J.P. Morgan & Co. Thursday shelved a $2 billion issue of subordinated debt for Korean Development Bank after two days of frantic efforts to place the offering with investors.

The delay underscored U.S. banks' vulnerability to the financial turmoil in the East that has caused liquidity to evaporate in emerging markets in debt, equities, and derivatives.

The deal was pulled one day after J.P. Morgan disclosed that "unsettled market conditions globally" would hurt fourth-quarter earnings.

The venerable New York banking company is the nation's biggest market maker of emerging market debt, and analysts said investor demands to flee this market en masse was the likely source of Morgan's problems.

"Being a market maker is great when there are different points of view," said David S. Berry, director of research at Keefe, Bruyette & Woods Inc. "But when no one's buying, things grind to a halt."

For the last two days, J.P. Morgan had struggled to restructure the Korean debt by extending its maturity and adding a put option. Complicating the bank's task, Moody's Investors Service and Standard & Poor's both downgraded the Korean Development Bank while the deal was in the market.

The debt was offered initially at 325 basis points over Treasuries. Market sources said the restructured deal was a 10-year offering, with a three-year put option, priced anywhere from 400 to 700 basis points over comparable Treasuries.

The deal was co-underwritten with Chase Manhattan Corp. and Merrill Lynch & Co., but the three won't necessarily be saddled with the debt. Market sources said the deal was pulled at the Korean bank's request and it is expected to be brought to market again early next year.

Executives at the major trading banks say they expect investment and trading activity involving the Pacific Rim to remain quiet until investors can better grasp what is happening there.

"This one of those many two-edged swords," said Charles W. Smithson, managing director at CIBC Wood Gundy Securities Corp. "In the near-term it gets very quiet, because a lot of people are on the sidelines, wishing they had covered their foreign currency exposure. But in the medium-term, companies that didn't use foreign exchange derivatives before will start."

While shareholders have been selling off stocks in all the major U.S. trading banks, individual banks are expected to be affected by the emerging markets crisis in different ways.

Citicorp, for example, which derives about 10% of its earnings from trading, has a big foreign exchange business and may actually benefit from corporate customers frantically trying to hedge their exposures to Asian currencies, analysts said.

Executives at insurance companies, which typically have a sizable appetite for high-risk, high-yield securities like emerging markets debt, say they are eyeing all Asian offerings warily.

If Standard & Poor's and Moody's, which have already downgraded South Korea's sovereign rating, deem Asian debt sub-investment-grade, it would be difficult for corporations there to borrow money via U.S. underwriters like J.P. Morgan, Chase Manhattan Corp., or Citicorp.

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