From Volume 7, Issue 34 of EIR Online, Published August 19, 2008

U.S. Economic/Financial News

The Guns of August for U.S. Banks

Aug. 12 (EIRNS)—Of the latest round of severe losses reported by big money-center banks, most significant is the report to the Federal Reserve made by JP Morgan Chase. The financial collapse is deepening, right up to this moment, is the message of that report.

Wachovia Bank had the largest loss in the latest round, $9.11 billion in the second quarter, an increase over its preliminary report just two weeks ago. Wachovia is having to buy back so-called auction-rate securities it sold to investors, laying off another 7,000 employees, and has acknowledged that it is now under investigation by the SEC and multiple state attorneys general for sales of exploding default swap derivatives to municipalities. UBS wrote off another $5 billion in worthless securities it holds, bringing its total writeoffs to $43 billion, and acknowledged an investor "run" which has reduced its investments under management by $41 billion.

But notably, JP Morgan Chase reported to the Fed that it lost $1.5 billion just in the month of July; that the prices of bank securities are still dropping; interest rate spreads increasing; that banking conditions are "substantially deteriorated" since July 1. Merrill Lynch's bizarre fire sale of its debt securities at 22 cents on the dollar, in which Merrill had to lend the buyer most of even that price, is having consequences hitting JP Morgan Chase and banks worldwide.

The head of the Federal Deposit Insurance Corporation announced July 30 that the FDIC will have to raise its premiums to banks, because just the eight bank failures so far this year will cost it about $9 billion for deposit insurance, or 17% of the FDIC's total fund, putting it below the legal requirement of funds with which to insure the nation's bank deposits.

Soros Deployed for Bailout of Lehman Brothers

Aug. 16 (EIRNS)—George Soros hiked his stake in Lehman Brothers to 9.5 million shares, equivalent to a 1.4% stake, Reuters reported yesterday. This is more evidence of a serious liquidity crisis, indicated also by reports that Lehman is negotiating the sale of its entire $40 billion real estate portfolio (i.e., assets and securities) in order to cover losses. The question is who will buy it, and at what price? Britain's TimesOnline reports that, in the event that Lehman finds no private equity or fund manager to buy it, it is considering whether to float its real estate portfolio. This will be the first time that unpriceable assets would be put on the market, with unforeseen (or better, foreseeable) universal consequences for financial balance sheets.

Home Prices and Sales Continue To Plunge

Aug. 15 (EIRNS)—The number of sales of existing single-family homes fell to a ten-year low in the second quarter of this year, and home prices dropped another 7.6%, on average, across the country. One-third of the home sales so far this year have been foreclosures. There were 4.49 million U.S. homes for sale at the end of June, the highest in a year, according to the National Association of Realtors (NAR). At the current sales pace, that represents 11.1 months' worth, up from 10.8 months' worth at the end of May.

The NAR reported yesterday that the median price fell to $206,500 from $223,500 a year earlier. Sales of single-family houses and condominiums fell 16% to 4.913 million at an annualized pace.

The biggest declines reported were in Sacramento, with a 36% drop, followed by the metropolitan areas around Cape Coral and Ft. Myers, Florida, down 33%.

Riverside and San Bernardino, Calif. prices dropped just under 33%, and Los Angeles dropped 30%, according to the report. The metropolitan New York area, including parts of northern New Jersey and Long Island, fell over 5%, and Boston dropped 11%.

"It's getting worse," RealtyTrac's executive vice president for marketing astutely noted. "The number of properties that have been foreclosed on by the banks and still haven't sold is the highest we've ever seen."

New Sinkhole in Financial Crash: College Loans Disappearing

Aug. 12 (EIRNS)—Student loans for the 2008-09 college year are disappearing around the country, as a fresh casualty of the deepening financial collapse. The Chronicle of Higher Education cites estimates that 200,000-300,000 students, or about 3% of college undergrads, have lost the loans they had lined up for the coming year, and some fraction of that number will have to drop out. The private market for student lending had grown to $17 billion annually as college tuitions skyrocketed and Federal support fell; but now, that private market is disappearing.

As the U.S. banking system becomes more and more unable to provide or arrange credit and loans, the college loan crisis is worsening. The Massachusetts Educational Financing Authority on Aug. 1 suspended loans entirely to 32,000 students' families, because the Authority could not issue bonds as it does every year. Gov. Deval Patrick (D) tried to get state pension funds to buy $50 million in these bonds as an emergency measure, but the state treasurer refused to authorize the investment. CBS-TV reported on families of students going to Massachusetts colleges using credit cards, or trying to line up home equity loans—giving the college student his or her own mortgage to pay on leaving school. Some succeed, but banks are also cancelling home equity credit lines around the country.

The Michigan Student Loan Finance Agency suspended its lending a month ago (23,000 loans lost). The New Hampshire Higher Education Lending Agency did the same on July 31 (6,000 loans lost). These are considered "private," though state-supported, lenders.

The private loans available, increasingly, are adjustable-rate credits, with no interest rate cap. Federal loan-support programs are available, but their interest rates have risen to the 8-9% level. More than 120 lenders have dropped out of the Federal student loan program. On Aug. 11, the sinking Wachovia Bank Corp., the sixth-largest student lender, suspended its undergraduate loan program. Since June, Citicorp (Student Loan Corp.), Bank of America, and JP Morgan Chase had already suspended theirs.

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