I am going to attend the ASPO conference this week in Washington, DC and will pass along anything of interest.
This is a gathering of the usual suspects, all telling each other how ruined we are.
Speaking of ruin, the euphoria of last week that accompanied the incredible success of the EU management to get its debt problems under control has evaporated starting this week as it becomes clear the EU management has done nothing to get its debt problems under control.
In fact, the EU debt problems are intractable and cannot be solved, wished or incanted away, exported overseas, painted over, or buried in a landfill, only endured until resolution takes place.
One step of the resolution process was this morning’s bankruptcy of MF Global — what’s that?
MF Global is/was a hedge fund with investment bank ambitions that is notable because it was owned/operated by an ex-governor of New Jersey. No, not that one. While is unclear at this moment what exactly brought MF Global to this sorry state, what is likely is that ‘investors in the firm lost confidence’ and that it ‘suffered from too much exposure to risk’ and that it ‘had inadequate capitalization’ that is, Bernanke did not return ex-New Jersey governor’s phone calls.
MF Global Holdings Ltd., the holding company for the broker-dealer run by former New Jersey governor and Goldman Sachs Group Inc. co-chairman Jon Corzine, filed for bankruptcy after making bets on European sovereign debt.
The New York-based firm listed total debt of $39.7 billion and assets of $41 billion in Chapter 11 papers filed today in U.S. Bankruptcy Court in Manhattan. Affiliate MF Global Finance USA Inc. also filed, with debt of as much $50 million and assets of as much as $500 million. The largest unsecured creditors include JPMorgan Chase Bank NA, as trustee for holders of $1.2 billion in debt, and Deutsche Bank Trust Co., as trustee for holders of $690 million in debt.
MF Global’s board had met through the weekend in New York to consider options including a sale to avert failure, according to a person with direct knowledge of the situation. Following a record loss, MF Global was suspended today from doing new business with the New York Federal Reserve, according to a statement on the regulator’s website. Trading in MF Global’s stock was also halted.
MF Global declined 67 percent last week and its bonds started trading at distressed levels amid its disclosures of bets on European sovereign-debt …
Let’s get this straight: a bank has leveraged exposure to EU debt and goes bankrupt. What does this say about the other banks who have leveraged exposure to EU debt particularly the EU banks? Firxt Dexia and now MF. Who’s next?
Meanwhile, there is the auto industry Death Watch: Saab orbits the drain … and is given a temporary reprieve.
Saab Sputters On, Saved by 2 Chinese Automakers
David Jolly (NY Times)
Saab Automobile said Friday that it had won a reprieve from collapse after two Chinese carmakers agreed in principle to buy the ailing Swedish automaker just hours before it faced court action that could have led to its liquidation.
Zhejiang Youngman Lotus Automobile and Pang Da Automobile Trade agreed to pay 100 million euros, or $140 million, for Saab and its British unit, according to Saab’s parent company, Swedish Automobile.
Saab was a quirky Swedish firm that was swallowed by by decidedly non-quirky GM then shed as part of that company’s bankruptcy in 2009. Saab is still quirky but they make cars. So what: Saab is walking dead, needing billion$ along with more than its two or three customers. Swedes are smart, they buy relatively few cars and the rest of the world is broke. Saab looks to have sold enough of itself for a few more months before is sinks into well-deserved oblivion.
Speaking of oblivion, here is the China Economy Death Watch:
A weekend scuffle in Shanghai over a drop in apartment prices adds to increasing evidence that China’s efforts to tame a surging property market are having an impact – even as it offers a hint of what could happen if the measures go too far.
A group of around 400 homeowners in Shanghai demonstrated publicly and damaged a showroom operated by their property developer after the company said it cut prices. Home buyers had wanted to speak with the developer to refund or cancel their contracts but were unsuccessful, according to local media. One report said the price cuts exceeded 25% per square meter.
Unrest is increasing in China: a Google search for ‘China riots September 2011’ brings 41 million results! There are riots over taxes, pollution, land grabs by corrupt insiders, working conditions as well as real estate losses.
‘Investors’ in China front as much as 25% of the asking price of new apartments in cash. The strategy is buy and hold: to await inevitable appreciation then sell for immense, easy profits. Because these are speculation vehicles rather than actual dwellings, many of these apartments are unfinished. Many of these apartments are in buildings that are completely vacant. Sadly for these so-called investors, prices are failing to go up which puts the trillions of yuan at risk!
The money still exists but is now in the hands of the property developers who borrowed themselves to put up the buildings. The developers also lent large sums to apartment buyers, who are now falling underwater. If all this sounds like the EU and Italy’s loans to Greece and Italy’s to Spain (and Germany’s to both) they should because the process is identical. The identical consequence is that both China and the EU are broke. Neither the loans nor the apartments built or bought with the loans are worth very much if anything at all.
The source of much of China’s funds is the easy-money policy of the US Federal Reserve. Right now, there is still Fed bond-buying, still ZIRP, still moral hazard. All the US funds flow to China by way of the dollar carry trade. As long as there are dollars and an interest rate differential there will be investment funds flowing to China to construct millions of empty apartments … that are now losing value if for no other reason than there are too many of them, far in excess of organic demand.
Meanwhile, the US is starved for investment capital. Go figure!
What is emerging is the required correction and the accompanying deleveraging. According to Victor Shih and others, the total amount of debt carried by the Chinese is much larger than the establishment lets on. Notice that China analysts focus on official government debt or external debt rather than the total public and private, internal and external indebtedness. The Chinese are in hock up to their necks: debt-to-GDP ratio for China is little different from Euro-deadbeat Portugal:
China’s Debt Problem Worse than Portugal
Elizabeth MacDonald (Fox Business)
Government officials in China, the largest foreign holder of U.S. debt, have been chastising the U.S. over Standard & Poor’s downgrade to AA+.
Guan Jianzhong, chairman of Dagong Global Credit Rating, has said the U.S. dollar is “gradually [being] discarded by the world,” and the “process will be irreversible.”
But China’s debt-to-GDP ratio is worse than the United States’ ratio. It is worse than insolvent Portugal, which is now relying heavily on the European Central Bank for help, and had to go to the International Monetary Fund to get a financial bailout.
The U.S.’s new AA+ rating from Standard & Poor’s is still higher than the one assigned to the Middle Kingdom. S&P has China’s debt rating stuck at AA-, the fourth highest level, due to its “sizable” contingent liabilities in its banking system.
China’s own system is jammed with rotten debt held in off-balance sheet state enterprises. Its countryside is littered with eerie, empty ghost towns. And Moody’s Investors Service says last month that China’s local debt was understated by hundreds of billions of dollars.
Despite that, the People’s Daily said S&P’s downgrade of the U.S.’s credit rating “sounded the alarm bell for the dollar-denominated global monetary system.” China owns an estimated $1.16 trillion in U.S. debt. China prints yuan to hold down its value so as to keep its exports dirt cheap. It then uses that extra printed currency to buy U.S. debt.
Here are estimates to keep handy as this debate rolls along:
China’s debt-to-GDP higher than Portugal’s ratio: China likes to say its debt-to-GDP ratio is 17%. Not so fast. The respected Beijing-based research firm Dragonomics says it is 89% of GDP, worse than Portugal’s 83% of GDP, and the U.S.’s 79% by 2015. Stephen Green, China economist at Standard Chartered Bank, figures China’s total debt, including contingent liabilities, is 77% of GDP. China’s balance sheet is notoriously murky.
China’s murk: Its massive and growing underground economy launders dollars and holds the resulting transactions off the balance sheet. What comes next is additional Chinese easing, more money printing, more carry trade, more bailouts for Chinese real estate in an attempt to keep the bubble inflated.
Keep an eye out on China. Europe teeters but China could crash any minute.