In this issue:

U.S. Budget Deficit Roars to $54 Billion as Tax Revenues Evaporate

Congressional Scrooges Leave 1 Million Americans Without Jobless Benefits by New Year

Corporate Bankruptcies Soar in All Sectors of Economy

Dems Charge Funding Levels 'Grossly Inadequate' Despite Raid on Social Security

States Gamble on Slots Instead of Economic Growth

Bipolar Greenspan Lauds Derivatives, But Warns of Possible Meltdown

WALL STREET POLICE BLOTTER


From Volume 1, Issue Number 38 of Electronic Intelligence Weekly, Published November 25, 2002

U.S. ECONOMIC/FINANCIAL NEWS

U.S. Budget Deficit Roars to $54 Billion as Tax Revenues Evaporate

The U.S. Treasury Department announced Nov. 21 that the budget deficit for October rose to $53.99 billion, reflecting the collapse of tax revenues. This marks the first month of the fiscal year 2003 (which starts Oct. 1), and thus, the United States has started off on a very bad foot. In October of 2001, the deficit was $7.66 billion, thus a nearly seven-fold increase has occurred since last year.

Amazingly, the Treasury Department asserts, according to its own Nov. 21 statement, even after it acknowledges a deficit of $53.99 billion for October, that the U.S. government will run a mere $103.20-billion budget deficit for the entire fiscal year 2002—that is, it believes that over the combined next 11 months, the budget deficit will rise by only $50 billion. This is extreme fantasy.

Congressional Scrooges Leave 1 Million Americans Without Jobless Benefits by New Year

The House and Senate failed to approve an extension of unemployment insurance Nov. 22, the last day of the lame-duck session, thus leaving 830,000 Americans without any temporary Federal unemployment benefits as of Dec. 28, when the last extension program ends. An additional 95,000 unemployed workers per week—more than 1 million by January—will exhaust their state benefits with nothing to fill the hole. (The program was started 10 months ago to deal with skyrocketing unemployment, as new jobs failed to materialize in the non-existent recovery.)

These 830,000 Americans to be cut off from the extended benefits are people who have already exhausted their state benefits. In Indiana, at least 10,000 will have no income, as the state was counting on the Feds for help. Nationally, as of September, 1.5 million people had exhausted both their state and Federal benefits, according to a recent study released by the Center on Budget and Policy Priorities (CBPP). Thus, by Dec. 28, well over 2 million Americans will have no income protection.

The CBPP, using official unemployment figures, says long-term unemployment—those out of work for 27 weeks or longer—grew to 1.66 million in October; that is, one in five unemployed persons has been without work for more than six months. Actually, the number is much greater, since official data leave whole categories of people out of the equation.

Corporate Bankruptcies Soar in All Sectors of Economy

ENERGY

*AES, the former giant in privatized and deregulated energy markets, is trying to refinance a $300-million-plus interest payment due Dec. 16. Another $1.6 billion in debt comes due in 2003. Citigroup is leading the refinancing effort! One of their big problems is $1.4 billion in project debt that has been defaulted on in Brazil, Argentina, and Colombia—as well as possibilities that the defaults could trigger demands for accelerated repayment of the parent company AES's debt.

AES is asking bondholders to decide by Dec. 3 whether they will postpone the interest payment due date, in exchange for a partial cash payment ($650 on a $1,000 current note) and new notes for the rest of the debt at a higher interest rate (10% instead of 8.75%) maturing in 2005. And AES is offering a share of its equity in its power projects.

The local projects carry more than $17 billion in loans and notes, while AES has about $6 billion in debt.

*Reliant mentioned the possibility of seeking bankruptcy protection, in its most recent filing with the Securities and Exchange Commission. The energy trader, which provides power to 1.5 million Texas residents, has been trying to refinance all of its short-term debt, with $3.6 billion coming due before March 31.

FINANCE

*Conseco, an insurance and finance behemoth, said on Nov. 19 it would file for Chapter 11 bankruptcy protection if it can reach an agreement with creditors to restructure $6.5 billion in debt, in a filing with the Securities and Exchange Commission. The company posted a $1.8-billion third-quarter loss, including $1.2 billion in costs to write down the value of securities and goodwill—the difference between the price paid for an acquisition and its book value.

*Morgan Stanley, the investment bank, reportedly will fire 2,200 employees, in the fourth round of job cuts since the start of 2001, as stock underwriting, mergers and trading have fallen to their lowest levels in more than six years.

*Deutsche Bank is in talks to sell about $3 billion of investments to managers of its private-equity unit, supposedly to reduce risks.

*Credit Suisse may sell its unit that processes trades for securities brokers, in order to raise $1.5 billion.

TRANSPORTATION

*United Airlines, trying to get a $1.8-billion Federal loan guarantee to stave off bankruptcy, will shrink its capacity by about one-fourth, relative to where it was on Sept. 11, 2001. The nation's second-largest airline will also cut wages and benefits of salaried and management employees by $1.3 billion over five and one-half years. The second-largest U.S. airline said it will cut an additional 9,000 jobs, leaving it with 26% fewer employees than on 9/11; reduce its flight schedule by another 6%, making capacity about 23% smaller; retire 49 of its larger aircraft; and delay deliveries of at least 25 more planes through 2005 (with dire implications for Boeing).

Boeing, after slashing nearly 30,000 jobs this year, said it will cut 5,000 more jobs in 2003, as companies in the deregulated airline sector—such as United Airlines—face, or have already entered, bankruptcy. The world's biggest maker of airplanes expects to slash commercial jet output in 2003 by nearly 50% compared to 2001, to 275-285 units. Seattle, Washington will bear the brunt of the job cuts.

*General Motors will cut hundreds of jobs over the next few weeks at its Saab unit, which is expected to lose about 500 million euros for all of 2002.

OTHER

*Xerox, the world's largest copier maker, said it will eliminate 2,400 more jobs and close more plants, in order to slash spending by an additional $1 billion, as $9 billion in debt comes due over the next three years.

Dems Charge Funding Levels 'Grossly Inadequate' Despite Raid on Social Security

Due to the revenue collapse and GOP tax cuts, trillions will be taken from Social Security, and still, the funding levels will be "grossly inadequate" in the 2003 Federal budget, according to a report issued Oct. 25 by the Democratic Caucus of the House Budget Committee. The report, "Republican Budget Slashes Domestic Priorities and Spends Social Security Surplus," charges that callous shareholder-value assumptions are embedded in the Republican budget, and argues that the reason "only five of the 13 annual appropriations bills" were voted on before the Nov. 5 election, is that the GOPers didn't want their budget cuts aired during the election campaign.

"To pay for the excessive tax cuts, the Republican 2003 budget plan not only diverts $2 trillion from the Social Security Trust Fund surplus, but also assumes grossly inadequate levels of funding for domestic activity." As revenues have worsened, the Democrats expect the "cuts could grow deeper" and this analysis "may be too rosy." (Of course, the Democrats aren't doing anything to reverse this; they blame GOP tax cuts, but will not vote to rescind them.)

Some of the cuts: $4.1 billion (13%) of Federal aid for highways; $90 million from the No Child Left Behind Act; $567 million (10%) from employment and training programs; elimination of Community Access Program, which aids the under-insured and uninsured; $54 million (41.9%) from rural health programs; $402 million to eliminate AmeriCorps; $2 billion (72%) of state and local law enforcement programs; Amtrak, needing $1.2 billion, would only get $762 million, which is also $64 million less than in 2002; and $300 million from LIHEAP fuel-assistance funds for people in poverty.

States Gamble on Slots Instead of Economic Growth

Rather than getting on board LaRouche's "Super-TVA" infrastructure policy, U.S. states are buying into the delusion that gambling revenues would patch up budget shortfalls. Some examples:

*New York's Governor George Pataki (R) is expected to move full-speed ahead on a plan to build six Indian casinos, including four along border regions from Niagara Falls to the Catskills, and to install slot machines in at least five horse-racing tracks.

*Pennsylvania has legislation pending, supported by Governor-elect Ed Rendell, to authorize slots at four horse-racing tracks near the state line, dubbed "racinos."

*Maryland is looking into adding them, too.

*In Massachusetts, a commission has been appointed to study the possibility of casino gambling.

*Rhode Island has created a commission to study adding casinos to the state's two slot machine sites.

*In New Jersey, a new hotel and casino is slated to open next summer in Atlantic City; and a study is being done to make the case for allowing slot machines at two race tracks.

Slumping Sales of McMansions Signal End of Housing Bubble

Those humongous, overpriced, and under-acreaged McMansions that have been popping out of the ground all over the country, may soon go on the auction block: Falling nationwide sales of million-dollar-plus homes portend the bursting of the housing bubble. Sales of these homes fell 10% in the third quarter 2002, compared to the second quarter, as the financial-services sector has been hammered by job cuts.

In New York, apartment sales in the most expensive 10% of the market fell 18%; California, which accounts for 65% of luxury home sales, had a 9.5% drop. Bloomberg hints at the impending popping of the bubble, by calling the sales drop a "sign the housing boom may fizzle." But maybe there is some good news in all this: Those huge white elephants could be divided up into affordable rentals for deserving non-wealthy families.

Bipolar Greenspan Lauds Derivatives, But Warns of Possible Meltdown

The increasingly out-of-touch Federal Reserve chairman Sir Alan Greenspan had nothing but praise for the derivatives bubble that now threatens to blow out the global financial system. Greenspan, in a Nov. 19 speech at the Council on Foreign Relations, blithely asserted that derivatives have made the financial markets "far more flexible, efficient, and resilient." Contributing to this mythical "dispersion of risk," he said, has been the burgeoning market in asset-backed securities (ABS) such as securitized bank loans, credit-card receivables, and commercial and residential mortgages. The secondary mortgage market (Fannie Mae and Freddie Mac), by using ABS-like interest-rate swaps and options, he noted, has "facilitated the large debt-financed extraction of home equity" that has propped up consumer spending.

In a fit of bipolarity, Greenspan was forced to recognize the reality of the impending derivatives blowout, admitting that these instruments are highly leveraged, even warning that there is a possibility of "a cascading sequence of defaults that will culminate in financial implosion," requiring liquidity pumping by Fed, using its "unlimited power to create money." Central banks, like the Fed, have become, he said, "lenders of last resort." Citing the Fed's "responsibility to prevent major financial market disruptions," he acknowledged the use, in rare circumstances, of "direct intervention in market events."

WALL STREET POLICE BLOTTER

This past week, in addition to the usual suspects, more bloodsuckers in the health-care and pharmaceutical companies left their prints on the Police Blotter, joining the line-up of Wall Street scoundrels:

The Bush Administration and Thomas Scully (head of the Medicare program) have been accused by Sen. Charles Grassley (R-Iowa) and others of being too soft on Hospital Corporation of America (HCA), the nation's largest for-profit hospital cartel. It seems they were not enforcing the False Claims Act in the settlement of Medicare claims. The Department of Justice is holding up the settlement, negotiated by HCA and Medicare officials in March, for HCA to pay the government $250 million to resolve disputed expense claims that it had submitted to Medicare for treating elderly and disabled patients from 1993 to 2001.

In 1997, the DOJ conducted a fraud investigation of HCA and raided the company. HCA paid a fine of about $800 million.

Candidates for Jail: Richard Rainwater launched his Columbia Healthcare looting scam with Richard Scott. Hospital Corporation of America (HCA) was founded in 1968 by former Kentucky Fried Chicken owner Jack Massey, Dr. Thomas Frist, Sr., and Thomas Frist, Jr., who bought up hospitals and then shut them down to enforce "shareholder value." When Columbia merged with HCA in 1994, Scott took over as CEO (Frist, Jr. again became CEO in 1997). Scott was prosecuted for fraud. Senator Bill Frist, Columbia/HCA's man in Congress, promoted legislation to cap Medicare expenditures and privatize the program. Tom Scully was the head of the Federation of American Hospitals, a for-profit healthcare lobbying group.

The Securities and Exchange Commission announced an informal inquiry into the steep fall in Tenet Healthcare's stock amid unusually high trading volume. Over the past three weeks, the second-largest for-profit hospital chain has seen an FBI raid at one of its California hospitals over unnecessary surgeries; a Medicare audit into special reimbursements paid to Tenet to handle costly cases; and an inquiry by the Federal Trade Commission into one of its hospital mergers.

Candidates for Jail: Jeffrey Barbakow, former investment banker at Merrill Lynch and Donaldson, Lufkin & Jenrette, became chairman and CEO in 1993, embarking on an acquisition binge.

*Credit Suisse First Boston and Citigroup are facing fines of $200 million each to settle conflict-of-interest investigations. Ten other firms face fines ranging from $120 million to $150 million. The case became public last April when New York Attorney General Elliott Spitzer released e-mails showing that Merrill Lynch analysts privately disparaged stocks which they were publicly promoting. Merrill settled last May, for $100 million, and that fine is being used as a benchmark for the others. Regulators met in New York on Nov. 18 to determine exact penalties before presenting them to the brokerage firms.

A complaint filed by the California State Teachers Retirement system, as part of an ongoing lawsuit against Homestore.com, alleges that Homestore and AOL Time Warner conspired to inflate revenue of both companies, by creating three-way transactions that used bogus advertising buyers as intermediaries. Sources involved in a Federal investigation of AOL Time Warner say the complaint is based on information provided by three former Homestore executives who pleaded guilty and are working with investigators.

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