U.S. Economic/Financial News

Violent Shakeout in Subprime Mortgage Market

The ABX index—an index of credit default swaps/credit derivatives—took a huge fall Feb. 22, based on the ongoing collapse of subprime mortgages, and Moody's Rating Service's announcement that it is considering downgrading five subprime mortgage lenders. Reflective of the fall of the ABX (down 24% since Jan. 18): Whereas in January, an investor would have to pay $389,000 for a year to protect or insure $10 million of lowest-investment-grade bonds, by Feb. 22, it would require more than $1.1 million. This is directly affected by the collapse in subprime mortgages. It should be stressed that the condition of demanding $1.1 million in credit default swap insurance for each $10 million in instruments based on bonds, last happened during April-May of 2006, with respect to the bonds of GM and Ford. At that point, the derivatives market blew apart, and suffered hundreds of billions of dollars of losses.

Meanwhile, Moody's said Feb. 21 that it may cut the ratings of units affiliated with New Century Financial Corp, the second-largest subprime lender. Moody's said it may also reduce the ratings for four other subprime lenders: NovaStar Financial, Ameriquest Mortgage, Accredited Home Lenders Holdings, and Winter. Twenty-four hours later, Feb. 22, NovaStar announced a fourth-quarter loss of $14.4 million, and its stock plunged 43% in a single day. That is the kind of wrenching fall that occurs when a market is imploding.

The danger is that collateralized debt obligations (CDOs)—a new "hot" type of derivatives that were issued against subprime bonds—totalled $500 billion in issuance in 2006, which is half of the volume of all CDOs of all types that were issued last year. The hedge funds, looking for high yields, reportedly bought the lion's share of these subprime mortgage-based CDOs; as these CDOs melt down, some hedge funds are going to suffer large losses, reported the Feb. 22 Bloomberg.

According to the Mortgage Bankers Association, subprime mortgages soared to 13.5% of all outstanding mortgages in 2006, which would put the volume of subprime mortgages at more than $1.3 trillion. Among the biggest subprime lenders, and most vulnerable, are big banks, like the British Crown's Hong Kong Shanghai Bank (HSBC), the largest subprime lender in the United States.

Delphi Division To Be Sold to Locust Group

Delphi Corp., i.e., the Cerberus/Appaloosa group of hedge funds that are taking control of Delphi in bankruptcy court—has agreed to sell off its Interiors and Closures Division to the notorious mega-millionaire, junk-bond defaulter, Ira Rennert's Renco, Inc. This large Delphi division includes six plants in the United States, and others in Germany, Austria, China, Korea, and Mexico. The plants make instrument panels, consoles, cockpits, door assemblies, and latches; they include two plants near Saginaw, Michigan and the Columbus, Ohio plant whose UAW workers repeatedly came to Capitol Hill to demand passage of Lyndon LaRouche's Emergency Recovery Act.

Renco Group, Inc., controlled by Rennert, notoriously defaulted in 2002 on a number of junk bond issues linked to its holdings WCI Steel and Lodestar. It has been cited nationwide by the Environmental Protection Agency as among the ten worst polluters in the United States. Its holdings include a good number of bankrupts. U.S. Magnesium Corp. and Lodestar Holdings (Kentucky coal) are both major polluters and bankrupts. WCI Steel of Warren, Ohio, owned by Renco, has been in and out of bankruptcy.

Way back in the 1960s, Rennert was cited twice by the SEC and, the second time, debarred from the securities industry and from the National Association of Securities Dealers on Wall Street. He went into the completely unregulated world of private equity deals in the 1970s and '80s, working with Michael Milken's "monsters" and others, and was a significant issuer of junk bonds. He was a partner in Milken's giant Integrated Resources scam of the 1980s.

The one deal which has made Renco is Rennert's 1992 acquisition of AM General, which got the exclusive contract to make U.S. Army Humvees since 2001. Rennert bought AM General for only $133 million, including only $10 million of Renco's own funds. Renco sold 70% of AM General in 2005 for $1 billion, to Ronald Perelman Enterprises. Rennert himself is a major funder of Likud campaigns in Israel, particularly Bibi Netanyahu; and lives in the largest occupied dwelling in North America, a monstrosity which nearly fills a 63-acre property on eastern Long Island.

Auto Loaded with Debt, Ready for Big Defaults

A journalist reported to EIR a recent conversation with an auto-supply executive at a meeting in Florida: The executive said that he's sure that 1) hedge funds are going to wind up owning Chrysler, probably the Cerberus group of funds that is now buying Delphi; and 2) there is so much more debt on the big carmakers and big suppliers even than two-three years ago—largely hedge-fund-borrowed debt—that there will, before long, be a big default or defaults—of Ford/Visteon, Chrysler, Tower, Delphi, or more than one. This could easily be tens of billions of dollars in debt.

Lyndon LaRouche commented: "That's what we have to remind members of Congress. When we were pushing on [saving auto] two years ago, it was the last chance. And they did nothing—including Hillary [Clinton]. There is not a chance to stop it now, unless someone decides to do it politically. These are now lost causes. We have to say [to Members of Congress], 'We told you guys. You went with Rohatyn's advice. You thought you were so smart!'

"We'll go with large-scale public works as part of infrastructure. That's the only thing that will work. Otherwise, everything goes!

"Anyone running for office who hasn't changed their tune on this since 2005, does not have a very good chance for success," LaRouche said.

Chrysler May Be Sold or Permanently Closed

Chrysler, once the world's third-largest automaker, may be sold or permanently closed. One thing is for sure, it certainly has been destroyed. In 1998, Daimler Benz bought out Chrysler for $36 billion; today, its market value may be as little as one-seventh of that, $5 billion, according to a Bank of America analyst Feb. 19.

Bloomberg reported Feb. 19, that as GM holds discussions with Daimler Chrysler about buying Chrysler, "other options for Chrysler would include selling shares in an initial public offering, a partial sale, or a closure of operations, said Juergen Pieper, an analyst at Bankhaus Metzler" (emphasis added). Pieper added that, likely buyers for Chrysler are "other carmakers, including Hyundai Motor Co. [of Korea] and Chinese companies, [or even] financial investors [locusts] are also likely candidates."

New York Times: Dangers of Financial Crisis Rising

In an editorial entitled, "Mortgage Insecurities" on Feb. 22, the New York Times, in a small nod to reality, wrote, "If the bankers, investors and regulators who populate the global financial markets are not already anxious, they should be." After a brief review of the Russian default of 1998 (which intensified the LTCM meltdown), the paper stressed, "More than 20% of global private debt securities is now tied to housing in the United States. That works out to $7.5 trillion—far larger than the [open] market for United States Treasuries. So if America's mortgage markets heads south, the losses could be widespread." Shedding a single layer of its "being objective" persona, the Times asserts, "The odds of a global financial crisis are still low, ... but they are rising."

Mittal Ordered To Divest Sparrows Point Steel Mill

Mittal, the world's largest steel producer, put together through the buyout of bankrupted steel mills throughout the world, was ordered to sell its Sparrows Point mill near Baltimore to settle antitrust issues raised by the Dutch company's recent merger with Arcelor SA, Forbes reported Feb. 20. The future of Sparrows Point and its remaining 2,400 steelworkers is unclear.