U.S. Economic/Financial News
Further Fallout in Sub-Prime Mortgage Market
The latest developments on the blowout of the sub-prime mortgage market include:
* Large sub-prime lender ResMAE Mortgage Corp. filed for bankruptcy on Feb. 12, making it at least the third major lender to borrowers with weak or poor credit histories to seek protection from creditors since late December, joining Mortgage Lenders Network USA Inc. and Ownit Mortgage Solutions Inc. ResMAE said it plans to sell most of its assets to Swiss bank Credit Suisse for $19 million. California-based ResMAE, one of the top 20 sub-prime lenders with nearly $8 billion of loans in 2006, said it has been "devastated" by a surge in defaults, which led to increased demand by investors that it buy back soured loans it had sold. Merrill Lynch, which had become the largest buyer of ResMAE's loans, insisted ResMAE repurchase more than $300 million worth of loans, an "enormous" repurchase request which ResMAE alleged "crippled" its operations, triggered a liquidity crisis and forced the sub-prime lender to put itself up for sale.
* Fremont General Corp., the seventh-largest sub-prime lender in 2006, has stopped providing risky "piggyback" second mortgages. These loans allow borrowers who can't afford to make a down payment, to finance up to 100% of the purchase price; usually they cover as much as the final 20% of the home's cost. Investors have grown increasingly skittish about buying such loans, as defaults have jumped among recent sub-prime borrowers, because in many foreclosure cases, second mortgages must be entirely or almost completely written off. About half of the sub-prime home-purchase loans included in mortgage securities in 2006 were piggyback second mortgages, according to a report by Credit Suisse Group in New York.
* Lenders Direct Capital Corp. shut down its wholesale sub-prime lending operations as of Feb. 9, saying liquidity appears to be in a "state of flux."
* San Diego-based sub-prime mortgage lender, Accredited Home Lenders Holding Co. reported a quarterly loss of $37.8 million, three times larger than Wall Street expected, and said it set aside $42 million more reserves at year-end than in September because delinquencies are rising.
Real Estate Bubble Blowout Hits Industry
The crash of the real estate market is now hitting homebuilders, and building materials suppliers. Here are some recent developments:
* KB Home, one of the largest U.S. homebuilders, said net orders tumbled 38% along with a "spike in cancellations." KB also announced a net loss of $49.6 million in its fourth quarter, due to writedowns on inventory and land options. It warned the next two quarters would be "challenging."
* Masco Corp., the maker of Behr paint and Delta faucets, said it will slash 8,000 jobs, or about 16% of its U.S. workforce by the end of the first quarter, as the building materials supplier posted its first loss in five years.
Daimler Moots Sell-Off of Chrysler
The Feb. 14 announcement by DaimlerChrysler of job cuts, plant closings, and losses was followed up with a large front-page headline in the Financial Times Feb. 15, "Daimler opens door to sell-off of Chrysler; Carmaker hires JPMorgan to explore all options." The press to implement the "shutdown America" scenario, in this case, comes from DaimlerChrysler chairman Dieter Zetsche who is quoted saying, "all options on table." The FT reports that JPMorgan is hired to "explore Chrysler's future." A source quoted in the FT said options include "outright sale, spinning off Chrysler to shareholders or continuing integration between Detroit and Mercedes car group," although "the latter is least preferred." CEO Thomas LaSorda said Chrysler needs to reduce dependence on the North American market and instead should "leverage alliances and partnerships" to use "emerging opportunities in new markets and new segments."
Chrysler Accelerates Liquidation of U.S. Auto Industry
The Chrysler group announced Feb. 14 its three-year "Recovery and Transformation Plan" that will cut 13,000 jobs, or 16% of its workforce; close its Newark, Delaware assembly plant; eliminate shifts at two other plants; and slash total production capacity by 400,000 vehicles per year. A key part of this restructuring, Chrysler said, will be a greater "global footprint" and to "balance supplier purchasing globally," i.e., more outsourcing overseas, by buying an additional $5 billion worth of parts from "low-cost sources."
Parent company DaimlerChrysler, reporting that fourth-quarter earnings fell 40% as sales of Chrysler vehicles dropped 7%, said it was considering "far-reaching strategic options with partners," and that "no option is being excluded" regarding its Chrysler unit.
Specifically, Chrysler will: in 2007, eliminate a shift at the Newark assembly plant, and one at its Warren, Michigan truck plant; in 2008, eliminate a shift at its St. Louis South assembly plant; idle the Newark plant in 2009; idle the Cleveland parts distribution center in December 2007; cut back powertrain, stamping, and component operations to reflect reduced capacity.
Hourly employment will be reduced by 11,000 over three years, with 9,000 in the U.S. and 2,000 in Canada. Salaried employment will be reduced by 2,000 over the next two years.
Special retirement programs and other termination/attrition programs will be announced later.
White House Reiterates 'Benign' Neglect Toward Auto
The White House reiterated its policy of benign neglect toward the U.S. auto industry last week in response to a question from a reporter regarding what the government had done since President Bush's meeting last year with the heads of the Big Three automakers, given Chrysler's cut of another 13,000 jobs,
"We have not targeted specific actions at this juncture," White House spokesman Tony Snow replied. "On the other hand, if you take a look at things like the health-care plan, that certainly does offer some opportunities.... One of the things we're trying to do is to make sure that workers are going to be able to have help when it comes to everything from job training, future education, existing unemployment insurance, and job programsall of those we think ought to be made available to them. Ultimately, the automakers are becoming more competitive. They need to. They understand that," Snow said.
At what point should the government come and help them out, the reporter asked. "A strong economy certainly is always going to be a helper to the auto industry in the sense that the more disposable income you havefor instance, more opportunities you have for people to go out and buy new carsso there are any number of ways where we can help them."
In other words: Bush to auto, "Drop dead!"
Home Sales Continue To Fall
During the fourth quarter of 2006, in 40 of the nation's 50 states, home sales fell relative to the same period of 2005, the National Association of Realtors (NAR) reported Feb. 15. For the nation as a whole, home sales fell 10.1% during the fourth quarter of 2006. For some states, there was a wipe-out: Comparing fourth quarter 2006 to fourth quarter 2005, sales fell in formerly "red-hot" areas, by 21.3% in California; 26.9% in Arizona; 30.8% in Florida; and 36.1% in Nevada.
Nationwide, for the fourth quarter of 2006, the median price of a home slid to $219,300, a drop of 2.7% from the same period a year ago. The National Association of Realtors was so freaked out, that in its press release, NAR President Pat Vredevogod Combs stated that it were better to make comparisons over a five-year period, rather than comparing 2006 to 2005, hoping that would make things look better, because 2006 was such a disaster.
Trade Deficit Grew at Record Level Fifth Straight Year
For the year 2006, the U.S. trade deficit on goods and services swelled to a record $736.6 billion, rising from a level of $716.7 billion for 2005, and $362.8 billion for 2001, a mere five years ago, the Commerce Department reported Feb. 13. The U.S. trade deficit for merchandise/physical goods (not counting services) jumped to $836.1 billion for 2006, also unprecedented, and nearly double the level of five years ago.
While Members of Congress were quick to blame China, and Speaker of the House Nancy Pelosi grandstanded and sent a letter Feb. 13 to President George Bush urging him to work with Chinese officials to "develop a new direction in U.S. trade policy" that addresses the "unsustainable" trade deficit, the truth is that the real culprit is 35 years of globalization/free trade, and the associated policy of de-industrialization, which not a single Congressman seriously addressed.
The U.S. trade deficit with China rose to a level of $232.5 billion in 2006, from $201.5 billion in 2005, which represents an increase of $31 billion. Yet, the U.S. trade deficit with NAFTA "partners" Canada and Mexico, rose from $122.5 billion in 2005, to $142.6 billion in 2006, an increase of $20.1 billion. For 2006, the U.S. trade deficit with the European Union nations stood at a stunning $116.6 billion. The overarching problem is the pursuit of globalization, not something caused by a single nation.