Wednesday, October 08, 2008

Big Bail Out

If anyone has been wondering how come Banks in the US and European countries, where they must comply with financial rules, are failing, while their counterparts in China are not, an article which led to the suspending of a news publication could give some hint.

Finance and Economy is a national Chinese newspaper. It was ordered by the Department of Propaganda of the Chinese Communism Party to suspend operation for three months. The article was written by a young reporter about the 'pre-bail-out' of a branch of the Chinese Agriculture Bank, one of the Big Four commercial banks in China.

According to the investigative report, The Agricultural Bank of China (ABC) transferred YMB 800 Billion subprime loans ($130 Billion) to a State Run Fund Management Company. In order to convert state run banks to commercial markets, the Chinese central government supplied full fund in their face value to the bank. Similar measure had been applied to other Big Four banks. However, what happened before and afterwards drew the reporter's attention.

In one city level branch (Changde Branch of Hunan Provincial Branch of the Agricultural Bank of China), YMB 4.6 Billion ($0.7 Billion) subprime had been transferred to the State management company on a rate between 1% to 30%. The management company is then supposed to auction these sumprime. Before the public auction, the Changde Branch bought back all the subprime with a 1.5 times markup. So in the end, the management company pocketed hundreds of millions for loan laundrying, and the Changde Branch took 4.6 Billion extra for doing nothing. It was revealed that a senior official of the ABC, Vice President Luo Xi was behind the sequence of transactions, and have personal interest involved.

In an unrelated report, a Bank of Communications, another one of the Big Four, IT technician was fired because the employee discovered irregularities in transferring subprime to State Fund in the amount of billions and reported it to his supervisor.

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