The China Syndrome: It's Our Fault They Don't Trust Us

Discussion in 'Wall St. News' started by Greg Richards, Feb 5, 2009.


    Financial Times – February 5, 2009
    By Janet Tavakoli

    Published online: February 4 2009 17:10 | Last updated: February 4 2009 17:10

    When Washington passed out hundreds of billions in bail-out funds in September 2008, it said it could worry about the cause of the meltdown later. This allowed lack of trust in the US financial system to fester.

    More recently, the Obama administration turned up the rhetoric against China by saying it believed the country was “manipulating” its currency. The president also wants to see a Chinese stimulus package.

    The US needs China to hold the US Treasury and agency debt it owns and, more importantly, to keep buying new US debt. So if Washington wants to ease tensions and keep its borrowing options open, it should look to Wall Street.

    Did Washington think it could allow US investment banks to carpet-bomb Asia with financial mini-bombs and escape the fallout?

    In Hong Kong alone, $2bn of Lehman’s principal-destroying mini-bonds were sold. Most US investment banks joined in the insanity. Investors – including officers at nosebleed-high levels in Japan, Macao, Hong Kong, Singapore, and mainland China – have been burned as their triple-A investments were wiped out.

    George Soros in his recent Financial Times article was correct that credit derivatives created issues, but he missed the most glaring problem. US investment banks were not the victims of bear raids; they were fundamentally unsound. Investment banks and hedge funds turned financial risk into financial crack with leverage. The risky overrated debt had no upside and lots of downside. Leverage in the form of massive borrowing and credit derivatives made the fall swift, painful and often fatal for equity investors in investment banks and hedge funds.

    Pundits trying to inflate their own bubbles of self-credit put the blame on unsound models. But such fools for randomness are a distraction from the key issue: malfeasance.

    Financiers and structured finance professionals were aware of the negative potential of risky loans. Yet they took it even further. The risky tranches – those that any investment banker worth their salt knew were write-offs – were used to create other packages that their buddies “managed” in one fund, while shorting in their hedge funds.

    The problem was not the models’ failure to capture probability outliers but the industry’s failure to rein in the liars.

    Sophisticated investors with structured finance expertise (bond insurers, bank portfolios, large pension funds) became willing victims by failing to perform basic due diligence.

    But there were genuine victims: naive homeowners who were misled into risky mortgage loans and retail investors who were missold risky mislabelled products.

    The biggest victim has been the global financial system, and we are all suffering the effects of mischief that remains unchecked. There is no innocent explanation for many of the securitised bonds made and sold by investment banks. They were a conduit for shifting losses.

    There were no black swans or swans of any colour involved. Like Black Bart, the 19th-century Californian stage coach robber, Wall Street bankers made off with the loot without firing a shot. They were enabled by Washington overseers and financial regulators who – when not beneficiaries of the good times – behaved like ostriches.

    Meanwhile, news of the fact that no one in the US has been brought to justice has not escaped notice. It is possible that Chinese banks are being less co-operative with the US because Wall Street scammed them.

    There is hope, but the only way out of this is a return to sound financial principles, which will include cleaning up our mess.

    At the Davos conference, Jamie Dimon, JPMorgan chief executive, sounded like Warren Buffett or Charlie Munger (or Janet Tavakoli) when he remarked: “Some really stupid things were done by American banks and American investment banks. To policymakers, I say: Where were they?”

    Janet Tavakoli is president of Chicago-based Tavakoli Structured Finance. Her book DEAR MR. BUFFETT: What An Investor Learns 1,269 Miles From Wall Street about the global financial meltdown is published this year.
  2. Greg.....

    Good posts....

    What a Mess.....The SEC, What was Wall Street, The Rating Agencies....Mortgage creators....the list goes on....

    Too big to jail now the question....

    The issue now being going after all of the above including all the managers etc....

    How about suitability and the failure to supervise....

    And conflicts of interest.....

    It seems as though lawyers will be working on this for the next 40 years....The SEC/Corporate revolving door is what the game is all about....The legal business.....IS BIG BUSINESS....

    The Chinese should/have already buy US debt with freshly printed currency in return....


    As I have written in previous is past time to clean house....and build a better system for securities....

    Looks like the Corporate/SEC cesspool killed their own golden goose....
  3. Mvic


    We don't trust us, no wonder the Chinese don't. In fact if I were advising anyone on their investments I would tell them to run for their life when old credit addict (think meth addict) uncle sam comes around trying to pimp his bonds.

    Libertad, you are right but I don't see us getting there. This stimulus is a prime example of why, too much money at stake and a few million to the right lobbyists can reap billions. That is the basis for decsions, and they are barely even trying to hide it anymore, not what is good for the country and its people. Without meaningful campaign finance reform, term limits, and anti lobbying laws nothing will change and we will be lobbied in to oblivion.
  4. Mvic