U.S. Economic/Financial News
Will AIG Be the Next Enron?
The American International Group insurance giant has been forced to acknowledge having dressed up its financial condition through transactions which "appear to have been structured for the sole purpose or primary purpose of accomplishing a desired accounting effect." As a result, AIG will lower its book value by $1.7 billion. AIG also cited fraudulent accounting of its business with reinsurers that it controls in Bermuda and Barbados. Investigators are looking at a 2000 transaction between AIG and General Re, a unit of Warren Buffett's Berkshire Hathaway, that artificially inflated AIG's reserves by a handy $500 million.
AIG's former chief executive and chairman, Maurice R. Greenberg, was forced to step down as chief executive on March 14, after regulators uncovered evidence that he had initiated the transaction with General Re. Greenberg is scheduled for an interview with investigators on April 12. Buffett is scheduled for an interview on April 11. AIG has fired a chief financial officer and vice president of reinsurance. Another senior executive has also been fired.
AIG also said that it would file its annual report with the SEC a month late, on April 30.
As a result of AIG's admissions, Standard and Poors stripped it of its triple-A rating. Fitch Ratings lowered its rating on AIG two weeks ago, and on March 28, Fitch put the company on negative credit.
AIG shares have lost 22% since Feb. 14 when the company disclosed it had received subpoenas from the SEC and from New York Attorney General Eliot Spitzer.
Mineta Told: Dismantling Amtrak Is Not 'Reform'
The National Association of Railroad Passengers (NARP) delivered a letter on March 26 to Transportation Secretary Norman Mineta challenging the Administration's "reform" of the Amtrak budget and agenda. "NARP welcomes an intelligent discussion aimed at developing an intercity rail network" for the nation," the letter stated. "If this Administration is truly serious about improving intercity passenger train service," it needs to reform "the environment in which Amtrak operates rather than dismantling [it]. It is not necessary to burn the village to save it. A modern rail passenger network will not emerge from the ashes of Amtrak."
The NARP pointedly wrote: "Without Amtrak, we lose the ability to operate over the nation's rail network.... We also risk losing infrastructure, rolling stock, equipment, facilities and a skilled workforce that will cost billions to replaceif it can be replaced at all." In fact, the national passenger rail network has already been stripped to the bone, leaving vast swaths of the country with no viable transport system except for highways. Rural America has been especially hard hit in this regard.
As with Social Security, the Bush Administration has not made its "reform" plan for Amtrak available, except to propose zero dollars, and state that bankruptcy is its way to "reform." An NARP official told EIR March 28 that Administration officials complained about NARP's criticism of "the plan," without having read it first. There's just one problem: The plan is nowhere published!
In 2003, the Bush Administration submitted a bill to Congress, which indicates that it is proposing a transfer of "all planning responsibilities to the states," despite the fact that "most travel crosses state lines and interstate commerce is a constitutionally mandated Federal responsibility, the NARP letter states (emphasis added).
NARP has detailed plans for what, how, and where to focus development of the nation's rail service, which EIR is reviewing.
Amtrak's Debt Rating Outlook Downgraded to Negative
In light of Bush's zero-funding budget proposal, and uncertainty of what Congress will do with the national rail service, Standard & Poors on March 29 downgraded Amtrak's debt rating from stable to negativethereby undercutting the company's ability to borrow. S&P also now rates Amtrak's corporate credit at BBB, or two notches above junk.
Real Estate: 'A Piece of Dirt' Makes You Feel Good
"This is more exciting than a mutual fund. It feels safer, too. You buy a piece of dirt, you feel you'll always have a piece of dirt." With this as an introduction, the Sunday, March 27 Los Angeles Times ran a long feature on the insanity that has taken hold in the U.S. real estate market. "In the same way that the stock market's apparently limitless ascent in the late 1990s seduced investors into buying shares in untested dot-coms, relentlessly rising house and land prices are spurring people to do things that used to be considered unusual, if not irresponsible." They quote an analyst saying that "markets are ruled by either fear or greed," this one being greed. The article also notes that some real estate speculators are people who look at their retirement savings and are worried that they are not going to have enough.
The Times includes many figures indicating the speculative nature of the market today, where the "investment" purchases have jumped over 50% in the recent years, and now make up 25% of the market, according to the National Association of Realtors. Houses along the coast cost so much that no one could ever charge enough rent to cover the mortgage, so the fever has spread inland, into Reno, for example. In typical California style, the market has created its own submarketyou can now get an agent to find the right real estate agent for you.
The article ends with a cautionary tale, of how the market in Las Vegas peaked last year: Houses that sold for $450,000, with expectations (emphasized by the realtor) of quickly going to $550,000, suddenly dropped to $335,000. With a mortgage of $3,000 a month, it could only be rented for $1,250.