U.S. Economic/Financial News

Goldman Sachs $100 Billion Bailout Plan

Oct. 13 (EIRNS)—Treasury Secretary Henry Paulson, formerly of Goldman Sachs, and his sidekick, Treasury Undersecretary for Domestic Finance ("Plunge Protection"), Robert Steel, also from Goldman Sachs, are trying to orchestrate a crazy $100 billion bailout scheme for their former firm, which dwarfs the $3-4 billion bailout arranged for hedge fund LTCM by the Federal reserve in 1998, according to today's Wall Street Journal.

Under the plan, all the top U.S. and perhaps some British banks, will join to create a "receptacle," which will buy up the worthless so-called assets held by the "structured investment vehicles" (SIVs) of Citibank and many other banks. Although these mortgage-backed securities and collateralized debt obligations are worth nothing, the new "super-conduit" will lay out $100 billion to buy them at their current nominal value, or close to it, in order to try to sustain the lie that all the hedge funds and banks together, which hold trillions in such worthless "assets," are still solvent. The "super-conduit" will raise the funds to buy the worthless SIV assets by selling short-term debt to the public. But why would anyone be crazy enough to buy it? Here's the catch: it will be backed dollar-for-dollar by the consortium of banks which Paulson and Steel are trying to put together. The banks are to put themselves on the line for this worthless paper—in reality, for the hedge funds and the British Empire.

The tentative name for the "receptacle" is Master-Liquidity Enhancement Conduit, or M-LEC. If the banks agree, its announcement could come as early as Oct. 15, the same day Citigroup releases its results.

Mortgage-Industry Jobs Collapse with Housing Market

Oct. 13 (EIRNS)—As the real estate market has collapsed in recent months, fueled by the subprime mortgage crisis, there has been a concomitant collapse of mortgage-industry jobs. At least 76,000 jobs have been lost so far, of the 500,000 tallied at the height of the housing boom, according to recent Federal data quoted in the Washington Post.

Orange County, bastion of well-to-do conservatism in California, may well be ground zero for mortgage-industry job losses. California has been one of the states hardest hit by the real estate bust, and Riverside County, just a few miles away, has the highest foreclosure rates in California. Furthermore, several of the largest subprime mortgage lenders call Orange County home, including Ameriquest Mortgage and New Century Financial, which has filed for bankruptcy this year. Just last year, brokers were raking in commissions worth up to several hundred thousand dollars per year. Now many are in unemployment lines, or working for $10 per hour. According the Orange County Register, quoting California Employment Development Department figures, Orange County alone has lost 8,100 jobs in the mortgage industry in the last year, not counting subsidiary jobs related to the mortgage industry.

Mounting Buyer Cancellations Drag Down Homebuilders

Oct. 13 (EIRNS)—The inability to sell new homes is not the only factor throwing homebuilders into the red. Buyers are now cancelling purchases in record numbers as well. Before the real estate bust of 2007, cancellation rates hovered between 10% and 30%, depending on location and housing type. Now, in some segments of the homebuilder industry, cancellations are outstripping sales.

For Comstock Homebuilding in Northern Virginia, for instance, 78 of 81 homes sold in the third quarter of 2007 were cancelled by the buyer. According to the Washington Post, quoting Hanley Wood Market Intelligence data, cancellations in the Washington, D.C. area have risen to 48% for July and August, up from 18% last Summer. The condominium market has been particularly hard hit, with cancellations over 124%, up from 13.5% last year. (That means there were more cancellations of previous sales than there were new sales.)

The combined effect of the inability to move new homes, the cancellations of previous sales, and the fire-sale pricing to unload excess inventory, has left many homebuilders booking huge charges on their balance sheets, for property losses and devaluations. Centex Corp., for instance, one of the largest homebuilders in the United States, is expected to declare $1 billion in such charges when it posts earnings on Oct. 23. According to MarketWatch.com, Moody's on Oct. 11 lowered ratings on Centex, Pulte Homes, and Lennar Corp. to junk status, with negative ratings outlook.

IRS Report Shows Worst Income Inequality on Record

Oct. 12 (EIRNS)—The wealthiest 1% of Americans "earned" 21.2% of all income in 2005, according to the IRS—a record that beats even the dot-com bubble days of the '90s. It was "only" 19% in 2004, and 20.8% in 2000. The entire bottom half of the population earned only 12.8% of all income, down from 13.4% in 2004. The IRS says this income disparity was last seen in the 1920s, although they don't have precise records for that era.

President Bush, asked about this by the Wall Street Journal yesterday, responded: "First of all, our society has had income inequality for a long time. Secondly, skills gaps yield income gaps." His "No Child Left Behind" law is aimed at solving that, he said. He made no mention of his "No Child Left Alive" veto of the SCHIP children's health insurance bill.

The Brookings Institution's James Furman (of the Hamilton Project) says there has been increasing inequality for 30 years, other than an artificial improvement after the dot-com bubble burst.

The IRS report showed that hedge fund managers were far out on top, with the top 25 earning more in 2004 than the CEOs of all the S&P 500 combined! Also, profits per partner in the top 100 law firms doubled between 1994 and 2004, to over $1 million.

Housing Crises Create Social Chaos in Upscale Miami

Oct. 9 (EIRNS)—Some of the worst cases of unsellable real estate, and the highest rates of foreclosures per square mile, are on Miami's high-priced beach-front property, according to yesterday's Biz Journal.

A report produced by Miami-based Condo Vultures Realty, says that three of the buildings with the highest number of foreclosures are clustered in the pricey Brickell district of downtown Miami. The Club at Brickell is number one with 54 foreclosures; The Vue at Brickell is number three with 49; and the Jade at Brickell is fourth with 42. Together the three account for more than $113 million worth of unpaid loans.

Sunday's Miami Herald reveals another aspect of this hyperinflationary bubble. Since 2005, the article says, Miami homeowners have signed on to "exotic" mortgages "at twice the rate in the rest of the country." Speculators who "flip" houses, and suburbanites taking out vanity home-equity loans to remodel or expand, have all been caught in the same trap. So-called "negative amortization" loans, where the borrower loses money with every payment, even before the rate re-sets, and loans with low "teaser" introductory rates, which are now resetting to 16%—rates as high as credit cards—amount to about 20% of all loans in Miami-Dade and Broward counties.

These loans are concentrated in the "celebrity haunts of South Beach, the stately manors of Weston, the gleaming condo towers of Sunny Isles Beach and the financial district of Brickell."