LILA RAJIVA: The Mind-Body Politic
Individuals Not Ideologies
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Prem Watsa On The Uptick Rule
Prem Watsa of Fairfax Financial - one of several targets of short-selling attacks - in an interview with financial editor Diane Francis in the National Post:
“Q What stock market rules contributed to the meltdown?
A Eliminating the uptick rule [can only short on upticks in stock prices] was a mistake and so is short selling without borrowing the stock first. The ban on shorting financial institutions is lifted again and the SEC is debating whether to bring back the uptick rule again. What we need more of is transparency in all markets, including with respect to shorting and derivatives.
Q What of the role of boards of directors?
A In a bubble it’s difficult for boards of directors. Compensation should be long term. It should be stock-based and not cash. Our company’s compensation system is focused on the bottom line, not top line, and is long term. The Romans built strong bridges because their engineers had to stand under them as the army crossed them for the first time. Responsibility brings better results and aligned interest with partners.”
My Comment:
Watsa is an interesting figure to listen to on the financial crisis. Born in Hyderabad and educated in Chemical Engineering at the Indian Institute of Technology, he is the founder, CEO, and chairman of Toronto based Fairfax Financial, as well as a director and member of the risk committee at ICICI Bank in India. He’s been called India’s Warren Buffett and he did handsomely for Fairfax investors, turning shareholder equity from $2 billion in 2006 to $6.5 billion in 2009 by betting against credit default swaps.
Besides specific rules like the uptick rule, he cites the emphasis on ratings (versus due diligence or prudent risk management) and an increasingly short-term bias in the way companies, shareholders, and money managers act.
What does that amount to? A concern with the way things look, rather than the underlying reality.
It was the focus on labels and not reality that did the capital markets in. At least, that’s my generalization
Zerohedge On Banning Credit Default Swaps
Zerohedge has a technical discussion of why hedge fund manager David Einhorn’s call to ban Credit Default Swaps is essentially a call to dismantle the entire fiat money system. Some of the details elude me, as they’re very technical, but the rest seems right to me. There’s no inherent difference between a credit default swap and, say, an interest rate swap, of which there are many more. So Einhorn’s demand is in effect a demand to ban all derivatives…
“Remember the liquidity pyramid?
As the graphic shows, derivatives account for 1,000% of world GDP, in essence allowing the world to believe fiat money is worth something only courtesy of financial sleight of hand which involved derivatives and securitizations. Yet all those calling for an end to CDS also have to realize that due to CDS intertwined nature, the world fiat system would need to do away with all derivatives (not just CDS), and when you do that you basically eliminate the other hybrid asset classes: securitizations being chief among them. What this would leave us with is a liquidity pyramid which ends with bank loans, which are much more manageable and whose risk can be controlled. It would also leave the world with a fiat currency system, which would lose about 10x of its value overnight, thereby leading to an instantaneous and global unwind of fiat money, and rolling waves of domestically denominated hyperinflation. A spectacular race to the bottom of the asset pyramid. And who will rather commit suicide than see that happen: why the Federal Reserve of course.
Which brings us full circle: an attack on CDS is an attack on excess liquidity, which is an attack on the global asset/liability imbalance (as world GDP and otherwise output has no chance of catching up with the liquidity that is currently available), which is an attack on fiat money, which is an attack on the perpetually low price of gold (because if and when derivatives and securitizations are done away with and tangible assets regain their true value, gold would go up by at least the same magnitude that fiat currencies are devalued), which is an attack on the heart of our broken financial system itself, and, an attack on the Federal Reserve, the Fractional and Central Banking System in principle. Well done David.
We hope Einhorn is successful in bringing more people to understand not just what the risk implications of CDS are (while also demonstrating the positive value that they do in fact provide in a rigged and broken capital market), but also what the underlying thematic subject of his attack really is: a busted fiat system. In essence, David believes in a fresh start. So do we, because on a long enough timeline…”
My Comment
Just to make it clear - I am myself not in favor of banning all derivatives. Why? Not because I think they´re profound innovations..or vitally necessary. But I think it´s the wrong way to go about tackling the problem. Banning one set of financial instruments will only prevent the smaller players from using them. The largest and best connected players will game the ban in some way, or make use of other sorts of compensating structures. A better way would be to undo the fiat money system altogether…
So my agreementis with Zerohedge´s assessment of the situation and not necessarily with Einhorn´s recommendation on that point.
Besides, Einhorn, who made his money off of CDS´s, is an odd person to be pushing a ban.
Janet Tavakoli Faces Off With Goldman On AIG CDOs
Janet Tavakoli in Market Watch
“Earlier, Goldman denied it could have known this was a problem, yet acknowledged I had warned about the grave risks at the time. If Goldman wants to stick to its story that it didn’t know the gun was loaded, then it is not in the public interest to rely on Goldman’s opinion about the greater risk it now poses to the global markets.
Goldman excuses its participation by saying its counterparties were sophisticated and had the resources to do their own research. This is a fair point if Goldman were defending itself in a lawsuit with a sophisticated investor trying to recover damages. It is not a valid point when discussing public funds that were used to bail out AIG, Goldman, and Goldman’s “customers.”
Goldman claims the portfolios were fully disclosed to its customers. Yet at the time of the AIG bailout, Goldman did not disclose the nature of its trades with AIG, and Goldman did not disclose these portfolios to the U.S. public. If it had, the public might have balked at the bailout.
The public is an unwilling majority owner in AIG, and public money was funneled directly to Goldman Sachs as a result of suspect activity. The circumstances of AIG’s crisis were extraordinary and without precedent. I maintain that the public is owed reparations, and it would be fair to make all of AIG’s counterparties buy back the CDOs at full price, and they can keep the discounted value themselves.”
The Conscience Of A Speculator
December 20, 1998: an exchange between George Soros and Steve Kroft on “60 Minutes”:
“Kroft: “You’re a Hungarian Jew …”
Soros: “Mm-hmm.”……Kroft: “My understanding is that you went … went out, in fact, and helped in the confiscation of property from the Jews.”
Soros: “Yes, that’s right. Yes.”
Kroft: “I mean, that’s—that sounds like an experience that would send lots of people to the psychiatric couch for many, many years. Was it difficult?”
Soros: “Not, not at all. Not at all. Maybe as a child you don’t … you don’t see the connection. But it was—it created no—no problem at all.”
Kroft: “No feeling of guilt?”
Soros: “No.”
Kroft: “For example, that, ‘I’m Jewish, and here I am, watching these people go. I could just as easily be these, I should be there.’ None of that?”
Soros: “Well, of course, … I could be on the other side or I could be the one from whom the thing is being taken away. But there was no sense that I shouldn’t be there, because that was—well, actually, in a funny way, it’s just like in the markets—that is I weren’t there—of course, I wasn’t doing it, but somebody else would—would—would be taking it away anyhow. And it was the—whether I was there or not, I was only a spectator, the property was being taken away. So the—I had no role in taking away that property. So I had no sense of guilt.”
Death Penalty for Chinese Embezzler
“China on Tuesday executed a former securities trader for embezzlement, the first person in the industry to be put to death, but millions of yuan are still missing, a state newspaper said.
Yang Yanming was sentenced to death in late 2005 and took the secret of the whereabouts of 65 million yuan ($9.52 million) of the misappropriated funds to his grave, the Beijing Evening News said.The report added that Yang was the first person working in China’s securities sector to be executed.”
More here at News Daily.
Stories like these should alert us to the possibility that there may very well be mini-Madoffs (mini in absolute money terms only) all over the world, on which this recovery rests flimsily.
Feds Suspected Rajaratnam Ten Years Ago
Forbes has a report on an Intel engineer, Roomi Khan who cooperated with the Fed´s to avoid charges in a wire fraud case back in 2001- 2002. Apparently Rajaratnam was making money from inside information even then.
“According to a June 2002 sentencing memorandum for Khan, the earlier case arose after Intel suspected Rajaratnam was getting tips from an Intel insider because he was predicting Intel’s revenue “with extreme accuracy.”
Intel set up a hidden video camera that on March 6, 1998, recorded Khan, employed as a product marketing engineer at the company, faxing an important report concerning Intel’s three main Pentium processors to Rajaratnam.
The memo said Khan on March 24 then faxed handwritten pages that contained pricing information and sales data for Intel chips. “By multiplying those numbers, one can determine Intel’s total revenue for the quarter,” it said.”
Madoff -Related Accounting Firm Does Dubai´s Accounts..
From the Independent:
“Dubai World will start a formal process next week that will see it invite leading banks, including HSBC, Royal Bank of Scotland (RBS), Lloyd’s Banking Group and Standard Chartered, to create a steering committee to represent the many lenders. KPMG has been lined up by the lead banks to represent them in negotiations, with a formal appointment expected once the compilation of the five-to-six bank steering committee is finalised.
My Comment:
Now, KPMG is the big four accounting firm that gave Madoff´s representations to Tremont Group Holdings (a US fund that Madoff purportedly hoodwinked) a thumbs up. The Tomchin Family Charitable Trust, one of numbers of investors who were allegedly scammed by Madoff, has launched a lawsuit against KPMG and Tremont for negligence in monitoring one of Tremont´s funds that invested with Madoff.
The lawsuit included a list of other Madoff clients that included Victoria de Rothschild of the banking family of the Rothschilds and a Tory party contributor:
“Also on the list of Mr Madoff’s British clients is Lady Victoria de Rothschild, who is related to Nathaniel Rothschild, the co- chairman of Atticus Capital, the hedge fund.
Lady Victoria is a well-known figure on the society circuit and became known more recently as a lender to the Tory party, having set up a special company that gave the party a £1,014,000 loan that is due to be repaid in 2010.”
KPMG has also been hit with a $1b lawsuit for “reckless and negligent” auditing of failed subprime broker, New Century Financial, reportedly the first major case against an auditor arising from the financial crisis.
My Comment
So we have a Madoff-tainted accounting firm KPMG, with multiple legal problems, representing the banks that loaned to Dubai on one side, and (as I noted before) French banking legend Rothschild on the other side, heading up the restructuring efforts for Dubai….
Wiki has a list of KPMG´s legal infractions that includes this:
“In February 2007 KPMG Germany was investigated for ignoring questionable payments in the Siemens bribery case.[29] (Siemens agreed to pay a record $1.34 billion in fines to settle the case in December, 2008.) In November 2008 the Siemens Supervisory Board recommended changing auditors from KPMG to Ernst & Young.[30]
In 2006, Fannie Mae sued KPMG for malpractice for approving years of erroneous financial statements.[31]
In March 2008 KPMG was accused of enabling “improper and imprudent practices” at New Century Financial, a failed mortgage company[32] and KPMG agreed to pay $80 million to settle suits from Xerox shareholders over manipulated earnings reports.”
Some confidence-builder… a bank that´s been closely connected to the Madoff scam and to the Fannie and Freddie case (and hence, to Goldman Sachs)…
KPMG and Deloitte were brought in to investigate India´s ¨Madoff¨” - the fraud- riddled IT outsourcing giant Satyam (now Mahindra Satyam, its post-merger avatar - over the objections of the Institute of Chartered Accountants, India´s regulator, which said KPMG was not registered with it and would thus not be subject to its code of conduct or disciplinary proceedings.
Dubai Government Thumbs Its Nose at Creditors
After tentatively implying that there would be a back-stop to Dubai World´s debt problems, the Dubai Government on Monday disowned any legal obligation to Dubai World and told creditors that they needed to take responsibility for their loans.
“Creditors need to take part of the responsibility for their decision to lend to the companies,” said Abdulrahman al-Saleh, director general of Dubai’s department of finance. “They think Dubai World is part of the goverment, which is not correct.”
My Comment:
What´s going on here? The back and forth isn´t recent, but has been going on the whole year, with Dubai implying at one time that its debt load was taken care of, and at another, that it still had more problems; and in this instance, first seeming to back up Dubai World and then, backing-off from its backup….
The timing and vacillation seem to suggest that the government is testing the market and the reaction of investors before making its move. Not good.
And it leaves open the possibility, already raised by UBS in a recent Bloomberg piece, that the problems exceed the $80 billions of government liabilities and might extend to off-book structures that are not presently known.
Update:
After weekend assurances from Dubai that its much richer fellow-emirate Abu Dhabi, seat of the UAE federal government, would help, and that liquidity would be assured for local and international banks that needed it (through a “special additional liquidity facility”), Asian markets recovered this morning from their sell-off last week. But this morning, the local stock exchanges have been hit hard and this new announcement could provoke a second sell-off in world markets, especially in the UK FTSE, since British banks, especially Royal Bank of Scotland, have loan exposure to Dubai World.
Then, there´s also the exposure that UK banks have to other investments where Dubai World holds a stake.
And there´s the indirect exposure US banks have to Dubai through ties with UK banks.
India Fears Effects of Dubai Meltdown
After earlier assurances that the Dubai meltdown wouldn´t impact the Indian market much, top officials now admit in published reports that the Indian labor market could be affected.
“Annual remittances to India from UAE is about 2 billion US dollars, out of the $52 billion sent by Indian expats from across the world.Two-thirds of the six million people living in Dubai are Indians, more than 60 per cent of them Malayalis, much to the worry of Kerala’s Finance Minister T M Thomas Isaac.“One main fear,” he notes, “is that the credit to realty sector in Dubai would be frozen for some time. It could seriously affect the construction sector, thereby our workers.” There is also concern about the fate of Kochi’s Smart City project as the Dubai-based real estate giant TECOM is already alleged to be in a bad shape.Most of the Indians employed in the UAE, according to recruitment agencies, are in the real estate sector, financial services and retail.“The Middle East meltdown,” says E Balaji of Chennai-based headhunting firm Ma Foi Management Consultants, “will lead to at least 25 per cent contraction in the job market. It can have a ripple effect.”
My Comment:
I´m assuming that the job market refered to is the job market for Indians in the Middle East….
Meanwhile, the rupee has come under pressure as the Indian stock market sold off on the events in Dubai.
Deadbeat Expats Flee Sharia Crackdown on Debtors
Foreign workers lured by the promise of easy living and credit are turning tail and choosing to leg it, rather than face Dubai´s tough Sharia law which mandates prison for debtors [not a bad idea in some cases...]:
“Now, faced with crippling debts as a result of their high living and Dubai’s fading fortunes, many expatriates are abandoning their cars at the airport and fleeing home rather than risk jail for defaulting on loans.
Police have found more than 3,000 cars outside Dubai’s international airport in recent months. Most of the cars – four-wheel drives, saloons and “a few” Mercedes – had keys left in the ignition.
Some had used-to-the-limit credit cards in the glove box. Others had notes of apology attached to the windscreen.”
Abu Dhabi Agrees to Selective Bail Out
“We will look at Dubai’s commitments and approach them on a case-by-case basis,” the official told the Reuters news agency by telephone, adding: “It does not mean that Abu Dhabi will underwrite all of their debt.” Al Jazeera, November 28, 2009
An unnamed Abu Dhabi official has said that the rich UAE [United Arab Republic] emirate will help its spendthrift neigbour Dubai on a case by case basis.
This gets pretty interesting for all the other countries out there with sovereign debt problems .. even though, as I blogged earlier, Dubai´s is not a sovereign debt problem. It´s a problem for Dubai World.
However, there seems to be a perception issue involved, which is causing credit default swaps for Irish banks to rise dramatically.
What´s going on?
This isn´t the first time the Dubai story has caused jitters in the market. Ten months ago, Dubai CDS´s rose to record levels on fears that neighboring and much richer Abu Dhabi wouldn¨t ride in to the rescue.
But that was Dubai CDS. Now it´s Irish CDS´s that are up.Over at the Baseline Scenario, Simon Johnson has an explanation. He says the Irish tremors are caused by the perception that as Dubai goes, so go the other sovereign debt crises around the world:
1. If Dubai can effectively default or reschedule its debts without disrupting the global economy, then others can do the same.
2. If Abu Dhabi takes a tough line and doesn’t destabilize markets, others (e.g., the EU) will be tempted to do the same (i.e., for Ireland and Greece). “No more unconditional bailouts” is an appealing refrain in many capitals.
3. If the US supports some creditor losses for Dubai (e.g., because of its connections with Iran), this makes it easier to impose losses on creditors elsewhere (even perhaps where IMF programs are in place, such as Eastern Europe).I´m not sure I follow this reasoning at all. Nor do I understand why Mr. Johnson seems to think this adds up to strengthening Ben Bernanke´s hand…..
Let´s see. Is Mr. Johnson saying that if picking and choosing whom to rescue is OK for an Arab sheikh, it should be good enough for Ben Bernanke?
Frankly, that sounds less like an explanation and more like advance PR for the Fed to engage in arbitrary treatment - bailouts - of banks and other companies..
[Update: And lo, it turns out that Ben Bernanke does need all the help he can get. He wants his power, dammit...see this oped at the Washington Post, hat tip to EconomicPolicyJournal]
A more convincing explanation of the Irish reaction than Johnson´s is Irish exposure via investment and employment to the Dubai economy.
“The Emirate was a Mecca for the Irish glitterati during the Celtic Tiger years, with many would-be investors taking a gamble. Ireland captain O’Driscoll bought an apartment in the e389million Tiara Residence in 2006 off the plans. However, the property may now be worth much less than the €500,000 he paid for it.
But thousands of Irish investors are facing the prospect of their Dubai prop-erties plunging in price. Price drops in Dubai have been severe. According to Knight Frank Global House Price Survey, prices dropped by 40%.
It’s all a long way from the glittering heights of the middle of the decade - and from the 1980s, before the ruling Al-Maktoum family decided to turn their dusty emirates into a leading city.
The Irish have shaped the landscape of Dubai like few other nationalities, with Irish builders, engineers and architects prominent in building up the city state.
But now, question marks hang over the fate of hundreds of Irish who escaped the slump at home for jobs with companies under Dubai’s control.”
More here.
Dubai Govt. Unable to Pay Debt
“The government of Dubai is in major financial trouble.
The government late Wednesday said it would restructure Dubai World and announced a six-month “standstill” on repayments of the state-run wide-ranging conglomerate’s debt.
Government-owned Dubai World is a conglomerate with interests in real estate, ports and the leisure industry. The firm carries around $60 billion in liabilities. Credit agencies Moody’s Investors Service and Standard & Poor’s downgraded the debt of a range of government-related firms, including DP World, after the restructuring announcement.
The dollar amounts involved with Dubai are relatively small in this tranche (compared to the real estate debacle0, but this continues to indicate the shortage of dollars to support the current capital structure.
As one would expect, markets are reacting negatively. International stock markets are down across the board. The dollar is climbing.”
More at The Telegraph.
My Comment
We´ve been watching this story since we first read it via Peter Cooper, who has some other insightful comments on his blog, Arabian Money.net.
“The Private Equity World Middle East 2009 conference this week attracted a good crowd and many sponsors. However, the gloom and despondency among delegates and speakers is tangible. Why are these canny business operators so depressed?
Basically they do not believe in the recovery and see a double-dip in the global economy as stimulus packages are withdrawn. The current uptick has left businesses too highly priced and their owners overconfident in the opinion of private equity firms.”
Cooper has also noted that gold sales in Dubai have crashed, although with the increase in general investor interest, he thinks this won´t have a major impact on the world gold market. Cooper also thinks the China boom is driven mostly by government stimulus money and is very vulnerable to a collapse.
His opinion comes with regional expertise behind it, while mine is simply based on my sense that the 2008 crash was only a preview of coming attractions…but still, I´m wary of the move in gold. My sense is that speculative money is pushing up the price and it could go down fast short-term. Long-term fundamentals remain good, of course.
Now, this is Thanksgiving and trading is thinner that usual, so market fluctuations do get amplified. Also, the move down in gold shouldn´t be taken out of context. It´s only to be expected, given its strong performance recently. But nonetheless, the strengthening of the dollar and the sell-off in the markets is significant.
Also significant is the fact that the Dubai government made the announcement after the local stock market had closed and on the eve of the Eid holiday that runs upto December 6.
Here are the numbers:
[(Note: the Asian markets sold off on Thursday, the other figures are opening figures in Europe and America.]
Update: there was some recovery in the markets by the close of Friday.
[Note also: First set of figures is from AP, Friday, November 27, 5:34 AM.]
Figures in brackets are from IBNLive.
Japanese Nikkei 225 down 3.2% (2.28%)
Australia down 2.9%
Shanghai down 2.4% (1.82%)
(India´s Sensex down 2.67%, Nifty down 2.8%)
Hang Seng (Hong Kong) down 4.8% (3.45%)
Kospi in S. Korea down 4.7% (4.01%)
Europe, down over 3% on Thursday, slid further:
FTSE 100 (UK) (down 3.2% on Thursday) 0.3%
DAX (Germ) (down 3.25% on Thursday) 0.4%
CAC-40 (France) (down 3.4% on Thursday) 0.6%
The Canadia market (TSX) dropped over 200 points.
On Wall Street, the Dow is down this morning by 2% and the S&P by 2.5%
Oil down by $4.17 to $73. 79 a barrel in Europe ($72.39 in Asia).
The dollar climbed back up from a 14 yr low of 84.81 yen to 86.33 and moved above parity to the Swissie.
Gold fell from a high above $1192 on Thursday to as low as $1136 (a move of $52 $56, which isn´t that big a deal for it, but nonetheless could be an indication of future downside volatility)
Looks like in a market sell-off, as before, the dollar gains..
This is why price-chasing is a danger.
It’s Not the Borrowers, It’s the Lenders
Karl Denninger at Market Ticker is usually someone I agree with, but on this he strikes me as at least partially wrong:
“But just as occurred in the 1930s, Bernanke cannot change the dynamic because there are no willing and able borrowers left.
THAT is the dynamic that sets off deflation and makes it pervasive. This is the condition that Bernanke has ignored and claimed does not exist, but the fact remains that it does.”
No willing and able borrowers left? Even anecdotal evidence says that’s not true.
People with solid credit histories are being refused loans.. and if you have some kind of credit glitch, forget it. And forget about getting NINJA loans and liar’s loans and all the rest of the credit that used to be available like a spigot.The banks aren’t lending. But it’s not because there are no borrowers. Of course, there are people who’d like to borrow and can. All the people who weren’t flipping houses and maxing out plastic, for instance. Believe it or not, there are plenty of us.
Banks aren’t lending because they don’t want to. They have other reasons besides unqualified borrowers:
*They have to shore up their balance sheets and build reserves* They’ve been burned before, and don’t know what kind of collateral is out there and what kind of assets.
*No one knows the correct price of anything, because values are deflating in all sectors or are badly manipulated by government subsidies and intervention; and also, because the mark-to-market model was suspended (correctly, in my opinion).
*Lenders are uncertain about the future and are waiting
*Banks can get a better return investing/speculating with their money - and there are plenty of borrowers for that. Investors are just waiting on the side-lines for the commodities/currencies/metals/housing/you-name-it casino to reopen.
The Renegade Economist on Gordon Brown’s Lies
The Renegade Economist takes apart Gordon Brown’s inane attempts to pretend he had no hand in the global financial collapse.
World Bank Global Outlook: No Green Shoots
This harsh reality is reflected in the World Bank Global Outlook Report of June 22, 2009.
It notes the following for 2009:*Global growth is set to fall by 2.9%
*World trade is likely to shrink by nearly 10%
*Industrial production in rich countries will drop by 15% from August 2008
*Developed economies will contract by 4.5% in 2009 and grow only in 2010 and 2011
*The US economy will decline by 3%
*Private capital flows to developing countries are likely to be halved, from $US 707 billion (2008) to $US 363 billion (2009)
*Industrial production in developing countries, excluding China, is set to fall by 10%.
*GDP growth in developing countries will fall from 5.9% (2008) to 1.2%.
China Quotes Ben Franklin, Criticizes Greenspan for Asset Inflation
“Mr Cheng [former vice-chairman of the Standing Committee and current head of the green energy drive] said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets. This is where Greenspan went wrong from 2000 to 2004,” he said. “He thought everything was alright because inflation was low, but assets absorbed the liquidity.”
Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery. China’s task is to switch from export dependency to internal consumption, but that requires a “change in the ideology of the Chinese people” to discourage excess saving. “This is very difficult”. Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China.
“The US spends tomorrow’s money today,” he said. “We Chinese spend today’s money tomorrow. That’s why we have this financial crisis.” Yet the consequences are not symmetric. “He who goes borrowing, goes sorrowing,” said Mr Cheng.
It was a quote from US founding father Benjamin Franklin.”
More here at The Telegraph (UK).
My Comment:
Three things give this remark away, in my humble opinion as a long-time propaganda watcher.
1. The speaker is the head of China’s green energy drive. That means he is likely to be on good terms with the green energy people in the US government, the financial center of which is Goldman Sachs. Goldman Sachs has extensive ties with China’s state sector and is counterparty to huge derivative contracts with state banks and companies.
2. It is notable that Mr. Cheng’s language echoes the language of the left-liberal governing class in emphasizing the role of Greenspan at the expense of everything else. Greenspan, being a former Randian and an avowed libertarian, is expendable to this group. Cheng does not mention the role of cheap money, the creation and trading of mountains of derivative contracts, and debt-based policies that go back to long before 2004, and indeed long before Greenspan. He does not mention the Federal Reserve itself.
3. It’s also notable that Mr. Cheng echoes the left-liberal line about over-saving being a problem in China. But the problem is not thrift and savings (i.e. capital formation), which by definition can never be excessive in a capitalist economy where investment is put to work by genuine market forces. The problem is malinvestment caused by manipulation of the interest rate. And that’s a problem in which the Federal Reserve’s role is critical.
Major Market Move in Offing
Looks like there’ll be a good deal of volatility ahead in the markets this coming week and through the fall:
*From Monday last week onward, New York has been riled up by the news out of China that Chinese SOEs (State Owned Enterprises) might walk away on derivative contracts that they think have been deeply manipulated. (They’re right on that). The SOEs involved are Air China, China Eastern, and Cosco.
*The derivatives are not mortgage-backed securities (the cause of the 2008 melt-down) but - likely- hedged oil futures in the OTC (over the counter) market, which is unregulated (that is, the SEOs hold synthetic longs).
*The threat - if it is that - has forced gold out of its summer trading range to within points of the $1000 mark, before falling back..and it pushed up the Chinese market by about 5%.(Sept 3)
*The counter-parties are 6 foreign banks, said to include Goldman Sachs, UBS, and JP Morgan. Goldman could take a hit on the contracts for around $15 billion, it’s rumored.
Note: The Chinese have been buying IMF bonds (50 billion) and watching the US meltdown and “stimulus” hocus-pocus with a good deal of warranted alarm, because all it means is their investments are being manipulated and driven down.
Obama’s reappointment of Bernanke was also taken as a bad sign by the Chinese. (correctly).
*Rumors have been swirling of further defaults of major US banks.
*The G20 has a preliminary meeting this weekend and the Chinese are said to have put the purchase of off-market gold on the table.
*The Chinese are pushing gold and silver on their populations, probably in anticipation of a currency meltdown.
*Meanwhile, Hong Kong has asked for all its gold to be returned from London.
*Last week, Germany asked for all its gold to be returned from London.
*Meanwhile, Abu Dhabi Commercial Bank and King County, Washington State have brought suit against Moody’s, S&P, and Morgan Stanley on fraud charges for the contracts they wrote, a case that would have massive implications for how other contracts are treated.
*[Oddly (?), Washington State is also where the earliest swine flu cases in the US were detected and where one of the largest outbreaks on campus just surfaced today - with some 2000 students at Washington State University coming down with the virus. Washington State had previously received large grants from Homeland Security for emergency preparations for pandemics, had TV Public Service Ads in place, had written up plans and practiced exercises].
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