U.S. ECONOMIC/FINANCIAL NEWS
U.S. Corporate Debt Defaults Grow
The combined total of U.S. corporate debt, which is classified as being either in default, or in distress, has risen nearly $200 billion during this year, to $879 billion. This amount is greater than the combined Gross Domestic Product of all but eight nations in the world.
All of this debt is now classified as junk-bond status, though the bonded debt of some companies did not start out that way, but, as in the cases of WorldCom or Adelphia, was only downgraded to junk-bond status shortly before, or at the point that, these companies filed for bankruptcy. Debt is considered to be in default when the issuer company stops making interest payments on the debt. Of the above-mentioned $879-billion debt figure, $389 billion represents defaulted debt, and the rest, debt that is "distressed." In dollar volume, the 12-month default rate, that is, the percentage of all U.S. corporate bonded debt that is in default, is 15%, the highest rate ever. Further, the defaulted bonds are trading at only 18 cents on the dollar, which is far less than the historical average of defaulted debt of 42 cents on the dollar.
Soaring Personal Debt, Based on Housing Bubble Worries Some on Wall Street
It's not only corporate debt that has Wall Street biting its nails: In an article headlined "Debt Problems Hit Even the Wealthy Biggest Surge in Borrowing Is Among Those with Highest Incomes; Liquidating the 401(K)," the Wall Street Journal Oct. 9 telegraphs the worst fears of the financial establishment. It reports a fact well-known to EIR readers: "Household debt has ballooned to more than 100% of disposable income, ... the highest percentage on record," the Journal notes, with an almost audible tremor in its voice. Yet, despite "auto repossessions, personal bankruptcies and mortgage foreclosures [being] at or near [their] highest levels in decades," as long as the interest rates can be kept in check, while the housing bubble remains afloat, then, the Journal sighs hopefully, "the wealthiest are able to manage their higher debt loads."
Just how crucial the housing bubble is to this pyramid scheme, is indicated by Federal Reserve data showing that "debt for the top-fifth of U.S. households hit 120% of disposable income in the first quarter" of 2002. The piling on of debt by the wealthy is possible due to "increased borrowing against the value of their homes." When the housing bubble pops, this debt bubble will go poof. The debt burden for the bottom four-fifths of households rose to 80% of disposable income in the same period, the WSJ reports.
Port Lockout Continues To Send Ripples Throughout Economy
Both Honda and Toyota automakers have warned that future U.S. sales could be hurt by the West Coast port lockout (see INDEPTH article, "Port Lockout: Straw To Break Economy's Back?"), despite the reopening of the ports under a Taft-Hartley injunction, according to Bloomberg News Oct. 11. Honda is suspending production at two U.S. plants and one Canadian factory this week because of continuing parts shortages. Toyota reports that their U.S car and truck sales may fall 15% this month. Among retailers, The Gap (clothing) says delays in getting merchandise into stores may lower fourth-quarter profits as much as 7 cents a share.
Meanwhile, relations between the Pacific Maritime Association and the International Longshore and Warehouse Union continue to be tense as the ports remain log-jammed due to the 10-day management lockout. The PMA continues to seek "normal" productivity levels while the union insists these are impossible, given the conditions at the ports. ILWU national spokesman Steve Stallone was quoted in the Fremont, Calif. Argus, describing the chaotic and dangerous situation on the docks faced by returning longshoremen: "[T]he infrastructure is cracking already ... but of course that will become our fault."
Wall Street Braces for Deepest Job Cuts Yet
"Wall Street braces for deepest job cuts yet," the Wall Street Journal wrote Oct. 8, as the bear market continued its rampage on The Street. Since the end of 2000, the nation's securities firms have laid off 32,287 employees, or 8.8% of their workforce, with no end in sight. Credit Suisse First Boston's announced 1,700 job cuts Oct. 7, following JP Morgan Chase's earlier news that it is considering 4,000 layoffs, or 20% of its investment-banking department workforce.
Wall Street executives, it notes, hoped "to hold on" to employees, "betting that the bear market would lift." But now, after mergers-advisory work is down 43% to $351 billion, from $616 billion in 2001, global underwriting volume fell 12.6% to $774 billion in the 3Q over last year's 3Q, and only seven public offerings were made in the 3Q just concluded "the fewest since 1980" writes the Journal, the executives are "waving the white flag and handing out the pink slips."
Thousands More Added to Jobless Rolls
Reflecting the collapse of the manufacturing sector worldwide, the following companies announced new rounds of layoffs:
*GE Aircraft Engines, a division of GE, will cut 1,000 jobs this year, and 1,800 next, at its Evendale, Ohio plant, as a result of the drop in orders for new engines by the airlines.
*Raytheon will cut 500 workers in its Massachusetts and California plants, due to having lost a satellite contract.
*Corning Inc. says its ailing fiber-optics business will require more job cuts and may close plants in North Carolina, Germany, and Australia. It earlier announced it would idle four optical-fiber plants this fall and has already cut 4,000 jobs this year, on top of 12,000 last year.
*Lucent Technologies, the struggling telecommunications company affiliated with Bell Labs, will lay off 10,000 people between now and March, leaving the total workforce at 35,000, down from its peak of 155,000 a few years ago. The new cuts were prompted by Lucent's expectation of a $2.2-billion loss for its fourth quarter, which ended Sept. 30 its ninth consecutive quarterly loss.
*Maytag Corp. will close its Galesburg, Ill. refrigerator-production plant, resulting in 1,600 layoffs. A company spokesman said the plant can no longer compete with its competitors, who have moved production to Mexico.
United Airlines Bankruptcy Still Threatens as Union Deal Falls Through
United Airlines, the nation's second-largest air carrier, has for two months been trying to stave off bankruptcy by winning $9 billion in concessions from its five unions, along with other expenditure cutbacks. But on Wednesday, the International Association of Machinists (IAM) withdrew from a union coalition, to independently negotiate its workers' concessions. United has asked for $9 billion, but the unions counter-offered $5 billion. The union employees own 55% of the company and hold two seats on the Board of Directors their payoff for bailing out the company in 1994 all of which would be lost in bankruptcy.
Labor and creditor concessions are conditions for United to get a $1.8-billion Federal government loan guarantee.
United faces a series of debt payments in the weeks ahead. On Nov. 1, it must pay $41 million in interest payments on two bonds. In November and December it must also pay $945 million on accrued debt.
In the last 18 months, United has racked up nearly $3 billion in losses, and next week is expected to announce huge third-quarter losses.
The airline industry is being asked by the FAA to improve flight programs and security, a big component of which requires purchase and installation of new screening machines at $1 million each. These expenditures are estimated to amount to $11 billion (over the next 10 years) yet the industry is expected to lose $7 billion this year.
Handwriting on the Wall for JP Morgan Chase, But It's Not Alone
JP Morgan Chase is in a death spiral, and will have to find a merger quickly to avoid public catastrophe, in the estimation of EIR economist John Hoefle. Morgan Chase's stock fell to $15.45 on Oct. 9, dropping its market cap to $30.8 billion (from a peak of $106.5 billion), The blood is in the water, and if Morgan is not already having problems finding counterparties for its derivatives deals, it soon will be, whatever Fed guarantees it might have. There have been rumors that Morgan would be merged with Citigroup, but Citi has its own problems and CEO Sandy Weill appears to be fighting for his life.
Morgan Chase, which has not yet reported its third-quarter numbers, has announced it will write off $1.4 billion in loans for the quarter, and said overall trading revenue in July and August was $100 million, compared with $1.1 billion in the second quarter.
To help cut expenses, Morgan Chase will lay off about 4,000 of its 20,000 investment bankers, Bloomberg reported Oct. 4. With these cuts, the bank will have cut 14,000 people since the merger.
Morgan is not alone in the meltdown sweepstakes. Charles Schwab is down 82% from peak; Morgan Stanley is down 72%; Merrill Lynch is down 60%; Goldman, Sachs, 54%; Citigroup, 50%; Lehman Bros., 48%; and Bear Stearns, 45%. Merrill, which has already cut 15,000 jobs, is preparing further cuts, according to Bloomberg.
Merrill Lynch Dumps 75% of Nasdaq Holdings
In yet another sign of the doom of the "New Economy," Merrill Lynch announced it will stop trading 75% of the Nasdaq stocks it holds. With more than one-third of the Nasdaq listings now trading below $5 per share, and dollar volumes crumbling by 35% in the first half of this year, Merrill Lynch sees no incentive to deal with these loser-stocks.
Gallows Humor Reflects Mutual Fund Disaster
"How do I get my mutual fund manager down from the tree? Cut the rope!" That's the joke making the rounds of Wall Street these days, reflecting the damage done to the funds in the third quarter. Fewer than 1% of all mutual funds were in the black during the quarter, and the average equity (stock) fund fell 17.5%, the second-worst quarterly drop since 1987, according to the Washington Post Oct. 7. Even real-estate and gold funds, which tend to fare better in troubled times, lost money. Only the bear funds, which make their money by betting stocks will decline, had a good quarter. The total value of assets in equity mutual funds dropped more than 16% in the quarter, to less than $2.2 trillion, while the value of bond funds rose 4%, according to AMG Data Services president Robert Adler. During the quarter, investors shifted an unprecedented $51.1 billion out of equity funds, and $43.5 billion into bond funds, Adler said.
Half of All U.S. Households Own Stock, As Markets Topple
Nearly half (49.5%) of all American households owned stock at the beginning of 2002, up from 48.5% in 1999, according to the latest "Equity Ownership in America" survey, published in September by the Investment Company Institute and Securities Industry Association. Some 52.7 million households and 84.3 million individuals owned stock, up from 49.2 million and 78.7 million, respectively, in 1999. The number of households with investments in stock mutual funds rose 12.4%, to 47.0 million from 41.8 million, during the period, with households owning stock inside employer-sponsored retirement plans rising 16.5%, to 33.2 million from 28.5 million, while those outside of employer-sponsored retirement plans rose 3.2%, to 28.8 million from 27.8 million. The number of households owning individual stocks declined 4.9%.
The majority of stock investors own equities through employee-sponsored retirement plans. Sixty-six percent of equity investors owned stock mutual funds in employer funds, and 17% owned individual stock (including employer stock), the survey said.
WALL STREET POLICE BLOTTER
*Massachusetts securities investigators say they have found the proverbial "smoking gun" in the Credit Suisse First Boston (CSFB) case: internal documents and e-mails which show that the investment-banking subsidiary of Credit Suisse demanded fees in exchange for positive stock ratings. "This is clearly a smoking gun in the area of criminal responsibility, especially as it pertains to Mr. Quattrone," said Massachusetts Secretary of State William Galvin, the state's top securities regulator. Frank Quattrone headed CSFB's Silicon Valley operation, a leader in the high-tech IPO business.
*Buford Yates, former director of general accounting for WorldCom, pleaded guilty to securities fraud and conspiracy, for his role in hiding more than $7 billion in expenses to make the telecom giant appear profitable, saying he was instructed by supervisors to make "adjustments" to the company's books. He has agreed to cooperate with investigators against his former bosses.
Yates said in Federal court in Manhattan that he knew the wrong information would be reported to the Securities and Exchange Commission.
Sentencing was set for Jan. 9. Yates, if convicted of both charges, faces up to 15 years in prison and more than $1 million in fines.
*The U.S. Attorney's Office in New Jersey announced Oct. 9 that it has opened an investigation into whether Bristol-Myers Squibb, one of the nation's biggest pharmaceutical firms, improperly inflated sales figures, in a scheme involving discounts to wholesalers. The SEC opened a civil investigation of the same issues in August.
*Two more Worldcom executives pleaded guilty Oct. 10 to Federal charges of securities fraud and conspiracy: Betty Vinson, former director of management reporting; and Troy Normand, former director of legal entity accounting, each pleaded guilty, in U.S. District Court in Manhattan, to the charges, admitting that they helped inflate WorldCom's earnings by concealing expenses. Vinson said that she was ordered by her supervisors to make accounting "adjustments." She and Normand are cooperating with Federal prosecutors, who are building a case against ex-CFO Scott Sullivan and ex-chairman Bernard Ebbers.
Vinson faces a maximum sentence of 15 years in prison, which may be substantially reduced for providing testimony in the case.
The Securities and Exchange Commission filed a complaint against Vinson and Normand, accusing them of violating anti-fraud reporting rules and of aiding and abetting the WorldCom fraud.
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