From Volume 7, Issue 9 of EIR Online, Published Feb. 26, 2008

U.S. Economic/Financial News

Bloomberg Threatens 1000s of New York City Foreclosures

Feb. 20 (EIRNS)—New York City Mayor Michael Bloomberg, in a model of his push for corporatist fascism in the U.S., is planning to allow a private company to foreclose on thousands of New York City residential properties that have unpaid water bills. The result would be evictions of many thousands of residents.

The city is preparing to sell liens against almost 15,000 multi-family buildings, to a subsidiary of the investment bank and securities and derivatives trader Bear Stearns, according to the New York Sun. The Bear Stearns subsidiary Xspand will grab for itself $0.12-0.25 of each dollar it collects for the city.

Bloomberg had already threatened to shut off water to 8,120 single-family homes if they failed to pay their overdue bills by Feb. 21, the Daily News reported Feb. 20.

"Everybody should pay," Bloomberg insisted. "You pay. I pay. They should pay. There's no reason why you and I should subsidize somebody else, and the city will take any appropriate steps to collect the money owed."

Last month, Bloomberg signed a law authorizing the first-ever sales of water liens against owners of multiple dwellings, after the city council insisted that single-family homes and seniors be protected from foreclosures.

Credit-Default Swaps Market Set To Blow

Feb. 17 (EIRNS)—A nervous New York Times today featured a page-one article on the likelihood that the unregulated credit-default swaps market may be the next to blow out. This speculation-rich market, with contracts valued at close to $50 trillion, is ten times larger than the face value of corporate bonds underlying it—approximately $5.7 trillion.

The rapid growth of swaps, with virtually no regulation, has created such chaos, that should there be any major economic upheaval—the Times dares only call this a possible "hiccup in this market"—it could set off a "chain reaction of losses at financial institutions" which would further destabilize credit markets.

The Times worries whether this market will be able to withstand a big jump in corporate defaults, noting that American International Group (AIG) got into trouble recently because it had "incorrectly" valued some of these instruments, and ended up losing $3.6 billion after some of them declined in value. Commercial banks are also heavily involved, with JPMorgan Chase being the biggest player with $7.8 trillion, followed by Citibank and Bank of America. The market is rife with speculators, particularly hedge funds.

Auction-Rate Securities Hit 'Loan Shark' Levels

Feb. 19 (EIRNS)—Interest rates have reached "loan shark" levels in the $330 billion market for auction-rate securities, another reflection of the collapse of the global financial system. Auction-rate securities are long-term bonds designed with interest rates that reset at auctions every 7, 28, or 35 days—a method that in the past provided lower interest rates than could be obtained through fixed-rate loans—but the collapse of the global securitization scheme means that such methods no longer work. In recent days, there have not been enough bidders to buy these bonds as they reset, causing sharp spikes in the interest rates the issuers must pay. Previously, big banks such as Citigroup and Goldman Sachs would step in and buy the bonds at the periodic auctions they oversee, but they have ceased to do so, as they are too busy trying to save themselves to support the auction-rate market.

The University of Pittsburgh Medical Center, as an example, saw the rate it was paying on one of its bond issues jump from 3.5% to 17%, and is now paying an extra $500,000 a week in interest on its bond portfolio. UPMC Treasurer Tal Heppenstall told Bloomberg news service that his institution would try to buy back $430 million of its bonds to cut its losses. "It's outrageous. We're AA-rated credit. We don't need to get financing from loan sharks," he said.

With bond auctions failing and interest rates soaring, municipal bond issuers are in a mad rush to convert their auction-rate bonds to other forms of bonds, which will undoubtedly raise their borrowing costs, if they can find takers.

Home-Building Permits Tumble to 16-Year Low

Feb. 20 (EIRNS)—Housing starts overall rose 0.8% from December to January; yet single-family housing starts fell by 5.2%, the Commerce Department reported. Building permits slid 3.0% to an adjusted annual rate of 1.08 million, the lowest level since November 1991.

Now Corporate Debt Is Hitting the Fan

Feb. 21 (EIRNS)—The Wall Street Journal reported today, that, with banks pulling back on lending because of the credit crunch, the noose is tightening around some companies no longer able to get easy access to credit. This is driving some of those companies into bankruptcy: Yesterday there were filings by Sharper Image (upscale and techie home furnishings) and Lillian Vernon Corp. (mail-order knickknacks). Some companies already under bankruptcy protection, including Delphi Corp. (auto parts) and Solutia Corp. (chemicals) have been unable to emerge from bankruptcy for lack of new funding arrangements.

According to the Journal, the total value of corporate-bond defaults in the first 50 days of 2008 is already approaching the total for all of 2007.

These problems in corporate debt, supplementing those with asset-backed securities and other exotic practices, feed back into the credit crunch: banks are writing down values of corporate loans on their books. UBS AG and Credit Suisse Group, for example, announced last week a total $400 million decline on their leveraged loans.

'Carbon' Legislation Stops Power Plant Construction

Feb. 23 (EIRNS)—Kansas electric utility Sunflower Electric Power, with the help of the coal giant Peabody Energy and others, has been fighting to keep two coal power plant projects from being deep-sixed by the Climate Change agenda hanging over the U.S. economy, even before new regulations have been mandated. The projects face fierce opposition by environmentalists, the banks, and Democratic Gov. Kathleen Sebelius.

Even though the state desperately needs new power, a certain paralysis has set in, because of the expectation that in the near future, carbon taxes or carbon cap and trade will be legislated, leading to high penalties for the high carbon dioxide emissions of coal-fired plants. The governor wants the plants to include carbon-capture—a technology a decade from implementation—and many banks are already adding in a premium to finance such plants, anticipating new greenhouse gas rules in the near future. According to the Feb. 23 Washington Post, Citigroup, JPMorgan Chase, and Morgan Stanley are already factoring in carbon costs, claiming: "Due to evolving climate policy, investing in CO2-emitting fossil fuel generation entails uncertain financial, regulatory and environmental risks."

In the absence of coal or nuclear in its future, Kansas is facing a scenario not unlike that of South Africa, where demand is beginning to outstrip supplies, leading to belt-tightening, higher prices, and loss of industry. Like South Africa, Kansas hopes that energy efficiency mandates and quick-fix natural gas plants will fill the vacuum left by incompetent energy policies driven by Gorey global warming hysteria.

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