rss feedYes, shaken not stirred. But a derivative twist with that? Sounds intriguing.
I shouldn’t be surprised by what humans can think up in terms of financing or elaborate rules to accomplish goals.
But consider these two examples and one column, as published in The New York Times.
I highlight passages here for one simple reason: I think they’re worth keeping in mind – at least for the future.
As we know, the consequences of not keeping lessons in mind can be devastating, as we’ve seen in the nation’s recent housing crisis which triggered other problems and rippled far and wide.
1. THE BORROWING PRACTICES OF GREECE
Federal Reserve Chair Ben Bernanke testified on Capitol Hill Thursday, saying Goldman Sachs was under investigation for its involvement in helping the government of Greece borrow money, the Times reported.
Greece’s financial picture is so tenuous, the Times noted, that government officials must raise $34 billion in the coming months and its economic stability could cause weaker European nations to collapse.
This financial issue just didn’t pop up last year. It apparently stretches back to around 2000.
From the Times:
Greece has suffered from large deficits for years, and until now it seemed as if big banks would always be there to bail it out. As far back as 2000 and 2001, Goldman helped Athens quietly borrow billions to mask its poor finances by creating derivatives that essentially transformed loans into currency trades that Greece did not have to disclose under European rules.
As I understand this paragraph, this move produced weakness in Greece.
And those words are back (and thanks to the Times for these definitions): Derivatives and credit-default swaps.
Bernanke, as quoted by the Times, told federal lawmakers:
Obviously, using these instruments in a way that intentionally destabilizes a company or a country is counterproductive.
And the Securities and Exchange Commission is assisting federal and government officials in the Greece case by looking at, again according to the Times article:
potential abuses and destabilizing effects related to the use of credit-default swaps and other opaque financial products and practices.
OK. Well, we’re playing some ball, here.
I should note that Goldman Sachs declined to comment to the Times but the article talked about a Feb. 21 presentation in which Goldman Sachs reported:
The Greek government has stated (and we agree) that these transactions were consistent with the Eurostat principles governing their use and application at the time.
I’ve always been fascinated when any organization, company or person uses the words “at the time” – or something similar to that phrase.
I’m not an expert on Eurostat, which is Europe’s statistics body, and its rules at that time. But this is certainly fascinating – and a bit unnerving – to watch.
Then again, we’ve seen the ups and downs of the economy on a rollercoaster in recent years.
2. ONE IDEA CONSIDERED TO SAVE HUMMER
What caught my attention in the failed Hummer deal was one idea to make the plan work.
Sichuan Tengzhong Heavy Industrial Machinery Corp., a Chinese company in Sichuan province, with the help of a Hong Kong investor would take the company known for its boxy, military-style sport utility vehicles off the hands of General Motors.
Again, The New York Times noted that there were reports of questions from Chinese regulators but also that financing – Chinese banks are trying to slow down an overheated lending market – was problematic.
The solution?
Go offshore.
Reported the Times:
(Chinese) regulators have informally agreed not to object if Tengzhong makes the purchase through an offshore subsidiary, said another person knowledgeable about the transaction. But if an offshore subsidiary is used, Hummer would not qualify as a Chinese company after the deal and would not be able to open a low-cost assembly plant in China any time soon to supplement production in the United States. China only allows foreign automakers to set up 50-50 joint ventures with Chinese car companies, and each of these deals also requires individual approval from regulators. While Tengzhong has the cash to pay for the Hummer brand, it needs bank financing to operate the division, redesign vehicles and set up new production facilities in China.
Here’s another noteworthy part that reveals sort of the head-scratching nature of this deal. Keep in mind that Chinese banks weren’t entirely supportive of financing this deal.
So, Tengzhong – according to a Times article a few days ago - decided to approach Western banks for loans to support Hummer:
Tengzhong has been desperately trying to persuade Western banks in the last few days to lend it the money to operate Hummer while keeping it outside China, but has found little enthusiasm so far, this person added.
Um, there’s good reason for that.
First, Hummers are pricey – some models sell for over $60,000. Second, well, gas is expensive these days. Hummers are not known for efficient gas mileage. That adds up – in theory – to low sales.
In December 2009, Hummer only sold 325 vehicles, The Associated Press reported. The high in sales occurred in 2006 when about 71,500 Hummers rolled off the lots and into people’s driveways.
By the way, I wrote about a now-closed Hummer tax break that once gave certain people the chance to write off about $38,000. I also posted a blog entry about Hummer when this deal was first announced.
But back to the topic.
First, it’s amazing – but not completely surprising, I suppose – how there was talk to make the deal work by moving Hummer’s ownership headquarters to a third country but still have it backed by Chinese owners who have cash and loans to operate Hummer in China and worldwide.
But then, the potential new Chinese owners – and a businessperson from Hong Kong – would have to go through all of the Chinese regulatory hoops to formally enter the Chinese market to sell the vehicles to the country’s elite or government officials who want a huge sport utility vehicle similar to what U.S. soldiers drive.
Quite possibly, technology transfer could have occurred. It would not surprise me if Chinese officials were interested in seeing what made the civilian Hummer tick.
The other fascinating part of this story is that the Chinese company, Tengzhong, approached Western banks about getting loans to continue Hummer operations.
This is despite the fact that Western banks have undergone implosions of historic proportions – at least in the United States – and are more risk averse these days in order to make sure that their loans are repaid.
General Motors also was selling the Hummer unit largely because of poor sales. Gas remains expensive these days.
I like circular logic.
But this failed deal has the markings of one neighbor agreeing to buy a nearby house in a depressed market for a rock-bottom price but then deciding to go to that owner’s bank to ask for a loan to buy it – and expecting for the loan request to be approved.
Of course, it would have been different had Chinese banks assumed the risk of the Hummer purchase.
In October, when I first wrote about this deal, I said that this marks a shift in how a fast-growing country with capital – in this case, China – can move up the ladder in the global economy.
I still think that in the case of China – but just in other areas. I didn’t realize this back story had developed until it became public.
It also shows that even with impressive gross domestic product growth in China – at least on paper or in graphs – obstacles can still surface in blocking the completion of a business transaction.
3. U.S. HEALTH CARE FROM A JOURNALIST’S VIEW
Like others in the United States, I appreciate having health care insurance. But the litany of rules and decisions can baffle.
That’s why I appreciate Times columnist Nicholas Kristof’s take on the subject. Funny.
Oh, yes.
Since I raised it in the headline, James Bond often asked for Vodka martinis that were shaken not stirred.
