By Pam Martens and Russ Martens: September 2, 2015
Shanghai’s Bull Statue on Its Bund Waterfront (left); Bull Statue in Lower Manhattan (right)
The Dow Jones Industrial Average plunged 469.6 points yesterday for a loss of 2.84 percent but Wall Street banks and trading firms took a far heavier bruising. Business media have been placing the blame for global stock market convulsions on China’s slowing economy, devaluation of its currency and seemingly unstoppable selloffs in its wildly inflated stock market. There would seem to be much more to this story than we know so far to explain the outsized fall in Wall Street bank stocks.
Yesterday, with the Dow losing 2.84 percent, the major names on Wall Street fared as follows: Citigroup, down 4.75 percent; Bank of America, down 4.65 percent; Wells Fargo, down 4.39 percent; JPMorgan Chase, down 4.13 percent; Morgan Stanley, down 3.86 percent; and Goldman Sachs, down 3.44 percent. The Blackstone Group, a private equity firm with significant involvement in China, lost 5.26 percent.
These outsized losses versus the Dow’s performance are becoming the norm among the Wall Street banks. In just three trading sessions on Thursday, August 20, Friday, August 21 and Monday, August 24, JPMorgan Chase lost 10.87 percent of its market cap or $27.18 billion. Despite JPMorgan CEO Jamie Dimon’s serial reminders of the bank’s “fortress balance sheet,” the market is unconvinced. One has to ask why.
One explanation making the rounds on Wall Street is that even if some of these Wall Street mega banks don’t have a lot of direct exposure to China, they do have a lot of direct exposure to loans they have made to countries and corporate customers who depend on China for earnings. China is the largest buyer of industrial commodities in the world and its economic slowdown and attendant collapse in commodity prices – from oils to metals to agricultural products – is making repayment of loans to banks look riskier.
The major Wall Street banks also have Prime Brokerage relationships with the major hedge funds, a fancy way of saying they provide margin and loans of securities for risky trading. A growing number of hedge funds have been taking a pounding as trading becomes more erratic.
Adding to the worries is the fact that more than 300 companies based in China trade in U.S. markets as American Depository Receipts (ADRs). Approximately 100 companies in China trade on U.S. stock exchanges with another estimated 200 trading over-the-counter in the United States. In 2014, Thomson Reuters estimated that the market capitalization of Chinese companies listed on just the New York Stock Exchange and Nasdaq Stock Market totaled more than $1.4 trillion. That’s a serious amount of money and there are concerns that U.S. market makers could take losses attempting to make a two-sided market in the shares during days when prices are whipsawing.
Another concern is that there may be Wall Street bank exposure to China that is off the radar screen. In February, Rolling Stone’s Spencer Woodman reported that a number of big Wall Street names like JPMorgan, Citigroup, UBS, and Merrill Lynch (the investment bank and stock brokerage arm of Bank of America) were underwriting bonds for real estate firms in China that were involved in forced evictions and relocations of Chinese residents in order to build large development projects. Woodman references a 2012 Amnesty International report which found that some forced evictions “resulted in deaths, beatings, harassment and imprisonment of residents who have been forced from their homes across the country in both rural and urban areas.”
Woodman reports further:
“Amid this heated debate, several overseas bond-selling documents show that some of America’s largest banks, including JPMorgan Chase, have helped to raise money for Chinese real estate companies that have expended considerable resources on demolishing buildings and ‘relocating’ people for their recent projects in China. (It’s important to note that the revelations in these documents do not necessarily point to the level of the injustices in the Amnesty report.) Two bond-selling documents, both marked ‘Strictly Confidential’ but uploaded to the website of Singapore’s stock exchange, state that, in 2012 alone, a company with bond sales facilitated by banks like JPMorgan Chase and Citigroup called Kaisa Holdings devoted more than $1 billion RMB, or $160 million USD, to ‘demolition and resettlement’ costs relating to its real estate projects. Other overseas bond documents show that in recent years, Bank of America and JPMorgan Chase helped to sell bonds for a Shanghai-based real estate firm called Future Holdings, which spent $131 million RMB on demolition and resettlement costs in 2011. Dispelling any notion that Future Holdings and Kaisa Holdings might be engaging in some sort of happy form of human relocation, both documents use similar language to make clear that disputes with original inhabitants of land they buy might cause ‘protests or legal or other proceedings.’”
Also in February of this year, the Wall Street Journal reported on the multi-year, ongoing investigation of JPMorgan Chase by the SEC and U.S. Justice Department over its hiring of relatives of Chinese government officials in a program known internally as “Sons and Daughters.” One email printed in the article quotes Fang Fang, JPMorgan’s former chief executive of China investment banking, describing a conversation he had at a 2008 dinner with a Chinese commerce ministry official who was appealing to Fang Fang to help save his son from being laid off at the bank. The email reads:
“The father indicated to me repeatedly that he is willing to go extra miles to help JPM [JPMorgan stock symbol] in whatever way we think he can. And I do have a few cases where I think we can leverage the father’s connection.”
