BEIJING—A Chinese economic official blamed "fraudulent practices" at some international investment banks for large losses incurred by Chinese state-owned companies on derivative contracts, in the government's strongest criticism yet of the role played by foreign banks.
Li Wei, a vice chairman of the State-Owned Assets Supervision and Administration Commission, cited contracts tied to energy prices sold by banks including Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley, to aviation and shipping firms.
Mr. Li, writing in the latest issue of the Study Times, a newspaper published by the Party School of the Central Committee of the Communist Party, also criticized Citigroup Inc., along with Merrill Lynch and Morgan Stanley, for developing "extremely complicated" derivatives products. He said 68 state-owned enterprises incurred combined book losses of 11.4 billion yuan ($1.67 billion) on 125 billion yuan worth of derivatives investments by the end of October 2008. Foreign investment banks were the "chief culprits" behind the huge losses, he said.
Now while no one likes being blamed, lets be very straightforward here: our derivative system caused this failure and it was both of our own creation of it and of our own blind trust in it that led to the near destruction of the financial system in the fall of 2008. That Chinese counterparts were willing to sign up to participate in this complex market, as well as agree to put money down on an extremely overvalued commodity such as oil (whose high prices were heavily linked to grossly exaggerated profits for large government owned oil companies in both Russia and China alike), suggested that there was far, far too much optimism that this bubble would not burst.
Now to be fair, the way the bubble burst was so drastic, and so unlike anything almost anyone with a positive spin was predicting (and lets be further fair by pointing out that during a boom market, people are idiots and won't listen to the pessimists) that the losses were far more devastating than ever before. The fact that companies gambled on put options for their cash earned from derivative trading on subprime mortgage loans, in turn based on inflated property values, onto a stock like oil that was clearly being driven up by potentially lucrative high prices, shows an extremely complicated, and downright risky, chain of actions for which the fault lies in the risk taking of individual companies such as China Eastern Air Holding Co. AND American companies like Costco Group.
We should remember that we are in this together, and I personally am surprised that the Chinese would take any of these risks. While it is one thing to develop trust with the individuals who are selling you potentially lucrative trade ideas, it is your own corporate responsibility to be objective when it comes to analyzing the potential dangers of risk that face your company's investment. In this case, almost anyone could tell you that it was 'extremely complicated'; that it was should have been reason for any company, Chinese or American, to step back and rethink their perspective.
Read the full article here.
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