From Volume 36, Issue 39 of EIR Online, Published Oct. 9, 2009

U.S. Economic/Financial News

Credit Crunch to Small Business Is Getting Worse

Oct. 2 (EIRNS)—Wall Street analyst Meredith Whitney has discovered a "second-wave credit crunch." Despite the massive bailouts to the mega-banks and firms, small businesses, which primarily fund themselves through credit cards (82% of small businesses, according to Whitney) and loans from local lenders, are facing the same cut-off of credit as consumers. Credit-card lines have been cut by over $1.25 trillion in 2009, she says, and she forecasts another $1.5 trillion in these cuts coming in the near-term. Small business bank lending has been cut $113 billion in 2009—the first contraction since 1993.

Whitney notes that small businesses employ one-half of the workforce (when they are working), and produce 38% of the Gross Domestic Product.

2009 U.S. Consumer Bankruptcies Rise Above 1 Million

Oct. 2 (EIRNS)—The rate of personal bankruptcies reached the highest level since the laws were changed in 2005 to make bankruptcy far more difficult for individuals. Personal bankruptcies totaled 1,046,449 for the period, according to the American Bankruptcy Institute and National Bankruptcy Research Center. For the first nine months of 2005, the figure was 1.35 million.

Bank Credit Collapse Crunches Construction

Oct. 2 (EIRNS)—The case of Minneapolis-based Schwing Construction is a microcosm of the collapse of U.S. construction activity, the failure of the American Recovery and Reconstruction (Obama "stimulus") Act, and the intensifying contraction of bank credit in the current economic collapse. The story was reported yesterday in the Minneapolis Star-Tribune.

Schwing, one of the country's largest makers of concrete mixer trucks and concrete pumps for construction sites, has been forced into Chapter 11 bankruptcy, in significant part, by Wells Fargo bank severing its credit lines.

The company played a major part in rebuilding the Minneapolis-St. Paul I-35 bridge one year after it collapsed, and is now working on the New York City "Freedom Tower." It would be a significant player if any major public infrastructure works, like those in FDR's New Deal recovery, were being carried out by the "stimulus." But instead, Schwing's orders are have largely collapsed. Its workforce is down 80% in two years, from 660 to 130. Its revenue is 80% down from $276 million in 2007 to $65 million in 2009.

In addition, Schwing has been driven into bankruptcy by Wells Fargo Bank, which has eliminated credit lines to the company, even though they were not and had not been delinquent. First, Wells Fargo forced Schwing to pay down the main credit line, from $45 million to $21 million. Then the bank began to "sweep" Schwing's operating accounts, pulling out cash, to cut the lines further or eliminate them. Schwing went into Chapter 11 to protect itself from Wells Fargo, to try to continue to meet payroll and pay suppliers, and to be able to accept new orders without Wells Fargo seizing the prepayments.

Wagoner Was Right: Obama Policy Destroyed GM and Chrysler

Oct. 2 (EIRNS)—Rick Wagoner, the CEO of General Motors who was forced by Obama's economic geniuses to resign, is turning out to have been right on one thing: The Obama-pushed bankruptcy has ruined GM and Chrysler sales, just as Wagoner said it would. Ford's sales were down 5% year-on-year, in the September "post-clunker" collapse. GM, which a few years ago sold 350,000 units a month, went down 51% year-on-year to 150,000. Chrysler went down 53% from September 2008 to 60,000, about even with Nissan.

Lyndon LaRouche was again proven right, in that the traditional American predilection to buy American cars is finished with this collapse: The five Japanese and Korean companies now outsell the Detroit Three. Overall sales were 25% down from September 2008, 40% down from August, and heading for 10 million for the year, down 30%.

FDIC Urgently Needs $45 Billion More for Bank Failures

Sept. 29 (EIRNS)—Facing what it expects to be perhaps 100 more bank failures in the next three months, the Federal Deposit Insurance Corporation (FDIC) today demanded $45 billion in more or less immediate cash to insure those failures, from the very banking sector in which they're occurring.

The FDIC says its funds for insuring deposits of failed banks will be exhausted by the end of the year; it raised its estimate for its costs of those failures to $100 billion from $70 billion; and it projected $50 billion in those costs in the next quarter.

Chairman Sheila Bair and the FDIC board, at its quarterly meeting, adopted a Notice of Proposed Rulemaking to make banks prepay their estimated quarterly risk-based assessments for the fourth quarter, and for all of 2010-12, right away; also to raise those fees for 2011 and 2012 by 0.03%. The rule is stayed 30 days for public comment.

Bair said, "This proposal is a vote of confidence for the banking industry's resilience.... The banking industry has substantial liquidity," which she estimated at $1.3 trillion excess reserves. It is notable that at latest, nearly two-thirds of this is in interest-bearing deposits at the Federal Reserve, avoiding lending into the U.S. economy.

The FDIC acknowledged that its insurance fund will be in the red already by tomorrow, the end of the third quarter. It has said it has set aside bank-loss reserves of $22-24 billion, and Bair continues to state publicly that the FDIC has "plenty of cash" for bank failures. But this will obviously go quickly. Even the FDIC staff estimate is that the agency will have no such cash left by very early 2010. A further acceleration of bank failures in the ongoing crash of commercial real estate securities and derivatives, for one example, would blow the reserves out much sooner.

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