Asian stocks tumbled yesterday as the fallout from growing problems in the US mortgage market snagged one of Australia's highest flying banks and stoked concerns over how much the debacle may ultimately cost.
Dealers said Wall Street losses overnight sparked by trouble at another US company on its exposure to higher risk mortgage loans set the region up for a bad day just as it was recovering from last week's mayhem.
The tone was set in Sydney, down 3.3 percent, where market favorite Macquarie Bank said two high-yielding funds faced losses of up to A$300 million (US$258 million) because of the problems in US sub-prime home loans.
Shares in Macquarie Bank, known for its deal making and massive executive pay-checks, shed 10.7 percent as a result, enough to prompt Australian Treasurer Peter Costello to offer assurances that all was well.
"If you've got exposure in the US market then you'll be affected by US developments ... but I don't see any grounds to see the exposure of these funds in the US will impact on the parent in Australia," he said. "We know that the parent in Australia is a well-capitalized, highly profitable bank."
The issue, however, is that no one really knows yet the full extent of the problem and stock markets, above all else, hate such uncertainty, dealers said.
"I think to a certain extent it's fear of the unknown," CMC Markets senior dealer James Foulsham said of the Australian market. "People don't really know what sort of impact it's going to have. They don't think the full story has come out on this at the moment."
The problem dates to the US housing boom of 2005 and last year when the name of the game was to keep the loan flow going, as lenders spliced and diced the resulting mortgages into ever more exotic securities which were then sold into the global credit markets.
As US interest rates then rose, weaker borrowers defaulted, leaving their mortgages virtually worthless and so undermining the value of these instruments which were bought by investors, many of them institutions.
"Really, with the intricacies of how widespread this can be, investors are beginning to worry. If any more come out, this could steamroll the market," CommSec equities analyst Donahue D'Souza said in Sydney.
This was why the Macquarie Bank news seemed to have had such an impact, raising the specter that many other financial groups may end up in the same boat, said Song Seng Wun, Head of Research at CIMB-GK Research in Singapore.
"We don't know [the impact on Asia] ... We can only watch and see," Song said.
In Tokyo, which fell 2.19 percent, "stocks declined as investors are worried about a further pullback on Wall Street amid spreading worries about the US credit market," said Mitsushige Akino, chief fund manager at Ichiyoshi Management.
"As the economic fundamentals are solid here there are many investors who would like to buy on the dips but they are opting to wait as volatility in the US stock market has been quite high recently," he said.
Elsewhere in the region, Seoul lost 4.0 percent, Mumbai was down 3.08 percent in afternoon trade along with losses of 2.50 percent in Kuala Lumpur.