From Volume 6, Issue 28 of EIR Online, Published July 10, 2007

U.S. Economic/Financial News

Dana Corp. Joins in the Slaughter of Auto Workers

July 7 (EIRNS)—Hot on the heels of the UAW wage-slashing agreement with Delphi last month, on July 6 the UAW and the United Steelworkers Association reached an historic accord with the bankrupt auto-parts supplier Dana Corp. The two unions agreed to take over the management of their retiree health-care plans from Dana after a lump-sum payment into the plans by Dana. Most of the funding for this scheme is coming from the private equity company Centerbridge Capital Partners LP, which will put up $500 million of its own funds, plus $250 million it will round up from other investors. In return, the buyout firm will gain 25% ownership in Dana. Dana benefits to the tune of $1.1 billion by removing retiree health obligations from its books as it seeks to emerge from bankruptcy.

Other concessions by the unions include a new, two-tier wage structure, whereby new workers will start at $14 per hour, while established workers retain their present wages. Furthermore, according to today's Bloomberg, the plan "freezes defined benefit pension plans for union employees and arranges for buyouts of some retirement eligible or recently retired employees at some factories." The agreement must still be voted on by the rank-and-file of the two unions.

The new health-care trust funds—Voluntary Employees' Beneficiary Associations (VEBA)—and the two-tier wage structure are being rolled out as the template for contract negotiations coming up this Summer between the UAW and associated unions, and the "Big Three" automakers. In December 2006, Goodyear Tire broke ground with a similar deal with the United Steelworkers.

Beware the 'Bare Sterns' as More Hedge Funds Sink

July 4 (EIRNS)—In a sign of the collapsing credit market, United Capital Asset Management, an important player in asset-backed securities, said July 3 it has halted investor redemptions on four of its Horizon hedge funds that manage over $500 million, after suffering losses on bad bets in the subprime mortgage market. On the heels of the near-collapse of two Bear Stearns hedge funds, United Capital sold "a large amount" of cash securities in the market to cover "an unusually high number of redemptions requests" in the past ten days. Because of trading losses related to derivatives on subprime mortgages and market repricing, United Capital expects the funds to have lost money both in June and for all of 2007. The investment firm has even stopped trading in the synthetic structured finance markets completely, because they are "highly volatile," while insisting it was "not currently in a liquidation mode."

"We're going to see more problems at more firms; the unraveling process has started," hedge fund manager Alan Fournier of Pennant Capital Management LLC was quoted as saying by today's Wall Street Journal.

Another Hedge Fund Closing Down

July 5 (EIRNS)—The Wall Street Journal reports today that Braddock Financial Corp. of Denver is closing its $300 million Galena Street Fund, which mainly invests in subprime mortgages, and is suspending redemptions (payments to investors in the fund who want to get out) until it can sell some of its assets.

This is the second announcement in two business days of a hedge fund "closing the door" to withdrawals by its investors—a reaction to the crisis which the Bank for International Settlements recently warned, could itself cause a financial crisis. On July 3, United Capital Assets Management, a much larger hedge fund, with $906 million in assets, blocked any withdrawals by investors, after reporting losses.

Galena was hedging its investments by "shorting" on them (betting that they'd decrease in value), so that if the value of the investment went down, the "short" bet would go up. Unfortunately for Galena and its investors, the hedges have recently not balanced out quite so neatly.

Chrysler, Without Daimler, Is Dumped into Junk Status

July 2 (EIRNS)—Both Moody's and Standard & Poor's rating services have dumped Chrysler stock into "speculative-grade credit rating" status, commonly called "junk." The fourth-largest American auto maker is six levels below investment grade at Moody's, and five under at S&P, with the financial services division only slightly higher. As the high-yield loan market disintegrates due to the subprime mortgage collapse, Chrysler's efforts to raise $20 billion to pay for its own buyout by hedge fund vulture Cerberus, are running into trouble. Chrysler is forced to offer loan-shark rates of 6 percentage points over LIBOR (London Inter Bank Offered Rate), according to Bloomberg today, quoting sources who refused to be identified.

Hedge-Fund Crisis Spurs Two Congressional Hearings

July 3 (EIRNS)—In light of a growing credit markets crisis centered on hedge-fund failures and the mortgage-based securities and derivatives they trade, two Congressional committees reportedly have scheduled new hearings on hedge funds in July.

In a rare event, the chiefs or deputies of the Treasury, Federal Reserve, Securities and Exchange Commission, and Commodity Futures Trading Commission will testify before the House Financial Services Committee on July 11. Collectively, these are the famous and usually secretive President's Working Group on Financial Markets, colloquially known as the "Plunge Protection Committee," which monitors for market crises and plans liquidity interventions or bailouts to head them off.

Congressional sources say the Committee will be asking hard questions of the market supremos, in light of the multiple hedge funds that are leaning or falling like dominoes as the U.S. mortgage-bubble meltdown hits international credit markets. The failures of two large Bear Stearns investment bank-operated hedge funds has exposed an international "shredding" of inflated securities values in progress.

Other sources report that the House Ways and Means Committee will also hold a hearing examining the hedge fund problem in July, though a date is not yet set.

More American Adults Than Ever Have No Health Coverage

July 4 (EIRNS)—Figures released by the Centers for Disease Control show that the number of non-elderly adults in the United States who do not have health insurance, is rising. Elderly Americans have health care provided under Medicare—a program that has been under attack by the White House.

The CDC survey—called the 2006 National Health Survey—found that the number of uninsured adults between the ages of 18 and 64 increased from 34.5 million in 2005, to 35.6 million in 2006, an increase of 2.1 million in one year. The percentage increase of the non-elderly adults from 18.9% in 2005, to 19.8% in 2006, was deemed by the CDC to be "statistically significant."

Both the number and percentage of children under 18 without any health insurance is also increasing, from 6.5 million or 8.9% in 2005, to 6.8 million or 9.3% in 2006.

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