"“We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.” "

Chinese premier Wen Jiabao 12th March 2009

""We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system."

Timothy Geithner US Secretary of the Treasury, previously President of the Federal Reserve Bank of New York.1/3/2009

Sunday, August 19, 2007

Did China trigger Market Meltdown ?

In a very relaxed mood, as dwelling in that warm glow, when Manchester United are thrashed 1-0 by the Blues in our "Derby" match, orders were given to the pantry to break out the Bacardi Breezers and so a slightly lightheaded Toni Fabuloso has been providing me with some long overdue Ayurvedic massage - well that's we call it - something about total body karma she murmers soothingly.

Drifting (as it tends to do at times like this) mindlessly, several possibilities popped up, Collateralised Debt, Blackstone, IPO, China, slump, dollar dives...

Let's begin somewhere near the beginning ...

Stephen A. Schwarzman, 60 (roommate at Yale of Dubya and also member of the Skull and Bones ) is Chairma and CEO of the Blackstone Group LP and co founder with Peter G. Peterson 81 (who is Chairman of the Council on Foreign Relations). This "blue chip" high powered outfit in February this year "purchased" Equity Office Properties in the the largest leveraged buyout ever which required US$23 Bn of funds - a few days later Stephen invited us all to his glitzy party (Rod Stewart provided the entertainment ) to celebrate his 60th Birthday on February 13th. (Cost - US$6 Mn. , but who's counting ?).

On May 20th the Chinese Gubment announced that it's new un-named Investment vehicle ( headed by Antony Leung, Hong Kong's financial secretary from 2001 to 2003, appointed in January 2007) was buying into Blackstone with US$3Bn ahead of the forthcoming IPO at 95% of the IPO price, (The Chinese State holds some US$1.3 Trillion US Treasury Bonds ) . This will give them 10% of Blackstone (for an agreed 4 years) but this was in the form of non voting "investor units" not shares so creeps under regulatory radar. "I see it as the Chinese paying tuition to learn a little bit about how to invest in the rest of the world. " said Trevor Houser on APM radio. - Really ? Sounds like very expensive distance learning.

"To the extent that the state investment company stays below the 10 percent threshold for governmental review...and invests in securities that are liquid, which this security eventually will be, that's a very easy way for the state investment company to put large amounts of money to work with minimum to no controversy," Schwarzman is quoted saying - it also meant that he and his pal could up the IPO offer from US$4Bn. to US$7Bn. (and pocket US$3Bn. more of the readies)

This investment puzzled some folks because the last time the Chinese Gubment tried to invest in the US big style, was when Chinese oil company CNOOC tried to acquire California based Unocal, the folks who had done a deal with the Taliban for a pipleine through Afghanistan (in which famouse pianist Ms.Condileezza Rice helped put together) but which came to a sad end when President Clinton sent the Tomahawks flying into Kabul when his cocksucking girl friend's dirty washing got more publicity than it needed.

Anyway,CNOC pulled out of a bidding war which Chevron won and piled into the sunny seas off Angola at the time.

Perhaps the timing was connected with the visit the following day by Chinese Vice Premier Wu Yi to meet U.S. Treasury Secretary Henry Paulson in Washington to discuss sticking points in trade in the second round of the two governments' "Strategic Economic Dialogue."

Then came the IPO.

Jim Jubak of MSN Money Markets at Street.com called this a "Must Miss" .."a very, very, very bad deal for investors " and added what now appears to be a very astute rider.."I believe investors are about to learn a great deal about this market".

Note. If Jim talks. Listen.

The market he was talking about was the go-go Private equity market in which Blackstone had shown an astounding annual 23% on average for the company's private-equity funds since 1987. Blackstone at the time of the IPO had US$80 Bn. assets under management which according to the offering showed :

US$31 billion in private-equity funds that do buyouts of public companies

US$18 billion in real estate investment funds

US$17 billion in funds of hedge funds

US $7 billion in senior-debt investments

US$6 billion in hedge funds that invest (?) in distressed bonds, stocks, near-equity debt (called mezzanine debt) and closed-end mutual funds.

What was actually for sale in the IPO was a 15% stake in the company that manages all that money that people have invested - or at least, provided them to invest and for which the co-founders wanted seven billion bucks. (Just pause to get your breathe here)

The company structure is BTW a master limited partnership, so investors will be unit holders NOT shareholders - Shareholders get to vote - on everything, investors just sit and watch the founders and hope the profits roll in like they did in the good ol' days.

Jim pointed to Fortress Investment Group who had IPO'd earlier in the year , with US$30 Bn. funds in management - Offered at US$18.00 they soared on the day to US$35 and had dropped back to US$27 when he was writing - Friday they closed at US$17.57. Ouch!!!

Blackstone offered at US$31 (valuing the company at US$33.43 Bn) closed on the first day (June 22) at US$36 and have slumped ever since to close at US$24.71 on Friday. Ouch! Ouch! - 46 days to lose one thrid of your money investment. Incidentally the day Bear Stearns let it slip that two hedge funds specializing in subprime debt ( a market said to total US$600Bn.) run by its asset management arm were facing a sudden wave of withdrawals by investors - On July 10, Standard & Poor’s announced it was downgrading $7.3 billion worth of securities sold in late 2005 and 2006. This was shortly followed by Bear Stearns CEO Warren J. Spector resigning on a Sunday afternoon.

Despite a last ditch attempt by Rep. Henry A. Waxman (D-Los Angeles) to delay the IPO and make changes to the generous tax treatment such deals provide - he proposed that publicly traded partnerships deriving income from investment advisor and asset management services pay the federal corporation tax rate of up to 35% instead of the 15% rate Schwarzman and Petersen enjoyed .. More details of how they end up with an effective tax rate of 5% on the sale profits that Lord Patel explained here recently

Yes folks you read that right - 5% Federal taxes !!

Due to tax cuts introduced by Dubya, Stephen's old room mate at Yale, (who is incidentally a massive funder and fund raiser for the Republican Party).

However that is straying from the point. Investors don't get a vote but if you are the Chinese Gubment and have shelled out US$3 Bn. into the founding partners pockets , the founding partner is going to listen?

Now if they, (or Antony Lueng on their behalf) said "Hey fellas", look at all these funny "collateralised debt obligations" (CDO's) these massive tranches of "collateralized bond obligation"(CBO) balance-sheet CDOs and arbitrage CDOs , these "mezzanine" finance deals, "revolvers" , "ramp-ups" we have too much exposure .

Blackstone had US$13 Bn. and a further US$17Bn. in hedge funds who were heavily exposed - " ..let's unload them", says Antony Leung. Maybe. Who knows ?

Now if a big mover like Blackstone starts to dump ..... is that a shot across the bows in the first battle of economic warfare ?

Just a thought.

Fast boats in China

So it seemed sensible to see what reaction is in China to the gyrations of the market and looked at the English Edition of China People's Daily

..Passenger numbers on Chinese airlines rose to 86.7 million in the first half of 2007,16.7% on last year....construction began on the construction of the main body of the first nuclear power station in NE China at Dalian, Liaoning province ..... China on way to being world's second largest exporter this year .... China now marketing 1.5 MW wind powered generator ...

Highlighted and eye catching however was the news about Racing at day 2 of the Qingdao International Regatta, the first Olympic Test Event for sailing in preparation for the 2008 Olympic Games.

In the Women's 470 classes in which the Swede Mrs Therese Torgessen is leading (crew Vendela Zachrisson) - after a disappointing 5th at Cascais in the ISAFChampionships recently, in which Britain's Christina Bassadone and Saskia Clark won a bronze medal but who are trailing at 15th so far.(Official website) .

Just downloading this pic of some happy sailors in the sun and Toni Fabuloso cracked open another Bacardi Breezer and said some more Ayervedic massage was needed.

She talks about Kapha disorders which manifest emotionally as greed and possessiveness and physically as obesity, fatigue, bronchitis and sinus problems.

President Hu had a good time fraternising with all the other members of the SCO and the wannabees, and got nicely treated.

Remember when some mad Chinese journo "crashed the Press conference" at the White House Rose Garden last April and embarassed visiting President Hu for a several minutes ? Talk about meeting a host of indignities."President Hu, your days are numbered!" and "President Bush, stop him from killing!" , "President Bush, stop him from persecuting the Falun Gong." shouted a Falun Gongist in both English and Chinese who had upstage his predecessor Jiang Zemin, in Malta 5 years previously.

This followed the band who the crowd were told would play the "national anthem of the Republic of China" -- the official name of Taiwan - no Chinese flags on the lamp posts, and "official visit" not a "formal visit" a "lunch" and not a "formal dinner".... granting a press pass to granted a one-day pass to Wang Wenyi of the Falun Gong publication Epoch Times - the White transcript that day politely airbrushed her 3 minute tirade calling it an "audience interruption."

Wal Mart and Home Depot ,2 of the US's major retails report sales slowdowns, lower returns, GM and Ford have cut 2007 sales forecasts .. Jumbo mortgages (over US$400K) rates have gone from 6.25% last month to as much as 8%.

Don't mess with Hu.

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