Chris Knipp Writing: Movies, Politics, Art

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PostPosted: Mon Mar 26, 2018 7:34 am 
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America's volatile unregulated financial market cruising toward another crash - via China.

Here is another documentary exposé - from Alex Gibney and the other producers of of Enron: The Smartest Guys in the Room - of the fraudulence of the US financial system and the devious methods it has been using. In this case the focus is on events since the 2008 financial collapse, and involves dangerous the use of the "capitalist" boom in China. Another huge heist emerges quickly before our eyes. Jed Rothstein's film is breezy, accessible and entertaining, but anything but reassuring. I wish it had been angrier and more analytical. It may slip by too easily. Some of its components are a little lazy or flat. But it's message is potent.

After the great recession of 2008 Wall Street operators immediately went to work to find a new crooked, unsafe way of making big money. This involved China, where everything was booming, or appeared to be, and the Chinese market became desirable for US investors. They used a "backdoor" process to get the stocks listed on the market quickly, without audits, called a "reverse merger" - meaning merging Chinese companies into the shell of a defunct US company like a mining company in Nevada, a company no longer functional but still "listed." Firms Roth and Rodman made profits bringing Chinese companies to the US, but the real money came listing them on the NY Stock Market. The banks and big investors cashed out when the values of the stocks went up high and left others holding overvalued shares.

But the real fraud of all this emerged when a man named Carson Block actually went to China, initially to establish his own storage company, called Love Box. Then he started investigating the actual physical plants in China of some Chinese companies that were on the US stock market. What he found was fakery and exaggeration - junk, in fact, companies with none of the value they claimed to have.

To start off with Block visited a paper company called for US stock purposes Orient Paper. He found it to be basically a dump, producing virtually nothing, and possessing no raw materials remotely worth its claimed $150 million value. Based on the Chinese saying, "Muddy waters make it easy to catch fish," he started a new firm called Muddy Waters, to put out reports on companies like this, "fish" he'd caught in the "muddy waters" of their false claims.

Carson Block's report on Orient Paper tested the waters of the effectiveness of his reports. Describing Orient Paper in a widely issued report, he recommended to US investors in it a "strong sell," i.e., get rid of this stock fast. It worked. In a few days his report made Orient Paper stocks go down rapidly on the stock market.

Here China Hustle backtracks to show how a situation like this could so easily happen in America, of stocks sold for companies with nothing like their claimed value. The reason is - rather hastily stated and we must take this on faith, but it fits in well with earlier patterns in other documentaries - that the various kinds of official guarantors or certifiers of the trustworthiness or validity of stocks are a mere sham. Bankers, auditors, and lawyers "ensuring" the quality of companies are superficial and unreliable. They are rubber stamps. They merely backup the claims of the companies' management. This seems to have been news to the firms like Roth and Redman that had been the conduits for the Chinese companies into US stocks. How could that have been? Do they not watch the films of Alex Gibney? Or Charles Ferguson's rigorous 2010 indictment Inside Job?

Others beside Block investigated Chinese companies that had wound up on the stock market and were overvalued or fraudulent. Then the possibility arose of "short selling" these stocks - betting on the companies stocks failing because they were no good. A safe bet, when you know. With over 300 reverse mergers of businesses in China, it turned out from $20-50 billion was lost by investors on fraudulent China businesses.

Time out for more explanation: "guanxi." This is the word for the Chinese system of mutual back scratching between companies and those around them, doing mutual favors that can be called back later. This was used when American "short sell" specialists, secretly investigating fraudulent companies, were detected, and the companies called back favors from local authorities according to the "guanxi" system to stamp out the disguised investigators they had found out. One of the key Chinese investigators, Kun, goes to jail for two years; the police are in collusion with a fraudulent silver mine called SilverCorp. Guanxi is a system that works in a country where the legal system is very loose, like "the Wild West," an American professor teaching in China says.

Dan David, CEO of Geo Corp, one of the main short-sell guys, followed throughout the film and its de facto guide and whistleblower, tries to go to lobby Congress, The short sellers, though, turn out to have stopped 40 times more fraudulent Chinese companies than Congress. The problem is, though the short sellers make money and also stop the bad companies, beneficial for them and for the economy, the private US investors and mutual funds, pension funds, and retirement funds go on losing money in this process - in the billions of dollars.

The capitalist system, this film says, and says it more than once, favors making money, not morality. So it winds up favoring crooks. Dan David keeps going after the bad Chinese companies, exposing them and bankrupting them: this is the only really viable weapon he has. Not the law, not Congress. The film shows David going after a big Chinese company called TechPro, attacking it not by going online but by addressing a large number of people in Hong Kong.

The film here spends a little time - not too much; it would be too sad - on small private investors with no retirement accounts who lost (for them) big time, $100,000, say, or half of all their investments, on a Chinese stock that turned out to be worthless, sometimes pennies on the dollar, sometimes literally zero.

This could happen on such a scale becaue the US government is not protecting its investors. Quite the reverse. David and others at the end tell us that this is a "perfect storm," another 2008 waiting to happen - helped along with a big further boost, promised anyway, from President Trump, who says he will disable by another 70% the US's already too loose financial regulations.

Along comes a big Internet company from China, called Alibaba Group, and it's huge on the US Stock Exchange, and not introduced by the back door this time through a reverse merger, but via a giant IPO. Its CEO, Jack Ma, is worth $40 billion and one of the richest men in China. A financial journalist states that buying Alibaba stock is like buying a lottery ticket. Basically, the China market is not safe. It's not regulated, laws are not enforced, it's rife with crime. Jack Ma, seen being chummy with President Trump, and saying "trust me," is proof of how huge the danger now is.

That $50 billion lost to fraud is nothing. It's much bigger than that, because, it's not just Roth and Rodman, a couple of banks, it's all the banks, and it's going to get much, much, bigger. A tsunami is going to happen, and the US economy is sailing right into it. Rodman, by the way, we're told, after filing for bankruptcy, "merged with a competitor and re-entered the investment banking business." The bad guys stick around as long as they can, till it all goes down.

The film closes with a series of titles to tell us: That Carson Block still runs Muddy Waters and has become one of the most successful short sellers in America. Matt and Soren, two other short sellers featured in the film, continue to short frauds and have opened their own firm in Texas. Former General Wesley Clark, who left the film when he saw it was not going to make him look good, who was the titular head of Rodman, has joined the boards of at least 18 public companies and continues to speak at investment conferences. He knows nothing about investment. (He is a figurehead.) Kun is trying to sue SilverCorp for his wrongful imprisonment. Dan continues to invest short and still press his crusade in Washington. Only one of 400 Chinese companies that came to market during the reverse merger boom has had a CEO who's gone to prison, despite all the frauds.

And here's a clincher: In 2016, the Securities and Exchange Commission that regulates stocks, initiated an investigation on Alibaba's accounting practices. Then, in 2017, President Trump appointed jay Clayton, who worked as a lawyer on Alibaba's IPO, to head the SEC.

The combined market value of the 100 Chinese companies currently traded on US stock exchanges is now 1.1 trillion dollars.

The China Hustle is a little film with a big warning. 1.1 trillion dollars is no small chunk of change. China's shakey companies can destroy the US economy, and cause a tsunami in world markets.

China Hustle, 84 mins., debuted at Toronto Sept. 2017. Co-produced by Alex Gibney, distributed by Magnolia, showing in New York at IFC Center from 27 Mar. 2018, Landmark Bay Area from 30 Mar.

©Chris Knipp. Blog:

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