Category: Investing

China: Rio Tinto Convictions

30 March This year. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

When four executives through Rio Tinto, the giant Anglo-Australian mining company, had been arrested last July upon charges of stealing commercial secrets, as well as taking and receiving bribes from Chinese officials,

30 March 2010. By David Caploe Expert degree, Chief Political Economist, EconomyWatch.com

When four executives from Rio Tinto, the giant Anglo-Australian mining organization, were arrested last This summer on charges of robbing commercial secrets, as well as getting and receiving bribes from Chinese officials,

most Westerners interpreted the move because trumped-up retaliation for the debt-strapped company’s rejection of a 19.5 billion All of us dollar cash injection from the state-run Chinalco final June,

since Rio Tinto is one of China’s greatest suppliers,

helping it import tens of vast amounts of dollars worth of iron ore every year — a vital component for metal that is fueling its flourishing economy.

Given the deep inter-relationship between organization and  country, the confrontation was highly charged from the beginning.

But when the run-up to the trial began, as well as the highly un-transparent proceeding itself, the situation became even stranger,

culminating in the announcement of unexpectedly harsh prison sentences of seven to 14 years for the 4 executives for taking bribes and stealing commercial secrets.

According to the New York Times account of the verdict,

The case heightened the fears associated with foreign investors doing business here because the four were initially arrested on espionage charges,

fueling concerns that the prosecution was politically motivated, intended to punish Rio Tinto for its clashes with Chinese companies.

Until the actual verdict, Rio Tinto — one of the world’s greatest producers of iron ore — had strongly defended its employees.

But the organization issued a statement late Mon saying it had chose to immediately fire the 4 employees,

describing the evidence released throughout the trial that they had accepted about $13.5 million within bribes as “beyond doubt.”

The verdict, which will come shortly after Google decided to pull its search engine out of China,

appears to be the latest indication that China is taking a harder line with foreign companies doing business here.

Rio Tinto was not charged in the case, however in announcing its verdict Monday,

the court essentially accused the company of using stolen information to damage China’s economic interests,

costing about 20 of this country’s steel generators an extra $150 million last year alone.

For reasons we discuss by the end, this in fact appears to be the essential issue in the case.

But before explaining why, it also makes sense to check out several of the OTHER strange facets of this situation,

notably the announcement through Rio Tinto, just before the trial was set to begin in late 03,

that it and Chinalco had signed the non-binding, 1.35 billion US dollar deal to help develop a massive mine in Guinea, closing a period of turbulent relations using its biggest shareholder.

According to Rio leader Tom Albanese at that time, "We have lengthy believed that Rio Tinto and Chinalco could work together on major projects for mutual benefit".

In that context, this looked as if the test would conclude with a simple slap on the wrist or even two.

But once it actually started, as this earlier New York Occasions article notes, a lot of "filthy laundry" on both sides began to appear,

and this became clear that more what food was in stake than simply some relatively minor disagreements among close business associates.

Stern Hu, an executive at the British-Australian mining giant Rio Tinto, said in court he accepted two large bribes at the end of 2008 and early 2009 totaling about $1 million from Chinese steel mills in exchange with regard to agreeing to sell them long-term supplies of iron ore, his lawyer Jin Chunqing said.

Although the four Rio Tinto executives on test here on charges of bribery and stealing commercial secrets had admitted taking bribes,

the revelation shed new light on why they did and just how corruption in the Chinese steel business worked …

“Two small companies bribed Stern Hu to get a long-term contract with Rio Tinto, which normally is not available for medium- and small-sized businesses,” Mr. Jin said.

“It was throughout the economic crisis in late 2008 which large-scale steel companies were struggling with continuing their deals with Rio Tinto. That’s when the small companies decided to get involved, causing a corruption of the system.”

Steel industry experts say bribery has grown widespread here in recent years as Chinese steel mills have competed for valuable imports of metal ore, much of it controlled through foreign suppliers.

Analysts said a chaotic pricing system had made a two-tiered market, fueling corrupt deal-making.

Many large state-run metal companies in China agree to long-term contracts at a set price with foreign suppliers,

while smaller metal mills compete to buy materials on the open market, frequently for higher prices.

“Desperate steel mills would do anything to call supplies,”

said one steel industry professional in a telephone interview on Friday,

speaking on the condition of anonymity for fear of government retribution.

“There was a huge potential for mischief and a huge incentive to bribe.”

Getting a discount on the open market price could mean saving tens of millions of dollars, experts say,

giving tremendous power to iron ore salesmen working for companies like Rio Tinto.

In this particular context, the verdicts raised one immediate question:

If the Rio Tinto executives were guilty of accepting bribes, what about the companies that offered them ???

The Shanghai No. 1 Intermediate People’s Court partly answered that question on Monday, launching it would soon charge at least two Chinese steel industry officials with passing trade secrets to Rio Tinto.

But that certainly doesn’t finish the questions, not just with regard to Rio Tinto, but ALL Western companies either actively doing or seeking to do business in China.

By the time of the convictions, there is a general consensus the convictions had been significant not so much for the company, even though it certainly complicates its connection with China,

but for the general state of China’s often tough discussions with foreign suppliers over iron ore prices.

Before the detentions, China’s steel business association had repeatedly attacked Rio Tinto and other foreign iron ore providers for driving up the cost of iron ore and negotiating unfairly.

On Monday, the court confirmed that metal ore negotiations were at the center from the case

and insisted that Rio Tinto employees had been passing secrets to top arbitrators for the company.

It said that in 2009, Mr. Hu and Mr. Wang obtained confidential information from the China Iron & Steel Association,

the government physique that negotiates iron ore prices with foreign suppliers.

The court said the actual Rio employees had “damaged” China’s interests.

In this context, the MOST important take-away from the Rio Tinto case, at least to this point —

there is, in the end, the possibility that, having made its toughness clear, China will decide to soften the suddenly stiff sentences —

seems NOT to be, the la Google, that Traditional western companies seeking to do business in China had better watch their own step,

although there’s little doubt the actual surprisingly harsh convictions perform, in fact, underline such a information, at least for now.

But if the whole issue area of iron ore prices Or availability / negotiations is really the central issue here,

then the REAL significance of all this drama lies in its ramifications for what most observers from the global political economy see as THE key issue of the moment:

Is China’s financial growth likely to continue — or is it going to crash, whether in a hard or gentle landing ???

If the country is willing to make such a stink about the whole area of iron ore —

which, remember, is really a key factor of production within the making of steel, The important component in almost all manufacturing —

then it’s hard not to infer China’s leaders are in fact certain growth is going to continue,

and it is therefore in the country’s short-, as well as medium- and long-term, curiosity to strike as hard a bargaining position as it can about prices / availability etc.

This being said, it wouldn’t end up being beyond the Chinese leadership to realize that most shrewd observers would in fact infer this from the hard-line outcome of the trial,

and take advantage of that inference to increase the credibility associated with projections of the country’s continued growth

as prelude to what they know is, in fact, going to be a slowdown associated with some sort, whether hard or soft.

But it could also mean what it appears to mean:

China’s leadership is quite certain growth is going to continue, and they want to safe the most advantageous negotiating placement as possible,

with not just Rio Tinto and other companies, but also the other countries who serve as the ultimate supply of that key ingredient.

Given the actual crisis in the Eurozone and, doctored BLS figures aside, the on-going problems of the US,

China’s short-term economic profile remains key to the immediate future of the world political economy.

And if the Rio Tinto case is any indication — which, again, it may or may not be —

then one would have to figure the Chinese leadership, at least, is confident about the country’s ability to continue its remarkable growth,

even within a general global framework of weakness at greatest and steep recession from worst.

They could, of course, be arrogantly wrong in this assessment.

But the fact they’d even take such a position —

given all the complications it will obviously bring with one of their most significant private-sector partners —

is definitely a fact really worth pondering.

David Caploe PhD

Chief Political Economist

EconomyWatch.com

China: Krugman Wrong on Forex Devalution

Conventional academic economics is a disease.

Despite its pretensions and mathematical “certainties,” there is no department of social science much more dis-connected from its alleged subject matter compared to economics – and that is saying something, something not good.

So while particularly disappointing, it’s not particularly surprising whenever usually UN-conventional economists – notably Paul Krugman of Princeton and, more importantly, the actual New York Times, and Nouriel Roubini of NYU, aka Dr Doom, one of the few academics that had even the vaguest inkling the catastrophe of Black September 08 was coming – lapse in to the orthodoxies they generally eschew.

Intriguingly enough, these conceptual slides often come in the area associated with global trade and balance of payments, where or else smart people like Krugman as well as Roubini are seemingly unable to escape the stale platitudes they generally disdain when it comes to MOST issues of political economy:

in Roubini’s case, the “sub-prime” state of the US financial system like a whole, which he correctly warned about well before even the Bear Stearns collapse in March and, of course, Lehman Bros in Black September associated with 2008;

with Krugman, he’s on the mark regarding just about EVERY issue – recently, the IN-sufficiency of the Obama stimulus, which he properly said at the time it handed Congress would NOT be enough to promote a sustainable recovery, and the economic [not just human] imperative of SERIOUS health care “reform,”

although he was a little past due in realizing how significant a blockage the insane All of us campaign contribution “system” would be within achieving anything of actual value.

It was thus fairly disheartening to wake up on Monday, eager to read his latest clear sally against all things stupid in American political economy, to rather be blasted by his ill-mannered screed against China’s alleged forex manipulation, which is supposedly getting such a bad effect on the weak efforts at global recovery.

Tensions are rising more than Chinese economic policy, and rightly so: China’s policy of keeping its forex, the renminbi, undervalued has become a substantial drag on global economic recuperation. Something must be done.

And upon he went from there.

It was equally dismaying to read two days later on a New York Times content – whose board, like Krugman, has generally been notable in making strong and convincing quarrels against the babbling inanities that pass for “public discourse” in the US these days – taking the same sort of ill-informed collection on the whole question of Chinese currency values:

China’s decision to base its financial growth on exporting intentionally undervalued goods is threatening economies around the world. It is fueling huge trade deficits in the United States and Europe. Even worse, it’s crowding out exports from other creating countries, threatening their about recovery.

And on THEY proceeded to go, making more likely just the sort of worldwide trouble they correctly warned against at the conclusion, namely that “this difference [can] escalate into a fight that no one can win.”

So what is the problem with this line – and why does it go back to the nonsense associated with conventional academic economics ???

Put bluntly, both Krugman and the Times content board are ignoring the central fact of the world political economic climate that has existed since the late Nineteen forties: countries either sell to the US or even they sell to countries that sell to the US.

Instead, they are simply following the inaccurate – but ubiquitous – conventional academic economics Presumption that world trade should somehow be “balanced” – that is, that each country should have its industry and overall payments be roughly “in balance.”

In reality, this flies in the face of not just the current world political economic set-up, however the entire history of world politics economies that have existed, in a variety of forms, since at least 1815 and also the rise of the “second” British Kingdom, following its victory within the Napoleonic wars of the early 19^th hundred years.

“Equilibrium”, however, is a KEY concept of conventional academic economics – regardless of how non-existent it is in the real world – and they will try everything they can to POSIT equilibrium in almost any situation –

even if, as is the case with the current world economic downturn in general and trade picture in particular, it is completely ir-relevant to what is really happening.

Now most of the time, smart guys like Krugman / the New York Times Editorial Board Or Roubini realize this, especially when you are looking at DOMESTIC economies,

where it’s blatantly apparent equilibrium may be a “consummation devoutly to be wished,” but they recognize it for which it is: “a complete falsehood,” as Michael Corleone told the Senate in Godfather II.

But somehow, when it comes to problems with trade and the world politics economy – especially one in the actual terrible shape it is these days – they want to return to the emotional comfort of the dominant myths of their graduate school days,

and make-believe an equilibrium they know is completely fictional in domestic political economic climate somehow really DOES exist on the global stage.

In fact, nevertheless, it NEVER has – the actual US, for example has run an overall balance of payments deficit since 1959, and an overall trade deficit because 1971, without any appreciable decline within the American standard of living –

and, given the American-centered character of the world political economy since 1947, it never SHOULD.

Put bluntly, both the US and the rest of the world possess benefited greatly from a worldwide political economy that is essentially UN-balanced:

it is good for both America and every other country that the US run consistent payments and trade deficits, which will enable at least SOME countries to run payments and trade SURPLUSES –

which, by the way, are a) different and b) not necessarily good things in and of themselves, but that’s a subject for another day.

In reality, there ARE some countries that MIGHT be hurt by China’s fierce determination to hold on to a particular worth for its currency –

but they are certainly NOT developed economies like the United States as well as Western Europe, the Times’ editorial on the contrary.

Despite the rhetoric emanating from the US – but NOT other nations supposedly being hurt by the Chinese value, the reasons for which the Times can’t seem to figure out –

low-value-added Chinese exports TO the US and the rest of the developed world generally do NOT compete with high-value-added products arriving from those countries,

for the simple reason that low-value-added products left the developed world quite a long time ago as a result of wage levels which are simply too high.

Put bluntly, almost all the manufacturing jobs that left the US for Mexico or China or any other low-wage country are NEVER coming back –

and to pretend they are is not just absurd and self-delusionary analytically, but misleading to People in america and dangerous to world economic peace.

The first 3 are pretty obvious. However why is this nonsensical obsession with Chinese language currency valuations so inimical to world economic peace ???

Quite simply, because it pretends there’s a villainous motive at the rear of perfectly “normal” economic practices the US by itself a) has practiced for decades; and b) continually promotes in principle –

namely, the mobility of capital, which, as Karl Marx therefore eloquently pointed out, always seeks the lowest possible wages in order to get the actual highest possible profits.

In this context, the countries whose industries are most likely to be harm by low Chinese forex valuations are not the US and Europe – whose consumers only benefit from the low prices of Chinese exports –

but places such as Indonesia and Vietnam, whose manufactured exports contend directly with China, both in their own home markets and third markets like the US and Europe.

These countries definitely could have a case against China, although many of them offset their own problems with manufactured goods by making significant sales of raw materials to China itself.

But for significant and generally enlightened sectors of the American elite – like Paul Krugman and also the New York Times Editorial Panel, as well as the openly selfish web host of K Street insurance supporters swarming all over Capitol Hill –

to make a big deal about “low” Chinese currency ideals being in any way problematic for either the US or global economy is patently absurd.

As we have noted, US consumers – practically more than any major economic “actors” on the planet – in fact benefit significantly from low cost Chinese language imports,

as would European consumers, if their more protectionist governments might let them in, which, a minimum of so far, they remain reluctant to perform, given the political power of whatever domestic manufacturers may still can be found.

The problems with the US and, because the global political economy is American-centered, the world economies have little to do with China in general, and certainly NOTHING to use the value of China’s currency.

Those problems relate to the lies that America’s politics / corporate / press / academic elites have been informing the American people and the world – and, for all we know, themselves – since at least the Reagan regime, exponentially multiplied, obviously, during the age of Cheney / Bush.

And if the US is going to somehow manage to find a way out of the mess it’s in, it should stop blaming China, and admit, because Shakespeare put it, “the fault lies not in our stars, but in ourselves.”

But of course, that’s a great deal harder than shifting the onus onto one of the couple of countries in the world that –

for its admitted problems, above all within environmental / occupational / product safety, as well as independence of speech and individual rights –

has a political leadership that actually knows what it’utes doing when it comes to economic policy.

As all of us put it in the matter of Lehman / Repo One hundred and five and Goldman Sachs / Greece –

which are MUCH much more to the point when it comes to America’s real issues –

“Welcome to the Lost Years,” which are, unfortunately, only just beginning.

David Caploe PhD

Chief Politics Economist

EconomyWatch.com

President / acalaha.com

 

Goldman Derivates Collateral

27 February 2010. By David Caploe PhD, Chief Politics Economist, EconomyWatch.com.

27 February 2010. Through David Caploe PhD, Chief Political Economist, EconomyWatch.com.

Even though we have some actual questions regarding significant aspects of Warren Buffet’s relations with Goldman Sachs, we have usually appreciated his outspokenly negative portrayal of one of his erstwhile colleagues’ preferred playthings – derivatives – as “economic weaponry of mass destruction.”

In our view, the nuclear metaphor is actually entirely apt, since – once these things DO explode – there will be two aspects: the actual immediate “blast effects” and the long-range “fallout” – each of which will cause intense suffering, otherwise death, for individuals and establishments coming in contact with them. Remember that 100 million more people are hungry thanks to the Financial Crisis.

Despite his and our consistent warnings concerning the potential dangers of these totally un-transparent and un-regulated instruments, the keyword until now has been “potential”.

But the situation in Greece begins to outline, in all too painful detail, how the utilization of derivatives can, in this case, exacerbate an already screwed-up situation, and, in the case of the US housing market, create a issue when none previously existed – which is why Americans, Asians and others, and not only the directly affected Men and women, should pay careful attention to the unfolding Greek tragedy.

In this regard, it is nice to see the New York Occasions beginning to play a more positive role in making sure the consequences of those “economic nuclear devices” are clear towards the public. To be sure, the Times has done some landmark reporting on the destructive effects of these and other instruments, especially in the hands of Goldman Sachs. But, as we have pointed out, they have consistently “hidden those stories in plain sight” by releasing them at times when fairly few people are going to see them.

Now, however, even they are seeming to realize the detrimental effects of the actual “double game” they and most additional mainstream media organizations regularly play with major advertisers and other powerful forces in society, whose activities they must expose in order to maintain “journalistic credibility” at a time when the web is destroying daily the company plan by which they have operated not less than two hundred years without cutting off either much-needed revenues or equally-crucial access to sources within these powerful groups.

It was therefore somewhat encouraging – at least from a “public enlightenment” point of view … the substance is truly frightening – to read 2 major pieces the Times did not [for a change, whenever it comes to Goldman] “conceal in plain sight”, but actually put in prominent places, and maintained for a while, on their web site.

The first appeared on February 24, as well as was notable in three ways:

1.     

It made clear the structural similarities in the methods used by Goldman Sachs and others in how these people handled BOTH the Greece “sovereign debt” situation AND the US housing market.

2.   

It did a nice job of explaining the way the derivatives in question – credit-default swaps – actually worked, again, both in relation to A holiday in greece and the still-waiting-for-the-other-shoes-to-drop-mortgage-backed-securities-MBS- American International Team [AIG] scandal, and

3.   

Perhaps most explosively – which is saying something – it revealed how Goldman, JP Morgan Chase contributing to a dozen other banks involved with “helping” Greece through the – again, un-regulated and totally non-transparent – use of derivatives had simultaneously backed the heretofore almost unknown company that had created an index that enabled the market players to wager on whether Greece and other European nations would go bust.

Let’s start with the architectural similarities:

Bets by some of the same banking institutions that helped Greece shroud its mounting debts may actually now be pushing the nation nearer to the brink of financial ruin.

Echoing the type of trades that nearly toppled the United states International Group, the increasingly popular insurance coverage against the risk of a Greek default is making it tougher for Athens to raise the money it needs to pay its bills, according to traders and money managers.

These contracts, referred to as credit-default swaps, effectively let banks and protect funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, a whole country. If Greece reneges on it’s debts, traders who personal these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house — a person create an incentive to burn on the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich. …

If that sounds familiar, it should. Critics of those instruments contend swaps led to the fall of Lehman Brothers.

But until recently, there was small demand for insurance on federal government debt. The possibility that a created country could default upon its obligations seemed distant.

So how is it that these credit-default swaps – in whose acronym CDS became well-known throughout Black September 2008, despite the fact that few understood what they intended, even fewer how they really worked – operate,

making it possible for companies such as Goldman Sachs and others to simultaneously “help” their clients acquire loan money, while making sure they on their own would profit, in some ways even more, if their clients actually couldn’t pay back the money they were assisting them secure ???

The underlying theory of a credit-default swap is fairly simple, once it’s explained clearly enough to “outsiders.”

At the same time frame banks are loaning huge amounts of money to either companies or even, as in this case, countries, they want to make sure their loans / investments are safe.

In order to do that, these people take out insurance, usually with a large enough insurance company – say, AIG – able to stand up to the pressure should the worst happen – for example, either the company goes bankrupt or country defaults on its obligations.

Unfortunately, whether intentionally or not, the existence of these credit score default swaps makes more and more likely the eventuality they are allegedly in place to make sure doesn’t occur – that is, a bankruptcy or default.

The result, therefore, is a vicious cycle.

If, for reasons uknown, a country like Greece begins to appear it’utes going to have problems paying its debts, banks and others who have already loaned / committed to that country rush to buy these credit default swaps Or CDSs / default insurance policies / whatever you want to call them.

This increased demand creates a rise in the price of these default insurance policies, which is hardly surprising.

However, once the price of the insurance policies starts to rise, it – equally unsurprisingly – becomes more expensive, if not impossible, for the country in question to find the money it must pay off its existing obligations.

As it might be harder for them to find the money they need to pay their debts, the potential of a default – the very outcome the CDSs / default insurance policies were supposed to help guard against – becomes increasingly likely.

Given the speed of modern financial transactions, this vicious cycle can blow up in a matter of hours:

Creditors become concerned and panicked about losing their money – leading them to become active within the credit default market.

This reduces available lending sources Or increases interest rates for the nation wishing to borrow, hence producing default more likely.

This leads to even more demand from creditors – and hence higher prices for – the CDSs / default insurance policies,

in change making it ever more expensive and much more difficult for the country to find the cash to pay its debts – etc etc etc etc, as Yul Brynner said in The King and I.

While obviously disturbing for all parties involved, the basic dynamic really isn’t that hard to understand.

It’s the next action that makes the whole process grisly and nasty – for this is where the “double game” banks / insurance providers / countries were actively playing got truly vicious.

As Greece’s personal finances has worsened, undermining the dinar, the role of Goldman Sachs and other major banks in masking the true extent of the country’s issues [through the use of other complex derivatives] has attracted criticism from European leaders.

And, once we noted in discussing this aspect of the situation on February 16, making big bucks for themselves in the process of helping Greece and Italy avoid the allegedly strict “deficit” limits which were pre-conditions for joining the Eurozone.

But before that issue became obvious, a little-known company backed by Goldman, JP Morgan Chase contributing to a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.

So let’utes be clear: at the same time Goldman et aussi al were using complex derivatives to help Greece, Italy and perhaps others AVOID the government deficit limits that were supposed in order to insure credit-worthiness for entrance into the Eurozone,

they were simultaneously creating an index that would enable them to bet on which of their own clients might, in fact, go into default –

as a result of the really help they were giving them, using other complex derivatives,

in avoiding the deficit limits that were supposed to preclude this sort of default.

Whatever you are able to say about their ethics – that isn’t much – you’ve got to admire the smarts on these guys.

They weren’t stealing through Peter to pay Paul – they were stealing from Peter As well as Paul to pay themselves.

But let’s let the New York Times tell the story they, after all, not just documented, but actually, for a change, made available on their website at a time people when people may really see it.

A little-known company supported by Goldman, JP Morgan Chase and about twelve other banks had created an index that enabled market players to bet upon whether Greece and other Western nations would go bust line.

Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps …

The Markit index is made up of the 15 most heavily traded credit-default swaps in Europe and addresses other troubled economies like Portugal and Spain.

And as worries about those countries’ debts moved markets around the world in February, trading in the index exploded.

In February, demand for such index contracts strike $109.3 billion, up from $52.9 billion in January.

Markit collects a flat fee by licensing agents to trade the index.

Trading in Markit’s sovereign credit derivative catalog … helped to drive up the cost of insuring Greek debt, as well as, in turn, what Athens must pay to gain access to money.

The cost of insuring $10 million of Ancient greek bonds, for instance, rose to more compared to $400,000 in February, up from $282,Thousand in early January.

On several days at the end of January and early Feb, as demand for swaps protection soared, investors in Greek ties fled the market, raising uncertainties about whether Greece may find buyers for coming bond offerings …

And who are the participants in this little “double game” ??? Surprise, surprise:

European banks including the Swiss giants Credit Suisse and UBS, France’s Société Générale as well as BNP Paribas and Deutsche Bank of Germany have been among the heaviest purchasers of swaps insurance, according to investors and bankers who asked for anonymity because they were not authorized to comment publicly.

That is because those countries are the most exposed. French banks hold $75.4 billion worth of Greek debt, followed by Swiss institutions, at $64 billion, according to the Bank for International Settlements. German banks’ exposure appears at $43.2 billion.

Trading in credit-default trades linked only to Greek debt has also surged, but is still smaller than the country’s real debt load of $300 billion.

The overall amount of insurance on Greek debt hit $85 billion in February, up from $38 billion a year ago, according to the Depository Trust and Clearing Corporation, which tracks trades trading.

Whether this cozy little arrangement will continue remains not clear, since – either through ignorance, which would be unpardonable, or collusion, which would end up being even worse – US government officials tend to be FINALLY starting to “make inquiries” into this sordid and almost incredible situation.

It remains unclear precisely how serious this “inquiry” is going to be, however the sudden motivation could hardly become more clear. Certainly European officials have indicated for several weeks awareness of the whole history of Goldman’utes involvement with several of the Membership Med / PIGS countries.

But this wasn’t until the day after the Times story appeared that recently re-appointed Fed chairman Ben Bernanke introduced the Fed would be looking into Goldman’s role in BOTH finishes of the double game they’re been playing in the Greek fiasco.

Which, of course, underlines our on-going point about the crucial role of the media in today’s economedia © world. It’s not as if Goldman’s activities haven’t been comprehensive in scores of media resources – even in the New York Times, albeit at moments once they could easily be “hidden in plain sight”.

But as soon as a Times tale about the sleazy role of derivatives appeared during the middle of the function week – as opposed to the beginning of a long vacation weekend, which is where they’d been placed before –

the response was immediate, if albeit barely confidence-inspiring, given the Greenspan / Bernanke Fed’s apparent willingness over the last several decades to close its eyes nearly completely until absolutely instructed to look at anything “unusual” – a trait shared with the equally somnolent Securities & Exchange Commission.

If I had been Goldman, I wouldn’t be too concerned about American officialdom – they are so deeply implicated in the whole sordid mess they risk a complete collapse of whatever shred of legitimacy they may still retain.

The Europeans, though, may well be a different story, especially since they will be looking to pin blame for this disaster on anyone BUT themselves and their own derelict establishments and practices, and Goldman makes the perfect villain, for all kinds of – mostly legitimate – reasons.

As with regard to Greece, the outlook continues to be grim, heading towards dire:

In a sign of the challenges their country faces, Greek officials called off a planned trip to the United States and Asia aimed at interesting new investors in its bonds due to a lack of demand …

Greece faces a critical test next week, when it will try to raise about 3 billion pounds ($4 billion), through an issue of 10-year bonds.

But with threats of the downgrade to its sovereign debt pending, investors say Greece would need to spend a whopping 7 percent rate of interest just to get people to buy.

That is nearly a percentage point more than the rate investors received in the previous Ancient greek bond sale, in The month of january, and a full 3 percentage points more than Greece’s borrowing cost before the current crisis. …

The rise in investor skepticism has brought Greece to adopt a new funding strategy.

Instead of selling debt through community auctions, where the danger of a failed offering could further unnerve markets, it has gone straight to institutional investors, sounding them out in one-on-one meetings, mostly in London.

Bankers and analysts in Athens say there is a discussion within the Finance Ministry as to whether the government should go to the market now, or wait until a new menu of changes — like more taxes and further public field wage cuts — is introduced, in the hope that such steps will result in lower financing expenses.

But a more dire view is already taking hold, according to some bankers, as investors fret which Greece may simply not be able to cover 20 billion euros associated with debt coming due within April and May, and 53 billion euros for all of the year.

It seems unlikely that such a quantity can be raised from investors — many of them conservative pension plan funds and insurance companies that are already nursing losses from the 8-billion-euro Greek bond issue within January that was hit through the recent market downturn.

Guess they weren’t able to get into that personal little Markit to make sure they got the right credit-default swaps.

Maybe next time, they’ll contact Goldman before they start giving away their money. Without doubt, they’ll receive a friendly wedding reception – they should just be sure to keep their hands on their wallets all the time, literally and figuratively.

David Caploe PhD

Chief Political Economist

EconomyWatch.com

 

Parthenon – Goldman Sachs Latest Purchase?

By David Caploe PhD, Chief Political Economist, EconomyWatch.org, 16 February 2010

By David Caploe Expert degree, Chief Political Economist, EconomyWatch.com, Sixteen February 2010

Chinese New Year / President’utes Day / Carneval – no matter in which you were in the world this weekend, it had been likely a celebration of some kind, where people focused on family / fun / festivities.

Which means, as followers of economedia © and Economy Watch well understand, it was the perfect time to bury any kind of bad or questionable news.

And when the subject is Goldman Sachs, that’utes usually when the New York Times falls another powerhouse article – playing the actual “double game” of credibility Or “but we didn’t really hurt you” in which mainstream media organizations attempting to make any claim to legitimacy so often engage.

So it’s hardly astonishing that – at a time when even a lot of “slow growth” Europe is getting ready to celebrate, despite the on-going financial stagnation – this Friday night in the US / Saturday morning in European countries was when the Times chose to release an explosive piece on how good old Goldman Sachs has been seriously involved in covering up what it right now turns out has been the Ancient greek government’s chronic mis-management of its condition budget and finances.

What – you imply GS has not only a) been betting against the mortgage-based securities it was selling its own clients; b) deeply implicated in the almost- and still-pending fall of AIG, the largest insurance company on the planet; but also c) helping to aggravate the already bad crisis in the Eurozone ???

Apparently so.

But if the Occasions has anything to say about it – and apparently they do, since the story was reported by not just the indefatigable Louise Story, co-author of the OTHER “hidden within plain sight” Goldman scandal stories cited over, as well as two other journalists – you’ll probably never know about it.

But that’s what Economy Watch is all about – to make sure you DO find out about these things, both here as well as on our increasingly-popular FaceBook Fan page:

Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking A holiday in greece and undermining the euro by enabling European governments to hide their mounting debts.

As worries more than Greece rattle world markets, records and interviews show that with Wall Street’s help, the country engaged in a decade-long effort in order to skirt European debt limits.

One offer created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.

As usual, the guys from GS waste no time and will work in ingenious ways – and eerily parallel to the tricks they and their buddies on Walls Street used to help obtain the US in the great shape it’utes in today.

In early November — three months before Athens became the epicenter of worldwide financial anxiety — a team from Goldman Sachs found its way to the ancient city with a really modern proposition for a government struggling to pay its expenses …

The bankers, led by Goldman’s president, Gary D. Cohn, kept out a financing instrument that would have pushed financial debt from Greece’s health care program far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

And apparently, the same kind of sordid maneuvers that worked so well in the US also go over just as easily in Europe.

It had worked prior to.

In 2001, just after Greece had been admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said.

That deal, hidden from public view because it was treated like a currency trade rather than a mortgage, helped Athens to meet Europe’s deficit guidelines, while continuing to spend past its means.

Hmmmm … does that problem ???

Using accounting sleight-of-hand to help people spend beyond their means – at least for a while, until the whole house of cards comes tumbling down – where HAVE we heard this before ???

Once again, the primary culprits are what Street. Warren of Buffet has called “economic weapons of mass destruction” – DERIVATIVES.

As in the American subprime turmoil and the implosion of the American Worldwide Group, financial derivatives played a job in the run-up of Greek debt.

Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere. …

Such derivatives, which are not freely documented or disclosed, increase the uncertainty over how deep the troubles go in Greece and which other governments might have utilized similar off-balance sheet accounting.

The tide of fear is now washing more than other economically troubled countries on the periphery of Europe, making it more expensive for Italy, Spain and Portugal to borrow.

So how did it work ???

In a large number of deals across the Continent, banks supplied cash upfront in return for federal government payments in the future, with those liabilities then left off the books.

Greece, for instance, traded away the rights in order to airport fees and lottery proceeds in years to come.

Critics state that such deals, because they are not recorded because loans, mislead investors and regulators about the depth of a country’utes liabilities.

Now here’s where the parallels become even more disturbing – with the Western equivalent of the phrase that has become all too familiar of late in the American context: Too Big To Fail [TBTF].

The crisis in Greece poses the most significant challenge yet to Europe’s common currency, the euro, and the Continent’s goal of economic unity.

The country is, in the argot associated with banking, too big to be allowed to fail.

Greece owes the world $300 billion, and major banking institutions are on the hook for much of that debt. A default might reverberate around the globe.

So how did this complete relationship between Wall Road sharpies and – relatively – poor nations develop ???

Wall Street did not create Europe’s debt problem. However bankers enabled Greece and others to gain access to beyond their means, in offers that were perfectly legal.

Few rules govern how nations can borrow the money they need for expenses like the military and health care.

The market for sovereign debt — the Wall Street term for loans in order to governments — is as unfettered as it is vast …

Banks eagerly exploited what was, for them, a highly lucrative symbiosis with free-spending governments …

The 2001 deal between Greece and Goldman, for instance, netted GS more than $300 million.

Which is why Goldman and its fellow Wall Streeters were so anxious to help countries such as Italy and Greece circumvent the – allegedly – strict rules governing membership in the Eurozone.

But exactly how did this become a problem for those countries in the first place ? ???

For all the benefits of uniting Europe with one currency, the delivery of the euro came with an original sin.

Which is precisely the argument utilized by Paul Krugman in his despairing analysis of the Eurozone turmoil in general, and the Greek tragedy in particular.

So what was that “unique sin” ???

Countries like Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the agreement that created the currency.

Rather than raise taxes or reduce spending, however, these governments artificially reduced their deficits with derivatives.

And that, of course, is where the boys from the Street arrived:

Despite persistently high deficits, the 1996 derivative helped bring Italy’s budget into line by swapping currency with JPMorgan at a favorable exchange price, effectively putting more money in the government’s hands. In return, Italy committed to future payments that were not really booked as liabilities.

In Greece, the bookkeeping was even much more creative than with Italy:

In exactly what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the actual country’s airports and freeways to raise much-needed money.

Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports.

A similar deal in 2000 called Ariadne wolfed down the revenue that the federal government collected from its national lottery.

Greece, however, classified those transactions as sales, not loans, despite doubts by many critics.

But however beneficial in the short-term, the long-range implications can be disastrous – as the current Greek crisis now sadly illustrates.

George Alogoskoufis, who became Greece’utes finance minister in a politics party shift after the Goldman offer, criticized the transaction in the Parliament in 2005.

The deal, Mr. Alogoskoufis argued, would saddle the government with big payments to Goldman until 2019.

And talking about yet another such swap,

Edward Stansted, a senior vice president at the Moody’s credit rating agency, stated the deal would ultimately be a money-loser for Greece because of its long-term payment obligations … “This swap is always going to be unprofitable for the Greek federal government.”

Which kind of sums up why both the US and now, it seems, Europe as well are going to face a mixed financial / economic crisis for the foreseeable future.

So enjoy Carneval / the actual Presidents’ Day weekend sales / & Gong Xi Fa Cai – because it looks like the hangover is going to be brutal.

David Caploe PhD

Chief Political Economist

EconomyWatch.com

Rich Nixon – Would You Buy a Used Derivative From This Man?

By Donald Caploe PhD, Chief Political Economist, EconomyWatch.org, 11 February 2010

Advisory: The following is based purely on circumstantial evidence as well as analogical reasoning and NOT any within information.

By David Caploe PhD, Main Political Economist, EconomyWatch.com, 11 Feb 2010

Advisory: The following is based purely on circumstantial evidence and analogical reasoning and NOT any inside information.

During the actual Watergate hearings of the mid-1970s – examining dirty tricks that, in today’s perspective, seem almost laughably collegiate, but were taken very seriously at the time, which only exhibits how degraded American political culture has since become – a dramatic moment was supplied by Republican Senator Howard Baker of Tennessee, as he asked two very simple connected questions: what did President Nixon know – and when did he realize it ???

Today the biggest political economic scandal on the horizon remains the near-meltdown of the global financial system that almost took place in Black September 2008, during which the venerable Lehman Brothers did in fact go under, nearly bringing with it several of it’s competitive collaborators, and ushering in not only a continuing global recession, but a crisis of credibility in major financial institutions almost everywhere – except, of course, Canada, that despite its physical closeness to the US, has somehow remained immune from the contagion still running rampant just below its southern border. [Ed: EconomyWatch.com do of course cover this subject in Canada – The Best Advanced Economy in the World.]

That the Canada situation – so close, and yet therefore far – is practically NEVER discussed highlights a sad truth about public discussion regarding the causes and ramifications of those still-frightening events: even now we know almost as little about what happening behind the scenes as we did in the time.

To be sure, there have been a raft of self-justifying accounts of these occasions, most recently by then-Treasury Secretary, as well as former head of Goldman Sachs, Holly Paulson, who discussed his On the Brink: Inside the Race To Stop the Collapse of the Global Financial System on February 9 with the most successful proponent of “value investing”, the Oracle of Omaha themself, St. Warren of Buffett, in an interview streamed live on CNBC.com.

Now We generally like Buffett, basically because he takes a long-term approach to investing, and never hesitates to criticize Wall Road practices he considers questionable, deceptive, or dishonest, even if they are the SOP of the day.

But as I watched his disappointingly unrevealing chat with Paulson, skipping here and there over various “highlights” of the run-up to, and dark days of, that Black September, I suddenly got a very bad feeling.

Because despite the great deal we still don’t know about what was going on then, one factor we DO know, all-too-clearly, is that Goldman Sachs, at least so far, has come out of the still-unfolding crisis within visibly better shape than any other Western financial institution.

And as indicated by two disturbing, yet brilliantly reported, articles through Gretchen Morgenson and Louise Story from the New York Times – both of which, we have argued, were seemingly “concealed in plain sight”, one on Christmas Eve, the other on the Friday night / ‘life was imple’ of Super Bowl weekend break – it also seems Goldman Sachs took a major role in “heightening the contradictions” that led to the outbreak of this worldwide disaster.

There are several explosive information in the Christmas Eve tale about how Goldman – and, to be sure, additional investment banks and hedge funds – sold their clients derivative packages, allegedly solidly backed by home loans – the infamous mortgage-backed securities, or MBSs – while, at the same time, making OTHER wagers against the very same items they were promoting their clients.

Now, to be sure, Buffett has railed towards derivatives, famously calling them “weapons of economic mass destruction”.

But the crucial reason for this context is WHEN do Goldman start playing this dual game of betting against the very same debt packages they were selling their clients as if they had no doubts about their solidity ???

Worried about a housing bubble, top Goldman executives made the decision in December 2006 to change the firm’s overall stance on the mortgage market, from positive to negative, though it did not disclose that publicly.

Indeed, the article points out that several key players within Goldman had started taking this stance even before the firm’s general policy on the housing market shifted into bear-ish precincts.

So a good 18 months at least prior to Black September 2008, Goldman being an institution had moved against what it perceived from that point forward as a bubble in the housing market they were fairly certain was going to collapse – even as they continued to sell derivatives based on that market to their clients.

What about the Super Bowl weekend story ???

Well, it was about exactly how Goldman basically pushed AIG to the wall in a quiet but intense dispute over valuations of these very same “derivatized” mortgage-based securities against which Goldman had been institutionally betting, for at least a year, by taking out insurance on them along with AIG.

The dramatic climax of this conflict, with which the Times’ story begins, took place in a conference call at the end of January 2008 – a year after Goldman had privately turned bearish on the housing market, as well as nine months before the explosion of Black September – a major function of which, you may recall, had been the hysteria engendered by the possible collapse of the largest insurer within the world, that very same AIG.

The obvious inference, obviously, is that Goldman’s desire to make good on its bets From the housing market led it to place pressure on AIG they understood the insurance company could not withstand.

Not surprisingly, Goldman potentates vehemently took umbrage at the very concept:

[David] Viniar [Goldman’s Chief Financial Officer] said that Goldman had done nothing wrong and that the actual firm was merely trying to enforce its insurance policy with A.I.G. “I don’capital t think there is any shame whatsoever,” he concluded.

Lucas truck Praag, a Goldman spokesman, reiterated which position. “We requested the collateral we were entitled to under the terms of our agreements,” he said in a written statement, “and also the idea that A.I.G. collapsed because of our represents is ridiculous.”

But read on and you might feel these distinguished men were being a bit disingenuous, to say the least:

Perhaps probably the most intriguing aspect of the relationship in between Goldman and A.I.G. had been that without the insurer to supply credit insurance, the investment bank could not have generated some of its enormous profits betting against the mortgage market.

And whenever that market went south, The.I.G. became it’s biggest casualty — and Goldman became one of the biggest beneficiaries.

So why is the time here so important ???

Because when Street Warren of Buffet finally did are available in on his white equine to rescue Wall Street from its own voracious greed, and the rest of the world from its callousness as well as stupidity, he had his choice of places where he might put his money as a means of showing faith in the system that seemed to be failing at the seams.

He obviously hadn’t become involved during the whole Bear Stearns debacle earlier in 2008. And he could have chosen in order to rescue Lehman Brothers, the venerable expense house established in 1855 – however he didn’t. Or he could even have taken his billions and help stabilize the world’s biggest insurance company, AIG – but he didn’t do that either.

Instead, on the 23^rd of September, 2008, Goldman announced a private deal to market Berkshire Hathaway $5 billion of perpetual favored stock – basically a loan having a guaranteed 10% annual dividend of $500 million dollars – Along with a “bonus” of the right to buy $5 billion of GS common at $115 / share at any time during the next five years.

Now, given Buffett’utes penchant for long-term investments, one could bet he wasn’t too concerned when, at one point in the first year of the “bonus” period, GS was, like so many American houses were and would turn out to be, “underwater”, at around $47 / share.

Only these 43,478,260 warrants weren’t places Buffett was planning to live in, but, rather cash in at some point later within the 5-year period. So when the price a year later was at $186, Buffett – had he sold the entire lot – would have made a good profit of some $3 billion.

In this context, we are duty-bound to raise the question of due diligence.

Certainly Buffett is not a guy to throw his money away. And, almost equally certainly, the Oracle of Omaha had enough connections in and around Wall Street to know both

a)   

that GS had turned bear-ish on the housing market by the end of 2006 AND

b)  

that they’d taken out downside positions backing that up with AIG – positions which, if he had known about them, he or she certainly knew would place AIG in the toilet to the advantage of GS if the housing market collapsed, as he almost certainly knew it would.

The concerns therefore that Howard Baker requested of President Nixon re Watergate suddenly resound loudly in the wake associated with Black September 2008:

What do Warren Buffett know about the negative position of Goldman Sachs towards the housing market – and when – such that he had great confidence giving a $5 billion loan to GS at a time when the whole financial world seemed heading towards Doomsday ???

Maybe someday we’ll know if there’s yet another Goldman Sachs scandal to be uncovered – this time around involving the last man anybody would ever suspect: Warren Buffett.

Or perhaps we won’t.

 

David Caploe PhD

 

 

 

 

EconomyWatch.com