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TAIEX plunges to lowest level in nearly two years

The benchmark TAIEX yesterday plunged to its lowest level since September 2006, led by a sell-off of financial stocks as investors grew nervous about local financial institutions’ combined exposure of more than NT$600 billion (US$19.74 billion) to US mortgage lenders Fannie Mae and Freddie Mac.

The index ended 322.72 points, or 4.51 percent, lower at 6,834.24, the lowest close in the past 22 months. Turnover was NT$107.516 billion in yesterday’s session, an increase of 13 percent from the previous day’s NT$94.871 billion, the Taiwan Stock Exchange’s tallies showed.

The TAIEX’s Banking and Insurance sub-index closed 5.8 percent lower in yesterday’s trading, led by a 6.97 percent drop in Cathay Financial Holding Co (國泰金控) to NT$58.7. Shin Kong Financial Holding Co (新光金控) and Fubon Financial Holding Co (富邦金控) were also limit-down to NT$17.8 and NT$25 respectively, the stock exchange’s data showed.

The Financial Supervisory Commission (FSC) yesterday urged investors to remain calm, saying that domestic financial and insurance companies would only suffer limited losses from their securities investments issued by Freddie Mac and Fannie Mae, which total NT$616.371 billion.

“Investors shouldn’t worry unnecessarily since it is almost certain that the US government won’t allow these two companies to fail,” FSC Vice Chairwoman Lee Jih-chu (李紀珠) said yesterday.

She also said that the problems the two mortgage firms have encountered are nothing like the subprime mortgage crisis.

She also said that the local financial institutions’ investments in free-falling shares of Freddie Mac and Fannie Mae only took up 0.1 percent of their total investment.

Huang Tien-mu (黃天牧), director of the commission’s insurance bureau, said the nation’s insurance sector had incurred the worst losses of NT$489 million as of the end of last month, out of NT$840 million in shares for these two companies.

The insurance sector, however, expects no losses from its NT$489.6 billion long-term mortgage-backed securities (MBSs) issued by Freddie Mac and Fannie Mae, Huang said.

Domestic insurance companies also invested NT$45 billion in corporate bonds, which aren’t expected to suffer losses, that were issued by the two US mortgage firms, Huang said.

In total, the insurance sector has the biggest investment — NT$535.6 billion in the two companies.

Lee reiterated that there are no signs that ratings on MBSs or bonds issued by the two US companies would be downgraded soon, which she said provided a confidence boost to domestic companies’ US investment prospects.

“The two companies’ financial problems should have a limited impact on the local financial sector,” she said.

Wu Tang-chieh (吳當傑), director-general of the FSC’s Securities and Futures Bureau, said that domestic investment trusts have only suffered NT$880,000 in losses from their US$40 million in MBS-related investments as of early last month.

Director-general of the FSC’s banking bureau Chang Ming-daw (張明道) said that domestic banks have invested NT$77.2 billion in MBSs issued by the two US companies and another NT$2.2 billion in their bonds as of last Friday, which he said should incur limited losses.

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