News reports tell us that in China, after the boom, scams are being uncovered, like we see in USA, with Madoff, et al.
It appears the Chinese government had a program to help domestic industry by subsidizing production. These preferences will always cause malinvestment, no matter when or where they are tried. China has programs that "benefit" the steel business.
In this case, the steel companies produced based on state program funding, and others got bank loans to buy the production of steel for some putative project. Once a company had a warehouse full of steel, they then had assets upon which to get a bank loan with steel as collateral to pursue the business for which they originally wanted the loan.
So, if you need $1 million to open a restaurant, you borrow $2 million from a bank to buy steel for foreign trade, and then warehouse the steel. With $2 million in steel in a warehouse as collateral, you now can get a loan for a million for a restaurant. Complicated, but it gets the job done.
Well, when a bust comes, frauds get exposed. It appears at some point in the game, they decided all this steel was just too much trouble, so they did not bother with the part where the steel was made. It was all just on paper. Now when the state goes to collect the assets when the borrower defaults, they find... yikes! ... no assets. No steel.
Now with war drums beating, maybe this is disinformation to mislead the enemy. But it is probably just typical raw financial shenanigans that takes place in any boom time.
A insider at Washington Mutual bank told me at the height of the real estate boom money to buy up those bundles of mortgages was showing up faster then WAMU could create mortgages. So if they had $100 million more in money available but not $100 million in loans to sell, at one point WAMU just photocopied the last $100 million in loans and sold that too. The idea is at some point the would get caught up in originating loans, and had $100 million in guaranteed financing. Why not?
The damage is done during the boom, the bust is where who pays is decided. Often in history the powers that be change the subject with war. And today we are looking at a whole lotta subject -changing.
Feel free to forward this by email to three of your friends.
It appears the Chinese government had a program to help domestic industry by subsidizing production. These preferences will always cause malinvestment, no matter when or where they are tried. China has programs that "benefit" the steel business.
In this case, the steel companies produced based on state program funding, and others got bank loans to buy the production of steel for some putative project. Once a company had a warehouse full of steel, they then had assets upon which to get a bank loan with steel as collateral to pursue the business for which they originally wanted the loan.
So, if you need $1 million to open a restaurant, you borrow $2 million from a bank to buy steel for foreign trade, and then warehouse the steel. With $2 million in steel in a warehouse as collateral, you now can get a loan for a million for a restaurant. Complicated, but it gets the job done.
Well, when a bust comes, frauds get exposed. It appears at some point in the game, they decided all this steel was just too much trouble, so they did not bother with the part where the steel was made. It was all just on paper. Now when the state goes to collect the assets when the borrower defaults, they find... yikes! ... no assets. No steel.
Now with war drums beating, maybe this is disinformation to mislead the enemy. But it is probably just typical raw financial shenanigans that takes place in any boom time.
A insider at Washington Mutual bank told me at the height of the real estate boom money to buy up those bundles of mortgages was showing up faster then WAMU could create mortgages. So if they had $100 million more in money available but not $100 million in loans to sell, at one point WAMU just photocopied the last $100 million in loans and sold that too. The idea is at some point the would get caught up in originating loans, and had $100 million in guaranteed financing. Why not?
The damage is done during the boom, the bust is where who pays is decided. Often in history the powers that be change the subject with war. And today we are looking at a whole lotta subject -changing.
Feel free to forward this by email to three of your friends.
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