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Citi Faces $270 Million Loss; "In Panic" Over Chinese Port Commodity Fraud
Despite the near-record scream higher in Chinese stocks over the last few months, under the surface China is rattled and nowhere is that more evident than in the collapse of its commodity-backed ponzi-financing deals. Since we first uncovered the fraud at the port of Qingdao, another has appeared that is just as fraud-ridden - Penglai; and Citi and Mercuria Energy are arguing over who pays. According to Mercuria's lawyer Graham Dunning, Citi was "in a state of panic," when they uncovered the fraud. As Bloomberg reports, Dunning exclaimed "it appears that substantial quantities may be missing from the warehouses or may be the subject of multiple pledges," and the bank says it is owed at least $270 million. Other 'banks' have been less forthcoming about their potential losses, but the government probe has so far uncovered almost $10 billion in fraudulent trade, including irregularities at Qingdao, according to the country’s currency regulator.
Suspected metals fraud in China sparked claims of betrayal by both U.S. bank Citigroup and trade house Mercuria over who would absorb about $270 million in exposure to financing deals, a London court heard this week.
The dispute:
Mercuria held copper and aluminium in Chinese warehouses and agreed a series of deals that were effective loans from Citi using the metal as collateral.
Under the repurchasing agreements, or repos, Citi agreed to purchase metal from Mercuria before selling it back at a slightly higher price to include interest on the effective loans.
The two groups were in the midst of several repo deals when the potential fraud in China was uncovered in warehouses in both Qingdao and Penglai. Citi demanded early repayment of the repos and Mercuria refused.
Citigroup was in a “state of panic” when alleged fraud was uncovered in two Chinese ports, Mercuria Energy Group Ltd.’s lawyer said as a London trial over disputed metal finance deals got under way.
“The discovery of the fraud was a massive problem for Citi as it was their metal and it was at their risk,” Mercuria lawyer Graham Dunning told a London judge. “There was a state of panic.”
The disputed copper and aluminum is under lockdown in the ports of Qingdao and Penglai, where Chinese authorities are investigating an alleged fraud. Neither side can get access and they don’t know how much of the metal is there, Dunning said at a pre-trial hearing in August.
Citigroup argues that it effectively delivered the metal to Mercuria under the terms of a sale-and-repurchase agreement by handing over warehouse receipts. The bank says it is owed about $270 million. Mercuria, a Cyprus-based firm with major trading operations in Geneva, argues the products were never properly delivered.
“It appears that substantial quantities may be missing from the warehouses or may be the subject of multiple pledges,” Dunning said today.
...
The probe at Qingdao, China’s third-largest port, is examining companies owned by a Chinese-Singaporean metals trader, Chen Jihong, who is alleged to have pledged the same metal inventories multiple times for collateral on loans. Chinese authorities have uncovered almost $10 billion in fraudulent trade, including irregularities at Qingdao, according to the country’s currency regulator.
Citi was worried about reporting a potential "hole" in its balance sheet to regulators while Mercuria was in the process of arranging a huge acquisition of the physical commodities business of bank JP Morgan Chase, lawyers said.
...
But the Chinese authorities imposed a lockdown on parts of the two ports where the metal is held, preventing anyone, including Citi, Mercuria and the warehouse operators, from accessing the material, court documents said.
"We expect them (Mercuria) to keep us out of a potential messy situation," according to an email from John Young, Citi's managing director of commodities business development, cited in court documents.
Mercuria's Chief Financial Officer Guillaume Vermersch promised Citi that "Mercuria would make Citi whole if there were issues concerning the underlying metal"
So Citi went for Blackmail...
Young suggested that Mercuria be reminded that it had extensive financial arrangements with Citi, including $4 billion in credit and borrowing facilities and over $14 billion of bilateral trade facilities, plus potential help in financing the purchase from JP Morgan.
But Mercuria resisted what it regarded as unfair pressure...
"Citi hoped that...it could force Mercuria to agree on its quick exit from a difficult position and hence enable Citi to fill the potential hole in its balance sheet... which was concerning the regulators in London and New York,"
* * *
The precedent in this case is important as dozens of trading intermediaries will be on the hook if Citi's claims are upheld and the smaller trading units are severely under-capitalized to cope with any forced deliveries.
* * *
Addenda: since, we suspect, commodity funding deals, the transactions at the basis of the broken Chinese repo/rehypothecation pathway will once again become a prominent feature of the mainstream media circuit as soon as journos figure out the losses are mounting, here is a reminder of the key basics involved , as we posted over a year ago.
An example of a typical, simplified, CCFD
In this section we present an example of how a typical Chinese Copper Financing Deal (CCFD) works, and then discuss how the various parties involved are affected if the deals are forced to unwind. Exhibit 3 is a ‘simplified’ example of a CCFD, including specific reference to how the process places upward pressure on the RMB/USD. We believe this is the predominant structure of CCFDs, with other forms of Chinese copper financing deals much less profitable and likely only a small proportion of total deal volumes.
A typical CCFD involves 4 parties and 4 steps:
- Party A – Typically an offshore trading house
- Party B – Typically an onshore trading house, consumers
- Party C – Typically offshore subsidiary of B
- Party D – Onshore or offshore banks registered onshore serving B as a client
Step 1) offshore trader A sells warrant of bonded copper (copper in China’s bonded warehouse that is exempted from VAT payment before customs declaration) or inbound copper (i.e. copper on ship in transit to bonded) to onshore party B at price X (i.e. B imports copper from A), and A is paid USD LC, issued by onshore bank D. The LC issuance is a key step that SAFE’s new policies target.
Step 2) onshore entity B sells and re-exports the copper by sending the warrant documentation (not the physical copper which stays in bonded warehouse ‘offshore’) to the offshore subsidiary C (N.B. B owns C), and C pays B USD or CNH cash (CNH = offshore CNY). Using the cash from C, B gets bank D to convert the USD or CNH into onshore CNY, and trader B can then use CNY as it sees fit.
The conversion of the USD or CNH into onshore CNY is another key step that SAFE’s new policies target. This conversion was previously allowed by SAFE because it was expected that the re-export process was a trade-related activity through China’s current account. Now that it has become apparent that CCFDs and other similar deals do not involve actual shipments of physical material, SAFE appears to be moving to halt them.
Step 3) Offshore subsidiary C sells the warrant back to A (again, no move in physical copper which stays in bonded warehouse ‘offshore’), and A pays C USD or CNH cash with a price of X minus $10-20/t, i.e. a discount to the price sold by A to B in Step 1.
Step 4) Repeat Step 1-Step 3 as many times as possible, during the period of LC (usually 6 months, with range of 3-12 months). This could be 10-30 times over the course of the 6 month LC, with the limitation being the amount of time it takes to clear the paperwork. In this way, the total notional LCs issued over a particular tonne of bonded or inbound copper over the course of a year would be 10-30 times the value of the physical copper involved, depending on the LC duration.
Copper ownership and hedging: Through the whole process each tonne of copper involved in CCFDs is hedged by selling futures on LME futures curve (deals typically involve a long physical position and short futures position over the life of the CCFDs, unless the owner of the copper wants to speculate on the price).
Though typically owned and hedged by Party A, the hedger can be Party A, B, C and D, depending on the ownership of the copper warrant.
* * *
Please note the bolded, underlined text above. That's more or less the whole story here... and consider every commodity that has been used for the purpose of collateral has been utterly devastated in price considerably exaggerating the problem.
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U.S. banks will stick their dicks in anything they think puts out.
Oh yeah and this problem didn't go away except in the MSM.
I bet all those other 10,000 fucking problems in the last eight years didn't disappear either except in the flash drives of the MSM
the shareholders of citi held a referendum on whether or not citi should take possession of its "collateral"
we are pleased to report that the referendum was rejected, by about 80 to 20
so that should settle the issue
hugs,
the stewards of citi
Hey! Who let the cat out of the box?
Combine musica chairs with russian roulette
http://y2u.be/tOW5eljyjms
I sort of hate to quote Denninger but, "there's never just one cockroach".
we rehypothecated some folks.
It's kind of fun watching Citi get it's ass burned by the physical commodity world. They should stick to what they do best- twiddling fiat numbers in a computer.
Now if only there was some other physical commodity that was massively mis-priced and with unsure physical posession that would rise up and smack banks like Citi and others in the ass.
Maybe we need something catchy, so the kids can meme it up on the internets, like, I dunno, "gold, aauuuuu" [girl voice] with a cute furry cat pawing a krugerrand, or, "I can haz gold, bitchez?" because I've been typing here for so long, pumping my own decisions, that I'm starting to smell some of you guys, or imagine your odors, and it ain't cool. I read an article like this, and if fuckin' al-yoo-mini-um has Citi in a panic, wtf will gold do to these clowns?
Mercuria to Citi:
No tickee, No laundee, round eyes!
They figure it's only $270 million. Somebody will just take a hit on their bonus this year
It will be a hoot when all they find in the warehouses is a box of empty coke cans and a few dozen pre-1982 Lincoln pennies.
Interesting..
If you are a bank, it’s no big deal when you pay a billion dollar fine because you committed fraud.
But if someone defrauds you for twenty-five cents, you go apoplectic.
American taxpayers
American taxpayers
...arguing over who pays.
As China’s economy deteriorates and their wealthy Chinese exit the country for cleaner air, better schools and [relatively] moar freedom of speech, we’ll see their Shanghai stock market imitate the USA with new highs every day for a year … or five. The worse their economy sinks, the higher the market will soar.
It’s the New World Order, Paradoxical Effect !
"It's kind of fun watching Citi get it's ass burned by the physical commodity world. "
Isn't it really the Zionist western banksters getting burned by the independent Chinese?
Going to be fun to watch.
Popcorn?
An American, not US subject.
In the words of former Citi CEO Chuck Prince, "Keep on Dancin Baby!"
Poor, poor Citi - have they never heard of rehypothecation?
I am weeping from the bottom of my soul because these banks have just had it so rough in life! Everyone is always picking on the little guy...
We Qingdaoed some folks.
Denninger is so pissed off and demoralized that he's giving up and selling market-ticker.org
http://market-ticker.org/akcs-www?post=229640
Maybe he can sell it to the Street.com or Dennis Kneale might buy it for fun.
Christ, not this again.
He was supposed to have shut the whole thing down a year ago.
What an asshat.
I bid $3, but his SPAM filter rejected my mail.
What's funny (and sad) is that he doesn't even own the .COM TLD for his primary domains, tickerforum and market-ticker.
I bet he imagines his .net and .org domains are worth many ounces.
I thought he hates gold?
https://www.youtube.com/watch?v=WCwWfSYBwOQ
Denninger's an asshole. Glad to see that he'll no longer be spouting his shit on the 'net.
Upvoted for your keen insight into the character of one Karl S. Denninger.
.
Customers deposit ?
Not even a pirated copy of Windows 8.1?
my best friend's ex-wife makes $60 /hour on the computer . She has been fired for 8 months but last month her income was $16723 just working on the computer for a few hours. try this web-site... www.yelptrade.com
Ben Yellen makes a lot more on HER computer. Find out how:
http://www.federalreserve.gov/
Of course she had to be chained to her computer to put in 70 hours a week, her pimp took all the money and left for a week in Vegas, and he forgot to fill up her food bowl before he left.
So now she's DEAD and that's why they're looking for a new candidate.
She's dead Jim. I told Spock not to feed her Tribbles, bu that pointy eared green blooded faggot wouldn't listen to me.
Oh, Hi, Spock.
We were just ...aagggahrrragh bullubgufsh, m immm nerft.
He's dead, Spock.
Chen Jihong seems to be an expert at playing the metal commodities shell game. While Mercuria and Citibank argue over the vanished metals, Jihong has safely stashed his ill-gotten gains in New York, Hong Kong and Los Angeles real estate, with the property ownership hidden behind Cayman Island and Singapore based shell corporations. Time for Jihong to do a vanishing act.
I still wait for audition of USA gold reservs xDDDDD Seems like CHina are cleaning dirty deals with USA.
Hey that is quite a long winded explanation.
I have a better one.
Why are there so many Chinese Millionaires and Billionaires moving to North America?
Because they are steeling everything that is not nailed down and getting the fuck out of there.
Gosh. I never thoiught of it that way.
You think them Russian Oligarchs stole some stuff, too?
Jeeez.
Buncah crooks out there.
Glad I .... (insert patriotic homily of your choice, here then fuck off)
I don't think that's what he meant, knuks...aren't US oligarchs offshoring their wealth, too?
Wherever you stole it from you don't hang around the joint waiting for somebody to figure out where it went.
Mercuria, a Cyprus-based firm with major trading operations in Geneva, (some product, maybe, in China)
and they think they are going to get paid?
Tee Hee hehehehe.
Organizations based in Cyprus are on a losing streak in that regard.
so, in the end it all balances out?
brilliant!
I don't always agree with you, but that's OK.
You do have a way with words, though, and mostly you are bang on.
This comment would come in uder the latter category.
I'm thinking you may have a degree in sarcasm.
Sarcasm and cynicism
oh, so they are not trying to escape state prosecution?
"Why are there so many Chinese Millionaires and Billionaires moving to North America?"
Because the Zionists are moving their main operations on over to Europe.
An American, not US subject.
The Chinese are going to be pissed when the Zionists launch an ostensibly DC US war against nuclear armed Russia and Russia nukes the DC US "heartland."
"General, we have relocated our response missiles next to all the most expensive Chinese investments thru out the US."
"Good, Major, we have 'em now."
Anyone who nukes DC has my support, even though dozens of innocent lives might be lost.
Hopefully, it will be done by SAC.
You'll know the U.S. is done for when you see wealthy Jews jamming the airports for flights to Jerusalem.
Funny, but you could actually substitute the word "done" with the word "free" here.
Can't wait for my interest rates to go up for this foul up by these tards. Wonder how they are going to pay back Mr. Joe Average. Financial, Legal and Government in the USA are an embarassment to this nation.
Wonder how they are going to pay back Mr. Joe Average.
With more cops and more military hardware in their hands.
Joe Average is never paid off.
Joe Average PAYS!
The federal reserve will buy those bad "assets"
Just wait until the LBMA ponzi with rehypothecated gold comes unraveled. 100 claims on each ounce. Ouch!
comex has the right to settle in cash, they don't even need to have any gold.
it'll be fine, just fine...
Once they start 'settling' in cash, it's GAME OVER!
They settle in cash almost all the time.
Not true. A WDR, warehouse depository receipt, is a legal title to the product. If you hold the WDR, as Citi, you actually OWNED the bar of gold with the corresponding serial number. I've done this, taken delivery, many times. They do their best to talk you out of taking delivery the whole way. The time for the Exchange to give you cash is BEFORE they give you the WDR.
Only $270M?!
That's like adding a deck chair to the already-insolvent-by-billions Titantic.
"It appears that substantial quantities may be missing from the warehouses or may be the subject of multiple pledges"
They must be referring to gold stored by the US govt...
www.TopTheNews.com
not satisfied with the amount of fraud in the usa citi dabbles in chinese fraud too
Why not? Citi is the poster child for "too big to prosecute".
So are the riots about to spread to the Mexican/American border?
If this kind of crap is going on with such humble metals as copper, etc,you can only imagine the highjinks going on with REAL precious metals. My God do these bastards know how to steal or what? Hell they commit crimes the MAN doesn't even know are crimes yet. If they weren't such greedy disgusting scumbags you would have to admire the audacity.
i think the canary is that Citi would be in a panic over $270 million.......
$270M out of this warehouse, $270M out of that warehouse...pretty soon it starts adding up to some serious cash.
So what's the big deal?
Isn't that what depositor assets are for?
Just pull a Corzine out the ass and get on with life.
It's Christmas bonus time, and daddy wants a new Ferrari.
$3.2M stocking stuffer.
http://www.motorauthority.com/news/1094417_ferrari-celebrating-60-years-...
$270mm of collateral is alot of fiatsicos that they printed up and loaned out that they will have to call if it goes to 0. things are so tightly wound now, it will be a small few hundred million that will set this baby off....don't think this is it (could be) but it is coming.
Coming soon: new members for the Dead Bankers Society
As a point of interest, a PBoC employee in Liaoning shot a couple of bank Presidents, a vice-president and the head of the Labour Union. Cause 'unknown'.
It sucks when the shoe is on the other foot, don't it?
Oh, I forgot. Banks are not ever supposed to lose money. They're the ones that are supposed to do the screwing to everybody else.
Too bad, motherfucker.
That chart looks to be based on the B WEE SAW S TEES storage tank schematic.
I hope they hang the bankers and put it on youtube.
Let's see, a cubic foot of copper weights 560 pounds so a metric ton is about four cubic feet, at about $3/pound is a little under $7k/ton, or the same as about five gold one-ounce coins.
So a billion dollars in copper is 150,000 tons and a billion dollars in gold is about 24 tons (and a ton of gold is less than half the size of a ton of copper), so storing value in copper is like 12,000 times more awkward than storing value in gold. Huh. Looks to me like anyone who even bothers, is nutz.
OK maybe six gold one-ounce coins, whatever.
The copper is just the vehicle for the scam. The commodity involved could be anything.
Or finally, nothing.
It's amusing to note that these fraudulent numbers were all used to "calculate" China's GDP (which just surpassed the USA's).
Of course, the fact that Gaymerikka's GDP* is equally fraudulent isn't a great comfort. But watching both of them crash to zero ought to be entertaining.
* What do we "produce," exactly, other than insipid, brainless pop stars and their countless wannabees?
Like watching a weird game of Hot-Potato.
Will the Zionist banksters get most of their wealth out of the DC US/dollar before collapse?
Will the Chinese be able to convert enough of their dollar paper assets into hard assets before the collapse?
Keep watching to see.
An American,not US subject.
"Pass the popcorn."
History repeats:
The Salad Oil Scandal, also referred to as the "Soybean Scandal", was a major corporate scandal in 1963 that ultimately caused over $150 million (approximately $1.1 billion in 2008 dollars)[1] in losses to corporations including American Express, Bank of America and Bank Leumi, as well as many international trading companies. The scandal's ability to push otherwise cautious and conservative lenders into increasingly risky practices has prompted some comparisons to recent financial crises including the 2007-2008 subprime mortgage financial crisis.[2]
The scandal involved the company Allied Crude Vegetable Oil in New Jersey, led by Tino De Angelis, which discovered that it could obtain loans based upon the inventory of its salad oil.[3]
Ships apparently full of salad oil would arrive at the docks, and inspectors would confirm that the ships were indeed full of oil, allowing the company to obtain millions in loans. In reality, the ships were mostly filled with water, with only a few feet of salad oil on top. Since the oil floated on top of the water, it appeared to inspectors that these ships were loaded with oil. The company even transferred oil between different tanks while entertaining the inspectors at lunch.[4]
Once the scandal was exposed, American Express was one of the biggest casualties. Its stock dropped more than 50% as a result of the scandal, which cost the company nearly $58 million. De Angelis was convicted of fraud and conspiracy charges in connection with the scandal and served seven years in prison, gaining his release in 1972.[5]
http://en.wikipedia.org/wiki/Salad_Oil_Scandal
An American, not US subject.
$270 million?
No problem, have it for ya in the morning. Let's go, Elwood.
hahahha 270 million are you fucking kidding me? that's basically a rounding error these days.
I have been repeating this several times. Our J Banker friends are refusing to listen.
The 1998 ASEAN Monetory Crisis is not about corruption or financial miscaculations.
It is a war between cultures. Western world keep thinking they can ride on Asians. I refer Specifically to the Chinese.
The business class of Chinese only pretend to be stupid. But they dig a big hole behind you to let you fall or push you in later.
The 1998 Crisis showed the extend of the Chinese underground business power in all ASEAN countries.
More is yet to come.
The sad reality is that the vast majority of bankers, especially Citi bankers are just plain stupid. They consistently make the wrong decisions over and over again. It may be part of the Citibank corporate culture. If one looks back 20, 30, even 40 years the story is consistently the same. Bad loans, bad timing, bad management, bad planning, bad strategy, bad leadership, bad judgment, bad, bad, bad, etc. The pattern is so obvious that this parasitic institution needs to be euthanized with extreme prejudice.
Comissions on sales are today, discovery of fraud is much much later and discovery of true criminals is blurred.
TBTF Right ?
No they still fail all the time.
I bet JP morgan who dumped the hyperhypothecated widgets on unsuspecting Mercuria in March knew exactly what was in the warehouses a long time ago. How expensive is it to bribe the cleaning crew and nightwatchman anyway? Its SOP
They lost money from 6000 years bubble ?
$270M - no worries. Old Yeller can print that.
Here we go. From fractional banking to fractional warehousing!!!
A bank bag full of Lincoln pennies, that's it!
A Black Swan or Ugly Duckling? All Chinese parties are being quiet because the Chinese Government is unwinding this mess and will make all of the crooks whole.
Not necessarily, with the PRC, often the 'whole' is just below the brain stem.
Scandals like this rarely appear alone. I suspect we will discover over the next year that this was the tip of the iceberg.
Jack Lew to the rescue.
This type of situation is EXACTLY why they put ringers in high government positions.
A walking, breathing insurance policy for the board of directors.
They WILL be made whole....
I bet Citi has been "financing" Venezuela's oil diplomacy PretoCarib oil program too.
Hmm, lets see this looks to me like every countries banks are running the same scams.
That means if warehouses in China are contracted out to hold assets for Chinese banks and American banks, and both banks are leveraging those assets (like all banks do), than obviously the American banks are going to get hosed when it comes time for those assets to be delivered as obviously Chinese banks will get priority by the warehouse operator and local govts.
American banks should have nothing to do with warehoused assets in china if they know whats good for them, its idiotic for them to think otherwise.
It will be interesting to see how the Chinese government deals with the cunning criminals. Will the criminals walk with a small fine and go back to work like they do in the USA? Maybe, they will find the criminals guilty, seize corporate assets and chop the criminal’s heads off.
I hope it’s a public execution and televised, millions would watch and cheer!
This is a glaring example of why a Russian/ Chinese "reserve currency" is a wet dream.
The US is untrustworthy, but the Chinese are even worse.
They took the GS model for aluminum manipulation to the extreme.
http://www.nakedcapitalism.com/2013/07/how-goldman-made-5-billion-by-man...
Good thing the U.S. doesn't have much business with China......right?
China’s J-31/FC-31 POS
Yale Receives $10 million……Harvard Got $15 Million Both Chinese Donors
Chinese Chicken Coming To U.S.
Chinese Billionaires Buying American
U.S. Oil and Gas Companies Eager To Do Business in China Oilcomm 2014
NASA Administrator Made Unpublicized Visit To China in November
sounds familar, but america had them rated AAA.
i thought banks were supposed to get out of the storage, and resale, for higher prophit, in metals market.
it was well documented on how jpm screwed americas businesses for the same actions.
i'll bet the chinese co.'s won't be bailed-out, and chinese not involved won't be financialy damaged, and the chinese involved in fraud will legally held accountable, and citi-bank should be thanked for bringing this matter to their attention.
"chinese involved in fraud will be shot"
There, fixed it for ya.
If you are a bankster, there is nothing worse than corruption that you do not control.