Friday, May 15, 2009

Reproduction of a deleted Telegraph article

In my last post I linked to an article in the Telegraph that has since been deleted by the Telegraph. Lefty Peep, one of the regular commentators, has kindly linked to a site here (called Zero Hedge) that has reproduced the article.

The original article has been copied from the Zero Hedge website, and is reproduced below. The version on Zero Hedge, from my recollection, is an accurate copy of the original article. Zero Hedge suggests that the Telegraph article was taken down in response to a complaint from Mr. Patterson, whose views are the central point of the article, and who is now disputing that he said the things for which he has been quoted. Zero Hedge are now asking for the views of other individuals who were at the conference at which Mr. Patterson spoke, and the discussion of this can be found here.

I am reproducing the disputed article as I believe that it, if it does represent Mr. Patterson's views accurately, then it should be widely available. However, on reading the article, readers should be aware that the article is disputed by the subject of the article. The article follows below (I believe that the emphasis such as bold text has been added since the original article was published):
US 'sham' bank bail-outs enrich speculators, says buy-out chief Mark Patterson

The US Treasury’s effort to stabilise the banking system through the TARP programme is a hopelessly ill-conceived policy that enriches speculators at public expense, according to the buy-out firm supposed to be pioneering the joint public-private bank rescues.

“The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40pc of the money but get little of the equity upside,” said Mark Patterson, chairman of MatlinPatterson Advisers.

The comments are likely to infuriate Tim Geithner, the US Treasury Secretary, because MatlinPatterson took advantage of the TARP’s matching funds to buy Flagstar Bancorp in Michigan. His confession appears to validate concerns that the bail-out strategy is geared towards Wall Street.

Under the convoluted deal agreed earlier this year, MatlinPatterson has come to own 80pc of the shares while the US government has ended up with under 10pc.

Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.

“It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they’re doing this for the greater good of society,” he said, speaking at the Qatar Global Investment Forum.

Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. “At least the British are not hiding the bail-out,” he said.

MatlinPatterson said private equity and hedge funds were deluding themselves in hoping to go back to business as usual after the trauma of the last 18 months.

“This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance,” he said.

Alfa hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well,” he said.

Like many bears, Mr Patterson expects the great crunch to end in deliberate inflation, deemed a lesser evil than outright depression.

“The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed’s balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road,” he said.

Matlin Patterson, however, has missed the Spring rebound, the most powerful rise in equities in over 70 years. “We shorted the equity rally because we thought it was lunatic. We’ve kept adding positions seven times, and we’re still holding,” he said. Ouch!

At present there is no way to confirm that this was what Mr. Patterson said, and readers will need to consider this in whether they take the article seriously. However, there are a couple of points with regards to the article that might need highlighting. The first is that it is difficult to imagine any reasonable motive for why the reporter might have invented the quotes. After all, the article is based upon a conference where many people would have heard Mr. Patterson's discussion - and inventing things from such an event would therefore be an odd thing to do.

The second point to consider is that, if he said such things, Mr. Patterson would have risked any further involvement in bailouts and may have damaged the position of his company in any future bailout activity (Ratner calling his company's jewellery 'crap' comes to mind as a similar example). As such, retraction of the comments might be seen as an exercise in damage limitation, if the comments were indeed accurately recorded.

Neither of these points demonstrate that the article has accurately represented Mr. Patterson, but they are points that might be considered in making a judgement about the veracity of the article. I will, of course, field any comments on this from Mr. Patterson, and an explanation of why the original article is wrong, and why he has chosen to ask the article to be removed from the Telegraph.

In the meantime, I am guessing that many US taxpayers might find the alleged comments made by Mr. Patterson to be a matter of some concern. No doubt, many of these taxpayers might want to establish whether the comments were made and, if they were made, may find that their perspective on the various bailouts has shifted.

From the point of view of this blog, there is nothing new in the quoted comments and, if they are accurate, just serve to confirm an existing view. Of particular note is the comment suggesting that the banks are insolvent, a point made many times on this blog.

As a final comment, all credit to Zero Hedge for hanging on to the original article, and their efforts to establish the truth of what was, and was not, said. If such comments were made, they represent an 'insider' view that should be heard.


  1. There is a very interesting article on asset price inflation, or bubblenomics here:

  2. Is a Fractional Reserve Banking System Inherently Inflationary?
    Though this is off the main topic,
    I would interested to hear your opinion of this argument:

    It argues that saving money in a bank, under a fractional reserve system, is itself inherently inflationary.

    Any comments?

  3. Here's another article from the Telegraph that's very pertinent: America Threatens Trade War With China

  4. RE: Lord Keynes,

    You asked two questions. 1) Is Fractional Reserve Banking Inherently Inflationary and 2) does saving in a bank add to inflation.

    This just happen to be one of my favourite topics, so I will forward an answer.

    Answer to Q1
    "Fractional Reserve Banking" or simply "Banking" does create inflation when GDP growth is positive. It also creates deflation when GDP growth is negative.

    Inflation is caused not by the quantity of money in circulation as Cynicus Economicus would have you believe. It is caused by how often each unit of money is spent in a certain time period. Banking is a system that enables money that is not currently being spent by its owner to be spent by someone else, therefore increasing the velocity of money. In fact, it is possible in theory for a single dollar to fill the entire US economy because of the way banking works, but this would of course be a highly leveraged economy!!

    Banking has the potential to create huge levels of inflation. This is why central banks exist. They are independent of commercial banks and can step into the open market and control the velocity of money by interest rates. You must remember that interest rates are not set by the central banks. They are set by the open market. The central bank sets a target then buys bonds (quantitate easing) or sells bonds (quantitate tightening) from commercial banks to try and get close to the target.

    Although banking is inflationary and deflationary (it exaggerates the economy) it is controllable using central banks.

    Answer to Q2
    My belief is that all money exists only inside the banking system. Even M0 is still within the banking system, as it is only a form of transaction and not a form of store. Therefore if you save or spend, it is still in the banking system and cannot be saved into the banking system as it is already there. Saving has no effect on inflation.


    Great links to understand what's happening in the monetary world at the moment. Deflation v Inflation.

  6. Ambrose Evans-Pritchard giving it all 3 barrels here:

    You can read his (only slightly) more bonkers alter-ego at The Crunch Times:

  7. From RGE Monitor:

    "Will Lula's Visit Deepen the Brazil-China Economic Relationship?

    Brazilian President Lula hopes to increase Brazil-China trade and investment linkages in his May 2009 visit to China, which became the country's largest single trading partner in 2009. Brazil is a key supplier of soybeans, iron ore and other raw materials to China. In addition to boosting trade and especially investment, China and Brazil may also coordinate in seeking a greater role in global economic governance and in attempts to gradually diversify their savings and trade flows away from the U.S. dollar
    Lula: With trade between Brazil and China increasing more of it should be conducted in reais or yuan not in USD. Agreements signed on this visit likely to include sharing of images from satellites, agreement between China Development Bank and Petrobras, cooperation in trade and civil law, for ports and waterways. Brazil has more JVs in China (431 at the end of 2007) than China has in Brazil (94)"


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