From Volume 5, Issue Number 48 of EIR Online, Published Nov. 28, 2006

U.S. Economic/Financial News

Oberstar To Focus on Rebuilding Nation's Infrastructure

Rebuilding the nation's infrastructure is the priority of Rep. James Oberstar (D-Minn), incoming chairman of the House Transportation and Infrastructure Committee.

The top priorities for the Committee, as he outlined them at a press conference in Duluth Nov. 8, are: 1) pass the Water Resources Development Act to secure the go-ahead to build locks and dams on river systems; accelerate dredging of harbors on the Great Lakes; conclude the bi-national U.S.-Canada authority to operate the St. Lawrence Seaway; and move ahead with New Orleans levee plans, among other critical projects; 2) fund wastewater and sewage treatment systems; and 3) secure funding for Amtrak and high-speed rail development.

Oberstar is also concerned that a funding source for port security be created and that the committee re-establish oversight on use of Federal funds in transportation projects, e.g., look at aviation maintenance, where airlines often contract out to third-party providers to save money, but at great risk to airline safety.

Oberstar also discussed Amtrak in a Nov. 21 interview with Associated Press; he was asked why he thinks Amtrak needs more funding and is a priority. Oberstar replied that the nation needs a "balanced" transportation system, which means "supporting each mode to the fullest to accomplish its unique role" in the overall needs of the nation, from "maritime shipping," to "inland waterways," to "freight and passenger rail," to "transit, highways, [and] aviation." Specifically, he noted, "The more rail service we can provide on short-haul operations, the better it is for aviation, which can concentrate on what it does best—long-haul service." In this regard, "Amtrak is a critical part of our national transportation mosaic," the Minnesota Democrat said.

As for building high-speed rail, he wants to see the U.S. set up short-term and long-term investment plans. There are several routes where he sees the feasibility of getting speeds up to 125 mph as an average. On the Northeast Corridor's Boston to Washington, D.C., the trip should be made "in about four hours," or the St. Louis to Chicago route in about "2.5 hours." He said he hopes the committee will commission studies to determine realistic investment potentials for high-speed rail development.

Plunge Protection Team: 'There Is No Systemic Risk'

Richard Fuld, CEO of Lehman Brothers, granted an interview to the Italian financial daily Il Sole 24 Ore Nov. 19, in which he repeatedly addressed the issue of hedge funds and systemic risk, as if indirectly responding to Lyndon LaRouche and others, like former Treasury Secretary Robert Rubin, who have both recently issued warnings.

"As a board member of the Federal Reserve Board of New York, Fuld has worked to bail out more than one hedge fund," says the introduction; however, "he is against demagogic-flavored criminalizations."

To the question of whether hedge funds pose a systemic threat, Fuld answered: "I do not see particular risks; to the contrary, hedge funds are a balancing element of the markets, which brings stability to the global financial system.... I personally lived through the LTCM collapse: LTCM had a very high leverage, and the market was so exposed to the fund that a bailout through purchasing its assets was difficult. Therefore the New York Fed intervened with a bankruptcy operation. The probability that another LTCM case will take place is highly reduced, thanks to the improvement of general risk-management activity in the financial system." Since there are more funds than good investment strategies, Fuld expects a "natural selection, but ... without fears of a systemic risk."

Fuld then complained that the U.S. financial market is "hyper-regulated," and that this should change.

Merger Activity at All-Time High, Funded by Debt

The year hasn't ended yet, but the volume of mergers and acquisitions in 2006 has already surpassed the previous record level of 2000, when the AOL/Time Warner and Vodafone/Mannesmann mega-deals were struck. As of Nov. 20, the total value of announced mergers and acquisitions in 2006, according to Dealogic, has reached $3.46 trillion, compared with $3.33 trillion in 2000. The volume of leveraged buyouts, most often by private equity funds, has tripled this year to $616 billion, compared to $222 billion last year.

Almost half of this year's transactions, 47%, occurred in Europe, the unmistakable new target-land of the hedge funds and private equity funds.

Within a 24-hour period, Nov. 19-20, new takeovers of a total volume of $75 billion were announced, including the $36 billion takeover of Equity Office Properties Trust by Blackstone, now the biggest leveraged buyout deal ever, and the $26 billion merger in the commodity sector of Phelps Dodge and Freeport-McMoRan Copper & Gold. In the latter case, the combined companies' debt will soar from zero to $15 billion; and plunge from investment-grade status, to junk-rated—typical of these wild leveraged buyouts' bank borrowing.

What is most telling is the characteristic marked difference between this takeover tsunami, and the last one (1999-2000), which was massive enough and caused a wave of energy and materials inflation. Whereas the 1999-2000 takeovers were funded, in the largest part, by corporate stock transfers, this takeover bubble is funded overwhelmingly by cash (i.e., debt). Therefore, leveraged defaults by the newly debt-loaded target companies could blow up the credit markets.

U.S. corporations alone are on a course to raise $750 billion in junk-rated debt this year, 80% of it from banks.

American Youth Hopelessly Strapped with Debt

USA Today and ABC News began a six-week series Nov. 20 on the growing debt burden of young people in the United States. According to their report, nearly two-thirds of those in their twenties are carrying some debt, with those carrying $20,000 or more being the fastest-growing group. From 2001 to 2006, the average total debt of those in this group rose from $14,645 to $16,120. "This debt-for-diploma system is strangling our young people," says author Tamara Draut. "It's creating a sense of futility that no matter what they do, they're not going to be able to get ahead. It's a sense of hopelessness."

Regulators, State Officials Quash Dereg Mega-Mergers

When the Roosevelt-era Public Utility Holding Company Act (PUHCA) was repealed two years ago, through the Energy Act, unregulated utilities began a feeding frenzy of proposed mergers in order to "grow their earnings and dividends." While the Department of Justice and Federal Energy Regulatory Commission said the mergers would "do no harm," state officials and regulators have moved to prevent this cartelization of an industry.

Over the past two months, Excelon and Public Service Enterprise Group (New Jersey) called off their merger, as did FPL Group (Florida), and Maryland-based Constellation Energy, reported Nov. 15. In New Jersey, the utility commission "feared" that the concentration of generating capacity controlled by the conglomerate would allow them to exercise "market power," that is, fix prices. In Maryland, Constellation's proposed 72% rate hike led to a revolt in the State Legislature, and to Democratic Gov.-elect Martin O'Mally's pledge to fire the entire utility commission. There is now even talk of reversing the state's ill-conceived deregulation law, as public officials return to a concern for the general welfare.

More U.S. Assets Grabbed by PPP Swindles

A number of rotten Felix Rohatyn-style Public-Private Partnership deals are advancing:

* Chicago. On Nov. 1, the Chicago City Council approved 37-8, the leasing of four municipal parking garages to Morgan Stanley, for $563 million in a PPP 99-year lease deal.

* Pennsylvania. Gov. Ed Rendell (D) and Speaker of the State House John Perzel (R) on Nov. 20, each pitched separately the idea of a PPP lease of the Pennsylvania Turnpike, in order to raise state funds. The 537-mile system was the first in the nation. Among the companies in line is Macquarie Infrastructure Fund. Estimates range from $10 billion to $30 billion.

* New Jersey. Leasing the state turnpike could fetch $30 billion, according to some state officials.

But opposition is emerging: Stop the "pawnbroker mentality" was the advice of the head of the National Association of Owner/Operators and Independent Truckers, on an MSNBC Nov. 21 show, "For Whom the Profit Tolls." He scored the PPP deals in the works, saying that "Macquarie and Cintra—the Australians and the Spaniards—are not benevolent people." Government has an "inherent responsibility" for transportation. These PPP privatizers are seeking "mature" infrastructure—meaning already built assets, to loot. The White House has been a "cheerleader" for theft. But Congress can be skeptical, especially Rep. Oberstar, incoming head of the Transportation Committee.

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