From Volume 6, Issue 32 of EIR Online, Published Aug. 7, 2007

World Economic News

LBOs Take a Dive—Major Banks Are in 'Deep Kimchee'

Aug. 3 (EIRNS)—The number of big leveraged buyout (LBO) deals that have collapsed has more than doubled, from $17 billion in the first two weeks of July, to $43 billion in the last two weeks alone. According to figures from Thomson Financial, $546 billion in deals globally have yet to be closed with $26 billion within the UK. The Daily Telegraph reported Aug. 3, that $87 billion has been wiped off the books of ten of the world's leading banks since January, including Barclays, $6.1bn; Credit Suisse, $3.6 billion; Goldman Sachs, $4.6 billion; HBOS, $12.7 billion; HSBC, $5.5 billion; JPMorgan, $12.1 billion; RBS, $16 billion; Morgan Stanley, $3.8 billion; Bear Stearns, which lost $5.3 billion, a full third of its market value, and Merrill Lynch, which alone lost $17 billion in market value.

On top of this, the Financial Times, under the headline "Buyout groups turn screws on banks," ran an article Aug. 3 on how the buyout firms are demanding that the banks come up with the funds they were contracted to raise. The banks themselves, because they can't sell the debt, and therefore don't want to back the loans with their own resources, want to pull out of the deals. They are said to be going so far as to consider picking up the breakup fees paid by private equity groups to companies if a deal collapses. Over the recent period, banks and buyout groups were so eager to do the deals that they stopped putting escape clauses in the contracts, so now lawyers are being brought in by the banks and the equity groups.

Next Stage of the Collapse: Now the IPOs Have Dried Up

Aug. 4 (EIRNS)—In his July 25 webcast, Lyndon LaRouche explained the lawfulness of the current speculative blowout in terms of the "bookends," or boundary conditions at either end. One end is the original credit issuance; at the opposite end, after the original credits are leveraged tens of times over, they are reloaned by banks for new speculative bubbles, such as leveraged buyouts (LBOs) and initial public offerings (IPOs).

The credit-issuing end in recent years has depended on the yen carry trade—the borrowing of Japanese yen at super-low interest rates—and on the home-mortgage swindle. But now, the yen carry trade has choked up, and the home-mortgage bubble has burst. The money is no longer there for the banks to lend at the opposite "bookend." As the result, a gigantic world speculative bubble, which must either expand exponentially or collapse, is now imploding. EIR has reported how LBOs are now being cancelled faster than they can be announced. Of the estimated $500-600 billion which banks have already committed to future LBO deals, most of it will never actually be available. Kohlberg Kravis and Roberts (KKR) had to cancel its LBO of British retail chain Alliance Boots. The banks which were the intermediaries of Cerberus's takeover of Chrysler Corporation have had to take 95 cents on the dollar, rather than get stuck for the whole $2 billion.

Now the IPO bubble has also burst, and for the same reason. After getting killed with mortgage-backed securities and all the rest, the intermediary banks no longer have the money. Already this year, $37.9 billion in IPOs have been withdrawn or postponed on Wall Street alone. There are 230 IPOs in the pipeline so far for this year.

Among the companies delaying or cancelling IPOs, is KKR, which has yet to announce a date for its $1.25 billion IPO offering. Other recent postponements and cancellations include Cunico Resources, which has mines in Eastern Europe and Zambia. Cunico was planning to sell $600 million in shares on the London Stock Exchange, but put it off, according to Reuters July 3; SAF-Holland, a truck part supplier in Germany, with a $200 million offering in London; Third Point, a U.S.-based hedge fund with a $690 offering in London; Diamond Circle Capital, with a $400 million offering in London; and Quark Pharmaceuticals of the United States, which recently cancelled its Nasdaq offering.

Yen Carry Trade Unwinds: The Other End of the Collapse

Aug. 1 (EIRNS)—The yen carry trade, the borrowing from Japanese banks at 0.5% interest rates which has fed the speculative bubble, is in trouble. The rise in the value of the yen with respect to most other currencies is effectively increasing the interest rate to the point that this source of cheap liquidity is drying up.

Lyndon LaRouche has described the collapse of the yen carry trade, and the meltdown of the U.S. mortgage markets, as the two bookends between which the speculators are caught. People can't afford to pay the high-interest rate mortgages they were suckered into, and the speculators can't get access to easy money to cover their losses. "

View all of this in the context of a wild gambling casino," LaRouche said on Aug. 1. "You talk about sober bankers. There isn't a sober banker in a carload anymore." The rise in the yen began last week, when Western speculators, caught with losses on the subprime mortgage market and the hedge funds, scrambled to cash in their bets made with borrowed yen, buying yen to pay back their yen loans. This drove up the yen, causing further losses to yen borrowers, and the spiral began. Today, with equity markets falling sharply around the world, and the yen continuing to rise in value against all major currencies, the "unwinding" of the carry trade continued. Beyond the rising yen, the Japanese appear ready to raise their interest rate from 0.5%, possibly this month, further squeezing the carry traders.

Australian Hedge Funds Take a Dive

Aug. 1 (EIRNS)—Macquarie Bank, Australia's largest securities firm, announced that two of its hedge funds could lose up to 25% of $300 million, because of the collapse of the U.S. subprime market. As a result the bank's share price collapsed by 10.7% in one day. Its Macquarie Fortress Notes fund and the unlisted Macquarie Fortress Fund are heavily exposed to the U.S. market. The two funds are leveraged by a factor of about 6.5. Six Australian hedge funds have bit the dust in recent weeks. Australia's hedge fund market, worth $45 billion, is one of Asia's largest.

Chinese Protest Government Speculation in Securities

Aug. 3 (EIRNS)—There is a growing backlash against speculative investments by the Chinese government, as those investments begin showing big losses.

* Beijing's new investment fund is under attack for its first purchase—a $3 billion stake in the Blackstone Group. In the six weeks since the investment was made, the value has dropped by $500 million. This company isn't actually even chartered yet, but used another company to buy the Blackstone shares on its behalf.

* The People's Bank of China has led the way among central banks in buying U.S. mortgage-backed securities (MBS), accumulating an estimated $100 billion worth. When MBS problems broke out in May, the People's Bank stopped MBS purchases, but it does not appear to be liquidating them yet.

* The state-owned Chinese Development Bank agreed last week to invest 2.2 billion euros in Barclays, and another 7.6 billion euros if Barclays wins the bidding war for ABN AMRO. The International Herald Tribune reports that Chinese blogs are full of attacks on the government, to beware of "wolves in human skin," and compares them to "the foreign thieves who pillaged our forefathers, only more cunning."

Even the Israeli Real Estate Market Isn't Safe

Aug. 3 (EIRNS)—Heftsiba Global Ltd., one of Israel's largest construction companies, is rumored to be bankrupt. The company, which has three publicly listed companies, Heftsiba Global, Heftsiba Jerusalem Gold, and Heftsiba Hofim, is believed to have 1 billion shekels in debt, close to $250 million. The Israeli daily Ha'aretz reports that another company, Electra, which recently bought 90% control of Heftsiba, saw its own stock collapse by 7.6%, prompting a suspension of its stock trading. Other real estate companies suffered loses on the Tel Aviv stock exchange in the last week as well. Rumors that Heftsiba was about to go belly-up prompted panic among thousands of customers who have paid the company hundreds and thousands of shekels to build houses and apartments in areas beyond the green line, meaning illegal settlements on Palestinian territory in the West Bank. According to a report in the Jerusalem Post, the panic has seen these customers scrambling to occupy their unfinished apartments and houses.

British Hedge Funds Say 'Bring It On!'

Aug. 3 (EIRNS)—A source working in several of the larger hedge funds in the City of London told EIR today that the entire financial community is in a state of denial about the crash. "They see it crashing, but they tell themselves it's just a 'correction' that was overdue. And, in any case, they welcome the crash—in fact, the thing they are worried about is that the governments might intervene to calm the markets. Hedge funds thrive on volatility, no matter up or down. That's what they bet on. It's stable markets that hurt them." Asked if it were not the case that the crash is destroying some funds and threatening them all, he answered: "Of course some will fold, and even the biggest, like Man Group, lost about 8% last week. But they schedule in a few blows like this. Their statistical projections predict an episode like this once every few years. Of course, this is the third time this year—February, April, and last week—but I think LaRouche is right that nothing will puncture their fantasy about cycles, until they hit the ground." The source also noted that all the funds are holding the same positions, and now that this has built up so high, it is impossible to get out. If one tries to pull out, they'll all follow, and ... boom."

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