Devil in the Details
Research for Online Investors

6/29/12

Bloomberg is banned in China this morning.  Their website does not appear in any searches from the mainland. What broke?  Bloomberg had the audacity to publish an article yesterday exposing the next possible President of China, Xi Jinping, as a profiteer.  Xi’s extended family has amassed a fortune.

This is not popular in China.  Bloomberg did a good job of digging through documents to find business interests from rare earth mining companies, a technology company to Hong Kong real estate.  Xi’s nor his wife's name does not appear on any of the ownership documents.

Xi is the child of Xi Xhongxun.  The elder Xi was a revolutionary fighter with Mao Zedong who gained control of China in 1949.  Because of his father’s ties to Mao, his sons are referred to as “princelings.”  Their linage allows them to wield influence in business and politics.  Xi’s sister and her family seem to be the largest offenders of capitalizing on their namesake.

Xi may not have known his sister and her family were amassing a fortune.  He warned officials in 2004 about graft in a conference call “Rein in your spouses, children, relatives, friends and staff, and vow not to use power of personal gain.”

This is embarrassing, as always the devil is in the details.  You can read the problematic article Xi Jinping Millionaire Relations Reveal Fortunes of Elite.

Sanctions against any country buying crude oil from Iran are scheduled to tighten next week.  This law was passed in December to give President Obama the tools necessary to stop Iran’s nuclear enrichment program before they built an atomic bomb or Israel bombed them to destroy their capability.

The president dutifully carried the water to push sanctions against Iran.  His Secretary of State, Hillary Clinton, has flown around the world and chatted up the sanctions as tough and effective.  In March, the administration granted exemptions to Japan and ten European countries.  In early June, they granted exemptions to India and six other countries. Yesterday, the administration exempted China and Singapore.  That makes 20 countries Iran can sell crude oil to next week with inpunity.

Boy…those are tough sanctions.

The market is up this morning on relief that Angela Merkel gave in so the eurozone can start giving away money, hand over fist, to anyone anywhere.  Whoa pardner…it is not that straight forward.

This morning at 4:30 a.m., after 14 hours of meetings, eurozone leaders agreed to use the EFSF to bailout Spain’s banks and enter bond markets to lower borrowing costs for Spain and Italy.  Furthermore, when the ESM is approved and active it can be used in the same way.

ESM rules require that any money used out of it in bailouts have preferential status.  Germany agreed to waive this for the Spanish bank bailout, since it had applied before the ESM was active.

Money flowing directly to banks from either of the bailout funds is a big change.  Previously, all monies had to flow through the sovereign which then could loan or invest it in the banks.  This added to the sovereign debt and created more market uncertainty.  It is being done on the condition that a bank supervisory body and rules, are set up by the end of the year.

The devil is in the details, and we think the details will make this BIG breakthrough less than it appears.

Changes have to be approved by unanimous votes.  Germany’s parliament has not even approved the ESM yet.  Finland and the Netherlands are two countries that will look dimly on any sort of FREE money.  Any country that wants the EFSF or ESM to buy their bonds must apply to the European Commission.  Just like the present bailout procedures, conditions will be set and the country will have to comply.

Quote:
Socialism is a word that is a hate crime if used about an American politician who wants us to be more like Europe. Or, alternatively, a word used by many European politicians to define themselves.---Cliff Asness

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