The global capitalist crisis (Part 3) The big casino The following article was published in "The Guardian", newspaper of the Communist Party of Australia in its issue of Wednesday, November 18th, 1998. Contact address: 65 Campbell Street, Surry Hills. Sydney. 2010 Australia. Fax: (612) 9281 5795. Email: <[EMAIL PROTECTED]> Webpage: http://www.peg.apc.org/~guardian Subscription rates on request. ****************************** By Anna Pha When Malaysian Premier Dr Mahathir Mohamad blamed the hedge funds for the collapse of Asian currencies last year he was ridiculed by the International Monetary Fund (IMF) and Western economists as not understanding financial markets. Poor governance and cronyism were blamed for the economic crisis. Few people knew much about hedge funds until the Malaysian leader spoke out. When the US Federal Reserve's Chairman Alan Greenspan called in representatives of the largest US banks to organise a private, multi-billion dollar bailout of a US hedge fund facing bankruptcy, a great deal more information leaked out. Long-Term Capital Management (LTCM) as the hedge fund was called, was set up by a bond trader, John Merriewether, who hired two Nobel Prize economists and a former Federal Reserve Board vice- chairman to assist. The minimum investment to join the fund was $10 million. Returns on investments were more than satisfactory -- averaging a little under 40 per cent per annum. Much better than anything the banks or stockmarkets were offering. The fund had US$4-5 billion of pooled assets and borrowed large sums of money to give it US$200 billion to gamble with on the markets -- a debt ratio (leverage) of more than 40:1! The US$200 billion was used to speculate in currencies, bonds, derivatives and other financial instruments. An intricate web of financial dealings left it with a total market exposure of US$1,200 billion. That is, in the worst possible scenario it could have lost US$1,200 billion with a capital base of less than US$5 billion! Because hedge funds are private partnerships its activities were not regulated or controlled in any way. It took a little bad luck and the fund lost around US$4 billion, wiping out most of its capital base. The fund had built up a complex web of interconnected financial transactions and there was a real danger that this whole scheme would unravel and bring down the big banks and other financial institutions which had done business with the fund. There could have been untold repercussions. Many billions of dollars of creditors' money was at stake. Greenspan intervened. "Had the failure of LTCM triggered the seizing up of markets, substantial damage could have been inflicted on many market participants ... and could have potentially impaired the economies of many nations, including our own", Greenspan told the US Congress. Private sector bailout The bailout, to the tune of US$3.725 billion, was not just to save the financial system but a number of powerful financial institutions and individuals. Merrill Lynch with an exposure of US$1.4 billion played a big role in the bailout. Goldman Sachs; Bear, Stearns; Bankers Trust; Sumitomo Bank of Japan; the Bank of Italy (Italy's central bank); Dresdner Bank of Germany; and UBS of Switzerland were other big institutional investors in the fund. Merrill Lynch's chairman had a personal investment of US$800,000, and 123 of its senior executives had put in a total of US$20 million of their own money. Despite the bailout there is no guarantee that the hedge fund will successfully unravel its positions without further losses. Power brokers The revelations surrounding LTCM's bailout exposed the close ties between the banks, hedge funds, government and powerful wealthy individuals who head the financial institutions. The fund's massive leverage (debt to assets ratio) of more than 40:1 and the measures Greenspan and the banks went to, confirm claims by Dr Mahathir that the hedge funds have the power to dominate movements in financial markets and that is what they and the banks did in East Asia. Destroying a currency The hedge funds and banks get together and "short" a currency. They borrow billions of the currency and then continuously sell it to drive down the currency's rate of exchange (its price). In an attempt to stop the slide in its currency the central bank of the country concerned buys up its own currency using its foreign currency and gold reserves. But these reserves are rapidly run down because they are no match for the combined resources at the disposal of the foreign hedge funds and the banks. Eventually the central bank gives up and the currency crashes. The funds then repay the loans at the new lower rates, making massive profits. Transnational corporations can then move in to buy the assets of the country concerned at knock-down prices created by the crashed exchange rate. Trillions a day Between US$1.5-2 trillion is traded daily on international currency exchanges and possibly as much again on the unregulated "over the counter" markets, outside the exchanges. There is no public record of these "over the counter" transactions. An estimated 97.5 percent of all currency trading is purely speculative and is not related in any way to trade in goods, and services, tourism or other useful purposes. The combined wealth of the hedge funds is such that they can collapse currencies in a day. If a group of funds with hundreds of billions of dollars at their disposal decide to take on a relatively small currency like the Australian dollar or Thai baht which have been floated, they cannot lose. The floating of currencies and lifting of restrictions on capital flows in and out of countries have considerably increased the power of hedge funds and other financial institutions over governments. As Dr Mahathir said, "This deliberate devaluation of the currency of a country by currency traders purely for profit is a serious denial of the rights of independent nations." Once the currency has been crashed and the economy of the country concerned is in crisis the way has been opened for the IMF to come in with its "rescue" package. IMF moves in This alleged "aid" is used to impose drastic "reforms" on the government of the country concerned, forcing it to privatise publicly-owned enterprises and services, cut social welfare, education and health services and accept the so-called free trade policies. Industries are forced to close, banks are bankrupted and millions thrown out of work. This is what has happened in Indonesia, South Korea, Thailand, the Philippines, Mexico and Brazil. In the past imperialism imposed colonialism by using troops and gun-boats. Today it is done by hedge funds, banks and TNCs which, by controlling the economy of whole countries, also control the government of that country. In a deregulated environment central banks do not have the power to successfully oppose determined hedge fund operators and prevent currencies being decimated. The financial resources in the hands of the speculators far exceeds the reserves of most central banks. LTCM had US$200 billion to play with -- around eight or ten times the amount that the Reserve Bank of Australia has in foreign reserves and gold. During the Asian currency crisis in 1997 more than $100 billion of currency reserves were sucked up by the hedge funds, banks and other financial institutions, leaving the economies of many countries and their currencies more vulnerable than ever. The full might of the financial sharks was seen in Russia where they forced the central bank as government banker to hand over its functions to a private bank. The government's money was used for gambling, state employees' did not receive their wages and debts could not be repaid resulting in the private takeover of public assets. Instability The control by hedge funds and other financial institutions of huge financial resources gives them a tremendous advantage over markets and governments. But the extensive use of derivatives and other highly speculative and risky instruments has increased the instability of the financial system and capitalism itself. For workers it means even more insecurity. (See opposite for explanation of derivatives.) The funds not only attack currencies but bond markets and stockmarkets causing them to depreciate sharply in a way that does not reflect the underlying economy but can have serious ramifications for the real economy, for people's jobs and living standards. Reimpose controls The development of global financial markets and the interdependence of economies means that no corner of the globe can escape being exploited by these speculators -- unless governments reimpose controls over the inflow and outflow of capital, prohibit speculation in currencies and the export of profits by foreign- owned companies. It is essential that governments reimpose controls over their own trade. This is what Malaysia is attempting to do, a course that was adopted by Hong Kong, China, Russia and is spreading to other Asian countries. This trend is being vividly reflected in the decisions coming from the present APEC meeting being held in Kuala Lumpur and is being vigorously opposed by the Australian and US Governments which are front-runners in the demand that all other countries open up so that the financial speculators and TNCs can have an open go. They are clearly disappointed that more and more governments are determined to defend their independence and sovereignty. The Guardian | Phone: (02) 9212 6855 65 Campbell Street, | Fax: (02) 9281 5795 Surry Hills. 2010 | Email: [EMAIL PROTECTED] Sydney. Australia. Website: http://peg.apc.org/~guardian
