From Volume 6, Issue 37 of EIR Online, Published Sept. 11, 2007

U.S. Economic/Financial News

Alan 'Bubbles' Greenspan Lies Again

Sept. 8 (EIRNS)—According to the Wall Street Journal of Sept. 7, former Federal Reserve Chairman Alan Greenspan, the man who's being increasingly blamed for the current phase of the financial blowout, hinted at the seriousness of the present financial crisis, in a Washington, D.C. speech given the previous day. Greenspan, while babbling that "business expansions are driven by euphoria and contractions by fear," compared present market behavior to the 1987 and 1998 market crashes, deliberately understating the seriousness of the situation by several orders of magnitude (no doubt to allay the fear and boost the euphoria of his high-finance audience). A more truthful comparison would have been to the Little Dark Age of the 14th Century, after the collapse of the Bardi and Peruzzi Banks in Italy.

Swan Song of Buyout Boom: TXU Mega-Deal Approved by Shareholders

Sept. 8 (EIRNS)—On Sept. 7, shareholders of TXU, the huge Texas utility, agreed to proceed with the largest buyout in history. Texas Energy Future Holdings, a holding company of private equity firms Kohlberg Kravis Roberts (KKR) and Texas Pacific Group, agreed to buy the utility for $69.25 per share, in a deal that may be the last hurrah of mega-buyouts—if it doesn't fall apart in the interim. There are several hurdles left to surmount, including approval by the Nuclear Regulatory Commission and the Public Utility Commission of Texas. The largest hurdle of all will be the financial system itself, busily converting trillions in "assets" into thin air as it collapses. The deal may end up costing $45 billion.

Just last week, according to the Sept. 1 London Times, the banks financing the deal to the tune of $26 billion were offering $1 billion to KKR to break it, knowing fallout from the fast-developing credit freeze-up would leave them taking huge losses when they try to peddle the debt to fearful investors. The balky lending banks are some of the largest investment banks in the world, including Goldman Sachs, Morgan Stanley, Citigroup, JP Morgan, and Lehman Brothers. KKR refused to stop the deal. They had secured their loans at the height of the buyout boom, locking in very good terms, and were determined to plow ahead, despite the growing problems in the buyout industry with financing and closing deals.

Lyndon LaRouche's comment on the deal: "It's all bunk. The banks don't have any money. KKR is desperate, they're finished, and they know it. The whole thing is gone. It's not a series of individual problems with this or that hedge fund—the hedge fund system is dead, along with the entire subprime mortgage scam. They should just reconcile themselves to losing their money. My statement is: Taking any money out of the banks to bail out the hedge funds is a crime against humanity. They're dead, and it is a waste of time and effort. Putting money in hedge funds today is like investing in Reichsmarks in 1923."

Food Giants Hit by Food Shock

Sept. 6 (EIRNS)—The food giants Tyson and Kraft have reported that the hyperinflationary spike in food prices is damaging their profits and their stock prices. reports that Tyson shares fell nearly 13%, the most in six years, noting that the diversion of food crops to corn for biofuels is leaving less acreage for wheat and soybeans and thus pushing up the price of grain used to feed poultry and cattle, so that consumers must pay more for milk, beef, and chicken and related products. Wheat prices have jumped 58% on the year. Soybean prices were up 32%; corn 11%; cattle futures 7.3%.

Interbank Loan Rate Hits Record; Banks Short on Money

Sept. 5 (EIRNS)—The rate U.S. banks charge each other for overnight lending rose again today to 5.72% for the three-month rate, the highest since January 2001.

There is a virtual freeze on credit availability, as banks scramble to cover their losses on junk investments of all types. A top international banker today described it as a financial "heart attack." The banks simply don't have the money to lend.

Normally, at the end of each business day, banks loan their extra reserves to other banks at an interest rate keyed to the London Interbank Offered Rate, or Libor. The Libor, which is also rising sharply, is about 1% higher than the U.S. interbank lending rate.

Commercial Real Estate Drifts Towards Disaster

Sept. 5 (EIRNS)—Declining prices in the multi-trillion-dollar U.S. commercial real estate market now threaten a new downward plunge in the current systemic breakdown, bringing down thousands of small banks and many pension funds, unless Congress quickly passes Lyndon LaRouche's Homeowners and Banks Protection Act. reported signs of the breakdown Sept. 5. In July 2007, investors bought the fewest commercial properties since August 2006, and apartment building acquisitions were down 50% in July, compared to June. The Tishman Speyer Properties-led group, which had planned to complete a $13.5 billion buyout of Archstone-Smith Trust, a commercial property giant, in August, was forced to postpone that deal until October. Deals in the commercial real estate market are falling apart, as expected rates of return are revised downward. Large commercial property developer David Lichtenstein asserted, "People who can get out, are getting out."

Commercial real estate mortgages total $2.2 trillion, many bundled into mortgage-backed securities, like the residential mortgages. "Development loans," construction loans secured only by the land on which a developer plans to build, comprise some comparable large dollar figure.

One of the most vulnerable sectors is small U.S. banks—less than $1 billion in assets—which have gobbled up commercial real estate loans. The Federal Deposit Insurance Corporation reports that 37% of all small banks either: 1) are exposed to commercial real estate loans to the extent of 300% of their capital; or 2) are exposed to construction loans alone, to an extent exceeding their capital. In addition, the Sept. 3 Pensions & Investment magazine reports that many pension funds have bought commercial properties, using 80-90% leverage. Many planned to hold the properties only a short time, and sell them at a substantial speculative profit, because the market value of buildings was rising. But now, with building values weakened, the pension funds are left holding properties that are difficult to move, while incurring significant debt service on them.

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