Tag Archives: subprime

Chinese ‘Shadow’ Banker In Defence Of Raping Peasants

10 Jul

In a timely follow-up to yesterday’s post, we see that the steep rise in small business loans by Australian bankers at usury rates of 17 per cent or more, really has nothing on the Chinese ‘shadow’ banking industry.

From Bloomberg (via the Sydney Morning Herald):

“Although we charge about 24 per cent annually for our money, demand remains virtually unlimited.”

In the autumn of 2010, as deputy head of China investment banking at UBS, I spoke to a group of wealthy investors in Beijing about the outlook for Chinese stocks.

A rumpled, 50-something man from Hangzhou named Wang Zhigang pulled me aside afterward and asked for my advice about investing. Until then, he had made his money through kerbside lending, not stocks. But, he lamented, his returns had dropped from more than 30 per cent a year to a mere 23 per cent. He worried about his personal fortune, which he had built up from nothing to almost 3 billion yuan (about $US490 million then).

He hardly needed my advice, I told him. ”With your performance, even Ba-Fei-Te should farm out some money for you to manage!” I said, referring to Warren Buffett’s name in Chinese.

Intrigued, I flew to Hangzhou a few days later to find out how Wang had done so well. He drove me to the Haining Leather Market to meet some of his customers. They were merchants of leather shoes, handbags and accessories. Their network was wide and close-knit, and they sold products globally through traditional channels, as well as online.

Twenty years ago, these guys would have looked like small fish to a traditional bank. Even after their businesses had grown exponentially, they couldn’t supply the kind of collateral banks demanded. Yet these merchants needed money and fast. So they turned for help to ”shadow” bankers such as Wang.

There has been a lot of talk lately about shadow banking in China. Between kerbside lenders, microcredit institutions, pawnshops, trust loans, ”wealth management products” from banks and other components, this murky and unregulated financial universe is now worth an estimated $US5 trillion ($5.5 trillion), challenging the dominance of the traditional banking sector. Such unrestrained growth naturally worries China’s central bank, which fears a flood of bad shadow loans could prompt a financial meltdown similar to the US subprime crisis in 2008.

A liquidity squeeze in June, when the central bank allowed interbank lending rates to rise as high as 20 per cent before intervening, was widely interpreted as a warning to banks to clean up shadow portfolios.

China’s shadow bankers are easy to demonise. Like Wang, many are seemingly unsophisticated. Their methods are unorthodox, possibly even unsavoury. Their loans don’t show up on balance sheets. They look like a disaster waiting to happen. I believe these fears are misplaced, and I should know: Eight months after my visit to Hangzhou, I became a shadow banker.

Since 2011, I have run a microcredit firm in Guangzhou, which provides loans to thousands of small-scale entrepreneurs: florists, restaurateurs, fish farmers, vegetable growers, hawkers.

Although we charge about 24 per cent annually for our money, demand remains virtually unlimited. Our customers are too small and unstable to get traditional bank loans. At the same time, because we keep our loan amounts small – $US20,000 apiece on average – and because we have close contact with our clients, the business has proved reasonably secure. Our bad debts have not strayed above 5 per cent since the firm was founded five years ago.

This month, I visited Wang again. A few borrowers had defaulted in recent months, he told me, but unlike some competitors, he had been ”extremely lucky”. He was scrupulous about lending only to clients and businesses he knew well, and experience had given him a good eye. ”This is my hard-earned money; I have to be careful,” he said. ”My family was dirt-poor when I was a child. I am just so afraid of becoming poor again.” Wang’s fortune had almost doubled since I last saw him.

One cannot defend a $US5 trillion industry with a couple of examples. Two of Wang’s colleagues had been wiped out in the past year after large borrowers defaulted. Several other informal lenders in Hangzhou had ended up behind bars after disgruntled investors accused them of fraud. In recent weeks, news reports have described mass bankruptcies among small businesses that had borrowed heavily from shadow banks at exorbitant rates.

But neither should one condemn all of shadow banking because of stories like these. Shadow banking is well diversified and serves a legitimate customer base. By and large, it has much lower leverage than banks or corporate China. Losses at shadow banks are often absorbed by entrepreneurs themselves, without affecting the taxpayer.

Even the ”wealth management products” offered by regular banks are not to be feared, because they are just deposits, pure and simple, whatever the theoretical distinctions. I buy them myself.

Certainly, the sector could stand greater supervision. But many of the regulations in place are vague and unreasonable. Authorities have never clearly defined something as fundamental as what constitutes ”illegal fund-raising”.

Microcredit operations, such as ours, are allowed to borrow from no more than two banks for any more than 50 per cent of their equity capital. Why only two banks? Why only 50 per cent? These restrictions are arbitrary and limit our ability to lend to underprivileged customers.

The government and the media are making a scapegoat of the wrong culprit. Shadow banking has flourished in China for one reason: financial repression. By keeping interest rates artificially low, authorities have forced savers to search for more lucrative financial products. By favouring banks – which, in turn, favour state-owned or well-connected private-sector companies with loans – they have forced small enterprises to seek out people like me and Wang.

Meanwhile, projects that might look sketchy at 9 per cent interest rates suddenly look feasible at 6 per cent. Under such conditions, traditional banks have steadily lowered their lending standards – from prime loans to subprime and then to simply silly loans.

Sound familiar? That’s how the 2008 financial crisis began, too. Leaders are right to worry about the possibility of a banking crisis in China. But instead of focusing their ire on shadow bankers, they should raise benchmark interest rates in order to reduce the amount of credit flowing to dodgy loans through the formal banking sector. The threat to China’s financial system is right there – out in the open – not lurking in the shadows.

This is a very cunning apologia for his profit-making machine, by shadow bankster Joe Zhang.

His self-serving moral relativism is breathtaking. And nauseating.

In former UBS (Swiss) banker Zhang’s self-justifying mind, the fact of his (and other carpetbagging main-chancers of his ilk) making fast, vast personal fortunes by charging peasants “about” 24% interest for small loans of “credit” — using “methods” that are “unorthodox, possibly even unsavoury” — is actually a good thing.

So many poor peasants “helped”, you see.

Never mind that all the “money” originates as little more than digital bookkeeping entries.

In China’s 1.35 billion people, the predatory masters parasites of the international banking universe have always seen a vast pool of potential slave labour.

A rich human resource to be exploited (and ultimately, controlled), just like everyone elsewhere.

Through usury.

Offering “credit”. At “interest”.

Little do they care if thousands of small remora like Zhang come along for the ride.

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At fellow anti-usury activist anonemiss’s superb Applied Philosophy, see also:

Micro Credit is Usury

Micro-Usury Shows Its Ugly Face

“Generate Your Own Capital Through Savings” – Shoaib Sultan Khan

Fresh Financial Crisis “Around The Corner”

31 May

More warnings that GFC 2.0 is on the way … and that those toxic financial inventions called derivatives will be front and centre again.

From Bloomberg:

Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is “around the corner” because the causes of the previous crisis haven’t been solved.

The total value of derivatives in the world exceeds total global gross domestic product, creating volatility and crisis in stock markets, Mobius told reporters inTokyo today.

“Are the banks bigger than they were before? They’re bigger,” Mobius said. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”

The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. subprime loans and contributed to the collapse of Lehman Brothers Holdings Inc. in September 2008.

How relevant is all this to Australia?

Very.

Australia’s Big Four banks have recently been downgraded by Moody’s credit rating agency, mainly due to their reliance on off-shore borrowing.

What this means in practice, is that another GFC-style credit “freeze” in the USA and/or Europe would again bring our banks to their knees in a matter of weeks, begging for Government (ie, taxpayer) financial support.  The granting of which is exactly what has brought Ireland to the brink of total bankruptcy.

Even more worrying, Fitch’s credit rating agency recently placed 54 ‘tranches’ of Australian residential mortgage-backed securities (RMBS) on ratings watch “negative”, due to increasing arrears by overstretched mortgage borrowers.

These are the same kind of exotic financial derivatives that brought down the USA financial system.  And the same clever “investments” that Wayne Swan has poured $20 Billion into.  What’s worse, Wayne has even invested in RMBS that include “low doc” loans. Can you say “sub-prime”?

But in my view, perhaps the biggest concern of all is our banking system’s combined $15 Trillion in Off-Balance Sheet “Business”, which is mostly in, that’s right, derivatives.

Barnaby was right.

How Wayne “Franked” Another $20 Billion

27 May

It’s long past due time that Wayne Swan formally adopted the name of his alter ego, Frank Spencer.

From ceiling insulation to school halls to “green” loans to computers in schools to set-top boxes, every “investment” that our Treasurer touches, ends up totally ‘Franked’.

From the SMH:

Arrears on mortgage repayments spiked to a record high in the first three months of 2011, as more Australians struggle with rising costs, Fitch ratings agency says.

Arrears on prime residential mortgage-backed securities (RMBS) of 30 days or more hit a record high of 1.79 per cent in the first quarter, from 1.37 in the final quarter of 2010, the group said, as Christmas spending and the Queensland floods forced more Australians to struggle in repaying their mortgages.

RMBS are home loans which are bundled together and sold to institutional investors by banks and mortgage lenders. Misrated RMBS were at the heart of the subprime crisis in the US which lingers to today.

As we have seen previously (How Australia Will Look When The SHTF), Wayne has “invested” $20 billion of borrowed money into Australian RMBS since the GFC, to prop up our housing bubble.

Including an extra $4 Billion which he approved in April – (ie) after the period of increasing arrears that is mentioned in the SMH article.

This news gets much worse though:

The increase in arrears for the most fragile band of mortgage borrowers, low-doc loans, with payment delays of 30 days or more hit 6.74 per cent in the first quarter, up from 5.7 per cent in the final quarter of 2010, a higher level than December 2008 quarter, when the financial crisis hit and the Reserve Bank began rapidly lowering rates.

Low-doc mortgages are written for riskier borrower than prime mortgages, which are written for customers who have a reasonably safe ability to borrow.

Delinquencies of three months or more on conforming low-doc mortgages, which are used by people who are self-employed for example, soared past 5 per cent in the March quarter, from about 3 per cent the December 2010 quarter.

Would our Wayne have “invested” any of that borrowed $20 Billion in low-doc RMBS?  Or, did he stick with “prime” RMBS?

From the AOFM website:

Purchase of RMBS – Program Update

Minimum Eligibility Requirements

* Low documentation loans, that is loans underwritten using alternative income verification procedures, may be included in mortgage pools.

Oooooooooo!

Wayne’s ‘franked’ another $20 Billion.

Some Mothers Do ‘Ave ‘Em

UPDATE:

Another ‘franked’ “stimulus” program from Wayne. Remember the doubled First Home Owners Grant, that also helped to prop up our housing bubble?

The Reserve Bank has warned many first home owners who bought into the market with the help of generous federal government assistance may now be vulnerable to rising interest rates.

RBA deputy governor Ric Battellino said today there were concerns that buyers who bought into the market in 2009, when the federal government grant was increased, may have over-committed themselves.

Are any of those hundreds of thousands of “vulnerable” first home owner mortgages actually “low doc” loans, Wayne?

Are any of them packaged up in the $20 Billion worth of RMBS that you “invested” borrowed money in … Wayne Frank?

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