From Volume 6, Issue 22 of EIR Online, Published May 29, 2007

U.S. Economic/Financial News

2006 Job Creation Figures a Lie; Layoffs Hidden

May 23 (EIRNS)—Challenging the strange job statistics of the Commerce Department's Bureau of Labor Statistics (BLS), an economic research firm says nearly half of the 2006 "job creation" in the U.S. economy didn't exist.

For the second and third quarters of 2006, for example, not 888,000, but only 485,000 jobs were created in that six-month period, said Stone and McCarthy Research Associates. For just the third quarter, the actual job creation was just 19,000 total, when the BLS figures claimed 498,000! The reason is that the BLS was making assumptions of a very high rate of formation of new small businesses, assumptions which have been shown to be dramatically over-optimistic by new data just issued by the BLS itself. The huge drop gives an idea how large a share of those "newly created jobs" you hear about each month, are actually assumed rather than counted or surveyed.

And that is not all of this coverup. Stone and McCarthy think the over-reporting has continued up to now, perhaps worsened. They observe the apparent lack of any significant drop (in BLS monthly reports) in residential housing employment, when that sector has, in fact, tanked. Housing construction has fallen more than 15% in the year up to April 2007, while BLS data on residential housing jobs have hardly changed. Since foreign-born workers accounted for 45% of all national job growth last year, even more in states like California, Texas, and Louisiana with very active home construction in 2006, if a large number of those workers were undocumented immigrants, their layoffs in 2007 would not be registering at all, either in payroll jobs figures, or the unemployment rate.

With a collapsing housing bubble and plunging auto production and sales—the two biggest U.S. employment drivers—and falling retail sales, etc., many economists, not just Stone and McCarthy, have been trying to figure out where the Fed and the White House have been "manufacturing" employment statistics.

Merrill Lynch in Frenzied Race to Oblivion

May 22 (EIRNS)—Merrill Lynch, the giant stock brokerage/investment bank, has made its second hedge fund "investment" in eight months, taking a minority stake in GSO Capital Partners, a firm which specializes in loans to companies with bad credit ratings and other "distressed" investments, Bloomberg reported. GSO, of New York, London, Houston, and Los Angeles, is run by Bennett Goodman, who got his start at the Drexel Burnham Lambert dirty-money junk-bond shop.

Last October, Merrill Lynch bought a minority stake in DiMaio Ahmad Capital, and last month agreed to invest in a new fund being started by Dow Kim, Merrill's departing co-head of trading and investment banking. Merrill Lynch already owns half of BlackRock Inc., the largest publicly traded U.S. fund manager.

Merrill Lynch is trying to keep up with Morgan Stanley, Lehman Brothers, Citigroup, and JP Morgan Chase, which have all been expanding their hedge fund business in a frenzied race to oblivion.

Bondholders Howl Over Sally Mae Takeover

May 22 (EIRNS)—Bondholders were "ambushed" by last month's $25 billion takeover of SLM Corp., the student loan company known as "Sally Mae," by a group including JP Morgan Chase, Bank of America, J.C. Flowers, and Freidman Fleischer & Lowe. The leveraged buy-out will significantly increase Sally Mae's debt load, and the deal has caused the interest rates of finance company debt to rise. Bonds sold by finance companies have lost some $5 billion since the deal was announced, and the increase in yields the companies must pay on their debt has risen by $1.4 million in annual interest to sell $1 billion in debt, according to Bloomberg.

In a "leveraged buy-out" (LBO), the targetted company is usually saddled with huge debts as the predator group cashes out, but finance companies, which live on the difference between what they pay for the money they borrow and what they charge for loans they make, and thus need high credit ratings, had previously not been considered LBO targets. Finance companies represent 40% of the $2 trillion U.S. corporate bond market. With the financial system choking on its own debt, takeovers are increasingly being used to hide bankruptcy, and sometimes the rescue operations do almost as much damage as letting a company blow up.

More Oil Cartel Price-Gouging? BP Cuts Alaska Production

May 22 (EIRNS)—Oil giant BP has shut down one quarter of its 400,000 barrels-per-day production at Prudhoe Bay, Alaska, after discovering a "produced water" spill May 21, according to Reuters. Produced water is water trapped in underground formations and brought to the surface with oil or gas. BP, formerly known as British Petroleum, gobbled up American oil companies Amoco and Atlantic Richfield in the last decade, and has seen a number of disasters at its facilities, from a deadly explosion at its Texas City refinery in 2005 to an oil spill at Prudhoe Bay in 2006. U.S. Rep. Bart Stupak (D-Mich.), head of the investigations arm of the House Energy and Commerce Committee which is examining the 2006 spill, blamed budget cuts at BP for the incidents. "It appears to be yet further evidence that BP's cost-cutting culture has put our nation's economy at risk," Stupak said.

Gov. Rendell: Give Us a Federal Capital Budget

WASHINGTON, May 24 (EIRNS)—"America will never cure its infrastructure deficit until we adopt a Federal Capital Budget." So insisted Pennsylvania Gov. Ed Rendell (D) today at a House Highways and Transit subcommittee hearing on the subject of public private partnerships (PPPs, or P3s) financing for infrastructure projects. Subcommittee chairman Rep. Peter DeFazio (D) acknowledged that capital budgeting is the solution, yet succumbed to his own pessimism, saying, "I hope we get there someday."

DeFazio has criticized the use of P3s for allowing private speculators to loot public infrastructure. But when DeFazio challenged Rendell on his plans for a P3 deal for the Pennsylvania turnpike, the governor shot back, "Are you going to give me a Federal capital budget?" DeFazio dodged the question and pressed Rendell for assurances that if Pennsylvania enters into a P3 deal, it would protect the public interest. Undeterred, Rendell responded, "If you're not going to give us a Federal capital budget, then we have no alternative." Rendell reviewed the extent of Pennsylvania's transport infrastructure deficit which, uncorrected, is costing lives and dollars, and said that to meet his state's funding gap to fix roads, bridges, and public transit, he'd have to raise gas taxes another 12 cents a gallon. Rendell acknowledged problems with P3s, but concluded: "Let me be clear. The Federal government's refusal to establish a capital budget" for infrastructure leaves the states with no alternative to fund these critical projects. "If I could have avoided it, I would have. We have a serious problem and we have to do something."

As LaRouche Warned, GM Is 'Effectively Bankrupt'

May 24 (EIRNS)—GM confirmed for the first time on May 22 to auto analysts that Cerberus Capital Management, which just carried out a private equity takeover of Chrysler, has pulled out of the bid by a consortium of hedge funds to buy control of the bankrupt auto supply company Delphi.

GM then, on May 23, increased its own estimate of what it will have to kick in for Delphi's labor-retirement and other costs, to $7 billion. And GM announced it would take an immediate $1 billion charge against its earnings in this quarter, and borrow another $1.1 billion in junk bonds. Delphi was the parts division of GM until 2000.

Auto industry sources think that GM is throwing this $1 billion into the 18-month-old negotiations between Delphi and the United Auto Workers (UAW), taking place in bankruptcy court in New York, to finally get a settlement in the near future. This would clear the decks for the "Big Three" automakers to confront the UAW and demand "transformational" concessions from the union in national contract talks this Summer. Under Cerberus' ownership, Chrysler will lead that confrontation.

GM's condition is now "effective bankruptcy," as Lyndon LaRouche warned in February 2005 that it would be, under continued economic policies. From 1999-2006, GM's gross profits have declined from $40 billion to $22 billion, while its debt has grown from $199 billion to $450 billion. In just three years, its debt-interest expenses have risen from $9 billion to a projected $18 billion this year. Its auto sales have shrunk by 2% globally, and 7% in the United States.

During the six months that Cerberus appeared to be leading a hedge-fund syndicate to buy Delphi, it carried out financier Felix Rohatyn's original 2005 restructuring plan for that company. The Steering Division was sold off to Platinum Partners hedge fund; the Interiors Division was sold of to private equity vulture Renco Group, Inc.; two more of the remaining plants in Michigan and Ohio were closed, and closing of a third, in Moraine, Ohio, was announced; the early-retirement buy-out of 22,000 out of 34,000 union workers was completed. Delphi announced, in late April, that it intended to emerge from bankruptcy as primarily "an information technology company," rather than an auto supplier. That "stripping and flipping" work done, Cerberus withdrew, leaving the actual ownership of the post-bankrupt shell to the other hedge funds and banks—and the longer-term expenses to GM.

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