World Economic News

Northern Rock Borrowing Reaches $32 Billion

Oct. 19 (EIRNS)—Northern Rock, the failed British mortgage lender, is believed to have borrowed another £3 billion ($6 billion) from the Bank of England this week, bringing its total borrowings to £16 billion ($32 billion). Of concern is the fact that the borrowings are increasing, up from £2.3 billion and £2.9 billion in the previous two weeks, "indicating that Northern Rock's funding problems remain acute," economist Simon Ward told the Guardian.

Northern Rock depositors are apparently continuing to withdraw their money, as reflected in a tremendous increase in new deposits at British building societies. (British building societies would be considered savings co-ops in the U.S.) Deposits for September were a record £2.92 billion, an astonishing £1 billion more then the previous record, as savers flee to the building societies from the banking system.

Home-Building Plummets in Germany

Oct. 19 (EIRNS)—At a Frankfurt press conference of the construction industry yesterday, Hans-Peter Keitel, head of the industry association, reported a drastic drop in new housing starts—by 50% during the first three quarters of 2007, compared with the same period 2006.

Nomura Hit by Subprime Crisis, Shuts U.S. Mortgage Unit

Oct. 16 (EIRNS)—Nomura Holdings, Inc., the Wall Street Journal leaked, will close its mortgage-backed-securities business, due to "the meltdown of subprime residential mortgages in the U.S." Nomura is Japan's largest investment bank by market capitalization. It plans to take a $621 million write-down on residential mortgages and a charge of about $85 million for closing that business. Nomura will have a pretax loss of as much as $511 million for the last quarter. Combined with previous write-offs, Nomura has now taken losses of more than $1.2 billion on residential mortgages in the U.S. "This is an extremely regrettable result," said Nobuyuki Koga, Nomura's president and chief executive.

Why Is Murdoch's Wall Street Journal Pointing at London?

Oct. 18 (EIRNS)—The lead article in today's Wall Street Journal, "How London Created a Snarl in Global Markets," reports that structured investment vehicles (SIVs), that is, those collapsing funds which are the subject of frantic rescue efforts by the U.S. Treasury and major U.S. banks, were created by "a small coterie of London bankers who engendered what became a $400 billion industry."

"The funds boomed because they allowed banks to reap profits from investments in new-fangled securities, but without setting aside capital to mitigate the risk." The article describes SIVs as funds set up by banks to issue short-term commercial paper and medium-term notes to investors, and then use the proceeds to buy long-term higher-yield assets—i.e., subprime mortgages and related junk. The assets are owned by the investors, not the banks, so the SIVs aren't on the banks' books; the bank profited by collecting fees for operating the SIVs.

The Journal elaborates that, "Most of the few dozen SIVs, typically registered in offshore havens such as the Cayman Islands, are managed out of London." London law firms are also heavily involved in providing advice to SIV operators.

The Journal attributes this London-nexus to the fact that the initial SIVs were launched out of Citigroup's London office in the late 1980s, and the Citigroup bankers who invented them now run the world's largest SIV, Gordian Knot Ltd., from an office in the Mayfair district of London, and that "most people with the necessary skills and experience are in the United Kingdom."

IMF Chops Economic Forecast for United States

Oct. 17 (EIRNS)—The International Monetary Fund, in its semi-annual World Economic Outlook, made a sharp downward revision in its rosy growth forecast for the United States, citing credit tightening and mortgage market problems. The IMF said the U.S. economy was set to grow merely 1.9% in 2008, down from the 2.8% forecast in July.