As China Dumps U.S. Assets, Wall Street Insists on Continuing Bailout of AIG

Yesterday, China dumped a huge chunk of its U.S. residential mortgage holdings held by HSBC bank. Meanwhile, AIG, another China-centered global institution, received another $30 billion tranche atop the $150 billion that have already paid out of the U.S. Treasury to keep that global insurance giant afloat.

Stock values for both firms dropped yesterday, dragging down markets worldwide. Of the two, the continued slide of AIG is the more troubling. The shut-down of HSBC’s residential mortgage unit announced Monday may actually be a good thing for distressed American homeowners.




AIG: Still on the American Dole

There are two problems with the ongoing AIG bailout, and neither of them have to do with protecting life insurance policy holders in the United States. First problem: American International Group (AIG) is misnamed - AIG is actually a huge China-based market-maker for Mortgage-Backed Securities (MBS) and Credit Default Swaps (CDS)

Second problem, a lot of people in DC and on Wall Street think that AIG needs to be kept afloat to sustain prices in unregulated secondary markets and the institutions that bought heavily into them during the Bush years. http://www.nakedcapitalism.com/2008/09/aig-asks-fed-for-help.html

AIG was actually established in China by Hank Greenberg, who is to China what Armand Hammer was to the Soviet Union, a primary conduit for Chinese investment and influence in the U.S. See, http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=132x7095505

The fear is that if AIG goes down the portfolios of many other banks and companies that bought MBS and CDS are going to implode. Wall Street would obviously prefer that the Federal Gov't step in and guarantee what remains of the value of these derivatives.

The other terror is that unless the Fed keeps pumping dollars into AIG and backing up the value of firms holding MBS and CDS, the Chinese will pull up stakes in the American economy and the market for US financial instruments, including federal bonds, will implode.

Those fears are not well-founded and like many things on Wall Street, much too hyped. It makes much more sense to just cancel both sides of the most speculative forms of swaps contracts. Derivatives trading should be regulated and some forms, such as naked swaps and pure unregulated third-party speculation by hedge funds in defaults, should simply be outlawed. Those institutions that are so over-leveraged and insolvent that they can't restructure their portfolios without AIG's "risk managment" products will probably fail, regardless, and should be nationalized. As for the Chinese, their position is interlocked with ours. If we go down, they'll be swallowed up along with us, and vis-a-versa.

As for keeping the secondary markets for mortgages going, that sort of bailout may be something that we’re all stuck with. Unlike swaps, houses are something that Americans actually need.

HSBC: Back to China

HSBC was founded 150 years ago by British investors as the Hong Kong and Shanghai Bank. Today, it is both the largest bank in Europe by assets, and the largest Asian bank listed on a stock exchange outside China. It operates as does AIG, as the global conduit for the flow of foreign investment and dollar returns back to China. In these times of deep distress and losses on western holdings, HSBC is retrenching back to China. See, http://www.bloomberg.com/apps/news?pid=20601087&sid=aNKzW5YND75g&refer=home

The value of HSBC, traded on the London and Hong Kong stock exchanges fell nearly 20 percent yesterday due to mounting losses in its U.S. mortgage operations, which the bank announced are being shut down. In 2003, HSBC took over Household Finance (dba, Beneficial), which became an aggressive player in subprime mortgages. Related write-offs have resulted in at least $13 billion in U.S. mortgage related losses. Cash-starved HSBC was forced to close down its U.S. mortgage units and water-down its stock by a $18 billion “rights” offering on European and Asian exchanges yesterday. http://www.iht.com/articles/reuters/2009/02/23/business/OUKBS-UK-HSBC-RIGHTSISSUE.php Look at what’s happened t European and Asian exchanges as the American mortgage and middle-income crises spreads outwards to global money centers. They all lost at least four percent. We're all tied together in a terrifying global plunge in over-inflated assets and equities values.

HSBC is commonly referred to as the largest bank in Europe, but HSBC is actually the initials of the Hong Kong Shanghai Banking Corporation, and it was the largest issuer of subprime and endangered Aa mortgages in America, the massive defaults of which has left Fannie Mae and Freddie Mac (FM/FM) holding the bag, contributing to the massive downfall and forced nationalization of those government securitized entities.

Foreign Bond Holders Resisted Homeowner Protections

Unlike some other lenders, HSBC did not seek TARP money, which would have entailed compliance with some limited mortgage relief measures attached to that law, because HSBC is not a U.S. based firm. However, that bank did act as one of the biggest resellers of FM/FM mortgages through its HFC/Beneficial retail outlets, which marketed aggressively to subprime customers.

When those risky mortgages failed, FM/FM had to guarantee the losses. Effectively, the U.S. Treasury paid out to a Chinese and European-owned company money for loans that bank had signed. HFC/Beneficial refused in many cases to modify its loans, and got to seize and hold those properties in foreclosure. That’s what happened during the Bush era. The U.S. guaranteed returns on the US real estate holdings of its 2nd largest trading partner, as millions of Americans lost everything.

What has happened is a growth of spine in Washington, and a determination that the federal government needs is a stop to the interlocked death-spiral of middle-class incomes and foreclosures. Declining wages and mounting losses of homes are entirely related. See, http://mortgagestats.blogspot.com/2009/02/unemploymentunderemployment-rates-vs.html Some relief may be coming tomorrow, when FM/FM issue new guidelines for foreclosure relief regulations. Mortgage companies have already started soliciting business from homeowners endangered by foreclosures. New incentives are being offered to mortgage lenders to make mortgage modifications that would bring down principle owed to prevailing market values and reduce interest rates. Some distressed homeowners holding FM/FM-backed notes may be eligible for caps on monthly mortgage payments of no more than 38 percent of monthly income. Up until now, many mortgage-lenders – including HSBC – have resisted writing down loan amounts.

This resistance has been in large part because holders of mortgage-backed bonds on Wall Street saw large-scale loan modifications as a threat to the value of their MBS. However, the mortgage crisis is now so severe that homeowner relief is being viewed as a necessary cost to prevent a further melt-down of the entire mortgage industry. HSBC and its foreign backers have realized this, and are now cutting their losses. This is a big signal to the rest that a large-scale adjustment in overinflated American real estate values is now under way, and that Wall Street will be required "to put skin in the game". Homeowners can not continue to carry the burden.

The bailout of AIG is thus more complicated than simply sustaining its insurance operations. HSBC's write-off of HFC/Beneficial is a signal that the American real-estate bubble is flat, and big foreign investors do not hope to squeeze much more money out of it. These developments are part of a struggle between the U.S. and its Chinese and European business partners over who will carry the next part of the burden of economic adjustment. AIG should now be liquidated – not propped-up -- and its legitimate insurance operations spun-off. Further bailouts of AIG are just throwing money down a bottomless pit until it reaches China. There is no value to other than paying extortion to the Chinese banks and insurance companies to hold onto their Treasuries, dollars, and other U.S. assets

On the other hand, it may actually be a good sign to see the Chinese and their European money-center banks fleeing the American mortgage market – it means the federal government is about to put some resources into assisting distressed homeowners, and can now do so without outside pressures resisting help to ordinary middle-class Americans.

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If someone knows, there are millions who'd like to sell their houses the same place.

when no other governments will willing to put up a penny. they must have realized the us taxpayers are to scared to object

I know this is a common opinion, but AIG should not get anymore money, nor should any bank. Any bank that is insolvent should just get take over by the FDIC. As we all know Wall street will never be satisfied, and Team Obama needs to realize this. At the same time the Obama administration is bailing these buys out, they are blaming Obama for the Dow falling. He needs to out right nationalize AIG and the failing banks. He shouldn't worry about being attacked for nationalizing, because right now as I mentioned previously he is bailing these guys out and they are still attacking him.

That is why we are bailing them out.

If that isn't nationalization, I don't know what is.

"The capitalists will sell us the rope with which we will hang them." V.I. Lenin

http://www.time.com/time/world/article/0,8599,1882594,00.html

The world might be sinking into its worst recession in generations, but China is on a wild shopping spree. Sitting some $2 trillion of cash reserves, Beijing is taking advantage of the woes of others to cement its grip on new sources of commodities ranging from olive oil to crude oil —often at fire-sale prices.

China's growth rate may be slowing in concert with the world economy, but even at that slower rate, its economy continues to expand, requiring a steady increase in supplies of oil, copper, aluminum and other minerals. And laying in sources of supply for those commodities also helps it prepare for the next boom. As economies across the world shrink, Chinese officials have told reporters in Beijing in recent weeks that they see a rare chance to expand its sources for primary commodities. "There are editorials in the Chinese press saying that this is a one-in-one hundred-year's opportunity," says Erika Downs, China energy fellow at the Brookings Institution in Washington. "There is a sense that this is a moment to be seized, that with competition lower they can get a good deal."

Recent deals with Brazil and China highlight Beijing's ability to use loans a means of securing energy supplies. In mid-February, Beijing negotiated a $10-billion loan to Brazil's state-owned oil company Perobras, as well as a $25-billion loan to Russia's state-run oil company Rosneft. Both companies' revenues have plummeted in recent months as crude oil prices fell by more than two-thirds. China offered large cash amounts in a tight credit market, but rather than require that the loans be serviced and repaid in cash, Brazil and Russia will repay the loans in crude oil supplies to China over the next two decades. Russia will ship eastern Siberian oil, while in Brazil, China hopes to get a share of major offshore fields which have recently been discovered. So, no matter what happens to the global economy, China is assured steady oil supplies over the next 20 years from two major oil-producing countries, in regions which are far more politically stable than China's suppliers in Africa.

But China's shopping spree has gone far beyond oil. The Australian government is examining a bid by the Aluminum Corp. of China or Chinalco to buy an 18% stake of the heavily indebted minerals giant Rio Tinto, for about $19.5 billion. It is also considering a bid by the Beijing trading company Minmetals to buy Australia's mining company Oz Minerals for about $1.7 billion — enough to wipe out that company's debt. Meanwhile, Chinese president Hu Jintao made a five-country swing around Africa in early February, signing deals in Tanzania and Madagascar on agriculture and telecommunications, and promising debt relief to the poorest continent

The Communist Party, at its best, is a functioning selection-mechanism for getting many of the smartest people into government service.

I take it this is your work, your research and not a repost of another article. This is excellent work and very well digs into and describes what is going on.

This needs to be on the home page.

I alway find this reference strange : "help to ordinary middle-class Americans."

More than 50% of the UK's population are working class. The middle class here are not expected to be in the majority until c. 2020. The USA's working class are rarely mentioned. Don't they exist or is it simply that they don't matter to you?

The Bloomberg article you link to quotes HSBC's CEO for Asia-Pacific, so of course all he's going to talk about is Asia. According to the article it is going to add 10 to 15 branches in China. That's it! That's peanuts. It's got over 100 in Hong Kong alone, but only 79 in all of mainland China.

Second, you say "HSBC's write-off of HFC/Beneficial is a signal that the American real-estate bubble is flat, and big foreign investors do not hope to squeeze much more money out of it."

Huh? Do not hope to squeeze much more money out of it???? It's virtually bankrupted HSBC. They've written off a hell of a lot more than $13 billion on the US mortgage mess.

One thing I do agree with though is that appeasing the Chinese was one reason for the bailouts.

Thanks for the research.

See, www.bloomberg.com/apps/news?pid=20601087&sid=aNrHJGK4jnzA&refer=home - Similar pages
Bloomberg.com: Worldwide That bank jv investment overshadows its direct retail banking presence there, which is admittedly minimal.

That is atop its China assets management portfolio (GIF Investment Fund) that exceeds $8 billion. See, www.assetmanagement.hsbc.com/displayArticle?cd_doc_path=/gam/press/2008/jan-jun/russia_fund.html&siab...gam

As for the magnitude of HFC/Beneficial's losses, you are correct. It's known losses are two times the 2003 purchase price. Consider this:
www.bloomberg.com/apps/news?pid=20601087&sid=auMyO4IJpths&refer=home

Inner City Press is a wonderful site that has been tracking the likes of HSBC,AIG,GE Capital and Citibank,for years now. It is a non-profit out of the South Bronx and also covers the UN beat.

It authored a novel entitled Predatory Bender a few years back-BEFORE the present situation.

It also has a specific site called Citigroup Watch.

Here's some links:Inner City Press -- Reporting and Taking Action from the South ... Inner City Press is a non-profit organization headquartered in the South Bronx of New York City which is active in the fields of community reinvestment, ...
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