Janet Tavakoli: China's Massive (And Unknown) Derivatives Default
October 6, 2009
Submitted to The Daily Bail by Janet Tavakoli
China Defaults, Currency Basket Threatens Dollar
Robert Fisk exposed revived discussions by the Gulf States, China, France, Japan, Brazil, and Russia to replace the dollar as the benchmark oil trading currency with a basket of currencies including gold within 10 years. This proposal is not new and discussions have been ongoing for decades. But other extraordinary moves in the capital markets suggest we should take this threat to the dollar’s position very seriously. For example, China has $2.3 trillion in currency reserves (about 70% in dollars), and China knows how to get its way.
In November 2008, Chinese banks said they would no longer play by our rules. Top tier banks (Bank of China and Industrial and Commercial Bank of China) reneged on derivatives contracts. They failed to come up with billions in collateral on dollar/yen FX trades, which were out of the money after the yen’s October appreciation. This should have been headline news in every financial newspaper, but it wasn’t.
Chinese banks defaulted. They may have been partially motivated by U.S. malfeasance in the capital markets that caused losses in Asia. The U.S. squandered its credibility and our cover-ups have done nothing to restore it.
Most credit support annex agreements would say that closing out these trades would be an event of default, and then the cross default on all the trades would kick in with the same counterparty. But the credit of the Chinese banks was better than many of their counterparties. Everyone was forced to renegotiate contracts with the Chinese banks.
From the perspective of the derivatives markets, this is earth shattering. What would have happened if AIG had done the same thing? (Hey, Goldman, UBS, and others…you want your collateral? Well…Stuff It!)
At the end of August 2009, China signaled that state owned oil consumers: Air China, COSCO, and China Eastern could default on money-losing commodities derivatives contracts.
If we had been paying attention, the U.S. should have done everything in its power to correct our mistakes, clean up the mess in our financial system—instead of sweeping it under the carpet—and turned our efforts to maintaining the credibility of the capital markets and the credibility of the dollar.
Janet Tavakoli Article Collection
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Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).
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Oct 6, 2009 at 1:49 PM
Reader Comments (10)
SAME TOPIC, DIFFERENT SLANT:
Who Oversees the Legitimacy of Derivative County-party Claims?
http://letthemfail.us/archives/2147
Good work, JT and DB!!!
Did I just read that and interpret it correctly? Is Goldman Sachs the authority by which derivative counter-party claims is judged legitimate? Could that explain how Goldman appeared to be the de facto “regulator” who decided that they themselves should receive no haircut on their $12 billion counter-party payment through the AIG bailout, endorsed and enabled (if not extorted) by former Goldman Sachs CEO, then Treasury Secretary, Hank Paulson?
http://www.breitbart.com/article.php?id=CNG.e272eaa74dccc30f21c6ff7638b0f37b.461&show_article=1
The Dollar is under attack...
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/6255816/World-Bank-could-run-out-of-money-within-12-months.html
The Real Reason the Giant, Insolvent Banks Aren't Being Broken Up--excellent
http://www.washingtonsblog.com/2009/10/real-reason-giant-insolvent-banks-arent.html
How Big is $9 Trillion? – Willful Omissions From Paul Krugman
http://politicalmath.wordpress.com/2009/08/25/willful-omissions-from-paul-krugman/
GOLDMAN SACHS WIVES HATE TO WAIT--this will piss you off...
http://www.nypost.com/p/pagesix/goldman_sachs_wives_hate_to_wait_VddIjS4IenJXTwP5ihUg1M
Janet says “From the perspective of the derivatives markets, this is earth shattering. What would have happened if AIG had done the same thing? (Hey, Goldman, UBS, and others…you want your collateral? Well…Stuff It!)”
Now, I am really confused, AIG did do the same thing. The U.S. government stepped in and became the settling institution and in taking that role, they spent almost $170 billion. Is Janet saying that the Chinese government should have been the counterparty and kicked in their share of the failed portion of the collapsed derivatives market? The cries for an orderly unwinding of the derivatives market was all I heard about at the time. Did China take the U.S. to the cleaners and, if so, how much did they fleece us for? Is China participating in the new derivatives?
Janet talks about credibility and this is the most important point and the dollar may even deserve its beating. The Fed will be using inflation to pay off our massive debt. Penske put an end to the Saturn deal with GM for that very reason. Ditching the dollar is what the oil cartels want because they know the future of the dollar as well. I doubt that the Fed will have the ability to do it smoothly over the next 5 to 10 years if we even get that much time.
My prediction is that the future of the U.S. will mirror that of England. After college, the best and the brightest whether it is with the first company they work for or to find the opportunities will pack up their stuff and go abroad. If they stay here in the States, their quality of life is only going to get worse.
Put derivatives and the like in the front of the casino next to the oversized slot machines with the synthesized spin and ding sounds. In fact, let the Las Vegas Sands handle the entire derivatives market. Give them a 2% cut in the action and they will keep everyone more honest than the Wall Street mafia and the inept SEC and Fed. Goldman Sachs and the like will continue to flout the system until the well is dry.
For now, we get to see the liberal media portray Norway as the best place to live. If only every country with a miniscule population had a gigantic oil pension fund. Every pathetic liberal media outlet is showering us with articles that have the obvious support Obama’s Marxist-Socialist agenda slant. Even with Norway’s single-payer system (no copayments and spa treatments), many still opt out because of the wait and the level of care.
Okay, I got a little off topic, sorry. Janet, please oh please keep explaining this stuff to us. There are so few points of reference these days. Thanks.
"I wish I understood everything Janet says and the implications and consequences but I just don’t. How is China’s inability to come up with the additional collateral any different than AIG’s."
She's made this point in the past so I know what she means...she is a firm believer that AIG (the government) should not have paid claims at PAR...she was sarcastically referencing the fact that the Chinese banks had more balls than our gov't had...
"Is Janet saying that the Chinese government should have been the counterparty and kicked in their share of the failed portion of the collapsed derivatives market? The cries for an orderly unwinding of the derivatives market was all I heard about at the time. Did China take the U.S. to the cleaners and, if so, how much did they fleece us for? Is China participating in the new derivatives?"
She's not really criticizing the Chinese and she's not saying the Chinese gov't should have stepped in...she's simply commenting on their chutzpah for staring our banks down and winning...and she's implying that our gov't was afraid to do the same thing...
Her comment about earth shattering was PURE sarcasm...she was making the opposite point...that there was no calamity in the derivatives market as a result of the Chinese action jsut like there would have been NO CALAMITY here had the gov't (AIG) decided to pay out only 50 cents...through a renegotiation just like the Chinese banks demanded re-negotiation of the contracts...
Hopefully, that explains her thoughts further....you have to remember her intense sarcasm to get her points occasionally....
But I realize, you wanted Janet herself to comment so I will leave it open for her to do so if I got anything wrong...
It's worth pointing out that her comments here echo Whalen's. We apparently have economists and other pinheads running the show who have never heard of re-negotiating a contract. That's one of the things that always infuriates me about the "chain reaction" meltdown arguments regarding CDS and other derivatives. I mean, seriously, wtf? Just because there's a contract doesn't mean it's going to work like a physics equation. A CDS doesn't have to be paid off at par just because some lawyer says it's supposed to. Or at the very least, it doesn't have to be paid off right away. To hear Geithner and Bernanke talk, if AIG didn't pay out (at par) the world would have ended. But what they forget -- and neither of them has ever had a real job since graduating from college -- is that the money doesn't just get sucked out of the counterparty by magic. Even your average professional tough guy knows as much -- that just because John Doe owes "The Boss" some money, that doesn't mean it won't take a little "persuasion" to get it out of him. By the same token, if a BK judge says tough titty on these here CDS thingies, then that's it. Tough cookies.
Just look at residetial mortgages for Pete's sake -- what do Geithner and Bernanke think defaults and delinquencies are about? Yeah, the contract says they're supposed to pay on time "at par," but if they don't... I guess these punks have only the most superficial, abstract notion of what a charge-off is.
"GOLDMAN SACHS WIVES HATE TO WAIT" Further evidence of their contempt for the rest of us, they should be on their knees begging for our forgiveness for their husbands robbing us. But instead they wear that robbery as a badge of honor, their husbands have taught them well...
"All we need is a printing press and some paper..."