Streetwise Professor

January 30, 2010

Perfectly In Character

Filed under: Economics,Financial crisis,Politics,Russia — The Professor @ 5:24 pm

Henry Paulson’s new book alleges that Russia attempted to convince China to join it in selling large quantities of Fannie Mae and Freddie Mac (government supported entity, or GSE) bonds in order to force the US government to prop up the GSEs:

Russian officials had made a top-level approach to the Chinese, suggesting that together they might sell big chunks of their GSE holdings to force the US to use its emergency authorities to prop up these companies,” he said.

. . . .

“The Chinese had declined to go along with the disruptive scheme, but the report was deeply troubling,” he said. A senior Russian official told the Financial Times that he could not comment on the allegation.

Bloomberg has more:

Paulson learned of the “disruptive scheme” while attending the Beijing Summer Olympics, according to his memoir, “On The Brink.”

The Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies,” Paulson said, referring to the acronym for government sponsored entities. The Chinese declined, he said.

Russia’s five-day war with U.S. ally Georgia started on Aug. 8, the same day as the opening ceremonies of the Beijing Games. Prime Minister Vladimir Putin told U.S. President George W. Bush during those ceremonies that “war has started,” according to Dmitry Peskov, Putin’s spokesman.

“The report was deeply troubling — heavy selling could create a sudden loss of confidence in the GSEs and shake the capital markets,” Paulson wrote. “I waited till I was back home and in a secure environment to inform the president.”

Putin spokesman Peskov denies the allegation:

Russia never approached China about dumping U.S. bonds, Peskov said today. “This is not the case,” he said by phone.

Note that Peskov is quoted in Bloomberg as a source of information about Putin telling Bush that war had begun; he is not necessarily a definitive source about this other allegation.  Note further that the FT could not get official comment one way or the other.

This occurred about a month before the Feds seized the GSEs, and 5-6 weeks before it all hit the fan in mid-September.  Although there were clouds on the horizon in the late-summer of 2008, there was little to suggest the severity of the impending tempest.  Thus, the Russians should be congratulated for their perspicacity.  I wonder what information led them to this conclusion, and how they obtained it.  (Although, their foresight was not perfect.  Even though the Russian market had already begun to show serious cracks post-Mechel and with the onset of the Russo-Georgian War, the official attitude was that Russia was becoming an economic juggernaut that was immune from adverse economic shocks from abroad.  Not exactly, as events proved.)

Of course, there is a single source for this allegation–Paulson–and he doesn’t provide any real detail as to how he came to know of this gambit, or what information led him to this conclusion.

That said, it is eminently believable.  Combine mercenary motives with the Putinists’ raging complexes and resentments of the US, and their desire to knock America down a few pegs, and to that add the “I wish my neighbor’s cow would die” element of the Russian character, and you can easily see this happening.

If it did happen, it says a lot about the Russian M.O. Clearly, Russia had 65.6 billion reasons to be concerned about Fannie and Freddie.  Moreover, they were rightly anxious about the financial condition of the GSEs, and the potential for a substantial loss in the value of their investment.  But, if Paulson is right, rather than behaving in a constructive and forthright way, Russia instead acted the manipulative gangster, and attempted to play Machiavellian Great Games and score geopolitical points.

Such attitudes should be kept in mind when dreaming about resets, and negotiating arms control agreements, Afghanistan logistics arrangements, and actions against Iran.

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  1. If the global financial system can be knocked down a few pegs thanks to intrigues from one emerging market, it deserves to be knocked down. As it inevitable will anyway within a few years because of peak oil, energy shortages, and US economic fragility. Might as well happen sooner than later, because a collapse postponed will be all the more total.

    Comment by Sublime Oblivion — January 30, 2010 @ 8:58 pm

  2. can we conclude that US was at the mercy of the Communist Party of China?

    Comment by a. russian — January 31, 2010 @ 1:00 am

  3. Talking of conspiracies…what does the prof think about curious recent events surrounding security breaches at GOOG China. And recent purported arms sales to Taiwan. Looks like ground is being prepared for something…..

    Comment by Surya — January 31, 2010 @ 1:32 am

  4. Apparently Paulson is full of praise for Timmy! in the book. Plus his GS nexus & possible role in AIG-GS scandal might make one more cautious in reading too much into what he says. Perhaps he is trying to build a story as to why he spooked out everyone in Sept, and may be trying to take the focus away from what happened after the AIG bailout.

    Comment by Surya — January 31, 2010 @ 9:49 am

  5. Surya–Definitely wouldn’t put too much weight on stuff Paulson says about things he was directly involved in. He definitely has a vested interest in spinning the past, and his interests are aligned with Timmy!’s and Bernanke’s in this regard. That’s their story and they’re sticking to it

    Re Google–far too murky for me. Yes, there is something going on beyond the official issues. Re Taiwan, that often heats up when the Chinese want to distract attention from domestic issues. Could be a harbinger of some economic turbulence. Could also be due to games-within-games being played b/t US and China. It’s never really about Taiwan. That’s a shadow play.

    The ProfessorComment by The Professor — January 31, 2010 @ 12:25 pm

  6. True…something is definitely going on behind the scenes there. I hope future doesn’t disappoint in shedding light on that 😀

    Comment by Surya — January 31, 2010 @ 1:33 pm

  7. Google was raped by Baidu in China and is cutting its losses by making a (false) stand on human rights and democracy and all the rest of that nonsense it couldn’t care less about except in so far as pretending to care about them will improve its profit margins in other markets.

    Comment by Sublime Oblivion — January 31, 2010 @ 4:53 pm

  8. “all the more total”

    There’s no such thing as “more total.” SUBLIME MORON strike again, with his pigeon English.

    Meanwhile, if the US economy collsapses the “total” destruction Russia will feel will be far greater, as we clearly saw during the last crisis. No US demand for oil, bye-bye Russia. And bye-bye China, with no US market for its goods.

    Given that, everyone should know Russia only wants to help the US economy improve. It should be impossible to believe a story like this, but it isn’t, because Russia is doing all it can to undermine the US economy in an insanely self-destructive manner due to the deranged nature of Russia’s KGB “leadership.”

    That idiots like SUBLIME MORON can cheer such a prospect only goes to show the depths to which Russia must sink for so-called “friends>”

    Comment by La Russophobe — February 1, 2010 @ 1:01 pm

  9. Googling “all the more total” produces 1,910,000 results, so teh internets would beg to differ.

    If the US collapses, what will happen is that China and Russia will enter into a closer relationship. China will shift more towards satisfying domestic demand, more of Russia’s oil will flow towards China. The US consumer isn’t necessary.

    But in any case more economic growth anywhere is a recipe for disaster given the limits to growth on the planet. In reality, ecotechnic dictatorship is our last hope of averting the collapse of industrial civilization.

    Comment by Sublime Oblivion — February 1, 2010 @ 3:28 pm

  10. Sublime, that assumes China can turn on a dime (or the renminbi equivalent). If the dollar collapsed then Chinese monetary reserves go up in smoke and the very foundation of their economy (feeding Uncle Sugar) evaporates. How much domestic demand will there be if the factories currently making stuff there now have no one to sell to? Read up on “just in time” inventory control and decide for yourself what the effect would be if someone threw a big wrench in that particular engine.

    I’ll help with the visuals. Imagine a jet turbine going full speed. Now imagine a big wrench getting thrown in the intake.

    Could China survive such an economic armageddon? Maybe. But it’s assuming an awful lot.

    Comment by Swaggler — February 1, 2010 @ 4:04 pm

  11. Afghanistan logistic would be harder and costlier for Americans and allies to manage without the Russians. I don’t quite see what can be done about Iran with US and the willing bogged down in Afghanistan and half victorious in Iraq. Maybe the Israelis will resolve the issue, which is not in US interest. US is at the mercy of many now and blaming Russians for having a laugh is not going to win you anything.

    Comment by Leos Tomicek — February 2, 2010 @ 3:42 pm

  12. When I heard this allegation it seemed to me that all parties behaved completely in character: the Russians are bad actors who think they stand to benefit from subversion, the Chinese have the system working so well for them that they would not want to play ball.

    It got me trying to think back to the year Russia had its financial crisis. Were the US and the Bretton Woods organizations more helpful to Russia than not? I think they were. I don’t think we tried to pile on or capitalize on their troubles. Let’s not forget next time.

    Comment by David Smith — February 2, 2010 @ 10:07 pm

  13. “Afghanistan logistic would be harder and costlier for Americans and allies to manage without the Russians.”

    Never heard about Manas base, did you?

    Comment by Deith — February 3, 2010 @ 8:11 am

  14. rooshans.

    SWP, this is not the first time the rooshans have tried to sabotage US securities.

    Recall the rashan invasion of Georgia, which consisted of 1) a media blitz 2) invasion by troops 3) naval attacks launched by the Black Sea Fleet 4) cyberattacks against Georgia 5) an attempt to dump US securities, of all things, on the London and other world markets.

    The rashans, as with the gas wars, ended up shooting themselves in the foot as to the last one – they sold at a loss – and probably as to all of the above.

    Comment by elmer — February 3, 2010 @ 8:58 am

  15. I heard Manas airbase is now costlier…

    Comment by Leos Tomicek — February 3, 2010 @ 12:11 pm

  16. I heard Manas airbase is now costlier

    Comment by Leos Tomicek — February 3, 2010 @ 12:11 pm

  17. “It got me trying to think back to the year Russia had its financial crisis. Were the US and the Bretton Woods organizations more helpful to Russia than not? I think they were. I don’t think we tried to pile on or capitalize on their troubles. Let’s not forget next time.”

    Well, lets see. The US and Bretton Woods organizations encouraged the GoR to maintain 6%-240% interest rates in the run-up to that crisis, to maintain a high value for the Ruble. As a result, Russian businesses couldn’t get money, and imports crushed the domestic agricultural and manufacturing sectors.

    real helpful. NOT.

    Comment by rkka — February 4, 2010 @ 6:34 am

  18. That’s 60%, not 6%.

    Comment by rkka — February 4, 2010 @ 6:35 am

  19. C’mon rkka. You can say the state of the art theory and practice sucked. You can’t say anyone was malevolent with it. Not qualitatively the same thing as Bill Clinton calling up Tony Blair and saying “Psst let’s short the living shet out of the Moscow index.”

    Comment by David Smith — February 4, 2010 @ 11:43 am

  20. @ David

    I know that you people in the West really believe all that nonsense. And you believe it is all good. Don’t blame others for having none of it.

    Comment by Leos Tomicek — February 4, 2010 @ 7:44 pm

  21. @Swaggler,
    I think it could. China’s export dependency is overrated. See my recent post

    Comment by Sublime Oblivion — February 7, 2010 @ 9:13 pm

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