Investment Bank Failures in Asia

Peregrine's Strategy

What were the external and internal factors that led to the collapse?

There are many factors that could explain the rapid failure of Peregrine's failure that seemed to appear in such a short time frame. It seems fairly obvious that management bears the burden of responsibility on many levels, however, there are other explanations that could also be introduced, although the causes are debatable. However, the mainstream press seemed to focus purely on the management capabilities of the company.

"The collapse of Peregrine Investments Holdings Ltd., the biggest business failure in Hong Kong during the Asian economic crisis, was caused by bad management and not the crisis itself, according to a government inspector's report (Manuel, 2001)."

In fact, it was recommended that the courts restrict the top-level management team from operating for fifteen years based on the management team's incompetence in running the investment bank.

Although such a judgment may seem reasonable, the investigators for the case were not able to actually find any means of fraud which would suggest that the failure could be the product of bad judgment. The corporation began as a domestic player that specialized in fixed-income business investments that could compete well in the Asian markets given its domestic appeal to many of the Asian firms. The success of the firm depended on its internal ability to match investors and borrowers in a range of different financial instruments.

As the Asian market's sole domestic provider, the organization had a significant edge on many of the international players that were competing in the market. However, their initial success undoubtedly led to a level of hubris that ultimately led to the company's demise. The company attempted to expand faster than it could have in a more sustainable growth model, and then in 1997, the Asian crisis left the firm vulnerable to external events that ultimately led to the demise of the company. It was most likely the management's attempt to leverage the company's previous successes on an ambitious growth path that led to the company's vulnerable position during the crisis.

2. Evaluate Peregrine's strategy and its implementation. What did it do right, and what did it do wrong? Was Peregrine's collapse a failure of strategy? A failure of implementation? Or just plain bad luck?

It would be hard to explain Peregrine's demise with only bad luck. The company obviously engaged in many speculative behaviors that put the organizations at risk. While the fall of the Steady State obviously contributed to the company's weakened position, there were many issues present than just this single investment. Peregrine was obviously over leveraged due to its aggressive growth strategy and could not absorb the costs associated with this company's failure. Furthermore, instead of being forthright about the turmoil the company was in, the management team thought it would be better to minimize the effects of negative publicity by showing their strength in the face of a slew of negative claims -- to the extent that they were entirely misrepresenting their operating position.

The management team did not simply deny the fact that there were any financial problems present, they actually went as far as hiring an investigator to investigate the so-called leak of the individual that could have been responsible for spreading this "misinformation" (although this was solely for publicity needed to mitigate other claims). This one fact seems to indicate the extent of the management team's willingness to try to cover up the actual financial problems that they were experiencing to the public. Although the company also implemented a slew of policies to attempt to minimize its exposure to the problems in which it encountered, primarily by selling off assets, all the while blaming the problems on the "rumors" that were being spread about the company's compromised position.

3. Why did Hong Kong authorities fail to intervene? What can we learn from this case?