US Financial Crisis/Bailout, China's Role

Whats going on is that the Bailout has resulted in the "Living Dead" presence of failed Institutions still led by the same discredited Executives that caused the problem in the first place.

Trust me, China is not about to come and save Wall Street. What they have said is that they will help recapitalise the Global Banking System, that means that they will go direct to market and do so mainly in the developing world.

The European markets plunged with the DAX nearly as much as 8%.

The Nikkei just lost 10% of its value today.

Austria and Russia has suspended trading. I find the delicious irony that Wall Street managed to do something to the Russians that the Georgians and NATO failed to do, and that's to put a real sense of fear.

Iceland is now formally the first nation to default and go bankrupt. Iceland government now taking over the nation's largest bank. The UK is freezing all Icelandic assets. Pakistan and the Ukraine appear jittery.

I'm no economist, but I've read that the fall in stock prices is due to hedge funds selling shares to cover their butts.

Morgan Stanley's stock price is being hammered at the moment, quite a bit more fallout will occur before things flatten out, so talk about Chinese acquisitions of useful Wall Street assets would be premature IMHO.

True, the Mitsubishi unit that bought into Morgan Stanley just took an 8.5% hammering at their stock value yesterday.

Russia, Indonesia and Ukraine suspended trading as of yesterday.

Truly sad. It affects all pensioners in every part of the globe.

Hong Kong pensioner fights for life savings in financial meltdown
HONG KONG, Oct 12 (AFP) Oct 12, 2008


Retired security guard Tam Kai-biu does not like to take risks.
The 74-year-old never gambles on the horses or the lottery. When his banks tried to sell him an investment product, he would say: "Please, I don't need any funds or stocks."

Now he fears he may have lost the two million Hong Kong dollars (260,000 US dollars) of savings and pension he and his wife had built up since he arrived here penniless from the southern Chinese city of Guangzhou in 1955.

While the global financial crisis has triggered massive and unprecedented government intervention to try to shore up plummeting markets, his story is a potent indicator of how the squeeze affects ordinary people around the world far removed from once-mighty banking and investment titans.

Tam and his wife had saved the money over almost four decades from what was left after raising four sons. He worked as a wood craftsman during the day and a security guard at night, while his wife was a cleaner.

"We earned the money with our own hands and we would not do anything risky with it," he told AFP.

In mid-August, Tam received a phone call from his long-time financial advisor at Hong Kong's Dah Sing Bank.

At the time, shares in US investment bank Lehman Brothers were collapsing on concerns that the 158-year-old company could not raise enough capital to cover mortgage losses.

None of this was mentioned and instead Tam's advisor told him about an attractive "savings plan" offering interest of 3.8 percent, significantly higher than the 2 percent he was getting.

"He said the plan was great and that although Dah Sing was not the 'boss' behind it, there would be no risk at all. He advised me to transfer all my money into it," Tam said of his advisor.

Tam, who dropped out of school and is barely literate, said he had never heard of Lehman Brothers when he was sold the so-called minibonds, a complex financial instrument linked to both bonds and derivatives.

Even if he had, he would not have known that the 600-billion-US-dollar Wall Street giant was behind what he had signed his life savings into.

His financial advisor gave him an English-only document spelling out the nature of the "savings plan" and made no attempt to translate it for him, he said.

The document, seen by AFP, contains a scribbled Chinese note on one page saying the products were "principal protected" -- which Tam said was written by his financial advisor.

On another page in smaller English print, the document reads: "There is a risk that any investor may lose the value of their entire investment or part of it."

On September 15, the US bank filed for bankruptcy.

Tam said his financial advisor contacted him that day and said for the first time that his money had been used to buy Lehman Brothers financial products.

Tam tried but failed to locate the advisor at the bank, but said the manager showed him the document he had signed, drew brackets around the words "Lehman Brothers" and asked him: "Here, can't you see the name of the issuer bank yourself?"

He said he was now having trouble sleeping and eating, and his wife was suicidal.

They are among the more than 8,000 angry Hong Kong investors who claim that various local banks mis-sold them the "mini-bonds" and other complex financial products backed by Lehmans, which are now potentially worthless.

Their combined loss could be around 12.7 billion Hong Kong dollars.

It's not just in Hong Kong. In Singapore, about 600 investors who have lost savings rallied Saturday urging the city-state's central bank to help recover their money.

Like Tam, many of those who gathered were retirees who invested their life savings in financial products linked to Lehmans and other institutions.

They, too, told AFP they felt "cheated" and "betrayed" that the banks did not fully inform them of the risks when they were offered the products.

A spokeswoman for Dah Sing Bank refused to comment on Tam's case.

But asked why they continued to sell Lehman products despite knowing the bank was close to collapse, she told AFP: "The rating of Lehman Brothers was still high at that time.

"Its collapse happened so suddenly that it was unexpected for all of us."

For weeks, the investors have staged protests outside the banks and clashed with police to demand a full refund of their original investments.

The city's de facto central bank said it is investigating the banks which sold the products, and politicians have threatened class action suits.

Sitting under the trees to recover after an hour of shouting slogans and waving placards in a recent protest outside the city's legislature, Tam said: "I will keep protesting until they give me back my money.

" What else can I do?"

All rights reserved. © 2005 Agence France-Presse.

..and more depressing defaults to come...

The troubles sound familiar. Borrowers falling behind on their payments. Defaults rising. Huge swaths of loans souring. Investors getting burned. But forget the now-familiar tales of mortgages gone bad. The next horror for beaten-down financial firms is the $950 billion worth of outstanding credit-card debt—much of it toxic.

That's bad news for players like JPMorgan Chase (JPM) and Bank of America (BAC) that have largely sidestepped—and even benefited from—the mortgage mess but have major credit-card operations. They're hardly alone. The consumer debt bomb is already beginning to spray shrapnel throughout the financial markets, further weakening the U.S. economy. "The next meltdown will be in credit cards," says Gregory Larkin, senior analyst at research firm Innovest Strategic Value Advisors. Adds William Black, senior vice-president of Moody's Investors Service's structured finance team: "We still haven't hit the post-recessionary peaks [in credit-card losses], so things will get worse before they get better." What's more, the U.S. Treasury Dept.'s $700 billion mortgage bailout won't be a lifeline for credit-card issuers.

The big firms say they're prepared for the storm. Early last year JPMorgan started reaching out to troubled borrowers, setting up payment programs and making other adjustments to accounts. "We have seen higher credit-card losses," acknowledges JPMorgan spokeswoman Tanya M. Madison. "We are concerned about [it] but believe we are taking the right steps to help our customers and manage our risk."

But some banks and credit-card companies may be exacerbating their problems. To boost profits and get ahead of coming regulation, they're hiking interest rates. But that's making it harder for consumers to keep up. That'll only make tomorrow's pain worse. Innovest estimates that credit-card issuers will take a $41 billion hit from rotten debt this year and a $96 billion blow in 2009.

Those losses, in turn, will wend their way through the $365 billion market for securities backed by credit-card debt. As with mortgages, banks bundle groups of so-called credit-card receivables, essentially consumers' outstanding balances, and sell them to big investors such as hedge funds and pension funds. Big issuers offload roughly 70% of their credit-card debt.

But it's getting harder for banks to find buyers for that debt. Interest rates have been rising on credit-card securities, a sign that investor appetite is waning. To help entice buyers, credit-card companies are having to put up more money as collateral, a guarantee in case something goes wrong with the securities. Mortgage lenders, in sharp contrast, typically aren't asked to do this—at least not yet. With consumers so shaky, now isn't a good time to put more skin in the game. "Costs will go up for issuers," warns Dennis Moroney of the consultancy Tower Group.

Sure, the credit-card market is just a fraction of the $11.9 trillion mortgage market. But sometimes the losses can be more painful. That's because most credit-card debt is unsecured, meaning consumers don't have to make down payments when opening up their accounts. If they stop making monthly payments and the account goes bad, there are no underlying assets for credit-card companies to recoup. With mortgages, in contrast, some banks are protected both by down payments and by the ability to recover at least some of the money by selling the property.
THE BIG BOYS' BURDEN

Making matters worse, the subprime threat is also greater in credit-card land. Risky borrowers with low credit scores account for roughly 30% of outstanding credit-card debt, compared with 11% of mortgage debt. More than 45% of Washington Mutual's credit-card portfolio is subprime, according to Innovest. That could become a headache for JPMorgan Chase, which agreed on Sept. 25 to buy the troubled thrift's credit-card business and other assets for $1.9 billion. Says a JPMorgan spokeswoman: "

We are aware of the credit quality of [WaMu's] portfolios and will manage risk appropriately."

Credit-card losses are already taking a bite out of lenders' balance sheets. Bank of America, the nation's second-largest issuer behind JPMorgan, revealed on Oct. 6 that roughly $3 billion of its $184 billion credit-card portfolio has soured, a 50% increase from a year ago. At the same time the bank, which is also dealing with the broader financial tumult, said it would have to cut its dividend by 50% and raise $10 billion in fresh capital. The stock stumbled more than 25% the next day when investors largely scoffed at the new shares BofA was offering. "The good news for us is that we have the strength to get through this, but the bad news is that the earnings recovery does take a while," says BofA spokesman Bob Stickler. "We are prudently adjusting our underwriting standards to adapt to changing economic conditions."

Likewise, American Express (AXP), which caters to wealthier borrowers, upped its provisions for credit-card losses from $810 million to $1.5 billion in the latest quarter, a sign that even upscale consumers are having trouble. "We have enhanced our credit models and continue to prudently manage our risk by scaling back some card acquisition efforts and reducing credit lines where appropriate," says an AmEx spokeswoman.

The industry's practices during the lending boom are coming back to haunt many credit-card lenders now. Cate Colombo, a former call center staffer at MBNA, the big issuer bought by Bank of America in 2005, says her job was to develop a rapport with credit-card customers and advise them to use more of their available credit. Colleagues would often gather around her chair when she was on the phone with a consumer and chant: "Sell, sell." "It was like Boiler Room," says Colombo, referring to the 2000 movie about unscrupulous stock brokers. "I knew that they would probably be in debt for the rest of their lives." Unless, of course they default. Responds BofA spokeswoman Betty Riess: "The allegations do not reflect our practices. The bank has nothing to gain by extending credit to people who do not have the ability to pay us back."

Now regulators and politicians are trying to curb some of the industry's abusive practices by limiting interest rate hikes, abolishing certain fees, and cracking down on questionable billing practices. Under rules proposed by the Federal Reserve, a borrower would have a 21-day grace period before being hit with a late fee, instead of the few days offered by some firms now. A similar plan working its way through Congress would allow banks to increase rates only on consumers' future purchases—not existing balances. And under both proposals, credit-card companies would have to allocate account holders' payments equally to balances with different interest rates. Currently, firms first apply payments to the debt with the lowest rate, which means it takes longer and makes it costlier for consumers to pay off their debt.
LAST HURRAH

The Senate isn't expected to vote on the matter until early next year. The Fed's rules, currently being reviewed by the industry, could take effect around that same time. But lenders seem to be preparing for the worst-case scenario: an outright ban on some practices.

To get ahead of rules that would hamper their ability to reprice accounts, for example, many firms are jacking up interest rates. A survey of major issuers by consumer advocacy group Consumer Action found that 37% of firms have raised rates across the board, even for borrowers with relatively pristine credit records. "In anticipation of a federal crackdown, card companies are scouring their portfolios and tightening credit," says Tower Group's Moroney.

Even consumers like Michael Polemeni, who miss only a single payment, can find themselves in the crosshairs of credit-card companies. The independent computer specialist relied heavily on his credit cards for child support payments and business expenses. Polemeni generally made more than the minimum payment each month, carrying a $2,000-or-so balance. But in July he missed a payment, and Providian, owned by Washington Mutual, jacked up his rate from 9% to 30%. "I was shocked because I am a very good customer," say Polemeni, who paid off the full balance immediately. WaMu didn't return calls for comment.

Not everyone will be able to pay down their debts like Polemeni. And that could make for a vicious cycle: As credit-card companies raise rates, more consumers fall behind on their payments, which then hurts the issuers. Says Innovest's Larkin: "We are going to see the banks massively hit."

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network
Emerging Markets Gorge on Plastic

Consumers in Latin America, South America, and Eastern Europe are filling their wallets with credit cards. The number of cardholders in Brazil and Mexico has more than doubled in the past three years. But rapidly rising credit-card debt can wreak havoc on emerging-market economies, according to Oxford Analytica. Take South Korea. Consumers there went overboard on credit in 2003 and defaulted on a large percentage of those loans—which seriously crimped the country's growth.

To read the Oxford Analytica article, go to

End of US era - now China calls the tune

The world order is changing, because China is propping up the US.

SO THE Group of Seven leaders have vowed to "take all necessary steps" to stop the world's financial immolation. That's good news. But first they are doing whatever is necessary to secure for themselves what is left of their toasted assets.

Last week Gordon Brown's priority was to use money laundering and terrorism laws to seize the British vaults of a bankrupt Icelandic bank. He says he will seize more Icelandic assets "wherever is necessary" to secure £20 billion ($52 billion) invested by Britons and British local governments.

International insolvency practitioners call it ring fencing - where rich countries, usually the United States, can lock down their borders to seize assets and jump in front of equally entitled but less muscular international creditors. That is why the US will get the lion's share of the leftovers of bankrupt investment banks like Lehmans.

But Iceland and Lehmans are sideshows in the new world of international financial cooperation and brinkmanship. The match-up that matters is between the mother of all debtors, the United States Government, and its primary financier, the Chinese Government.

By now China has accumulated more than $US2 trillion ($3 trillion) in foreign exchange reserves. The holdings are not transparent. Australian officials, for example, have no idea how much Australian currency is held by China's State Administration of Foreign Exchange.

But experts in both China and the US estimate that 70 per cent of China's foreign assets are held in the form of loans to the US Government and its agencies. That means America's official debt to the Chinese Government is worth 10 per cent of America's GDP, 40 per cent of China's GDP and more than twice as much as the combined value of all of the companies on the Australian Stock Exchange.

To understand both the raw power and vulnerability of China's international balance sheet you only need to look carefully at the demise and partial rescue of the US government agencies Freddie Mac and Fannie Mae.

Freddie and Fannie own or guarantee almost half of all American mortgages. To pay for these toxic loans that fuelled the US housing bubble they issued $US5 trillion in "agency" bonds.

In recent years it has been foreign governments that have footed the bill, accumulating about $US1 trillion of Fannie and Freddie agency bonds, according to Brad Setser, the sovereign wealth guru at the Council on Foreign Relations in New York. He estimates China alone holds between $US500 billion and $US600 billion.

Foreign governments, especially China, became even more important in funding bad US mortgages after the private sector financial system began to seize up a year ago.

But by July even they had taken fright. US Treasury data shows foreigners - read foreign central banks - bought $US34.3 billion of US Treasury bonds in the month but sold $US57.7 billion of agency bonds. China was selling Freddie and Fannie bonds (as well as US corporate bonds and US equities) and only buying US Treasury bonds because they were explicitly guaranteed by the US Government.

By August the US Treasury Secretary, Henry Paulson, began to realise that the biggest players in the American mortgage market were unviable. The foreign governments that had been funding them were turning off the tap.

The Washington Post reported that officials of the People's Bank of China told the US Treasury they expected it to "do whatever is necessary" to protect China's investments in Freddie and Fannie.

The US Treasury promptly gave guarantees to China and the agency bond holders that had lent to Freddie and Fannie, while allowing shareholders to lose everything.

Last month China again tested its new-found financial leverage. The Chinese Vice-Premier Wang Qishan reportedly sought an assurance from Paulson that Chinese investors would no longer face political opposition when investing in US companies. Paulson would have gladly given that assurance if he had the political credibility to do so.

For 60 years the US has shaped the global financial system and occasionally made threats to get what it wants. In August a new era began.

Now China stands between the US and national bankruptcy. Like a creditor that has invested all its savings in a single stricken business, China cannot extricate itself without seriously harming itself.

Its challenge is to extract the advantages it can while keeping the US national enterprise alive.

The prospect of losing $US400 billion, perhaps even as much as $US600 billion in Freddie and Fannie was a severe shock to the Chinese political and financial system.

A former senior adviser to the Chinese central bank puts it this way: "If these two companies went bankrupt, then all mortgage bonds will go down. So we will lose $US400 billion in one go."

The former adviser believes China has a long fight ahead of it to save its assets.

"The bonds have been taken over by the Government so they are temporarily safe. Temporarily. China's assets are still in danger at least of devaluation, even default, so China should join other countries on how to stabilise this situation."

The risk is that governments can miscalculate, they can misread each other and they can be pushed off course by domestic politics, even in an authoritarian country like China.

The overriding comfort for the world is that it makes no sense for China to abandon its US government investments. Even a hint that it might do so would send investors rushing for the door, causing the US dollar to tumble, US long-term rates to shoot through the roof and the value of China's foreign reserves to evaporate.

Or perhaps the ability to do the mother of all insider trading: short the dollar, leak or start a rumor, profit, deny the rumor.

RedMercury said:

Or perhaps the ability to do the mother of all insider trading: short the dollar, leak or start a rumor, profit, deny the rumor.

Click to expand...

That kind of illogical action would put trillions of Chinese assets at risk, not to mention destroy the wealth of its primary customer. Destroying China's own wealth both now and in the future. How China would keep such a move secret is also a question. It's not like they can just call their local broker to make the play.