From Volume 6, Issue 46 of EIR Online, Published Nov. 13, 2007

World Economic News

Dollar Crash Went Completely Out of Control

Nov. 7 (EIRNS)—With Bank of England governor Mervyn King telling the Financial Times that the world's central bankers are now holding conference calls with each other every day on the credit collapse, it was obvious today that they had lost all semblance of control of the hyperinflationary dollar crash underway.

* The price of gold in dollars leapt to $845;

* The price of oil in dollars passed $98, headed for $100;

* The dollar fell to nearly $2.11 to the British pound; to a 60-year low against the Canadian dollar; to below $1.47 to the euro; nearly to 113 yen/dollar.

* Wall Street financial interests were demanding Fed chairman Ben Bernanke promise another interest rate cut, in upcoming Congressional testimony—which Bernanke failed to do, sending further tremors through the financial markets;

* The New York Stock Exchange Dow-Jones index fell over 4% for the week ending Nov. 9; the Nasdaq was down more than 6%; as all financial and insurance stocks were plunging, some by 10-15%;

* Morgan Stanley, which had just reported a billion-dollar loss in leveraged buyouts which failed, discovered $3.7 billion in new losses in mortgage securities, joining virtually all big banks in the tank;

* Moody's Investors Service started cutting rates on $33 billion of debt of the big banks' structured investment vehicles (SIVs), hitting 16 SIVs of Citigroup, British HSBC and Germany's WestLB.

'Fire Sale of Assets' Next Phase in Banking Crash

Nov. 7 (EIRNS)—"Risk rises of asset fire sale" is the banner headline across the front page of today's Financial Times, under which lies a large graph showing the dollar collapsing from $1.34 to the euro in October to 1.4552 today, a drop of 9% in just less than two months. Under this graph are three others, also for the last two months. One shows the price of gold zooming from $740 to $820, another the price of crude oil from $80 to $98, and a third, the collapse of the ABX BBB index of value of U.S. mortgaged-backed securities from a high of 29 to the current 18.

The FT reports that U.S. Treasury Secretary Hank Paulson's brainchild, the Master Liquidity Enhancement Conduit (MLEC), is "dead in the water" following Citigroup's revelations of huge writedowns. The credit-rating agencies have deemed a "clutch of complex debt vehicles to have defaulted" all of which will force the sale of "these assets, inevitably at heavily discounted prices." On top of Citigroup's surprise Nov. 6 announcement of a new $11 billion writedown, Morgan Stanley could be in the hole for about $6 billion in writedowns according to David Trone, of Fax-Pitt Kelton.

If that's not enough, the FT reports that there is worry for the health of U.S. bond insurance companies, whose high credit ratings and insurance are essential to the issuance of bonds and other commercial paper. Playing into this picture is the announcement that Standard and Poor's and Moody's have received default notices for another $5 billion worth of collateralized debt obligations (CDOs), which are causing some of the huge losses being reported by the big banks.

German Citizens Can't Afford Living

Nov. 9 (EIRNS)—As the Creditreform Association of Germany documents in its latest survey on private households' indebtedness, insolvencies are up 50% in Germany, against the past year. All in all, 150,000 new cases have been added to the list, mostly Hartz IV recipients who cannot afford the cost of living any longer, but also, increasingly, homeowners who, because of a lost job, cannot pay their mortgage any longer, nor even the regular expenses of keeping a home.

The same trend goes for Germans who have become dependent on one or more badly paid mini-jobs, to compensate for a full time job that isn't available. As the Credit Reform Association also said, 7.3 million Germans, almost 10%, do not have the income they need to stay alive. With the continuing rise in consumer goods, most people won't be able to afford a shovel to bury their dead.

Moody's Begins Issuing Death Certificates for Banks' $350 Billion SIV Fraud

Nov. 8 (EIRNS)—Moody's rating agency yesterday sounded the death knell for those off-balance-sheet speculative creatures of the big international banks, called "Structured Investment Vehicles" (SIVs), sinking U.S. Treasury Secretary Henry Paulson's crazy super-SIV bailout scheme, the Master Liquidity Enhancement Conduit (MLEC), in the process.

Moody's announced steps towards downgrading $33 billion of debt issued by 16 of the 39 existing SIVs. While the rating action immediately affects specific SIVs sponsored by nine international banks, the fire sale of assets and restructuring it triggers, kills the $350 billion SIV market as a whole.

Leading the list of bank SIV sponsors whose debt is to be downgraded, is the already collapsing Citigroup, which set up seven SIVs carrying some $83 billion in debt.

The other banks affected are: Bank of Montreal, Germany's Dresdner Bank, HSH Nordbank, and WestLB banks, the Dutch-based Rabobank, France's Société Générale, and Britain's Standard Chartered and HSBC.

In a follow-up conference call today, Moody's Paul Mazataud emphasized that "it seems clear that the situation has not yet stabilized and further rating actions could follow." Some SIV managers admit the market for SIV paper "has been permanently disrupted, and the SIV model will not survive in its current form," another Moody's analyst reported.

Moody's report described a continuous decline in the net asset value of these SIVs from mid-Summer, and continuing now. EIR has concluded that this decline has already reached a level which should mean a mandatory shutdown and liquidation of some of these SIVs—forcing their bank sponsors to place their losses from these off-balance sheet operations, onto their own books. Moody's said its action came after it learned that some of the SIVs were already liquidating assets whose value was deteriorating. It assumes the SIVs will continue liquidating assets at distressed prices, being unable to issue new debt or to refinance.

Financial Trainwreck: Rear Wheels Also Fall Off...

Nov. 8 (EIRNS)—The U.S. commercial paper market shrank by $15.6 billion in the week ending yesterday, Federal Reserve data released today showed, provoking moans that this marks the worst credit crunch since the panic days of August. The contraction was driven by the $29.5 billion drop in the toxic waste called asset-backed commercial paper. The asset-backed paper market, which totalled some $1 trillion in mid-August, is now calculated at $845.2 billion.

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