China Seeks to Lessen Its Reliance on US$ Through Aggressive Acquisition of Real Assets

“Everyone is saying we should go to the western markets to scoop up [underpriced assets],” said Chen Yuan. “I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.”

Financial Times
China to deploy foreign reserves
By Jamil Anderlini in Beijing
July 21 2009 19:09

Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.

“We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats late on Monday.

Mr. Wen said Beijing also wanted Chinese companies to increase its share of global exports.

The “going out” strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China.

Qu Hongbin, chief China economist at HSBC, said: “This is the first time we have heard an official articulation of this policy ... to directly support corporations to buy offshore assets.”

China’s outbound non-financial direct investment rose to $40.7bn last year from just $143m in 2002.

Mr Wen did not elaborate on how much of the $2,132bn of reserves would be channelled to Chinese enterprises but Mr Qu said this was part of a strategy to reduce its reliance on the US dollar as a reserve currency.

“This is reserve diversification in a broader sense. Instead of accumulating foreign exchange reserves and short-term financial assets, the government wants the nation to accumulate more long-term corporate real assets.”

State-owned groups, particularly in the oil and natural resources sectors, have stepped up their hunt for overseas companies and assets on sale because of the global crisis.

China Investment Corp, the $200bn sovereign wealth fund, has been buying stakes in overseas resources companies and has taken a 1.1 per cent stake in Diageo, the British distiller.

In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies.

“Everyone is saying we should go to the western markets to scoop up [underpriced assets],” said Chen Yuan. “I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.”

The Fed's Currency Swaps

Some controversy was triggered over a line of questioning this morning during Ben Bernanke's testimony before Congress, as reported on top financial blog sites Zerohedge and Naked Capitalism. We read them both daily and are often envious of the depth and breadth of their expertise.

Congressman Grayson's line of questioning implied that the Fed was providing loans to foreign companies. Others wondered if the Fed was engaged in propping up the dollar by forcing central banks to buy US dollars in these swaps.

During the current credit crisis the Fed first reacted to market conditions and requests from central banks starting in September 2008 by expanding its currency swap lines with the European Central Bank and the Swiss National Bank, and creating new swaps with the Bank of Japan, Bank of England and the Bank of Canada for $180 billion.

What Is a Currency Swap?

A currency swap is a transaction where two parties exchange an agreed amount of two currencies while at the same time agreeing to unwind the currency exchange at a future date.

The currency swap is executed at a given exchange rate, generally the market rate, in order to provide liquidity in a specific currency to a specific banking jurisdiction. Here is an example of a swap that was conducted with the BOE at the rate of 1.8173.



The reason for the swap is to provide the BOE with additional US dollars to meet the short term needs of its client banks, and the dollar demands of their customers.



In September private banks were reluctant to lend to one another or engage in private swaps because of a prevailing fear in the market of potential bank insolvencies and the counter party risk which that entails.

At the same time there was a 'run' on dollar assets in Europe as customers sought to liquidate their investments, denominated in US dollars, but held by foreign banks. Some of these investments ironically enough were collateralized debt obligations that had been sold by Wall Street. TED Spread Soars to New Record - Symptom of the Eurodollar Squeeze?



Did Wall Street set up their foreign counterparts, and then squeeze them mercilessly when they needed dollar assets? Probably giving the Street too much credit for planning. It is more likely a case of simple misrepresentation, followed by fear when the misrepresentation had been discovered.

The Ted Spread is the difference between the US Dollar LIBOR and the 3 Month US T Bill. It intends to measure the difference in 'price' between dollars in the US and dollars overseas. Nine out of ten people might notice a sharp spike in this spread as the credit crisis hit full fury in September 2008. Demystifying the TED Spread



As one can easily see, the TED Spread began to decline after the Fed and the Central Banks began to provide dollar liquidity where it was required.

There is concern amongst some people that the Fed was engaging in these currency swaps to prop the dollar, as expressed in the US Dollar Index (Dx).

There was no need to do these swaps to support the dollar, as the US dollar was already enjoying a strengthening as the 'flight to safety' currency. The original September tranche created by the Fed grew to 500 billion dollar swaps line as the Central Banks sought to prevent a currency crisis, an artificial dollar shortage in what amounted to a run on foreign banks for dollar holdings, as the credit crunch hit with its full fury.



The DX index is a somewhat imperfect gauge of the dollar value as it is heavily weighted to the Euro and Yen, and has a no exposure to some of the most important developing industrial powers.

More importantly, here is the Euro - Dollar Exchange Rate. Again, the 'jitters' over the state of the European Banking System were causing a steep decline early on and a flight to safety in the US Dollar. The Dollar Rally and the Deflationary Imbalances in the US Dollar Holdings of Overseas Banks



Ben Bernanke is no Alan Greenspan in that his deportment in front of Congress is rarely calm, but I did not find any particular 'tells' in his responses to Mr. Grayson beyond his usual skittishness and unease in the public spotlight.

Quite frankly, my initial take was that Ben was incredulous that the Congressman was asking such naive questions, particularly when the congressman started asking about the source of the Fed's authority to conduct foreign exchange operations.

Personally I wondered if it was a 'red herring' served up by a friendly Democrat. There are much more penetrating questions to be asked of Mr. Bernanke and his Fed, and these are not among them. Ron Paul is much closer to the mark than Congressman Grayson.

The concern about the swaps seemed a bit misplaced and confused. But the obvious opacity of the Fed and its operations does underscore the political naïveté in promoting the Federal Reserve as the uber regulator of the system.

One must wonder who is so politically tone deaf on the President's economic staff? Or is Larry Summers really that arrogant to think that he can be the next Fed chief and chairman of the SEC all rolled into one? Considering Larry's past performances, the answer may very well be yes.

Postscript: The emails show that there are those who observe, somewhat correctly, that if the Fed had done nothing to alleviate the eurodollar short squeeze then the dollar would have most likely appreciated in value, perhaps moreso than it had done.

The proponents of this solution do overlook the problem that the private markets for overnight loans had utterly seized, and to not provide central bank liquidity in this situation would have most likely have caused a cascade of significant failures, and a backlash from the rest of the world that would have been equally impressive.

There is the substantial issue, raised rather stridently by some of the central banks, that it was the US financial institutions and ratings agencies that had caused the problem in the first place by selling large amounts of fraudulent assets to trusting private bankers around the world. You know, those funny foreign folks who the US, as a net debtor with debt load growing mightily, is going to continue to ask to buy its debt and financial instruments now and for the forseeable future, and continue to support the dollar as a reserve currency.

Is Change Coming to Japan?

It will be good news for Japan indeed if the opposition Democratic Party in Japan can win their August 30 elections.

The LDP has been in power since 1955!

Can you imagine what kind of corporatocracy the US would have if the Republicans had won every election since Eisenhower? This is what exists today in Japan.

There is an embedded bureaucracy in the Japanese Ministry of International Trade and Industry that is formidable, and that will resist policy change. So there is room for pessimism.

And the election is far from won. Do they use voting machines in Japan?


Bloomberg
Aso Dissolves Japan’s Parliament, Admits Failings
By Sachiko Sakamaki and Takashi Hirokawa

July 21 (Bloomberg) -- Prime Minister Taro Aso dissolved Japan’s parliament, clearing the way for an Aug. 30 election that polls indicate will hand power to the opposition Democratic Party of Japan for the first time.

Lower-House Speaker Yohei Kono announced the dissolution in parliament today to a chorus of cheers. Aso’s ruling Liberal Democratic Party, in power for all but 10 months since 1955, will defend a two-thirds majority in the election.

“The era of one-party dominance is over,” said Gerald Curtis, professor of Japanese politics at Columbia University in New York. “This is the first election since the LDP was formed when just about everybody believes that the chance for a change of the party in power is very real.”

The DPJ plans to encourage consumer spending by providing as much as 5.3 trillion yen ($56 billion) in child support, eliminating road tolls and lowering gasoline taxes. The party also aims to shift tax money from public works spending to strengthen social security, DPJ legislator Tetsuro Fukuyama said in a July 14 interview.

“They are going to increase the purchasing power of the people directly and they are going to fund this by cutting out wasteful spending,” said Jesper Koll, Tokyo-based chief executive officer of hedge fund adviser TRJ Tantallon Research Japan. “That’s a good, sensible economic policy to have.”

Poll Lead

Forty-two percent of respondents in an Asahi newspaper poll published yesterday said they would vote for the DPJ, compared with 19 percent for the LDP. The opposition, which has controlled the less-powerful upper house since 2007, had a public approval rating of 31 percent, compared with 20 percent for the LDP, according to the poll.

Aso, who came to office last September, has resisted calls from within his own party to resign before the election. His administration has been plagued by cabinet scandals and a deepening economic recession.

“I’m sorry my unnecessary remarks damaged credibility in politics,” said Aso in today’s televised press briefing. Since taking power, he has said doctors lack common sense and mothers need discipline more than their children, angering both groups. “I also apologize the LDP’s lack of unity” created public mistrust.

Aso, 68, pledged to revive the world’s second largest economy and improve the financial security of voters with free pre-schools and higher wages for part-time workers....

United States Postal Service Faces October Default Along With...

This is making the rounds, so we thought we might include both this article and its source article, with some commentary.

The postal unions are raising red flags, and using the "D" (default) word to bring attention to a gap in the forward funding of their retirement benefits which they see coming in the autumn.

Most federal agencies pay their retirement costs as they are incurred. The Postal Service pre-funds their projected retirement benefit costs a few years in advance.

The issue here with the unions is a bit bigger than just the September preparyment. The Postal Service has funds set aside for future retirement costs in a way that is similar to Social Security. Indeed, one might think of this system as their version of Social Security.

There is about $32 billion set aside (on paper) for their needs. The unions would like the postal service to get access to that money now. Think of it as taking the Social Security Trust Fund out of the Treasury and making it available for management by some private entity now.

What's the issue? Since the system has been in place for so long, and only now is such a fuss being raised, there is an obvious fear on the part of the Postal Employees of a government default and a devaluation of their pension fund, along with Social Security.

Make sense? I think it does when viewed in that light. Employees close to the government are fearful of a general default at the end of September that will erode the value of their own Pension Trust Fund.

There are other explanations of course. Union Management may wish to take over the management of their $32 billion pension fund to allow some of the Wall Street banks to help them 'improve earnings' and generate hefty fees.

The fear of default driven by rumours circulating amongst Federal employees and their kin makes a bit more sense, but we will not know for certain until the fall.

My Federal Retirement
USPS May Be Unable to Make Payroll in October and Retiree Health Plan Costs, Unions' Letter to White House Says
July 19, 2009

On July 14, unions representing United States Postal Service (USPS) workers wrote the White House with "extreme urgency" asking for a meeting to address lack of funding for both employee payroll in October and health benefits for retired employees.

The letter, which the FederalTimes.com blog provided a scanned copy late last week, says:

"[USPS] top executives are now saying that the USPS will default on a $5.4 billion payment to prefund future retiree health benefits on September 30, 2009. And its government affairs representative are now telling Congressional staff that the Postal Service may not be able to make payroll in October and will be forced to issue IOUs instead."

The letter was co-signed by the presidents of the American Postal Workers Union, National Rural Letter Carriers' Association, National Association of Letter Carriers and National Postal Mailhandlers Union, and sent to White House Deputy Chief of Staff, Jim Messina.

GovExec.com reported more on the letter in this column on July 17 which is included here below:

Postal unions seek White House help on pay, benefits
By Carrie Dann
CongressDaily
July 17, 2009

Four unions representing the nation's postal workers are pleading for a meeting with the White House to address possible funding shortfalls for workers' payroll and retiree health benefits, according to a letter obtained by CongressDaily.

The presidents of the American Postal Workers Union, National Rural Letter Carriers' Association, National Association of Letter Carriers and National Postal Mailhandlers Union co-signed the Tuesday letter to White House Deputy Chief of Staff Jim Messina, warning that the U.S. Postal Service is at risk of defaulting on a $5.4 billion payment to prefund retiree health benefits at the end of September.

The letter alleges that USPS "may not be able to make payroll in October and will be forced to issue IOUs instead."

Yvonne Yoerger, a spokeswoman for USPS, confirmed that the unions wrote the letter but disputed the claim that payroll deadlines will be missed.

"That's not something that's been discussed at all," she said. "We are committed to making payroll."

Yoerger said USPS will continue to work with OMB and the Office of Personnel Management to determine if and how the Postal Service can meet the Sept. 30 deadline to pay forward $5.4 billion in future health liability costs.

The Postal Service is required by law to set aside funds for future retiree health care costs, rather than paying recipients as costs are incurred as other government agencies do. As a result of a $3 billion loss to date this year, the unions wrote, no money is available for those future payments, and regular payroll deadlines may not be met unless other funds are tapped.

"Such a [financial] collapse can be averted without resort to a taxpayer bailout by reforming the retiree health prefunding provisions of the law and [by] giving the Postal Service access to its own resources in the Postal Service Retiree Health Benefits Fund, which now has a balance of $32 billion," the unions wrote.

But that transfer of funds would require congressional approval, and the unions fear that pressure from the White House will be needed to prompt quick action. "We believe that the Obama administration must intervene now to avoid both a political and economic train wreck," they wrote.

Reps. John McHugh, R-N.Y., and Danny Davis, D-Ill., introduced legislation this year that would amend the law to allow USPS to reach deeper into the flush Retiree Health Benefits Fund, but the unions argue the measure would not do enough to fix the financial problems.

CIT Averts Bankruptcy: Another Sunday Night Save (Perhaps)

It is good to hear that the 'well capitalized' CIT may strike an eleventh hour deal with its creditors and financiers to avoid an ugly bankruptcy for now.

Now if only the United States can do the same thing for itself with its bondholders...

Let's see if it is real, and what happens. Remember that what is being discussed here is 'bridge financing' for a company that is in a debt death spiral. The plan for their recovery will be more important than any temporary deal.

Financial Times
CIT seals rescue package
By Henny Sender and Francesco Guerrera in New York
July 20 2009 04:31

CIT on Sunday night clinched a two-year, $3bn rescue financing with its creditors that will enable the troubled US finance group to avoid a bankruptcy filing.

After round-the-clock weekend talks that included the possibility of a Chapter 11 filing, CIT and its main creditors sealed an agreement on the financial lifeline, according to people close to the situation.

“This paves the way for an orderly restructuring of the balance sheet with time and capital,” said one participant in the likely financing. “And it will give CIT’s customers plenty of capital.”

The company, which provides finance to nearly a million small and medium-sized companies in the US, and its creditors had to move quickly to arrest a slide into bankruptcy and prevent its best customers from defecting for fear that the lender could no longer support them. (We had thought the problem was that their customers had no alternative - Jesse)

The group of at least six creditors who are planning to provide the capital comprise a mix of traditional money management firms and hedge funds who bought into the debt at much less than 100 cents on the dollar. They include Baupost, a Boston-based hedge fund, CapRe, hedge fund and private equity firm Centerbridge Partners, Oaktree Capital, Pimco and Silverpoint Partners. Barclays is expected to act as agent on the financing package.

CIT’s board met on Sunday night and approved the financing. If the agreement holds, CIT will have enough time to work out which, if any, assets it should sell. The next step will likely involve cajoling other holders to exchange their debt into equity and then, having demonstrated that CIT has a viable survival plan, to go to the government and ask for help.

Jeff Peek, CIT’s chief executive who led negotiations with creditors, was likely to stay on following the financing, people close to the situation said. The management has been criticised for diversifying into high-risk businesses such as subprime lending and student loans and relying on capital markets to fund CIT’s balance sheet.

CIT’s creditors stepped in after it became clear that the government was not willing to provide any emergency assistance, whether in guaranteeing CIT’s debt, or in accepting assets in exchange for cash from the Federal Reserve or in allowing CIT to transfer more assets into the bank holding company it set up at the end of December.

The rescue financing will come as a relief to the government – had CIT filed for bankruptcy protection, the Treasury would likely have lost the $2.3bn of bailout funds CIT received late last year.

It would also have been a huge embarrassment for the Fed, which had described CIT as adequately capitalised when it approved of its banking application.

The creditor-led rescue of CIT may stave off political criticism of the government’s handling of the crisis. If CIT had gone under, at least some of its smallest customers in the business world would probably have had a hard time finding alternative sources of capital, adding to economic weakness.

New Silver Fund

Silver Bullion Trust, an all silver fund from the CEF/GTU closed-end fund group, has its roadshow going on now.

Initially it will only be available in Canada. It will trade on the TSX to start, then on the AMEX once it has risen to $75 million of assets which is a similar process used in the introduction of GTU.

It will trade in Canada in both U.S. and Canadian dollars.

The initial offering is reported to be for up to $200 million, so the $75 million threshold could be met immediately depending on the bid size of the deal.

It is expected to price at around US $10 (1 share + 1 $10 warrant) by July 29th.

This could be a interesting alternative to SLV and to CEF for those who wish to invest more heavily in silver.

Paper, Scissors, Gold

As you may have heard recently, the Comex has asserted their right under their rules to deliver the equivalent paper interest in Exchange Traded Funds such as GLD in lieu of the delivery of physical bullion for those standing for delivery under the rules of the commodity exchange.

Is GLD really the same as physical bullion?

"...it appears that a lot of investors believe and trust that investing in GLD is the same thing as buying physical gold bullion. A close reading and analysis of the GLD Prospectus, however, reveals that investing in GLD is drastically different from owning gold. This analysis will show why GLD is nothing more than another form of a derivative security which is loaded with counter-party default risk."
Owning GLD Can Be Hazardous to Your Wealth

Here is a recent statement from Dennis Gartman who most often derides those he calls 'goldbugs.'

"To finish, we do agree that recent decisions to allow for the "delivery" of ETF shares in the stead of actual physical gold against a futures position does cause us some concern. Indeed, it causes us some very real concern, for if we stand for delivery of wheat we expect to receive wheat, not paper. The same holds true for delivery processes on the COMEX, and if GATA and the "Bugs" have a complaint it is this new decision by the COMEX. On this, we’ll grant that the "Bugs" have something to complain about." Dennis Gartman in The Gartman Letter

We have often said that when the real crisis of liquidity comes, and the final flight to safety from the credit bubble collapse begins in earnest, the exchanges will alter the rules to allow for cash and paper settlement of claims for bullion, which they cannot or will not be able to deliver at the agreed upon prices.

This is what makes the current structure of the short positions held by a few banks on the precious metals exchanges a 'racket,' a type of Ponzi scheme where the same thing is sold repeatedly with no means of satisfying the aggregate of the claims and ownership.

We are sure the Comex is "well capitalized," and will continue to be so, even as it is rocked by de facto delivery failures and the substitution of more paper to back up the general failure of paper.

The wheels of justice grind slowly but they grind exceedingly fine.

CIT Called "Well-Capitalized" Even As It Teeters on Bankruptcy

This underscores the charade that is the Fed and Treasury stress testing. There is a cloak of accounting fraud covering many US financial institutions, even as their value soars on paper and the public continue to be robbed of their savings.

The Fed and Treasury are using their current position as de facto crisis regulators of US financial insitutions and pseudo-banks to cover up the deep problems of regulatory failure and financial fraud, largely their responsibility as the overseers of US credit and monetary policy and the financial system during the credit bubble.

They seem to have taken on the role of the Ratings Agencies in perverting their stewardship to serve the Wall Street bankers.

The Fed should not and cannot be allowed to obtain any more power over the US regulatory process. That they even resist a fair and honest audit of their lendings of public monies is an insult to our Republic.

Until the banks are restrained, and balance restored to the economy, and the financial system reformed, there can be no sustained recovery.

Bloomberg
CIT Group’s ‘Capital’ Was All Talk, No Trousers
by Jonathan Weil
July 15, 2009 21:00 EDT

July 16 (Bloomberg) -- Even as CIT Group Inc. teetered near collapse this week, neither the company nor its overlords at the Federal Reserve Board ever backed off their official position that the struggling lender was “well capitalized.”

Coming from the world’s most powerful central bank, that designation used to mean something about a company’s financial strength and ability to absorb losses. Not anymore.

Investors watched yesterday as yet another major financial- services company angled for a government bailout -- this time unsuccessfully -- while still sporting U.S. banking regulators’ highest capital rating. It’s a sure thing CIT won’t be the last.

Even the regulators say their capital standards are broken. Just last month, in an 88-page report outlining its regulatory overhaul plans, the U.S. Treasury Department wrote: “Most banks that failed during this crisis were considered well capitalized just prior to their failure.”

It was only last December that the Fed’s board of governors voted unanimously to let CIT become a bank-holding company, making the commercial lender eligible for federal rescue funds and allowing it to borrow from the Fed’s discount window. In doing so, the Fed said CIT would be well capitalized once it received its $2.3 billion of bailout money from the Treasury’s Troubled Assets Relief Program, which CIT got later that month.

CIT’s bosses, led by Chief Executive Officer Jeffrey Peek, had been touting the company’s well-capitalized status repeatedly ever since, in financial filings and investor presentations. In reality, whatever capital CIT possessed existed only in its executives’ heads -- literally.

Accounting Standards

The problem here is with the accounting standards as much as the government’s capital rules. Consider this disclosure from the footnotes to CIT’s latest annual report. As of Dec. 31, CIT said the fair market value of its loans was $8.3 billion less than the value it was using on its balance sheet. Loans at the time were about two-thirds of its $80.4 billion of total assets.

By comparison, New York-based CIT had $7.5 billion of so- called Tier 1 regulatory capital as of Dec. 31, and $8.1 billion of shareholder equity. Take away the inflated loan values, and CIT’s capital and equity would have been less than zero. CIT hasn’t said what its loans’ market values were as of March 31.

The craziest part is that the difference in the loan values came down to nothing more than CIT executives’ state of mind. (And the Fed's and the FASB's tacit endorsement of this accounting fraud on investor - Jesse)

Had CIT classified the loans as “held for sale,” the accounting rules would have required the company to carry them on its balance sheet at their cost or market value, whichever was lower. By labeling almost all its loans as investments instead, CIT got to avoid writing them down to market values.

Say the Word

So, for capital purposes, the only difference between an insolvent CIT and a well-capitalized CIT was a mere utterance by management that it planned to keep holding the loans. No wonder so many zombie banks continue to roam the country. All they have to do is wish away their ruin, and the rules let them.

There is one catch. As CIT said in its annual report, it’s allowed to classify loans as investments only if it “has the ability and intent” to hold them “for the foreseeable future or until maturity.” Otherwise, it must book the market losses.

It’s hard to see how CIT’s management could believe the company still has the ability to keep holding onto its loans now. Not with more than $3 billion of reported losses in the past eight quarters, a looming cash crunch, and its debt trading in the bond market as if the company might fail. A CIT spokesman, Curt Ritter, declined to comment.

Not Making Sense

Think how arbitrary these accounting labels are. A declining asset doesn’t stop falling in value just because its owner intends to keep it. Nor, if you were applying for a loan today, would a bank value your collateral based on what you think it might be worth someday after the economy rebounds. Its value would be what you could sell it for now.

Back on Dec. 22, when it approved CIT’s application to become a bank-holding company, the Fed released a nine-page statement explaining its rationale. While the Fed said its board considered “all facts of record,” nowhere in that document did it discuss the possibility that CIT’s loans might not be worth what the company’s balance sheet said, or that CIT might lack the ability to hold them for as long as it claimed.

The current capital rules “simply did not require banking firms to hold enough capital in light of the risks the firms faced,” the Treasury Department said in its report last month. The financial crisis, it said, “has demonstrated the need for a fundamental review of the regulatory capital framework.”

That review, to be led by the Treasury Department, won’t be completed until the end of this year. Whatever form the new rules take, the report said they must be “credible and enforceable.”

What a welcome change that would be.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

Derivatives Crisis: More Bailouts On Deck?

The derivatives market is about as ugly as it gets, and puts a new edge on 'too big to fail, to big to exist."

The banks want to keep the game going because it suits their current model of taking risks, making huge bonuses, and writing off the losses to the public.

It remains to be seen if the Obama Administration has what it takes to regulate and rein in the banks. While Larry Summers and Tim Geithner are on the team the answer is probably 'no.'

One thing which strikes us as odd in this Bloomberg article is the emphasizing of stimulus as a source of future crisis. All things considered two trillion in stimulus across the globe is a relative drop in the buck-et compared to what the bank bailouts are costing in direct and indirect taxation on the real economy. Bloomberg seems to be crusading against anyone but the bigh banks getting public money, so perhaps it is not surprising.

As you know, CIT is deeply troubled, and most likely heading towards some sort of managed bankruptcy. The company is said to be holding counter party risk with many banks including Goldman Sachs. The rally may be based on strong rumours of an imminent bailout for CIT. The word on the Street is that Geithner and Summers caved again after a few key phone calls.

Let's see how the Obama Administration handles yet another financial institution brought low by bad risk management in pursuit of outsized profit.

Wall Street and their demimonde in the government and the media hate stimulus packages designed to assist the ordinary Joe, even if all it does is ease the pain during a steep downtrend (which was caused by the financial sector). They hate it, unless there is a way to charge fees in its distribution, and turn it into a profit-making venture for them where they derive most if not all of the benefits.

The dollar and the US bond are taking it repeatedly on the chin. As are most of the US public and the holders of its debt.

The timeframe Mr. Mobius has for the next major crisis is way out on the far edge of any projection we think is probable by quite some distance. Its not clear that it really matters, given the significant hurdles facing the economy this year.

Let's see how the Boys handle the burgeoning Commercial Real Estate, Pension, and Stage Government crises. I think they may very well precede the derivatives coup de grace, and several of them are big enough to be show-stoppers, if not triggers for a larger systemic meltdown.

Until the banks are restrained, and the financial system is reformed, and balanced is restored to the economy, there will be no sustained recovery.

The Obama team is incompetent, and probably worse. Its a great disappointment. They are showing all the wrong moves on the economy.

All the charts included here are from our friends at ContraryInvestor.

Bloomberg
Mobius Says Derivatives, Stimulus to Spark New Crisis
By Kevin Hamlin (Beijing)

July 15 (Bloomberg) -- A new financial crisis will develop from the failure to effectively regulate derivatives and the extra global liquidity from stimulus spending, Templeton Asset Management Ltd.’s Mark Mobius said.

“Political pressure from investment banks and all the people that make money in derivatives” will prevent adequate regulation, said Mobius, who oversees $25 billion as executive chairman of Templeton in Singapore. “Definitely we’re going to have another crisis coming down,” he said in a phone interview from Istanbul on July 13.

Derivatives contributed to almost $1.5 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg. Global share markets lost almost half their value last year, shedding $28.7 trillion as investors became risk averse amid a global recession.

The U.S. Justice Department is investigating the market for credit-default swaps, Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks, said July 13.

Mobius didn’t explain what he thought was needed for effective regulation of derivatives, which are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. The Bank for International Settlements estimates outstanding derivatives total $592 trillion, about 10 times global gross domestic product.

Looming Crisis

“Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency,” he said.

A “very bad” crisis may emerge within five to seven years as stimulus money adds to financial volatility, Mobius said. Governments have pledged about $2 trillion in stimulus spending.

The Justice Department’s antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter.

Treasury Secretary Timothy Geithner last week urged Congress to rein in the derivatives market with new U.S. laws that are “difficult to evade.” He said strong capital requirements were the key.

Geithner repeated President Barack Obama’s call to force “standardized” contracts onto exchanges or regulated trading platforms, and regulate all dealers.

Credit Freeze

The plan to regulate the derivatives market is part of a wider overhaul of financial industry rules meant to prevent any possibility of a repeat of last year, when the collapse of Lehman Brothers Holdings Inc. and American International Group Inc. froze credit markets and worsened the global recession.

In the Senate, Agriculture Committee Chairman Tom Harkin, an Iowa Democrat, is pushing for legislation that would require all over-the-counter derivatives trades be traded on regulated exchanges, not just standardized ones as the Obama administration is seeking.

U.K. banks will be forced to curb trading activity that helped cause the global financial crisis, Britain’s top financial regulator said last month, while stopping short of seeking to separate their lending and securities units.

“Banks have lobbied hard against any changes that would make them unable to take the kind of risks they took some time ago,” said Venkatraman Anantha-Nageswaran, global chief investment officer at Bank Julius Baer & Co. in Singapore. “Regulators are not winning the battle yet and I’m not sure if they are making a strong case yet for such changes.”

Mobius also predicted a number of short, “dramatic” corrections in stock markets in the short term, saying that “a 15 to 20 percent correction is nothing when people are nervous.”

Emerging-market stocks “aren’t expensive” and will continue to climb, Mobius said. He said he favors commodities and companies such as London-based Anglo American Plc, which has interests in platinum, gold, diamonds, coal and base metals.

In China and India, Mobius sees value in consumer-oriented stocks and banks, he said.