank showed quite graphically how a bank had over-reached itself throughout Asia. It had developed large debt exposure in Thailand and Indonesia, and sought to raise more revenue through a risky venture with the Swiss-based Zurich Centre Investment Group, an act of desperation which literally broke the bank. Third, it was the Indonesian and Thai banks that had the most to lose in the region, especially through debt exposure, and shaky organizational and regulatory control in their respective banking systems. Furthermore, the exposure of Japanese banks in Asia, coupled with the on-going domestic crisis in Japan, quickly reverberated throughout the financial centres of London and New York City, as a significant number of Japanese banks ceased their operations in order to consolidate activities back in Japan.

One final conclusion can be advanced in respect to how global investment banks have managed the complexity of employment change under conditions of crisis. It can be argued that for many global investment banks exposed to the crisis, they treated it as yet another global 'event,' which required immediate corporate restructuring of their operations to reduce losses and maintain profitability. Throughout the crisis, for all of the major non-Asian banks, it was more-or-less business as usual. Moreover, as these adjustments were being made in the Asian region, banks were faced with the Russian and Brazilian crises, both of which broke in early 1998. Again, many of these banks restructured and downsized staffing accordingly (Table 3). Nevertheless, most European and North American investment banks have by now recovered from the succession of crises that were inflicted upon the world economy during 1997, 1998, and 1999: on the balance sheet anyway. More importantly, they are now in a much more powerful position in East Asia than they were before: not least because of the strength of the European and North American economies. They have: lean cost structures; begun to consider buying stakes in Asian banks; and are seeing off their major competitors in the region the Japanese banks. Moreover, it is predicted that the very big players, with 'deep pockets' and 'patience' - banks such as Merrill Lynch, Citibank, Deutsche Bank, and ABN Amro - will emerge as the winners, as the region turns around in the next five years or so (Boland, 1999, p. VI).

Finally, we would like to argue that there are two major geographical arguments arising out of the crisis with respect to the global financial system. The first is that global investment banks became very important actors or intermediaries in the spatial architecture of the region's financial system. The investment banks were the principal actors that sustained the region's financial system through their networks of branch offices, their interaction with financial markets within East Asia, and their networks of clientele, which included both the private sector and the state. Their role as intermediaries in the regional financial system was invaluable during the crisis, as many 'local' Asian banks, including the Japanese, began to suffer - and in many cases collapse - insofar as they were exposed to mounting debt exposure. The second major geographical argument to arise from this study is that the scale and diversification of global investment banks into other geographical markets meant that they were able to manage the financial crisis more effectively than their East Asian counterparts. As East Asian banks were effectively tied into their own regional financial systems, they were the institutions that lost most from the crisis. They were the least geographically dispersed and diversified. As for Japanese banks, they are now far too concerned with events in Japan, their own forthcoming 'Big-Bang,' and the scramble with US banks for strategic alliances in Tokyo (Rowley, 1998).

ACKNOWLEDGEMENTS

We would like to thank the United Kingdom's Economic and Social Research Council for funding this research, which is part of a wider project investigating 'A comparison of London and New York's responses to the Asian Financial Crisis' (Award No. R000222693). The usual disclaimers apply.

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