From Volume 4, Issue Number 35 of EIR Online, Published Aug. 30, 2005

U.S. Economic/Financial News

Panicked N.Y. Fed Calls Emergency Meeting on Credit Derivatives

In what Lyndon LaRouche characterized as a pure act of hysteria, the New York Federal Reserve summoned major banks, financial institutions, and governmental regulatory agencies to a Sept. 15 meeting. On Aug. 12, New York Fed president Timothy Geithner issued a letter to bank chief executives, calling on all "major participants" in the credit derivatives market, directing them to have both "a senior business representative and a senior risk management person" attend the meeting. to attend the meeting. The letter, sent

This occurred, reported Bloomberg, "amid concern the $8.4 trillion industry is rife with unconfirmed trades." On July 27, the Counterparty Risk Management Policy Group, a banking industry group that first met in 1999 after the collapse of hedge fund Long-Term Capital Management, issued a report calling for an "urgent" effort to tackle the "serious" accumulation of trade confirmations, and for banks to be prepared to reduce trading until the deals are confirmed.

Moody's Cuts GM and Ford Debt to Junk

Moody's Investors Service lowered GM's debt rating Aug. 24 by two levels to Ba2, citing continued operating losses in North America ($1 billion in second quarter) and challenges to restructuring for long-term viability. Moody's also cut GM's finance arm, General Motors Acceptance Corp. to junk status. The downgrades affect about $170 billion of outstanding debt, Moody's said. Ford's debt rating was cut one level to Ba1. Ford Motor Credit Co.'s rating was cut to the lowest investment grade.

Ford Warns of Possible Plant Closures

Ford Motor Co. warned of possible plant closures as part of a second major restructuring plan to be announced by the end of autumn, the Detroit Free Press reported Aug. 24. Chairman and CEO Bill Ford said the cost-cutting plan will be announced after the Frankfurt auto show in mid-September. He would not dismiss questions that plant closures might be in the offing. "We do have an overcapacity issue, and it's something we will address," Ford told journalists after being appointed the new chairman of the Detroit Economic Club.

UAW Meetings in Chicago Report Talk of Bankruptcy

United Auto Workers vice president for GM and Delphi, Richard Shoemaker, is holding meetings in Chicago with UAW local officials at both companies from around the country. In Associated Press wires and in a Detroit News report Aug. 23, local presidents including James Kaster from Lordstown in Warren, Ohio, are quoted saying that Shoemaker reassured them that GM does not want to reopen the UAW contract prior to 2007, in order to cut health-care insurance costs; and that it is looking for health-care savings "in the m[illion]s, not the b[illion]s" from within the existing contract.

These comforting noises from Shoemaker were belied, however, by auto financial analysts quoted in the Detroit News, who said that reductions of even hundreds of millions in health-care costs, are irrelevant to the size of GM's worsening financial problem. These analysts now forecast that GM will lose $4.6-4.7 billion in North American operations in 2005 as a whole—meaning that they expect that GM's Summer boom in sharply reduced-price auto sales, has deepened the company's losses. The News quoted Walter McManus of the Michigan Office for the Study of Automotive Transportation, saying that things will only get worse for GM and the UAW between now and 2007: "They need to make a deal. Their situation is not improving."

Reports from those within the meetings, said that Shoemaker in fact saw little chance that GM would pull out of its dive anytime soon. One local president reported that Shoemaker's talk included a long and detailed description of the prospective bankruptcy process, step by step—implying it for either Delphi, GM, or both. Foolishly, the UAW officialdom did not allow a presentation of Lyndon LaRouche's "retooling auto" policy, which has been urged on Congress by state legislatures and city councils throughout the industrial belt.

Hedge Funds Buying Up DaimlerChrysler Stock

Hedge Funds are buying up DaimlerChrysler stock, triggering fears in Germany that the hedge funds may launch an operation against the DaimlerChrysler management, and go for a breakup of the firm, the Wall Street Journal reported Aug. 25. In May, DaimlerChrysler estimated that hedge funds held 10%-15% of the company's stock; now press accounts estimate their holdings at 20%.

The Swiss financial daily Neue Zuercher Zeitung had a full-page article the same day, reporting on deepening fears that the German government will take action against hedge funds, which is making the funds very nervous. When a similar hedge-fund assault on Deutsche Borse took place recently, it led to a call by Chancellor Gerhard Schroeder's for global regulation of hedge funds.

Hedge Funds Lost 2% in Second Quarter

The hedge-fund sector shrank by 2%—$21.6 billion—in the second quarter, as wealthy investors pulled money out. Hedge fund assets decreased from $1.081 trillion to $1.059 trillion at the end of June, according to data released by the Barclay Group. "We're seeing redemptions from single manager funds even as money continues to flow into funds of funds," says Sol Waksman, president of Barclay. The data show that high-net-worth investors have been selling, while institutional investors have been buying. Seven of the 14 hedge-fund sectors saw money under management decline during the April-June period.

More Hedge Funds Under Investigation for Fraud

The Connecticut-based Bayou Group hedge fund, is but the latest to come under investigation into disappearing funds of investors, according to financial press Aug. 25. Clients of Bayou received refund checks which couldn't be cashed. When they called the offices of Bayou, no one was there to answer the calls. The U.S. Attorney for Connecticut, the Connecticut Department of Banking, and likely the Securities and Exchange Commission are investigating. Bayou managed $400 million for investors.

In a related development, the SEC won a temporary restraining order against a West Palm Beach, Florida hedge fund, KL Financial Group, to halt what it called a "massive fraud," involving $70 million in missing funds.

Mass Layoffs Hit Nearly 1 Million Workers Since January

In July 2005, employers took 1,249 mass lay-off actions, hitting 131,326 workers; both figures increased slightly from June, the Bureau of Labor Statistics reported Aug. 23. During January-July, there have been 8,673 mass lay-off events, meaning a whopping 924,343 workers have filed initial claims for unemployment insurance benefits.

The auto sector—with its crucial machine-tool capacity—continues to be gutted, with 39,470 mass layoffs just in July. Manufacturing overall represented 43% of all mass lay-off events, and 56% of all initial unemployment claims filed in July.

Fewer Blast Furnaces Producing Steel in U.S.

There are fewer blast furnaces producing steel in the United States now than at any time since the nationwide steel strike in 1959, according to an AP wire Aug. 23. Integrated steel production has dropped dramatically over the past 12 months, despite finished-steel price cuts, according to the president of West Virginia's Wheeling Pittsburgh Steel Corporation, Alan Page. Page said that whereas 32 blast furnaces were operating in the United States in June 2004, by June 2005 only 23 were still firing. He compared this with the low point of 19 blast furnaces operating during the 1959 nationwide strike, noting that the degree to which integrated steel producers have cut back is unprecedented.

Integrated steel production, employing blast furnaces to make structural steel and very-high-strength steel from iron ore, constitutes about half of total U.S. steel production, according to the Iron and Steel Institute. Total U.S. steel production in August was down 11% from August 2004; and production for January-August was down 6% from the same period in 2004; indicating that the fall in production is accelerating.

The cutbacks are attributed by Page and other commentators to "hoarding" orders by steel users last year, and a cutback in demand from China.

Durable Goods Orders Fell 4.9% in July

Durable goods orders fell by 4.9% in July, which is the biggest drop since January 2004. When transportation is excluded, the drop is 3.2%, which is the biggest drop since April 2004. The decline was broad-based and showed up in every sector. Analysts are saying the weak demand for aircraft and military equipment and computers drove orders down.

New Home Prices Fall in July for Third Straight Month

The median price of a new home fell 6.1% in July for the third month in a row, even as sales rose 6.5% to highest-ever level, according to the Commerce Dept. Aug. 24. Sales of new one-family houses jumped in July to a seasonally adjusted annual rate of 1.41 million units, surpassing the previous record set in June of 1.32 million units. However, at the same time, the median sales price of new homes fell in July to $203,800, down from $219,500 in June and $212,400 in July 2004. This reflected a sharp drop in sales of homes valued from $250,000-299,999, along with a big increase in sales of homes priced from $125,000-149,999.

Debtors Rush To File Bankruptcy Before New Law Takes Effect

More debtors are filing for bankruptcy to beat the October deadline, when new legislation, making it more difficult for individuals to file for bankruptcy protection, goes into effect, the New York Times reported Aug. 23. Filings through July, in the four months since the new law was signed by Bush in April, are up 17% this year over the last in Cleveland, 14% in Milwaukee, and 22% in Northern Iowa. There is a similar pattern in the Midwest and parts of the South and rural West. Nationwide, bankruptcy filings for April, May, and June were up by 11%, hitting a record-high 467,333. More than 1.6 million bankruptcies were filed in the 12-month period ended June 30.

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