Looks like it – if anyone wants confirmation, check out the Japanese suggestion that they could contribute to a global fund to help bail out the US financial system. This fund’s charter reads: “a fund whose investors are those nations who, for reasons of actual historical or anticipated future fear of China, wish to ensure that Chinese influence is diluted sufficiently to stop them (a) exercising regional hegemony in foreign affairs, (b) continuing to manage their own economic affairs in such a way as to export instability to the rest of the world, and (c) the rest of our fears about China…..

Step forward Japan, the last country to engage in a full scale war with China. All others fall into line behind…

My best judgment states the following will happen over the weekend:

1. Morgan Stanley will be “saved” by an injection of funds by the CIC. Brad Setser notes, within a link contained at:

http://tinyurl.com/3uc4s4

that early last month, the Federal Reserve gave a special exemption to CIC from the ban on foreign entities owning more than 5% of a bank holding company.

This was not reported in the financial press, to my knowledge.

This is ironic because of course it was the Morgan family that repeatedly bailed out the US government prior to creation of the Federal Reserve as a response.

This bail out of Morgan comes at a heavy price.

That price is that now China shall assert important controls over US economic and foreign policy in return, similar to IMF austerity regimes.

This “ringfencing” of toxic waste is the first step.

Additionally, I believe that President Bush will be forced to agree to be more “cooperative” on the future of Taiwan.

Just as Argentina and scores of other nations lost control of their destiny at the hands of IMF shock therapy, the US is now held hostage by the self interest of a foreign power.

The Chinese Communist Party will assist the US in its transition to service of their empire.

But it will be on their terms.

Welcome the feudal state!

This is the end of the American era in world history. The Asian epoch has now begun.

Please adjust your conduct to these new realities.

Thank you.

Matthew Dubuque

Rien — smart points; ones I agree with/ wish I had made. If I had to bet, MS is using the CIC to push up Wachovia’s price. But that is a pure guess given the regulatory hurdles to doing a deal, and my guess about the politics of it.

I also suspect that if the CIC did end up with 49% of Morgan Stanley, the politics of US central bank support for the brokers would get a lot more difficult. I.e. why does China get access to the Fed but not homeowners/ workers?

There are two different concepts here:

bank holding company – a company that owns a bank and a non-financial company

financial holding company – a company that owns several different types of financial companies

Not the same thing. CIC and Huijin are allowed to do BHC type things, but not FHC type things.

The issue here is that sense Huijin and CIC own a bank that operates in the United States (namely Bank of China). Without Federal Reserve approval, CIC and Huijin would be classified as bank holding companies and prohibited from owning non-bank companies such as (for example) General Motors or Joe’s House of Pizza.

The Federal Reserve basically issued a waiver based on the precedent of an Italian bank that said that since CIC are Huijin are government owned that they are exempt from a BHC.

The waiver does *NOT* give CIC and Huijin permission to accquire a US bank. The letter specifically says that CIC and Huijin may *NOT* operate as financial holding companies (i.e. a company that owns both a bank and an insurance company) without another set of approvals.

Financial holding companies and bank holding companies are entirely different things. From this letter it looks like that CIC and Huijin were prohibited from investing in *non-bank* US companies before 8/5/2008, and that might explain why its first investments were all financial companies.

What might be posible is that MS is talking about some king of sleeping partnership if/when MS is acquired by a marginally more robust (and are they in trouble? yes if everyone believes so) financial institution with fewer “international” issues.

The market idea seems to be that Wachovia (now the only giant-with-an-attitude without an investment banking affiliate of substance) would be MS’ savior. This while Wachovia itself is also the subject of rather malicious rumors.

Perhaps the US authorities need commercial banking affiliation in order to support an investment bank. This while the only large scale universal banking experiment, Citigroup, does not exactly look like a textbook case of successful corporate strategy, let alone wise capital management.

Amazing how a problem can degenerate into a solution..