From Volume 36, Issue 40 of EIR Online, Published Oct. 16, 2009

U.S. Economic/Financial News

Golden Hastens Small Business Lender's Bankruptcy

Oct. 5 (EIRNS)—A year ago, Goldman Sachs investment bank notoriously siphoned $12-14 billion out of the Federal Treasury's TARP bailout facility, as a result of the credit default derivatives (CDS) contracts it had made with AIG insurance company. This "Goldman Sucks" case was one of the clearest proofs, to sane people outside Wall Street and the City of London, that financial derivatives should be outlawed from a new international credit system.

Now Goldman is sucking on billions in CDS derivatives once again, in the case of CIT Small Business Lending Corp., and may be helping drive the century-old CIT, the largest U.S. lender to small businesses, into bankruptcy. Hundreds of thousands of small retail businesses, already suffering a severe credit cutoff, would be hit harder if CIT goes under, worsening the economic collapse and intersecting the ongoing blowout of commercial real estate.

Put simply, Goldman, which is CIT's advisor and most recent lender (with a $3 billion credit line in January), has a large, CDS-based interest in a potential CIT bankruptcy. Not only would a bankrupt CIT have to pay Goldman $1 billion as "present value of the lifetime return" on the $3 billion loan; a CIT bankruptcy would also make Goldman Sachs' credit default derivatives pay off to a tune of, perhaps, as much as $3 billion more.

Latest reports are that a bankruptcy may be being "prepackaged" by banks organized by Goldman, with the loan doubling to $6 billion, and becoming debtor-in-possession financing.

A CIT bankruptcy would be a double bonanza for Goldman—just as AIG's effective bankruptcy was—while cutting off many thousands more retail businesses from credit. CIT, while in severe financial trouble, has continued lending, though it is losing money on its $30 billion credit outstanding to small businesses. The bankruptcy would also wipe out Treasury's bailout equity in CIT, a $2.3 billion loss for the TARP.

Austerity To Be Imposed on Wars, Too?

Oct. 7 (EIRNS)—Since the Obama Administration took office, Secretary of Defense Robert Gates has been warning the military services to no longer expect the high growth rate in the defense budget that has characterized the last few years. What this means for the Army was spelled out by Maj. Gen. Robert Lennox, the director of the Army's Quadrennial Defense Review Office, who is slated to become the next Deputy Chief of Staff for Resources; he spoke during a panel discussion on Army modernization at the annual conference of the Association of the U.S. Army on Oct. 5. After describing the pressures on the Army budget, he stated that "declining resources mean we may have to deal with a decade of austerity, or find smarter ways of doing business." This, despite the fact that the Army is maintaining a large chunk of its forces in combat and trying to modernize its combat brigades when they rotate home.

When Lennox was asked at what point the austerity becomes more than can be overcome with "smarter ways of doing business," he replied: "That's probably a question for the Department of Defense, Congress and the American people to address."

Nursing Homes on the Verge of Financial Collapse

Oct. 5 (EIRNS)—The entire national system of 16,000 nursing homes, which house close to 1.9 million people, is on the edge of collapse. The immediate trigger is cutbacks in reimbursements from Medicare and Medicaid—even before President Obama's proposed (Nazi-modeled) Independent Medicare Advisory Council (IMAC) is implemented.

Last week, the Centers for Medicare and Medicaid Services (CMS) enacted a Medicare rate adjustment that cuts an estimated $16 billion in nursing home funding over the next ten years, on top of state-level cuts from Medicaid. In 2008, Medicaid payments by states to nursing homes already fell short by $12 per patient per day—nearly $4.2 billion in unreimbursed costs for Medicaid-allowed expenses, according to the American Health Care Association.

"We're really teetering on the edge of what we see as the collapse of the long-term care system," Deborah Chernoff, spokeswoman for District 1199 of the New England Health Care Employees Union in Connecticut, told AP. Eli Feldman, CEO of the Metropolitan Jewish Health System in New York City, reported that his company had to lay off about 200 of its 1,000 employees at three nursing homes in Brooklyn, because the state cut Medicaid funding by 10-14%. Said Feldman: "We understand there's a recession/depression, but this is not health reform ... and the victims are basically the people who live in the facilities. The Legislature basically says, 'Too sick, too old, too bad."

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