China is trying to get out of its bad debts problem in part by asking many of the state-owned banks to find foreign partners to help them sell shares and go public. After the government spent $45 billion of its foreign currency reserves
bailing China Construction Bank and Bank of China out of their bad debt problems, things looked good. CCB's non-performing loans after the bailout were supposed to be only 12%. Citibank beat three other banks in the contest to lead China Construction Bank's initial public offering in 2004, and all was rosy. Citibank's outlook was so positive that they were set to not only lead the IPO and reap the commission, they were putting up $2 billion of Citi's own money to buy a 10% stake in CCB. Until this March, when CCB's chairman resigned…"for personal reasons", parroted the People's Daily Online
. Because he was another corrupt lamprey
is probably more like it. Citi got cold feet on actually staking its own money on the deal-2 gigabucks is a lot of money to invest in a Chinese state-owned enterprise with corruption problems from the top and an unknowable quantity of bad debt. They were still willing to be the lead on the IPO and sell this stock to others, mind you-they just didn't want any themselves, thank you very much. As punishment, CCB is freezing them out of the IPO they were to lead.
Victor Shih at Northwestern U shares Citi's circumspection
, noting that China's government is unlikely to refrain from interfering with the bank even after IPO. He also notes that even after IPO, outside owners will have little say in the management of the bank, which will fall to insiders. Likewise, the Communist Party continues to make all personnel decisions
and is likely to continue to do so. What kind of investment is this?
What happens to bad debt after the Chinese government bails it out? It goes to Asset Management Companies (AMCs) which are intended to recover as much money as possible from selling pledged collateral assets. Sort of a government repo man. Problem is, they did much of their recruiting for the AMCs among the ranks of the very people who caused the problem, and predictably, the crooks are pulling off one of the biggest double swindles in history. This story
is about a man who first helped create the problem by directing loans from his employer, a state-owned bank, to friends, relatives, politicians, and other cronies, then moved on to an AMC to sell off some of the same assets he'd corruptly lent money for, privileging his cronies by asking far under fair market value, and profiting handsomely. Sordid indeed.