In November 2008, Chinese banks said they would no longer play by our rules. Top tier banks (Bank of China and Industrial and Commercial Bank ofChina) reneged on derivatives contracts. They failed to come up with billions in collateral on dollar/yen FX trades, which were out of the money after the yen’s October appreciation. This should have been headline news in every financial newspaper, but it wasn’t.
Most credit support annex agreements would say that closing out these trades would be an event of default, and then the cross default on all the trades would kick in with the same counterparty. But the credit of the Chinese banks was better than many of their counterparties. Everyone was forced to renegotiate contracts with the Chinese banks.
From the perspective of the derivatives markets, this is earth shattering. What would have happened ifAIGhad done the same thing? (Hey, Goldman,UBS, and others…you want your collateral? Well…Stuff It!)
At the end of August 2009,Chinasignaled that state owned oil consumers: AirChina, COSCO, and China Easterncould defaulton money-losing commodities derivatives contracts.
If we had been paying attention, the U.S. should have done everything in its power to correct our mistakes, clean up the mess in our financial system—instead of sweeping it under the carpet—and turned our efforts to maintaining the credibility of the capital markets and the credibility of the dollar.
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