THE EVERGRANDE SHELL GAME
If' you're following the meltdown of the Chinese real estate developer Evergrande, you'll want to read this story shared by V.T. about how Evergrande's default on bond interest is a mostly virtual default. The story is by Stan Szymanski, whom we've blogged about before in connection to the developing Evergrande story. This is his latest musing:
The first problem is that most of the press is maintaining that Evergrande made an interest payment, except that one holder of Evergrande bonds is maintaining that it did not. So where is the money? It's a shell game, according to Szymanski, it's there, but no one seems to know exactly where "there" is:
Juxtapose the opportunity for training I was receiving at Morgan Stanley against having the opportunity (in my off time) to watch a shell game on the street in ‘The City’. Seems simple enough. See ball under shell. Follow ball under shell. When shells stop moving point to the one with the ball underneath it. In reality, it is a lot harder than it seems, especially when the purveyor of the game is adept at public deception.
Lately, I have been asking the question of ‘where’s the money?’ when it come to China Evergrande Group and all their interest payments to offshore bondholders. Public deception apparently not only by Evergrande, but also apparently by its paying agent and virtually all of the financial press around the world with the notable exception of Dr. Marco Metzler and DMSA where he serves as a senior analyst. DMSA, (as they are Evergrande bondholders), are preparing action against the developer. From its November 10, 2021 press release: …’DMSA itself is invested in these bonds and has not received any interest payments until today's end of the grace period. Now DMSA is preparing bankruptcy proceedings against Evergrande and calls on all bond investors to join it.’…
So virtually all of the financial media has perpetuated the ‘story’ that Evergrande had made its past due interest payments on its offshore bonds when, according to DMSA and Dr. Metzler, they had not.
Under which shell is the interest payment, if there is one at all?
Now, the first thing that followed this that caught my eye was another bond-related scam, and how a particular Chinese firm decided to deal this it. And when you're done reading it, you can relax, because my jaw is still on the floor too:
First, the scoundrel known as Yango Group. In ‘China developer Yango Aims To Avoid Defaults With Bond Swap Backed By Its Chief’ by Andrew Galbraith dated November 1, 2021 (Reuters via Yahoo): …’Chinese homebuilder Yango Group offered on Monday to exchange some U.S. dollar bonds for new notes personally guaranteed by its chairman as it struggles to free up cash and avoid defaulting on upcoming debt payments.’… The article goes on to explain:
…’Yango is offering $25 in cash and $1,000 in new notes for each $1,000 of existing bonds exchanged, it said in a Hong Kong bourse filing. The exchange offer applies to its U.S. dollar notes due in February 2023, January 2022 and March 2022, which have an outstanding face value of $747 million.
The new bonds are personally guaranteed by Lin Tengjiao, Yango's founder and chairman, the filing said. The Hurun Global Real Estate Rich List of March 2020 had estimated Lin's personal fortune at $2.4 billion.
Yango said it is also seeking the support of investors to change the terms of its five other outstanding dollar bonds.’…
...now wait a minute! I've never owned a bond in my life, but a personal guarantee from the owner of the company!?!?!? Since when have personal guarantees been a part of bond covenants? Did Bernie Madoff or Bernie Cornfeld (look him up) or Enrico Dandolo (look him up too) cook this one up?
If you're having a bit of difficulty swallowing that one, so does Szymanski:
Did you see that basically, Yango can’t/won’t pay its interest and principle payments? That they offered bondholders (for each $1,000 face value) $25 in cash (that’s 1/4 of 1% of face value-not even the interest due) and to swap the original Yango bond for a bond, not backed by the earnings ability of the company (Yango), but backed by the CEO of Yango!? I don’t care what they say what the value of his ‘fortune’ is-real estate in China is down significantly and may now have potential illiquidity issues-So tell me-how does a bondholder get paid???
Is the CEO of a company that can’t pay it interest and principle when due now supposed to be -more creditworthy- than the company he works for??? I hardly think so.
On top of this, somehow one ratings agency managed to keep Yango's bonds at a AAA rating. Good luck with that... maybe there will be a prize in your box of Cracker Jacks, and maybe not.
Please now turn ‘on’ the implied (but invisible) sarcasm control on this writing up to ‘high’ as I say: ‘Thank goodness that this Chinese rating agency cut its outlook to ‘negative’-Dagong is doing a really good job alerting the public as to the dangers of the creditworthiness of Yango…Boy, Yango is really lucky to still have a ‘AAA’ rating on their bonds! (Now with both hands turn the sarcasm control back to zero…)
Szymanski continues by summarizing Dagong's "ratings methodology," which basically amounts to an accusation that the major ratings agencies - Standard and Poor's, Moody's, and Fitch - basically act unsupervised and only serve America's interests, and what is needed is a ratings agency to serve China's interest.
But it's the final two paragraphs that really concern us, for Szymanski drops a bombshell, and hints at a bit of his own high octane speculation:
Potentially, some your money is at risk as it may be invested in mutual funds that own these bonds. Potentially, more money of yours may be at risk because an institution you entrusted with your money may own derivatives involving these Chinese Real Estate Developers. In the October 29, 2021 DMSA press release in discussing the possible impact of an Evergrande bankruptcy Dr. Metzler concludes by saying … "The Great Reset - the final meltdown of the current global financial system - has long since ceased to be a purely intellectual thought experiment,"….If this happens, a meltdown of the global financial system, just how much of your money is at risk?
Evergrande is one shell, Yango Group another and Dagong yet another. There is an organization who is the purveyor of the shell game whose goal is to go home with all the shells, the ball and your money-just like the guy on the street in Manhattan running his game way back in 1996. (Boldface emphasis added)
So there we are: we are back, once again, to the problem I've been emphasizing for years, ever since the "bail outs" of 2008: the derivatives, those tranches of securities and bundles of bundles of tranches, all related to vast mortgage and real estate fraud, that have been sloshing around in the system, and no one - and I mean no one - has been talking about them. Instead, the talk has been the usual nonsense: interest rates, quantitative easing, currency, digital currency, but not a word from the "usual sources" about the derivatives. And then comes the real bombshell: all of this - the derivatives swaps - is not only a vast mechanism of fraud, but there is an organization behind it. It is almost as if Szymanski is implying that the "economic miracle" that has been China since the days of Chairman Deng Xiao Ping has been one vast money laundering shell game.
In my book Babylon's Banksters, I began with precisely this problem, pointing out that it was a Chinese economist - Dr David Li - who came up with a mathematical formula that lay behind the creation of these "bundles of bundles" of securities, and who had close associations with the Royal Canadian Imperial bank and who then went on to become a risk assessment manager... in China, of course. The essence of the formula was that any bad paper in a bundle of securities would be offset by the high probability of all the good paper in said bundles, and thus his formula set off a whole new era of speculation: one made money by trading those bundles, and then bundles of bundles, and then bundles of bundles of bundles. The financial world grew rich on a system increasingly several derivatives away from reality. It was, and is, crony crapitalism on parade.
Or to refer to a name I mentioned earlier, this is like Bernie Cornfeld's scheme, and his Investors Overseas Services, on steroids... the only question is, who's playing the role of Robert Vesco?
See you on the flip side...
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