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Is the China bubble about to burst?

  
Analysis, Economy, Education
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China bubbleAn aggressive and arrogant China is entering 2010 with a bit of uncertainty. Although there was no let-up in its exports in 2009, its internal financial position looks uncertain. China watchers are expecting a bubble that will eventually burst.

In 2009 banks in China lent internally about US$1.4 trillion to businesses, including the real estate industry, with dubious performance records. James Chanos, a successful U.S. stock market dealer, has predicted that China’s financial collapse could be far worse than Dubai’s.

China soothsayers wish to prove Chanos wrong – and they may be right. With US$2.2 trillion in foreign reserves, it would seem China could weather any storm. But the problem is that its cash reserves are uncashable. The United States and Europe are not just waiting to repatriate the money to China. So China could be left to its own devices if it faces a financial storm where markets tumble and poor people with money tied to investments see their savings vanish.

Easy credit, too much money in the economy, excessive foreign direct investment, a completely undervalued currency and rising real estate prices have definitely created a bubble. This bubble could burst with any minor international event. That is the price China would have to pay for designing policies that serve Western consumer markets. (more…)

Top 10 Lessons from the Lehman Collapse

  
  Education
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Sunday is the five year anniversary of the bankruptcy of Lehman.  So what have we learnt?

1 – Bank executives lie…

…they also got paid huge amounts, weren’t as smart as they thought they were and those that ended up at the top tended to be deeply flawed individuals…

On Sept 10 in a conference call with investors, days before Lehman collapsed, Dick Fuld clearly stated to his shareholders that “no new capital was needed” and that “real estate and investments were properly valued”. Yet only five days later, Lehman filed for bankruptcy.

 

At a congressional Committee just a few weeks later, Dick Fuld was defiant. He stood by his “no new capital was needed” statement: “no sir, we did not mislead investors”. And he added that “we (made) disclosures that we believed were accurate”. If no new capital was needed why did Lehman go bust five days later? And if he didn’t know the financial position of Lehman what was he doing as CEO?

As part of the Congressional Committee hearings, Dick Fuld was allowed to make a presentation before he was questioned. These are his exact words as to the cause of Lehman’s demise:

“Naked short sellers targeted financial institutions and spread rumours and false information. The impact of this market manipulation became self-fulfilling as short sellers drove down the stock prices of financial firms. The ratings agencies lowered their ratings because lower stock prices made it harder to raise capital and (it) reduced financial flexibility. The downgrades in turn caused lenders and counter parties to reduce credit lines and then demand more collateral which increased liquidity pressures. At Lehman Bros the crisis in confidence that permeated the markets lead to an extraordinary run on the bank. In the end despite all of our efforts we were overwhelmed.” (more…)

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