U.S. Economic/Financial News

Mortgage Rate Increase Could Bring on a 'Bloodbath'

June 20 (EIRNS)—A panicked Mark Kiesel, an executive at the $678 billion Pimco, the California-based fund manager, warned June 20 that a half-percentage point increase in the 30-year mortgage rate over the past five weeks—from 6.15% to 6.74%—is creating the conditions for a "bloodbath." The rate increase, combined with stricter lending standards for subprime mortgages, means that millions of people will no longer be able to stay in their homes, Kiesel said, warning that the worst is yet to come.

Nouriel Roubini, a former Treasury Department director in the Clinton Administration, told Bloomberg June 20, "It's not just a housing recession anymore. It looks more and more like an economic recession." Kiesel told Bloomberg News that he is sure the housing crisis will drive the U.S. economy into recession, but then foolishly suggested that it could be stopped if the Federal Reserve would just cut its benchmark rate "at the first surge in unemployment."

Rangel To Hold Hearings on Taxing Private Equity Funds

June 21, 2007 (EIRNS)—House Ways and Means Committee chairman Charles Rangel (D-N.Y.) plans to hold hearings on the private-equity tax rate after the Congress returns from the July 4 recess, the New York Times reported today. "While the Senate has outlined their own unique approach on these issues, the House is not bound to consider identical legislation—especially as it pertains to the transition rules," Rangel said.

Rangel was referring to the five-year delay in taking effect, of the Senate's proposed Baucus-Grassley legislation, which would make private equity managing partners—many of them fabulously rich from income taxed at 15% at most—pay the corporate tax rate of 35%. In addition, the Baucus-Grassley bill would apply only to private-equity funds which have sold stock to the public—so far, only Fortress Capital and Blackstone Partners.

Vermont Rep. Peter Welch (D) has introduced a bill similar to the Baucus-Grassley Senate Finance bill, but with one notable exception: It drops the transition clause, and would take effect immediately on becoming law.

Senate Finance Committee chairman Max Baucus (D-Mont.) says that he is open to shortening the transition period in his bill.

Panic on Wall Street To Plug the CDO 'Catastrophe'

June 23 (EIRNS)—Peter Schiff, president of the Connecticut-based Euro Pacific Capital, warned about a potential "catastrophe" in the CDO (collatoralized debt obligations) markets, due to the Bear Stearns hedge fund collapse.

"As long as these CDO bonds stay off the market, as they universally have, asset managers have the luxury of 'marking them to market,'" Schiff wrote in a research note, reported by Dow Jones on June 21. "Not surprisingly, using this method, the vast majority of these bonds are valued at par or greater." But if the Bear Stearns bonds were auctioned in the open market, their real values would be exposed. "This would force other hedge funds to similarly mark down the value of their holdings. Is it any wonder that Wall Street is pulling out the stops to avoid such a catastrophe?" Schiff wrote.

Worse than the impact of hedge fund losses, would be the impact of an open market auction of subprime CDOs. "Their true weakness will finally reveal the abyss into which the housing market is about to plummet," Schiff wrote.

Delphi, UAW Reach Lose-Lose Pact on Wage Concessions

June 23 (EIRNS)—U.S. auto parts manufacturer Delphi, and the United Auto Workers union reached agreement June 22 on contract negotiations, including large wage and benefit cuts, although neither party is going public with the details until after the contract is voted on by the 17,000 UAW members next week. Vulture funds looking to buy Delphi out of bankruptcy had been pushing for beginning wages to be lowered to $12 per hour, but sources told the Wall Street Journal that the final deal will probably set beginning wages at $14 per hour, just half of what the workers presently earn. GM, formerly the parent company of Delphi, says it will commit $300-400 million annually to bridge the wage gap between what Delphi will pay and what the UAW wants. Workers would also be eligible to move to open jobs at GM, or take a retirement option.

Part of the deal allows Delphi to close seven plants, while keeping four open and selling the rest, according to Bloomberg.com.

Default Security Abandoned in Corporate Debt Bubble

June 21 (EIRNS)—More than a third of all loans made by financial institutions in the United States thus far this year, have been "cov-lite," according to Standard and Poor's Leveraged Commentary Data (S&P LCD), an industry newsletter. This means that the loans contain either watered-down bond covenants, or none at all.

Normally, a bank would insert covenants into loans, so that lenders and investors are protected: stipulations, such as minimum levels of interest coverage, or the obligation to publish quarterly reports, or sometimes, to meet performance standards. The S&P LCD reported, "Talk is that arrangers [investment banks] are being told not to bother calling [private equity] sponsors for new mandates unless they are prepared to do cov-lite." (For more on this, see InDepth: "Subprime Losses Fell Hedge Funds, Threaten Pensions, by Paul Gallagher.)