From Volume 7, Issue 4 of EIR Online, Published Jan. 22, 2008

U.S. Economic/Financial News

Ambac Downgraded: Another Nail in the Financial Coffin

Jan. 18 (EIRNS)—Ambac, the nation's second-largest bond insurer, was stripped of its critical AAA credit rating today by Fitch rating agency, which cut its rating two notches to AA. The move came after Ambac had to abandon plans to raise $1 billion in new capital when its stock dropped by 70% in the last two days.

Though S&P and Moody's have yet to cut their ratings on Ambac, those cuts are inevitable, unless the company can find new capital, and without its top rating, Ambac's business will rapidly deteriorate, as will the guarantees it provides on $556 billion in bonds, including some $67 billion in bonds issued by CDOs (collateral debt obligations).

Bond insurance is more of an accounting trick than actual insurance, since the bond insurers don't have anywhere near enough capital to cover any widespread wave of defaults on the bonds they back. The bond insurers basically rent out their AAA ratings to give the illusion that the bonds they insure are sound. The losses now working their way through the markets after the seizing up of the securitization scam, will destroy the bond insurers, and the illusion of protection they provide. The demise of the bond insurers is a yet another nail in the coffin of a dead system.

Building a 'Floor' Where There is No House

Jan. 15 (EIRNS)—Lennar Homes announced today that it has sold 11,000 properties in eight states to investment bank Morgan Stanley for 40 cents on the dollar (based on an already depressed November valuation). The purchase, by Morgan's Real Estate division, was for properties in 32 communities, although the amounts and in what states of development the properties were in, were not stated. Wall Street has seized on this, the first big sale since the market began to tank, proclaiming that this event had (finally) set a "floor" for the industry, as if it can only go up from here. What they don't yet understand is that it is the entire house which is collapsing, and, as they are trying to build a "floor," the "basement" is continuing to recede.

Indicative of the collapse process we are now in, is the emergence of real estate "vultures." About 150 so-called "real estate opportunity funds" have been formed to buy distressed properties and other assets, a 21% increase over the number this time last year, and an all-time high, according to Real Estate Alert, as quoted by Bloomberg. "We're watching Denver, Phoenix, Austin and Tucson, but South Florida is our principal focus," said one self-described vulture. "If you're a vulture, Florida has more carrion. This stuff is lying on the ground. It's lost life. Some of the stuff in Phoenix is still breathing. Perhaps not for long."

Widening Collapse Now Threats State Budgets, Services

Jan. 15 (EIRNS)—As the financial system collapses, revenue shortfalls are hitting state legislatures nationwide. In addition to more publicized problems in New York, California, and New Jersey, reports from other states are mounting, with only one solution, LaRouche's Homeowners and Bank Protection Act.

Maine: New sales tax revenue estimates indicate that further cuts are likely and that the rainy day fund will have to be tapped. "With the ink barely dry on the proposed supplemental budget, the Baldacci administration is expecting more red ink and more spending cuts," says the Bangor Daily News, "as the recently re-projected sales tax revenues are failing to meet the lower estimates." The state's Finance Director Rebecca Wyke said that November sales tax revenues were down by at least another $1 million, and that "there is no expectation, based on national studies and anecdotal reports of sales in Maine, that there will be a rebound when December sales tax receipts" come in. Gov. John Baldacci is so far determined to keep the social safety net in place. "We have to do it differently," he told the paper, "but we will keep it in place."

Michigan: The State's Treasurer, Robert J. Kleine, said revenues are down roughly $200 million from the adopted budget, which was slashed and tax hikes made, to adopt it. "We continue to see very slow growth in state tax revenues," he told AllPatriotNews. "Annual sales tax collections have grown less than the rate of inflation for six consecutive years, while, adjusted for inflation, General Fund revenues have dropped nearly 40% since 2000 ... [and] the slowing national economy will reduce 2008 revenues below levels assumed in the budget."

Kentucky: The state legislature is considering a 12% cut in the Department of Education's general fund, with an additional 7% in specialized education programs, including cancelling full-day kindergarten.

The System Is Bankrupt: Citigroup, Merrill Lynch Report

Jan. 15 (EIRNS)—Citigroup reported the largest loss ever admitted by a U.S. bank today, $10 billion for the fourth quarter, but that loss, as big as it is, is actually a cover story designed to hide far more serious damage. In the fourth quarter, the bank took $18 billion in losses on mortgage-related securities and added $4 billion to its reserves for losses on loans and consumer credit, losses which reflect the overall collapse of the global financial system. To help plug the hole in its balance sheet from these losses, the bank revealed $12.5 billion in new capital from the investment arm of the government of Singapore, the Kuwaiti Investment Authority, and others, on top of the $7.5 billion it obtained from the Abu Dhabi Investment Authority last November; in all, the bank has raised about $26 billion since the crisis began.

Merrill Lynch announced that it had arranged a $6.6 billion capital injection from Korean Investment Corp., the Kuwaiti Investment Authority and others, on top of the $6.2 billion it arranged in December.

These injections represent a global effort to try to contain the effects of the blowout of the international financial system last year, in which trillions of dollars of nominal financial values vaporized, never to return. The losses have already occurred, and what is playing out now is merely the accounting for those losses on the balance sheets of the players. The banks are desperately trying to stretch out the reporting of these losses to buy themselves time, because to tell the truth would be to admit that they are hopelessly insolvent—what they are hiding is much worse than what they are admitting! As Lyndon LaRouche observed, "there is no bottom to this crisis." The system itself has died, and is taking the banking system with it.

Home Foreclosure Rate Accelerating

Jan. 17 (EIRNS)—A report on home foreclosures in California during December and the first third of January shows that the pace of foreclosures is accelerating. Foreclosures jumped 45% month-over-month in December, with some 32,948 households receiving foreclosure notices, with 12,783 losing their homes to repossessions and auctions, according to In January, a "gargantuan" 9,001 properties were sold at auction in just the first eight business days, the report said. Housing construction starts fell 14% in December to an annual rate of 1 million homes, the lowest number since the 1991 recession, while for the entire year of 2007, starts fell 25%, the biggest year-over-year decline since the days of the Volcker Fed's "controlled disintegration" interest rates in 1980. However, since the builders sold less than 700,000 homes last year, they are still building considerably faster than they are selling, a process which will destroy the builders and send housing prices downward, triggering even more foreclosures.

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