China’s Lehman Bros

China has discovered the concept of “too big to fail” with the Evergrande disaster:

As of the end of June, Evergrande had nearly 2 trillion yuan ($309 billion) of debts on its books, plus an unknown amount of off-books debt. The property giant is on the verge of a dramatic debt restructuring or even bankruptcy, many institutions believe.

A bankruptcy would amount to a financial tsunami, or as some analysts put it, “China’s Lehman Brothers.” The venerable American investment bank’s 2008 collapse helped trigger a global financial crisis.

Evergrande, one of China’s three biggest developers, has a giant footprint in China. Its liabilities are equivalent to about 2% of China’s GDP. It has more than 200,000 employees, who themselves and many of their families have invested billions of yuan in the company’s WMPs. The company has more than 800 projects under construction, more than half of them halted due to its cash crunch. There are thousands of upstream and downstream companies that rely on Evergrande for business, creating more than 3.8 million jobs every year.

Like many of China’s “too big to fail” conglomerates, Evergrande’s crisis has fueled speculation over whether the government will step in for a rescue. Several state-owned enterprises, including Shenzhen Talents Housing Group Co. Ltd. and Shenzhen Investment Ltd., both controlled by the Shenzhen State-owned Assets Supervision and Administration Commission (SASAC), are in talks with Evergrande on its Shenzhen projects, according to people close to the talks. But so far, no deals have been reached.

A potential default by Evergrande could spread to markets outside China as it has huge, high-interest offshore bonds. Some of its offshore bonds carry interest rates as high as 15%, a person close to the Hong Kong capital market said. UBS estimates that $19 billion of Evergrande’s liabilities are made up of outstanding offshore bonds.

Evergrande has been frantically selling properties at discounts this year. In late May, it offered certain homebuyers 30% to 40% off if they paid entirely in cash. In the first half, the company reported 356 billion yuan of contracted sales, slightly higher than 349 billion yuan for the same period last year. Average selling prices in the first six months declined 11.2%. Meanwhile, payables increased 14.7% to 951 billion yuan, and sales and marketing expenses increased 30% to 17.8 billion yuan. In response to the market environment, the company increased sales commissions and marketing expenses, the company said.

Compared with its competitors, Evergrande has higher capital and human costs but lower selling prices, an industry participant said. “How can it make money?” the person said.

The developer reported a 29% slide in profit for the first half. Its 10.5 billion yuan of profit mainly reflected an 18.5 billion yuan gain from the sale of some shares and marked-to-market holding in internet unit Henten Networks. It reported a loss in its core property business of 4 billion yuan.

Evergrande’s extremely high debt ratio, high financing cost and repeated delays in payments to suppliers, partners and local government show that its liquidity has always been tight, but on the other hand, the fact that it has survived years under this model indicates that it has always been able to generate money, a veteran investor said.

Now everyone is watching whether it can dodge the bullet once again.

I would not assume that the Chinese government will follow the lead of the US government and bail out Evergrande and the banks whose failure it threatens. First, Xi Jinping hates corruption with a passion and he is not likely to care one little bit about saving the wealth and careers of all the bankers and businessmen at risk. Second, China has seen how the 2008 financial crisis weakened the USA, and how the US failing to burn the dead wood in the financial sector had terrible consequences for its real economy.

We know the Chinese were paying very close attention to the 2008 situation and its aftermath, because the strategic guideline of Tao Guang Yang Hui established under the Deng regime was officially revised for the first time after the global financial crisis, which the Chinese interpreted as marking the end of the USA as the singular superpower.

So my guess is that unlike the US government, the Chinese government will protect the common people at the expense of the financial sector.

DISCUSS ON SG


Never trust the banks

As in 2008, the banks are taking the money the government has given them to help small businesses and are refusing to loan it out:

Nearly a fifth of small British businesses could be forced to close in the next four weeks after running out of cash amid complaints banks are refusing to give them government-backed coronavirus loans.

Many bosses said banks had declined them emergency payments over claims they had not met the required criteria while others could not get through on the phone or were told the money would take weeks to arrive.

Mark Fuller, who owns popular celebrity haunt Karma Sanctum in Soho, said he was unable to apply for funds because he could not guarantee his businesses would be able to start paying it back after six months in the event of a lengthy shutdown.

‘The loan is under normal business conditions, which is fine but then don’t suggest otherwise,’ he told MailOnline. ‘I have already been told by the government and Barclays that the only way to receive a loan is by cutting my staff.’

Other bosses were declined payments for having significant cash reserves, despite fears these would not be enough to last out a lengthy lockdown, or because they owned properties that could be used as collateral for a regular commercial loan.

Scott Littlefield, from SPL Management, a property company based in Poole, told MailOnline: “This scheme is not really fit for purpose. Our bank, Nat West, is virtually non-contactable at the best of times and the staff in branch can only deal with personal banking issues, not business. They always say to approach your relationship manager although all relationship managers were done away with in 2010.”

If you think the US banks are bad, you should try dealing with a UK bank. They make it almost impossible for a UK-based company to even get a bank account. And, as in the US, they refuse to play what is supposed to be their part in crisis-amelioration efforts.

The governments need to stop looking to the banks to help solve the problem. They ARE the root of the problem, and therefore cannot be part of the solution.


Speaking of Chinatown

Things aren’t looking so good for the global financial system:

China banks are running out of cash in HKD and USD. Maximum withdrawal limit drop from USD1300 to USD38. A drop of 34 times. China financial doom day coming.

Can you say “bank run”?


Deutsche Bank in trouble

Those massive layoffs weren’t the only sign that Germany’s largest bank appears to be in difficulty:

Here are the dynamics in a nutshell: Deutsche Bank CEO Christian Sewing is pulling back from catering to risky hedge-fund clients, i.e. running a prime brokerage, as he attempts to radically overhaul the troubled German lender while BNP CEO Jean-Laurent Bonnafe wants to expand in the industry. A deal of this magnitude would be a stark example of the German firm’s retreat from global investment banking while potentially transforming its French rival from a small player in the so-called prime-brokerage industry to one of Europe’s biggest.

Of course, publicly telegraphing that DB is in dire liquidity straits and needs an in-kind transfer of its prime brokerage book would spark an outright panic, and so instead the story has been spun far more palatably, i.e., “BNP is providing “continuity of service” to Deutsche Bank’s prime-brokerage and electronic-equity clients as the two companies discuss transferring over technology and staff”, according to a July 7 statement. The ultimate goal of the talks is for BNP to take over the vast majority of client balances, which are slightly less than $200 billion currently.

There is just one problem: nothing is preventing those clients who would be forcibly moved from a German banking giant to a French banking giant from redeeming their funds. And that’s just what they are doing. Or rather, nothing is preventing them from moving their exposure for now, which is why they are suddenly scrambling to do it before they are suddenly gated.

And the stock price comparison below is not the most encouraging thing I’ve ever seen, particularly given that we are currently at the height of a bull market.


Even the Guardian gets it

This is one of the few times you will see me approvingly quote an article from The Guardian:

Even as their world came apart, the bankers clung to denial. By August 2007, the flagship hedge fund of Wall Street’s most prestigious firm was tanking fast – and what explanation came from the man at Goldman Sachs? “We were seeing things that were 25-standard deviation moves, several days in a row.” The bank was getting hit by events that were only meant to happen once every 100,000 years – and they were happening every day of the week. Given a choice between blaming their models or reality, Goldman’s bosses held the world at fault.

You know the rest because, a decade later, you and I are still paying for it. How the banks died, the world economy collapsed and most of us got poorer. How the financiers, mainstream economists and regulators were so detached from reality that they swore blind that such a catastrophe was impossible – even while it was under way.

Their reputation has never recovered. And as an economics journalist, I look across at politics and see the same process at work. Brexit, Donald Trump, Jeremy Corbyn: time after time, the political class has completely failed to understand the world they were governing, policing and analysing. Allow me to be blunt: our political crisis is also a crisis for our political class. And it is one from which I doubt they can recover.

At each major fork in the road, they have sped off down the wrong turning, while decrying the other as unimaginable. Each time, they have crashed.

That is because the maintream economic models, on which so much of the social policy of the last 45 years has been made, are wrong. But the wealth of too many powerful and well-connected individuals relies upon the continuance of the system built on those false models for anyone to make any substantive changes until the whole thing collapses. As it inevitably will, sooner or later.

For starters, all the bad debt needs to be written off. It will never be repaid. But writing off the bad debt means the bankrupting of almost every major bank in the world, and the financial elite would rather see the world collapse into disease, famine, and war than accept the just consequences of their idiotic actions.


How rule by banker manifests itself

Bankers selected Obama’s entire cabinet one month before the 2008 election:

The most important revelation in the WikiLeaks dump of John Podesta’s emails has nothing to do with Hillary Clinton. The messages go all the way back to 2008, when Podesta served as co-chair of President-elect Barack Obama’s transition team. And a month before the election, the key staffing for that future administration was almost entirely in place, revealing that some of the most crucial decisions an administration can make occur well before a vote has been cast.

Michael Froman, who is now U.S. trade representative but at the time was an executive at Citigroup, wrote an email to Podesta on October 6, 2008, with the subject “Lists.” Froman used a Citigroup email address. He attached three documents: a list of women for top administration jobs, a list of non-white candidates, and a sample outline of 31 cabinet-level positions and who would fill them. “The lists will continue to grow,” Froman wrote to Podesta, “but these are the names to date that seem to be coming up as recommended by various sources for senior level jobs.”

The cabinet list ended up being almost entirely on the money. It correctly identified Eric Holder for the Justice Department, Janet Napolitano for Homeland Security, Robert Gates for Defense, Rahm Emanuel for chief of staff, Peter Orszag for the Office of Management and Budget, Arne Duncan for Education, Eric Shinseki for Veterans Affairs, Kathleen Sebelius for Health and Human Services, Melody Barnes for the Domestic Policy Council, and more. For the Treasury, three possibilities were on the list: Robert Rubin, Larry Summers, and Timothy Geithner.

This was October 6. The election was November 4. And yet Froman, an executive at Citigroup, which would ultimately become the recipient of the largest bailout from the federal government during the financial crisis, had mapped out virtually the entire Obama cabinet, a month before votes were counted.

No wonder Mark Carney thinks he can tell Theresa May what to do, and not do. Given the current political structure, he probably can.


The aristocrats grow arrogant

It’s rather shocking to see a banker openly defy a head of government in this manner:

The Governor of the Bank of England last night issued an extraordinary warning to Theresa May to stop telling him how to do his job. In an unprecedented intervention, Mark Carney hit back angrily at the Prime Minister’s claim this month that his policies had damaged the interests of savers, pensioners and the young. And he stressed he would resist any interference from Mrs May in setting interest rates or monetary policy.

‘Politicians have done a very good job of setting up the system,’ he said. ‘Where it can be difficult sometimes is if there are political comments on our policies as opposed to political comments on our objectives. ‘The objectives are what are set by the politicians. The policies are done by technocrats. We are not going to take instruction on our policies from the political side.’

The bankers are not going to take instruction from the political side? I would expect they’re going to find out pretty soon that the people are not going to take much more of this devastating rule-by-banker, given how destructive their policies that relentlessly favor the .01 percent are to everyone else.


Deutsche Bank is in trouble

In case you hadn’t noticed, we’re very far from being out of the 2008 crisis. The bandaids are leaking. Heavily.

Update: In an emailed statement, the German finance ministry told Bloomberg that the report on Deutsche Bank by German weekly Die Zeit “is incorrect” adding that “the federal government isn’t preparing any rescue plans. There are no grounds for such speculation.”

  • GERMAN FINANCE MINISTRY DENIES DIE ZEIT REPORT ON DEUTSCHE BANK
  • GERMAN GOVERNMENT ISN’T WORKING ON BANK RESCUE PLAN: MINISTRY

Only two more denials until it is unofficially confirmed.

It’s all about Deutsche Bank this morning again, where after last night’s vigorous denial by CEO John Cryan, who told Bild that the troubled German lender is not seeking a government bailout and that it’s balance sheet is solid, earlier this morning Germany’s Zeit reported that the German government is working on a contingency plan for Deutsche Bank. The German outlet writes that possible scenarios apply in case Deutsche Bank AG needed capital injection to cover litigation costs and include the option of German government taking a stake.

Contingency plan envisages possible sales of Deutsche Bank units, with the option of state guarantees to back the transactions if needed. One worst-case scenario involving the government taking a 25% stake would apply only in extreme emergency. All options are contingency planning and German govt hopes Deutsche Bank won’t need any state aid.

Queried by Reuters, a Deutsche Bank spokesman referred to an interview Chief Executive John Cryan gave German daily Bild on Wednesday and denied the report. “At no point did I ask the chancellor for support. Neither did I suggest anything like that,” had told Cryan Bild in response to a different report that said he had asked German Chancellor Angela Merkel for her support with a $14 billion U.S. demand to settle claims it missold mortgage-backed securities. Such a request would be “out of the question for us,” Cryan said, adding that he could not understand how “anyone could claim that.”

Despite the preemptive denial, Zeit said that the German government is still hoping Deutsche Bank will not need state support and only scenarios for a potential rescue are being discussed so far.

In related news, it is calculated that the insanity can last somewhere between eight and 68 months longer before it all crashes down.

The ECB and the BOJ, the two central banks most actively monetizing debt currently, have 8 and 26 months respectively, if they do no changes to their programs. However, if incremental easing is layered on, like expanding the scope of their bond buying programs or purchasing equities even more aggressively, the total rises substantially. The final answer: 68 months, or just above 5 and a half years,  in the case of the ECB, were it to steamroll all political opposition and monetize virtually every possible bond (and 20% of the equity market), and 48 months, or 4 years, in the case of the BOJ. 

How very strange! One would have thought those one million new immigrants would have been good for the German economy….


The China train is NOT fine

David Stockman foresees some grim deflationary bubble-popping out of China:

The truth is, the 25 year growth boom in China is just a giant, credit-driven Ponzi.  Any fool can run a central bank printing press until it glows white hot.

At the end of the day, that’s all the Beijing suzerains of red capitalism have actually done. They have not created any of the rudiments of viable capitalism. There are no honest financial markets, no genuinely solvent banks, no market driven allocation of capital and no financial discipline which comes from the right to fail as well as succeed.

There are, for instance, 287 million equity trading accounts in China, most of them opened within the last year and overwhelmingly held by retail punters with sub-high school educations. In less than 12 months they took down upwards of $1 trillion of margin debt through official brokerage channels and a massive network of shadow banking sources including dodgy peer-to-peer lending arrangements.

So fortified, they clambered after a stock market bubble that expanded by $3 trillion in just 60 trading days ending on June 14, and then broke into a panicked selling stampede that liquidated that very same $3 trillion of bottled air in hardly 20 trading days thereafter.

The problem is that the impact of the Chinese deflationary collapse is not likely to be limited to China, and will likely render all of the Western central banks’ efforts to keep the Western economies afloat through zero interest rate policy moot. The central bankers are counting on the Chinese to respond to a popped bubble like they do, with a flood of liquidity propping up the financial gangsters. But the Chinese government is much more likely to jail and shoot the lot of them.

The latter is the Achilles Heel of the whole Ponzi. To arrest capital flight they will have to do the opposite of what they have done for the last 20 years. That is, they will have to shrink the domestic money supply and banking system in order to sell dollars and euros rather expand domestic credit in order to sequester dollar liabilities (i.e. treasury bonds) in the PBOC.

In due course, China will be aflame with campaigns against corruption and enemies of the state as it seeks to cope with its collapsing financial bubbles and endless herds of economic white elephants. Chairman Mao’s axiom as to where state power really comes from——that is, the barrel of a gun—-will become the increasingly evident modus operandi of the communist party rulers.

The resulting deflationary spiral will suck the global economy into its vortex. And Wall Street will go down for the count because this time the Fed will be utterly powerless to reverse the tide.

Just remember, even when the paper money and the digital wealth evaporates, you’re not actually any worse off materially than you were the day before.


Peeling the onion

The big banks and the US government are fighting a desperate court battle to keep hidden the way in which they collude to permit the bank executives to freely break the law without risking any criminal penalties.

The reason both the Democratic and Republican establishments are in full on panic mode about the rise of Donald Trump and Bernie Sanders is a deep seated fear that the plebs have finally woken up.

Democrats rail against big corporations, while Republicans rail against big government. This scheme has been used to successfully divide and conquer the public for decades while big government and big business successfully schemed to divert all wealth and power to an ever smaller minuscule segment of the population — themselves.

It took awhile, but the people are finally starting getting it and they are royally pissed off. One of the primary mechanisms for this historic elite theft has been the creation of a two-tiered justice system in which the rich, powerful and connected are never prosecuted for their criminality. Instead, the government actively protects them by pretending corporate entities commit crimes as opposed to individuals. Of course, this is impossible, but yet it’s how the government handles white collar crime. The Orwellian named “Justice Department” casually utilizes deferred prosecution agreements (DPAs), in which companies pay a little fine and the criminals themselves walk away with not just their freedom, but ill gotten monetary gains as well.

Nowhere is this most apparent than when it comes to the big banks. The individuals who work at these criminal cartels can literally do anything they want with total impunity. One of the most egregious examples of this was the $1.9 billion settlement arranged with HSBC for laundering Mexican drug cartel money and dealing with sanctioned countries. If you or I did this we’d be sitting in a concrete box eating porridge through a straw for the rest of our lives, but when “masters of the world” at big banks do it, the parent company just pays a slap on the wrist fine and life goes on. That’s how oligarch justice works.

Although the Department of Justice and HSBC thought the money laundering case was settled ancient history, a determined chemist from Pennsylvania is throwing a wrench into their plans and it could have major implications.

One of the surprising things I learned very early after expatriating was that not only were my suspicions about the USA being one gigantic fraud all true, but that many elite Europeans knew all about it.

The anti-American contempt they express tends to be less because they look down on Americans for being overweight, monolingual, and untraveled, but because Americans are so blind to the fact that their government is the largest criminal enterprise on the planet despite having been warned of it in 1961 by President Eisenhower.

This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence — economic, political, even spiritual — is felt in every city, every statehouse, every office of the federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society. In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military–industrial complex. The potential for the disastrous rise of misplaced power exists, and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals so that security and liberty may prosper together.
– Dwight D. Eisenhower, January 17, 1961

It’s not as if this machinery has become less influential or less pervasive in the last 50 years, although these days we wouldn’t call it the military-industrial complex, but the financial corpocracy. The EU, just so you understand, is an attempt to lay the foundation for something similar across Europe. But it’s doomed to failure, because Europe is too nationalistic, too heterogeneous, and too openly corrupt.

There have always been kingdoms and empires. One elite or another has almost always ruled over Man. This is nothing new and the current rulers of the USA are far from the worst that Man has ever known. But Americans don’t understand that they are ruled and therefore mistakenly believe they are free. Europeans know they are not.