From Volume 37, Issue 17 of EIR Online, Published Apr. 30, 2010

U.S. Economic/Financial News

Goldman Sachs Model Was Not Unique: Introducing Magnetar

April 21 (EIRNS)—Two weeks ago, before the news of the SEC charges against Goldman Sachs—for having designed their own mortgage CDO to fail—investigative website ProPublica released a report which documented the same exact process, this one involving the Chicago-based hedge fund Magnetar. Magnetar, the astronomical name for a collapsed star which has become a black hole, capable of consuming galaxies, named its funds after ... the galaxies.

Magnetar was created in 2005 by Alec Litowitz, a whiz-kid trader who struck out from Chicago hedge fund Citadel Investment. Litowitz and New York recruit David Snyderman quickly zeroed in on the "equity" portion (the "junk bonds," if you will) of the mortgage CDO market. Equity was the hardest "tranche" (CDO segment containing the poorest-performing loans) for the banks to sell, but after collecting $1.7 billion of investor money, Magnetar put out the word: "We're buying." In doing this, Magnetar actually helped perpetuate the bubble which Greenspan had created.

At its height, Magnetar was consuming about a third of this "toxic waste" portion of the CDO market—deals eventually amounting to $23 billion—with Wall Street's biggest banks virtually kissing their feet for buying the stuff. (Magnetar's first fund, Orion, involved Deutsche Bank, who brought in the "small German bank" IKB.) In an article just before the collapse of market, in March of 2007, Business Week put Magnetar near the top of their "Who Will Get Shredded?" list.

What nobody knew, but soon found out, was that Magnetar, like Goldman Sachs and John Paulson's hedge fund, was betting that their own investments would go bad. Even as the market began to collapse, Magnetar continued making deals, but they finally succeeded in creating one, "Tigris," in March of 2007, which was so bad that rating agency Moody's refused to rate it. Tigris was eventually sold to Japanese bank Mizuho, with Magnetar pocketing $450 million.

In 2007, founder Alec Litowitz was rated as making $280 million; Magnetar's central Constellation Fund was up 76% for the year; its "assets under management" had grown to $7.6 billion (a 300% increase in two years); and its two top traders were given "Trader of the Year" honors. Today, Litowitz has been informed that the SEC is "looking into" the Magnetar deals, and an ongoing suit between Merrill Lynch (as fund seller) and Dutch Rabo Bank (as the "sucker" buyer), involves a collapsed fund, "Norma," created by Magnetar. But for now, they are still in "business."

300,000 Teacher Jobs May be Cut Nationwide

April 22 (EIRNS)—April is the month of reckoning in the U.S. for planning the next school year, and the latest nationwide projection for loss of teacher jobs is 300,000, as localities hopelessly try to "adjust" to their shrinking revenue as the economy collapses. Programs of all kinds are being eliminated (athletics, music, foreign languages), as well as class hours.

Local staffing for the current school year was propped up by the 2009 Obama "stimulus" funds of about $1 billion, now running out. The Obama solution is talk of more "stimulus" and mockery about rewarding only "quality" teachers.

State teacher lay-offs slated:

New York—15,000 teachers and staff.




New Jersey—6,000


Protests are occurring almost daily. Yesterday, 15,000 education staff and supporters rallied in Springfield, Ill.—the biggest demonstration there in 25 years. Also yesterday, hundreds of Teaneck (N.J.) High School students staged a walkout, and marched on their football field to protest athletic cuts.

Part of the mass-strike activation, the stated purposes of the rallies range from no tax hikes, to no budget cuts, to just, "No." For instance, in New Jersey, in local votes for school budgets on April 19, 58% of all localities turned down their proposed school budgets—a 35-year record number of "No's"—mostly because they didn't want more tax hikes, and wanted teachers to take pay cuts. Now the governor and others are implementing drastic cuts.

Conrad Attempts to Impose Obama's 'Fiscal Commission' in Advance

April 21 (EIRNS)—Budget Committee chairman Sen. Kent Conrad (D-N.D.) today introduced a five-year budget resolution for FY2011-15. Conrad is in line with the "Peterson Commission" idea of Wall Street oligarch Peter Peterson, to impose draconian austerity on the American people after Wall Street is bailed out with trillions. "The [Federal] debt is the threat" is Conrad's jingle-slogan. He and Gregg teamed up with British puppet President Obama to try to get Congress to vote away its budgetary power to such a commission. That failed in January.

Now Conrad has introduced the same quackery in his budget resolution, extending Obama's freeze on "all" non-security discretionary spending for three full years, through FY2013. Conrad's budget draft cuts spending by $671 billion more (or 1.6% of GDP more) than Obama's budget. The Committee for Economic Policy Research (CEPR) estimated that this means Conrad would cut total American employment, by FY2015, by 2.3 million jobs below even the mass unemployment Obama is satisfied with.

Conrad says his budget already meets the Obama Deficit Commission's target, of lowering the Federal deficit to 3% of GDP by FY2015. This, though he doesn't say so, is the globalist European Commission's so-called "Maastricht rule" straight-jacket on national legislatures.

But, he bragged, his three-year freeze doesn't apply to quite "all" discretionary spending. "Green energy" spending, which he and Obama favor, is "funded in this budget at $500 billion more than President Obama's request." No expense too great to charge to Americans, in order to force their energy use down! And as for the Iraq and Afghanistan wars, Conrad's bill would increase spending by $20 billion immediately.

The Conrad proposal also contains a $2 billion so-called "budget reconciliation instruction." This sets up the use, again, of "reconciliation" tactics on the floor of the Senate to pass highly controversial and ideological legislation with just 51 votes. Conrad intoned that "it will be used only for debt reduction." He knows that's not likely to be true. The likely intended beneficiary is Obama's global-warming "cap-and-trade" legislation.

Reich Takes Dodd to Task: Glass-Steagall Is Necessary

April 21 (EIRNS)—Calling Senate Banking Committee chair Chris Dodd's so-called Wall Street reform legislation "a very small step," former Clinton Labor Secretary Robert Reich says the Glass-Steagall repeal of 1999 has to be reversed.

In a syndicated column on April 21, Reich demanded: "Resurrect the Glass-Steagall Act in its entirety so commercial banks are separated from investment banks. The current bill doesn't go nearly far enough. Commercial banks should take deposits and lend money. Investment banks should be limited to the casino we call the stock market, helping companies issue new issues and making bets. Nothing good comes of mixing the two. We learned this after the Great Crash of 1929, and then forgot it in 1999 when Congress allowed financial supermarkets to do both."

Reich's other demands are for breaking up banks of over $100 billion in assets; and requiring all derivatives to be traded on clearinghouses or exchanges.

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