|
The Banking Crisis Is Not Over. Why?
Bear Stearns Rescue Has Caused More Problems For Fed and Bernanke
Two public announcements from different ends of the world caught my attention. This is the smoking gun that the banking crisis is far from over. In fact, it may get worse, much worse. Sorry to have to spoilt your weekend.
But truth must be told! It is starting to hurt badly and the symptoms have finally emerged in Malaysia.
First Announcement
On the 6th May 2008, the Sun newspaper reported that a local bank in Malaysia announced that it “plans to dispose RM1.5 billion of its non-performing corporate and business loans that involve 200 accounts … This amount is part of the legally claimable loans of RM12.9 billion”
The Group Chief Executive, Datuk Nazir Razak said, “We will only sell the loans if we can get the right price. Under the present difficult international capital market environment we may or may not get the right price.”
It was also reported that the bank hopes that a sharp improvement in consumer banking would help offset a possible slowdown in investment banking and treasury this year. But credit card debts are mounting and cardholders are taking longer time to pay.
This bank must be daydreaming that international hedge fund investors etc. will buy up these loans, repackage them and sell them off to be traded in the now collapsed “off-balance sheet, and over-the-counter markets.” That market died and was buried in 2007!
Since 2007, I have been warning all of you that this would happen in Malaysia and that the financial authorities are covering up this mess. But their handi-work had no impact. It did not work. The hoped-for-recovery in the USA and Europe from the banking crisis (which may have helped) did not materialize and will not materialize in anytime soon. Ouch!!!!!!!!!!!!
Second Announcement
Bloomberg on the 9th May 2008 reported that the CEO of Citigroup Vikram Pandit “plans to get rid of about US$400 billion of assets”. Please don’t get deluded by the expression “assets”. In banking jargon, “assets” in this context refers to lousy stinking loans with dubious mortgages.
What Citigroup is trying to do is no different from what the local bank is trying but on a much larger scale, as Citigroup is the largest banking group in the world prior to the collapse of the global banking system in 2007. The bank, since the beginning of the credit crisis has officially written off some US$40 billion and has reported a first quarter loss for 2008 amounting to US$5.1 billion, following the 4th quarter loss in 2007 amounting to US$10 billion.
Vikram Pandit has basically told the world that major surgery is needed for Citigroup if the bank is to survive as a smaller entity. If it does survive, it will no longer be the biggest global bank, a position it held for close to a decade.
The Shit Has Hit the Ceiling Fan
Both banks have a common problem. No one is interested in taking up these stinking lousy toxic wastes. But, both of these banks are pre-empting a significant rescue and wants to be the first in the queue for substantial bailouts from their respective central banks.
In so far as the local bank is concerned, this is nothing new. It has almost become a habit i.e. to be rescued time after time by the central bank of Malaysia (Bank Negara) using taxpayers’ monies!
In so far as Citigroup, this will be a whole new ball game. Why?
In my previous articles, I drew your attention that the Fed has allowed commercial banks, investment banks etc. to first use their toxic wastes as security for over-night loans at the discount window to overcome the liquidity problem. When that failed to stimulate inter-bank lending, the Fed then adopted the unprecedented measure of allowing these banks and financial institutions to exchange their worthless toxic wastes (valued at par) for Fed’s treasury bonds so that they can be used in turn as security for inter-bank borrowings.
This has brought some calm to the financial markets. And the Bank of England has recently announced that it will also adopt similar measures (£50 billion will made available to distressed British Banks).
But, it is just not working.
And Citigroup’s announcement is proof of this failure. The shedding of US$400 billion of “assets” is a mind-boggling figure. This is just one global bank.
When Bear Stearns was rescued through the back door via the acquisition by JP Morgan Chase with a US$30 billion hand-out by the Fed, this set a dangerous precedent. Both Bernanke and the Chancellor of the Exchequer (UK) have announced that no banks will be allowed to fail!
The Middle East sovereign funds are not buying these US$400 billion toxic wastes. In fact, after their initial “sucker investments” in 2007, they have since discovered that they were “invited” not to a party for the rich and famous but a sink-hole full of shit. And they are demanding drastic action from Vikram Pandit or else …..!
So the US$400 billion question in the case of Citigroup and the RM12.9 billion question in the case of the Malaysian bank is – WHO HAS THAT KIND OF MONEY AND IS WILLING TO DOLE IT OUT?
You can bet your bottom dollar, it would not be private money from Wall Street or any other street.
As I have said in my previous articles, when it comes to profits, capitalistic principles apply to ensure that Wall Street and global bankers will reap the rewards. But when it comes to dealing with massive losses, socialism applies and public monies will be used for bail-outs!
It is obvious that only Central Banks (and their printing machines) have the means and willingness (after due threats from the financial mafias) to come out with the paper money!
Bernanke’s Dilemma
As stated in the foregoing paragraphs, the Fed had exchanged toxic wastes from banks for its triple A rated treasury assets to provide liquidity to the financial markets. It was estimated that the value of the exchange was about US$400 billion representing 50% of the total value of Fed’s treasury assets.
So, is the Fed going to do a similar swap for Citigroup’s US$400 billion toxic wastes with the balance of its treasury assets? Not likely! Can you imagine the Fed having as its assets, toxic waste - US$800 billion worth of it?
Is the Fed going to start the printing press to buy up these toxic wastes?
Most probably, as it has no other choice but, this will start an avalanche of similar demands from other banks as what is good for Citigroup should also be applicable to them. The amount demanded will be in the US$ Trillions!
If Fed has only a balance of US$400 billion of triple A assets, it will be obvious to all and sundry that any such rescue must of necessity be conducted via the printing press – toilet papers issued to purchase stinking lousy shit – CDOs, CLOs, MBAs etc..
The emperor is naked. He has no clothes!
The dollar will collapse. When this happens, what do you think the Japanese and the Chinese will do when they have in their hands US$ trillions worth of toilet papers?
What will Malaysia do in the circumstances?
Why The Oil Trade Will No Longer Be Denominated in US$ In The Near Future
Goldman Sachs has recently announced that oil will hit US$200 a barrel. This is a self-serving forecast. Goldman Sachs knows that the only way, and a slim chance at that, for the US$ to survive as a “trading currency” (not even a reserve currency) is for an artificial demand for the US$.
And so long AS THE OIL IS TRADED IN US$, there will be a demand for dollars and the dollar will appreciate in tandem with the increase in price for crude oil.
Oil importing countries will cry murder! They will have to exchange their hard earned national currencies for toilet papers to buy a product whose price has been artificially jacked up by international traders (not OPEC, and nothing to do with shortages) working in conjunction with the big global oil companies.
Sooner or later, these oil importing countries will refuse to trade oil in dollars!
They have no choice, purely from a domestic economic point of view.
The Double Whammy
Managing a country’s finances is not unlike that of balancing a family’s budget, save this difference. When a family runs out of money, it has either to work harder to get additional revenue or borrow. In the case of a country, it can also borrow, get additional revenue from more exports (work harder) or print money.
The export market is a very competitive market. Price differential is a critical factor. Therefore, a country that depends on exports would want a cheaper currency so that its exports are “cheaper” to that of its competitors.
To do that, when its currency is peg to the US$, it invariably prints more local currency to buy dollars to maintain the exchange peg. For if the dollar depreciates then the local currency must appreciate in tandem unless the central bank intervenes as stated above. The net result is “imported inflation” because imports will cost more, because of the “forced devaluation of the local currency”. In layman’s terms, we need more ringgit to buy the same amount of imported cars, shoes, clothes, petrol, food etc..
And when the crude price shoots to US$200 as forecasted by Goldman Sachs, when previously it was only US$80 or less, where are we going to get the additional dollars to import the crude, if exports revenue remains the same or even worse, declined?
Malaysia has just announced that our first quarter exports for 2008 have dropped because of the weakness of the US market, our main export market. Our currency has appreciated somewhat vis-a-vis the dollar. Hence, our exports will cost more to our buyers.
The only solution is to print more money to depreciate our currency, thereby making our exports cheaper. This will cause further inflation and a drastic increase in the cost of living for our local folks. Hedge fund vultures will be waiting to attack our currency as in 1997 when we become weak and vulnerable.
This is the scenario that is staring at all countries which are trading oil in US$ and are export dependent.
As stated in my last article, we are heading towards stormy seas and uncharted waters.
Matthias Chang
 |
Matthias, don't get too upset and jump from a building. We wouldn't want to read that and spoil our breakfast. 
Are you ready to give up your US dollars for toilet paper?