Just how large is China’s subprime exposure?
[Can Moscow and Beijing] mend a global financial system battered by subprime crisis? Where are the central banks of Russia and China?
Hmmm. The fact that China and the oil exporters are running a large current account surplus does – in a lot of ways – help to explain why so much credit was available for so long for so many Americans looking to buy homes. At the same time, I am not sure that Russia and China can really do much to solve the subprime crisis. It, after all, stems from a combination of over-indebted US households that no longer can make mortgages payments and a crisis of confidence in US financial engineering.
But credit should still be given where credit is due. Russia’s central bank has helped, in its own small way. Its willingness to sell dollars and euros over the past two weeks helped foreign investors take some risk off the table, and in the process, helped supply liquidity to the market.
China is also helping, though in a different way. Its banks clearly will be absorbing some of the losses from subprime. SAFE likely will absorb some losses too – though we don’t yet know how much.
I have spent a bit of time recently trying to guess China’s subprime exposure. The three big Chinese state commercial banks have disclosed about $12b (11.94b to be exact) in subprime exposure (BoC has the most exposure, but also the most foreign debt).
These three banks collectively held – at the end of 2006 — $155b in dollar denominated securities and $199b in foreign securities. That works out to almost all of the $228b in “private” Chinese holdings of debt securities that show up in China’s net international investment position data.
In addition to holding a fair amount of subprime exposure, they also likely have a lot of exposure to “prime” US mortgages, and probably a range of other US assets as well.
But the $200 in debt held by the three large state commercial banks at the end of 2006 pales relative to the $1,066 billion that SAFE had at the end of 2006 — let alone its current stash of $1,332 billion.
And it is very, very hard to figure out how much of that is in US mortgages. The US survey data now breaks out holdings of mortgage backed securities from holdings of other asset backed securities. But the US data is over a year old, and it clearly doesn’t capture all of China’s current holdings.
How do we know this? Simple: the three Chinese banks have disclosed more subprime holdings ($12b) than China’s recorded holdings of all MBS in June 2006 ($9.45b). The US data can be found at the very end — p. 117/ Table 25 — of the most recent US Treasury survey.
It isn’t clear – at least to me – if China’s banks hold their US securities in China or Hong Kong. But the combined total of the MBS held by China and HK at the end of 2006 — $14.6b — is only a bit larger than the exposure the Chinese banks have disclosed to US subprime debt. Adding the data from Hong Kong in doesn’t solve the puzzle.
Moreover, the limited scale of China’s holdings of MBS reported in the US data is at odds with the reporting of Keith Bradsher of the New York Times. Bradsher, citing “people with knowledge of the central bank's trading,” has reported that China holds about $100b of private MBS. It is also at odds with a fair amount of anecdotal data.
The FT’s Alphaville reported about a letter from Kyle Bass of Hayman capital last week. Bass claimed::
I recently spent some time with a senior executive in the structured product marketing group (Collateralized Debt Obligations, Collateralized Loan Obligations, Etc.) of one of the largest brokerage firms in the world. … This individual proceeded to tell me how and why the Subprime Mezzanine CDO business existed. Subprime Mezzanine CDOs are 10-20X levered vehicles that contain only the BBB and BBB- tranches of Subprime debt. He told me that the “real money” (US insurance companies, pension funds, etc) accounts had stopped purchasing mezzanine tranches of US Subprime debt in late 2003 and that they needed a mechanism that could enable them to “mark up” these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!! …. Interestingly enough, these buyers (mainland Chinese Banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, UK banks) possess the “excess” pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the US in USD, 2) petrodollar recyclers.
These two pools of excess capital are US dollar denominated and have had a virtually insatiable demand for US dollar denominated debt…until now. They have had orders on the various desks of Wall St. to buy any US debt rated “AAA” by the rating agencies in the US. How do BBB and BBB-tranches become AAA? Through the alchemy of Mezzanine-CDOs. With the help of the ratings agencies the Mezzanine CDO managers collect a series of BBB and BBB- tranches and repackage them with a cascading cash waterfall so that the top tiers are paid out first on all the tranches – thus allowing them to be rated AAA. … This will go down as one of the biggest financial illusions the world has EVER seen. These institutions have these investments marked at PAR or 100 cents on the dollar for the most part. Now that the underlying collateral has begun to be downgraded, it is only a matter of time (weeks, days, or maybe just hours) before the ratings agencies (or what is left of them) downgrade the actual tranches of these various CDO structures.
That is a fairly dramatic claim – and one at odds with the relatively limited exposure of Chines to US mortgages reported in the US data. So what is going on?
First, and most obviously, the US survey data is now a year out of date. It misses $400b in Chinese reserve growth (roughly $370b adjusting for valuation effects) and an additional $63.6b in private Chinese debt purchases in the second half of 2006 that shows up in the Chinese balance of payments data (some of those private purchases may have been reversed in the first half of 2007, we don’t yet know). The acceleration in Chinese reserve growth over the past year coincided with an increase in China’s risk appetite. The purchase of debt securities by China’s banks also picked up in the course of 2006 – and a lot of these purchases were financed using funds borrowed from the PBoC through fx swaps –
As a result, China — both the banks and SAFE — likely added substantially to their holdings of US mortgage debt over the past year. That doesn’t bode well for China – at least not if it bought newly issued MBS and above all new mortgage-backed CDOs. The 2006 “vintage” of subprime CDOs hasn’t received rave reviews from the critics. A lot of those mortgages were taken out by people who umm perhaps stretched the truth in order to qualify for a loan to buy a home that they expected to rise in value, aided by mortgage-brokers looking for another commission …
Second, after looking at the data on the reported holders of US MBS in the middle of 2006, I would guess that the US data isn’t picking up the ultimate owners of a lot of MBS. Two give away: the single biggest holder of MBS was the Cayman Islands ($72.4b of $340.9b total) and the Caymans, Bermuda and Jersey combine to account for about 30% of total foreign holdings.
My guess is that a lot of CDOs are legally set up a Cayman island funds. Their purchases of US debt show up as purchases from the Caymans. But the CDO then sells tranches – effectively its own bonds – to investors globally. Those sales wouldn’t show up in the US data. Even the survey is only picking up one leg of the overall trade.
Another $120b of MBS were held in the UK, the Netherlands, Luxembourg, Belgium and Ireland. Some of those MBS were held by conduits set up by European firms – and US banks who prefer to show profits (and perhaps now losses) in Europe for tax reasons. But perhaps some CDOs are also managed out of these locations – all of which offer relatively favorable (I think) tax treatment for offshore investors.
Certainly China’s $9.5b in recorded holdings of MBS – and Japan’s $19.8b in recorded holdings – seems a bit low. China and Japan have large current account surpluses to invest in global markets. The Caymans – and for that matter Europe – doesn’t.
In the past, I have used China’s holdings of all “corporate” debt as a proxy for its MBS holdings – largely because the rise in Chinese holdings matched the anecdotal reports that China had emerged as an important buyer of “private MBS.” After looking at the data more closely, I clearly got this wrong – the majority of China’s recorded holdings of corporate debt are not MBS. See the Table 25 at the back of the 2006 survey; too bad the monthly TIC data doesn’t provide a bit more of a breakdown between different categories of corporate debt.
But I am also relatively confident that the US data understates China’s holdings. There is just too much evidence that China was a force in the MBS market over the past year to believe the US data.
Bradsher’s estimates make sense to me. Significant purchases of MBS over the past year that don’t fully register in the US data would also help fill in the huge gap between recorded Chinese purchases and any plausible estimate of the increase in its dollar reserves. Some of London purchases and Hong Kong purchases are also likely making their way to China. No one else has bought $450b of debt over the past year …
But even if SAFE has $100b of “private” MBS and say $20b in subprime exposure that doesn’t represent that large a share of its portfolio. It probably holds close to $900b in Treasuries and Agencies and another $300b in relatively safe euro, pound, Canadian dollar, and won-denominated debt. And on a mark to market basis, the rise in the value of China’s Treasuries and Agencies likely offset much of the fall in the value of its “subprime” CDOs. Say the average duration of China’s holdings is around 3 years. And say US interest rates fell by 20 bp because of the subprime crisis. That implies a 0.6% increase in the market value of China’s holdings from interest rate changes – or a $6b rise.
China’s true exposure to the subprime crisis doesn’t come – in my view – from its direct holdings of CDOS that hold subprime CDOs.
No, China’s exposure comes from its concentrated bet on the dollar – and the risk that the US policy response to a slowing economy and investors aversion to US debt will combine to put pressure on the dollar going forward. In my view, analysts who rely on the TIC data to infer China’s holdings end up understating the dollar share of China’s portfolio rather significantly. China now holds a lot more than $635b of US debt. Just look at the survey data – is shows close to $700b in Chinese holdings over a year ago (p.50/ chart 19). The survey revised China holdings up by $90b in mid-2005 and in mid-2006 and likely will do something similar once the mid-2007 comes out.
Further dollar weakness consequently would be a problem for China. It implies more pressure for RMB appreciation – and growing financial risks for the central banks and the investment agency, which have financed their purchases of both dollar and euros by borrowing in RMB. SAFE has a lot more exchange rate risk on its balance sheet than credit risk.
None of this though is to deny the sting China may feel from losses on its holdings of CDOs. It likely bought at the wrong time, just as the US housing market turned south. And while subprime CDOs may not amount to that large a share of China’s overall portfolio, they could account for a decent share of recent flows.
And that poses a key question: will SAFE realize the mark to market gains on its treasuries by selling some and using the proceeds to buy riskier assets – perhaps at attractive prices? Poland’s blogging deputy central bank governor – Dr. Rybinski — thinks China and others central banks with a lot of cash should do so. That would help add liquidity to segments of the market that now lack liquidity. And the central banks might be able to buy some assets at a nice discount.
Or will China retreat from risk after buying a generation of CDOs that offered more risk than return?
My guess is that there are a lot more investors in the US and Europe now hoping to sell illiquid CDOs – including additional CDOs stuffed with subprime debt — to China, Russia and the wealth funds of the oil exporters than there is demand for such exposure … But that is just a guess.
UPDATE: SAFE now reports that it has zero subprime exposure — apparently, it only bought "prime" MBS.
So what does this mean for USD:RMB quasi-peg? How does this situation change the status quo?
“China’s true exposure to the subprime crisis doesn’t come - in my view - from its direct holdings of CDOS that hold subprime CDOs.
No, China’s exposure comes from its concentrated bet on the dollar - and the risk that the US policy response to a slowing economy and investors aversion to US debt will combine to put pressure on the dollar going forward. ”
B. Setser, Kudos to you on a great post.
So the questions then, are;
1. Do you think Chinese officials are of this same mindset or at a minimum recognize the potential loss on their US dollar holdings?
2. If so, if they asked you to advise on appropriate hedging measures, what would your reply be?
IMO, China would have to be foolish to throw more good money after the CDOs.
“Will SAFE realize the mark to market gains on its treasuries by selling some and using the proceeds to buy riskier assets - perhaps at attractive prices? ”
That might make sense in terms of taking advantage of distressed spreads. But spreads may be widest just when underlying treasury yields are lowest (hence the sale of treasuries). So it might also be an idea for them to hedge the underlying treasury interest rate risk in conjunction with this - e.g. through interest rate swaps. Otherwise, expected future credit risk gains may be offset by future interest rate risk losses.
Which begs the question - what does the interest rate risk look like on a typical CDO? What is the typical duration of the underlying MBS and/or the CDO structure? Is it fixed or variable rate?
Given the massive size of PBOC treasury and MBS portfolios to begin with, and the natural platform for duration diversification, it’s not that easy to see a case for there to have been selective micro hedging of interest rate risk within those broad portfolios. But selective forays into wider spread markets when treasury yields are dropping might suggest such a change.
jkh — interesting points, as usual. i need to think about them more.
stuart.
1) some chinese officials recognize the risk associated with their dollar position, some don’t. my perception is that understanding of the risks is growing, but i haven’t been to beijing for a while. others probably have a better sense.
2) china cannot hedge its exposure to changes in the rmb/ $ (or rmb/ euro — as the rmb is likely to appreciate against the euro as well). it could try to shift more assets into currencies that are likely to appreciate alongside the dollar with the rmb, but, well, such countries generally wouldn’t welcome large inflows from China. fundamentally, tho, this is an unhedgeable risk. the PBoC is taking on rmb/$ and rmb/ euro risk because the private market doesn’t want that exposure. it consequently cannot unload it.
Yesterday an analyst at Goldman Sachs in China stated that China has “decoupled” from the U.S. and is able to survive selling to everywhere else in the world. Interesting to note the word DECOUPLED and with such a proud tone. If this means China does not fear the U.S.
well it’s quite obvious. Is China angry if they are stuck with synthetic securities you can bet they are. Does the U.S. need China ? It sure as hell seems so .
I’d be very surprised if PRC banks had large amounts of low tranche CDO exposure. This would be out of character. The CDO exposure numbers that the BOC and ICBC have published so far are reasonable, and almost certainly are in senior debt that shouldn’t lose much value.
Also about FT Alphavile…. It’s important to keep in mind the scale of these things…. If someone sold a billion dollars of bad CDO’s to some Chinese bank or Middle East sheik, that investment is totally insignificant in the grand scheme of things. One billion dollars is pocket change, but it make for a lot of good conversation. I’m rarely worried about anything that costs less than $100 billion.
Brad,
A bit offtopic, do you know anything about the $4,5 billion bet on catastrophe within four weeks ?
http://www.nationalexpositor.com/News/241.html
It’s been showing up on various news recently.
Conspiracy?
dang 2fish, it takes a lot to get your attention. $100b is a lot of money. I am still impressed by somewhat smaller sums. LTCM’s capital was about $3b after all, and the prospect that it might be exhausted (and cut into their much bigger positions) got the entire financial world galvinized for a while.
all accounts agree that china (banks/ SAFE) bought the highly rated tranches. but some highly rated tranches of all subprime CDOs (the ones composed out of the mezzanine tranches of other mbs) may take significant losses, from what i have heard.
Twofish said
“One billion dollars is pocket change, but it make for a lot of good conversation. I’m rarely worried about anything that costs less than $100 billion”.
And how do feel yourself? Like a genius or a good gambler?
Are you nervous with last troubled waters or just behaving as an spanish bull-fighter?
Don’t bull-fight too much, because all pigs have their St. Martin day!
Goodnight!
“some highly rated tranches of all subprime CDOs (the ones composed out of the mezzanine tranches of other mbs) ”
It will be interesting to see how rating agencies can get away with such animals, if they existed. The underlying assets are so obviously highly correlated.
On the other hand if you hold senior tranche of simpler assets and can’t be made whole you can always take possession of the properties, so long as you are not leveraged and forced to liquidate.
re: “stems from a combination of over-indebted US households (just households?)… and a crisis of confidence in US financial engineering”
if ’stems from a combination of [the sale of credit that was inappropriate for many households];
“…Countrywide’s entire operation, from its computer system to its incentive pay structure and financing arrangements, is intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers…” http://www.nytimes.com/2007/08/26/business/yourmoney/26country.html?em&ex=1188532800&en=5cec853a5ac41de8&ei=5087%0A
…and the ways debt was resold and traded;
“…hedge funds… account for… 80% of distressed debt trading… a hedge fund that fails to value its assets properly could face a scenario in which it is severely overexposed… 58% of funds face operational risks related to calculating net asset value… Instrument liquidity… would be a hedge fund holding an unusual derivative contract that other players would be unlikely to, or unable to, purchase if the fund holding the contract had to sell quickly…” http://www.financeasia.com/article.aspx?CIaNID=59502
“…excessive leverage can be dangerous whatever the underlying credit risk…” http://www.ft.com/cms/s/0/389e2912-55d3-11dc-b971-0000779fd2ac.html
…may be more accurate
I think you named it. Large banks in China will suffer huge losses from the inevitable rise of the RMB. Hence the central bank will step in and provide liquidity at home. In so doing, I doubt it will be able to on top of that provide liquidity to the US markets.
Just as in the 20’s it is a too long postponed fall in the leading currency which will create a major liquidity crisis in the challenger and funding countries, triggering the fall of the global debt pile.
The chinese tried to keep the RMB low, just like the US tried to keep the dollar low, and subsidized the battled by two wars global leader. But doing so led to speculation at home and once.
Once it became clear that something at to be done against speculation, once bubbles started to burst at home, this was the end of it.
Forget about NYSE, the important news now is what happens to chinese banks and oil funds. Those have been the liquidity providers. If those start to go bankrupt, because they took too much risk, because export growth falls, investment falls and therefore oil price fall … Then this is the end of the party, no punch bowl anymore and a huge hangover
so rather than the size of the holding, if the more important question of China’s or any entities’ subprime exposure may relate more to relative risk and the ways it is correlated.
re: “chinese banks and oil funds… have been the liquidity providers” ???
Brad, How do you think the current overseas finger burning from US debt products will affect the IMFC’s Multilateral Consultations?
I’m thinking this might be a wake up call that the IMFC can use to try to start the move to a more balanced global system.
If the Fed is lowering US interest rates to provide liquidity and China is raising domestic interest rates to cool the economy, it looks to me that there is more pressure for a reval and more hot money flows.
Back from Vacation.
According to the Chinese rumor mill, given the US addiction and dependency on China’s financing of US deficit debt, an under the table deal has been arranged between Treasury Secretary Paulson and the China PBoC. The US Treasury and Federal Reserve cannot afford to have an Asian buyer’s strike of US debt securities that would skyrocket interest rates, and plunge the US Economy into a deep recession. The US government will “unofficially” compensate the Chinese state-owned banks for their subprime bond losses. The vast majority of subprime bonds owned by Chinese banks were rated at least “AA” by S&P and Moody’s. Thus it is incumbent for the US government to compensate the Chinese for the criminal fraudulent rating of US mortgage bonds.
On a sidenote, notice that the US government has suddenly become more cooperative with the Chinese over the Taiwan issue. The Bush Administration tone from before labelling China as a “strategic threat” to today, opposing Taiwan representation in the United Nations, World Health Organization, etc. It is never a good idea to stick your middle finger at your banker creditor.
wimpie — my sense is that the IMF multilateral consultation is still going nowhere. to the extent the US slowdown keeps the US deficit from rising, the current consensus that the “imbalances” are no longer much of a concern will remain (the latest rhetoric is that imbalances have been solved, global growth has rebalanced, and so on — look at some of lipky’s speeches). the US political calendar (W = lame duck) and chinese political calendar (Party congress and all) argue against any real policy change. Plus, the imf doesn’t yet have a new MD …
if there is impetus for change it will come from a disconnect between us monetary policy (likely to ease) and the monetary policy needed in other parts of the “dollar zone” — i.e. China and much of east asia and the gulf.
Two things for our good host and his readers:
(1) MarketWatch claims…
Liquid Chinese banking sector absorbing subprime
Exposure thought limited; investors still see sector as play on China growth
(2) There’s an article in today’s International Herald Tribune on how others are seeking a broader role in the governance of the US financial industry. What is remarkable is that it’s those in Old Europe who are leading the clamor. Perhaps their FIs have taken on too much of this stuff (BNP, UBS, etc.)
I don’t think any action will come out of it. After all, who is wiser? The free-spending fool (US) or those fooled by the free-spending fool? Act foolishly, pay the price, I say. Just desserts.
Unless there is something big we don’t know about, PRC losses on sub-prime are going to be minor.
As far as Taiwan, the US has been quietly cooperative with Beijing for some time now. This is suddenly getting out into the open because Chen Shui-Bian is under this idea that if he makes a lot of noise, he can pressure get public support from the American public to push the United States into being more cooperative with Taiwan. As usual, he is seriously out of touch with things, and unfortunately I think his efforts will leave Taiwan even more isolated in the international community.
“Let’s have a war to save democracy” is not a theme that is popular with the American people right now.
Private Chinese Company seeks to buy Seagate Technology Corporation
http://www.nytimes.com/2007/08/25/business/worldbusiness/25drive.html?ex=1188705600&en=4a26e7c58272954c&ei=5040&partner=MOREOVERNEWS
SAN FRANCISCO, Aug. 24 — A Chinese technology company has expressed interest in buying a maker of computer disk drives in the United States, raising concerns among American government officials about the risks to national security in transferring high technology to China.
Although disk drives do not fall under a list of export-controlled technologies, the attempted purchase of an American disk drive company would require a security review by the federal government, according to several government officials.
re: “Let’s have a war to save democracy” is not a theme that is popular with the American people right now.
“…since the U.S. military invaded Iraq in 2003, its “show of force” brand has proved to have limited appeal to Iraqi consumers, according to a recent study commissioned by the U.S. military. The key to boosting the image and effectiveness of U.S. military operations around the world involves “shaping” both the product and the marketplace, and then establishing a brand identity that places what you are selling in a positive light, said clinical psychologist Todd C. Helmus, the author of “Enlisting Madison Avenue: The Marketing Approach to Earning Popular Support in Theaters of Operation.” The 211-page study, for which the U.S. Joint Forces Command paid the Rand Corp. $400,000, was released this week…” http://www.washingtonpost.com/wp-dyn/content/article/2007/07/20/AR2007072002163.html
re: subprime crisis… stems from
“…DBS and other regional banks face a credibility problem because there appears not to be a full appreciation of what is on the balance sheet and a failure to recognise the extent of CDO exposure as markets change… Complete, accurate and timely disclosure is critical. Investors don’t appreciate surprises or changes to disclosure.”…” http://www.ft.com/cms/s/0/4a2ec1fa-55d3-11dc-b971-0000779fd2ac.html
“The booming Chinese stock market was responsible for up to half the earnings growth of companies listed in Shanghai and Shenzhen during the first six months of 2007 - a worrying trend that analysts say will exacerbate any market downturn… First-half profits at Ping An Insurance jumped 140 per cent, largely on its stock market investments…” http://www.ft.com/cms/s/0/70816c48-54fe-11dc-890c-0000779fd2ac.html
“…therefore view performance comparisons between Mutual Fund A and Index B for what they are: marketing materials” http://www.indexuniverse.com/index.php?option=com_content&view=article&id=2622&tmpl=component&print=1&page=&Itemid=39
The Great Financial Crisis or Who’s Got a Turd in his Briefcase?
http://www.petras.lahaine.org/articulo.php?p=1707&more=1&c=1
All the major financial analysts claim the ongoing and deepening financial crisis is in large part the result of investor uncertainty. This is because the investment banks, derivatives and hedge funds placed high risk, sub-prime mortgages and junk bonds, along with other more reliable debt paper into packages and sold them to institutional and private bankers who in turn ‘retailed’ them around the world.
The rating agencies, who are paid by the sellers, all gave top billing (AA, AAA) to these hybrid securities, mortgages and junk bonds, encouraging investment advisers to push them on to risk-averse client looking for higher returns than Treasury notes. Most of the investors do not know whose and what paper they are holding, nor how much their hedge funds are losing or have lost. Those who can, have pulled out.
Meanwhile, Goldman Sach, Bear Stearns and Lehman Brothers are all closing down bankrupt investment funds or trying to prop them up. The Federal Reserve props up all the worst speculators in the name of ‘saving the financial system’ - in a way that it would never prop up the failing American health system. The financial system has the ‘runs’ and infusions of Fed funds have failed to block the ‘run for cover’.
The ‘turds’ in the briefcases are big and smelly but no one knows how big: $250 billion or $500 billion. There are a lot of bankers and hedge fund billionaires walking around with invisible clothespins on their noses.
The US Federal Reserve knows what class they represent: Real existing speculator plungers, not textbook risk-calculating value-oriented entrepreneurs, are their reference group. The risk of letting the bad boys sink is that there are too many of them, working in most of the most powerful investment houses, managing too many funds, for the most powerful financiers.
It’s time for central banks to stop bailing out markets
By Andy Xie
Published: August 14 2007 03:00 | Last updated: August 14 2007 03:00
The global credit bubble is bursting. This bubble is primarily leverage financing for owning risky assets. The people who were responsible for what happened played with other people’s money, marketed arcane financial products with false promises of fat profits, but stuffed their own pockets with big bonuses. Neither these masters of the universe nor their greedy but naïve investors deserve to be bailed out. They deserve what is coming to them.
The central banks bear equal responsibility in the current debacle. After 9/11, central banks cut interest rates dramatically and provided the cheap money for this leverage bubble. They must not flood the world with liquidity again to sustain this bubble or create another. The central banks should focus on price stability, not financial market stability, and should provide liquidity only to contain the multiplier effect of the bubble bursting on the economy.
an “independent” economist in Shanghai indeed: http://www.ft.com/cms/s/a3fdb712-49fe-11dc-9ffe-0000779fd2ac.html
“Iraqi hedge fund `The Babylon Fund´ announced today that they successfully managed to steer away from the general global financial meltdown seen lately… the ISX stock market in Baghdad, prices rose strongly, as did value and volumes traded, as participants positioned themselves ahead of foreigners’ entrance into the ISX, which was allowed as of 1st of August…” http://www.hedgeco.net/news/08/2007/iraqi-hedge-fund-escapes-market-turmoil.html
“Another $120b of MBS were held in the UK, the Netherlands, Luxembourg, Belgium and Ireland. Some of those MBS were held by conduits set up by European firms - and US banks who prefer to show profits (and perhaps now losses) in Europe for tax reasons. But perhaps some CDOs are also managed out of these locations - all of which offer relatively favorable (I think) tax treatment for offshore investors.”
we open an irish newspaper to learn that an outfit we never heard of - ormond quai - is a subsidiary of another we had never heard of - sachson l b a german ?bank - and has been trading in slices of dud mortgage deals and lost more money than we can easily comprehend in one month flat.
there is a €17 bn bailout, that’s $23 bn - in germany because the attempted sale of the sachson l b portfolio would destabilise the ?whole bang shute.
so from a general irish perspective -
1 we did not know it was there till we saw the picture of their offices in the paper.
2 we did not know that AAA rated stuff could vanish in a puff of smoke.
3 we wonder what else is down in the dublin financial services centre that we have no clue about.
4 we are a very open economy, more ‘globalised’ than most on the planet.
5 so we don’t want the global financial system to fold up either . . .
what we do know now, if we didn’t before - is that there are a lot of financial operators out there who conceal their nature and activities as religiously as a bunch of taliban wives and girl friends.
- that some of them have been selling brooklyn bridge, and doing so in a way that causes the profits to arise in huckster-hospitable ireland.
- that their friends in high places are prepared to lend more money to cover the general nakedness from public view.
but as brad has pointed out to me with regard to china - if i understand him correctly - it is not enough to lend them money to hold on to what they have. to keep the system afloat they have to keep on doing what they were doing before. now is that going to happen ?
at a subliminal level many countries are unhappy with america. german banks and irish smart guy gamblers are playing the same games, but ordinary people are going to say this started in america. people who run into trouble are not necessarily rational or fair in who they blame for it. the USAAA will be re-rated USB.
the central banks of the world will be arm twisted and scarified into deals to support the system - but remember. ponzi schemes in general do not survive because the organisers stick it out - they survive as long as new suckers pile in at the bottom.
like all of these people - i am ignorant of the financial detail, both what is public and what is concealed. this makes no difference. kick a hedgehog and he curls up. it does not matter whether he understands the difference between boots and shoes. he begins to lose interest in going places. so will small investors and borrowers.
so i am saying that future attitudes among ordinary people to the desirability of credit will be different. bernanke will drop money from helicopters . . . into banks. a waste of time if the little people at the bottom of the pyramid lose the confidence to borrow.
it does not really matter if the fed rescues the man who bought brooklyn bridge - what matters is that this will not now be a good time to put the golden gate on the market. the next bubble will be harder to sell.
“Another $120b of MBS were held in the UK, the Netherlands, Luxembourg, Belgium and Ireland. Some of those MBS were held by conduits set up by European firms - and US banks who prefer to show profits (and perhaps now losses) in Europe for tax reasons. But perhaps some CDOs are also managed out of these locations - all of which offer relatively favorable (I think) tax treatment for offshore investors.”
we open an irish newspaper to learn that an outfit we never heard of - ormond quai - is a subsidiary of another we had never heard of - sachson l b a german ?bank - and has been trading in slices of dud mortgage deals and lost more money than we can easily comprehend in one month flat.
there is a €17 bn bailout, that’s $23 bn - in germany because the attempted sale of the sachson l b portfolio would destabilise the ?whole bang shute.
so from a general irish perspective -
1 we did not know it was there till we saw the picture of their offices in the paper.
2 we did not know that AAA rated stuff could vanish in a puff of smoke.
3 we wonder what else is down in the dublin financial services centre that we have no clue about.
4 we are a very open economy, more ‘globalised’ than most on the planet.
5 so we don’t want the global financial system to fold up either . . .
what we do know now, if we didn’t before - is that there are a lot of financial operators out there who conceal their nature and activities as religiously as a bunch of taliban wives and girl friends.
- that some of them have been selling brooklyn bridge, and doing so in a way that causes the profits to arise in huckster-hospitable ireland.
- that their friends in high places are prepared to lend more money to cover the general nakedness from public view.
but as brad has pointed out to me with regard to china - if i understand him correctly - it is not enough to lend them money to hold on to what they have. to keep the system afloat they have to keep on doing what they were doing before. now is that going to happen ?
at a subliminal level many countries are unhappy with america. german banks and irish smart guy gamblers are playing the same games, but ordinary people are going to say this started in america. people who run into trouble are not necessarily rational or fair in who they blame for it. the USAAA will be re-rated USB.
the central banks of the world will be arm twisted and scarified into deals to support the system - but remember. ponzi schemes in general do not survive because the organisers stick it out - they survive as long as new suckers pile in at the bottom.
like all of these people - i am ignorant of the financial detail, both what is public and what is concealed. this makes no difference. kick a hedgehog and he curls up. it does not matter whether he understands the difference between boots and shoes. he begins to lose interest in going places. so will small investors and borrowers.
so i am saying that future attitudes among ordinary people to the desirability of credit will be different. bernanke will drop money from helicopters . . . into banks. a waste of time if the little people at the bottom of the pyramid lose the confidence to borrow.
it does not really matter if the fed rescues the man who bought brooklyn bridge - what matters is that this will not now be a good time to put the golden gate on the market. the next bubble will be harder to sell.
So the US exports debt products that suck up available Chinese capital and destroy it.
Does that mean we’ve moved on from exporting Dark Matter to exporting Black Holes?
gillies: Another $120b of MBS were held in the UK, the Netherlands, Luxembourg, Belgium and Ireland.
The trouble is that MBS doesn’t give enough information. What type of MBS?
gillies: what we do know now, if we didn’t before - is that there are a lot of financial operators out there who conceal their nature and activities as religiously as a bunch of taliban wives and girl friends.
Actually no…. The activities and nature are all there for people to see. The trouble is that people don’t know to look until something blows up.
Put you card in the ATM funny bits of green paper come out. Take that green paper, and you can buy yourself a cup of coffee. In those transactions there are thousands of things that have to work just right, and an entire industry devoted to making sure that the system works. And most people don’t have the curiosity or the interest to figure out how the systems work….
Until one day you put the card in, and nothing comes out….. Having an economic system collapse before your eyes is something that ends up with repercussions that lasts for generations.
The trouble with Andy Xie is that what is describes makes no sense, he seems to want to add liquidity to the markets without adding liquidity to the markets.
Stuart: “IMO, China would have to be foolish to throw more good money after the CDOs. “
Yes - but unless they let their currency appreciate, they have to buy something denominated in dollars.
They are NOT going to find assets with the same risk-return profile the subprime CDOs purported to have, because those profiles have been exposed as fantasy. So they have to choose: more risk, or less return. In either case, it’s a losing venture, relative to their prior strategies - and it does nothing about the broader risk Brad always comes back to: massive future exchange rate loss from a depreciating dollar when they finally bite the bullet.
It seems as though we load the Chinese up with our debt, and then tell them that the only things they can buy with US dollars and debt are more US dollars and debt. We infect them with toxic waste mortgages, and then Paulson takes a trip to China to try to convince the Chinese to buy more toxic waste mortgages. The Chinese dump three billion dollars into Blackstone, and, in a few weeks, are down half a billion dollars. There are even a couple of US Senators that must believe that threatening the Chinese with tariffs will make them even more willing to subsidize our wars and deficits. Then we try to jawbone them into letting their currency appreciate, so that we can pay them back at in discounted dollars while we devalue their wealth surplus at the same time.
How many times can the US stick it to these people, before they say they’ve had enough? When Greenspan touted adjustable-rate mortgages, was he trying to stick it to lower and middle class Americans in order to keep the real estate bubble inflated, or was that the beginning of a plan to poison the rest of the world with toxic sub-prime/cdo gargage?
black swan -
The Chinese and the oil exporters make their own choices in this matter. They do not HAVE to buy dollars at ALL - they can just let the RMB appreciate. That they choose not to do so is what creates the financial headaches. After all:
1. If China (or the Petros) wants to maintain a current account surplus and dollar parity, it MUST accumulate dollars, and use them to purchase dollar assets.
2. This MUST reduce interest rates in the US - with predictable increases in frothy asset prices and poor investment decisions that ALWAYS accompany cheap money.
3. Because China is the lender, China is also the lender for the bad loans. When they go bust, China MUST eat the losses.
There’s no way out of this - it was predictable, and it was predicted. If China and the Petros believed themselves different, smarter, better - or just that the normal rules of financial markets no longer applied - then they are on exactly the same board as all the other oft-scorned bubble-surfers: high and dry and frantically hoping the tide comes back real soon.
I am no apologist for inflation, nor excessively coining or printing any medium of exchange in lieu of tough political or personal choices. But there is a tone desperation here recently amongst posters that is, perhaps, in excess of what might be deserved. The US remains the world’s largest exporter; the gaps -both fiscal and trade - while large, are of “doable” orders of magnitude, whether we collectively work longer for less, consume/import less, or requisition the required revenue from the numerous sources available domestically. Housing, while o/v in some markets is not going to zero, nor anywhere close, and there undoubtedly as I write this, are untold hundreds of thousands non-Americans thinking about how they can buy a holiday home here given the favorable rates of exchange, current excess supply, and current direction in nominal prices. YEs there will writedowns, and hits to capital throughout the system, along with stricter lending policies in similar fashion to every credit cycle we’ve seen before. Yes, this one is bigger, and the impacts perhaps greater and longer, at a time that sadly might coincide with other contractionary and/or deflationary pulls. But with some leadership, appropriate public policy, traditional belt-tightening, hard and creative work and perhaps civic spirit on the part of the looters to return some of they’ve been stolen back the State (and so the people from who’ve they’ve stolen it from), we could see the back of this relatively quickly, and again join the ranks of the developed and civilized world, with a balanced sense of public interest, and a general perception of reality amongst its people that is a great deal closer to actual reality than it is at present.
cassandra — you are practically an optimist …
the part that still worries me the most is the export/ import gap, which still strikes me as comparatively large. there is a real adjustment there that is not small relative to the size of the us tradables sector.
then i hadn’t considered the possibility of exporting vacation services (along with homes … which amounts to exporting as asset to a non-resident) to the eager masses yearning to brave the TSA and us customs to reach their holiday destination
EthanJ: 3. Because China is the lender, China is also the lender for the bad loans. When they go bust, China MUST eat the losses.
Actually no. A can lend to B. B lends to C. C goes bust. Depending on how you structure the deal it could be that B eats the losses (and this is why investment bank stocks are going down right now).
You can also do clever things so that D eats the losses without realizing it. This is particularly useful if you are a politician.
For example, if Bush were to raise taxes to pay for the war in Iraq, everyone would notice. What has happened is that the chain of events that led to the subprime mortgage fiasco is deeply connected with the amount of money that the US is spending in Iraq in a way that most people can’t follow, and which doesn’t remove money from people’s wallets in any obvious way.
I don’t understand why the US is beholden to the stupid green agenda and doesn’t push clean coal more. The amount of money spent on stupid wars, ethanol and bail outs could go into this. I am very disappointed Obama gave up pushing clean coal.
Surely using this massive US resource makes all the problems you all go on about diminish. Then a little encouragement of the savings rate and we all live in a better world. How an unstable, terrorism prone world prefers the nuclear option makes no sense to me either.
I am a big sceptic that carbon emissions are the primary determiant of climate change. Surely positive feedback loops in water vapour in response to large standard deviation random but natural moves in the earths tempurature could have jsut as much do to do with our current weather patterns as changes to .5% of co2.
Manc Trader
Just to get at the crux of the issue. Bernanke and most economists in positions of power are operating under a theory of credit and markets that is just different from Andy Xie and a lot of the people on this list. The theory of credit and markets that Bernake is acting under is either neo-Keyesian or monetarist and argues that you need to dump liquidity into the system. There is a alternate theory of credit that comes from von Mises and the Austrians, which says that you need to just let the system crash and readjust.
Personally I think that the monetarists are right on this one and von Mises is wrong. If you look at the actual default rates on the sub-primes, they are rather small in the grand scheme of things. Also, the consequences of getting the model wrong are smaller if you take the monetarist approach. If you add liquidity and the von Misesians are right, you’ve just make a crash that was coming anyway slightly wrong. If you take out liquidity and the conventional economists are right, then you risk sending the world into nasty recession.
I should point out that the fascination of conventional economists with numbers helps and the Austrian schools distrust of numbers hurts. What a policy maker wants to know is how bad is it going to get so I can calculate how to sell this to the public and keep myself in power. Mainstream economists can say that their policies will cause a recession of about a yada length, unemployment of yadda size, and a GDP hit of yadda, and at that point the politican can figure out what to do. (Have the problems come early in the term and blaming the previous guy is useful here.) Von Misesian Austrians can’t provide those numbers, and so this is useless for a politician.
I come from an evidential tradition, and I don’t know who is really ultimately right. What I’m interested in is conducting an experiment that gives you the data *without destroying the world*. With that view, going with the neo-Keyesians seems to be the right path.
DC: You were on vacation, so you might have missed the question. I’m curious about an inconsistency. On the one hand, you think that the Washington Consensus was disastrous for SE Asia, but yet you seem to argue that the US should now follow those disastrous policies to deal with subprime mortgages. I’m curious if you can explain this.
I agree with gillies, the party is now clearly over, whatever the CB do. Time is up for the rich folks. THere s no riskless investment or lending activities. There s no profitable investment any where. All you can do in order to lose less money than others is pile US dollar bills or US treasory notes. (Or Best of all japanese and chinese bills and treasory notes).
We ve been through all this. We knew it would happen. It s not as if it s the first party that is over and we don’t nknow who the debtaholics are.
I also agree with twofish. The Iraq war is basically being financed by the oil states and the chinese, precisely those that risk the most in a sudden fall of the USD.
So you can expect a long deflationary era in the USA, whre the US will keep interest rates way too high because they will try to save their currency global status and defend the NYSE and Chicago exchanges … The US will then walk the English way into oblivion, losing all their industrial power.
But in 20 years China will be world leader. I just hope they will be a democracy by then.
/ gillies. I say the USD is IS US DDD—
It s tough to fight the entire muslim world and North Korea and China and Russia, when one so heavily relies on CHinese, russian and (often muslim) oil exporting countries …
In my mind, following Brad s last comment, the big question ahead is what will happen to the chinese exporting sector ?
I mean the US can easily spend less on chinese products,import much less because of disappearing financing, but can the chinese export less ? What will happen to their newly built facilities ?
COuld they be turned into military ones ? (after all the military business is the one business governments can provide without being criticized).
I wonder how it looks 100 millions urban chinese without jobs ? I wonder what it does to the chinese leadership …
re: “i hadn’t considered the possibility of exporting.. homes … which amounts to exporting as asset to a non-resident”
you do live and work in NYC - no?
“…Speaking of bucks, the shrinking dollar has boosted the buying power of foreigners, who are pouring money into New York City real estate as an investment as well as for a place to live… Another source of demand is from parents of students who are attending many of New York’s renowned universities. Instead of paying rent (which, as you might have guessed, is high), many are opting to buy an apartment for their kids to live in while they are in school, then either use it themselves when their offspring graduate, or sell it at a profit. The demand for real estate in Manhattan is so strong, it’s spilling over into parking spaces. It’s not uncommon for a parking spot in a prime location to sell for as much as $250,000…”
http://www.marketwatch.com/news/story/new-yorks-real-estate-market/story.aspx?guid=%7BC1313496-10C6-4D54-973E-81F3264EC8CE%7D
“…In El Salvador, as throughout Latin America, commercial banking services have traditionally been available only to the better off. This year, though, Mr Alfaro was offered an innovative $20,000 mortgage loan in the US… The deal was organised by a US money transfer company called Alante and Integral, a Salvadorian micro-finance bank. Until recently, handling a mortgage for such a small amount, especially a cross-border mortgage, would have been too expensive for banks to make a decent return… The deal highlights the way migrant workers and their families are slowly being brought into the world’s banking and credit markets, which experts say is crucial to giving remittances a wider impact on economic development…” http://www.ft.com/cms/s/0/1bf0b258-55d3-11dc-b971-0000779fd2ac.html
“…the growth - even in balance sheets of non-financial companies - of financial assets, which have risen in the US from being equal to 30% of tangible assets and net worth in 1952 to more than 80% today …financial debt has grown without interruption from 3% of GDP in 1952 to 110% today in the US…” http://www.ft.com/cms/s/0/5a4bbbba-568c-11dc-ab9c-0000779fd2ac.html
Toxic waste takes a human toll:
“In May, China bought a $3 Billion interest in Blackstone.
Since June IPO, Blackstone stock down 28%. Today, Chinese Finance Minister Jin Renqing has resigned for “personal reasons.” DOH!”
from Nattering Nabob Chrons.
Twofish: Actually no. A can lend to B. B lends to C. C goes bust. Depending on how you structure the deal it could be that B eats the losses
Yes, you can structure a deal that way, in private finance. But…
I think this presumes a level of bargaining leverage that the Chinese just don’t (didn’t) have. They’re coming to the market with a humongous pile of cash and everybody knows they’ve got to spend it. For crying out loud, it’s the official position of their government and PBC credibility depends on it! They are buyers only. They take what’s on the table - they are not going to bring loans to market, or repackage them on their own.
If you’re not willing to mix the punch (let alone take away the punch bowl), you can’t act shocked when your party gets out of hand.
(and this is why investment bank stocks are going down right now).
If I could short SAFE* I’d do it in a heartbeat.
* That is, if I could be sure Brad’s analysis is right and SAFE were a transparent public company. Of course, if we had that kind of information, we wouldn’t be in this mess and Brad would need something else to blog about. Not that he’d mind, I suspect…
Twofish:
On the one hand, you think that the Washington Consensus was disastrous for SE Asia, but yet you seem to argue that the US should now follow those disastrous policies to deal with subprime mortgages. I’m curious if you can explain this.
Dave Chiang - Reply:
The economic situations are not comparable. Southeast Asia only faced a liquidity crisis, whereas the US faces a bad debt crisis. Hong Kong and South Korea posted modest trade surpluses; why were their currencies savagely attacked by Wall Street Hedge Funds. Under then Treasury Secretary Robert Rubin, the ulterior motive of the US Treasury and IMF was destroy the Asian developmental model of state driven industrial capitalism. Until distracted by the 9/11 terrorist attacks, the Washington Consensus under the Clinton Administration viewed the booming Asian economies as the primary threat to US Global economic hegemony after the fall of the Soviet Union. Illegal, protectionist trade tariffs were imposed on Japanese luxury vehicles. Not surprisingly, the US Corporate media has also been demonizing Chinese products as inferior, despite the fact that more Mexican food product imports are rejected for contamination by the FDA.
By contrast, the Federal Reserve which reduced interest rates to well below real inflation rates, encouraged people to borrow more than they could afford. America is living beyond its means, borrowing some US$850 billion last year, while household savings in the country is nil or negative. Trillions of dollars in Subprime and Alt-A mortgage debt are simply uncollectable.
To black swan: Funny you should mention that with your user name, since part of Nassim Taleb book of the same name is how quickly people assign causality to things that aren’t related.
In this case, the Finance Ministry only is marginally related to the China Investment Company, and there is a Party Congress coming up and a general cabinet reshuffle before it.
EthanJ: I think this presumes a level of bargaining leverage that the Chinese just don’t (didn’t) have.
If you have cash, you have leverage. China has been careful to buy only relatively low risk securities, so it isn’t going to get hit by the mortgage bust too hard. Once the money enters the United States, then it gets packaged and repackaged into things that went bust.
DC: Trillions of dollars in Subprime and Alt-A mortgage debt are simply uncollectable.
This isn’t the case. The total loss in the subprime and Alt-A mess appear to be in the $300 billion range in a mortgage market of about $10 trillion. The problem is that if you kill liquidity then you have a self-fulfilling prophecy. As long as interest rates are low, default rates will be low, but if you increase interest rates, then the loans really do become uncollectable.
Liquidity crises become bad debt crises if you aren’t careful.
Personally I find your explanation implausible in part because I work on Wall Street, and it seems unlikely that the investment banks (or hedge funds) would be tools of US foreign policy in the ways that you suggest. Part of it is that many/most of the key decision makers in these companies aren’t Americans, and don’t have any particular reason to support “American economic hegemony” unless they can make money from it.
Also most hedge funds aren’t on Wall Street. The center of hedge funds is in Connecticut, and IB’s and hedge funds don’t get along very well. It’s a lot like a landlord/tenant relationship.
Twofish:
Former Treasury Secretary Robert Rubin was the chief executive of Goldman Sachs. I would like to point out that the allegations of US Treasury Dept gross mismanagement and high level corruption against Robert Rubin were from unrelated but informed sources: Nobel Economist Joseph Stiglitz from the World Bank, Professor Chalmers Johnson of the Japan Policy Research Institute, and John Perkins, formally employed by the Central Intelligence Agency.
The Wall Street Hedge Funds that raped and pillaged the Indonesian economy in the late 1990’s were all closely politically connected with the Clinton Administration; this included Long Term capital, the Tiger Fund, and the Soros Quantum fund among others. According to the former Malaysian Prime Minister Mohammad Mathmir, Wall Street Hedge Funds looted an estimated $10 billion in blood profits while impoverishing 100 million Indonesian people. To date, the Indonesian economy is never fully recovered from the ensuring bloodbath that left thousands of ethnic Chinese murdered by CIA trained paramilitary squads.
Throughout the entire Asian economic crisis, the Clinton Administration’s primary concern was only for the pocketbooks of politically connected Hedge Fund campaign contributors. Not a single penny of illicit profits has been repaid back to the Indonesian people, nor has there been any formal official apology. The Asian Economic Crisis in the late 1990’s constitutes a crime against humanity that should not be left unpunished under International Law.
DC — i don’t want to go into indonesia again with you. as you know,i think the clinton administration’s strategy in indonesia didn’t work, but i am not sure any strategy could have worked. bailing out the corrupt status quo (suharto) was not an option, and any reform undercut the value of investments tied to the regime (and most were). but please do not slander people i worked for and respect, especially when your facts are wrong.
the hedge funds (soros in particular) had bet against the baht. but they weren’t the problem in indonesia. hedging demand from indonesian corps with $ liabilities they couldn’t roll and capital flight were the real problems.
now lets see if I can end the italics
“…Asian moneymen were accused of funneling suspect donations into Democratic coffers as President Bill Clinton and Vice President Al Gore were running for re-election…” http://www.nytimes.com/2007/08/30/us/politics/30bundler.html?_r=1&bl&ex=1188619200&en=12732b229548807e&ei=5087%0A&oref=slogin
DC - (slightly OT)
What’s with the Chinese Defense Ministry being caught red-handed hacking into the German Defense Ministry’s computer network? Just curious what possible non-nefarious explanation there might be to these activities visa-vis what is now one of the most peacenik nation in the world…
Thanks
-C-
Cassandra,
Frankly it more of the same BS disinformation that the Chinese Defense Ministry broke into the German government computer network. Who would be stupid enough to leave a return IP address when one can easily bounce across a dozen anonymous proxy servers across the world. Moreover, just because an internet attack come from China doesn’t mean it originates from China. Many host computer servers at Chinese colleges are relatively unprotected with dozens of trojan virus exploits that can be downloaded from the internet. Several years ago, the US Dept of Defense accused the Chinese of hacking into US government computer networks. It turns out that it was a group of Israeli students who hijacked a network server in China.
speaking of information and ‘intelligence’ assets, how much of the “financial assets” mentioned in the FT Smithers article (2007-08-30 06:14:44) may be information assets and insurance - and where intangibles, such as brand value, human assets (perhaps some with American ivy league educations etc.) factor in - or how a clear distinction can be made between ‘intangible’ (which may include financial assets?) and tangible assets (and financial assets?) in the first place
and re: 2007-08-30 05:37:51
- how much longer can you ignore the education sector?
italics
Brad,
Since you think the Clinton Administration was so lily white, what is your explanation for President Clinton’s pardon of criminal fugitive Marc Rich, a convicted hedge fund trader under federal US law. While there have been a multitude of Presidental pardons in the past including Patty Herst, Clinton has the distinction of pardoning the only criminal fugitive that was in hiding from US federal government law enforcement agents. Did the million dollar political contribution by relatives of Marc Rich play any role in the Presidental pardon?
And as far as the Indonesian situation was concerned, the internal domestic politics in that sovereign nation was none of the Clinton Administration damn business. It is nothing more than a political ruse for the uninformed US public that the overthrow of the Indonensian government was somehow justified due to corruption. The status quo didn’t result in a bloodbath of ethnic Chinese that were closely associated with the Suharto government. Under then Treasury Secretary Robert Rubin, the ulterior motive of the US Treasury and IMF was destroy the Asian developmental model of state driven industrial capitalism that existed in Indonesia and the rest of Asia.
Just start another post brad….
this has become stale ?
how abt barclays getting 3 bn $ from BoE for 6+% rates ?
Sorry, my bad on the tags . Fixed?
…and again and again and again
I agree, and Guest raises an interesting topic, although I doubt that the BoE have said which bank it was who used their standing lending facility. And this topic should make DC think!
It occurs to me that we are seeing a liquidity-involvency crisis. The carry trade of financing high yielding bond holdings with low yielding ABCP no longer works. As the SIV’s ABCP becomes due, they must either wind themselves up, which may result in insolvency if the price that they can get for their bond holdings is low, or exercise their bank lines and borrow from the banks, who in turn may raise the funds in deposits from the former investors in ABCP (with the central banks making up any shortfall). Thus the sub-prime collapse could actually increase broad money supply!
DC: You really can’t have it both ways. On the one hand if Rubin is a massively corrupt mismanager, then you really can’t have them really successfully pulling off this massive conspiracy. People who are horrible mismanagers tend to shoot themselves in the foot when they try to pull of a conspiracy. (One reason I blog is that I feel guilty for not letting the world know what an incompetent manager Dick Cheney was at Halliburton.)
I think you are reading things that aren’t there, and missing things that are. Stiglitz has been harsh against IMF policies to third world nations, but I don’t think he things that Rubin was responsible for this.
A few points:
1) The fact that hedge funds and investment banks have close links with Washington is true but irrelevant. In the circles of politics and economics, everyone has close links with everyone else. That doesn’t mean that you can call someone and get X done. There are lots of rules both formal and informal that tell you what and can’t get done. The main thing that campaign contributions get you is that the person you are trying to lobby returns your calls and talks to you. That’s vitally important, but they aren’t going to obey you, just listen to you.
2) The amounts of money you are talking about are trivial. A New York skyscraper is worth about US$2 billion. Ten billion is not much money, and people in the corridors of power are not going to put through a massive conspiracy to get such piddling, small amounts of money. The people involved in high level strategy in NYC think in terms of hundreds of billions and trillions.
3) The problem with conspiracy theorists is that they miss the real conspiracies, and you end up fighting people that are your allies.
The “grand conspiracy” that I’m a part of is this. Financial institutions make money by matching people with money with people that need money and taking a small percentage. If you have large numbers of people with money, then you make money. Have 1.3 billion Chinese needing financial services, and you are looking at assets of the tens of trillions. Ergo, the people I work for are doing everything they can to make China (and the USA, and India and Botswana) rich.
This paper simply isn’t going to roll over. The end.
WASHINGTON (MarketWatch) — Outstanding commercial paper in the U.S. financial system dropped sharply for a third straight week, indicating that a severe credit crunch has not eased in the market that supplies most large companies with operating funds.
Outstanding paper fell by $62.8 billion, or 3.1%, in the week ending Wednesday to $1.98 trillion, bringing the total decline in the past three weeks to $244 billion, or 11%, the Federal Reserve reported Wednesday.
Commercial paper consists of short-term promissory notes issued by corporations to raise cash for their operational needs. Most of the paper has maturities between 30 days and 270 days; anything longer than that requires a registration statement with the Securities and Exchange Commission.
An estimated $1 trillion in commercial paper will mature in the next few months. As commercial paper expires, companies are forced to rely on previously arranged bank credit lines or arrange other financing. In the current environment, finding financing for maturing mortgage-backed paper has been difficult, and that’s led to a squeeze on mortgage lenders.
DC: Did the million dollar political contribution by relatives of Marc Rich play any role in the Presidental pardon?
Of course it did. It likely got the staff people with pardons to listen to why Marc Rich should be pardoned. But it’s not as if you can buy the pardon. You can buy an hour to explain to a staffer why they pardon should be given, and maybe there were good convincing reasons, I don’t know Marc Rich.
A lot of what people talk about in Washington is pseudo-corruption. A wants to make B look bad so they bring up the fact that B did the types of deals everything does.
DC: Under then Treasury Secretary Robert Rubin, the ulterior motive of the US Treasury and IMF was destroy the Asian developmental model of state driven industrial capitalism that existed in Indonesia and the rest of Asia.
And they wanted to do that, why? Brad worked for Robert Rubin. I work on Wall Street. Wall Street cares first and foremost about making money, and there is a heck of a lot more money to be made if Indonesia has a good economy. There *are* people in Washington who are willing to destroy a country to preserve American dominance, but they are not secretive about their goals (example Bill Kristol and the Weekly Standard). Rubin isn’t one of them, and Wall Street will have nothing to do with these plans.
I’m concerned that you are so fixed on enemies of China who aren’t real enemies, that you aren’t able to see who the real enemies are and who the real friends are.
Twofish,
In my personal opinion, the Clinton Administration was perhaps the most corrupt in US history. Please read my earlier comments relating to Clinton’s pardon of criminal fugitive Marc Rich. The amount of money we are talking about maybe trival in New York City, but the impact from the Hedge Fund currency speculators was completely destructive to the developing nation of 200 million Indonesian people. The ultimate foreign policy objective of the Clinton Administration wasn’t the deliberate impoverishment of the Indonesian people, but the restructing of Asian economies to the American Neo-liberalism model. Robert Rubin could personally care less one way or another about the Indonesian people. The high growth economies of the Asian tigers were viewed by Clinton Administration policymakers as the primary strategic threat to US global economic hegemony. The Asian Economic Crisis represented a deliberate attempt to destroy the Asian developmental economic model, originated by Japan but emulated across the Asian region. Of course, the strategy ultimately backfired with the Japanese refusal to cooperate with the Clinton Administration in any of their foreign policy objectives. At one point, the Japanese Finance Minister even threatened to dump US Treasury bonds in retaliation. At the Malaysian APEC summit, the Japanese Foreign Ministry blasted the Clinton Administration as incompetent and corrupt for its role in the Indonesian fiasco.
DC — you are right that Rubin did not like the tight ties (”crony capitalism”) between asian banks and asian firms, and part of his approach to the crisis was to insist on reforms in exchange for money. asian coutries always had the option to turn down the money and try to make do. most found that an unappealing option — on balance, i think correctly. Korea clearly is better off today than it woudl have been if it defaulted, and i think you can make a similar case for Thailand, though the case isn’t as clear cut. malaysia was able to avoid asking for money b/c it didn’t have as much s-term debt (a lesson the rest of asia has now learned).
the medicine that was applied elsewhere clearly didn’t work in indonesia — and the spiral of events that led indonesia into the deepest crash and the loss of life (including many in the ethnic chinese community) is clearly a tragedy.
I am not sure it necessarily is tied to “bad medicine” - though, as you can also make a case that indonesia didn’t really ever embrace the “no more crony capitalism” set of reforms so the proposed policy wasn’t ever implemented. indonesia also didn’t really tighten monetary policy either — it was injecting liquidity hand over fist into the the banks and the funds were flowing offshore. tho here you can argue that closing one corrupt bank before a broader system of deposit insurance was put in place contributed to the run (I think there is something to this argument). the policy makers in dc thought closing a bank tied to suharto would send a clear signal of reform, but to indonesians it sent a clear signal that investments they thought were safe (b/c of the owners political ties) were not as safe as was thought).
I suspect that the reality here is that the doctor didn’t initally get the diagnosis and prescription 100% right, but also that the patient didn’t follow the doctor’s instructions and took some additional medicine on the side that produced some unpleasant and unantcipated interactions.
but whatever, it is hard to argue if you look at monetary aggregates that indonesia pursued a too tight monetary policy at the time. BI’s discount window was open in a big way.
as importantly, I am not quite sure how you think indonesia should have been handled.
There never was an option that was “huge amounts of money with no conditions” to help sustain suharto and the status quo (suharto as you know had very close ties to a group of ethnically chinese businessmen, and a lot of suharto’s familty and friends were also in business in a big way).
so the options were “money and reform” — but here, I think (and this is not the consensus view) the treasury underestimated the extent to whcih reforms that undermined crony capitalism would undermine confidence, not add to it, and thus add to the run. after all folks had lent money to the crony capitalists in part b/c of their close ties (in the same way locals had invested in suharto banks b/c they were too clsoely tied to the regime to fail, or so the thinking went)
or no money and no reforms. but once int. banks decided they weren’t goign to rollover s-term lines to indonesian bnaks and firms, this was sure to cause distress. indonesia really did need the money.
so i am not sure that option would have worked either.
the crisis was also complicated by the fact that a lot of the debt was owed by firms not banks, and for a host of reasons, it is a lot harder to inject emergency liqudity directly where it is needed in those cases.
have you read bailouts and bail-ins by the way? there is an extensive discussion of indonesia’s case there, and after you read it, we might be able to have a real debate on the specific policy choices made in the crisis.
yes, i do defend the clinton treasury. i was there, and on balance, i think the us policy of providing dollars to emerging markets short on cash (and demanding policy changes in exchange) was better than a hands off, no intervention you got into the mess on your own you should get out of the mess on your own policy. and in three cases (mexico, brazil and Korea) I think you can clearly make the case that the coutnryr would be far worse off absent us intervention. thailand is more of a mixed case. indonesia didn’t work, but i am not yet sure i know what would have worked.
turkey more recently also worked. argentina didn’t. but those are part of the bush administration’s legacy more than the legacy of the clinton administration.
DC: In my personal opinion, the Clinton Administration was perhaps the most corrupt in US history.
You really think Clinton was worse than Warren Harding or Ulysses S Grant?
DC: The amount of money we are talking about maybe trival in New York City, but the impact from the Hedge Fund currency speculators was completely destructive to the developing nation.
Hedge funds don’t have nearly the resources to destroy a nation intentionally (they can cause a big mess unintentionally but that is something different). Hedge funds that deal with currency are also very rare, and generally lose.
DC: The high growth economies of the Asian tigers were viewed by Clinton Administration policymakers as the primary strategic threat to US global economic hegemony.
The person who runs this board happens to be one of those policymakers, and he seems to think that there was no such strategic aim. I’m also skeptical, because people who have strategic aims in government tend not to be quiet about it. The thing about the people in policy circles that want to “destroy communist China in the name of freedom” weren’t and aren’t quiet about it.
In order to have a policy of “lets destroy Indonesia” you need to have a lot of meetings and rather open discussions. Also people who support a policy usually do so for different reasons, and getting political support is a noisy, messy process.
One has to remember that Clinton was the guy that got China into the WTO. Once that happened you have large sections of the US economy which are now dependent on the continued success of China, and that creates an powerful lobby that has led the “destroy the evil Communists” lobby weak and divided. It is now unthinkable for any US policy maker to think of wrecking the Chinese economy and destabilizing the Chinese government which were ideas that were common in the early-1990’s. If the Chinese economy goes, so does the American economy, and the fact that China and the United States are so tightly intertwined is one of the positive legacies of Clinton.
If I can provide a third view, I d say that the USA in the indonesian crisis have been pathetic because they lack knowledge of the workings of institutions in general, and knowledge of foreign culture.
TO take a clearer example than Indonesia which is far away, unknown and never was a strategic threat anyhow… Remember UdSSR 1990.
Gorbatchev wants reform.
The chicago school boys come in and ask for direct privatisation of all firms, because hey a free market is private property … Don t you know ?
THey have no knowledge by then that a free market is a working legal system able to enforce contrat, a place where price are free to adjust which may create huge transition costs if some important prices (like energy) have been held for too long at below or above market prices, a place that need a banking system.
ANyway the UdSSR economy fell 50%, the life expectancy fell 10 years (that s some millions deaths caused by transition to capitalism) any way you look at it the transition era was a disaster.
Is there a better case for a conspiration ?
I mean weren t the Chicago boys so happy to prove the total failure of capitalism ?
Well you may think that the USA gave on purpose bad advices. I just think they were stupid and unaware of the realities. JUst as they ve been stupid and unaware of iraq realities … THe US country is well known indeed for its lack of apprehension of foreign realities and on top of that the lack of knowledge of its economists of the very importance of institutions…
Just look at ROubini s blog. WHat does he discuss : fiscal and monetary policies … He does not even adress regulation ones. Yet anyway you look at it the main problems origin not in fiscal or monetary imbalances … THey origin in the deregulation of the finance industry that has allowed all this foolish lending business with each lender passing the risk to the market hoping that the pollution created would never fall back on its head. I mean instead of turning lemons into lemonade, I would have called it, turning lemons into acid rain. Basically that s what has happened, before people were afraid to buy lemons, now they have been made unaware that all the citric acid has been sent into the sky up above and is just waiting to fall in disastrous acid rains.
Anyway. the UdSSR economy was destroyed by US recommanded economic policies and I don t think the US intentionaly destroyed the UdSSR and then RUssia in order to turn a lleading soviet model into a despotic crony pseudo democracy …
So if they did not do it with UdSSR and russia, I don t think they did it with indonesia.
Besides and on a last note, If you believe in conspiracies then you have to realise that it is highly possible that the chinese have lent to the USA in order to create thE disastrous economic crash ahead, the chinese communists are wise they know capitalism cannot work because of its inner contradictions, they have only pretended to turn to capitalism, but their only aim was to demonstrate what really happend when finance is let free and people can borrow their heaven on earth by indebting themselves and future generations… In 10 years it will be clear that the CHinese successed where the russians failed, they proved the complete failure of the capitalist model by pushing those stupid capitalists to borrow and borrow their way into the garbage of history.
DF: The road to hell is paved with good intentions. The few times I’ve talked with people in the US foreign policy establishment, I’ve come away frightened and alarmed. It’s not that these people are evil and Machievellian, it’s the opposite. These are lots of nice idealistic people….. That don’t seem to have ever been outside of suburbia…..
China doesn’t believe in capitalism. It doesn’t believe in socialism. It believes in “what-ever-works-ism.” One big problem with economists is that the incentives do not allow you to say “I have no clue what is going on.”