Three Bites: "China and the Yuan, BP and the 'Shakedown' and Hedge Funds - a New Book"

Sydney M. Williams

Thought of the Day

Three Small Bites

"China’s Currency Move – Giving in to the U.S., or Simply a Smart Move?”

“Twenty Billion Dollars – A ‘Shakedown’?”

“Hedge Funds – ‘Pure as Slush’, but less Flawed than Other Financial Institutions”

June 21, 2010

China’s announcement that they had removed the Yuan from being pegged to the Dollar sent markets soaring overseas this morning. Twenty months ago, during the global financial crisis, the Chinese linked the Yuan to the Dollar – a fortunate decision, as the Dollar, becoming the world’s safe haven, rose. Against the Euro, it should not be forgotten, the Yuan has already appreciated 16% this year. It will now float versus a basket of currencies, similar to the policy they had in effect from mid 2005 to mid 2008, but will be limited to moves of +/- 0.5%.

The Wall Street Journal points out this morning that during the years 2005-2008 the Yuan appreciated 21% against the Dollar. They did not mention, though, that during that same time the Dollar Index fell 18%. With the Dollar now at highs, the decision to remove the peg to the Dollar makes sense. It strikes me that that the Chinese may simply be better currency traders than many of their counterparties.

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Republican Representative, Joe Barton, created a sensation when he apologized on Thursday to officials from BP for the actions of the Administration. It was a stupid thing to do. As a Friday Wall Street Journal editorial put it: “Everyone agreed they hate CEO Tony Hayward.” But the $20 billion “shakedown”, as Mr. Barton described the fund, is a different matter. The fund may allow claims to be paid more quickly – and BP now says they have already paid out $2 billion – and that is a good thing, but actions have consequences. Not surprisingly, the Financial Times questioned the fund. There are normal judicial procedures that are typically followed. They write that the fund “smacks of confiscation.” But they also make an important point: “…And it makes it hard for the U.S. – the biggest owner of foreign assets in the world – to resist other nations’ extrajudicial imposts.”

Tony Hayward, who was relieved of his duties on the Gulf, was widely criticized for sailing this weekend in a race around the Isle of Wight. However, very little was made of President Obama’s decision to spend four hours on the golf course on Saturday with Vice President Biden. To the best of my knowledge, the President is still on the job. Personally, I don’t object to either one’s activities, but this seems like Press favoritism.

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In what appears to be a fascinating book (I have ordered the book, but have not yet received it), Sebastian Mallaby, a fellow at the United States Council on Foreign Relations and a columnist for the Washington Post, has recently written More Money than God – a look at the hedge fund industry. He makes the point that capitalist societies have out-shone state-run economies and the reason is largely attributable to the fact that in capitalist-driven economies responsibility for allocating capital lies with the private sector. Mr. Mallaby now fears that governments across the developed world are trying to set back the clock.

With the exception of a handful, hedge funds are not, as James Mackintosh in the Financial Times wrote, “’too big to fail’, as the demise of 1500 such institutions in 2008 caused barely a ripple.” Mr. Mallaby’s twin conclusions are, according to the FT’s review, “governments must encourage hedge funds and don’t regulate (he would relax this decree for the very largest, leveraged funds).”

While the reviewer found some objections, it is refreshing to read that not everyone is demonizing hedge funds.