U.S. Economic/Financial News

Arizona, Minnesota Revenue Collapse Accelerates

March 2 (EIRNS)—Arizona and Minnesota are the latest two states to suffer the budget deficit disease, as January revenue collections across the nation plummet. Overall, 18 states' current deficits total $14 billion in the current budget year, and 20 more are expected to have deficits in 2009, totaling $34 billion when combined.

Minnesota's $1 billion deficit just got worse. Its revenue shortfall is 2 1/2 times worse than predicted only three months ago. The state income tax decline is a 2% fall-off since the November report, and is due to a collapse in wages and decreases in capital gains payments, interest, and dividends. Five of seven lumber mills in the state have closed due to the housing crash. The governor is expected to make 3% across-the-board cuts next week.

Arizona's deficit ballooned again as January revenue collections were down 16% from a year ago (January 2007), bringing the new deficit estimate up to $1.2 billion. The biggest shortfall occurred in corporate taxes.

Wall Street May Back Up Birmingham's Sewer System

March 3 (EIRNS)—Jefferson County, Alabama's sewer system may get backed up by Wall Street. The county, whose seat is Birmingham, has had $3.2 billion in bonds slashed to below investment grade by Standard & Poor's. The downgrade, made after the markets closed on Feb. 29, came after the county said it may be unable to pay banks holding floating-rate debt for its sewer system or make payments on related interest-rate swaps. Jefferson County, which has $193 million reserves for its sewer system, faces the prospect of having to pay more than $1 billion to banks to buy back debt and unwind the swaps.

The county, on the advice of JPMorgan Chase, refinanced about $3 billion of sewer debt in 2002 and 2003 using floating-rate debt, including bonds with rates set at periodic auctions, mostly insured by FGIC Corp. and XL Capital Assurance. The county said it paid $6 million more in interest on its sewer debt in the four months that ended in January.

The county, in a notice to investors on Feb. 28, said it could "provide no assurance" that revenue from the sewer system would be sufficient to pay its increasing debt costs. The disclosure prompted S&P to lower the county's sewer debt by six levels to B, five steps below investment grade, and keep the bonds under review for possible further downgrading.

As a Bloomberg News Report put it March 3, "The county's plight shows what can go wrong for public borrowers across the U.S. who rely on financial products engineered by Wall Street, and peddled on the promise of lowering costs and reducing risk at little expense to taxpayers."

"There are ways of providing market support," said James Spiotto, chairman of the National Association of Bond Lawyers' committee on bankruptcy. "You don't want to be the person who shut down the sewer system," he told Bloomberg.

Bernanke Pleads for Bankers to Ease Up on Mortgage Holders

March 4 (EIRNS)—The chairman of the Federal Reserve, Ben Bernanke, urged mortgage lenders and investors today to reduce the principal on loans for many people whose homes are no longer worth as much as the amount they still have to repay. Noting that delinquency and foreclosure rates have soared over the last year, and that housing prices have not stopped falling, the Fed chairman warned that efforts by the government and industry to prevent foreclosures had not gone far enough, and that "more can, and should, be done."

Speaking at a conference of community bankers in Florida, the Fed chairman's remarks were at odds with the position staked out in recent days by Treasury Secretary Henry Paulson. Paulson has pushed the mortgage-lending business to freeze interest rates for at least some subprime borrowers whose low teaser rates are about to expire, but drew a clear distinction between that and helping people who, because of falling house prices, had no equity in their homes.

With no way out for these monetarists, they can no longer even read from the same script.

Cleveland Sues Top U.S. Banks for Negligence

March 5 (EIRNS)—Twenty-one major banks, including Goldman Sachs, Citigroup, Bear Stearns HSBC, and Merrill Lynch; and large credit institutions including, Washington Mutual, Wells Fargo, and Countrywide, are being sued for "guilty negligence" on the subprime crisis by the juridical director of the Cleveland municipality.

The banks, states the complaint, "deliberately targeted" a population among the poorest, a fact that "they could not ignore." By multiplying their credit proposals to a population they knew insolvent, "they should have expected that home foreclosures would be the inevitable consequence of their behavior, a behavior which represents a public damage as it is defined by the Ohio law."

The suit for "aggravated prejudice" was introduced in Cuyahoga County, whose major city is Cleveland. Ohio law permits judgments of "negligence," even though a law might not have been violated as such. Thus a car can roll over a victim, but not necessarily violate speed limits.

"The banks respected the law; says the municipality, but did it in a lawless fashion, pushing people to borrow in order to make tens of billions of speculative profits. And they did it consciously: the proof is that the black areas, the poorest, were the worst hit. Today all those banks have harshened the conditions to get credit. This demonstrates that they could have done it before," said M. Triozzi, the juridical director of the municipality. The municipality is apparently demanding hundreds of millions of dollars of charges to the banks.