TT: With market indicators still showing that the US recession may not be over, what outlook does Morgan Stanley hold for the upcoming economic recovery?
Michael Berchtold: According to our chief economist in the US, there are some continuing risks in the US economy. There's about a 60 to 65 percent chance that we could go into a double-dip scenario in terms of a further weakening of the US economy, which will push us back down into recession. If you look around the world, it seems the global economy continues to be relatively sluggish. The US stock market for the past few weeks had had a stronger performance, but there's still a great deal of concern.
PHOTO: CHIANG YING-YING
TT: What areas are Morgan Stanley monitoring to predict when the market will see an upturn, especially for the high-tech sector?
Berchtold: The indicator that our researchers look for on the technology side is the order book for the technology companies and how the technology customers are placing orders with big technology companies here in Taiwan. When we start to see a significant increase in orders from the US to tech companies here, that would be a very good sign. Our technology clients here in Taiwan are hopeful and see more of a gradual recovery than a dramatic recovery.
TT: With a total of NT$1.6 trillion in bad loans nationwide, market watchers estimate that this year, Taiwan may sell as much as US$10 billion (NT$350 billion) in bad loans. How big does Morgan Stanley think the market actually is and what portion of that figure do you plan to scoop up?
Berchtold: It's gonna be very hard to estimate how many bad loans and what quantity of bad loans will be sold over what period of time. NPL [non-performing loan] transactions tend to be sold on a bulk scale, so it's very dangerous to estimate how much is going to be done.
Also, it will take some time to negotiate this type of transaction, whether they are fully-negotiated transactions or by way of auction. What interests us is that we have confidence that when we put our money here in Taiwan, in NPLs, that we have confidence in our ability to work out the NPLs in the underlying economy. We have confidence in the financial system and the judicial system.
We have quite a strong interest in making investments here in NPLs. It fits with our strategies all over the world of making investment both in the real estate area and in the corporate area.
TT: Has the fact that 70 percent of Taiwanese NPLs are secured by some form of real estate proven a big incentive for Morgan Stanley?
Berchtold: We look at all different kinds of NPLs, both secured and unsecured. And we've made investments in both types all over Asia. Now, Taiwan is the most exciting market of NPLs and there are a lot of NPL opportunities. The reason we're so interested is that there's a meaningful amount of NPLs that need to be worked through the system. And what we're seeing is that financial institutions want to deal with their problems. Those two things together present an opportunity.
TT: So far, several NPL bulk sales have been closed including your NT$4.7 billion deal with the Union Bank yesterday. But we haven't seen any AMC buyers actually taking action to dispose of purchased non-performing collateral. Observers are saying, if no money is made via these re-sales, many AMCs may exit the market very soon especially when the local property market has hit rock bottom. What do you expect the profitability to be in term of the sale's turnover?
Berchtold: From Morgan Stanley's perspective, we are patient investors, looking at this process of working out NPLs -- which does take time. So we expect to be long-term investors here. We're not just looking at how our performance will be over just the next three months and going to decide whether or not we're going to stay. We have an overall committment to Taiwan on the banking side, on the research side and the sale and trading side. And we have an increasing committment and this is just one of the areas that we feel that we can play a part within Taiwan's financial area.
So, I would expect this transaction with Union Bank to be just one of several. And I also hope we can bring some innovative structures to Taiwan that we used elsewhere in the world in terms of how we finance NPLs, how we look at potential securities options and how we ultimately work out these NPLs.
TT: Having already been a leading NPL player in the region, what motivated Morgan Stanley to form an asset management company with Union Bank of Taiwan?
Berchtold: It was more regulation driven. If the bank sells NPLs through an AMC, they can get much better treatment from the government in terms of taxes. For example, if NPLs are sold to AMCs, banks can amortize their write-offs over five years. But if they sell the NPLs to private investors, then they'll have to write them off immediately. There are two advantages out of the parternship between Morgan Stanley and Union Bank. First, it gives Union Bank much better accounting and tax treatment. Secondly, it allows a joint venture with Union Bank, which allows Union Bank to enjoy potential feedback from sold assets if the bank has ownership in the joint venture.
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