From Volume 6, Issue 33 of EIR Online, Published August 14, 2007

U.S. Economic/Financial News

Fed Pumps Out $38 Billion; Says 'Everything's Fine'

Aug. 10 (EIRNS)—After announcing in a statement today that it will provide "liquidity to facilitate the orderly functioning of the financial markets," the Federal Reserve pumped $19 billion into the banking system, which it supplemented later in the morning with another $16 billion. The supposed "easing" of the stock market decline resulting from this action, was only momentary. When the Fed made a third injection of $3 billion in the afternoon, stocks began to slide again. Today's $38 billion infusion came on top of the $24 billion injected into the system on Aug. 9.

The injection today was done through the purchase of mortgage-backed securities. In fact, Bloomberg News reported that the Fed accepted only mortgage-backed debt as collateral for the weekend's repurchase agreement, amidst speculation that there will be an emergency Fed meeting next week to cut rates.

The Fed obliquely referenced the current market meltdown by noting that "depository institutions may experience unusual funding needs because of dislocations of credit and money markets." It said it was "providing liquidity to facilitate the orderly functioning of the financial markets." Reserves will be provided "as necessary," the Fed said, and "as always, the discount window is available as a source of funding."

Former Fed chairman Alice Rivlin, now at the Brookings Institution, noted that the current situation is one of "great uncertainty," and that Central Banks are injecting liquidity internationally—to the tune of $323.3 billion in the past 48 hours—"in hopes that collectively they can stabilize things." Indicating that, like many others, she's not in the real world, Rivlin also announced that the Fed has an "almost unlimited ability to supply liquidity if they feel that is appropriate."

Weimar, anyone?

Will the Lights Go Out at Luminent?

Aug. 10 (EIRNS)—After losing access to the commercial-paper market, Luminent Mortgage Capital isn't sure it can stay in business for much longer, according to Bloomberg News. The company suffered a liquidity loss due to "unanticipated disruptions in the secondary mortgage and national real estate markets," it explained in a regulatory filing today. The filing explained that due to the "significant" and "unprecedented" deterioration of the mortgage market, and the sources of financing it relies on, Luminent is now facing margin calls on its highest-quality assets, and can't borrow as much through repurchase agreements. The company has been forced to delay its quarterly report to the Security and Exchange Commission, and is now said to be exploring all its options.

Biggest U.S. Mortgage Lender Heading Toward Bankruptcy?

Aug. 10 (EIRNS)—Countrywide Financial Corp, the largest U.S. mortgage lender, said it is experiencing "unprecedented disruptions" in the credit markets, negatively impacting its financial condition. This credit crunch has forced it to hold on to more mortgage loans than expected—at a significant markdown—because it has been unable to sell them. Already about 70 mortgage lenders have ceased business operations or sought buyers in the past six months. Countrywide, in a regulatory filing with the U.S. Securities and Exchange Commission, said it would hold, rather than sell, $1 billion more of subprime mortgage loans than it had intended, while marking down the value by 20%. Delinquencies are rising not only on subprime and Alt-A (so-called "liar loans"), but also on prime home equity loans. Countrywide said mortgage payments were at least 30 days late on 20% of the non-prime loans it serviced as of June 30, up from 17% three months ago. The delinquency rate on prime home equity loans jumped to 3.7% from 1.5% a year earlier.

Meanwhile, the largest U.S. savings and loan, and the third-biggest U.S. mortgage lender, Washington Mutual, said liquidity in the subprime mortgage market had "diminished significantly," adding that subprime turmoil has "spread" into higher-quality loans.

Automakers Reduce 2007 Sales Forecasts

Aug. 9 (EIRNS)—Over the last several days, Ford, General Motors, and Toyota have announced they've lowered their "outlook" for this year's sales figures. The Wall Street Journal notes that, "A prolonged sales downturn could force Detroit's auto titans to rethink their North American turnaround plans—which were built on the assumptions of stronger industry sales," assumptions which have collided with the reality of declining consumer credit.

In response to these diminished expectations, Ford CEO Alan Mulally said that the company will decide in the first week of September whether to cut it fourth-quarter production plans, rather than stimulate "false demand" with profit-draining incentives. GM, on the other hand, while decrying past "bargain-basement deals" on all of its vehicles, is considering such incentives in critical areas where it is faced with heavy competition from Toyota's incentive programs.

Grassley, Rangel To Move Bill To Tax Private Equity

Aug. 9 (EIRNS)—Iowa Sen. Charles Grassley (R) said that he intends to link his proposal to boost taxes on publicly traded "leveraged buyout" firms, to a fix of the alternative minimum tax (AMT), which both Democratic and Republican leaders in Congress are looking for. Grassley said that pairing his bill with a reform of the AMT—so that it would apply to many fewer, higher-income households only—would make it harder for opponents to vote against it.

The fact that Grassley is, in effect, embracing the strategy of Rep. Charles Rangel (D-N.Y.), chairman of the House Ways and Means Committee, and sponsor of a somewhat tougher private-equity tax bill, means that legislation to make wealthy private-equity managers pay the corporate tax rate on their income, could move faster in Congress than had been expected. Grassley's proposal would increase the tax rate paid by private-equity firms and hedge funds to 35%, if the firms had made public stock offerings. Under the current system, these firms' managers pay a lower capital-gains tax rate of 15%. Rangel's House bill would apply to higher form of taxation to managers of all private equity takeover firms, not just those that had issued public stock. Rangel had previously said that he intends to combine a tax increase for the private-equity firms and hedge funds, with a measure curtailing the AMT. Wall Street fiercely opposes the bill, and so does Treasury Secretary Henry Paulson. In fact, on Aug. 8, Paulson and President Bush called for lowering corporate taxes overall.

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