U.S. Economic/Financial News

S&P: Debt Blowout Is Coming; LaRouche: Stop the Takeovers

The economics research department of the S&P debt-rating agency, put out another shrill warning on Dec. 14, about a coming wave of "leveraged debt defaults" threatening the international credit markets. This means rapid-fire, and potentially massive defaults on the debts loaded onto merger and takeover "target" companies by hedge funds, private-equity funds, and banks. This is known as "leveraged" debt because it's issued on the assumption of looting the target. "Predators are extracting special dividends from prey to recoup their investment quickly, leaving these companies saddled with debt," said the report highlighted in a Dec. 14 London Daily Telegraph article by Ambrose Evans-Pritchard.

This S&P report, "Risk Outlook for 2007," is an even more alarmist repeat of the one it issued in October on the same danger (EIR, Nov. 3, 2006).

S&P warns that, "Leveraged loans have exploded.... As the interest coverage becomes thinner, defaults are certain to increase.... Prudent financial policies are being discarded. The average purchase-price for European LBOs in the three months to November hit a record high level of 9.4 times earnings." Most of this purchase money is borrowed, and S&P points to disturbing signs, including "a trend toward deals that are not even rated for credit risk." This kind of "unrated" borrowing shows the funds' complete disregard for the survival of the companies they're taking over and looting. "The big question is what happens [to this debt] in a downturn" now underway, the report warns.

The new round of ongoing attempted takeovers in the airline industry, for example—USAir taking over Delta, United and Continental merging, AirTran taking over Midwest—are new attacks on airlines already drastically shrunk and looted. Carriers that employed 420,000 workers in September 2001 employed 264,000 five years later, at more than a 25% cut in wages. Their fleet of jets had shrunk by 12%. AirTran CEO Joseph Leonard eagerly expects that a USAir-Delta merger would cut those carriers' combined jet fleet by another 10%, allowing AirTran to raise prices.

On Dec. 13, Rep. James Oberstar (D-Minn), who will chair the House Transportation and Infrastructure Committee, demanded the Justice Department stop the USAir-Delta takeover; if not, he said, he'd start hearings to block such mergers.

Lyndon LaRouche has declared his strong opposition to these "leveraged" buyouts, and on Dec. 14, LaRouche said that any takeover that turns a viable firm into a junk-bond company—the airline merger, like others underway, will do this immediately—is against the national interest. Therefore, in the national interest, Congress should block the mergers, including any in which it can't be shown that the target companies will gain in capacity, productivity, and production from the merger. Congress has to draw that line, LaRouche said, and draw it now, in the face of the oncoming debt crash.

Wall Street Guru: Risky Mortgages Could Trigger Major Financial Crisis

As high-risk mortgages go into default, the danger of a financial crisis is increasing, bankers and Federal officials warned at the National Housing Forum on Dec. 11, as reported by the Washington Times.

Wall Street guru Lewis Ranieri, who "invented" the market for mortgage-backed securities (MBS) in the 1990s, now says that banks and mortgage-brokers are passing $600 billion a year in risky mortgages to unwary investors, and that this could result in a financial crisis which is too big for the Fed to control.

Banking regulators said that major banks are selling questionable mortgages that they themselves cannot legally hold in their own portfolios, to unwary investors. The risk is even higher when brokers repackage the mortgages in deceptive ways, and sell them to small investors and foreigners who don't understand the risks, Ranieri said, while pointing out that the efforts of regulators to limit risking loans hasn't stopped the practice. He said brokers are bypassing the MBS market and bundling the riskiest mortgages together as "collateralized debt obligations" on the corporate/junk-bond market.

'Bubble-Within-the-Bubble': Homeowners Taking Houses Off the Market

* In the Denver, Colorado area, the number of days on the market it takes to sell a residential property is rising, according to Denver-based MetroList. For a condo, the average time on the market has increased to 134 days, up 14% from November 2005; and for single-family homes, up 20% to 103 days. At the same time, there has been a dramatic drop in the number of listings, down about 4,450 (or 14%) from 31,989 in July.

"People are giving up and taking their houses off the market," said Lance Chayet, broker-owner of Lakewood-based Hanover Realty. Among reasons he cited, "[S]hort sales and foreclosures are exerting negative pressures [on home values] and forcing some people out."

* In the Annapolis, Maryland area, many sellers are taking their homes off the market if they don't have an obligation to sell. "The major concern is that it's not going to sell in the market at the price they want," said Bill Hyland, an associate broker for Keller Williams Realty. Sales prices are quickly going down, as average time on the market has doubled to 87 days, 45 days longer than in November 2005, according to Metropolitan Regional Information Systems.

* In the region between San Francisco and Sacramento, California, one Antioch homeowner has been unable to sell his four-bedroom, two-bath house, even though he has slashed the asking price by almost $80,000 and added $40,000 worth of improvements. "Buyers have vanished," he said. "If this doesn't sell posthaste, I'm going to bite the bullet and pull it off the market."

* A Loudoun County, Virginia realtor told EIR Dec. 14, that homes are being sold only after significant hold periods, and steep discounts. He reported that one house in the town of Purcellville had first gone on the market for $750,000. After months of going nowhere, the home finally sold for $500,000, a 33% drop. Another home which had been hawked at $680,000, finally sold after 20% had been lopped off the price.

This realtor said that the homeowner who owns a home whose price has fallen—and can't meet monthly mortgage payments—can't even refinance the home, because the amount he owes on his mortgage is already greater than the market value of his home.

Sub-Prime Mortgage Delinquencies Spike Upward

During the third quarter, 2006, sub-prime mortgage borrowers had a delinquency rate on their loans of 12.52% (delinquency represents more than 30 days behind on a mortgage payment). Sub-prime mortgage borrowers having adjustable rate mortgages (ARMs), experienced an even higher delinquency rate of 13.22%. Meanwhile, with respect to all home mortgage borrowers, 4.7% of their loans went into delinquency.

Sub-prime mortgages are loan-shark-type mortgage loans which are made to individuals who have "impaired credit." The loans are extended, typically, to individuals with low income, often Hispanic and African-American households. The loans carry high interest rates, substantial fees, and severe penalties for non-payment. Today, the volume of the sub-prime market is placed between $650 billion and $980 billion, the latter representing one-tenth of the home mortgage market. The weak sub-prime market represents a likely point of explosion for the whole mortgage market.

Two sub-prime mortgage lenders shut down in the first week of December. These were the Texas-based Sebring Capital Partners, and California-based Ownit Mortgage Solutions. the 11th-largest wholesale sub-prime mortgage lender.

This has created tumult in the derivatives market: the cost of credit default swaps to protect against default on $10 million worth of BBB-rated sub-prime mortgage bonds, jumped from $310,000 to $389,000.

November Foreclosure Rate Was Highest This Year

In November, some 120,334 properties nationwide entered some stage of foreclosure, up 4% from October and a sharp increase of 68% from November 2005, according to RealtyTrac Inc. The survey found that one new foreclosure was filed for every 961 U.S. households—the highest monthly foreclosure rate reported so far this year. "Defaults, auctions and bank repossessions all trended higher in November, bringing the year-to-date foreclosure total to almost 1.2 million—up 43% from the same 11-month period of 2005," said James Saccacio, RealtyTrac president, adding that homeowners who purchased adjustable-rate/interest-only mortgages and have little equity, have been hit by stalling home prices and resetting of mortgage rates to higher levels.

Nevada's foreclosure rate jumped 12% to the highest for any state in the nation, knocking Colorado from the top spot. California reported the highest number of foreclosures for the third straight month, an increase of 19% from October.

Coalition Issues Report on Housing Affordability

The National Low Income Housing Coalition (NLIHC) issued its annual "Out of Reach Report" on Dec. 12, comparing the affordability of housing, and showing how prices for homes are soaring out of the reach of many would-be buyers. The report stated that in 1960, 23% of all the American households that rent, paid at least 30% of their income for housing. However, by 2005, 49% paid 30% or more of their income for their dwelling. (There are 34.5 million American households that rent, and 74.3 million households that own their own home.) Housing is considered to be unaffordable, if it consumes more than 30% of a household's income.

The report determined that nationally, a worker would need to earn $16.31 per hour, and work 40 hours per week, for a full 52 weeks of the year (without any time off for vacation or illness), just to be able to afford a one- or two-bedroom rental property. But that's a national average, which includes many rural areas that have lower housing costs. A worker would have to earn $24.73 per hour in Washington, D.C.; $26.27 in Boston; and $29.83 in San Francisco, to be able to afford a two-bedroom rental. Sheila Crowley, the research director for the NLIHC, stressed that even an increase in the minimum wage from $5.15 to $7.25 per hour, as is now being discussed in Congress, would leave millions of workers still unable to afford housing.

Auto Sector Is Hemorrhaging More and More Jobs

Bureau of Labor Statistics tables published for November show that the U.S. auto sector is losing 10-15,000 jobs monthly, and has shrunk by 288,000 net jobs—or 22%—in the past six years. On Dec. 12, the DaimlerChrysler unit, Freightliner (trucks and buses), said it will lay off 4,000 out of 24,000 employees in 2007, starting with 800 production workers at its truck plant in St. Thomas, Ontario. This is in addition to Chrysler's reported, but not announced, plan to close two auto assembly and one axle plant early next year. Also on Dec. 12, the major bankrupt auto parts supplier, Dana Corporation, announced closing four plants, two in Canada and one each in Missouri and Indiana, eliminating 440 jobs as it moves some production to Mexico. These plants are located in Syracuse, Indiana; Cape Girardeau, Missouri; and Guelph and Thorold, Ontario. In addition, four more plants are expected to be shuttered within the next two years.

The Virginian Pilot newspaper in Norfolk, reported Dec. 12, under the headline, "After Ford, Outlook Bleak," that in that area, suppliers Visteon, Johnson Controls, Tenneco, TDS/US, and truck hauler Allied Systems, are likely to eliminate 500-530 jobs as a result of the Ford Truck Assembly closure already underway, according to Old Dominion University's "State of the Region" report. Job loss at the plant itself is over 2,000. TDS's and Visteon's plants in the area are brand new, opened in 2003 at a total investment of more than $20 million. And the city of Chesapeake's tax revenue from the suppliers has been $225,000 annually.

An equity fund analyst, quoted in the Dec. 13 Detroit News, epitomized the tearing up of the auto industry in commenting on the latest report that the Cerberus and Appaloosa hedge funds have a joint operation to acquire the major ownership of Delphi stock. "'If they can buy in on the cheap, lower wages, and cut costs, the deal might make sense,' said John Novak, a Chicago-based analyst with Morningstar, Inc. 'There are attractive growth opportunities for parts suppliers globally in places like China, Eastern Europe, and other emerging markets.'" These motivations make clear that even after the buyout of over 18,000 Delphi workers from the industry, the UAW can still count on vicious demands for further wage cuts, whether the Delphi plants are closed, or sold to these predators. The hedge funds head a line of at least half a dozen sharks and vultures, including Wilbur Ross, wanting to buy in and loot Delphi, including its overseas operations.

Delphi $10 Billion-Plus in Arrears to PBGC

In November court filings, Delphi has admitted that it is $1.25 billion behind in payments to the Pension Benefit Guaranty Corporation (PBGC). So far, Delphi has paid a mere $234 million while, according to the court-approved bankruptcy reorganization, it was supposed to have paid in $1.5 billion by now. In total it is $10.6 billion in arrears.

Ford Buy-Out Hits White Collar Workers

Ford offered buy-outs to white collar workers on Dec. 11, involving 85% of the company's 38,500 managers, in every department. The company is seeking to cut 10,000 jobs, or over 25%, of its salaried personnel. Making the decision more of a gamble, is that if not enough people take the offer, they could be laid off instead, left with nothing. Workers have until Jan. 5 to decide.

Interviewing workers at a local coffee shop, the Dec. 12 Detroit News was told that workers had been advised not to talk to reporters. Some did, and indicated thoughts of moving, even to South America or, for the really desperate, Wyoming. "I always thought a college education meant better opportunities," said one. Another, with a better perception of the larger reality, spoke about joining a political movement to fight for workers. "We need a true discussion on how we keep a middle class in this country," he said.

Monsanto Targets Cotton Seed Growers

Seed-cartel giant Monsanto is demanding a $1.5 billion takeover of U.S.A. Delta Pine and Land Company, the firm controlling 50% of seed for cotton, the fifth-largest crop in the United States; the deal has been awaiting approval by the anti-trust review section of the Justice Department for four months, the Wall Street Journal reported Dec. 11. In some U.S. states, such as Georgia, Delta Pine and Land Co. dominates over 90% of cotton seed used. Monsanto has been pursuing this Delta deal for over ten years. Under the Clinton Administration, the Justice Department held up approval for 19 months, until finally, Monsanto temporarily backed out in December 1999. Since then, it renewed its takeover plans.

Monsanto controls about 25% of corn and soybean seeds used in the United States under its direct brands, and more under license to other companies, that pay fees for Monsanto's patented genetics. Today, the majority of all seeds genetically modified for soybeans, corn, and cotton, contain genes to which Monsanto owns the patent rights for traits to tolerate insecticide and herbicide. DuPont (Pioneer Hy-bred) and Syngenta seed companies are skirmishing for patenting new genes and traits to vie with Monsanto. Such patenting, an immoral private control over the means to life, was illegal in the U.S. until changes to the law were forced into place over recent decades.

In reviewing some of the recent takeovers and acquisitions in the food chain, Lyndon LaRouche noted the similarity to the early 1900s, and asked: "Where are the trust-busters when you need them?"