Foreign lenders have already been hit. One large European bank lost not only big money on derivatives but also possibly its independence as well. Swiss Bank Corp. The American bank that could have the most at stake is J.P. Morgan. Should Morgan suffer a loss of just one-tenth of that from defaulting customers, the bank's equity could be wiped out. That dam may have started to crack.
Derivatives are partly to blame.
In this case, SK Securities entered into a currency-swap deal with Morgan in early 1997 whereby SK Securities in effect borrowed U.S. dollars and invested them in Thai baht. But within a year the baht plunged in value, from 25 to 48 to the dollar, and the Korean firms couldn't cough up the dollars to repay Morgan. They subsequently sued Morgan in New York and in South Korea, claiming they weren't properly advised of the risks associated with derivatives. In other words, they pleaded stupidity. When you don't have an alternative, you do the last thing you can do.