Monday, October 22, 2007

peddling the broklyn bridge in beijing?

china's citic bank bought 6% of Bear Stearns for $1bln. at first I thought it was another Blackstone, where the chinese paid top dollar for an over valued LBO firm.

in this case, however, I do wonder whether they might not be smarter. Former Lehman CFO Brad Hintz tells AP:

Brad Hintz, an analyst with Sanford C. Bernstein, said the pact is more important to Citic in the long run as it evolves into a more global competitor.
"Bear Stearns will get more profit out of their Asian operations," Hintz said. "But, more importantly, over the long term Bear Stearns will end up with a credible competitor who will have learned global finance from Bear Stearns themselves."

it will be facinating to see whether the chinese can replicate american financial capitalism. I think it will be a bumpy road after years of corrupt development at any cost in the absence of a functioning court system or any kind of institutional regularity. even though you couldn't accuse wall street bankers of being hugely moral or honest people, the rules treat people equally and more or less fairly. people need to follow the letter of the law millions of times financing a single transaction. lawyers spend hundreds of hours structuring companies and deals. the primary reason it all works is that people all know beyond question that courts will always enforce certain rules certain ways. in finance, dozens of layers of laws and rules breath life into entire entities. living, breathing, growing entities are built from intangible concepts and constructs. this requires a level of intellectual and ethical integrity.

one must ask whether china's past, including the 5 year plan, tianamin sq and the cultural revolution, has prepared the its people to respect all the layers of rights found in a simple ABS pool.

they will learn over time, and surely will have some success along the way. but I have read books like Mr China and know the stories of the bureaucratic insanity and unfairness. the thing they haven't learned from our country yet is that it's best to treat everyone fairly. China has been exploiting our companies and stealing their technology for years -- at least back into the 1990s. they deliberately and grossly devalue their currency. they spew vast amounts of coal smoke into the air and are ruining massive rivers. everyone knows they are unaccountable and dangerous. in constrast, we are the same country built on the greatness of washington and lincoln. they have grown opportunistically on capitalism from the pits of hell under mao. we know events like WWII and the civil rights movement, in which americans rallied for the betterment of humanity. China's leaders have been enemies of human life and liberty who embrace freedom only when expedient.

as Americans we should be ashamed for such a country to hold sway over us. all so we can have $3 toys at wal-mart, and vast amounts of junk to fill our lives? I am not saying we shouldn't trade with china. but their currency scheme is increasingly insane as the dollar falls. our imports from china are up something like 500% in the last 5-8 years. their growth is so fast and so reckless it will take years and cost trillions to clean up. why must we subsidize a kind of economic development we'd never tolerate in our own country?
(interestingly, europe bears the brunt of China's currency scheme it, but that's another issue... )

china's cheap currency allows its employees and companies to serve 2 markets at once -- their own and the world's. before, it was just the world's. but now as the chinese buy homes and cars, and fill them with appliances powered by government subsidized coal power plants, a second set of demand for their products is growing. since the currency can't appreciate, the products are still cheap internationally. that way they can run their economy on two sets of buyers. (and of course, have plenty of money to subsidize electricity rates because of their huge trade surplus and trillion+ of reserves.

the currency scheme has worked, but their continuation of it now is insane. their economy is already overheating. and, they are growing more confrontational with the rest of the world.

(as an aside: Americans are going to have a very rude surprise after the olympics next year when China tries to claim an EQUAL footing with us on the international stage and other countries listen to them -- and CHOSE them. soon they will have to revalue the yuan. (I imagine the best way to play that is with singapore$ or NZ$, etc. sadly, we are making all of it possible right now. that's one debatably good reason not to buy stuff made in china. )

anyway, my original point in writing this post was that a lot of money will be made in coming years as china spends its billions on US assets like Blackstone. I wonder if Bear will be the same. on one hand, yes. but after reading Hintz's point, it seems like China made a smart investment. if they really can buy the germs of an entire industry in the world's largest market for just $1bln, maybe they're smarter than we think. it will make money for them for a while before it blows up. but that will take a long time.

one way or the other, the era of american domination is starting to fade. we should enjoy it until next summer. the world will be different in coming months. the post WWII world order, in which the USA claimed leadership in terms of freedom and prosperity, is coming to an end.

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