Covert QE?

[lektrode]

seen today over at the turd's place:

http://www.tfmetalsreport.com/blog/3...-covert-qe-way

"IMHO, QE3 is presently being implemented via the Chartering of NEW Bank Holding Companies in the United States which will utilize Chinese held U.S. Treasuries as their BASE Capital.
-The Chinese held US Treasuries will be utilized as BASE CAPITAL upon which to create TRILLIONS of digital FRN via fractional reserve.
While these Treasuries were held outside of the U.S. Banking System FRN could not be created via fractional reserve; -but, now these Treasuries WILL be used as a basis to generate digital FRN out of thin air.
IF China holds $1.2 Trillion of U.S. Treasuries....
...THEN $1.2 Trillion in U.S. Treasuries = the possible creation of $10.8 Trillion new digital FRN via fractional reserve banking.
Sounds kinda like a money printing scheme doesn't it?
-NO 'Dollar of Capital' rule as Our Host would say...
Sounds a tad inflationary doesn't it?
THIS is exactly how the U.S. Banks Counterfeited FRN and ramped up inflation during the housing bubble.
-It is going to be done again with the help of the Chinese.
The Chinese ARE NOT going to 'dump' their Treasuries: the Chinese are going to print Trillions of digital FRN and go on an unprecedented .GOV/FED sponsored Leveraged Domestic Buying Binge!"
This rather interesting idea seems to have been generated by this little-noticed story from last week.
http://www.thedeal.com/content/regul...uy-us-bank.php
The banks in question are: (from the article)

• China Investment Corp., or CIC, and other Chinese entities were permitted to acquire an 80% stake in New York's Bank of East Asia (U.S.A.) NA. CIC manages a portion of China's huge foreign exchange reserves.
• Separately Wednesday, the Fed also allowed the Agricultural Bank of China Ltd. to establish a branch in New York and the Bank of China Ltd. to have a branch in Chicago.

so... whats the itulip braintrust think about this?

mr metalman?

[photon555]

Re: Covert QE?

What did the Fed get in exchange for this sweet deal? Or was it blackmail? If this happens many americans will be working for Chinese companies, living in Chinese owned rentals, buying even more Chinese products, and probably eating a lot more Chinese noodles. How about the "McNoodle".

[lektrode]

Re: Covert QE?

good question - there had to be some reason why geithner was over there with hilary a week or so ago....

since when does treasury go with foggybottom on these types of trips?

[doom&gloom]

Re: Covert QE?

uh, I just wonder who they are going to lend to if this is actually happening. unless they lend to themselves to scoop up US assets.

[cobben]

Re: Covert QE?

uh, I just wonder who they are going to lend to if this is actually happening. unless they lend to themselves to scoop up US assets.

Have the communist Chinese learned all the best capitalist maneuvers already?

Of course you need some strategically placed moles to pull off one of these successfully, wonder who these might be . . .


Leveraged buyout


A leveraged buyout (or LBO, or highly leveraged transaction (HLT), or "bootstrap" transaction) occurs when an investor, typically a financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing). The assets of the acquired company are used as collateral for the borrowed capital, sometimes with assets of the acquiring company. Typically, leveraged buyout uses a combination of various debt instruments from bank and debt capital markets. The bonds or other paper issued for leveraged buyouts are commonly considered not to be investment grade because of the significant risks involved.^[1] If the company subsequently defaults on its debts, the LBO transaction will frequently be challenged by creditors or a bankruptcy trustee under a theory of fraudulent transfer.^[2]
Companies of all sizes and industries have been the target of leveraged buyout transactions, although because of the importance of debt and the ability of the acquired firm to make regular loan payments after the completion of a leveraged buyout, some features of potential target firms make for more attractive leverage buyout candidates, including:

• Low existing debt loads;
• A multi-year history of stable and recurring cash flows;
• Hard assets (property, plant and equipment, inventory, receivables) that may be used as collateral for lower cost secured debt;
• The potential for new management to make operational or other improvements to the firm to boost cash flows, such as workforce reductions or eliminations;
• Market conditions and perceptions that depress the valuation or stock price.

[fengguo1]

Re: Covert QE?

Great post. Once the Chinese held US treasuries are transferred into a US Bank, they can be "re-hypothecated" by the bank and used as collateral to create more credit money out of "thin air" as per normal banking credit formation. This newly created credit-money can be used to buy ... more US Treasuries. The more Treasuries the Chinese buy, the less the Fed has to QE. As the OP said, this may be QE by other means. I think The Bernank has taken enough flak from Congress about "explicit" QE.

So all in all, a win, win for
1. The Fed (no explicit QE)
2. The US Govt (generates demand for US debt & keeps interest payments down)
3. The Chinese Sovereign Fund (who are now effectively LEVERED long on the biggest bond bubble on the planet), and
4. The Chinese Bank (who earns a few bps on the money used to lever up on Treasuries)

[c1ue]

Re: Covert QE?

Seems like a ZeroHedge type fantasy.

For one thing, the Fed doesn't need to engage in any such maneuvering to activate QE - all it has to do is allow the stock market to fall for a month or two, like it seems to be doing now.

For another thing, while Chinese banks have recently been allowed to open or take over US banks - i.e. get banking licenses - what exactly would be the benefit for China to make tons of crappy loans like the TBTF banks did?

This action would both remove the gigantic dollar pile national security backstop as well as add the risk of all those hard earned dollar reserves getting 'lost'.