U.S. Economic/Financial News
GM and Ford Start Hocking Assets To Secure Loans
In what could be seen as the direct result of Congress refusing to act on Lyndon LaRouche's plans to save the auto section in 2005, the Nov. 16 issue of the Wall St. Journal featured a story, "GM and Ford, Hungry for Cash, Pledge Assets To Secure Loans," in which it described the automakers' desperate fire-sale of their plant and equipment. "Facing a deep financial crisis, Detroit's two top automakers have had to pledge some of their most essential assetsfactories and equipment as collateral to win badly needed new loans." For example, "On Monday, GM used equipment in some of its U.S. plants to secure a $1.5 billion loan to be arranged by J.P. Morgan Securities Inc. and Credit Suisse Securities." GM has total debt of $32.8 billion, the majority of it unsecured.
In Ford's case, in a conference call on restatement of its earnings, CFO Don Leclair said Ford aims to put together a loan deal that is likely to be secured "by a significant portion of the assets of the company." Ford's losses amount to about $7 billion so far this year, and the company is on track to approach GM's $10.6 billion 2005 loss.
Both companies continue to complain about their pension liabilities. Ford expects its "accounting change" to leave it with negative shareholder equity. Ford has roughly $23 billion in cash and expects to end the year with about $20 billion, a figure supplemented by $3.4 billion taken out of a fund employers set up to pay retiree health-care costs! GM expects to bolster its cash position with the sale of GMAC to Cerberusexpecting a $10 billion infusion. GM will hold on to $20 billion of GMAC automotive leases, which it plans to sell at a discount to raise another $4 billion in cash over three years.
Junk Debt, Hedge Funds Rule in Wrecked Economy
An international wire-service story called "Bad Credit Shines" on Nov. 16 reported the extraordinary fact that junk-rated debt has become the investment of choice of hedge funds (controlling 5% of capital worldwide) and private equity funds; and that over 60% of U.S. corporations now have junk, or "high-yield," credit ratings. The wire story, reporting assessments just published by the Chicago firm Hedge Fund Research, Inc., reports that hedge funds are massively buying junk bonds for high yieldseven non-performing corporate bond debt, speculating on its future yield. For one example, bonds of Delphi (bankrupt since October 2005, and in default on its bonded debt) are up 58% in value in the past six weeks. Credit is so easily availablethere is so much loan capital in the hedge funds, private equity funds, and banksthat defaults are alleged to be at a multi-year low. Wilbur Ross was just given $685 million by Goldman Sachs's hedge fund to invest exclusively in bankrupt, junk companies.
"We're having a big boom in dreck. For anyone to say this isn't overdone, I think is insane," commented the president of Envision Capital Management, in Los Angeles.
But this boom also suggests that the ratersStandard & Poors, Moody's, and Fitchare continually lowering most firms' credit into junk simply to give the predatory lenders higher yieldsas Italy's consumer federation has charged.
The Nov. 17 announcement of recently bankrupt U.S. Airways' beginning a hostile takeover of bankrupt Delta Airlines, shows the vulture character of all of this flood of "leveraged" lending. The merger would begin by cutting 10% of the combined airline's flights, getting rid of an equivalent ratio of its workers, and throwing out their contracts in bankruptcy courtUSAir's CEO Michael Parker says that's exactly why the takeover has to occur while, not after, Delta is bankrupt. But of the nearly $9 billion USAir is offering to buy Deltanearly half of which it would borrow on the junk-bond market$4 billion will go to pay off unsecured creditors of Delta with cash and stock, who might otherwise get close to nothing in Delta's bankruptcy. So the "leveraged" lending for the takeover, if it goes through, would pay $4 billion to other "high-yield" lenders, and probably loot an equivalent amount out of Delta's and USAir's capital and employees.
Major Homebuilder Hit by Rising Cancellations
According to wires released Nov. 14, D.R. Horton, the second-biggest U.S. homebuilder, posted a 51% drop in fourth-quarter profit as cancellations rose for the third quarter in a row. The cancellation rate rose to 40%, up from 29% in the third quarter. Sales orders were down 25%, falling in all regions of the nation, the worst drops being in Alabama, Florida, and Georgia. Horton also wrote off $142 million in inventory and $57 million in deposits for land-options that it no longer intends to purchase.
Hedge Funds Warned About Illegal Conduct
The enforcement director of the Securities and Exchange Commission, Linda Thomsen, and the enforcement chief of the New York Stock Exchange, Susan L. Merrill, issued warnings to hedge funds Nov. 13 at a securities conference in Manhattan.
Thomsen said the SEC expects to file more lawsuits aimed at hedge funds accused of illegal trading and violating their clients' trust. She said that regulators have repeatedly learned to "follow the money," and that, "these days, the money is in hedge funds, so the potential for abuse, the potential for securities law violations is there, because there is so much money there."
Merrill said that prime brokers might be held accountable if they failed to detect signs that hedge funds were conducting improper trades, like selling a company's stock short and intending to cover the transaction with shares to be purchased in the company's secondary stock offering. If the prime broker is among banks underwriting the offering, Merrill said, then it has enough information to detect that the hedge fund is intending to cover the short sale illegally.
Thomsen's and Merrill's warnings echoed concerns expressed among congressmen of both parties recently.