From Volume 6, Issue 35 of EIR Online, Published August 28, 2007

U.S. Economic/Financial News

Federal Reserve Bends Rules to Save Citigroup and Bank of America

Aug. 24 (EIRNS)—The Federal Reserve made another desperate lunge forward this week, sending letters to both Bank of America and Citigroup on Aug. 20 allowing them to "blow through" the legal limits on how much they are allowed to lend to their own brokerage firms, it was revealed today by Fortune. Fortune comments: "This unusual move by the Fed shows that the largest Wall Street firms are continuing to have problems funding operations during the current market difficulties, according to banking industry skeptics. The Fed's move appears to support the view that even the biggest brokerages have been caught off guard by the credit crunch and don't have financing to deal with the resulting dislocation in the markets."

Fortune also notes that the other big banks have probably received the same exemption, which allows each to lend $25 billion to its brokerage (i.e., Citibank can lend $25 billion to Citigroup Global Markets, its brokerage), which is about 30% of their capital, as opposed to limits of 10% under the regulations.

This move is linked to the Fed's reduction of rates on their discount window Aug. 17. "This is just a technicality to allow us to use our regular channels of business with funds from the Fed's discount window," said Bob Stickler, spokesperson for Bank of America, to Fortune's Peter Eaves.

The Fed even claimed to be acting in the "public interest," because it allows Citibank to get liquidity to the brokerage in "the most rapid and cost-effective manner possible," they told Fortune.

Congress Struggles with an Avalanche of Foreclosures

Aug. 23 (EIRNS)—Politicians are starting to panic over the anger that is boiling over in the population about current and coming home foreclosures.

In an Aug. 22 release, Sen. Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee and the Senate Banking Subcommittee on Housing, in letters to Federal Reserve chairman Ben Bernanke, Treasury Secretary Henry Paulson, Administrator of National Banks John Dugan, and corporate leaders in the subprime mortgage industry, stressed that simply providing liquidity to the credit markets, as the Fed has been doing, does not address the fundamental problems of the mortgage markets. "It is essential that the Federal agencies overseeing the financial markets use their influence over the major market players to encourage them to engage in a major effort to modify or refinance the loans that have a high probability of defaulting, so that the upcoming wave of foreclosures ... can be abated."

The House Financial Services Committee chairman Barney Frank (D-Mass.) and Rep. Gary Miller (R-Calif.) on Aug. 17 urged the U.S. Senate to raise the conforming loan limit for Fannie Mae and Freddie Mac. "In the current housing crisis, it is clear that we must immediately provide additional mortgage liquidity in all areas of the country, including high-cost areas."

In May, the House passed HR 1427, the Federal Housing Finance Reform Act of 2007, by an overwhelming bipartisan vote. The bill will overhaul the regulatory oversight of the government sponsored enterprises (GSE) of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, and will create an independent regulator with broad powers analogous to current banking regulators. The bill creates an off-budget and non-taxpayer-financed affordable housing fund, dedicating hundreds of millions of dollars for the construction, maintenance, and preservation of affordable housing on the Gulf Coast, the first year, and billions of dollars over the next five years for affordable housing nationwide.

Sen. Hillary Clinton (D-N.Y.) has issued a plan that will be introduced when Congress returns in September, that intends to establish a $1 billion fund to assist state programs that help at-risk borrowers avoid foreclosure. State programs could help make single mortgage payments, help renegotiate loan terms, or simply provide financial counseling. Her plan would also expand Fannie Mae's and Freddie Mac's goals, to aid larger numbers of at-risk homeowners, and help arrange payment forbearance and loan restructurings.

Meanwhile Democratic Presidential hopeful John Edwards is proposing another bank bailout, with a "large Home Rescue Fund," whereby a government agency will take over inflated mortgages from banks and mortgage lenders.

More Economic Insanity: Wild Speculation in Ag Commodities

Aug. 24 (EIRNS)—It's not just the housing blowout: Speculation in agricultural commodities is now reaching record levels. Last May, Charlie Carey, chairman of the Chicago Board of Trade (CBOT), offered this understated description to the Illinois Farm Bureau's Farm Week: "We see growth in commodity products worldwide." In 2006, the CBOT set its fifth consecutive record year for transactions, and as of the Spring of 2007, the trading pace was already 17% above 2006's rate.

On Aug. 23, wheat prices jumped to record highs, with the price for December delivery reaching an all-time high of $7.54 per bushel on the Chicago market. Over the past 12 months, wheat prices have risen by 110%, and threefold since 2000. Now, according to London's Financial Times, food industry executives are warning that meat, poultry, and dairy prices will climb in the short term, as farmers and processors pass on higher feed costs to consumers.

Since the CBOT introduced ethanol contracts in March of 2005, speculators have jumped into this area as well, taking advantage of the CBOT's introduction of electronic trading during daytime hours, which further expands opportunities for speculation.

'Cerberus Gone Wild' May Provoke National Auto Strike

Aug. 24 (EIRNS)—The big Cerberus Capital Management hedge/private equity fund, suffering losses from its recent multiple buyouts in the U.S. auto sector, etc., is so desperate for huge cuts in labor costs at its captive Chrysler Corp., that it may end up provoking a national auto strike. Auto industry sources told Bloomberg that Cerberus is breaking the front of the "Big Three" with Ford and GM, in contract negotiations with the United Auto Workers, because even the $2.5-3.0 billion annual cuts in health-care expenditures which Ford and GM are demanding from the UAW, are nowhere near enough, or short-term enough, for Cerberus-Chrysler.

Cerberus needs up-front cash; it has taken on steep losses in the mortgage market from its recent buyout of General Motors Acceptance Corp., the financial arm of GM; from the troubles of the Austrian BAWAG bank which it recently bought; and from inability to sell the debt from its takeover of Chrysler itself.

Leaks from the automakers to the Detroit News Aug. 23, show that what Ford and GM are demanding in cuts is already draconian: Ford has told the UAW that it wants to cut hourly labor costs by 30% in the national negotiations—taking combined wages, benefits, pensions, and retiree health care down to a combined $48-51/hour, from $71/hour currently. The 30% lower labor costs are based on what Toyota et al. are supposedly paying in their non-union plants in the United States.

The bulk of the cuts, nearly $3 billion a year, are to come by divesting the companies of their health-care plans, and dumping them on the UAW to manage, with an up-front, lump-sum payment from the companies. The automakers are threatening, otherwise, the wholesale move of assembly operations overseas. "If we're going to continue to do work in the North American market, we must have labor costs within the range of the [Japanese] transplants," the source says, according to Howe. "If we get within that range, there's no reason to leave North America for final assembly."

N.Y. Fed Admits Taking Garbage as Collateral

Aug. 24 (EIRNS)—The Federal Reserve Bank of New York has officially "affirmed its policy to consider accepting as collateral investment quality asset-backed commercial paper" (ABCP) for its discount window, according to Bloomberg today. Decorating the garbage with the silver wrapping of "investment grade" fools no one, as it has been widely exposed that the rating agencies have applied A1 ratings to ABCP which is re-packaged BBB garbage from the subprime gutters.

This announcement confirms what Lyndon LaRouche said one week ago, when the Fed announced the lowering of the discount rate, which (according to the media) was purely symbolic, since it is hardly ever used. LaRouche said this was "BS," that powerful people were bankrupt and demanding this action. Sure enough, the holders of the billions (perhaps trillions) of ABC paper are now dumping it on the Fed, which apparently will eat anything.

Realtors' Surprise: The Banks Have No Money!

Aug. 24 (EIRNS)—A two-hour discussion hosted by Louisiana LaRouche Democratic activist Fred Huenefeld, with a leading Federal official and more than 20 realtors in Monroe Aug. 23, revealed the shocking fact that real estate closings were being prevented because banks couldn't come up with the money to lend!

A realtor told the group, "I went to a closing a few days ago, and all of a sudden we were advised that the closing would not happen because the money would not be available from the lender! The buyer and the seller on the contract couldn't believe it." The Federal official, shaken by this report, said, "I am beginning to believe LaRouche and Huenefeld. What should we do?" Huenefeld presented the official with a copy of LaRouche's "Homeowner and Bank Protection Act of 2007."

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