From Volume 8, Issue 18 of EIR Online, Published May 5, 2009

U.S. Economic/Financial News

More Details Emerge About GM 'Bailout' Scheme

April 28 (EIRNS)—More information has emerged about the restructuring plan that General Motors submitted to the Securities and Exchange Commission last week. The company has until June 1 to nail down all the details, and get SEC approval, or the next step is bankruptcy court. Under the plan, the U.S. Treasury Department would own at least a 50% stake; the UAW would get 39%; bondholders would get the remaining 10%—and stockholders would lose everything.

And, what about jobs? In addition to the 21,000 assembly line jobs that would be permanently cut, the plan would shut down 42% of the dealerships, cutting an additional 6-8,000 jobs. The plan also depends on GM being able to sell off its Hummer, Saturn, and Saab divisions. The Swedish government has already balked at any bailout or takeover of Saab, preferring to let the firm file for bankruptcy.

According to the Los Angeles Times, bondholders are screaming bloody murder, over the pennies on the dollar that they would get in stock, in exchange for their bonds, arguing that the Treasury is getting a much better price for its $10 billion in bailout cash.

The idea that taxpayers are subsidizing the bailout of GM at the expense of tens of thousands of lost jobs, is stunning, and will certainly have blowback.

Three More Banks Bite the Dust

May 2 (EIRNS)—Federal regulators seized three more banks on May 1, bringing the tally of failed banks in 2009 to 32, compared to 25 in all of 2008. The Office of the Comptroller of the Currency shut down Silverton Bank of Atlanta, Ga., and the FDIC took over Citizens Community Bank of Ridgewood, N.J. and America West Bank of Layton, Utah. The FDIC arranged sales of the Utah and New Jersey banks, but set up a bridge bank to take over Silverton's operations. Silverton, with $4.1 billion in assets, was the largest failure since Downey Financial Corporation was shut down last November, costing the FDIC about $1.37 billion.

Of the three banks, Silverton, which the Wall Street Journal characterized as a "key cog in the South," may have the most systemic implications because, rather than being a depository bank, it was a commercial bank whose customers were other banks, about 1,500 in 44 states. According to an April 2 report in the Birmingham Business Journal, Silverton had been censured by the Federal Reserve Bank of Atlanta and prohibited from paying dividends or interest on any outstanding debt, or issuing any new debt without prior consent. Most of Silverton's losses were apparently in construction loans, pieces of which it had sold to smaller banks holding shares in Silverton, which led to its failure.

Reich: No Economy Apart from the Welfare of the People

April 29 (EIRNS)—Former Labor Secretary Robert Reich, in a commentary this morning on National Public Radio, ridiculed the idea of an "economy" existing apart from the welfare of its citizens. "Many are deeply worried about what a swine flu pandemic could do to the already weakened U.S. economy," Reich said. "I understand their worry, but it strikes me as misplaced. The real worry is that lots of people could get sick and many could die."

"Thinking about a pandemic as an economic crisis assumes there's something called an 'economy' whose health can be separated from the well-being of real people," Reich continued. "It's like viewing the financial meltdown as a crisis for Wall Street measured in how low the Dow sinks, when millions of people are losing their jobs, their savings, and their homes. In the end, an economy is nothing but people. If vast numbers of people are doing well, the economy should be judged a success. If many people are hurting, the economy is failing. Health is a big factor."

Obama Plan Has Worsened the Foreclosure Disaster

April 29 (EIRNS)—Administration or Federal Reserve talk on about "a coming economic recovery," raises just as many Congressional hackles as proposals for voting any more bank bailout money, according to Capitol Hill sources. The reason, they say, is that Members of Congress are feeling the heat over home foreclosures. Despite all the "mortgage modification plans" of the past two years, the foreclosure tsunami keeps rising, wrecking lives, households, and neighborhoods; and for two years, no one in Congress has had the courage to introduce the only action that would stop them—Lyndon LaRouche's Homeowners and Bank Protection Act of 2007.

In the latest foreclosure figures reported by the tracking firm RealtyTrac, it becomes clear that President Obama's mortgage rescue plan, announced on Feb. 17, has actually made the foreclosure wave worse. Foreclosures further spiked after February, with 320,000 filings and 86,000 home seizures in March. There were 802,000 foreclosure filings in the first quarter—the highest of any quarter so far—and 40% of those were in March. The latest spike occurred after the brief foreclosure moratoria by Fannie Mae, Freddie Mac, Wells Fargo, and two other lenders were ended as a result of Obama's announcement of his plan. Those moratoria had, for a while, capped the foreclosure tidal wave at a disastrous 3 million a year; now, the rate is closer to 4 million.

On April 28, this unsuccessful plan—which involves paying monetary incentives to lenders, before and after they refinance a mortgage, and each time the refinancing lasts six months without default—was extended to second mortgages, further expanding the lender bailout. As for one of the primary driver of foreclosures—the home price collapse—newly released Case-Shiller Index figures for February showed the national average home-price drop since the peak of the bubble in September 2006, had reached 28% and was still falling at over 2% monthly (the January-to-February drop was 2.2%). The drop from February 2008 was 18.6%. Prices continued falling in all 20 major metropolitan areas.

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