From Volume 6, Issue 42 of EIR Online, Published Oct. 16, 2007

World Economic News

'We Can't Sell This Garbage!'

Oct. 8 (EIRNS)—According to Standard & Poors, there hasn't been a single new "high-yield" (junk) bond issued since early August. This state of affairs has bankers worried, as evidenced by an article in Investment News Monday.

This "junk" bond market, often connected with leveraged buyouts, has been one of the major drivers of "growth" in the stock market for the past 25 years, and now the "engine" has come to a virtual standstill. The number of companies with "issues" (bonds) trading at distressed (junk) levels, called the "distress ratio," rose to 2.9% in August, and 3.2% in September, while it had been below 1% for most of the year. Analysts think they have about 90 days to remedy the situation before "a longer-term realignment" (i.e., crash), becomes a likelihood.

Last week, the Los Angeles-based fund Dalton Investments "announced plans to buy defaulted loans at significant discounts and restructure them," hoping that new buyers could be found who wouldn't remember the reason the loans defaulted in the first place. Why do this? "The subprime market is just beginning to unwind, and we expect defaults and foreclosures to skyrocket over the next six to 12 months," said Dalton Investments CEO Steven Persky in announcing the new "strategy." In the extreme example, banks are now lending to hedge funds so that they can buy their own distressed paper, just to get it off their books.

'Wave of Insolvencies' To Hit German Industry

Oct. 13 (EIRNS)—A wave of insolvencies is about to hit German industrial firms as a consequence of private-equity takeovers going bust, the German financial daily Handelsblatt reported yesterday. According to Alix-partners, a consulting firm specializing in restructuring of distressed companies, the volume of distressed debt from such takeovers in Germany is now about 400 billion euros ($560 billion). The insolvency wave is hitting the automotive and machine-tool sectors. The private equity fund Permira was recently forced to sell the auto-parts firm Kiekert to the hedge funds, which began liquidating it. Other examples include TMD Friction and Treofan. Now the wave will expand to all branches of German industry, Handelsblatt says.

Northern Rock's Shares Skyrocket After BOE Bailout

Oct. 11 (EIRNS)—Now that the Bank of England has agreed to accept all of the garbage mortgage-backed securities of Northern Rock, the sinking British mortgage lender, its share price has skyrocketed. The Times reports that 58 million of its shares changed hands yesterday in 81,800 separate trades, accounting for one-eighth of the entire turnover of the London stock exchange.

Jon Wood of the Monaco-based SRM Global Master Fund Partnership and Philip Richards of RAB Capital, revealed that they have been accumulating positions in the stock. The former revealed a 4.03% holding in the sinking Rock, which is now being bailed out by British taxpayers. The bank's share price increased 67 pence to 273.5 pence.

Hedge Funds Pile into Commodities

Oct. 13 (EIRNS)—An article in gives an impressive account of how hedge funds are plunging into commodity speculation, creating all sorts of new derivative instruments, cooking "a '70s-style inflation—or worse." "Wall Street and the City are suddenly piling into the commodity markets.... The PhD's who cooked up the U.S. housing bubble are now applying their haute finance skills to gearing up the cost of natural resources. Hence, the complexity of the very latest commodity offerings. Expect a side-order of inflation to reach your dining table as a result very soon!

"When unlimited money-supply growth crashes into rising demand for limited-supply essentials—such as natural gas, copper, soybeans, and cocoa—the result is sure to be price inflation as violent as the monetary inflation that preceded it. Add a sudden wall of money from Wall Street, the City, Frankfurt, Paris and Tokyo ... all seeking a growth market to replace the can't-lose gamble of home-loan trading and credit ... and the surge in basic resource prices will only accelerate. Now add a little pixie dust ... plus a dollop of leverage ... and voila! One '70s-style inflation—or worse—cooked to order.

"'An army of structured credit experts is studying products such as Collateralized Commodity Obligations—or CCOs,' reports Reuters, 'tied to the performance of a portfolio of underlying commodities, such as precious metals or energy prices.'...

"In other words, bond managers and fixed-income traders whacked by the collapse of mortgage-backed debt, can now put commodities into their portfolios—and just in time, too, for the runaway inflation about to hit thanks to monetary over-supply and heavily-geared financial buying. The magic of finance has turned consumable lumps of natural resources into a stream of income ... without the bother of digging the earth or planting a crop."

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