U.S. Economic/Financial News
BLS Reports 10,000 Auto Jobs a Month Are Disappearing
Official statistics released at the end of February show that the United States' auto sector is shrinking at 10% a year. According to the Bureau of Labor Statistics, employment in the U.S. auto sector has sunk down to the 1 million mark as of January, from 1.34 million seven years ago, in January 2000. This is a drop of 25%, but in the last year alone, since January 2006, it has dropped 9.5%, and this fall is still clearly accelerating, as in the past few months, the shrinkage has been by 10,000 jobs a month.
Chrysler on Feb. 28 announced a buyout offer to 50,000 unionized production workers in the United States; supposedly, this is to get 9,000 to quit in 2007 at targetted plants (to be closed); but as in the Ford, Delphi, and GM buyout cases, many more than 9,000 are likely to be washed out, and some replaced with temps, unless the company goes under meanwhile. The buyout is less "generous" than GM's or Ford'sup to $100,000 for workers far from retirement, who give up their benefits; very small incentives for early quitting for those near retirement.
Chrysler is cutting North American production by 400,000 vehicles, or about 20%, from 2006 levels.
Delphi's two plants in Anderson, Indiana are closing in June; of the nearly 300 workers remaining, who are second-tier low-wage replacements hired in 2006, about 60 will be able to transfer to Kokomo, Indiana plants for now; the rest will be laid off permanently. A worker involved in tearing the plants down, says that 25% of the machinery and tools were shipped out to Kokomo, Mexico, and Michigan; 25% of it has been auctioned off on DoveBid.com.
Delphi lost $5.5 billion for 2006, of which $4.3 billion was spent on shrinkage: $3.4 billion on worker buyouts, and $900 million on closed plant writedowns.
Blowing into Collapsing Debt Bubble: Bankers Search for Buyouts
The true "leveraged" insanity of the takeover of the big Texas electrical utility TXU, is now emerging. Although a debt-laden, $44-billion total-"value" takeover of TXU by the private equity groups KKR and Texas Pacific has been announced, with the cancellation of TXU's planned coal-based new power capacity, the circus is not over.
According to the Financial Times March 1, the banks in the announced KKR buyout are Goldman Sachs, Lehman Brothers, Citigroup, and Morgan Stanley. But other international banks, not involved in the KKR/Texas Pacific Group buyout, are now going to other private equity firms, with $40 billion loan packages already ready, and demanding that they make competing bids for TXU. Why? So that these bank syndicates can loan $40 billion at 9%!
Credit Suisse is shopping its $40 billion loan package to Carlyle Group, Blackstone Group, etc.; and Credit Suisse is meanwhile also advising TXU on being taken over. This is called "stapled financing," because everything for a takeover is put together and packaged by the bank syndicate in advance, in order that they can lend the money.
But at the same time, Deutschebank and Bank of America are also canvassing private equity groups, including some of the same ones, to find prospective buyers of TXU to take their $40 billion in loans. And TXU has been given 50 days, by KKR and Texas Pacific, to look over competing bids, should they be made.
And who got TXU to demand that condition, and is now running that whole "bid 'em up" process for TXU? Lazard!
Next stop $50 billion in debt? $60 billion? Lazard has done it many times before.
U.S. Subprime Market Twists Out of Control
The potential for a wipe-out of the subprime mortgage market, and credit-derivatives based on subprime mortgages, was grew significantly Feb. 26, when the ABX index, which tracks potential default on subprime mortgage-based credit default swaps (derivatives), reached the point that it now requires $1.6 million yearly, to insure against default on a $10 million subprime mortgage bond. This is an increase of one-third from the $1.2 million level on Feb. 23, one business day before.
This crisis not only threatens the $500 trillion worldwide derivatives market, but all banking institutions that have been involved with mortgages and subprime mortgages. On Feb. 26, the stock of Citigroup fell 2%, its biggest one-day fall since July 2006, which pulled down the Standard & Poor's 500 stock average. The stock of New Century Financial, the second-largest subprime lender in the U.S., continued to fall: Its stock has lost 52% of its value during the past four months, with most of that loss in the last 30 days.
At the same time, the banks are trying to tighten lending standards to the subprime market, according to an article, "Home Lenders Cut the Flow of Risky Loans," in the Wall Street Journal Feb. 26. Accredit Home Lenders Holding Co., for example, reported that loans for 100% of the home's value, which combine first mortgages with home-equity loans, accounted for 19% of loan originations in the fourth quarter of 2006, down from 45% during earlier quarters of the year. However, this hasty tightening of standardsdone in the typical manic manner in which Baby Boomer bankers operatewill decrease the flow of new loans, and decrease the upfront mortgage loan fees and income streams, which the banks would need to grab onto to try to offset the disaster that they are experiencing.
New Home Sales Plummet Again in January
In January, new U.S. home sales fell to an annual rate of 937,000, a drop of 16.6% compared to a level of 1.123 million in December 2006, the Commerce Department reported Feb. 28. This was the steepest monthly fall since 1994. A consensus of establishment economists had predicted that the fall for this period would be 3.6%. On a regional basis, comparing levels January of 2007 to December of 2006, new home sales fell 37.4 % in the West, and 18.7% in the Northeast. (Comparing the new home sale levels of January 2007 to the same month last year nationally, the fall was 20.1%)
This January, the inventory of unsold homes rose to 6.8 month's worth. Reality filters in: "The inventory situation is undoubtedly worse than reported," Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, said in a note to clients. "Builders will probably have to continue to work off bloated stocks of finished homes for most of 2007."
Wall Street in Deep Denial About Financial Crisis
It's not banks' low loan loss reserves that will blow out the banking system, as the Wall Street Journal implied Feb. 27, in its coverage of regulators' concerns that loan loss reserves are at their lowest level since 1990. Its headline, "No Worries: Banks Keeping Less Money in Reserve," indicates that Wall Street is still in clinical denial about the fact that the entire global financial system is disintegrating, and that banks will have a lot more to wrestle with than the fact that consumers and companies are "having difficulty paying their debts." The Wall Street paper highlighted the advisory put out last December by Kathryn Dick, the deputy comptroller for credit and market risk at the Office of the Comptroller of the Currency, urging bank executives to evaluate how they have calculated the size of their loan reserves. At that time, she stated, "[W]e do believe there is risk building in the system." Even so, it's really not that bad, the Journal concluded. The low level of reserves "aren't triggering any concern about the financial soundness of the nation's banking system. Bank failures are quite rare."