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China Bought US Debt In Violation Of Rules

From a forgiving Reuters:

U.S. caught China buying more debt than disclosed

By Emily Flitter [sic] – Thu Jun 30, 2011

NEW YORK (Reuters) – The rules of Treasury auctions may not sound like the stuff of high-stakes diplomacy. But a little-noticed 2009 change in how Washington sells its debt sheds new light on America’s delicate balancing act with its biggest creditor, China.

When the Treasury Department revamped its rules for participating in government bond auctions two years ago, officials said they were simply modernizing outdated procedures.

The real reason for the change, a Reuters investigation has found, was more serious: The Treasury had concluded that China was buying much more in U.S. government debt than was being disclosed, potentially in violation of auction rules, and it wanted to bring those purchases into the open – all without ruffling feathers in Beijing.

Shouldn’t we be grateful that China was willing to buy more US debt? Still, you have to wonder what they were up to.

Treasury officials then worked to keep the reason for the auction-rule change quiet, with the acting assistant Treasury secretary for financial markets instructing subordinates to not mention any specific creditor’s role in the matter, according to an email seen by Reuters. Inquiries made at the time by the main trade organization for Treasury dealers elicited the explanation that the change was a "technical modernization," according to a document seen by Reuters. There was no mention of China.

So the US caught the Chinese secretly buying blocks of our debt in a way that gives them control of the stock. Which is illegal. But instead of calling them on it and enforcing the law, which would preclude them from buying any future debt, the Treasury Department covered up the incident and quietly changed its rules.

The incident calls into question just how clear a handle the Treasury has had on who is buying U.S. debt. Chinese entities hold at least $1.115 trillion in U.S. government debt, and are thought to account for roughly 26 percent of the paper issued by Washington, according to U.S. government data released on June 15.

China’s vast Treasury holdings are both a lifeline and a vulnerability for Washington… Not knowing the full extent of these holdings would make it even more difficult to assess China’s political leverage over U.S. finances.

How can how much China owes of our debt be in doubt? You can bet your local bank knows to the penny how much you owe them. And you know, too.

The Treasury has long said that it has a diversified base of investors and isn’t overly reliant on any single buyer to digest new U.S. Treasury issuance. Evidence that China was actually buying more than disclosed would cast doubt on those assurances

Meaning, we suppose, that China might be the only country foolish enough to buy American debt. Or ambitious enough.

The United States sells its debt to investors through auctions that are held weekly – sometimes four times per week – by the Treasury’s Bureau of the Public Debt… The Treasury limits the amount any single bidder can purchase to 35 percent of a given auction

By the beginning of 2009, China, which uses multiple firms to buy U.S. Treasuries, was regularly doing deals that had the effect of hiding billions of dollars of purchases in each auction, according to interviews with traders at primary dealers and documents viewed by Reuters.

Using a method of purchases known as "guaranteed bidding," China was forging gentleman’s agreements with primary dealers to purchase a certain amount of Treasury securities on offer at an auction without being reported as bidders in that auction, according to the people interviewed

The practice kept the true size of China’s holdings hidden from U.S. view, according to Treasury dealers interviewed, and may have allowed China at times to buy controlling stakes – more than 35 percent – in some of the securities the Treasury issued

All of which begs the question — why was it so important to the Chinese to have a controlling interest in these blocks of stock? Were they trying to amass even more leverage against us?

Guaranteed bidding wasn’t illegal, but breaking the 35 percent limit would be. The Uniform Offering Circular – a document governing Treasury auctions – says anyone who wins more than 35 percent of a single auction will have his purchase reduced to the 35 percent limit. Those caught breaking auction rules can be barred from future auctions, and may be referred to the Securities and Exchange Commission or the Justice Department

Somehow we just don’t see the law ever being enforced in this case.

The Treasury Department generally does not comment on specific investors but a source in the department said China was not the only Treasury buyer striking guaranteed bidding deals. People familiar with the matter named Russia as being among the guaranteed bidders

Gee, Russia was breaking the rules to get more power over the US, too? What a shock.

This article was posted by Steve on Friday, July 1st, 2011. Comments are currently closed.

7 Responses to “China Bought US Debt In Violation Of Rules”

  1. Rusty Shackleford says:

    Sounds like the problem is at least twofold. 1) Running cover for the first black president, lest he be deemed a complete idiot and a failure, thus making blacks “look bad” and 2) in so doing, cause a communist takeover of the US economy, which, to many in the country is actually desirable because capitalism is evil.

    Be careful what you wish for, lefties. But to me, letting China infiltrate our economy is treason. I don’t care how it happens.

  2. Liberals Demise says:

    Is there no end to what line or Law the Crap Weasels won’t cross or break?
    Tweeking or modernizing a Law so you can slip through is still breaking it.
    It is a Gawd damn shame that we are being piecemeal by the low life bastards running the show!!

  3. Chuckk says:

    If China is buying too much U.S. debt, what does that say about the debt being offered by the rest of the world?

  4. tranquil.night says:

    Yeah, it’s bad, but what’s even worse and puts the debt tsunami in perspective is that the Fed and its zombie banks have been buying up the bulk of what China doesn’t, servicing the debt on the back of the value of people’s money. It’s just theft by another means. And the ChiComs aren’t even buying anymore.

  5. Reality Bytes says:

    I propose we sell China California. Old Glory will have a spare star. I bet we could pick up Mexico up for a song. Think about it. Blackwater isn’t busy. We can send them & the FBI in clean the place up. They got beautiful beaches. The food is amazing. They work hard & they all go to church.

    On a more serious note….the commercial banned for speaking to close to the truth.


    • tranquil.night says:

      RB, it might be better than continuing to let us get reconquered by our Southern chums. Even the ChiComs wouldn’t be so keen on that if they were in charge.

      That point Petronius made about cooperative interstate commerce being essential to Union holds true to California and others levying sales taxes on Amazon – they’re essentially interstate tariffs, exactly what the framers sought to limit & confound in most circumstances.

    • tranquil.night says:

      Well! I’m at the epicenter (geographically, not the issue) but you seemed to prophesy this right as it was hitting Drudge: “Official calls for Southern counties to secede from California – http://losangeles.cbslocal.com/2011/07/01/official-calls-for-riverside-12-other-counties-to-secede-from-california/

      Rush has said it no less than three times in three subsequent statements. “California’s lost.”

      Actually it’s at the final tipping point, this budget battle in which the Democrats and Moonbeam ‘have’ to massively raise taxes – where the country will be in another decade with unfettered Obamanomics. The resistance has the best organization in the South, and this might be the only realistic option to saving some portion of the state from an oppressive, nearly unstoppable regime.

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