THE DOLLAR CRISIS : Wall Street Begins to Tally Losses in the Latest Turmoil

In a new phase of the global currency crisis and the panic in Latin American stocks and bonds, Wall Street on Thursday began to focus on who’s on the wrong side of those crumbling markets.

Rumors swept the U.S. stock market early in the day that major American and German banks could rack up huge losses on Latin American loans or on Latin bonds they hold, as those economies careen toward recession.

In addition, speculation that some bank and brokerage foreign-currency trading desks may have bet big--and incorrectly--on the dollar’s direction this year raised the specter of unforeseen and dramatic first-quarter losses for Wall Street.

Although most analysts downplayed the potential for shocking earnings surprises at banks or brokerages, the rumors nonetheless clipped the stocks of many such U.S. institutions Thursday. J.P. Morgan, for example, dropped $1.125 to $62.75, and Merrill Lynch sank 75 cents to $40.75.

U.S. mutual funds that own Latin stocks, meanwhile, took another blow as the key Brazilian market lost a stunning 9.5% of its value Thursday, with the Bovespa index of Sao Paulo stocks tumbling 2,250 points to 21,383.

And shares of Telmex, the Mexican phone monopoly, fell in New York Stock Exchange trading to as low as $23--the cheapest they have ever been in their nearly four years on the Big Board. The stock closed at $24.50, leaving investors who loaded up on the shares in the fourth quarter with a minimum 40% paper loss compared to the year-end price of $41.

With no apparent end in sight to either the dollar’s downtrend or the collapse of Latin stocks and bonds, Wall Street’s sudden focus on the portfolio losses generated by those crises isn’t surprising. After all, the first quarter will end in three weeks, which will force banks, brokerages, mutual funds and other institutional investors to own up to losses suffered in devastated markets.

But experts noted Thursday that some of that accounting is already going on publicly and on a daily basis. Mutual funds, for example, are required to “mark to market” their portfolios each day, so their losses are well-known--painfully so--to shareholders. The Scudder Latin America stock fund, for example, has now lost more than 36% of its value since Dec. 31, after sliding 9% last year.

Although fund losses are devastating for the investors who own the shares, they don’t pose a threat to the fund firms themselves, which are separately capitalized from the funds they manage.

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Of far greater concern to analysts and government regulators is the hit to earnings that banks and brokerages could announce because of devalued Latin stocks, bonds and loans they hold, and the potential trading losses incurred by bank and brokerage foreign-currency operations.

Mexican government “par” bonds, the so-called Brady bonds, were quoted at just under 43 cents on the dollar Thursday, according to Thomas Trebat, analyst at Chemical Banking in New York. “That price is half the bonds’ peak value (in 1994) and is about the lowest it’s ever been,” he said.

Similarly, Argentine Brady bonds hit an all-time low of 36.25 cents on the dollar Wednesday.

Many of those Brady bonds are still in the hands of major banks like J.P. Morgan and BankAmerica, which took the bonds when they restructured much of their Latin American government debt in the late 1980s. One emerging-markets bond trader estimated that of approximately $30 billion in Mexican Brady bonds outstanding, “probably half are in the banks and half are sloshing around in the market with other investors.”

If the banks were forced to mark those bonds’ losses to market--as if they were recognizing a bad loan--they could take a painful hit to earnings in the first quarter, analysts say. But accounting rules will allow many major banks to avoid recognizing the paper losses on the bonds, depending on which type of account the bonds are held in.

Government regulators allow the banks to hold the bonds either in short-term accounts, such as “available for sale” accounts, or in long-term accounts designated for “held to maturity” securities. Because Brady bonds’ principal is fully backed by U.S. Treasury obligations, bonds in held-to-maturity accounts need not be marked to market.

BankAmerica, for example, had more than 75% of its $1.3 billion in Mexican Brady bonds in the held-to-maturity account as of last Sept. 30, the latest figures available.

Yet some analysts say that even where big banks hold Latin government bonds in short-term accounts, the positions aren’t worrisome. Likewise, direct loans made to Latin companies aren’t significant enough to be threatening, argues Salomon Bros. analyst Diane Glossman.

Bank of Boston, a leading U.S. lender in Argentina, says nothing in its portfolio suggests it should alter first-quarter earnings expectations.

The greatest risk to Wall Street in the Latin and dollar crises, most analysts say, has been in trading and market-making in troubled securities. As yet unknown, for example, is how many Latin corporate bonds have been forced back onto the books of brokerages by angry institutional clients who watched the bonds’ values plummet 50% or more. Los Angeles-based Trust Co. of the West, for example, is believed to have sold much of its once-huge Latin bond position back to Wall Street, albeit at a loss. The firm won’t comment.

The biggest unknown, however, is the exposure of foreign-currency trading desks to the dollar’s plunge over the past week. The failure of Britain’s Barings bank at the hands of a rogue stock-futures trader last month has heightened fears that some bank or brokerage dollar traders may have bet too heavily on a rising dollar in 1995, and now are deep under water. (Of course, some undoubtedly have bet correctly on the buck and are winning big.)

Because traders are supposed to mark their currency positions to market daily, “Somebody at those institutions knows where they stand, although we don’t yet,” said James Rosenberg, analyst at Lehman Bros. “And if they don’t know where they stand, then we have real trouble.”

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Telmex Winners, Losers

Here are some of the institutional investors that dealt significantly in Telmex shares in the fourth quarter, according to documents filed with the Securities and Exchange Commisssion.

TELMEX BUYERS

Shares added, Shares held Institution fourth quarter at Dec. 31 Franklin/Templeton 2,112,903 10,420,722 Capital Research & Mgmt. 1,857,900 11,638,900 Brandes Inv. Partners 1,178,409 3,883,828 Waddell & Reed 844,500 1,610,000 Comerica 529,042 529,042

TELMEX SELLERS

Shares sold, Shares held Institution fourth quarter at Dec. 31 Capital Growth Mgmt. 4,379,000 -0- Jennison Assoc. Capital 4,153,333 1,062,300 Eagle Asset Mgmt. 3,325,526 108,959 Mass. Financial Services 1,899,500 28,695 Fidelity Management & Res. 1,883,200 1,541,700

Source: CDA Investment Technologies