U.S. Economic/Financial News

Securitization of Mortgages Drives Foreclosure Wave

June 7 (EIRNS)—In a Reuters review, Wall Street gurus clearly acknowledged the truth Federal regulators have been dancing around: The massive securitization of mortgages since 2000 is now driving the "foreclosure tsunami," and blocking the renegotiation of defaulted mortgages to save homes. This brutal fact has also been seen in the fight between Bear Stearns investment bank and a group of hedge funds, led by the Paulson fund. The hedge funds have bought masses of the mortgage-backed securities (MBS); the investment banks and servicing banks, on the other hand, are now under Congressional pressure to renegotiate mortgages to avert foreclosures.

Banks and mortgage companies made profits multiple times on the massive wave of subprime, "Alt-A," adjustable-rate, and other unconventional mortgages, first by charging higher interest rates to home buyers, and then by packaging and reselling the mortgages as securities. Now the legal covenants of those securities prevent renegotiating the mortgage terms and payments, according to MBS "inventor" Lewis Ranieri, and other mortgage experts interviewed by Reuters. "Once you sell it [securitize the loan], the accounting says you can't go back and touch it," a Rice University professor told the news service. The securities holders—hedge funds, private equity, and other kinds of funds—can block renegotiation, which can't even be proposed until the underlying mortgage is in default.

The research firm Housing Predictor, Inc., based on a survey of 100 U.S. metropolitan areas in May, has forecast 2 million more foreclosures nationally, essentially agreeing with an earlier forecast by the Center for Responsive Lending, of a wave of 2.2 million more foreclosures coming. This would take the 2006-09 foreclosure "tsunami" to 3 million, larger than the one which hit when the U.S. savings and loan bank sector collapsed in the middle 1980s.

Only Federal and state legislative action can halt this wave.

Machinists Demand U.S. Manufacturing Policy

June 6 (EIRNS)—Tom Buffenbarger, the president of the International Association of Machinists and Aerospace Workers (IAM), called on Senate Democrats to treat the collapse in manufacturing as an economic epidemic.

"We cannot afford to be anesthetized by incremental improvements in one index or another," Buffenbarger said at a June 6 meeting of the American Manufacturing Initiative of Senate Democrats. "Since 1999, we have lost over 43,000 manufacturing plants and more than 3.2 million good-paying American jobs. No economy can continue to absorb that kind of damage and hope to survive," he warned. Buffenbarger spoke as part of a day-long session held by the Senate Democratic Steering and Outreach Committee, chaired by Sen. Debbie Stabenow (D-Mich.), entitled "Open Discussion on American Manufacturing."

While others attending the conference, including the CEOs of the automakers, complained about the high cost of health care, Chinese currency, and Korean trade policies, and offered alternative fuels as a so-called solution, Buffenbarger called on the committee "to lay the foundation for a national industrial policy that will put the brakes on this epidemic of job losses." He called for tax incentives to renovate and retool older factories, as well as education for high school graduates, and putting a "tourniquet on trade deals and tax breaks that are killing jobs and hope for so many American families."

Outside of the conference, members of the LaRouche Youth Movement were educating Democratic Senators on Lyndon LaRouche's capital budget and the Russian proposal to build the Bering Strait Tunnel as both a war avoidance policy and an economic recovery policy.

Reactors to China Bring Skilled Jobs to Pennsylvania

June 2 (EIRNS)—A preliminary order for just four of what may be hundreds of nuclear plants to be built in China, is immediately bringing 2,000 highly skilled jobs to the Pittsburgh area, according to a Pennsylvania official of the National Machine Tool Association (NMTA). "A world nuclear renaissance is the one chance to revive the machine-tool industry in this country," he said.

China's National Development and Reform Commission (NDRC) said on May 27 that the country has plans to increase its nuclear power capacity 20-fold, to over 150 gigawatts. China has ordered four ABWRs (advanced boiling-water reactors) from Toshiba Corp., the owner of Pittsburgh-based Westinghouse Nuclear Corporation, which will hire 2,000 new employees including newly trained machinists.

The work on the reactor elements will involve and expand a score of small and medium-sized machine-tool companies in the Pennsylvania area, as contractors, even though the United States has completely lost the capacity to build some major elements of the reactors, including generators and pressure vessels. The NMTA official told EIR that because of this huge loss of machine-tool production and capacities, he feared the U.S. industry would "see all this nuclear construction go away" to other nations. "But it's our one big chance," he said.

The largest potential nuclear-plant order currently in the United States, for the preliminary design of up to five 1,200MW reactors by the TXU electric utility in Texas, has gone to another Japanese company, Mitsubishi.

The U.S. economy has lost major parts of its most important machine-tool industrial capacities, in allowing nearly half the aerospace industry's capacity to shut down after 1990, and in the collapse and drastic shrinkage of the domestic auto industry, while Congress has not lifted a finger to intervene.

Rail Shipments Fall as Hedge Funds Buy Rail Stocks

June 5 (EIRNS)—In another marker of the disintegrating U.S. economy, shipments of most industrial and construction products by Class 1 railroads fell sharply in the first quarter of 2007, according to sources familiar with the industry. The most notable collapse was in auto and auto-parts shipments, which are a major component of freight railroads' business, and which were nearly 10% lower than a year earlier. But coal shipments; lumber, cement, and other construction materials; plastics; and steel shipments all dropped.

This reversal hits the Class 1 railroads just as a group of notoriously "activist" hedge funds had bought major positions in their stock. TCI Fund Management, Fortress Fund Management, and Atticus Capital Partners, along with Warren Buffett's Berkshire Hathaway funds—had all just taken significant stock holdings of the Class 1 railroads across the board: Burlington, Northern and Santa Fe, Union Pacific, CSX, Norfolk Southern, and Kansas City Southern Railroad. Outright takeovers are rumored.

The profits of these railroads had been up between 11% and 18% in 2006, and totalled $42 billion—indicating what an abrupt collapse is represented by the first quarter 2007 freight shipments.

Bubble Bursts: Unsold Housing Inventory Up 29%

June 6 (EIRNS)—The housing bubble is bursting. The number of homes listed for sale in 18 major U.S. metropolitan areas at the end of May rose by 5.1% in just one month, according to real-estate brokerage firm ZipRealty Inc.—named for the speed of turnover it once enjoyed on its transactions.

Compared to May of 2006, combined inventory was up a sharp 29% for the 15 cities for which such comparisons were available, the firm reported. A further drop in prices is expected as a result.

Meanwhile, the National Association of Realtors conceded somewhat to the reality of the collapse, saying drops in home sales and prices are going to be worse than originally forecast. Sales of existing homes are now expected to fall by 4.6% to an annual pace of 6.18 million units in 2007, down from 6.29 million units it estimated last month. NAR also predicted that the median sales price will decline 1.3%, worse than the 1.0% drop it forecast previously.