ABCPs and SIVs Crash And Burn And The Chinese Riddle
Elaine Meinel Supkis
The latest critter born in the barn where all the beasts of the dark night are bred and reared by the monetarists and bankers of the West is called ABCP vehicles. They and SIV--Structured Investment Vehicles---are invisible to regulators and at the same time, they make or rather MADE magic money for a while. Now, like all the systems, they are suddenly not working anymore at all and are yet another headache for governments. At the same time, China continues to play interesting and utterly opaque currency games. We speculate about all this yet again.
Structured investment vehicles, the off-balance sheet vehicles run by banks and asset managers that buy bonds backed by mortgage and other debt, face renewed pressure after Moody’s issued warnings on Wednesday on a number of their ratings.The ratings agency said it had put the ratings for different parts of the debt of five different SIVs on review for downgrade and that it had downgraded much of the senior and junior debt issued by Cheyne Capital’s $6.6bn SIV, which last week announced it had been forced to begin selling assets.
SIVs and their near cousins, SIV-lites, have been hurt by funding problems as short-term debt markets have seized up and by declining values in the kinds of assets they hold as investors have deserted asset-backed securities over fears of contagion from the US subprime mortgage markets.
An endless alphabet of names of various schemes and follies continue to confound magicians hoping these things could turn tricks and make wealth flow from every orifice. Selling assets to pay for loans taken out during more heedless days is what fuels panics. For example, if everyone buys stocks using only money they have previously saved, if the stocks fall down, there are paper losses but one can hang onto the stocks and wait for them to rise again. But if one got a loan based on the value of these stocks, when they fall below the levels set by the lender, the holder must sell and pay the difference or declare bankruptcy. Since most of them are reckless and careless fools, they often have no way of paying the difference so they and the lender end up going bankrupt one after the other which is why, for 35 years, it was illegal for people to get loans so they could buy stocks and gamble.
These laws all were destroyed one by one as brokers demanded the right to make more business by offering loans to gamblers. So they used all sorts of tricky new-made schemes that could hide the true nature of the beast and resume the dangerous practice of loaning money 10-1 to people wishing to gamble with the FOREX differentials or stocks and bonds.
For though few observers outside the halls of high finance had heard of SIVs until this summer (let alone their mutant cousin, SIV-lites), these vehicles are now throwing global money markets into a panic.In particular, what investors have suddenly realised in recent days is that not only have financiers created these vehicles on a startling scale this decade but they have also done so using an appalling funding mismatch.
Most notably, while these vehicles typically invest in long-term assets that tend to be illiquid, they finance themselves with asset-backed commercial paper that typically lasts just three months. This summer, however, investors in the ABCP market have gone on strike. Thus conduits and SIVs are now suddenly calling on bank liquidity lines instead.
And this – unsurprisingly – is now triggering a sense of panic. After all, some tens of billions of dollars worth of ABCP funding is due to expire in the next 10 days, with even more next month. And while it is unclear how much of that will be converted into bank liquidity lines, the prospect of rising cash demands has prompted the banks to grab (and hoard) whatever short-term finance they can find.
These ABCPs are simply new incarnations of the old scheme of lending money and then using it to place bets on volitility in the markets. The 'rising cash demands' that are forcing banks to 'hoard' finances is a symptom of a panic, not a cause. Banks know they must protect savers and the people demanding their money back will be savers, not debtors. Whenever there is a global banking crisis, the nations that suffer the most are the debtor nations. The US is the world's biggest debtor nation and so far, we have been spared the pain of our follies only because certain people are interested in keeping us limping along for a while longer. But we are not bankers. We can destroy the world banking system by causing rampant inflation. A serious danger.
The ABCPs the Financial Times is worried about is actually a small part of this big mess. From Securitization.net comes this Credit Suisse PDF written on August 27th which has a little chart which I heavily modified:
Like nearly all of these oddball bonds, the ABCPs popped up right about when Greenspan convinced everyone we no longer needed all those dumb Great Depression laws. Around 1996, the New World Disorder took off as the monetarists won the high ground. Note how swiftly these instruments grew! The chart telescopes the time frame so the last few bars are not each month or year but each week. The sudden fall in August is noticable. If it were a small blip, it wouldn't matter. But it is a collapse in confidence in these instruments. People not only don't want them anymore, they are desperate to sell and only the hopes there might be some foolish person speaking a foreign language that might be persuaded to buy these things. Thanks to the internet, the movement of information is faster than any con game. Once a con game is revealed, it can't go much further. Since ABCPs are based on the same presumptions that lending to dead beats will make lots of money, we know that no one will want them since everyone can see, this proposition is silly.
China will adjust its financial policies to fund domestic companies and financial institutions' outbound investment and increase foreign-exchange outflows, Zhou Xiaochuan, governor of the People's Bank of China, said.``China's financial policies to support companies to invest abroad are not sufficient, and the central bank is vigorously working on it,'' Zhou said today during an investment forum in southeastern China's Xiamen city.
China is seeking to expand channels for domestic companies and individuals to invest abroad to help reduce the country's widening trade and capital surpluses that result from surging exports and a two-decade-long policy of attracting foreign direct investment.
And what is this news? And embarrassment of riches! So much money is flowing in, China must force it back out again! This should be good news for the US, right? And it is! After all, a tremendous amount of this money is coming from the US itself! I have written about Foreign Direct Investment in the past. The affairs of all nations are getting increasingly complex due to this force. It has grown along with free trade, monetarism and the overspending spree in the US. China can see how Japan and Saudi Arabia both keep the US happy as they lend money to the US or buy up American businesses and resources. Since we insist on overspending, we are running this long fire-sale and are very proud of the fact that we are selling record amounts of America. So China is now moving to take over significant parts of the US and our plan of destroying our banking system and refusing to pay our debts doesn't impress them since they have other tools at hand. Unlike Europe or Japan, they are a big nation that isn't part of American military power.
Germany's trade surplus grew again in July, despite a dip in exports, the Federal Statistics Office said.The mild decrease still left exports close to historic highs. By contrast, imports declined a sharp 2.4%.
As a result, the trade surplus went up to 16.5bn euros ($22.5bn; £11.2bn) from 15bn euros in June.
This tidbit reminds us that Japan isn't the only one who can play the 'increase trade surplus by reducing imports' game. As capitalists, we should remember that profits matter. A great deal. If you always sell for a loss, you go bankrupt no matter how fast your sales grow in volume. Hear that, Paulson? Bush?
From the BBC:
Meanwhile, manufacturing orders in July experienced their biggest monthly decline since Germany's unification in 1990.
We are in a recession and it is global. Profits can rise even as trade falls. Manufacturing falls and this means lay-offs and the cogs in the wealth machine are workers with enough money to spend and if they are eliminated, the machine seizes up. This summer, we have seen someone working to make the world banking gears grind. While looking for charts and data to back up my contention that China's FOREX purchaces and the direction of money flowing in and out of their banks has caused the carry-trade Japanese weak yen/European strong euro system to collapse, I came across a paper by Brad Seltser at RGE Monitor.
Here is a tiny tidbit from Brad Seltser's research concerning the yuan and China's FOREX reserves:
For years, Brad and I used to argue directly. He never thought much of the Bank of Japan's manipulations but, like nearly all the people in our system, focused only on China's yuan. He frankly didn't believe my fantastical stories of my parents knowing Madame Mao and Chou Enlai or how the Chinese decided suddenly one day they wanted to learn how to behave in Western diplomatic situations so they paid me to teach them not only how to ring doorbells and talk at the dinner table (hahaha...mouth full!) ---but also teach them the dark arts of capitalism and money making.
I told him all their plans and how they worked hard and devising these short and long range plans including how they were going to learn how to manipulate currencies. They knew the yuan was not a real currency, it was more like barter than magical systems for creating money out of thin air. They were missing the important part: the value-added aspect of making labor a debt instrument. The dynamics of the system was more important than any individual parts.
Instability creates wealth. To continue: no one has the faintest idea what the Chinese have in the dragon's cave which is heavily guarded since the source of future power lies in keeping this magic stuff occult. The only way we can guess as to what they are doing is to try to fit them into the puzzle of what is going on in the world. The oil kings in the Middle East try to be secretive but they do too much business with British and European banks to hide much of anything. They know they are being spied on so they have concentrated on buying the banking systems and portals throughout the slowly bankrupting West.
China is doing this too, by the way. They will succeed, I am betting. Back to China's FOREX reserves: back last spring, China openly petitioned the other G8 nations and the IMF to begin proceedings against Japan for currency manipulations and trade violations. Instead of going after Japan, everyone joined Japan in attacking China and demanding the yuan be increased in value. Years ago, I pointed out to Brad that the US cannot demand China raise the value of the yuan while simulatneously letting Japan weaken the yen. Brad, like so many others, told me I was not well-informed, didn't I know Japan is having a depression? They need to be saved!
I flooded his webpage with data showing this was ridiculous. The other readers and he suggested I go off to some other part of the planet and start my own news service because they were sick and tired of me shooting down their delusions. They wanted to sound wise, talking about things they had NO IDEA what was going on. So my news service was born!
I go off to his writings only to laugh, of course. He is puzzled as to what currencies China holds. I have a clue: the Japanese are FURIOUS. They are in HYSTERICS. They can't believe their eyes: the yen, which was supposed to be dropping to 130 to the dollar this week is RISING IN VALUE.
They just bought another $300 into their FOREX reserves in the hopes this would make the yen weak against the dollar but every time the yen tries to drop to more than 115 to the dollar, someone with a long tail, red wings and long neck reaches out with its claws and buys yens and sells dollars. Japan is calculating, they must buy another $500 billion in order to beat China at this game and how much money did the Federal Reserve just print up and dumped into the overnight banking system, proportedly in order to drop interest rates by .25% and provide liquidity?
Gradually, it is reaching exactly this amount. Will this scheme work? Indeed, the futility of the Federal Reserve and the Bank of Japan to stop this is amusing. They know perfectly well, as I know, that China has begun to force Japan to use yen to buy things. When Europe stupidly attacked Iran and ceased banking with Iran, Iran retaliated by demanding Japan pay in euros and a certain someone with scales, etc, also buys Iranian oil and the yen flowing into Iran now flow to this dragon's dark cave and it counts very carefully.
Why would China want the currencies of the world's #1 and #2 industrial and trade powers? HAHAHA. Obviously, no? Obviously, this way they can control the value of the yuan and get a trade advantage which is pure monetarism and the monetarist pigs in the US should be applauding this since it shows that monetarism works...for the Chinese. Brad has many charts in his analysis which is nice but all of them are based on many series of guesses. And so we have to look at other things to make guesses. The fact that the Chinese demanded the yen rise in value only to be vetoed by the other G8 nations who use Japan's free loan business to run our entire banking system, the carry trade being the magic center of endless wealth creation, the fact that the same month China threatened the G8 with retaliation is the same month the carry trade began to unwind as the yen began rising in value against most currencies.
The silly story that Japanese housewives were driving down the value of the yen and the Bank of Japan was helpless has collapsed in the face of the rising value of the yen in the teeth of Japanese refusal to raise interest rates. Just this week, they snarled there would be no rate hike even though there is obvious inflation beginning to rage in Japan and the Japanese people no longer are saving any yens at all. The Bank of Japan doesn't want them to save yen! But if they offer to sell yen and a certain party is buying, the yen rises in value, no? This is the free-for-all nature of world FOREX markets, a market built up by monetarists who tout this as the nostrum for the hazards of fiat currencies.
The dangers of secondguessing are double when it comes to the Chinese. Many a commentator has said, if the Chinese dump the dollar, it will lose value and their holdings will suffer so they must keep the dollar from collapsing but this commentary leaves out the vital information that the guys printing the dollars are demanding China drop the value of the dollar! They should be begging China to dump the dollar! So which is it?
Do we want a strong or a weak dollar? And to strengthen the dollar against the yen and yuan, the central banks there must soak up all the dollars. Which they must keep doing no matter what, according to this world view. China knows the Bank of Japan and the Federal Reserve can flood the world with worthless currency, all they have to do is drop interest rates and this allows all the subsidiary systems to run up giant debts which are deemed 'wealth'. And China can't buy infinite IOUs nor is China interested in doing this. China is no longer holding, they are buying. They know the US has this tendency of selling stuff at a high price and then collapsing asset values so the holders get little benefit from buying anything in the US.
Like the Arab kings, they know that the US will drop its pants and moon them. But like the Arabs this time around, they know that if they buy up critical systems like the banking systems, ports, road systems, water services, energy systems and other vital links in running a society, no matter how low asset values fall, they will control the systems, not the real estate! And if real estate values here fall, then they can buy up all that, cheap, too.
The Chinese aren't looking for the best return in cash, they are flush. They are looking for the best 'pressure points' where they can control our future economic fates. For example, if they buy up the highway systems of Texas and Oklahoma that run down through Mexico, if the value of this purchase falls due to a depression here, they don't care if it loses 80% of its value, this wasn't bought with a loan from the Bank of Japan or someone else. It is their money.
The US, on the other hand, has had this habit of buying on credit, credit that comes from China and Japan. So when asset values drop and either entity demands the loans be paid or the industry or systems will be confiscated, we are in deep trouble! This is why China doesn't worry all night long, 'Will the US go bankrupt?' when they control the infrastructure at critical points.
Another misunderstanding is why they buy currencies. They are not gambling or seeking free money from the monetarist systems. They are laying traps and setting up systems designed to give them full control of the yuan. The dollar is out of our control, for example. Asia controls it. All we can do is cause inflation and we are now set to doing this with a vengence. So long as the Bank of Japan insists on keeping the carry trade going, the Chinese will ride our dollar horse no matter how much that saucy nag tosses its mane and bucks. But I am guessing that the Japanese are the ones buying dollars frantically, not the Chinese. They are buying yen.
“The ongoing liquidity crisis has deepened and broadened since . . . July,” said Paul Kerlogue, senior credit officer for SIVs at the agency.“Vehicles that fund [by means of] the issuance of commercial paper have found financing either impossible or achievable only at exorbitant levels.”
The bankruptcy of American homeowners has been going on a long time, over a year. The only thing that happened in July was China's spat with the other G8 nations and the IMF. Since this is an international banking crisis and not an American banking collapse, it looks increasingly that the battle between the yen and the yuan are already causing tremendous destruction. And frankly, this battle will make the Asian Currency Crisis look like a teddy bear picnic.Culture of Life News Main Page
I noticed that about Seltser. He seemed to be obsessed with the rmb and it's relation to the $. And how the Chinese just didn't seem to "get it". Haven't read him for quite a while.
Posted by: Al | September 08, 2007 at 07:49 PM