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USA Fire Sale: 1st Meeting July 3, 2007

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  • USA Fire Sale: 1st Meeting July 3, 2007

    USA Fire Sale - July 3, 2007

    In the spirit of our original USA Bankruptcy Filing posted on iTulip.com in 2001, and the faux iTulip interview with Alan Greenspan (google: "greenspan interview") from 1999, the following is the transcript of the first meeting in 2010 between a fictitious character Henry Cheng who represents U.S. creditors, and Hank Anderson, seller of U.S. assets.

    Cheng: We have $1.2 trillion. What do you have for sale?
    Anderson: Our first item is a portfolio of ABS CDOs.

    Cheng: ABS is asset-backed security. What's "CDO"?
    Anderson: CDO stands for collateralized debt obligation and in this case it means packages of debt based on parts of asset-backed securities which were previously low rated but which, because of the way they are packaged, have high ratings as CDOs.

    Cheng: Why is a package of parts of things worth nothing worth more than nothing?
    Anderson: Well, it's complicated but it has to do with the models of the risk of default under various conditions...

    Cheng: We will give you one dollar.
    Anderson: Mr. Cheng, I haven't told you what we are asking, yet. This collection of CDO portfolios originally sold for $140 billion...

    Cheng: Ok, we'll give you two dollars.
    Anderson: How can they be worth two dollars if they were once worth $140 billion?

    Cheng: If you have a better offer, take it.
    Anderson: Um, let's move onto our next asset. This is a big opportunity. We have $460 billion in asset backed securities and bonds on defaulted sub-prime mortgages. These were owned by hedge funds and investment banks, then purchased by the Federal Reserve following the passage of the 2009 Emergency Asset Classification Act.

    Cheng: What is "sub-prime"?
    Anderson: Sub-prime is a loan a lender offers to borrowers who have higher default risk than a prime borrower's.

    Cheng: Why?
    Anderson: Why is the default risk higher? Because the borrower is less creditworthy than a prime borrower.

    Cheng: No, why lend money to borrowers when you know they cannot pay back?
    Anderson: Well, statistically, many can pay back, enough for the loans to make money, usually, and in terms of policy, we want poor families to own homes and build wealth.

    Cheng: Ridiculous. A poor family needs income and equity, not credit and debt. "Usual" is never usual for long. What else do you have?
    Anderson: We have $560 billion in bonds on defaulted adjustable rate mortgages. These were "A" rated, prime.

    Cheng: But not now, right? So were not rated correctly. How rated now?
    Anderson: Ratings vary but mostly this portfolio is rated "B" or less.

    Cheng: Junk.
    Anderson: Well, technically, yes...

    Cheng: Not buying that, sand in a desert.
    Anderson: Let's move on. We see you are looking for high quality items. We have Treasury and agency bonds...

    Cheng: You joke! We sell US Treasury bonds, buy for our economic needs. What else is for sale?
    Anderson: We have $490 billion in distressed bonds from corporations that were financed by private equity firms in 2006 and 2007.

    Cheng: Interesting. We buy energy, manufacturing, resources. We like oil, coal, gas, metals. Fifty cents on the dollar! Very good price!
    Anderson: Uh, those are not for sale. As I am sure you know, laws passed by Congress in 2008 prohibit foreign ownership of US companies in strategic industries. All of the industries you name are strategic. Sorry.

    Cheng: Pharmaceutical. Biotech. Technology... networking, comms, wireless, software?
    Anderson: Those are the crown jewels of the U.S. economy. They are not for sale.

    Cheng: We buy stem cell R&D companies. Your laws prohibit this. Ours do not. For sale?
    Anderson: Right, so we have not developed that technology. Sorry, none for sale.

    Cheng: It's ok. You will buy new medicines from us later. Anything else?
    Anderson: This is all we came prepared to offer today.

    Cheng: Ok, we wait, come back later and buy "strategic" industries... ten cents on dollar. Goodbye.
    Last edited by FRED; 05-07-08, 08:52 PM.
    Ed.

  • #2
    Re: Fire Sale: 1st Meeting

    Anderson

    Comment


    • #3
      Re: Fire Sale: 1st Meeting

      Oh, first China will be bailing itself out of all of those bank problems it has. It will also have to hand out that $1.2 trillion of US dollars to bail its citizens out of the forth coming stock market bubble. Finally, if interest rates go up that $1.2 trillion of bonds will be worth far less than it is now.

      Comment


      • #4
        Re: Fire Sale: 1st Meeting

        Originally posted by Fred View Post
        In the spirit of our original USA Bankruptcy Filing posted on iTulip.com in 2001, and the faux iTulip interview with Alan Greenspan (google: "greenspan interview") from 1999, the following is the transcript of the first meeting in 2010 between a fictitious character Henry Cheng who represents U.S. creditors, and Hank Anderson, seller of U.S. assets.

        Cheng: We have $1.2 trillion. What do you have for sale?
        Anderson: Our first item is a portfolio of ABS CDOs.

        Cheng: ABS is asset-backed security. What's "CDO"?
        Anderson: CDO stands for collateralized debt obligation and in this case it means packages of debt based on parts of asset-backed securities which were previously low rated but which, because of the way they are packaged, have high ratings as CDOs.

        Cheng: Why is a package of parts of things worth nothing worth more than nothing?
        Anderson: Well, it's complicated but it has to do with the models of the risk of default under various conditions...

        Cheng: We will give you one dollar.
        Anderson: Mr. Cheng, I haven't told you what we are asking, yet. This collection of CDO portfolios originally sold for $140 billion...

        Cheng: Ok, we'll give you two dollars.
        Anderson: How can they be worth two dollars if they were once worth $140 billion?

        Cheng: If you have a better offer, take it.
        Anderson: Um, let's move onto our next asset. This is a big opportunity. We have $460 billion in asset backed securities and bonds on defaulted sub-prime mortgages. These were owned by hedge funds and investment banks, then purchased by the Federal Reserve following the passage of the 2009 Emergency Asset Classification Act.

        Cheng: What is "sub-prime"?
        Anderson: Sub-prime is a loan a lender offers to borrowers who have higher default risk than a prime borrowers.

        Cheng: Why?
        Anderson: Why is the default risk higher? Because the borrower is less creditworthy than a prime borrower.

        Cheng: No, why lend money to borrowers when you know they cannot pay back?
        Anderson: Well, statistically, many can pay back, enough for the loans to make money, usually, and in terms of policy, we want poor families to own homes and build wealth.

        Cheng: Ridiculous. A poor family needs income and equity, not credit and debt. "Usual" is never usual for long. What else do you have?
        Anderson: We have $560 billion in bonds on defaulted adjustable rate mortgages. These were "A" rated, prime.

        Cheng: But not now, right? So not rate correctly. How are they rated now?
        Anderson: Ratings vary but mostly this portfolio is rated "B" or less.

        Cheng: Junk.
        Anderson: Well, technically, yes...

        Cheng: Not buying that, sand in a desert.
        Anderson: Let's move on. We see you are looking for high quality items. We have Treasury and agency bonds...

        Cheng: You joke! We sell US Treasury bonds, buy for our economic needs. What else is for sale?
        Anderson: We have $490 billion in distressed bonds from corporations that were financed by private equity firms in 2006 and 2007.

        Cheng: Interesting. We buy energy, manufacturing, resources. We like oil, coal, gas, metals. Fifty cents on the dollar! Very good price!
        Anderson: Uh, those are not for sale. As I am sure you know, laws passed by Congress in 2008 prohibit foreign ownership of US companies in strategic industries. All of the industries you name are strategic. Sorry.

        Cheng: Pharmaceutical. Biotech. Technology... networking, comms, wireless, software?
        Anderson: Those are the crown jewels of the U.S. economy. They are not for sale.

        Cheng: We buy stem cell R&D companies. Your laws prohibit this. Ours do not. For sale?
        Anderson: Right, so we have not developed that technology. Sorry, none for sale.

        Cheng: It's ok. You will buy new medicines from us later. Anything else?
        Anderson: This is all we came prepared to offer today.

        Cheng: Ok, we wait, come back later and buy "strategic" industries... ten cents on dollar. Goodbye.
        Fantastic! I think we'll sell Taiwan.

        Comment


        • #5
          Re: Fire Sale: 1st Meeting

          Originally posted by Ishmael View Post
          Oh, first China will be bailing itself out of all of those bank problems it has. It will also have to hand out that $1.2 trillion of US dollars to bail its citizens out of the forth coming stock market bubble. Finally, if interest rates go up that $1.2 trillion of bonds will be worth far less than it is now.
          Martin Mayer told us: "All central banks, not only the Fed, struggle with the the fact that policies designed to manage price inflation invite asset inflation. They really don't know what to do about it. They've tried popping the bubbles as Japan did quite brutally in 1990 and bad things happened. The problem was that the collapse of their asset bubbles revealed a very weak banking system. China has for the past three or four years invested a large amount of the money they've earned in export trade to fix their banking system to avoid a similar problem. The problem is that the banks are owned and run by a central government, and there's a lot of corruption, so reform is slow and difficult, but they have made progress."

          Maybe their banks are in better shape than many believe, and they will not pop their bubble as Japan did but will continue to manage it down via tax policy. Not even clear it is a bubble. For a long time their stock market went nowhere while the economy grew over 8% a year. One argument is that their stock market is catching up because they have improved the viability of the market.

          Rising interest rates will make those notes worth less as will ongoing printing and dollar depreciation in the U.S. That's the "default" iTulip was talking about back in 2001 in its USA Bankruptcy Filing, if you note the comment at the bottom of the page, "Of course, the U.S.A. is not going to go bankrupt. The point of this piece is to make the inevitable alternative obvious. The U.S. will repay its debts, backed with the full credit of the government. Debts will be paid in full... with itty, bitty little dollars." That is why this asset sale scenario above is unlikely. More likely, a continued slow motion default via depreciation.
          Ed.

          Comment


          • #6
            Re: Fire Sale: 1st Meeting

            Originally posted by cakins View Post
            Fantastic! I think we'll sell Taiwan.
            Great point, I bet we throw in South Korea just for a kicker.
            "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."
            - Charles Mackay

            Comment


            • #7
              Re: Fire Sale: 1st Meeting

              Originally posted by Tet View Post
              Great point, I bet we throw in South Korea just for a kicker.
              patl sends us this...

              Life imitates art?

              "U.S. Urges China to Buy Mortgage Securities Amid Subprime Woes"
              Ed.

              Comment


              • #8
                Re: Fire Sale: 1st Meeting

                Originally posted by Fred View Post
                patl sends us this...

                Life imitates art?

                "U.S. Urges China to Buy Mortgage Securities Amid Subprime Woes"
                30% returns are a lot better than the 3-4% returns China is currently getting with their US d0llar reserves. Unfortunately when it's all said and done the 30% still returns in d0llars. I think China would rather buy Africa.
                "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."
                - Charles Mackay

                Comment


                • #9
                  Update 1

                  Process starting sooner than expected? Comments of GaveKal on the Citi-ADIA deal.
                  It is not everyday that one of America’s three largest banks sells 4.9% of its capital for an annual yield of 11%; so yesterday’s deal between Citi and ADIA is undeniably important. As with any deal, it is possible to spin a positive story (usually the buyer’s point of view) or a negative one (the seller’s perspective). In the spirit of the times, let us start with the negatives:

                  * As a seasoned HK money manager pointed out to us, even the Korean banks in 1998 never recapitalized their balance sheets with 11% converts; and this deal came from Bob Rubin and the world’s best financiers! So how bad must Citi’s balance sheets look? Of course, the counter to that argument is that given current market conditions, Citi could not really go around and do a three week road show for a rights issue. If Citi wanted to raise US$7.5bn discreetly, and in a hurry, they did not have that many doors they could knock on. Still, the fact that they needed US$7.5bn to plug holes is a concern, for it raises the question of whether other banks need to recapitalize like Bear and Citi have just done? And, if so, is the downturn in financials over?

                  * We should remember that the market responded to the BoA-Countrywide deal with just as much enthusiasm (and Countrywide is now worth roughly half the US$18/share that BoA paid), just as it welcomed the Bear-CITIC deal.
                  Ed.

                  Comment


                  • #10
                    Re: Update 1

                    Originally posted by FRED View Post
                    Process starting sooner than expected? Comments of GaveKal on the Citi-ADIA deal.

                    As the EU draft a restricted entry policy for SWF, where will they go with all those hot potato dollars? Will the US allow the funds to purchase US assets? You can count on it, with fewer destination options available to SWF they will end up purchasing US assets that are in desperate need of capital injections. By the time Paulson drafts guidelines as to how the SWF are allowed to invest they will have already acuminated US (distressed and accepted by the public) assets at an alarming rate.






                    http://www.telegraph.co.uk/money/mai...cnfunds129.xml
                    EC to rule on sovereign wealth funds
                    Last Updated: 1:22am GMT 29/11/2007
                    But a 'Fortress Europe' could erode the City's role as a clearing house for such investment, writes Ambrose Evans-Pritchard
                    The European Commission is exploring plans for an EU-wide law to regulate sovereign wealth funds, a move that could vastly complicate the City of London's ability to serve as hub for the investment flows from Asia, the Middle East, and Russia.



                    http://today.reuters.com/news/articl...CIC-URGENT.XML
                    BEIJING, Nov 29 (Reuters) - China Investment Corp (CIC), the country's new sovereign wealth fund, will invest in financial institutions hit by the meltdown in subprime mortgages, the head of the fund said on Thursday.
                    CIC head Lou Jiwei said the fund would need to prepare for at least a year before it was be ready to make major overseas investments.
                    The fund's initial capitalisation is $200 billion, but only a third of that is earmarked for investment overseas.
                    CIC would invest most of the overseas portion in publicly traded products, with only a relatively small share going into alternative products, Lou told a financial forum.


                    But he said the fund would not rule out direct investment opportunities.
                    CIC was set up in September with a mandate to seek higher returns on part of China's foreign exchange reserves, which totalled $1.455 trillion at the end of October.
                    He said CIC needed to earn at least 300 million yuan a day just to break even. (Reporting by Zhou Xin, Eadie Chen and Jason Subler; Editing by Edmund Klamann)
                    If you are an experience PE flipper out of work you may be in luck.

                    http://online.wsj.com/article/SB1196...googlenews_wsj
                    China Fund Seeks Talent Globally

                    By RICK CAREW
                    November 26, 2007; Page A17

                    BEIJING -- China's $200 billion sovereign-wealth fund has started a global recruitment drive, aiming to attract staff to manage its purchases of stocks and bonds on global financial markets.
                    China Investment Corp. opened a Web site in both English and Chinese to recruit for jobs varying from risk analysts to portfolio managers and public-relations officers, all to be based in Beijing. For the fund-manager jobs, it is looking for applicants with overseas education and experience.
                    CIC listed openings for portfolio managers to invest in North American, European and Japanese equities and fixed-income products including derivatives.
                    The sovereign-wealth fund's managers are planning to allocate a third of its $200 billion to investments in global financial markets.
                    The rest of CIC's initial $200 billion of funding is being used to buy domestic financial-sector assets.
                    The search to hire talent abroad is driven by China's shortage of local professionals with experience investing abroad.

                    Comment


                    • #11
                      Re: USA Fire Sale: 1st Meeting 2010

                      Now what are they going to do with all that $$$$$$$ ?

                      http://www.iht.com/articles/ap/2007/...s.php#end_main

                      Published: November 29, 2007 Singapore's state investment agency said it sold shares in two mainland China banks this week, and media reports said the sales netted Temasek US$800 million (€542.5 million) in proceeds.
                      Temasek sold 280 million shares in China Construction Bank on Wednesday, representing less than 2 percent of its holding in the bank, a company spokeswoman said Thursday. Local media said the sale of the shares earned Temasek about HK$2 billion (US$256 million), but the spokeswoman would not confirm the amount.
                      Two days earlier, Temasek confirmed it sold 1.08 billion shares in Bank of China for HK$4.45 billion (US$570 million; €386 million), reducing its stake in the mainland lender from 15.5 percent to 14.2 percent.
                      Both sales were part of Temasek's ongoing rebalancing of its portfolio, the spokeswoman said in a statement e-mailed to The Associated Press

                      What ever they invest in it will be with local partners and front companies http://www.itulip.com/forums/showthr...10161#poststopto avoid conflicts.
                      http://www.economist.com/finance/dis...ry_id=10218031

                      Nov 29th 2007 | SINGAPORE
                      From The Economist print edition
                      The tables turn on Singapore's pioneering investment fund



                      TEMASEK'S Singaporean chairman, S. Dhanabalan, rarely gives interviews, so when he issued three golden rules on overseas investments in the Straits Times this month, it was worth paying attention. Temasek is one of the earliest and biggest of what are now called sovereign-wealth funds, and is watched closely by its peers. His message was not an uplifting one.
                      Mr Dhanabalan said that as a result of the impact of rising nationalism on sovereign-wealth investments, Temasek would no longer seek controlling interests in companies outside Singapore, would use local partners and consider the “emotional sentiments” that may be aroused by its acquisitions. All sensible stuff, to be sure. The trouble is, he was speaking after an adverse Indonesian ruling that penalised Temasek even though the company's investments met all three of those criteria.

                      Comment


                      • #12
                        Re: USA Fire Sale: 1st Meeting 2010

                        Originally posted by bill View Post
                        Now what are they going to do with all that $$$$$$$ ?

                        http://www.iht.com/articles/ap/2007/...s.php#end_main



                        What ever they invest in it will be with local partners and front companies http://www.itulip.com/forums/showthr...10161#poststopto avoid conflicts.
                        http://www.economist.com/finance/dis...ry_id=10218031


                        They just sold another Chinese stock - http://www.scmp.com/portal/site/SCMP...ies&s=Business

                        The stock valuation in China has gone nuts, the real estate and stock bubble is bursting, time to sell out. Warren Buffet did that much earlier in September. But what i'm curious is - who's buying over their stocks! :eek:

                        Comment


                        • #13
                          Re: USA Fire Sale: 1st Meeting 2010

                          Originally posted by touchring View Post
                          They just sold another Chinese stock - http://www.scmp.com/portal/site/SCMP...ies&s=Business

                          The stock valuation in China has gone nuts, the real estate and stock bubble is bursting, time to sell out. Warren Buffet did that much earlier in September. But what i'm curious is - who's buying over their stocks! :eek:
                          Appears that our friend John Rubino shorted China too early. Looks like now the time at last has arrived to short China? John used 09 FTSE/Xinhua China 25 put options.
                          Ed.

                          Comment


                          • #14
                            Re: USA Fire Sale: 1st Meeting 2010

                            Originally posted by FRED View Post
                            Appears that our friend John Rubino shorted China too early. Looks like now the time at last has arrived to short China? John used 09 FTSE/Xinhua China 25 put options.
                            a broader approach is using puts on eem.

                            Comment


                            • #15
                              Re: USA Fire Sale: 1st Meeting 2010

                              The trouble is, he was speaking after an adverse Indonesian ruling that penalised Temasek even though the company's investments met all three of those criteria.
                              Sure is tough when you're no longer the biggest wad of cash on the block.

                              Temasek can take comfort in that they'll become a footnote as the precursor to the SWF - or what used to be called the cyberpunk megacorp: company combining corporate, political, and military power.

                              Comment

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