U.S. Economic/Financial News

Regulators Fear LTCM-Style Blowout of Hedge Funds

U.S. and international regulators have recently held discussions with hedge-fund managers and Wall Street executives about whether a rapid rise in interest rates, or a handful of simultaneous corporate bond downgrades could spark huge losses, the Washington Post reported Aug. 11. They also discussed the amount of money hedge funds currently borrow from big banks to finance operations. Citing a recent Deutsche Bank survey and a report issued by Tremone Capital Management, Inc. which both report that investment in hedge funds is dropping, according to the Post, but that nonetheless, millions of people now invest in hedge funds through pension funds or mutual funds and that this has magnified the risk. Regulators and executives say the worst-case result would be a repeat of 1998, when Long-Term Capital Management (LTCM) nearly toppled the world financial markets.

Meanwhile, public and private pension funds, which have been increasingly underfunded since 2000, are at the beginning of a flood of risky investments into hedge funds, according to a University of Virginia report. The "traditionally risk-averse" pension funds are now putting assets money into high-risk hedge funds, in desperate search of well-above-market returns. GM is supposedly taking the lead.

A new S&P study of the pension funds of the S&P 500, shows that the 369 of those companies which have defined-benefit pension plans, are just as underfunded now as at the end of 2003, despite the "stock market recovery of 2004" which supposedly would have fixed them up. They can't or don't want to make adequate new contributions to their plans, so they have to take risky shots to make very high returns on the assets already in them. Of the nearly 8,000 hedge funds, only a couple of hundred of the biggest—which claim to give very high returns, such as those run by veterans of Soros's funds and Tiger Management funds—will get the pension investments.

The author of the report, Prof. Edwin Burton, is himself a trustee of the $40 billion University of Virginia retirement pension system. He forecasts that "at least 70 big ones [pension funds] will make moves into hedge funds over the next 12 months," and that they will double the global size of the hedge funds, to $2 trillion invested, or more.

Visteon CEO Paid $4.4 million; Demands Wage Cuts for Workers

Visteon CEO Michael Johnston reached an agreement in May whereby the company, an auto-parts supplier, would transfer 24 plants back to Ford Motor, as a cost-cutting measure. (Visteon had split off from Ford in 2000). Ford will put these 24 plants into a "limited liability corporation." According to Bloomberg news service, Ford plans to close some of the Visteon plants and downsize and sell off others.

After Visteon had reached the deal in principle, which will be completed in September, Johnston declared triumphantly, "We do have a number of operations spread around the world that are underperforming. In some cases, we may be looking at moving production to a more competitive part of the world [i.e., where we can pay slave-labor wages-ed.]. In some cases, it would mean that we'll be closing some facilities.... You'll start to see some action pretty soon." He added, "now we will be a leaner operation."

By this maneuver, Visteon had cut its U.S. operations by 40%. By Ford's admission, a good portion of the advanced machine-tool capacity that Visteon "passed onto" Ford, will be permanently shut down.

For wrecking Visteon, which is the world's second-largest auto parts producer, Johnston has been bountifully rewarded. Visteon lost $1.19 billion in the second quarter of this year, after losing $118 million in the first quarter.

Looking at Visteon's 10K form for 2004, filed with the Securities and Exchange Commission, in 2004, Johnston earned $991,467 in annual salary; plus $2.38 million in annual restricted stock awards; plus $509,414 under a "long-term incentive program"; plus $261,557 in "perquisites and other personal benefits" (including the "personal use of ... company aircraft"); plus some other benefits, for total annual compensation of $4.37 million. This does not include pensions, which, depending on years of service, can reach several hundred thousand dollars per year. This, while he slashed his workers' pensions and health benefits.

Moreover, Johnston's compensation is in inverse relationship to the company's economic health:

In 2003, after Visteon's losses ballooned, Johnston's total benefit package went down. But in 2004, after he incompetently caused losses to grow larger, stockholders rewarded Johnston by raising his annual compensation package by $2 million to $4.71 million.

At the same time, Visteon has shifted many of its plants to slave-labor maquiladora operations in Mexico. Visteon now has 25 plants in the United States, but it operates 22 in Mexico, most of them part of genocidal maquiladora plantations. As well, it operates three plants in Argentina, and three in Brazil, run on a slave-labor basis.

Delphi CEO Earns Millions as Auto Industry Tanks

An official at Delphi, another auto parts supplier, told EIR Aug. 9 that Delphi CEO Steve Miller, who has been demanding that Delphi production workers accept wage cuts as deep as 50%, was awarded a $3 million bonus, just to take the top job at Delphi on July 1 of this year.

This Delphi official claimed she did not know the elements of Miller's salary this year. But using Delphi's 10K report for 2004, filed with the Securities and Exchange Commission, we have determined what Miller's predecessor as Delphi CEO, J.T. Battenberg III, earned for an average year during the period 2002-2004. During this period, Battenberg earned on average $1.65 million in annual compensation; plus $1.73 million annually in "restricted stock unit awards"; plus $800,000 annually in "securities underlying options"; plus $200,000 in corporate transportation (including "compensation to the individual for... use of company aircraft"). The minimum total was $4.38 million per annum, and this does not count many other perks, like executive pensions.

Assuming that Miller's total compensation package is the same as his predecessor's, and adjusting for the fact that he will have the CEO post for only half a year, Miller's total compensation package will be at least $2.2 million. Add in the $3 million signing bonus, and this ghoulish incompetent will earn a minimum of $5.2 million this year. It could go higher.

Delphi's President Rodney O'Neal will earn total compensation of more than $2 million this year; Delphi's Vice Chairman David Wohlen will earn total compensation of more than $2 million; and so forth.

On Aug. 4, Miller et al. threatened action to slash Delphi workers' wages by 50%, by forcing early retirements for workers earning $27.50 an hour and hiring a new workforce at $12 an hour. Miller has demanded deep cuts in employee health benefits and pensions. On Aug. 8, Miller, backed up by Wall Street, publicly warned that Delphi may file for Chapter 11 bankruptcy, were the workers not to accept Delphi's demands.

Lyndon LaRouche has urged Delphi workers to publicize the huge compensation packages of the Schachtian executives who have run the company into the ground, and demand that the executives be the ones who take the pay cut to pay for the mess.

Ford Axes Sales, Marketing Jobs

Ford Motor Co. said it is merging its Ford and Lincoln-Mercury divisions, cutting an unspecified number of sales jobs. Ford is closing six of its 17 regional sales/marketing offices, those located in Boston, Philadelphia, Cincinnati, Minneapolis and Seattle.

Hatchetman Steve Miller, CEO of Delphi, the largest U.S. auto-parts supplier, threatened the United Auto Workers Union: "If all we got was some help from GM, but no help from the UAW, that would not be sufficient," Miller was quoted as saying by Reuters. "We need both of them to participate in this restructuring." He implied a deadline of Oct. 17 for Delphi to reach agreements with GM and the UAW.

Did Pimco Run a Squeeze on the Treasury Market?

The U.S. Treasury Dept. is investigating PIMCO, a major bond-trading company, for running a squeeze on the market in 10-year Treasuries. A crisis of sorts emerged in the Treasury market in May and June, when traders who had sold a particular 10-year Treasury note short, found they could not obtain the notes they needed to settle their deals, resulting in the failure of billions of dollars of trades a day. According to Morgenson, it was clear that one or more of the holders of those notes had stopped lending them, "setting up what appeared to be a perfect short squeeze." As of June, by far the largest holder of these notes was Pacific Investment Management Company (PIMCO), a $500 billion money management firm which runs the world's largest bond fund. PIMCO is a unit of German insurance giant Allianz.

The Treasury Dept. is looking into the matter, and recently proposed creating a special lending facility to address what it said were persistent liquidity problems in the repo market.

Steel Baron Throws $60 Million Wedding Party

Lakshmi Mittal, the Indian-born, British-based buy-out artist just purchased a palatial home in the Kensington area of London for $120 million and spent $60 million on his daughter's wedding, a six-day party at the Versailles palace, according to Fortune's February edition. Mittal, who acquired a huge chunk of the U.S. steel industry at bargain-basement prices when he bought out the steel holdings of fellow con-man Wilbur Ross, runs slave-labor steel operations throughout Eastern Europe. Mittal, who acquired the U.S. companies after workers had been stripped of health-care benefits and had their pensions dumped on the Federal government, was named Fortune magazine's 2005 Europe Businessman of the Year. As part of the U.S. acquisition deal, Mittal was paid $2 billion (!) by his family-owned company. Shortly after acquiring the U.S. companies, he laid off one-third of the workforce at West Virginia-based Weirton Steel, claiming that a glut of steel in world markets was lowering prices. Workers at Weirton have made concession after concession in wages, work rules, and benefits, in a desperate struggle to keep the company open.

Home Prices Far Outstrip Wage Increases

Housing prices are far outstripping salary increases for low- and moderate-income jobs," according to a study by the Center for Housing Policy, released Aug. 9. Cities once considered affordable, such as Tulsa, Okla., are rapidly becoming too pricey for lower-income workers, such as janitors and retail-sales employees. The study found that the median price of a home in the United States rose 20% in just 18 months, to $225,000. During the same period, wages for teachers, firefighters, and nurses in most cities remained flat or increased slightly, but still fell far short of the annual salary needed to buy a home," the report states.

The Center for Housing Policy website has data for 2003 and the first quarter of 2005, from 183 metropolitan areas and for 63 occupations within the United States.

TennCare Beneficiaries Granted Reprieve, For Now

Nearly 100,000 medically needy TennCare beneficiaries were granted a temporary reprieve Aug. 9, just 24 hours before they were to be dumped from the state's Medicaid program. However, out of the pool of 197,000 poor people on Medicaid overall in Tennessee, at least 100,000 will be dumped in various ways by the end of the year, unless policy changes are effected. The reprieve, granted by a court ruling, will last only 10 months, and, according to the Tennessee Justice Center, only a small percent of the 97,000 will even qualify under the new rules.

Under pressure from local meetings in some of the poorest counties in the state, there is now a call by 12 state legislators for a special session to be held. The governor opposes the special session, but if two-thirds of the legislature petitions for the special session, it will be called. To keep the pressure on the legislature, a number of town meetings are to be held in the near future.