U.S. Economic/Financial News

Could Be 'Mini-Blowup' in Credit Derivatives Over Delphi, Refco Bankruptcies, S&P Warns

"Credit default swaps on GM [following its downgrade to junk status in May] in particular caused some issues among hedge fund clients, a mini-blowup, and this could happen again in a more severe manner," Standard & Poor's analyst Tom Foley told a telephone conference call with reporters on Oct. 18. Foley then tried to calm the media by saying, "Credit risk through the derivatives markets has increased, true," for some U.S. investment banks, "but we're not overly concerned" about it because many of them, such as Bear Stearns, have made a lot of money on all this speculation, down as well as up.

Hedge Fund Manager Blasts Greenspan as 'Most Incompetent, Irresponsible Fed Chairman of All Time'

Federal Reserve chairman Alan Greenspan is the "world's biggest serial bubble blower," culpable for the looming blow-out of the financial system, says hedge fund manager Bill Fleckenstein in MSN Money. The stock market bubble of late 1990s was created by Fed's easy-money policy, not high-tech, through the "practice of bail-outs and market cheerleading," he writes. Greenspan also precipitated an even bigger, more dangerous housing bubble. "[T]he fall-out from the housing boom, the unfinished business from the stock boom, and all the derivatives he's championed for his beloved deregulated financial system, will combine to hit with full force somewhere down the road."

SEC Must Monitor Hedge Funds, Suggests Washington Post

In a front-page article in the Oct. 19 Business Section of the Washington Post, regular columnist Michael Pearlstein, discussing the scandals and lawsuits tormenting the hedge funds, wrote that this is happening at a time when "the returns from hedge funds are about to turn negative, and the flow of funds into them has dramatically slowed."

Suggesting the SEC monitor the funds, Pearlstein said: "This is not the case of a few rotten apples. It is the case of an industry that has become so rich and arrogant—and so littered with charlatans and con men—that government must step in to protect the public."

Capital Inflows into U.S. Running at Annual Rate of More Than $1 Trillion

According to U.S. Treasury Department data reported in the Financial Times Oct. 18, capital inflows into the U.S. rose to $91.3 billion in August alone. Corporate bonds led the inflows with a net $40.3 billion, up 62% from July, and double the average of the past four months. Inflows into Treasury securities were virtually unchanged from July, while purchases of agency bonds (Fannie and Freddie) and stocks fell. Capital inflows for the June-August period totalled $260.6 billion—representing an annual rate of more than $1 trillion.

Consumer, Producer Prices Inflating at Rates Not Seen Since 1990

U.S. producer prices increased last month by an "unexpectedly large" 1.9%, the biggest gain in more than 15 years, according to wire service reports from AP and Reuters. For producers, energy prices roared 7.1% in September, rates not seen since October 1990. At the producer level, gasoline increased 12.7% last month, natural gas was up 9%, liquified petroleum gas was up 24.7%, and home heating oil rose 4.8%. Consumer prices have also jumped, posting a 4.7% gain in the 12 months through September, the biggest jump since 1991.

All of these price surges point to the Weimar-style hyperinflationary eruption of which Lyndon LaRouche has been warning.

GM Selling Controlling Stake in GMAC, Accelerating Plunge Toward Bankruptcy

General Motors CEO Rick Wagoner has announced a plan to sell 51% or more—"a controlling interest"—of GM's finance unit GMAC, and will announce the buyer within 90 days; losses grew to $1.6 billion during the third quarter alone.

Sources say this is corporate looter Kirk Kerkorian's plan, and he'll end up organizing the sale. This, combined with the huge losses reported again by GM, is bringing the bankruptcy of GM auto operations (with pensions) closer. The valuation of half of GMAC might be $10 billion in cash, but that would leave GM losing money at a rate of $6 billion a year, unable to make any pension-plan payments, etc.

The Detroit Free Press headline reads, "Will Sale of GMAC Sink GM?" The No. 1 automaker's third-quarter loss was triple what was "expected" on Wall Street. GM has already lost much more in three quarters ($3.8 billion) than GMAC's anticipated profits-dividend to GM for the whole year ($2 billion). The sales incentive campaign was a complete failure, with the market share 3% lower than last year's third quarter; some of the losses were the result of plant closings and layoffs.

Wagoner also said GM would eliminate 25,000 more jobs by 2008, and close additional assembly and component plants.

GM, UAW Reach Tentative Agreement To Slash Health-Care Benefits for Hourly Workers by $3 Billion a Year

This reduction, reported in the Detroit press—the biggest labor giveback in the auto industry since Chrysler was on the brink of bankruptcy in the early 1980 —was half the $6 billion cut GM was seeking. The deal, subject to ratification vote by the United Auto Workers union (UAW), would slash GM's retiree health-care liabilities for hourly workers by about $15 billion, or 25% of the automaker's hourly health-care liability. Out-of-pocket expenses for active hourly workers would total more than $2,000.

Delphi CEO Disparages UAW 'Manual Unskilled Labor' as Unworthy of High Salaries

In an interview printed in the Wall Street Journal Oct. 17, Steve Miller, the piratical CEO of the newly bankrupt Delphi auto-parts manufacturer, declared that "The days when manual unskilled labor can deliver a $65 per hour wage are disappearing." He was speaking of UAW labor—which is anything but unskilled.

Why should this be the case? Why, it's Adam Smith's invisible hand. "We are at the mercy of forces beyond our control. Globalization is a fact of life these days," said Miller.

Meanwhile, in China, where Delphi now has many of its 35 Asian-based facilities, the auto-parts company pays a total of $3 per hour for wages, health, and pensions, as compared with about $65 in the United States. According to Delphi VP Choon T. Chon, a Korean who runs Asian operations, the cause of the problem in the U.S. is the UAW union. He tells his employees: "Our mother has a tumor. This tumor is the UAW. We know that she's going to come out of the hospital very well."

Financial Vultures Ready To Snap Up Chunks of Auto-Parts Industry

Billionaire financier Wilbur L. Ross plans to form a joint venture with the Southfield, Mich.-based Lear Corp. which produces plastics and car interior seats. Ross will hold a majority of the equity in the new firm, which he says will be the "low-cost provider" in the plastics and interior segment of the auto industry.

The Ross-Lear venture plans to immediately bid on the assets of the bankrupt Collins & Aikman Corp., an auto-interior supplier, half of whose bank debt has already been gobbled up by Ross's investment group. Claiming he wants to create a larger, more viable supplier by bringing together those that are currently struggling, Ross says his aim is to control at least 10% of the global auto-interior business. He indicated that some of auto-parts suppliers Visteon and Delphi's former businesses could also "fit" into his new joint venture.