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Wall Street woes: why world's investors sit on sidelines

Job No. 1 for central bankers: restore confidence in markets.

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The authorities in London have already stepped in on one occasion to save a failing bank, Northern Rock. Britain acted after depositors lined up around the block to get their money, the first run on a British bank in 150 years. The government finally decided it would have to effectively nationalize Northern Rock, at a cost of around $100 billion to the taxpayer. Chancellor Alistair Darling explained the British rationale on BBC Radio this week: "The test that we apply, and the test that I think the Americans apply, in relation to any institution, is if it went down, would there be a systemic risk – in other words, would it have a knock-on effect into the rest of the system."

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The massive financial changes are prompting investors to shift to US Treasury securities, considered ultrasafe. However, this has also left many banks and financial institutions struggling to raise short-term cash.

In Portland, Ore., John Lekas, portfolio manager of Leader Short-Term Bond Fund, says he has been buying depressed bonds from regional financial institutions and getting returns of 13 percent to 21 percent. "No question, we've got a panic going on right now," says Mr. Lekas. "It's actually worse than last August."

In the past, the financial markets leaned on foreign investors to provide capital for financial firms. But Mr. Sohn, former president of Hanmi Bank, a Korean-American institution, says he doubts Asian investors will come piling in since they have already lost too much sleep over their investments in Fannie, Freddie, and Lehman Brothers. "They are scared to death," he says. "I don't think the Asians have any inclinations to invest in the US or come to the rescue."

Some analysts in China echo that view. China's sovereign wealth fund, China Investment Corp. (CIC), has lost so much on US investments in the past 18 months – notably in Morgan Stanley and Blackstone – that "it has been bitten several times and is shy," says Andy Xie, an independent financial analyst in Shanghai.

Shares of Blackstone, a private equity fund, and Morgan Stanley, an investment bank, have fallen more than 50 percent since Beijing bought in to them.

"It would be too politically sensitive to buy [more] assets that do not perform well," agrees Paul Cavey, a Beijing-based analyst with Australia's Macquarie Bank.

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