From Volume 8, Issue 10 of EIR Online, Published Mar. 10, 2009

U.S. Economic/Financial News

Collapsed Financial System Pushes Up Job Losses

March 1 (EIRNS)—According to an estimate in a Bloomberg News survey ahead of the Labor Department figures to be released on March 6, U.S. employers have cut payrolls in February by 651,000, the most since 1949, and the jobless rate probably surged to 7.9%. The economy lost 598,000 jobs in January, bringing the total drop in employment since the "recession" officially began in December 2007 to 3.6 million, the most of any downturn since 1945. While the Obama Administration is promising its stimulus plan will save or create 3.5 million jobs and the Federal Reserve is flooding markets with liquidity to revive lending and restore growth, Julia Coronado, a senior economist at Barclays Capital Inc. in New York, told Bloomberg: "We're not seeing any indication that we're finding a bottom."

In addition: the Institute for Supply Management's factory index, due on March 2, fell to 34 in February from 35.6 the prior month, according to the survey median. A reading of 50 is the dividing line between growth and contraction.

And, the National Association of Realtors index of pending home sales fell in January following a gain in December, according to the median forecast ahead of a report due March 3. On March 2, Commerce figures will be released and these figures are also expected to show spending on construction projects fell for a fourth consecutive month.

AIG Echoes LaRouche: The Risk Is Systemic!

March 4 (EIRNS)—A source who once served as a top regulator of the insurance industry confirmed that Lyndon LaRouche has been right in his analysis of the insurance sector. He referred in particular to a 21-page confidential document released Tuesday by AIG titled "A.I.G.: Is the Risk Systemic?" The document was subsequently leaked to the New York Times. According to this source, the report heightened the sense of urgency in the Obama Administration to proceed with another $30 billion bailout of AIG, to avoid what the NYT writer described as an economic apocalypse and a financial hurricane. The report shows that exposure to AIG's credit default swaps (CDS), which were used to insure other derivative bets, threatens both the banks and the insurance companies. The source said that he was aware, as of four years ago, that insurance companies had loaded up on derivative transactions, as a means of spreading the risk. But the way they spread it, he added, through issuing large volumes of CDS, threw out all the old rules and practices regarding risk in insurance underwriting. These companies had become nothing but a house of cards. What is hitting now is not just bad paper related to mortgages, but the unraveling of trillions of dollars of collateralized debt obligations (CDOs), which are insured by CDS transactions. I don't believe there is any way you can untangle this, he said, referring to promises by senior officials at the Treasury Department, who defended the latest bailout by saying that the bail-out was necessary to buy time, to arrange for selling off components of AIG's life insurance and other insurance business, which they claim could be spun off at a profit. That is a dangerous illusion. There could be a "run on the bank" on the insurance companies, and there is no way that can be bailed out. He referred to the AIG confidential report, which says that the company has written more than 375 million policies, with a face value of $19 trillion—How can you bail that out?

LaRouche said he thinks the former regulator has provided a fair assessment. "I have been warning that the insurance companies are next," LaRouche said.

Treasury To Invite Hedge Funds To Buy Toxic Waste

March 7 (EIRNS)—The U.S. Treasury Department is planning a scheme to convince hedge funds and private equity funds to buy into its bank bailout schemes. According to the March 6 Washington Post, the scheme would work like this: A hedge fund would put up $1 million of its own money, and borrow $9 million from the government to buy some asset-backed securities, which would then be used to finance consumer loans. If the value of the securities goes up, the hedge fund makes a tidy profit and the government is happy because consumer spending would supposedly increase. The Feds plan to put in $1 trillion into this scheme, and there would be in parallel, a $1 trillion scheme to create investment funds to buy up toxic waste. The hedge funds are reportedly thrilled with these plans because they would get to gamble directly with the taxpayers' money, rather than just that of their own investors.

The problems with these schemes should be obvious, but the Post never mentions any. First of all is the assumption that hedge funds still have unlimited cash to speculate with, when so many have, in fact, been losing money hand over fist, and have had to shut down, or prevent their investors from pulling their funds out, and similar measures. The Post's description of how the scheme would work raises the question: What happens if the value of the securities drops instead of rises? Some question applies to the scheme to buy up toxic assets. If they're worthless, now, why would they be worth something in the future?

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