Paulson to China: "We need to do this..."
The Bazooka man prepares the ground
by Michael Hampton, AKA Dr.Bubb | September 9, 2008Print
Henry Paulson is no fool, and he is close to China.
This weekend, there were articles, with headlines like this:
"Paulson readies the 'bazooka'
Big buyers of Fannie Mae and Freddie Mac debt have been shying away.
The Treasury secretary wants to coax them back."
In July, Paulson attempted to calm financial markets by pledging government support for Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500), which were under siege by investors because of fears about their weak balance sheets.
. . .
But now Paulson is readying the bazooka, because the markets didn't respond as hoped. Shares in the companies bounced back from multiyear lows in recent weeks, but bond markets have not regained confidence in Fannie and Freddie.
A thought-out, two-step process, ready to go, if the market failed to respond.
If he managed this for Fannie and Freddie, then why would have not also have a plan FOR THE US DOLLAR TOO ???. I find it easy to believe that a plan was in place - a plan involving US market action, co-ordinated with action by other countries, like China.
If there was such a plan, it might have been engineered through discussions like the following one, which is totally imaginary, but also seems to fit the facts:
== IMAGINARY CONVERSATION / Back in mid-June ===
China Representative (CR):
"Secretary Paulson, your dollar is very weak, and we are getting concerned. We are holding about $1.0 Trillion of Dollars, and falls are harming China's wealth. Most of this is invested in the debt of your mortgage giants, Fannie Mae and Freddie Mac. Their share prices are weak now too, and we are getting worried. What can be done?"
Henry Paulson (HP):
"Yes, I am aware of your holdings of Dollars. We think the dollar is now too weak. Too many speculators are ganging up on it."
(CR): "We would like to see a stronger dollar. Isn't there something that can be done?"
(HP): "I believe so. We have a plan. But we will need your help."
(CR): "We are interested to hear your plan."
(HP): "As you know, we have hundreds of Hedge Funds in the US, and here are thousands of them around the world."
(CR): "There are many Hedge Funds in Hong Kong, and a few are setting up in China now."
(HP): "Many of these hedge funds have been shorting the dollar. They have made billions doing this, and many funds now have huge positions short the dollar, and long the Euro, or long so-called 'commodity currencies' like the Australian Dollar or the Canadian Dollar. Some are also borrowing dollars, to buy Gold or to buy Oil or or to buy Energy or Mining stocks. They win as the Dollar falls, and they win as commodities rise."
(CR): "We are aware of these trades. How can we stop this?"
(HP): "When I was at Goldman Sachs, we watched the behavior of many Hedge Funds. Most use massive leverage, and they take big positions in relation to their underlying capital."
(CR): "Yes. We know that."
(HP): "The thing is, they have risk limits, and if positions move against them, then they will close off their positions, to stop the losses. Very often, a move of 3%, 4%, or 5%, will be enough to get the Hedge Funds to cover the positions. We intend to intervene in the markets soon, to push the dollar higher, to hit those limits. When the funds start covering their positions, that will force the dollar higher still. We need to start things off by buying dollars, and when the Funds start buying too to cover, their buying will force the dollar up higher. Some of the hedge funds will see a change in the direction of momentum, and even swing around the other way, and become long, rather than short on dollars.
Also, I want to mention - whatever dollars we buy, we will be able to turn around and sell later. I expect to make money on this intervention. This is really only possible because too many hedge funds are on the same side of the trade now. They are way too imbalanced on the side against the dollar. We can turn that around, through this action."
(CR): "Mr. Secretary, that is a brilliant plan! Burn the speculators, and get them to become dollar buyers!"
(HP): "Yes, we believe this will work. But we will need your help. We want to get the timing right."
(CR): "I believe we can offer help. But you will need to start the process, we can join in, once the dollar has begun to turn up. What timing do you have in mind?"
(HP): "Soon, very soon. The oil price has gone up too far. Demand is already beginning to falter in the US, and I understand that China will soon reduce its oil subsidies, and that will help to cut demand in China."
(CR): "Yes, that is true. Malaysia, Indonesia, and India, have cut their oil subsidies. We have agreed to do the same in China."
(HP): "Saudi Arabia has agreed to add another 500,000 barrels per day to supply. That will kick in soon. We thing oil will fall to at least $110, perhaps $100 or lower."
(CR): "We also have similar projections..."
(HP): "The right time to be buying dollars will be when Oil is falling. Then Gold willl be weak, and all the commodity plays will be under pressure: the commodity currencies will be weak, oil, gold, ... and mining and energy shares too."
(CR): "Hmmm. Interesting. We want to buy some gold, and some energy stocks too. That's where we plan to invest some of our dollars. A few hundred billion, even."
(HP): "We have been expecting that, as we spoke before. Isn't it better to wait for them to get cheaper?"
(CR): "We will help... In fact, I think there may be a way we can get our Chinese banks to buy dollars too."
(HP): "My country appreciates China's help. We have a long relationship of co-operation. Do not worry about your holdings in debt of Fannie and Freddie. We will not let you lose on that. My plan will help the holders too. But we must wait for the right time."
(CR): "You can count on us. But you will need to lead this process. We are ready to follow."
(HP): "Right. Watch oil and gold. That will be a sign the game is underway. I will alert a few close friends in the Hedge Fund Business. They can help too."
(CR): "A great plan."
Copyright © 2008 Michael Hampton