Exclusive: U.S. lets China bypass Wall Street for Treasury orders

(Reuters) - China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury's first-ever direct relationship with a foreign government, according to documents viewed by Reuters.

The relationship means the People's Bank of China buys U.S. debt using a different method than any other central bank in the world.

The other central banks, including the Bank of Japan, which has a large appetite for Treasuries, place orders for U.S. debt with major Wall Street banks designated by the government as primary dealers. Those dealers then bid on their behalf at Treasury auctions.

China, which holds $1.17 trillion in U.S. Treasuries, still buys some Treasuries through primary dealers, but since June 2011, that route hasn't been necessary.

The documents viewed by Reuters show the U.S. Treasury Department has given the People's Bank of China a direct computer link to its auction system, which the Chinese first used to buy two-year notes in late June 2011.

China can now participate in auctions without placing bids through primary dealers. If it wants to sell, however, it still has to go through the market.

The change was not announced publicly or in any message to primary dealers.

"Direct bidding is open to a wide range of investors, but as a matter of general policy we do not comment on individual bidders," said Matt Anderson, a Treasury Department spokesman.

While there is been no prohibition on foreign government entities bidding directly, the Treasury's accommodation of China is unique.

The Treasury's sales of U.S. debt to China have become part of a politically charged public debate about China's role as the largest exporter to the United States and also the country's largest creditor.

The privilege may help China obtain U.S. debt for a better price by keeping Wall Street's knowledge of its orders to a minimum.

Primary dealers are not allowed to charge customers money to bid on their behalf at Treasury auctions, so China isn't saving money by cutting out commission fees.

Instead, China is preserving the value of specific information about its bidding habits. By bidding directly, China prevents Wall Street banks from trying to exploit its huge presence in a given auction by driving up the price.

It is one of several courtesies provided to a buyer in a class by itself in terms of purchasing power. Although the Japanese, for example, own about $1.1 trillion of Treasuries, their purchasing has been less centralized. Buying by Japan is scattered among institutions, including pension funds, large Japanese banks and the Bank of Japan, without a single entity dominating.

Granting China a direct bidding link is not the first time Treasury has gone to great lengths to keep its largest client happy.

In 2009, when Treasury officials found China was using special deals with primary dealers to conceal its U.S. debt purchases, the Treasury changed a rule to outlaw those deals, Reuters reported last June. But at the same time it relaxed a reporting requirement to make the Chinese more comfortable with the amended rule.

Another feature of the U.S.-China business relationship is discretion: The Treasury tried to keep its motivation for the 2009 rule change under wraps, Reuters reported.

Documents dealing with China's new status as a direct bidder again demonstrate the Treasury's desire for secrecy -- in terms of Wall Street and its new direct bidding customer.

To safeguard against hackers, Treasury officials upgraded the system that allows China to access the bidding process.

Then they discussed ways to deflect questions from Wall Street traders that would arise once the auction results began revealing the undeniable presence of a foreign direct bidder.

"Most hold the view that foreign accounts only submit 'indirect bids' through primary dealers. This will likely cause significant chatter on the street and many questions will likely come our way," wrote one government official in an email viewed by Reuters.

In the email, the official suggested providing basic, general answers to questions about who can bid in Treasury actions.

"For questions more extensive or probing in nature, I think it prudent to direct them to the or Treasury public relations area," the official wrote.

The granting to China of direct bidder status may be controversial because some government officials are concerned that China has gained too much leverage over the United States through its large Treasury holdings.

For example, economist Brad Setser, who is a member of the National Economic Council and has also served on the National Security Council, has argued China's large Treasury holdings pose a national security threat.

Writing for the Council on Foreign Relations in 2009, Setser posited that China's massive U.S. debt holdings gave it power over U.S. policy via the threat of a swift, large sale of U.S. debt that could send the market into turmoil and drive up interest rates.

But Treasury officials have long maintained that U.S. debt sales to China are kept separate from politics in a business relationship that benefits both countries. The Chinese use Treasuries to house the dollars they receive from selling goods to the United States, while the U.S. government is happy to see such strong demand for its debt because it keeps interest rates low.

A spokesman for the Chinese embassy in Washington did not respond to calls and emails seeking comment.

The United States has, however, displayed increasing anxiety about China as a cybersecurity threat. The change Treasury officials made to their direct bidding system before allowing access to China was to limit access to the system to a specially designed private network connection controlled by the Treasury.

China is among the most sensitive topics for bankers and government officials who court the country as a financial client because of its size and importance, and none would agree to comment on the record for this story.

A former debt management official at the Treasury who did not want to be identified said that as China's experience in the U.S. Treasury market has deepened over time, Chinese officials may have felt more comfortable taking the reins in the management of their holdings.

Their request to bid directly, in his view, came from a confidence that their money managers could buy U.S. debt more efficiently on their own than through Wall Street banks, which can often drive up the price of Treasuries at an auction if they know how much large clients are willing to pay. Such a practice that is not specifically illegal, though most traders would deem it unethical.

Evidence of China's growing sophistication as a money manager in the U.S. markets is clear in its expansion of operations in New York. Its money management arm, the State Administration for Foreign Exchange (commonly called SAFE), has an office in Midtown Manhattan and a seasoned chief investment officer -- former Pacific Investment Management Co derivatives head Changhong Zhu -- in Beijing.

A woman who answered the phone at SAFE's New York office said no one in the office was authorized to talk to the media.

(Editing by Martin Howell and Steve Orlofsky)

Related:

WHY IS CHINA OUR NATION’S NATIONAL BANK

Technorati Tags: U.S. Treasury,U.S. Treasury Bonds,U.S. treasuries,China,watch the other hand,radcals in the White House,Wall Street,debt,Treasury Department,Tim Geithner,Obamaland,People's Bank of China,CFR,finance,banking,SAFE

Generation Zero - The Real Problem is Our National Character

Americans have to start doing what is right, what makes sense and what we can afford, not what feels good. And that has to start in our personal lives and in holding our elected officials accountable. The days and easy decisions for America and Americans is over or there will be no America left, at least not one that anybody wants to live in or leave to their our kids and grandkids.

There is a new brilliant documentary out called Generation Zero that every American needs to see, that makes it all very clear. It pulls together everything from the past 40-years into a concise package, explaining how we got here and what we have to do to get ourselves out. If we make a U-turn and do what is needed, no matter how hard it is, we will make it. If we do not, we will fall by the way side like all former empires and superpowers that became arrogant and narcissistic.

Generation Zero is the film of the discussion and thoughts that every fiscal conservative and American who has uses their common sense has had many times over, without necessarily knowing all the facts. I know I and many of my friends have had this conversation many times, however, I didn't realize how close the country came to collapse during the dark days of September 2008. This film makes it clear how close we came to the abyss. The film opens and closes with video from CSPAN that reflects the anger of middle-class America and how close we came to a complete and utter meltdown on September 18, 2008 when there was an electronic bank run that was hurtling out of control. Watch this clip to understand the situation. It also explains to those who still don’t get it, where the Tea Party and other like movement have come from.

The film opens with well-respected financial bloggers like Barry Ritholtz, Michael Panzer and Jim Quinn discussing the breadth of the crisis.The film begins in a low-key manner and slowly builds to a crescendo of fear, corruption, greed and incompetence among the elite who control the country. Bannon puts the blame squarely on the shoulders of Wall Street bankers and their corrupt protectors in Washington DC. Essentially, the theme of the film is that the rich ruling elite have gamed the system for decades and have destroyed the middle class of this country. Government malfeasance in passing the Community Reinvestment Act, repealing Glass Steagall, and allowing 5 Investment Banks (Goldman Sachs, Bear Stearns, Lehman Brothers, Merrill Lynch, and Morgan Stanley) to leverage 40 to 1 led to the crisis. When these firms converted from partnerships, with individual liability, to corporations with no personal liability, Pandora's box had been opened.

Bannon skewers the Baby-boomers who came of age during the turbulent 1960's and then turned into the greedy yuppies of the 1980's and 1990's. Bannon brilliantly ties together this financial crisis with Strauss & Howe's book The Fourth Turning. It ties in the hope of The Greatest Generation, who sacrificed and knew real hardship (WWI, WWII, Korean War and the Great Depression) to give their children a better life without all that pain and therefore spoiled them, the boomers, who became the ‘me’ generation (and then produced another spoiled generation). The spoiled boomers went on to embrace progressivism, shortcuts and the belief that it truly was all about them and owed to them. And then they allowed themselves to be lead, convinced and ruled by special interests and elitists, who ended up also only being concerned with themselves, their own ideals and their own wealth.

The film proceeds through the Unraveling of the 1990's and early 2000's. Neil Howe is the calm voice of reason throughout the film. The Unraveling is induced by greed, short-sightedness, inability to make tough decisions and most of all debt. The prominent spokespeople in the film included Newt Gingrich, Tobin Smith, Shelby Steele, Amity Shales, Peter Schweizer, Steve Moore and Lou Dobbs.

The film style is very effective. When discussing the Wall Street investment bankers you see Great White sharks devouring huge chunks of meat. The symbolism is fitting. I think that every American who is concerned about the direction of this country should see this film. The ending to this film has not been written. We have entered the Fourth Turning. It can end in glory or annihilation. Neil Howe points out that we have come out of each previous Fourth Turning as a stronger nation. That bit of optimism competes with the massive debts and poor decisions that have been made over decades. A feeling of doom resonates throughout the film. Whether America can rise up and take this country back from the ruling elite is unanswered. The more people that see this film, the better chance we will have.

Fox Business Channel aired a 10-minute segment on Feb 19th at 7:00 pm about Generation Zero and Sean Hannity did a special on his show on Feb 23rd. Generation Zero has already been shown at the Tea Party Convention to a baby-boomer crowd, for the most part, and then a CPAC last week. It was received with raves at both events. Steve plans on a general release to movie theaters in mid-March. A tie in to the National Tea Party on April 15 would be a perfect way to have as many people as possible see this important film.

The film gives you hope that if we start using common sense, stop allowing ourselves to be programmed and brainwashed by the Progressive left and are willing to do the hard stuff that there is hope that we can get this country back on track.

Common sense is a God given gift, and when you stop using it things begin falling apart.

There are many people that are much better at economics and most other things than I, but to me the common sense thing(s) to do are: become more nationalistic and a bit more isolationist for awhile; start producing (making) products again and put tariffs on products that undercut us, coming from foreign countries; develop our own energy from a large variety of sources; follow the Constitution and over-turn all legislation that goes against it; go through government and union benefits and retirement packages and adjust them to sensible levels; cut fraud and waste in government and government run programs; overturn all of what has been passed in the Obama administration behind or backs or against our will; take back control of our schools, parental rights and media, close our borders and restrict immigration for awhile, and get ourselves and our kids back to church!

We have enough resources in America to produce everything we need including energy. It is time we stop being prisoners to the world or the elitist crazies in our own country. Elitist radicals who think they are smarter than the average person… when reality they are the problem and the reason we are in the fix we are in!! Ask Marion~

Wisdom: The Greatest Gift One Generation Can Give To Another - by Andrew Zuckerman

Everyone needs to see this movie: Generation Zero

U.S. Raises Estimate for 10-Year Deficit to $9 Trillion as Bernanke – Tapped by Obama to Continue as Fed Chairman??

Congressman John Campbell often shares his opinion(s) with his constituents when he believe the President is doing the wrong thing or when he has new information and updates. Here is today’s update:

Bernanke: As readers of this missive know, I frequently voice my opinion when I believe the President is doing the wrong thing.That has been the case with virtually everything he has done thus far. However, when he takes action that I believe to be correct or helpful, I will point that out as well. Such is the case this week when the President announced that he will reappoint Ben Bernanke as Chairman of the Federal Reserve for another 4 year term. This is a hugely important and very positive decision for the following reasons:

1. Independence: The Federal Reserve should make decisions for economic reasons and remain independent of the White House so as not to politicize those decisions. I would say this regardless who the President is. Bernanke is independent and will have been appointed by both Bush and Obama. Replacing him could have sent a sign that the Administration was trying to control the Fed which would have been a terrible message and precedent.

2. Past performance: With the benefit of hindsight, one can criticize some of Bernanke’s moves and statements during his first term. Certainly, he can be criticized for not identifying the depth of last year’s crisis sooner, among other things. But virtually none of us foresaw the severity of the crisis or offered a solution that would have prevented it. Bernanke’s swift and decisive action contributed to saving the economy from what would have been a complete collapse last October. He has done a good job so far and we should let him see the job through back to a normal economy.

3. Continuity: Markets hate uncertainty, this is particularly true now. Continuing Bernanke’s Chairmanship until January 2014 gives the markets some confidence that monetary policy will be consistent and measured towards the Fed’s mission of growth with low inflation.

4. No Debt Monetization: This is probably the single most positive sign from the Bernanke reappointment. The federal debt and deficits are huge, unsustainable, and a major risk to future economic growth. Not to mention, it continues to grow. One way to deal with these problems is to “monetize” the debt. That means that the Fed would print money and buy all the new debt issues from the Treasury rather than sell them in the marketplace. Whenever any government has done this on any meaningful scale, it has resulted in uncontrolled inflation and a precipitous decline in the value of the currency. Bernanke has been clear that he thinks this is disastrous economic policy, and he is entirely correct. But it can be a politically easy way out of the mess without raising taxes or cutting spending. But it can’t be accomplished without the Fed Chairman’s 'OK.' Make no mistake; the debt/deficit is still a huge problem. But by reappointing Chairman Bernanke, one of the worst ways to deal with it appears to be off the table. I would also argue that without debt monetization, future inflation prospects are muted somewhat.

I remain respectfully,

Congressman John Campbell
Member of Congress

----------------

By EDMUND L. ANDREWS – L.A. Times

Published: August 25, 2009

WASHINGTON — The Obama administration, citing an economic downturn that has been deeper than it had first thought, raised its estimate on Tuesday of the government’s deficit over the next decade to $9 trillion from $7.1 trillion.

The Office of Management and Budget also said that it expected the economy to contract 2.8 percent this year, substantially more than previously estimated, and that unemployment would peak at around 10 percent.

Even as the new projections cast a shadow over efforts in Washington to steer a middle course between rekindling inflation with too much fiscal and monetary stimulus or risking another recession with too little, President Obama announced that he would nominate Ben S. Bernanke to another four-year term as Fed chairman.

The announcement was made by Mr. Obama while on vacation on the island of Martha’s Vineyard, Massachusetts. It was aimed at maintaining an air of stability in the financial markets as the United States moved toward a recovery credited in part to unprecedented actions by the Fed to help avoid an even worse disaster.

“As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another,” Mr. Obama said at a news conference also attended by Mr. Bernanke. “But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve.”

On Wall Street, stocks moved higher in afternoon trading, bolstered not only by the news of Mr. Bernanke’s reappointment, but also by the release of the Case-Shiller home price index, compiled by Standard & Poor’s, which showed that home prices in 18 of 20 top U.S. metropolitan areas were beginning to inch up and new figures showing that consumer confidence had bounded back in August after slipping in July. A Conference Board survey of consumers found that fewer people said that business conditions were bad, and that consumers detected some hints of thaw in the job market.

Despite the budget shortfall, White House officials said they saw no reason to back away from President Obama’s ambitious and costly goal of overhauling the health care system. The new amount includes the cost of the health care overhaul as well as about $600 billion in additional revenue that the administration hopes to raise, two initiatives Congress has yet to approve.

“I know there are going to be some who say that this report proves that we can’t afford health reform,” said Peter R. Orszag, director of the Office of Management and Budget. But he said the opposite was true: the only way to control spiraling Medicare costs, he said, was to get control of overall health care costs by overhauling the system.

“The size of the fiscal gap is precisely why we must enact fiscally well designed health care reform now,” Mr. Orszag said.

Republicans are certain to attack that argument. Indeed, they are already doing so.

Analysts at the Congressional Budget Office put their 10-year deficit estimate slightly lower, at $7.14 trillion, though the agency uses a slightly different method to reach its number. The budget office takes into account only policies already in place, while the administration can consider policies and budget decisions that it hopes to install.

White House officials predicted that the budget deficit this year would peak at $1.58 trillion, though they said the 2009 shortfall would be about $261 billion lower than they had predicted in May. The main reason is that officials have decided that they will not need another round of bailout money for the nation’s banks. The Congressional Budget Official also estimated a deficit this year of about $1.6 trillion.

In the earlier budget forecast, administration officials had created a “placeholder” of $250 billion to cover possible costs of additional bank bailouts. They also assumed higher costs for the Federal Deposit Insurance Corporation’s expansion of deposit insurance and debt guarantees.

Even so, the administration is projecting that annual deficits will remain above $1 trillion through 2011 and will be bigger than any since World War II, even when measured conservatively as a share of the nation’s economic output.

The government’s total debt would roughly triple by 2019, to $17.5 trillion, under the new estimate, almost $2 trillion more than the White House estimated in May. Measured as a share of the nation’s economic output, public debt would hit 76.5 percent of gross domestic product by 2019 — by far the highest percentage in the past half-century — from about 56 percent this fiscal year. This year will be the first time the number has exceeded 50 percent since World War II. The previous estimate was about 67 percent.

The biggest reason for the additional red ink is the administration’s recognition that the recession has been deeper and unemployment has been much higher than White House forecasters assumed in their first budget estimate in May.

The added depth of the downturn is expected to increase payouts for unemployment benefits and other safety-net programs, while reducing tax receipts more than originally expected.

The administration had originally assumed that the economy would shrink 1.2 percent and that unemployment would average about 8.1 percent this year. Instead, the economy is expected to shrink 2.8 percent while unemployment is expected to average 9.3 percent in 2009 and 9.8 percent in 2010. The administration expects growth of 2 percent next year and 3.8 percent in 2011.

In contrast, the Congressional Budget Office expects a 2.5 percent contraction this year, followed by growth of 1.7 percent in 2010 and 3.5 percent in 2011. For the first time, administration officials officially predicted on Tuesday that unemployment would climb above 10 percent by early next year, from 9.4 percent in July.

The costs of the additional unemployment and the slower growth extend beyond the next year or two, not just because the economy will take longer to return to normal but also because the government’s interest expense will be compounding more rapidly.

Mr. Orszag estimated that, by 2019, interest expenses would account for more than 80 percent of the projected deficit of $917 billion.

Without offering any details, the White House budget director said that President Obama would soon unveil plans to reduce long-term deficits tied to soaring costs of Medicare, Social Security and other entitlement programs.

There are only two ways to do that:

1. Finally listen to the American People and Conservatives in Congress and dump Obamacare while over-hauling entitlement programs by attacking Fraud and major Tort Reform

(or)

2. Ration and short-change old people and people with special needs…

For gosh sakes… how long can we really believe that a government who is $2 Trillion off on their debt projection can run anything, let alone efficiently?? Now we should trust them to manage our healthcare, one-sixth of the U.S. Economy…?

Posted: Knowledge Creates Power – Cross Posted: Daily Thought Pad

Warren Buffett Joins Critics on Obamanomics: Too Much Spending – Too Much Debt – Not Sustainable: Stop Spending, Stop Printing Money and No New Big Pr

Double Dip Recession Around the Corner

Times Topics: Warren E. Buffett

IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.

The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.

To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.

They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.

The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.

The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.

Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).

Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.

But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.

Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.