U.S. Economic/Financial News
Fed Launching Review of Subprime Mortgage Lenders
WASHINGTON, July 18 (EIRNS)As the housing market collapse accelerates, three Federal agencies and two associations of state regulators said July 17 that they will launch a pilot program in the fourth quarter, to review the practices of lenders and mortgage brokers with significant subprime mortgage operations, to see whether they are complying with consumer-protection laws. Up until now, most subprime lenders have not faced federal oversight; only 25% of subprime loans in 2005 were made by federally regulated banks, thrifts, and credit unions.
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, hailed it as "a step forward," but added, "It won't preempt a need for legislation."
The agencies collaborating on the effort are the Federal Reserve, the Office of Thrift Supervision, the Federal Trade Commission, and state agencies represented by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators.
Bernanke Sees $100 Billion Losses in Mortgage Bubble
July 20 (EIRNS)Federal Reserve Chairman Ben Bernankewho was warned a month ago by EIR that the mortgage meltdown was "much worse than he thinks"estimated in Congressional testimony, that there will be $100 billion in hedge fund and bank losses in the mortgage bubble that his predecessor Alan Greenspan largely created. Bernanke testified before the Senate Banking Committee on July 19.
Bernanke's public estimate is well down on the low end of bank and real estate analysts' estimates of these losses, and even Standard & Poors' forecast, in a July 14 report, that the losses will be in the $400-500 billion range. Hedging his bets that the subprime mortgage losses might go higher, Bernanke added, "A lot of the subprime mortgage paper is not as good as was thought originally," as he notified the Senators that he is now working with some banks to assess the value of their mortgage assets, such as collateralized debt obligations (CDOs)pools of bonds backed by subprime home loans.
The Fed chairman was careful not to leave any room for speculation that he might cut short-term interest rates in response to the accelerating collapse of the mortgage bubble. In fact, he can't lower them, because the dollar is sinking, and the yen carry trade could be rapidly "unwound" by U.S. interest rate cuts, worsening the market crisis.
Chrysler Takeover in Doubt as Credit Markets Sink
July 19 (EIRNS)The potential is emerging for a breakdown in the Cerberus Capital Management takeover of Chrysler Corp., as the U.S. mortgage bubble meltdown and hedge fund losses crunch the world's credit markets. This is one of at least a dozen "completed" takeovers actually in trouble in the stage of rounding up the junk-bond financing. International banks have already had to swallow $11 billion or more in losses from bonds they could not sell in takeovers they had committed to finance; and despite announced figures, the Cerberus/Chrysler takeover is one of the biggest, in terms of the financing that banks have to come up with.
Economists watching the private equity takeover markets have told EIR that the six big banks financing this Cerberus takeover have suddenly seen the interest rates they have to offer on the junk bonds, rise by between one-half and one percent, i.e., to near 9%. And that's just on the first, small stage of the dealthe takeover of Chrysler's automotive operation.
The much bigger part of the takeover is the refinancing of Chrysler Financial, in preparation for its likely merger with GM's financial arm GMAC, already controlled by Cerberus. This is the central reason for the takeover, and it requires financing of $50 billion or more. The sources say that when Cerberus's six big syndicating banks try to raise these bonds at the beginning of September, they will be facing interest rates 1.5% higher than they planned when the takeover was announced.
That difference in financing costs is prohibitively large on a debt deal this big, and shows how quickly the credit market is deteriorating. It is likely to throw the whole takeover into a cocked hat.
Index of U.S. Homebuilder Confidence Hits Record Lows
July 17 (EIRNS)The National Association of Home Builders/Wells Fargo index of homebuilders dropped 4 points to 24 in July, indicating that only about 25% of the nation's homebuilders rated the current housing market as "good." The figure is the third-lowest in the 22-year history of the survey, and the lowest recorded since the housing slump in 1991, when it registered a 20. A year ago, the figure stood at 39, and a year before that at 72. Analysts had expected a 2 point drop, but interpreted the 4 point drop as confirmation that the market was not poised for a "recovery" any time this year.
UAW Workers' To Lose Health Care, Pension Benefits
July 17 (EIRNS)Negotiations are to begin on July 20, in Detroit, between the United Auto Workers and Ford, GM and Chrysler. According to the Washington Post today, the "Big Three" automakers may well succeed in getting the UAW to agree to a radical shift in the provision of employees benefits packages.
The burden of health and pension benefits for retirees will be shifted to the UAW by way of a one-time, lump-sum payment of cash and stocks from the manufacturers. The union will use this to create and manage a special trust fund for the retiree benefits. This health-care trust model, known as a voluntary employee benefit association (VEBA), was used as part of contract hammered out between Goodyear Tire and the United Steelworkers union, and between the UAW and Dana Corp.
So far, it is unknown how the Big Three will come up with the billions needed to fund the huge trust, but, according to the Post, "by each company making one last, mammoth payment and handing responsibility to the unions, the automakers would dispose of more than $117 billion in projected costs, according to their figures."
Former UAW president Doug Frasier warns of major pitfalls. "It looks like you are going to get something for nothing," Frasier said. "It seems like we have a 'eureka' button. God help us if we go into a depression or recession and the value of the fund plummets, and the UAW is sitting there with this huge liability."