From Volume 5, Issue Number 10 of EIR Online, Published Mar. 7, 2006

U.S. Economic/Financial News

Foreign Companies Run Fourth-Fifths of U.S. Port Terminals

Eighty percent of U.S. port terminals are operated by foreign companies. Bob Waters, senior vice president of SSA Marine Terminals, America's largest terminal operator, provided an overview to National Public Radio Feb. 27, on how the outsourcing has spread: There are 15 major ports in the U.S., each of which is divided into a number of terminals, making roughly 100 terminals. SSA Marine Terminals and Maher Marine Terminals are the only two U.S. companies that operate major U.S. terminals, and they operate eight of them. Several cities and states manage another dozen. "Other than that, the rest of the terminals, which comprise 80%, are operated by foreign entities," he said.

The terminal operators, such as Dubai Ports World, provide stevedoring to shipping lines that utilize the port, to oversee the loading and unloading of ships. They also oversee moving cargo on and off trucks and rail, the scheduling of ships (like an air traffic controller), and then transport the cargo when it is taken for inspection.

New York Fed Head Raises Alarm About Credit Derivatives

New York Federal Reserve chairman Timothy Geithner warned about the dangers of credit derivatives, in a keynote speech Feb. 28 to the Global Association of Risk Professionals, in New York City, praised the non-existent benefits of "the rapid growth in instruments for risk transfer," and then focussed on derivatives, especially credit derivatives. He said, "They have not eliminated risk. They have not ended the tendency of markets to occasional periods of mania and panic. They have not eliminated the possibility of failure of a major financial intermediary. And they cannot fully insulate the broader financial system from the effects of such a failure."

Geithner continued, "The scale of the over-the-counter derivatives markets is very large ... now approaching $300 trillion." He emphasized that were one derivatives counter-party to fail, and renege on its contract, "the process of closing out those positions and replacing them could add stress to markets and possibly intensify the direct damage caused."

Credit derivatives are "written on a much smaller base of underlying debt issuance," Geithner pointed out, meaning that for each $1 in a corporation's debt, banks could write up to $10 in credit derivatives, to supposedly "insure" the debt. Geithner underscored that, "in the event of a default, [credit derivatives would] magnify ... the risk of adverse market dynamics."

The direction of Geithner's remarks is all the more significant, as he has been assigned, essentially, to be the Federal Reserve's case officer to get credit derivatives under control, on which matter he has been unsuccessfully working with the 14 leading credit derivative banks. (See this week's InDepth for an analysis of the carry trade.)

Hedge-Hog Cerberus Bids To Buy GMAC

Cerberus Capital Management is now in advanced stage of negotiations to purchase a controlling 51% share of GMAC, reportedly for $11-12 billion. Cerberus, which is joined in the bid by Citigroup, is a New York-based hedge fund with $14.5 billion under management, the world's ninth-largest hedge fund. (The company name is derived from the mythical Greek three-headed dog that guards the gates of Hell).

The company is run by Stephen Feinberg, who, according to an Oct. 5, 2005 Businessweek profile, "has a penchant for secrecy." Cerberus has long-standing Bush family, and neo-con ties: Dan Quayle—Bush 41's Vice President—now chairs Cerberus Global Investments. And, according to the BusinessWeek article, "Defense Secretary Donald H. Rumsfeld was an investor [in Cerberus] in 2001, according to government ethics disclosures." Further, the same Businessweek article reported that Cerberus-owned "companies ... set up military-base camps in Iraq."

The Nov. 15, 2005 Israeli news service reported that during that month, Cerberus-Gabriel Capital bought 9.99% of Bank Leumi, Israel's second-largest bank, which is at the center of dirty Israeli intelligence and financial networks. Cerberus announced its intention to increase its ownership to 20%. Then-Israeli Finance Minister Ehud Olmert, now Acting Prime Minister, helped craft the sale of Leumi. An additional force at Cerberus is Michael Steinhardt, leading Mega member, and sugardaddy for neo-con newspapers, who is a director of Ableco LLC, which company Businessweek identifies as "Cerberus' financing arm."

Quayle boasts in his biography that he helped bring Cerberus into Germany in 2003. Cerberus has been a locust: it bought up 4% of the apartments in Berlin when they were privatized, and bid to buy the WOBA apartments in Dresden. It also gobbled up German Mittlestand companies. Although it keeps in the shadows, Businessweek points out that Cerberus-owned companies globally have annual revenues of greater than $30 billion—more than MacDonalds or Cisco Systems—and more than 105,000 employees, more than Exxon-Mobil.

The Fitch downgrade of General Motors March 1 could be intended to accelerate GM's sale of GMAC to Cerberus and Citigroup (see next item). Were that completed, the ravenous Cerberus would control the chief financing instrument of GM cars; with that leverage, it could force further GM plants shutdowns, and layoffs of workers.

Fitch Flunkies Cut GM Debt Ratings Deeper Into Junk

Fitch Ratings, citing its expectation that GM would face continued losses, declining liquidity, and a financially stressed supplier base, forecast that "suppliers could begin to restrict trade credit to GM." Fitch also assigned GM's senior unsecured debt a recovery rating of "RR4," meaning creditors would recover between 30%-50% in the event of bankruptcy. Fitch also threatened to cut them again, unless the auto maker does more cost-cutting and succeeds in selling a controlling stake in its financial arm, GMAC. GMAC's ratings were left unchanged at two levels below investment grade; while it lowered GM's issuer default and senior debt rating by one notch, to five levels below investment grade.

February Sales Tumble at GM, Ford; Production Cuts Loom

Both General Motors and Ford reported a decline in auto sales for February and forecast cuts in second-quarter production. Ford Motor Co. said March 1 that U.S. sales in February dropped 4% compared to year ago, as sales of SUVs tumbled 20% or more. Sales to corporate and government fleets, which padded January results, in February rose 11%—and accounted for a whopping 41% of Ford's sales. Ford said it would cut second-quarter production by nearly 2% (16,000 vehicles) compared to a year ago. GM reported overall sales declined by 2.5% from February 2005. Retail sales rose 1%, while fleet sales fell 11%. GM will cut 2Q production by 3.7% from a year ago. Chrysler, on the other hand, said its U.S. sales were up 4%, boosted by zero-percent financing, extending the incentive through the end of March.

Further Gutting of Auto Industry; More Layoffs Announced

Here are some of the latest developments:

* Giant auto-parts supplier Lear Corp. officially announced the idling of its Hazelwood, Mo. seat-assembly plant for March 10, resulting in the layoff of 251 employees, because Ford is shutting down production at its SUV assembly plant in Hazelwood. Lear is also cutting more than 100 workers at its SUV parts plant in Lebanon, Va., due to GM's closing of its plant in Oklahoma.

* Meanwhile, General Motors said it will lay off about 65 workers at its parts-distribution facility in Hazelwood, starting June 30, according to a lay-off notice.

* Tower Automotive could face a strike, like Delphi, after it asked a bankruptcy court judge to cancel its union contracts. Tower produces parts for every automaker.

* Delphi posted losses of $1.37 billion since its Chapter 11 bankruptcy filing in October, with a $121-million loss in January.

(For more on the crisis in auto, see this week's Indepth: "Where We Stand in the Battle To Save the Machine-Tool Sector," by Nancy Spannaus.)

Housing Bubble Continues To Shrink

According to the National Association of Realtors, resales of U.S. homes fell 2.8% in January, the fifth monthly decline, and the lowest rate in two years. Since January 2005, sales have plunged by 5.2%. The supply of unsold homes on the market is the highest since August 1998. According to the Commerce Department, the sales of new homes fell 5%, to the lowest level in a year.

Bush's Medicare Drug Benefit: Katrina-Like Incompetence

So charged Sen. Byron Dorgan (D-N.D.) at the Democratic Policy Committee Oversight Hearing on the Implementation of the Medicare Prescription Drug Benefit on Feb. 27. The committee is calling for an extension until the end of the year before the enrollment period closes, to fix the red tape, glitches, and bugs that have plagued its first two months. So far, only 24% of those eligible have enrolled in a drug plan. They must do so by May 15 or face a permanent surcharge on their monthly premiums.

Some of the problems, besides the changeover snafus:

* Too many plans. In North Dakota alone, there are 41 plans offered by 17 companies to 105,000 beneficiaries. In Los Angeles County in California, there are 85 plans from which to choose.

* Too high a price. Because the Federal government is not allowed to negotiate prices with the companies, the prices for drugs are far higher than for the Veterans Administration—a windfall for the pharmaceutical companies. To control costs, benefits are not given for drug costs between $2,250 and $5,100 in personal drug spending, leaving in the lurch many chronically ill people needing several costly drugs daily.

* Many people who should be in the lowest payment group do not qualify under the new plan because of an assets test. If a widow, for instance, with no income and no insurance besides Medicare, has more than $6,000 in an account, she is pushed up into a higher payment category, which could cost her over $1,000 more per year. Of over 3.6 million applications for low-income subsidies, only 31% are eligible—51% of the excluded failed the asset test alone.

There are four bills which have been introduced by Democrats to patch up the ailing Medicare drug plan.

Republicans Shut Down Mine Safety Hearings

The Republican chairman of the House Subcommittee on Workforce Protections, Rep. Judy Biggert (Ill), shut down the March 1 hearing on "Evaluating Health and Safety Regulations in the American Mining Industry," after only 90 minutes. This was the first mine safety hearing in five years. After committee members were denied a second round of questions, Rep. George Miller (D-Calif) the Ranking Member of the Committee on Education and the Workforce, reminded the chairman: "So far this year 21 miners have died in the United States. This is a crisis. Yet, the Republican leadership in Congress were unwilling to devote more than a mere 90 minutes to this issue of life and death."

Miller added, "Congress has a responsibility to take action to keep more people from dying in preventable mine accidents. The Republicans show a lack of concern and respect for the miners and their families by shutting down this hearing before the facts could come out."

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