From Volume 5, Issue Number 2 of EIR Online, Published Jan. 10, 2006

U.S. Economic/Financial News

Wall Street Mobilizes To Force GM into Bankruptcy

Bank of America auto industry analyst Ronald Tadross unleashed another prediction Jan 3: General Motors stock would tumble 33% during 2006 (down to $13 per share), because GM lacked the will to implement the necessary deep cost-cutting measures. On Nov. 10 of last year, Tadross crowed that GM's "bankruptcy is inevitable." In the Jan. 1 issue of New York magazine, author James Cramer engages in "crystal-ball gazing" and states that in 2006, "General Motors will file for bankruptcy," adding, "it's time to go bankrupt and start over." He states that this is the method by which the textile and steel industries "reinvented themselves."

The bankers are not thinking of LaRouche's "strategic bankruptcy" to retool the auto sector to produce indispensable capital goods for infrastructure, but rather of driving GM's stock price down to the price range of a few cents, so that Kirk Kerkorian and the hedge funds can buy and loot it.

In this regard, the Jan. 9 Business Week, in a lead news analysis, headlined: "Should the Dow Jones Ditch General Motors?" GM is one of the 30 stocks that make up the Dow. BW complains, "GM's troubles are skewing the index, and battering investors who bet on it."

Standard & Whores on Jan. 5 cut the credit ratings of both Ford Motor and Ford Credit deeper into junk status.

'Big Three' Post Lower Auto Sales for Third Month

General Motors, Ford, and Daimler-Chrysler posted lower December U.S. sales—the third straight month of decline. GM said its U.S. sales dropped 10.3% in December, compared with December 2004, as car sales plunged 19.4% and truck sales fell 4.9%. For all of 2005, GM's sales declined 4%. Ford Motor said its U.S. sales in December were down 9%, with steep drops in SUV sales; for the year, sales dropped 4.4%. DaimlerChrysler reported U.S. sales slid 2% in December, with sales at its Chrysler unit falling 5%; for 2005, sales were up 4.5%.

Asian automakers posted mixed U.S. sales. Nissan said its U.S. sales were down 1%; Mazda announced sales dropped 8%; Honda's sales fell 3.3%. Sales at Toyota rose 8.2%.

Housing Bubble Troubles Wall Street

In its lead front-page article, the Jan. 3 Wall Street Journal runs a round-up on the economy for 2006. Over 40% of the more than 50 economists interviewed by the Journal are worried about the U.S. housing bubble. Jan Hatzius, Goldman Sachs' chief U.S. economist, revealed that during 2005, U.S. homeowners extracted $887 billion in funds in cash-out refinancing against the inflated value of their homes. This sum dwarfs all other consumer borrowing of every kind. Hatzius worries that the funds derived from cash-out refinancing will fall by more than a quarter of a trillion dollars in 2006, and this will produce a deleterious effect on the economy. Doing his best to whistle past the graveyard, Hatzius states that through this process, "We aren't building in a crash."

Asked about the problem faced by consumers, 22 of the interviewed economists included consumers' "overexposure to the housing market."

Minimum Payments on Credit Card Debt To Double

Under new guidelines issued by Federal regulators, banks have raised the minimum payments on credit-card balances from 2% to 4%; the average American household has about $9,000 in credit-card debt, with an estimated 40% carrying a balance from month to month. With the old minimum, under bankers' arithmetic, it would take 48 years and $21,000 in interest to pay off this debt. While doubling the minimum payments will reduce the repayment period to 14 years and interest payments to $4,800, it likely will be devastating for already cash-strapped families unable to afford those new minimums, and who could be hit by punitive interest rates of a whopping 30%. "Tens of millions of Americans are going to be affected by these higher payments," warned the legislative director for the Consumer Federation of America: "And unless the banks do it the right way, they are going to see a lot of defaults and many forced into bankruptcy."

The Wall Street Journal Jan. 4 dubbed this the "night of the living debt," as overextended "Zombie consumers" present a serious issue for the economy.

West Virginia Mine Cited Hundreds of Times for Safety Violations

One of the 13 miners trapped by an explosion in the Sago Mine in West Virginia, 27-year-old Randal J. McCloy, was brought out alive by the rescue party and taken to a local trauma unit in critical condition. All the others died in the mine. Meanwhile, safety violation statistics as well as charges from relatives of the victims continue to confirm the known dangerous conditions in the mine, including build-up of explosive methane gas.

Out of a total of 208 safety violations issued to Sago in 2005 by Federal authorities, 21 citations were for the build-up of combustible materials at the mine, and citations were still being issued as late as December. The mine was cited for a total of 208 safety violations in 2005—up from 68 in 2004. Ross acquired the mine in March 2005. The Sago Mine had 14 injuries last year, almost twice as many as in 2004, according to the Labor Department, which supervises the Mine Safety and Health Administration. J. Davitt McAteer, former director of the U.S. Mine Safety and Health Administration, commenting on the disaster told Bloomberg news: "When the numbers are going in the wrong direction, management has not been doing its job."

Ross also acquired six underground mines in Eastern Kentucky, and Kentucky mining regulators issued 54 temporary closure orders to ICG mines in the state last year because of safety problems.

West Virginia Senator Jay Rockefeller (D) told Reuters, regarding an investigation of the Sago disaster: "We must figure out what went wrong in the Sago Mine itself and where the company must answer for its safety record."

Senator Dick Durbin (D-Ill.) said, "In this instance, we heard of hundreds of violations of safety in this mine. We need to look at these carefully. We need to make sure that mining companies—especially coal-mining companies—are following the safety regulations. When we reduce the number of inspectors, and when we lose our zeal for enforcing the law, we invite tragedy. I don't know if it happened in this case, but we need to ask the hard questions."

The House Education and the Workforce Committee is focussed on this disaster. It is aware of what has happened at Sago since Wilbur Ross took it over, and its past violations.

Even Wall Street Journal Aghast at Takeover Sharks

Under a cartoon of a shark drinking through a straw from a goldfish bowl, the Wall Street Journal Jan. 5 candidly describes how private-equity firms suck companies dry, in an article titled, "Takeover Artists Quench Thirst." The technique is to buy up a company, have it take on a load of debt in the friendly loan climate of recent years, and have the takeover artists pay themselves large fees and dividends out of the loan, before any is used to benefit the newly acquired company. The company, now hobbled with debt, is then often sold again. Some examples:

* Apax Partners, Inc. bought up Intelsat, had the company take out a loan, and immediately paid themselves $350 million in dividends;

* Blackstone Group bought Celanese Corp. for $650 million up front, on the $3.4 billion price; within nine months it scooped up $1.3 billion in dividends;

* The group that bought up Warner Music put up $1.25 billion in equity. Within a year they received four dividend payouts totalling $1.45 billion;

* Kohlberg Kravis Roberts bought PanAmSat for $4.3 billion, and one month later was paid $250 million in dividends.

The other tactic used to "mine" portfolio companies is the collection of fees received when deals go through, which are often 1.5% off the top. These firms say they are just doing their job—making money for their stockholders. These guys give parasitism a bad name.

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