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Thread: US borrows just pawns in a global game

  1. #1
    Featured Member Vamp's Avatar
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    Default US borrows just pawns in a global game

    http://articles.moneycentral.msn.com...et.aspx?page=1

    This a great article that is a little long. I picked out some of the interesting points. It puts all of what is happening into perspective.

    The credit bubble is just starting to unwind, a credit-derivative insider says. And while U.S. borrowers are being blamed for the mess, they were really just pawns in a global game.

    One of the world's leading experts on credit derivatives, Das is the author of a 4,200-page reference work on the subject, among a half-dozen other tomes.

    Das is pretty droll for a math whiz, but his message is dead serious. He thinks we're on the verge of a bear market of epic proportions.

    The cause: Massive levels of debt underlying the world economy system are about to unwind in a profound and persistent way.

    He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates.

    Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors; hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand; and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed.

    Das' view sounds cynical, but it makes sense if you stop thinking about mortgages as a way for people to finance houses and think about them instead as a way for lenders to generate cash flow and create collateral during an era of a flat interest-rate curve.Although subprime U.S. loans seem like small change in the context of the multitrillion-dollar debt market, it turns out these high-yield instruments were an important part of the machine that Das calls the global "liquidity factory." Just like a small amount of gasoline can power an entire truck given the right combination of spark plugs, pistons and transmission, subprime loans became the fuel that underlays derivative securities many, many times their size.

    Here's how it worked: In olden days, like 10 years ago, banks wrote and funded their own loans. In the new game, Das points out, banks "originate" loans, "warehouse" them on their balance sheet for a brief time, then "distribute" them to investors by packaging them into derivatives called collateralized debt obligations, or CDOs, and similar instruments. In this scheme, banks don't need to tie up as much capital, so they can put more money out on loan.

    The more loans that were sold, the more they could use as collateral for more loans, so credit standards were lowered to get more paper out the door -- a task that was accelerated in recent years via fly-by-night brokers now accused of predatory lending practices.

    Buyers of these credit risks in CDO form were insurance companies, pension funds and hedge-fund managers from Bonn to Beijing. Because money was readily available at low interest rates in Japan and the United States, these managers leveraged up their bets by buying the CDOs with borrowed funds.

    So if you follow the bouncing ball, borrowed money bought borrowed money. And then because they had the blessing of credit-ratings agencies relying on mathematical models suggesting that they would rarely default, these CDOs were in turn used as collateral to do more borrowing.

    In this way, Das points out, credit risk moved from banks, where it was regulated and observable, to places where it was less regulated and difficult to identify.
    Nature knows no indecencies; man invents them. ~ Mark Twain


  2. #2
    Banned Melonie's Avatar
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    Default Re: US borrows just pawns in a global game

    Das wrote a great article, but in reality it's only 1/2 of the whole global perspective. The other 1/2 of the equation is just exactly where the investment capital behind these mortgages and derivatives has been coming from, and more importantly where it is / will be going to. Das touches on the issue of the Japanese Yen 'carry trade', but vastly understates its importance. Essentially the Japanese Yen 'carry trade' is based on an artificially weak Yen exchange rate plus extremely low Yen interest rates ... which allowed Das's hedge funds and CDO investors to borrow Yen at less than 1% interest rate while earning 6-7-8% from mortgage backed US CDO's purchased with those borrowed Yen.

    Obviously, since Americans spend more (borrowed) money than they earn, investment capital didn't come from American sources. Yes, some of it came from European doctors / lawyers / businessmen via European banks and hedge funds (as relayed in lots of news stories about troubled European financial institutions in the last few weeks). But if you look at who in the world actually has huge amounts of money to invest, it gravitates to two locations ... China and Japan with their huge US dollar trade surplus, and also the Saudis and Dubai etc. with their huge petrodollar surplus. Arguably, the whole international financial shakeup that took place last month exactly coincides with a decision by the Chinese on 7/17 to start backing away from the US dollar and start supporting the Japanese Yen (thus sending the carry trade crowd into an underwater situation with Yen vs US dollar exchange rate losses exceeding the interest rate spread).


    - is a very long read but explains the reality of the global US dollar situation very well.

    The redirection of Chinese surplus trade deficit dollars and Saudi surplus petrodollars away from 'reinvestment' in US dollar denominated bonds / mortgages / other assets is going to have a PROFOUND effect on the US economy in the weeks and months to come !!!


    (snip)"The results of the secret meetings between Miz Japan and the Chinese Dragon are now swiftly appearing. Mattel just apologized to the Chinese for not running a safe business. The Chinese are very angry about having the blame land on them when Mattel is 100% responsible for quality control. They are the capitalists doing the production, after all. Gold and oil shoot up in value as the dollar declines but guess what? As I predicted, the pre-7/17/7 status quo has returned only with a very big difference: China is now running things and Japan has to do certain things to keep China happy or else. I love it when my predictions turn out correct. This means my analysis is correct.


    From Bloomberg:

    The yen dropped the most in a week against the dollar and touched a six-week low versus the euro as gains in U.S. stocks and falling corporate borrowing costs encouraged investors to resume risky bets.

    Japan's yen declined against all 16 major currencies as investors jumped back into the so-called carry trade. The cost of overnight loans in dollars dropped a third day, after the Federal Reserve's unexpected move to cut its benchmark interest rate by a half-percentage point to 4.75 percent on Sept. 18.

    ``Risk aversion is coming down, which gives investors an incentive to push down the yen,'' said Christian Dupont, a senior currency trader at Societe Generale SA in Montreal.


    They try to explain things as if investors or businesses are running things here. They are but the fish being moved by the greater streams flowing into nets. The world flow of money suddenly came to a screeching halt right about on 7/17/7. The ONLY dynamic that changed back then was China loudly demanding the G8 nations punish Japan, not China, over currency issues. The IMF had a huge row with China the first week of July, as I reported here. China snarled that if the IMF and the G8 nations attack them about the yuan one more time, they would freeze up world banking systems by changing where they park their money. The G8 attacked China and on the 17th of July, China struck back.


    Everything the world bankers did to fix the frozen banking flows failed. I was gleefully astonished how they all dumped around a trillion dollars into the system, money they had to make up out of thin air. This weakened the world banking systems even more. Each hour of each day, the destruction of the world's banking money flow system was increasingly obvious. The Europeans and US tried every possible wand-waving magic trick to fix things...AND FAILED!


    When the failure was obvious, with the government of Japan collapsing in disarray, the Prime Minister perhaps trying to commit suicide, with the yen rising every day from the 17th of July until the very hour the meeting with the Bank of China concluded, Japan trembled with fear.


    I grew up deep inside the diplomatic/CIA community. I know how secret deals are done. When my dad used to vanish suddenly, I would rush to my shortwave radio and check out the news in the Soviet Union, for example. There would be nothing in the American news. Once, my dad was fly fishing in Colorado when a White House helicopter came down on him. 'I can't take a vacation, ' he complained as he got onto it and flew off, fishing lures still in his hat.


    In this case, the Bank of Japan's top dog made increasingly frantic calls to China's top dragon. Do recall that the previous top dragon in China's banking/finance system was decapitated and sent into exile right before all this happened. HEADS ARE ROLLING. And this means a change in direction as Hu gains increasing control over things and uses them for his ends which are quite obvious: to get control of Taiwan and reel in Japan.


    The monumental disaster of our negotiations with North Korea continue to reverberate in Asia. We basically handed it all off to the Chinese who then got things to work their way and then we tried to wreck the negotiations....AND FAILED. China made us sign the Chinese accords. Within hours of doing this, the Bush minions denied they did this but all of Asia's rulers got to see the paperwork and the possible secret videos showing the US kow towing to the Dragon Throne!


    Japan is not very cocky right now. They had to also kow tow. They are now rubbing their hands as they continue the carry trade/trade surplus game they invented. But they now are doing so at the BEHEST OF CHINA. For they will not dare interfere with China's currency values or issues. They will now side with China in international negotiations. This is very different from before yet to Western eyes, it looks as if the old status quo is back."(snip)
    Last edited by Melonie; 09-22-2007 at 12:40 AM.

  3. #3
    God/dess Deogol's Avatar
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    Default Re: US borrows just pawns in a global game

    China's top dragon - decapitated OR sent into exile? It seems a bit difficult to do both...

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