By Kim Jae-kyoung
Staff Reporter

Seoul financial markets took another heavy beating Thursday on deepening woes over the Wall Street crisis, which many believe has now started creeping into other parts of the globe as the credit crisis quickly turns into a crisis of ``confidence.''

Amid mounting skepticism over U.S. capitalism, global investors are losing confidence in the market. Banks no longer trust each other, as nobody is sure what secrets are hidden in each other's balance sheets.

With global investors pursing a flight to safety, the key index KOSPI nose-dived 32.84 points or 2.3 percent to close at 1,392.4, Thursday. The Korean won lost 37.3 won to finish at 1,153.3 won per dollar, while yields on three-year treasury bonds jumped 0.35-percentage points to end at 5.95 percent.

The local market meltdown came after the overnight crash on the U.S. financial market triggered by fresh fears over the ability of Morgan Stanley and Goldman Sachs ― the last two of the giant American investment banks ― to survive the deepening financial crisis.

In addition, the announcement that HBOS, Britain's biggest mortgage lender, reached a deal to merge with its rival Lloyds has intensified worries that the U.S. crisis is spilling over around the world.

With U.S. investment bank giants, the symbol of U.S. capitalism, collapsing one after another, many argue that the U.S. ``casino'' capitalism, a financial system designed to maximize returns based on a free market and open competition, is facing its demise.

``Investment banks are having trouble because they leveraged themselves in order to maximize returns for their shareholders,'' Mauro F. Guillen, director of the Lauder Institute at the Wharton School of Business, told The Korea Times.

``Their exposure is 30 to 40 times their capital base, meaning that both gains and losses on their investments are multiplied many times over,'' he added. ``They assumed real estate prices would never go down abruptly, and that is now costing them billions of dollars.''

The U.S. government's inconsistent intervention policy is also blamed for the global market chaos. They let Lehman Bothers go belly up but bailed out American International Group, increasing uncertainties in the market.

Now it seems that nobody knows where the Wall Street crisis is heading. But most agree that it will take some time to get out of dark tunnel, and the potential impact of the crisis on the rest of the world, including Korea, will be much larger than we many people think.

``It is still too early to tell when this will bottom out. The size of the U.S. mortgage market is absolutely huge and involves trillions of dollars,'' former AMCHAM Chairman Jeffrey Jones said.

``The U.S. government's decision to take over Freddie Mac and Fanny Mae was an important move to stop the bleeding and the AIG take over will also help, but still the primary problem is we don't know the size of the problem or how bad it will get,'' he added.

He pointed out that the strength of Goldman and Morgan Stanley will depend to a large extent on their exposure to these bad mortgage backed securitized investments.

A local bank CEO also said, asking not to be named, ``The financial crisis is far from over. I believe that only 60 percent of the whole crisis has just passed.''

``In the longer-term, I think that the potential impact of the Wall Street crisis on the domestic market and economy will be larger than that of the collapse of North Korean regime,'' a local business group chairman said on condition of anonymity.

kjk@koreatimes.co.kr