Sunday, November 10, 2013

(OT) US Fed's Purchase of MBS (Part of QE) after the "Lehman Shock" Were For Foreign Governments, Foreign Central Banks, Foreign Investors, Says Nikkei

I just saw this article at Zero Hedge "The Biggest Difference Between QE3 And QE2", which wonders aloud at the end:

But when more than half of the proceeds of QE to date... have ended up at foreign banks, perhaps at least a theatrical congressional hearing is in order?

That has brought to mind an article that I read yesterday in Japan's Nikkei Shinbun, which said part of the quantitative easing by the US Federal Reserve after the so-called "Lehman Shock" in September 2008 was not so much about helping the US domestic banks or the US housing market but about responding to the demand for the US action from foreign governments for their financial institutions, particularly from China and Japan, two largest foreign holders of the US treasuries AND mortgage-backed securities issued by Fannie Mae and Freddie Mac.

In the US, the purchase of mortgage-backed securities (MBS) issued by Fannie and Freddie by Federal Reserve has been explained as measures to support the housing market. It's that way even today.

From Nikkei Shinbun (11/10/2013; part):


Two months after the "Lehman Shock", the US Federal Reserve decided to purchase long-term bonds issued and guaranteed by the US government corporations [Fannie Mae adn Freddie Mac], as emergency response measures. It was the beginning of the extraordinary monetary easing that still continues today. What forced Chairman Ben Bernanke's hand was the cry for help and the pressure from foreign governments, including Japan and China.


November 24, 2008 at night, Federal Reserve Board in Washington DC. "I will announce it tomorrow. Prepare the package for additional measures as soon as possible. One-page summary, and quick." Bernanke instructed the staff with a slight quiver in his voice.


Early next morning on November 25, Federal Reserve Board called an emergency meeting and decided on the emergency response measures that centered on the purchase of long-term bonds issued and guaranteed by Fannie Mae [and Freddie Mac].


8:15AM US Eastern time. The announcement by FRB was typed on one page, in 13 lines. The total amount of purchase by Federal Reserve would, however, be 600 billion dollars. It was the beginning of an extraordinary measures whereby Federal Reserve, central bank of the US, would buy bonds directly from the market.


"Our first priority was to assure the market. There was little basis for the amount," says an aide to the chairman at that time.


Why did Federal Reserve choose to buy the long-term bonds issued by Fannie and Freddie? The official (ostensible) reason was "to support the housing market which was the cause of the financial crisis". However, there was an "international pledge" [as the real reason] that the US government had made right before the "Lehman Shock".


On the night of September 7, 2008. Treasury Secretary Henry Paulson had just announced the effective takeover of Fannie and Freddie, and he was now on the phone. "The US government will now fully back these companies." The Treasury Secretary was talking to the Chinese counterpart. Paulson also conducted a teleconference of G7 finance ministers, and made a pledge that the US government, for the first time, would guarantee the bonds issued by Fannie and Freddie.


It was clear that the collapse of the housing bubble left Fannie and Freddie deeply insolvent. In the meantime, the long-term bonds issued by them were estimated at that time to be about 1.5 trillion dollars. These bonds were considered high grade with implicit guarantee of the US government, and held by more than 130 entities such as governments, central banks, and institutional investors in Europe and Asia.


The two most worried countries were China and Japan, whose holdings were No.1 and No.2. President Hu Jintao of China pressured the US by threatening to sell its large holding of the bonds even at a loss.


At one time, a plan was being discussed whereby the Japanese government would take over (buy) part of the Chinese holding. If China dumped the bonds from Fannie and Freddie the damage to the international financial markets would be immeasurable. It didn't come to pass, but "Japan and the US were seriously considering the plan" (according to the source in international finance). The situation was very tense.

(Full article in Japanese at the link)

Slight quiver in his voice. That's poetic of Nikkei, but I think Mr. Bernanke's speaking voice always sounds like that.

By the way, how much Fannie and Freddie papers did China and Japan have at that time?

China had over 500 billion dollar worth of mortgage-backed securities from Fannie and Freddie, and Japan had over 250 billion dollars worth. The third largest holder was Russia, at slightly over 50 billion dollars.

From Nikkei (English labels are by me):

China and Japan were worried, Nikkei says. China threatened to dump, Japan was willing to buy what China would dump. In 20-20 hindsight, if China had dumped and Japan had picked up those MBS at a significant discount, maybe Japan would have no problem paying for the nuclear accident cleanup. Oh well.

Nikkei doesn't say why Federal Reserve was worried enough to start purchasing the MBS from Fannie and Freddie at that time. I don't remember the reason myself. All I remember was that the stocks of investment banks like Goldman Sachs, Citi, JP Morgan Chase were on a free fall in November, and a extra large downward pressure was on the stocks on November 21, 2008 which was Friday. After the announcement by Federal Reserve on November 25 next Tuesday, the stock markets were lifted somewhat, but all it did was to not fall for the duration of the year.


Anonymous said...

As the article states, China threaten to start dumping US paper. Worse than the major banks going belly up because of all the derivatives (swaps) based on US real estate, was that everyone and their mother would sell US paper even at great losses and ruin the US dollar as the reserve currency (conversion would flood the markets with cash driving down its worth). Enter the US Treasury (Paulson) to guarantee the paper between major governments.

US major banks only used the opportunity to trade with other people's money to try and sustain their profit margins to support an unsupportable Ponzi scheme going on in MBS investments (1 house supports 40+ investors).

China has to be the dumbest bunch of investors by buying US debt to in turn sell real goods back to the US. Could be considered junk products but real nonetheless versus all the bad paper they were collecting. They have lightened up since. Now buy any US paper direct, bypassing the banks to save commission costs.

M. Simon said...

Look up "robo signing" to find out why the MBS market was shaky. Also "mortgage derivatives" .

Nice explanation here:

arevamirpal::laprimavera said...

M. Simon, long time no see!

Yup. Robo-signing and CDO, plain, square and cubed. I even made a video using animation...

Read the following, more... said...

2nd Part of posted excerpt=
These are a few of the other recent significant inroads into the American economy made by the Chinese government’s sovereign wealth funds (SWFs) and Chinese corporations (most of which are state-owned enterprises, SOEs):

• Huawei Technologies — In 2010, national security concerns barred Chinese telecom behemoths Huawei Technologies and ZTE Corp. from a multi-billion contract with Sprint Nextel Corp. But Huawei, which is the world’s largest telecom equipment manufacturer and is closely tied to the Chinese government, continues to make headway in the United States nonetheless. It has a major corporate center in Dallas, Texas, and has opened a new research center in California’s Silicon Valley.

• U.S. shale gas — Sinopec Group, China’s huge energy SOE, has taken a $1 billion stake in Chesapeake Energy Corp’s Mississippi Lime shale formation.

And China, Inc., flush with trillions of dollars in cash, is just getting started. “Investors around the world may be cooling on the U.S., but not China,” noted a CNBC report in January 2013. “Chinese investment in the United States will likely break another record in 2013, according to research firm Rhodium Group. That’s after a record year in 2012 with deals worth more than $6.5 billion, a 12 percent increase from the previous record of $5.8 billion in 2010,” [The Rhodium Group is a globalist financial analysis outfit tied closely with the CFR]

Lining Up: Governors, Mayors, CEOs For state and local governments and private companies teetering on the financial precipice, China is the new Daddy Warbucks — and they’re all lining up to plead for his favor. In February 2012, California Governor Jerry Brown announced the formation of “a China-California Joint Task Force to drive more collaboration, investment and trade” between California and China. “I am creating a task force,” said Brown, “that will work with Chinese states and the central government.”

Also in April, another delegation of four state and territorial governors headed to China to participate in the third U.S.-China Governors Forum in Tianjin: Iowa Governor Terry Branstad (who led the delegation), Guam Governor Eddie Calvo, Virginia Governor Bob McDonnell, and Wisconsin Governor Scott Walker. The first forum was held in 2011 during the National Governors Association (NGA) Annual Meeting in Salt Lake City, Utah, where four Chinese provincial leaders participated. The second forum was held in Beijing in the fall of 2011.

Even the two top rated conservative states (Utah and Idaho) are seeking Chinese investments. Idaho’s Governor Butch Otter and Statesman Rocky Barker. This led to some hype on the internet a while ago saying that Ottor had inked a deal with the Chinese to sell 50 square miles of land near Boise for a new Chinese self-sustaining city south of Boise. The Intel Hub claimed that

"The planned 'self-sustaining city' in Idaho would include manufacturing facilities, warehouses, retail centers and large numbers of homes for Chinese workers. Basically it would be a slice of communist China dropped right into the middle of the United States."

That wasn’t very accurate. The Idaho Statesman published a more realistic scope of the project:

The article outlines Chinese national companies' interest in building and financing a fertilizer plant near American Falls, and developing a "10,000- to 30,000-acre technology zone for industry, retail centers and homes south of the Boise Airport."

Read the following, Part 3 said...

(Continued from 2 previous posts above)
But, the main concern of conservatives is valid. The Chinese are buying up a lot of US land and businesses and cash strapped cities and states are looking for a financial savior:

Many other similar delegations have been trekking the same routes, chasing the same coveted China dollars. As we note in our article “Will China ‘Save’ Detroit?,” Michigan Governor Rick Snyder is pinning much of his hopes for economic revival for Detroit and the state on Chinese investors, and in September he led his third trade mission to the People’s Republic.

Jasper correctly pointed out that the push to promote Chinese investment in the US is coming from the same globalists in the CFR and Trilateral Commission that were promoting US/Russian relationships during the cold war as a way of boosting the enemy’s economy:

China’s investment in the United States is a win-win situation, they [promoters] insist. That is the thrust of Policy Innovation Memorandum No. 13, published by the New York-based Council on Foreign Relations (CFR) in 2012, under the title “Fostering Greater Chinese Investment in the United States.” The study was written by David M. Marchick, managing director of the Carlyle Group, the huge investment firm ($180 billion in assets) that has been very bullish on China.

The Carlyle Group is deeply involved with the dark side of government, owning mercenary military contractors and repeating millions in government contracts. Marchick argued.

“Critics argue that Chinese investment could compromise U.S. security interests and lead to job offshoring,” he continued. “While Chinese acquisition of certain U.S. companies in the defense or technology sectors would create national security concerns, the preponderance of potential Chinese investments in the United States would raise no such issues.”

The US government both inhibits some Chinese investments in sensitive technology and allows it when they can let it pass. The most sensitive military technology often finds its way to China via the US transferring it secretly to Israel and letting Israel sell it to China—a backhanded way of helping Israel make millions in profits at the expense of world security.

According to the CFR’s Marchick memo, “Most Chinese investments have not and should not raise real concerns.” That is a theme echoed repeatedly by panhandling politicians, Chambers of Commerce, trade associations, and investment funds. Even so-called conservative think tanks, such as the Heritage Foundation, belittle national security concerns when there’s money to be made. In a July 16, 2013, paper, “China’s Steady Global Investment: American Choices,” Heritage writer Derek Scissors, Ph.D. claims: “In terms of national security, ownership of Chinese firms does not matter.”

Really? Everything that goes over to the People’s Republic of China should matter greatly and should raise real national security concerns. As Jasper pointed out, bluntly,

The fact is that China is a communist country, ruled by the Communist Party, which officially views the United States as its “Number 1 Enemy.” Notwithstanding the three decades of propaganda — by the regime and its Wall Street and American media allies — China has not “gone capitalist,” at least not in the sense of adopting free-enterprise capitalism. The so-called economic reforms of former premier Deng Xiaoping ushered in an era of “state capitalism” that created giant government corporations that are instruments of the state, whose sole purpose is to serve the interests of the communist state. Chinese companies, whether openly state-owned (SOEs) or nominally “private,” are tightly controlled by the Chinese Communist Party (CCP), the People’s Liberation Army, and the Chinese security services.

Read the following, cont. said...

(Part 4 of in-depth excerpt, previous posts above)
In its November 2012 report to Congress, the U.S.-China Economic and Security Review Commission (USCC) noted that China’s “government employs its corporations to advance its foreign policy objectives and international commercial interests.” The USCC’s 500-page report provides many examples of China’s ongoing, aggressive program of industrial espionage, intellectual theft, and cyber warfare directed against American industries, utilities, and financial institutions, as well as U.S. federal, state, and local government entities. The report states:

China depends on industrial espionage, forced technology transfers, and piracy and counterfeiting of foreign technology as part of a system of ‘‘innovation mercantilism.’’ China can avoid the expense and difficulty of basic research and unique product development by obtaining what it needs illegally. China’s success is evident, in part, by the large increase in the U.S. trade deficit with China on advanced technology products.

Let’s assess the why of Chinese investment. This is where I’m going to diverge from the New American’s view (and the John Birch Society). They still labor under the misconception that the globalists control Russia and China and that they are trying to peacefully merge the world into the New World Order and, more importantly, since they globalists control the “communists” they will never allow them to attack the West with nuclear weapons.

It’s called the “convergence theory” and it stems from a piece of disinformation planted by Rowan Gaither, head of the Ford Foundation when interviewed in 1954 by Norman Dodd of the Reese Committee, investigating why the foundations were promoting communism.

We operate here under directives which emanate from the White House... The substance of the directives under which we operate is that we shall use our grant making power to alter life in the United States such that we can comfortably be merged with the Soviet Union.

The trouble is, it wasn’t true. No conspirator like Gaither would have told the truth to an investigator like Dodd. Gaither merely gave him a plausible excuse to divert Dodd from the more sinister truth that the PTB were building a future enemy in order to create a war that would allow the destruction of US sovereignty and merger into a world government. Here’s Jasper’s explanation of what the PTB are up to in promoting Chinese investment:

Marchick is revealing the real reason for the current all-out push by the CFR and its corporate/banking/think-tank network to knock down all barriers to the trillion-dollar tidal wave of Chinese cash that will cascade into the American economy: to further their planned economic-political-social “convergence” of China with the United States.

Yes, if you want to neutralize domestic opposition to a political-economic merger between China and the United States, it makes eminent good sense to make as many Americans as possible totally dependent on Chinese companies for their livelihoods. That is clearly where the globalist elites at the Council on Foreign Relations intend to take us.

But the goal is not peaceful merger, nor dependence, either from the US globalist point of view or the Chinese—because both know that ultimately when that “merger” would take away rights, there would be a rebellion and whoever was in charge would have to use force. That’s why they are going for war as the ultimate catalyst for change, because when devastated, a people accept unpleasant things much more easily.

Final Part of Read the following: said...

(5th & Final Part of a multiple-part post; see preceding sections above)
In reality the Chinese are investing in the US as a means of using up the billions in foreign exchange they are holding, rather than selling them into the market which would drive down the value of both dollars and US bonds. They get more bang for their buck by buying commodities, businesses and real estate than by staying in the paper markets.

But that’s not all the Chinese have in mind. They do intend to subdue the West militarily someday, but they don’t want to do it by destroying the US economy with nuclear weapons. They, in concert with the Russians, intend to take down only military targets and the electric grid with EMP weapons, in order to blackmail the US into submission to a Russia/China dominated global government. In other words, don’t destroy the infrastructure—just destroy the military and the nation’s governability in order to induce capitulation from the social unrest and chaos.

I note that Chinese investment locations in businesses and real estate are not close to future nuclear targets. Most are in safe areas. They are interested in some high tech companies in Silicon Valley, San Diego and even the Seattle area, where they can harvest the technology and don’t need the facilities to survive. But they are staying clear of the real danger areas for major infrastructure investments. I’m sure they realize that those entire cities will experience severe unrest during a nuclear war, but the infrastructure they are buying into will survive physically and can be rebuilt when they see themselves taking over. That tells me they are aware of the need to avoid direct military targets.

The bottom line is that Chinese investments in technology are dangerous to national security and should be blocked. Investments in existing consumer goods companies and real estate development are not directly a threat, except as we allow the Chinese to gain more value out of the dollars they have accepted in exchange for their products. I personally believe, as a matter of law, that no foreign citizen ought to be allowed to buy property in the country unless they qualify for US citizenship.

The Chinese don’t intend to claim sovereignty over these land purchases as some have surmised, unless they are successful in conquering this nation, and then it’s a moot point anyway. I don’t believe the globalists, even though they are facilitating the rise of our enemies, intend to let them win. Rather, the war is a necessary stepping stone to drive US citizens into accepting a militarized world government with real power that they would otherwise reject.

Copyright Joel Skousen
October 25, 2013

Now, you should know.

Read the following. said...

I would simply like to know, where the first part of my long posts above, went to? After posting the 5th & final part (Sorry for the length, but it is EXCELLENT, ACCURATE KNOWLEDGE), I did see that all 5 parts were visible, #s 1-5; now upon returning to this page, that is not so, only pts. #2-5 are up.

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