Dec 102009

Title-Rating Mating Game

Ref: 09-038A of 14.Dec.2009 Author: Anil Selarka (Kalidas)

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Some countries do anything to get their aim achieved. They go to any length. The difficulty with the militarily powerful country like United States is that they abuse their power, become arrogant and destroy rest of the world with self centered policies. They also conceal their real intention as if they are fighting a strategic war.

There is absolutely no doubt that United States is in extremely tight corner financially, politically on home front and militarily in Afghanistan and Iraq. Its major concern on Foreign Exchange front is severe pressure on dollar. At the moment, it is trying to keep the interest rate low by printing its way out. The question is – How long? Sooner or later, it will have to come to the market for borrowing trillions of dollars so printed during last 16 months.

If China and Japan do not buy the Treasury bonds or notes, the rates will shoot up to glaring heights, placing enormous pressure on housing market. The recent visit of President Obama and Timothy Geithner (Treasury Secretary) was not for climate change or green technology. Both China and Japan have served them feelers that they will not longer be buying T Notes or Bonds in USD due to extremely high risk of devaluation and extremely low yield. This is why both President and Treasury Secretary have visited those creditor countries to pacify them. Otherwise, what Treasury Secretary has to do with carbon emission or climate change? He is facing worst climate back home.

GIF Animation

So, instead of convincing the other countries, notably China and Japan, it is trying another strategy used during Asian Crisis. Rating and Mating game. Instead of telling China or Japan to buy US$, it will force downgrades of strategic and vulnerable countries, and indirectly telling the major Forex owners not to buy their currencies, in fact sell them. If they sell those currencies, what would they buy? One is selling something against something. Here it is US dollar. In other words, by causing downgrades of those countries below investment grade, the major creditor countries will be indirectly persuaded to buy US dollar even if it is not desirable, almost bankrupt, yields almost nothing and yet it will be made the only alternative.

For instance, Greece considered one of the tiniest and yet corrupts country where one can influence the government policies by controlling the pockets of finance ministers and other cabinet ministers. After Iceland, it was Dubai, now Greece, Spain and United Kingdom. Further, the dollar is pushed up in paper trades – by causing some affiliated or TARP recipient banks to buy the $ Index which is set up against 6 currencies – Euro, GBP, Can $, Aus$, Yen and Swedish Kroner. (I still do not understand why SKR is there in the index. There are bigger currencies like RMB, INR, and South African Rand, which represent nearly 60% of world economies.

The rating agencies like Standard and Poor and Moody would never downgrade US corporations so easily. In spite of US incurring huge trillion dollars of deficits, its status will be retained at AAA level. Why not? US has incurred debt in its own currency US$ – if there is demand, it will simply print out the dollars and hand over to the countries creditors. No country in the world has incurred default on debt denominated in its own domestic currency, because they can print their way out.

If any non-US country incurs more debt into its own currency, these rating agencies act in collusion and threaten to downgrade that country. As recently as now, India, who holds almost $300 billions of Forex reserve, bought 200 tons of gold from IMF, recorded no banking or financial problems, having fastest economic growth of 7.9% and healthy property sector, was threatened with the downgrade even below investment grade due to rising budget deficits.

How about Japan which has highest level of national debt – almost 170% of its GDP – could still be rated Investment grade AA+? Only because Japan is appeasing United States by buying US treasury on demand.

Of late the relations between Britain and USA are not that cordial. Britain is nursing the feeling that it was wrongly goaded into war. It also feels that the present banking problems at home are mainly due to United States. It is almost certain, despite pronouncement to the contrary, that Britain and United States are drifting apart. This is why UK is sought to be downgraded by the US based rating agencies like S&P and Moody’s.

The message is “if you do not meet out political objectives, we will downgrade you and force you bear higher interest cost and devalue your currencies.” Your weakness is my strength – is what they convey.

If the people sell dollars, they buy gold as last resort or buy other English speaking countries currencies like British Pound. Instead of losing “reserve currency” status to either Euro or GBP, US is indirectly influencing rating agencies to downgrade UK so that people do not buy GBP, in fact sell it, instead of holding on to it. The history shows that only two currencies in the world – GBP and US$ – have played alternate role of global reserve currency.

There is a precedent too. During Asian crisis, every thing was pushed down – currencies, bonds, equities, properties and even Gold (because Asians have affinity for gold). The only currency rising was US$. If you cause fire, close down all doors and windows except one window – that is US$ – the people will rush into that window.

Look at the full list of Countries’ rated by S&P. Almost all countries almost bankrupt running into with giant losses in trillions of dollars are listed AAA or AA, the highest investment grade. The dollar block countries who have their currencies tied to US$, are also rated AA+ because they are loyal to USA.

  1. The creditor country like China is rated just A+ in spite of having $2.3 trillions in Forex reserve. Can you believe that? US with giant black hole of $ 2 trillions is still rated AAA and China fully dressed up with $ 2.3 trillions of surplus parked in Forex, is rated 5 notch below to A+.
  2. India is rated at BBB- , slightly above investment grade, in spite of having 7.9% growth in GDP and $300 billions of Forex reserve.
  3. Russian Federation is rated BBB+ in spite of having huge Forex and Gold Reserve.
  4. South Africa is also rated lower at A+.
  5. Almost all commodity countries (except Canada and Australia) are rated lower investment grades. The western countries want cheaper commodities, They rate these countries downwards, so that their Interest cost goes higher, capital markets go lower, and as result currencies go lower to make their buying of commodities cheaper in USD terms.

Almost all funds and pension funds have in charter a provision not to invest into below investment grade countries. The moment country like India is downgraded below investment grade; there will be huge sell off by funds that will bring down Indian Rupee and also entire capital market. The interest rates are also forced up as consequence.

GDP is also understated in respect of commodity countries. For instance, in India 50Million tons of potato will be valued at Rs 4 per pound or just 10 Cents per pound. The same potato will be valued in USA at $ 2 per pound or nearly 20 times intrinsic value. The US GDP looks better and India’s much smaller. Then, these rating agencies use grossly understated GDP numbers to compare with their budget or trade deficits. Obviously, they will look taller, because base is very small compared to western countries.

It is high time the developing countries understand this “Rating and Mating” game and take actions to protect themselves – one of them will be to impose blanket ban for 5 to 15 years on those mischievous rating agencies. Once they are kicked out while playing dirty war games, they will be put on notice not to cause troubles in those fast developing countries. The world will be a better place to live in.

Kalidas (Anil Selarka)

Hong Kong, Ref: 09-038A of 2009.12.10


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Oct 022008

Paulson’s Poison and Antidote

God saved America once in the Congress, convincingly defeating the motion of $700 Billion Bail out engineered by Paulson, aided by Bernanke and promoted by President Bush. However, the defeat means death of Goldman. So the Paulson is at it again, forcing the naïve President to follow his infamous Bush, Bush, Push Push policy to get the bill passed at any cost, this time through Senate. It is easy to manage 100 Senators in the House of Senate than 435 Congressmen in the House of Representatives.


He and Bernanke are showing the Senators the Rocky Mountain of impending economic collapse, with hundreds of carcasses around, each bearing one or the other bank’s name or brokers. These are the banks and brokers who floated the overseas subsidiaries in Bermuda, Cayman Islands, BVI, and host of such “off shore centers” to sell the exotic derivatives leveraged 6 to 7 times, even more- in some cases up to 50 times, into the balance sheets of off shore entities but off the balance sheets of their parents on shore, that is, on American soil. These derivatives were guaranteed later by their parents on shore for a fee – normally 1% to 2% of such transactions.


How we got here?
While the incomes were shown by their parents on their balance sheets, resulting into 4 to 5 times the normal profits associated with their normal range of business, boosting stock prices into upper stratosphere. When the troubles arose, and those derivatives started becoming “cancerous”, they transferred the respective assets and liabilities en masse from 2006 onwards, accelerating in 2007 and speeding up to extreme in 2008. These exotic derivatives turned into Toxic Waste with the result that the crisis started unfolding with the speed of hurricane Category 4, upgraded in September to Category 6 when massive force simply uprooted the banks, investment banks and brokers.

Nothing wrong with the regulatory mechanism…
Lot of blames has been heaped on the regulators for not monitoring or ignoring the worrying signs or warning signals. These derivatives did not exist in the books of the parents at all. They were existing in the books of their off shore subsidiaries which would not have been known to the regulators – they are not God after all. The parents did not disclose their onerous liability nor did they mention the extent of their guarantees to overseas subsidiaries to avoid taxes on the American soil.

When those derivatives turned sour or bad or toxic as they now call it, they transferred wholesale all assets and liabilities to the on shore parents as though they were their original creators. They therefore thrust upon the American citizens on shore, the off shore liabilities to which they were least concerned. How could local and domestic Americans be responsible for the business conducted by some one overseas in off shore centers? A bank like HSBC transferred the Assets and Liabilities of their overseas subsidiaries to the parents’ books by $45 Billions in a flash.


The question arises, if parents were neither involved nor part of original creation of off shore derivatives, and those off shore entities, popularly known as SIV (Structured Investment Vehicles), later busted with billions of dollars of losses, why should their American Parents be asked to shoulder their liabilities, when those subsidiaries were limited liability corporate entities and could have been allowed to die natural death? These American parents, in order to salvage their own reputations, allowed the transfer of Assets and Liabilities of their off shore subsidiaries.


Why Tax Payers should “Bail Out” Off Shore obligations of Parent companies?
The whole concept is outrageous. The local Americans are no way responsible for the actions of some company’s off shore operations. They do not pay taxes, are not governed by American law, do not contribute anything constructive to America, then what for the American Tax payers be asked to bail them out in the name of economy or imminent collapse of financial system? If this is acceptable, then American Tax payers are responsible for any corporation anywhere in the world just because their parents were American at one point of time.


Why Goldman always makes Money, when Competitors lose Billions?
In capitalism, it is a game of survival of the fittest. There are two ways of beating the competition – Healthy way and dirty way. In healthy competition, the better of one company rattles with the best of the other. The musical vibration fills the air and everyone dances on the floor.

Necessity knows No Law
In dirty competition, one survives by eliminating the other, following the principles of animal kingdom. The big fish eats the smaller one. A few decades ago, the British Courts delivered a unique judgment, that later became a legal idiom “Necessity knows No Law”.  The seamen on a distressed boat survived on the flesh of the other human being. It was neither considered Manslaughter nor Homicide, but the acute necessity that forced the survival of the one at the cost of other.


In present financial turmoil of extreme duress, almost all brokers or Investment Banks lost billions every quarter. The likes of Citi Group, UBS, HSBC, RBS (Royal Bank of Scotland) amongst banks having large Investment Banking operation, and Lehman Brothers, Bear Stearns, Merrill Lynch, Morgan Stanley amongst brokers, are found losing billions of dollars every quarter EXCEPT Goldman Sach. They have been making money consistently. Even Warren Buffet was convinced that Goldman has the best franchise, management team and business model to make the money consistently.  He opened his check book and gave them $ 5 billions when no one lends even $ 5 millions to other blue chip company or to even a commercial bank.


So the question arises, what uniquely places the Goldman and what differentiates it from the other competitors? How come they are always on the right side of the trade, so as to make money all the time in proprietary trading operations? What sets them apart from the other giants  like Lehman, Merrill, Morgan Stanley and Bear Stearns in same line of business?


The possible answer is, other brokers were not so close to the US Administration. The Treasury Secretaries like Rupert Rubin (during President Clinton’s Administration) and Hank Paulson, in Bush Administration makes all the difference. Both were ex-Goldman Senior Executives. Goldman is therefore in privileged position to get the  information from close quarters in US administration for over 12 years that other brokers could not or would not.


Why Paulson’s plan came only after the death of Bear Stearns and Lehman Brothers and elimination of giant Merrill Lynch from the market place? Why did not he push the plan well in advance to save those brokers under his proposed $700 billion blow out?  Was it his game plan to eliminate entire competition by decimating Bears Stearns and Lehman Brothers, and removing Merrill Lynch from the scene via its take over by Bank of America so as to give him a killing field in the market place?

Congress Says “Nay”, President says I did not hear you! Work again


President Bush is latching up Congreemen to bail out the bankrupts
President Bush is latching up Congreemen to bail out the bankrupts

 If you can not Convince, Confuse others. They will come round and agree…

The present mood of the Congressmen is somber. They still do not know what had hit them. They are stunned. The Paulson and Bernanke, so called professionals, joined by the departing President Bush, scare the hell out of them. They employ old technique of con men; do this or you will cause that, showing Ground Zero a few blocks away from Wall Street.

What we need today is not the professionals but a few practical persons having common sense. The intelligentsias have to take back seat for a while. There is a famous saying on the stock market – When in doubt, do nothing. However, the Senators and Congressmen are so scared that they do not want to take responsibility if the situation worsens when no actions were taken. They know nothing, and they feel that they have to do some thing. may be they have to do every thing. These professionals, who made this mess at first instance, could not be wrong all the time, they guess.

President Bush does not want to invalidate his 8 years of record of incompetence. He agrees what is put before him by his Fed Chief Bernanke and Treasury Secretary – Paulson.

So let us see, whether man on the street with lots of common sense wins or the intelligent con men who have paramount influence on the poor law makers.

Wait for only one day, and let us pray God to revisit this wrecked country and bless again for the betterment. Oh God, do not leave us to the devious devils – we do come to the church every Sunday and light the candles. Please protect us from the utter destruction. Amen! 

Kalidas, Hong Kong
October 1, 2008