As the first losses at the Cullen fund are finally being published I thought it prudent to republish an article I wrote in June 2012. I sincerely believe these are just the first losses and that the Cullen fund is a dead fund walking.
Yesterday I pointed out that a Merrill Lynch banker had been on the founding board of Guardians of the Cullen fund fr0m 2002 until 2005 and while this may be totally innocent here is some information you might need to make up your mind.
Today as I was trawling trough my news sources I found an interesting article in der Spiegel about how Goldman Sachs had aided and abetted the Greek Government in hiding the fact that the Greek debt was far greater than was legally possible within the Euro framework.
What this article states is that the year 2002 was when banks started to offer in earnest to governments what they had been peddling for some years to their other clients.
This reminded me of some graphs which I endeavoured to find back for you.
Here is a graph which shows what changed in the banking model when the Glass Steagall act was repealed de jura in 1999 (de facto in 1997) From that moment on investment and commercial banks were allowed to merge taking away limits put in place after the first Great depression.
As you see in the left graph the Commercial banking system was kept honest because they would go bankrupt if they loaned money to people unable to pay it back but in the right graph you see that that incentive no longer exists.
In the graph below that you see that more mortgages are being sold from that moment on meaning that the run up to the mortgage crisis didn’t start in 2007 but in 1998.
And last but not least the third Graph shows that the sales of Derivatives is more or less parallel to the amount of mortgage sales.
What makes the two graphs below so interesting is the fact that while the mortgage and derivatives trade started in the mid nineties they both make a serious jump in 2003 indicating the fact that the banks had found a market for derivatives based on amongst others the mortgage market.
That market was what was to become the Sovereign Wealth funds or the piggy banks of entire nations. According to the article I mentioned about how Goldman Sachs helped Greece states that this process started in 2002 and these graphs support that. Here is what one insider said about that time:
“Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future,”
Now let’s get back to the Cullen fund. The Cullen fund idea came about in 2000. I don’t know where Dr. Cullen got the idea from but it is very likely that like everywhere else he got a visit from a friendly banker who told him they had found a way of pushing part of their liabilities to the future. And I am sure that dr. Cullen would have been interested.
He probably took advice from some people in finance and even Don Brash as the Reserve bank governor thought it was a prudent idea no doubt and he even had this great guy who struck it rich waiting in the wings to take a place on the board of Guardians.
(According to the unabridged version of the unauthorised biography of John Key, Don Brash and John Key were in regular contact during his banking career and John Key was also a specialist in getting governments and pension funds to buy the Merrill Lynch crud. However as he was embarking on a political career they obviously had to find another nice banker to help start the Cullen fund)
So the Cullen fund was born and it started investing in… you guessed it… 2003.
Now correct me if I’m wrong but if you have a Merrill Lynch banker on the board who is a specialist in all these newfangled financial products and has a proven track record in “wealth” management you have him on board because you trust him to choose the right investments right?
Bankers after all are all about making money for their clients right?
Well no, actually as is shown in the very same Greek Goldman Sachs connection. After they “helped” the Greek to hide their debt they shorted or betted against the Greek being able to pay off their debt.
As off 2008 Merrill Lynch collapsed under its exposure to the Mortgage crisis. It was bought by the Bank of America. Last year the bank of America moved $ 75 trillion worth of Derivatives out of the Merrill Lynch books which as an investment bank would not have been able to claim insurance (I.e. taxpayers picking up the tap) to a commercial bank effectively dumping those trillions of debt unto the US tax payer.
The moral of this story is that Banks are not out to help, they are out to make money and that is something worth remembering when we see the Cullen fund and the $112 Billion in off the books Derivatives become unglued over the next few months to a year. (Obviously that was a bit premature. I wrote this article in June 2012 so that is over 2.5 years ago)