THE CHINA DERIVATIVES THREAT

The Fundamental View reports about the China derivatives threat.

(emphasis mine)

Monday, September 7, 2009
THE CHINA DERIVATIVES THREAT...... UPDATED AND REAL

...

LAYMAN'S TERMS

Let me put my layman hat on for a minute and see if I get this correct.

In the spring of 2008 when oil was being run up, Goldman Sachs and other banks made price forecasts on oil. These price forecasts provided that $150-$200 oil was likely.
At the time oil was clipping along at $100.00+ a barrel and had some legs underneath it. If I'm Nanshan Power or any other huge shipper, airliner etc who relies on oil I surely would have wanted to protect myself against the upside rise in oil prices. Nanshan entered into Derivatives contracts with Goldman Sachs to get this protection. Who better than Goldman Sachs to purchase the upside protection from given they were the firm that was making the case for $200.00 oil. This is exactly what Nanshan would have wanted to protect itself against.

In my view, Goldman Sachs had to offer calculations, models and particulars in those instruments in order for Nanshan to want to purchase the upside protection and none the least of which was it's forecast model for $200 oil. As we read above in the Reuters press releases discussing the Nanshan Power case, these contracts provided that as long as Oil stayed above $62.50 in their first scenario and $64.50 in their second scenario (covering 2009-2010) then Nanshan was going to make money on the protection. Given the information that Goldman Sachs (the seller of the instrument) gave to them, this surely must have seemed a great bet. It would have seemed a slam dunk!

Here's where things get real dicey.

In December of 2008 Goldman Sachs slashes it's forecast on oil prices to $30.00 per barrel. (LINK)

Wait a minute!! If I'm Nanshan Power I'm SURELY biting my finger nails at this point. Imagine the hypothetical exchange on the telephone that day...

Nashnan: "Hey! You told me that you were expecting oil to reach $200 per barrel...you sold me this stuff that was supposed to protect me!"


Goldman Sachs:
"Uhhh........sorry?"

Using the legal example I referred to above, could this significant downside revision be considered "an event" that could be construed as an event "beyond the general volatility of the market"?
Remember only 7 months before their $30.00 revision they were calling for $200.00 a barrel while at the same time they were packaging and selling these exotic products. In my uneducated view, such a downward revision would not appear to be consistent with "generally accepted market volatility conditions". That was significant downward revision and in my view would be material to the overall performance of the instruments the investment bank sold based on it's earlier forecast.

The Chinese will claim that these SOEs were not authorized or licensed to enter into these contracts. I would offer up for consideration that whether or not they were licensed may not be the point. The mere fact that a company sold a product to protect against an upside move of an asset
they were forecasting to go significantly higher and then drastically slashes that revision after these contracts or locked up smells might fishy to me. I imagine that Lawyers would have a field day with this.

Doesn't this eerily remind us of the lenders and investment banks "packaged promises" of huge real estate gains as they were dumping their very intricate instruments on unsuspecting customers just before the real estate market blew up?

It is ever apparent that in 2008 Goldman Sachs and other investment banks were talking one way while acting completely another way.

My reaction: Another example of Goldman having no morals or ethics. It isn't surprising that Chinese companies like Nashnan Power are planning to default.

This entry was posted in Background_Info, China, Financial_Wizardry, Wall_Street_Meltdown. Bookmark the permalink.

35 Responses to THE CHINA DERIVATIVES THREAT

  1. dudeman says:

    7 months is a long time and a lot happened in that time, including the collapse of our economy. Who can say if GS was guilty of something. It seems remarkable that China believes it can get away with this. This seems like a bailout, which in the past has allowed companies/governments to continue engaging in risky behavior. I sure wish the banks had forgiven some of my losses.

  2. Eric -

    There is a very simple and concrete way to get to the heart of the matter. What was GS's proprietary trading desk doing at the time? What kinds of bets were they making on oil?

    If they were following their own analysis and took large losses, then they're in the clear. If they were massively short at the time and made a killing then they were clearly engaging in fraud.

    We already know about Goldman trading against its own customers, so the answer will not surprise me. What WOULD surprise me however would be if the legal and political conditions allowed for such information to be subpoenaed and accurately stated.

    Perhaps some counterparties, who don't like them very much, might be able to answer that question. Also who are the counterparties to the derivatives sold to the Chinese SOEs? Are they held by GS or were the obligations packaged/sold elsewhere?

  3. Natasa says:

    Captain Anarchy,

    Good point.

    I think also that Chinese have the perfectly RIGHT to default on this garbage "contracts"...

    Who will force them NOT to do so?
    - The corrupt and bankrupt US government?
    - Criminal organization known as GS who controls the US government and other "international community" organizations like IMF or World Bank?

    ... and how...?
    - with MORE "printed" worthless paper "contracts"?
    - or with "outstretched" military NOT capable to oppress even so small country as Iraq (or Afghanistan)...?

    It looks like time to clear this cancer (US bank robbery "system") from the Planet - is near.

  4. Nero says:

    Look at what the cat drug-in:

    http://www.LogicChip.com

    Amazing...

  5. pebird says:

    From the site The Fundamental View - there are a series of articles that discuss how China might do this legally.

    Apparently in international derivative contracts the parties agree to have any disputes resolved by the laws of country that they both agree to.

    Also, China apparently has some precedent on their side with regard to an earlier dispute that was "settled".

    Anyway, interesting times.

  6. Anonymous says:

    Speaking about Gold...

    I bet you doomsters got wood or jizzed in your pants today...

    Gold tops 1005...

    But you know...

    It can only come down from here, LOL!

  7. Anonymous:
    Research this quote.

    "No one wishes for economic collapse. I get angry every time I see more evidence about how badly Goldman/treasury crowd have damaged our financial system. I am not HAPPY with their actions. I am not HAPPY that the dollar's prospects have been so badly damaged I seen no possibility for its survival. The US dollar, like the Titanic, is sinking, and I want to be on one of the lifeboats, but I am not happy with the situation at all.

    "If I could go back in time and throw some Goldman Sach executives in jail (especially Rubin) to prevent them from wrecking the US economy, I would. But I can't go back in time, so all I can do is prepare to deal with fallout of their actions, the collapse of the US economic system."

  8. Anonymous says:

    @BlasterMillennia

    Is Eric your god now...

    Does he speak for you...

    Does he control your thoughts?

    Speak your own words, use your own mind and worship no other but the One least you end up like him...

  9. Anonymous says:

    MarketBreeze.com appears to be back up!

  10. Natasa says:

    It really looks that Eric's observations, explained in couple last topics are correct - especially now:

    1. GS (and US Treasury) try to suppress price of gold with "paper gold". It happens always about 10 o'clock New York time. Than the spot price of gold use to be always pressed until closing of the NY paper gold stock-exchange.
    Now - it is more than obvious - than this is the time when Chinese try to liberate themselves from "US dollar trap" - i.e. they buying bullion gold at lowest price. With other words - they effectively keep price of gold up.

    2. After closing of NY "paper gold" stock-exchange - spot price of gold continue to rise, since other buyers still try to hedge with bullion gold. Chinese do not buying at this time.

    It is like a game (economic war game) between US and China.

    This looks at continuous game - and it going to stop this instant when there are NO REAL (bullion) anymore to sell.
    It looks that this moment is just closer and closer with each day past.

    The REAL question is just:

    WHEN NY paper gold exchange - will default since it has no possibility to deliver REAL bullion anymore?

  11. dashxdr says:

    @Natasa

    There won't be a gold default of COMEX or NYMEX. They'll just substitute shares of GLD for real gold. That's as good as gold, right?

    I think at some point no one outside of GS will take the long side of COMEX. GS probably takes both sides to make it appear like there is a market. When no one really takes the long side, price can collapse to zero.

    Eventually the COMEX price will become irrelevant. And a real market price will be established for real, physical gold.

    Everyone cheers (myself included) when new highs are made on the COMEX gold price. "Crossed $1,000! Yay! The sky's the limit!"

    But wait. COMEX is a fraud. It's insane to put any credence in the COMEX price anymore.

    Let's get physical!

    Man that Anon guy really is a jackass. The one who keeps putting those "LOL"'s in his posts.

  12. Anonymous says:

    @Natasa

    "With other words - they effectively keep price of gold up."

    Really? Gold dropped almost 11 points after hitting 1005...

    And stayed there!

    Looks like they cannot keep it up even for a full trading day on the NYSE...

    Which begs the question: how the are they going to keep it up for you PM lovers to cash out after the collapse?

    "It is like a game (economic war game) between US and China."

    No shit, haven't I said as much (and way before you came to this conclusion)?

    "WHEN NY paper gold exchange - will default since it has no possibility to deliver REAL bullion anymore?"

    When the war transcends mere electronic trading in the economic sphere...

    And descends into physical reality...

    And when that happens...

    Believe me, there will be no escape!

  13. Anonymous says:

    @dashxdr

    You're just jealous of me.

    LOL!

  14. Nero says:

    Granger over at LogicChip.com says gold breaks it's all-time high ($1,033) tomorrow AM (9/9/09). He's says it's a lock.

  15. Tian Men Pai says:

    http://www.bloomberg.com/apps/news?pid=20601087&sid;=aSp9VoPeHquI

    Can we do an investigation or brainstorm session on US default scenarios please.... pretty pretty please....

    Will a default avert hyperinflation in the US? At what point where it wouldn't do any good. Where are we now?

    Is it possible to default given there will be retaliatory steps taken in response. What are they? Can the US "tanked" them?

  16. Granger says:

    My data says Gold closes above $1,033 tomorrow (9/9/09).

    http://www.LogicChip.com

    Do your own due diligence before making a trade.

  17. Anonymous says:

    @Granger

    LOL, of it does....

    I'll never post here again (if you believe it I got land in Alaska to sell you)...

    That said...

    I know that it wont... LOL!

  18. Anonymous says:

    @Tian Men Pai

    We're not here to do your school work.

  19. Nero says:

    http://www.MarketBreeze.com is back up. An article that gets released WORLDWIDE at 7:00am EST tomorrow is up for preview for three more hours.

    It ties down why Gold is going to spike over the next six weeks...he's predicting a triple!

    http://www.MarketBreeze.com

  20. Anonymous says:

    A message to you, and YOU, know who you are.

    Tortured by my everyday surroundings
    Ease imprisoned by everything around me
    Branded and I got the marks to show it
    Misunderstanded now everybody knows it
    Die hard, shit drunk on remorse
    Unchain my balls I've seen this all before

    Control the boarders
    Take no orders
    The eyes of texas are upon you
    The eyes of texas are upon you
    The eyes of texas are upon you
    The eyes of texas are upon you

    Texas tattoo, my texas blood is true
    Texas tattoo, everyone must have the brand
    Texas tattoo, brotherhood the most defied
    Texas tattoo, now we're taking back our land

    Label: something wrong with my appearance?
    Judgement: The cause of interference
    Intimidation: Action made for waste
    Confrontation: Dealing with it face to face
    Freedom: Aimless crime for a high price
    Custom: So you never have to pay it twice

    Control the boarders
    Take no orders
    The eyes of texas are upon you
    The eyes of texas are upon you
    The eyes of texas are upon you
    The eyes of texas are upon you

    Texas tattoo, my texas blood is true
    Texas tattoo, everyone must have the brand
    Texas tattoo, brotherhood the most defied
    Texas tattoo, now we're taking back our land

  21. Anonymous says:

    OK...

    Eric, and I know this may come as a shock to hear this from me but, I think it's time to shut down the comment section to your blog.

    The reason that I say this is because there is a person posting shit in your comment section that could seriously hurt people...

    Like going to another site where purported leaked reports are to be.

    This isn't a good thing...

    I believe in free speech, but there are some forms of speech which is harmful to people.

    And this is one of them.

  22. dashxdr says:

    I think this Nero, Viper, etc who keeps posting links to parked domain names is just spamming, trying to get visits to his for-sale domains up so it looks like there is more activity there.

    For the love of god, Eric, turn off anonymous posting, as well as the kind where people can write in their own name.

  23. Tank says:

    I've read granger at market breeze before. He's real...just sayin'.

  24. Jane says:

    USD is being hammered these few days. Mike Shedlock is as quite as He possibly can.

    Just last week He issued a USD bottoming out article. What a loser...

  25. Anonymous says:

    Anyone who's ever had a heart
    Wouldn't turn around and break it
    And anyone who's ever played a part
    Wouldn't turn around and hate it

    Sweet Jane, sweet Jane
    Sweet, sweet Jane
    You're waiting
    For Jimmy down in the alley
    Waiting there
    For him to come back home
    Waiting down on the corner
    And thinking of ways
    To get back home

    Sweet Jane, sweet Jane
    Sweet, sweet Jane
    Anyone who's ever had a dream
    Anyone who's ever played a part
    Anyone who's ever been lonely
    And anyone who's ever split apart

    Sweet Jane, sweet Jane
    Sweet, sweet Jane
    Heavenly widened roses
    Seem to whisper to me
    When you smile
    Heavenly widened roses
    Seem to whisper to me
    When you smile

    La la la la, la la la,

    Sweet Jane
    Sweet, sweet Jane

    ===
    Cowboy Junkies (Original version by Lou Reed)

    [Mickey:] "The whole world's coming to an end, Mal." [Mallory:] "I see angels, Mickey. They're comin' down for us from
    heaven. And I see you ridin' a big red horse. You're drivin' the horses, whippin' 'em. And they're spittin' and barfin' all
    on you now. They're coming right at us. And I see the future. There's no death 'cause you and I, we're angels." [Mickey:] "I
    love you, Mal..." [Mallory:] "I know you do, baby. I've loved you since the day we met."

    Anyone who's ever had a heart
    Wouldn't turn around and break it
    And anyone who's ever played a part
    Wouldn't turn around and hate it

    Sweet Jane

    You're waiting for Jimmy down in the alley
    Waiting there for him to come back home
    Waiting down on the corner
    And thinkin' of ways to get back home

    Sweet Jane

    Heavenly wine and roses
    Seem to aspire to me
    When you smile

    Sweet Jane

  26. NM says:

    It is really strange that some people find blog to copy-paste - songs?

    BTW,
    Here is a link to “famous” Anglo-Saxon economic journalist Ambrose Evans-Pritchard who is almost always on the “American side” of the “story” (not strange) – but sometimes he was able to see quite good things around.
    http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100000821/china-bernanke-and-the-price-of-gold/

    This time he concludes:
    “…
    China’s mercantilist export strategy has led the country into a cul-de-sac. China must continue to run its trade surplus. It must accumulate hundreds of billions more in reserves. Ergo, it must buy a great deal more gold.

    Where is the gold going to come from?
    …”

    Even if his conclusion probably would be “deflation of dollar”, the logic is actually on the Eric’s side.
    Namely question:
    WHERE is the gold going to come from?

    … has en inherent answer:
    The GOLD can not “come from” as “paper gold derivates” – so it is obvious that REAL gold (bullion) amount on the Planet is too small if you compared it with “paper gold” which can be “printed” indefinitely…
    Of course since “paper gold” CAN BE “printed” indefinitely its PRICE will be in accordance to it – worthless.

  27. Nero says:

    It's 9/9/09; click on http://www.LogicChip.com before 4:00pm EST today!

    Yes, you'll be glad you did.

  28. Granger says:

    US Dollar is taking a dirt-nap! How low can it go?

    http://www.LogicChip.com

  29. Piper says:

    LISTEN UP! I, as an American, can't believe what I see before me--> The dollar is dead.

    The USD has CRASHED over the past five months and at present trend, could be poised to drop off a cliff. From what I've read from various sources smarter than myself, there is little, if any, support below 71.

    What does this mean? What the heck do wave counts matter at that point? I've also read that in Weimer-era Germany, people used to take wheelbarrows full of Weimer-notes to the store to buy a loaf of bread. Is that what we're potentially looking at here in the U.S.? If so, this is scary stuff. I see people here advising everyone to buy gold and/or silver -- what good will that do you if everything tanks?

    If the US Dollar falls into the 60's or 50's, are we looking at $7/gallon (or higher) gas? How will people afford to even drive to work? Is our Republic, or very way of life here in the U.S. being threatened by a potential crash of our currency?

    http://www.LogicChip.com

  30. Sucker says:

    These spams for parked domain names are really getting irritating...

    Incidentally the a**hole who is doing it, you really are scum of the worst kind. I wish I believed in hell because you undoubtably would rot there.

  31. Anonymous says:

    Sucker,

    These are most likely posts from China, India, etc. Companies there will spam your domain to 1,000+ sites for something like 50-bucks.

    Hmmm...perhaps I should give it a try:)

  32. Anonymous says:

    @Piper

    LOL!

    The dollar isn't even at its lowest point in a year yet... thought as if this writing it's less then a full point away.

    But what this shows is how ignorant you are by making this statement:

    "The USD has CRASHED over the past five months and at present trend, could be poised to drop off a cliff."

    I mean did you not see the dollar go up 52 weeks ago (or there about)?

    Because of that statement that you made I declare you a dumb pos....

    Good day!

  33. Anonymous says:

    I meant to use this as the quote:

    "LISTEN UP! I, as an American, can't believe what I see before me--> The dollar is dead."

  34. Anonymous says:

    Hey Anon,

    Maybe the USD hasn't "crashed" in your view, but it's certainly not looking very healthy. Maybe Piper IS an idiot, but the reality is this -- unless and until our gov stops spending money we don't have, the dollar is eventually toast.

  35. dashxdr says:

    This "piper" comment is a ruse to attract click throughs to the included domain name.

    Evidently a business has arisen out of the internet:

    1) Locate parked domain name that might have value.
    2) Buy it.
    3) Find popular blogs and learn enough to understand what the topics are
    4) Write fake comments that sound realistic, but be sure to mention the URL and encourage people to click on it.

    See? Piper's comment is not real, he has no beliefs at all in the subject. His goal is to get you to click on the link provided.

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