Global Economic News

Bankers Scream: It's Trillions, Not Billions, of Losses

Nov. 28 (EIRNS)—Bankers and commentators are referring to losses in the "trillions," more and more these days. Ambrose Evans-Pritchard, in today's Daily Telegraph, reports on a Goldman Sachs report by Jan Hatzious that housing prices in the United States could fall by 15%. Pritchard then computes the result that this would leave "a fifth of the country's homeowners with $3,000 billion [$3 trillion] in negative equity." The same Goldman Sachs report asserts that losses from subprime and Alt-A mortgage securities would together reach $500 billion, "forcing a contraction in bank lending of $2,000 billion" ($2 trillion), adds Pritchard. Goldman Sachs, far from wanting a solution, reports that it wants interest rates cut to 3% by the middle of 2008, to continue the hyperinflationary bailout—an impossibility no matter how fast the printing presses work, or the computer-money is generated.

Credit Crunch Leaves Banks Desperate

Nov. 29 (EIRNS)—As the end of the year approaches, and banks must open their books to financial auditors, they are scrambling in search of money. Both the ECB and the Fed are priming the pump but to no avail:

* The Daily Telegraph reports that the three-month Euribor is up 74 basis points, the highest since 9/11. This means that banks are so desperate to find money, that they are still trying to offer some junk to other banks, knowing full well that this is causing shock waves and nothing else.

* The ECB yesterday injected 50 billion euros, but "it did little to alleviate funding fears.... This was less than half the amount the banks bid for to cover their funding needs as the year-end credit squeeze intensified. They paid an average 4.65%, the highest in six-and-a-half-years, and was well above the ECB's base rate of 4%," the Telegraph writes.

* The New York Times reports that "credit flowing to American companies is drying up at a pace not seen in decades, threatening the creation of jobs and the expansion of businesses. According to data from the Federal Reserve, credit availability peaked at about $3.3 trillion in August, but by mid-November, credit was down to $3 trillion, a drop of nearly 9%. The Times reports, "not once in the years since the Fed began tracking such numbers in 1973 has this artery of finance constricted so rapidly."

* The Fed yesterday hinted at a new rate cut next month and injected $26 billion into domestic money markets in three transactions.

Housing Prices Fall Steeply Across Britain

Nov. 29 (EIRNS)—Inflated housing prices in Britain are falling at the steepest rate in 12 years. Prices were down 0.8%, just in November, the sharpest decline since June 1995, which was just after the big housing bust of the early 1990s. Then, prices fell some 35% across Britain, and there were 75,000 repossessions in 1991 alone. British mortgage lender Nationwide put out the November figure, and had already warned earlier this month that ten years of house price inflation is over. House purchase approvals are way down, from the peak of 128,000 a month at end-2006 to 88,000 in October, the lowest in three years, according to Bank of England data.

There are various estimates now coming out, of just how much British house prices are overvalued. Yesterday, HSBC bank announced that house prices are 30% overvalued, while last month, the IMF put the figure at 40%. The Times today quoted HSBC chief economist Karen Ward warning that the property crash will also take down the pound and force the BoE to cut interest rates. Ward wrote: "There is around 30% of the current house price level that cannot be explained." The report warns that consumer borrowing will shrink, forcing interest rate declines and a pound crash to less than $1.80. With three-month inter-bank interest rates at 6.59% again, lenders just cannot issue mortgage loans. The Council of Mortgage Lenders warned yesterday that these high rates are a severe blow to smaller lenders in particular, the Financial Times reported.

Why Doesn't China Want to Put Its Dollars in the U.S.?

Nov. 29 (EIRNS)—The China Investment Corporation, the fund set up to invest $200 billion of the $1.4 trillion in Chinese reserves, has shifted gears, and will now invest primarily in domestic areas, rather than overseas, according to the New York Times today, reporting from a source that is "familiar with the company's decision making." The corporation, which put $3 billion into the private equity fund Blackstone in June, will henceforth devote two-thirds of its funds to "assisting Chinese banks" and other domestic investment. About one-third will go into the two major state banks, the Agricultural Bank and the China Development Bank. Another third will buy the Central Huijin Investment Company, now part of the central bank, thus developing internal infrastructure, industry and agriculture rather than investing abroad.

The $70 billion which is still planned to go into foreign investments will not take any large stakes in major firms, but will make "many small purchases of equities, bonds and other investments," the source said. They will not consider, for example, a stake in Citigroup, Rio Tinto, or any such "big-ticket items," and will avoid airlines, telecom, and oil, as "potentially contentious" politically.

It may be that the loss of $1 billion of the $3 billion investment in Blackstone has played a role in this decision as well.

Asian Funds Get Out, Oil Money Comes In

Nov. 28 (EIRNS)—Middle Eastern oil money is flooding into the world's markets, temporarily plugging holes wherever it goes, according to the Nov. 28 London Globe and Mail. The region's state-run investment funds, and other firms from the Middle East, are on a buying spree, acquiring "ownership stakes in several high-profile companies in the United States and Europe," reports the article. One sovereign investment fund, the Abu Dhabi Investment Authority (ADIA), plans to invest $7.5 billion in Citigroup, Inc., making it the largest single investor in the bank, and marking this bailout as the largest on record for any sovereign wealth fund—and providing a 24-hour facelift for the U.S. markets.

According to analyst Edwin Truman of the Peterson Institute in Washington, the ADIA has already worked to soft-pedal these opaque, massive, and growing funds to the U.S. government. "Obviously they managed the public relations so they got to key [politicians] before the deal was announced." ADIA controls about $875 billion in assets worldwide, within what is estimated to be a $2.5 trillion, and growing, sovereign wealth fund industry.

The loony, and soon-to-be-replaced, director of the U.S. National Economic Council, and top Bush advisor, Allan Hubbard, reports on this as a sign of the soundness of the U.S. economy. "It reinforces the fact that America is a great place to invest," Hubbard told CNBC News. "People recognize we have the most successful, developed economy in the world, we have the fastest growth rate, we're the most secure, and that's why foreigners like to put their dollars here." Sen. Charles Schumer (D-N.Y.), of the Senate Finance and Banking Committee, who previously fought the ownership of U.S. ports by Middle Eastern companies, is looking favorably on this investment, saying that it will save jobs, bolster New York City's status as a global financial center, and give Citigroup's image a needed boost.