From Volume 4, Issue Number 40 of EIR Online, Published Oct. 4, 2005

U.S. Economic/Financial News

Derivatives Disaster Lurks Behind Airlines' Troubles

Commenting on the unserious reaction by the financial community to warnings of a hedge-fund collapse by German bank regulator Jochem Sanio, the Financial Times warned Sept. 26 of a derivatives disaster lurking behind Delta and Northwest airlines' bankruptcies. Commenting on how "amazingly complacent" was the reaction to Sanio, the Financial Times wrote, "The New York Federal Reserve has been doing a great deal of worrying lately about the swelling backlog of unconfirmed trades. There is also growing concern about the tendency for hedge funds to assign credit derivative contracts without informing the original counterparty.

"The trouble with poor documentation and paperwork delays only starts when a counterparty defaults and the lawyers are called in. And lawyers almost certainly will be called in after the bankruptcies of Delta and Northwest and the solvency problems building up among the suppliers of Ford and General Motors."

The Financial Times concluded that in the "disputes over credit derivative contracts in the wake of these bankruptcies may test the legal standing of derivatives.... Maybe the clients of Goldman Sachs are in for a shock."

Treasury Official: Improve Hedge Fund Regulation

"Since the time of LTCM, there have been further substantial changes ... in the way that the capital aggregation industry in the U.S. and the world is organized," U.S. Undersecretary for Domestic Finance Randall Quarles said at a meeting Sept. 25, organized by the Institute of International Finance. These changes have altered the way financial markets manage and disperse risk, "in ways we don't sufficiently understand," he said. "Hedge funds might be the area of regulation where there is most room for improvement in our approach."

Quarles warned that systemic risks have become concentrated in a handful of large firms, while the role of non-banks—namely, hedge funds and Fannie Mae/Freddie Mac—in financial markets has grown.

Energy Inflation Continues Despite Inventory Reports

Natural gas October futures leaped up again on Sept. 29, and oil and gasoline prices rose despite U.S. government releases showing that inventories of gasoline and heating oil had risen unexpectedly by nearly 5% in a week. The price of natural gas reached almost $15/1,000 cubic feet, now nearing four times its level of 2003, and 25% up during this week. Only three weeks ago, the Energy Information Administration had issued the "dire" forecast that the retail price of natural gas to households, etc. might reach $16.65/1,000 cubic feet by January 2006; but the wholesale price has now already reached nearly $15. Oil prices also rose again.

The gold price hit $478 in New York trading, amid general "forecasts" that it would be at $500/ounce soon.

Lyndon LaRouche commented, "There's nothing unusual or surprising about this. It's hyperinflation busted loose. The controls on this were broken in April-May of this year [in the hedge fund/auto debt crisis]. There's nothing to stop the hyperinflationary shock wave now."

Commodities Hyperinflation: 'It's All [Hedge] Fund Buying'

The Financial Times on Sept. 28 reported a big spike in copper prices, and the impact of the "invisible" shockwave effects from hedge-fund speculation were clear even to the FT's sources; "Copper Peak' Due to Hedge Funds" is the paper's headline.

Copper supply? Copper stocks on the London Metals Exchange are at their highest in over a year. Demand? Demand for copper fell by 2% in the first half of 2005. And the price? The copper price has risen by 65% from early 2004, and 20% since early 2005 (it's now $3,812/ton). This "was driven by hedge fund buying," reports the Times. " 'The funds are going to try to hold the price up,' says an analyst of ABN Amro. 'This is all fund buying; that is all it has been, said an analyst at Natexis Metals. The hedge funds are self-fulfilling; they create the momentum and then they run along with it, and they were pushing the market to test the previous high.' "

Energy commodities continued to inflate at even higher rates. Gasoline futures leapt up Sept. 28 by 7% on the Chicago Mercantile Exchange, to $2.34/gal. for October delivery; natural gas pushed up even further, by 9% during the day, to $13.90/1,000 cubic feet. This is now 250% higher than during the 2002-03 Winter. Propane contracts rose 6% during the day.

Greenspan Massages the Truth

Speaking before the National Association for Business Economics Sept. 28, Federal Reserve chairman Alan Greenspan massaged the truth with Adam Smith's "invisible hand." Giving a lying justification for his policies of "economic flexibility" since 1987, Greenspan explicitly cited Adam Smith's Wealth of Nations and Smith's "invisible hand." Greenspan defended deregulation and the "conceptual" advances in increasingly "complex financial instruments" of "risk dispersal," which were introduced after the crash of 1987. Obviously fearing a return under Lyndon LaRouche's leadership to an FDR policy of regulation and protectionism, Greenspan defended the very policies which have brought the current system to an end.

Credit Card Delinquencies Reach Record High in 2Q

[source: ABA press release, Sept. 28]

The American Banker's Association's latest Consumer Credit Delinquency Bulletin revised the 1st Quarter figures to show that 4.76% of accounts (from 4.03 previously reported) are delinquent, and that in the 2nd Quarter, the number was up to 4.81%. Home equity loan delinquencies also rose to 2.75% of accounts in the 2nd Quarter, above the 1st Quarter figure of 2.61% (but which had also been revised upward).

ABA's chief economist, James Chessen says that "gas prices are taking huge chunks out of wallets, leaving some individuals with little left to meet their financial obligations. With gas prices still rising, the third quarter is not likely to be any better."

Heat Advisory in Gulf, Where Power Is Out

Heat advisories have been issued for east Texas and the entire hurricane-hit Gulf region, where hundreds of thousands of people remain without electricity; therefore, without fans or air conditioning, the Forth Worth Star-Telegram reported Sept. 27. Temperatures have been over 100 degrees, and there may be evacuations of the vulnerable. The military has set up a mobile field hospital in Shelby County in East Texas to handle emergencies.

All rights reserved © 2005 EIRNS