[OPE] Winners in the financial crisis: stain-to-market

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Mon Mar 24 2008 - 09:28:54 EDT

Disequilibrium is the life of the market. The more market volatility there is, the more interesting things become for the professional speculator who doesn't have to toe the line to the dogmas of the bourgeois classes, or Marxist-Leninist bureaucrats. This is obvious especially in China and Russia, where gigantic capital gains can be realised if you speak the language. 

The Left may discuss nervously about a "meltdown" but in reality, capital accumulation continues regardless, at an even more furious, ferocious pace, with an even more ruthless competition to grab more of tomorrow's wealth today. It is just that, because most "Marxist" theories of how accumulation works are rather primitive (actually, they have little to do with Marx's own theory, which is now 150 years old), they fail to understand anything much about what really happens, and are just reactive to the news.

Big winners in the financial crisis are successful hedgefunds and other speculators who predicted the downturn. These investors powerfully develop the intelligence and expertise to "see into the future" (the frontier of accumulation) and their capital assets are typically not tied down for any long time, the aim being to extract maximum short-term profit. The textbooks might say one thing, but if you carefully study economic reality, there is a lot of profit to be made.

Imagine for example you buy an option contract to sell a particular share for 50 dollars at a certain point in the near future, being fairly certain (using market intelligence) that the value of the share will shrink. The moment the share's value has shrunk to (say) 10 dollars, you can purchase the share, and resell it for 50 euro, exercising your option contract. Someone else's loss is your gain, no additional wealth is created, but you are oh so much richer all the same. You make money out of economic contraction.

Using techniques of this type, hedgefunds such as Andrew Lahde's company Lahde Capital from California and companies like Paulson and Hayman in New York have realised internal rates of profit of several hundred percent. Paulson, the New York-based hedge-fund manager, more than doubled its asset base to $20 billion. Since nobody can beat that kind of accumulation, this type of activity just grows and grows, diversifying in all sorts of areas. The more volatility there is, the better, and if you have sufficient funds, the whole world's your oyster. Companies such as Renaissance Technologies "scientifically" manage tens of billions of dollars in funds with only a few hundred people, yielding real profit rates vastly above the average.

Andrew Lahde himself says plainly "Our entire banking system is a complete disaster. In my opinion, nearly every major bank would be insolvent if they marked their assets to market" (in other words, if they valued their assets at their real current market value). Alex Allen, chief investment officer of London-based Eddington Capital Management Ltd told Bloomberg News, that the financial crisis is like "a bank panic turned upside down", with bankers, not depositors, concerned they won't get their money back. Quite.

In general, corporate executives and financial consultants to the wealthy (working for companies like Mercer, Fiducian, Callan, Wilshire, Marco etc.) are also big winners. They just keep earning more and more, downturn or no downturn. Not their income, but the value of their international assets grow by 10%+ per year. Globally, about 10 million people own $1million or more, but their combined asset wealth now equals about $42 trillion which keeps growing at about 7% per year, downturn or no downturn.

The banks put the screws on the fund innovators, and demand more and more capital from them to collateralize leveraged loans. But that just means that the banks slowly but surely lose their grip over the loans business, in which case it becomes a matter of "if you can't beat them, join them". Here in the Netherlands, the very large ABN-Amro bank was taken over, and simply dismembered. How could that happen? Mainly, grotesquely bad management (in contrast, ING bank has a reputation as the best employer in the Netherlands).

The weakening dollar and the strong euro gives a great boost to foreign tourism into the United States, which it at its highest level since 2001 - foreign tourists spend in excess of $120 billion in the US a year, and indeed in parts of New York they can pay with euros. US exporters are also able to export gigantically more, at competitive prices. The value of US exports of services is now going beyond 15% of the total value of global cross-border exports. Because the banks have more difficulty obtaining funds worldwide, the interest rate on private savings accounts increases in many places - some Dutch banks now offer 5.4%, and Dutch savers for example are saving 7% more in 2007 than in 2006. 

A bonanza also exists for Asian Sovereign Wealth Funds which previously had difficulty in being able to buy up Western businesses with the money they don't invest in their own people. Because Western financial institutions got into difficulty, investors from China, Singapore and Qatar were able to buy up, relatively cheaply, equity in Fortis, Credit Suisse, Merrill Lynch and JC Flowers among others. If you can make a profit, or if somebody helps you out of financial difficulty, the racial prejudices suddenly disappear, the doors go open, and you can suck your orange. 

Moreover, corporations already flush with cash are engaging in a whole new round of sell-offs and takeovers to boost their asset base, or extract more surplus. Thus, for example, the big Dutch corporations (Shell, Ahold, Akzo-Nobel, Philips, ING etc.) realised record profits in 2007, but this was mainly due to sell-offs and takeovers, or redistribution of capital surpluses, not to any expansion of production, or to a significant increase in market share. 


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