From Volume 4, Issue Number 28 of EIR Online, Published July 12, 2005

U.S. Economic/Financial News

Hedge Funds' Rapid Growth Increases 'Systemic Risks'

The rapid growth and poor recent performance within the hedge-fund sector have increased the risks faced by financial markets and the financial institutions that do business with them, Standard & Poor's rating agency cautioned July 5. A system-wide liquidity crisis, like the one that erupted following the collapse of Long Term Capital Management in 1998, is a possibility and a concern, according to the rating agency's report entitled, "Hedge Funds and Their Counterparties—Catching the Big One."

"Although the direct effects of poor performance of any hedge fund are expected to be minimal, systemic risks are a greater concern," said S&P's credit analyst Tom Foley, who helped write the report.

S&P warned of risks from hedge funds' use of leverage, or borrowed money, to magnify trading losses. And if hedge funds have to sell positions rapidly to meet margin calls during an already weak market, this could knock prices down further. "In extreme cases, a race to liquidity can ensue, resulting in widespread trading losses—not only for the hedge funds, but also for the trading desks of securities brokers," the report said. "As a result, financial institutions' links to the hedge-fund sector go well beyond the direct losses."

KPMG Issues Broad Coverup of Hedge Fund Danger

The accounting firm KPMG issued a major coverup of the collapsing hedge-fund industry in its July report. The report, "Hedge Funds: A Catalyst Reshaping Global Investment," acknowledges that hedge funds have made huge profits only because they were totally deregulated and were extracting profits from a bear market. The trouble seen in the hedge funds since late 2004, they argue, is only the result of the rebounding economy [sic], together with the increasing investments from pension funds ("especially in Europe") which has created a demand for more regulation.

The huge study, based on interviewing managers and administrators of most of the major hedge funds in 35 countries over an extended period, concludes that the next three years will see robust profits, but at a lower level. A few interesting "warnings": "regulation will not prevent blow ups"; and "consolidation will happen, more through Darwinian than traditional routes."

One thing is clear: The report is aimed at getting desperate pension-fund managers to throw their money into the gambling pit: "The hedge funds industry needs a new generation of investors—especially pension funds—to sustain its head-long growth." This carries a problem, however, since these very people will "force greater transparency and different governance structure. Worse still, regulators in the U.K. and the U.S. are unlikely to allow retail investors into hedge funds without further controls."

Announced Layoffs Skyrocket in June

Announced layoffs surged in June to a 17-month high of 110,996, led by the blow-out in the automotive industry, according to CBS Marketwatch July 6. Employer announcements of job cuts jumped by 35% from 82,283 in May, even though job cuts usually fall in the Summer months, and are up a whopping 73% from June 2004, according to employment consulting firm Challenger, Gray & Christmas. So far this year, planned job cuts are worse than last year's, by 14%. The auto industry announced a staggering 45,378 job cuts just in June!

CDC Official Confirms: Nation Faces Flu Pandemic

Rep. Henry Waxman (D-Calif), the Ranking Member of the House Government Reform Committee, grilled a Centers for Disease Control official about the Bush Administration's cuts in public health at a time that the nation is facing a flu pandemic. During committee hearings on pandemic readiness June 30, Waxman demanded of Dr. James Leduc, Director, National Center for Infectious Disease: "You note that the same labs, the same health-care providers, the same surveillance system, the same health departments and personnel, will guide responses to both a pandemic flu and an annual influenza. I am concerned that the administration is proposing to cut support for local and state health departments by $130 million. These cuts are proposed at exactly the wrong time. Why are we reducing the ability of state and local health department to respond to a potential pandemic when health experts say the risks of pandemic are increasing? And, given the threat of a pandemic flu, would it be responsive for Congress to increase support of state and local health departments?"

Leduc replied: "Well Sir, I wholeheartedly support those comments. And I couldn't agree more with your observations. I would just offer a hearty 'Yes, Sir' that these are, in fact, very serious issues.... The threat of pandemic influenza and annual flu are just examples of broader issues of emerging infectious diseases, many, many infectious diseases, that are facing the nation. And clearly, we need a strong capacity at the state and local level to address these issues as a nation."

U.S. Government Did Not Order Anti-Virals

The U.S. Government could have ordered anti-virals last year, but did not, according to George Abercrombie, President, CEO of Hoffman-LaRoche, Inc., testifying before the House Committee on Government Reform June. 30. Abercrombie told the committee that he and people from the pharmaceutical firm Roche Laboratories met with senior officials from the U.S. Centers for Prevention and Disease Control (CDC), the Department of Health and Human Services, and Members of Congress, and that, "We all agreed we needed a stockpile [of antivirals for avian influenza]." But, Abercrombie told the hearing, no order or commitment for anti-virals for a stockpile came, even though his firm could have provided tens of millions of courses of therapy for the country, had the U.S. placed an ordered last year.

Other countries placed their orders first. Since 2003, his company has been working 24/7, and has increased production eight-fold. The U.S. has only stockpiled enough anti-viral medication for 2% of its population, while France, Finland, Norway, Switzerland, New Zealand, and Portugal have purchased enough for between 20% to 40% of their populations.

Mobile-Home Prices Exceed $1 Million in Southern California

A two-bedroom, two-bath trailer perched on a lot in Malibu, Calif. is selling for $1.4 million, while two other mobile homes sold in the area recently for $1.3 million and $1.1 million, USA Today reported July 6. And another, at $1.8 million is in escrow. At the same time, prices on such "mobile villas" in Key West, Fla. top $500,000. Worse, since trailer buyers don't own the land, they pay "space rent"—as high as, or higher than many mortgages in other parts of the U.S. On the $1.4 million trailer, for example, space rent is $2,700 per month.

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