Re: OT: "Dear AIG: I quit!" was, End of the dollar?

On Wed, 25 Mar 2009 14:24:18 -0600, F. George McDuffee
<gmcduffee@xxxxxxxxxxxxxxxxxxxxxx> wrote:
<snip>
And I
disagree that the US currency is overvalued. If it was, we wouldn't have
such large foreign investment. Overvalued currencies kill direct foreign
investment.
<snip>
You might want to think this through from the point of the
banksters rather than a normal human being.
<snip>
---------------
Just came across this article from Bloomberg detailing how the
cappo banksters are using KIKO [knock in / knock out currency
derivative contracts] to hose the Koreans when the US currency
appreciates. Similar grift used in most other areas.

Remember that Korea is a small part of Asia, and that similar
KIKO contracts have been sold throughout the area.

This results in a double bind. If the Dollar drops, the value of
the dollar foreign reserves drops and their products become too
expensive to export in dollar terms. If the dollar appreciates,
they get a hose job with the KIKO derivative contracts.

{Thinks -- if the cappo banksters are making all this money from
the KIKO contracts, why isn't this showing up on their ballance
sheets in the home countries? Where is the money going? Barclays
Plc, Citigroup Inc.?s Banamex unit, Goldman Sachs Group Inc.,
JPMorgan Chase & Co. and Merrill Lynch & Co. are specifically
mentioned in the article.}

--------
Korean Corporations Court Bankruptcy With Suicidal KIKO Options

By Yoolim Lee

March 25 (Bloomberg) -- Tucked into a quiet street in Daegu, a
once-bustling industrial city 300 kilometers southeast of Seoul,
Kumkang Valve Mfg. Ltd. looks deserted on a December afternoon.

There?s hardly any heat in the two-story brick headquarters even
though it?s snowing for the first time in three winters. Next
door, a dozen workers in navy-blue uniform jackets toil at the
few machines that are running. They?re welding ball valves that
will open and close oil and gas pipelines for Royal Dutch Shell
Plc and Saudi Aramco.

It wasn?t always this slow for 28-year-old Kumkang Valve and its
70 employees. In 2006, then South Korean President Roh Moo Hyun
honored the company for overseas sales that exceeded $20 million.
In 2007, founder and Chief Executive Officer Choi Kyung Shik got
another trophy, imprinted with Roh?s signature, after sales
topped $30 million.

Growth skidded to a halt in mid-2008 -- and not because orders
dried up. Along with the rest of the Korean economy, Kumkang had
been on a roll amid surging exports. The company?s crash came
after the fallout from currency contracts that Choi signed with
banks and now says he didn?t understand. In September, Kumkang
filed for bankruptcy because of changing exchange rates and terms
of the deals. In November, one bank closed the last of Choi?s
contracts, costing him $15 million, half of his annual revenue
last year.

50,000 Firms

Choi?s firm joined more than 50,000 businesses around the globe
that are in a similar predicament. As their currency bets go the
wrong way, many are struggling to make cash payments. Currency
deals that have gone awry are yet another dropping shoe in the
accelerating global economic crisis.

Choi?s involvement with soured currency transactions started in
2007, when he worried that the rising won would make his ball
valves too expensive for overseas customers. He bought currency
options based on the won-dollar exchange rate from the Korean
unit of Standard Chartered Plc and three other banks.

The deals, known as knock-in/knock-out, or KIKO, options,
involved two currency levels. Choi stood to profit from the bank
as long as the won strengthened until the capped ?knock-out?
price. If the won rose above that value, Choi?s right to sell
U.S. dollars at a favorable exchange rate to the bank would be
knocked out, ceasing to exist. If the won fell below the other
capped level, the ?knock-in? price, Choi would have to sell more
dollars to the bank at an unfavorable rate, taking a loss.

?Knock-In?

Choi ran into trouble when the won plummeted against the dollar
in early 2008, as U.S. investors started repatriating funds from
overseas assets amid the credit crisis at home. That triggered
the ?knock-in? provision that forced him to sell double the
amount of U.S. currency at the higher price.

From the beginning of 2007 to March 24, the won lost 33 percent
versus the dollar, becoming the worst performing among 16 major
currencies.

?I never imagined my company could go down over some silly
financial product,? says Choi, his gray hair making him appear
older than his 55 years as his eyes tear up in his chilly office.

Business owners the world over find themselves in the same hole,
company filings show. Firms in Brazil, Hong Kong, India,
Indonesia, Mexico, Poland, South Korea and Taiwan posted at least
$30 billion of losses on foreign exchange derivatives in the past
year, according to corporate filings, testimony to regulators and
research reports released in the 12 months ended in February.

?Zero-Sum Game?

Controladora Comercial Mexicana SAB, Mexico?s third-largest
supermarket operator, filed for bankruptcy in October after it
lost $1.1 billion from currency derivative deals it had made with
Barclays Plc, Citigroup Inc.?s Banamex unit, Goldman Sachs Group
Inc., JPMorgan Chase & Co. and Merrill Lynch & Co. In Poland,
losses by 40,000 companies involved in soured currency options
may cost $4.2 billion, the Association for the Defense of Polish
Entrepreneurs says.

Some banks made fees by selling their clients? currency
derivatives to third parties, says Lin Che Wei, who advised
Jakarta-based PT Elnusa on its losses from a currency derivatives
contract with PT Bank Danamon Indonesia, which is owned by
Temasek Holdings Pte and Deutsche Bank AG. Other financial firms
took the contracts onto their books and profited as their clients
lost money, he says.

?Some became a zero-sum game,? says Lin, former president
director of PT Danareksa, Indonesia?s largest state investment
bank. ?The bank made money when the customer lost money.? Bank
Danamon in February reached an out-of-court settlement with
Elnusa in a lawsuit about a derivative contract worth $9 million.
<snip>
In Seoul, 13 banks, several of them with foreign owners, sold
hundreds of currency-option contracts, bringing in surging fees.
Clients didn?t know about the fees because they?re routinely
hidden in contract jargon and require data and analysis not
included in the papers that customers sign, Das says.

Bank Profits

The eight banks that sold the most KIKO contracts reported 2.57
trillion won of profits at market price from outstanding
currency-option contracts as of Sept. 30, according to the FSC.
Those contracts included the currency options contracts the banks
sold to their corporate clients as well as those traded among the
banks themselves, the KFB said in a statement on March 9. KIKO
contracts accounted for about 12 percent of the total at the end
of 2008, it said.

Currency Crisis

The Korean won plunged to a record low of almost 2,000 in 1998,
causing foreigners to pull billions of dollars in capital from
South Korea. That triggered a wave of devaluations across the
continent. Bonds, stocks and currencies tumbled. Thousands of
businesses went bankrupt, and interest rates soared to 30
percent.

During that period, Korea suffered its biggest currency- related
derivatives debacle. In 1997, J.P. Morgan & Co. arranged seven
investments for five clients, including SK Securities Co.

J.P. Morgan?s so-called total return swap contracts involved
interlocking trades among four currencies: the U.S. dollar, the
Japanese yen, the Thai baht and the Indonesian rupiah. J.P.
Morgan, which merged with Chase Manhattan Corp. in 2001, called
the contracts ?Promax deals,? with Promax being short for profit
maximization.

?Déjà Vu?

The trades blew up after the baht plunged, detonating a chain
reaction of devaluation, bankruptcy, default and trading losses.
Four Korean firms sued J.P. Morgan in Seoul in 1998, saying the
U.S. bank hadn?t adequately explained the risks. In turn, J.P.
Morgan sued three Korean companies in U.S. federal court that
year, demanding they pay for the losses.

J.P. Morgan and SK Securities settled the $380 million suit out
of court in late ?99 after the U.S. bank agreed to invest $85
million for a 10 percent stake in SK Securities. J.P. Morgan
didn?t admit or deny wrongdoing.

In December 2002, Korea?s financial regulator fined SK Securities
1.2 billion won for disclosing too little in the settlement with
J.P. Morgan.

?It?s a deja vu,? says Kim Jung Tae, former CEO of Kookmin Bank,
referring to the current KIKO derivatives crisis. ?People never,
ever learn anything.?

<snip>

In June 2008, the over-the-counter market for currency
derivatives totaled $63 trillion, according to the Bank for
International Settlements. That?s bigger than the World Bank?s
$60.7 trillion estimate for global GDP this year.

Better Margins

As derivatives took off, JPMorgan and other Wall Street firms
were eager to pitch currency contracts in South Korea and other
emerging markets to boost earnings, Das says.

?The margins on these types of products are better in emerging
markets, as the clients are less sophisticated and less
knowledgeable,? he says.

Along with Citigroup and Standard Chartered, which have wholly
owned banks in Korea, HSBC Holdings Plc, Barclays and JPMorgan
are among global banks that sold KIKO contracts to Korean
exporters, according to a September survey of 102 companies by
the Korea Federation of Small and Medium Business, known as Kbiz.

<snip>
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http://www.bloomberg.com/apps/news?pid=20601109&sid=aDQ1pZabcyIo&refer=exclusive



Unka' George [George McDuffee]
-------------------------------------------
He that will not apply new remedies,
must expect new evils:
for Time is the greatest innovator: and
if Time, of course, alter things to the worse,
and wisdom and counsel shall not alter them to the better,
what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman.
Essays, "Of Innovations" (1597-1625).
.