U.S. Economic/Financial News
Bush Goes To Bat for Enron's Bankers
June 13 (EIRNS)The Bush Administration is opposing shareholders' lawsuits against several major banks over their role in the Enron corporate fraud case. According to AP June 12, in a split with the Securities and Exchange Commission (SEC), President George W. Bush argued that only the SEC should file lawsuits. The issue arises in an upcoming case before the Supreme Court.
The securities fraud case filed by investors in Charter Communications, has big implications for the lawsuit filed by Enron shareholdersbacked by 33 state attorneys general and state securities regulatorswho argue that Merrill Lynch, Barclays, and Credit Suisse Group should be held equally liable with Enron for its massive accounting fraud. Bush sent his message about reducing "unnecessary lawsuits" via deputy White House counsel to Justice Department Solicitor General Paul Clement, who declined to file court papers. The SEC had voted 3-2 to ask the solicitor general to file a friend-of-the-court brief on behalf of the shareholders.
New Senate Bill May Curb Vultures' Appetite for IPOs
June 16 (EIRNS)Private equity and hedge funds pondering going public in order to benefit from a federal tax loophole in the Internal Revenue Code, may have to think again, if a bill introduced into the Senate Finance Committee June 14 is passed. Senate Bill 1624, sponsored by Sens. Max Baucus (D-Mont.) and Charles Grassley (R-Iowa), would require such funds to be taxed at the corporate level of 35%, instead of the 15% enjoyed by public partnerships deriving 90% or more of their income from passive investments (rents, royalties, dividends, interest, sale of capital gains).
According to Senator Baucus, in his remarks introducing the bill: "This year, some private equity and hedge fund management firms are attempting to qualify for partnership tax treatment. They seek to do so even though they derive virtually all of their income from providing asset management and financial advisory services. These management firms argue that they are able to achieve this result by claiming that all of their income from asset management and investment advisory services is passive. But objective observers would say that this income actually arises from active businesses. Congress's intent in 1987 was to treat such publicly traded partnerships as corporations. In the legislation that we introduce today, we seek to ensure that Congress's original intent is carried out."
While the highly technical language in the bill does not mention private equity funds or hedge funds, which are known internationally as "locust" or "vulture" funds, Baucus's introductory statement hits its mark, and cheerleaders for the funds are gearing up to stop the bill.
Bear Stearns Faces Collapse of $6 Billion Subprime Unit
June 14 (EIRNS)Bear Stearns issued $4 billion in Mortgage Backed Securities (MBSs) June 14, in a desperate effort to shore up its losses in the subprime blowout. Two of its funds are in trouble, and if both close, as expected, then a subsidiary of Bear Stearns, Everquest Financial, could go belly-up, just as it was about to conduct an IPO!
One of the endangered funds, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, has $640 million in invested capital, plus $6 billion in borrowed capital, mostly from Goldman Sachs and Bank of America. It could be liquidated if the $4 billion MBS sale fails. The fund has lost 23% this year through April, and has blocked investors from further requested withdrawals of about 40%.
The Wall Street Journal today notes that Bear Stearns' $4 billion sale is "a sliver of the $7 trillion residential mortgage-backed bond market, but it is still a large amount to be sold at one time, and a potentially troubling sign for the broader mortgage-backed bond market." Bear Stearns is expected to report a 6% drop in earnings in the second quarter over last year.
The Mortgage Bankers Association reported a record level of delinquencies in the subprime sector in the first quarter: 15.75% of all subprime ARMs are 30 days-plus delinquent, up from 14.44% in 2006 fourth quarter, which was already the highest on record. The subprimes going into foreclosure (usually over 90 days delinquent) in first quarter were 3.23%, up from 2.70% the previous quarter, and the highest on record. This surveys 5-6 million subprime mortgages "worth" about $1.5 trillion; and is an out-of-date snapshot. May will look even worse.
It's Not Just Bear Stearns
June 15 (EIRNS)Wall Street's highest flyer, Goldman Sachs, reported June 14 that it had suffered a 24% drop in its fixed income (mortgages, bonds), currency, and commodities revenues for the second quarter of 2007, largely due to the collapse of the subprime mortgage market. Combined with losses from its biggest hedge fund, Global Alpha, Goldman Sachs profits for the second quarter were a mere 1% better than fellow Wall Street company Bear Stearns' 33% second-quarter drop in profits and emergency sell-off, but still a far cry from what their clients and investors expect from them. Not to be left behind, the quasi-governmental mortgage giant Freddie Mac reported a $211 million loss for the first quarter, after it had to write down the value of its mortgage derivatives.
Greenspan: 'Enjoy It While It Lasts!'
June 14 (EIRNS)The rapid rise in interest rates is spreading terror in financial markets, Times Online reported (June 14). Julien Garrel, chief investment strategist at Legal & General, said that the 65 basis point jump in yields on global bonds over the past month is the most dramatic rise since 1994, after the Mexican debt crisis. In the UK, over 800,000 mortgages known as "two-year fixed rate" (i.e., ARMs, re-adjusting every two years), are now up for renewal and facing a serious "repayment shock," as ten-year gilts rose to a seven-year high of 5.54%.
Alan Greenspan, speaking in New York, acknowledged the crisis, and said the boom in liquidity couldn't last forever, so "enjoy it while it lasts!"