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LaRouche: Those Who Attacked My Forecasts Are Now Proven Insane

Nov. 4, 2007 (EIRNS)—This statement was released on Oct. 4 by the Lyndon LaRouche Political Action Committee (LPAC).

Lyndon LaRouche today strongly chastized those who have attacked him, for repeatedly warning that the entire global financial and monetary system is hopelessly, irreversibly bankrupt, and must be put through a bankruptcy reorganization to begin a process of global reconstruction. "The news of the past 48 hours that two of the largest financial institutions in the United States, Merrill Lynch and Citicorp, are in dire crisis and have chosen to fire their CEOs," LaRouche said, "just serves to underscore that I have been right, and all of my critics have been wrong to the point of clinical insanity." LaRouche noted that Bloomberg was reporting on Nov. 4 that former U.S. Treasury Secretary Robert Rubin is likely to be brought in as the "interim" chairman of Citigroup.

LaRouche cited his now famous Triple Curve Function, as the reference point for understanding the scale of the financial and physical economic breakdown process that has entered a new, accelerated phase in recent weeks. The documentation cited in the three reports immediately below, when viewed from the standpoint of the second of LaRouche's two Triple Curve diagrams, makes the case that we have already entered a fullscale worldwide Depression, far more severe than the Great Depression of the 1930s. "Many foolish Democrats are behaving worse than Hoover," LaRouche charged, "by persisting in denying the reality of the collapse, and therefore refusing to take the emergency action that I have spelled out, as the only means of solving this crisis."

Citigroup Problem Radiates Through the Financial System

Nov. 4, 2007 (EIRNS)—The New York Times reported today that "Citigroup's board is highly likely to nominate Robert E. Rubin,... as its interim chairman," at its emergency Sunday board meeting. Rubin would replace Citigroup CEO Charles Prince III, who reportedly has been forced to resign. Prince's resignation, if confirmed, would be the second resignation, within the past 96 hours, of a CEO at a major U.S. financial institution, following that of Merrill Lynch CEO Stanley O'Neal.

The Citigroup shake-up follows a deepening melt-down at the world's either first or second largest financial institution. Under Prince and his mentor, the previous Citigroup CEO, Sandy Weil, Citigroup wildly expanded, increasing its total assets from $1.09 trillion in 2002, to $2.35 trillion at the end of the third quarter of 2007, a doubling in less than five years. Often, Citigroup invested heavily in financial markets shaped by and under the domination of the City of London financiers.

Citigroup possesses the following speculative investments:

  • $80 billion in radioactive, off-balance sheet structured investment vehicles (SIVs). Altogether, Citigroup has 7 SIVs, with names like Dorada and Sedna Finance, 4 of which, EIR has discovered, were created in and are steered from the Cayman Islands.

  • $60 billion in off-balance sheet Conduits, which are also speculative vehicles, operating under slightly different rules.

  • At least $20 billion in collaterialized debt obligations (CDOs).

  • More than $70 billion in asset-backed securities, based on credit card cash flows.

All of these markets are either outright catering, or facing serious problems. The most problematic are the SIVs. An SIV must by law have sufficient paid-in equity (the value of the stock that it sold), such that the equity represents "stored funds" which could cover those losses/writedowns suffered on the SIV's senior debt. To state it simply, were the losses on the SIV's senior debt to exceed the value of the SIV's paid-in equity, the SIV must effectively be shut down. It appears that some of Citibank's SIVs are headed toward or may have crossed the danger line, had strict accounting principles been in force.

On Thursday, Nov. 1, Canadian Imperial Bank of Commerce analyst Meredith Whitney stated that Citigroup would have to increase its capital by $30 billion to cover problems. The statement, which is true, caused tremors throughout the international financial system, and there was a mass dumping of Citigroup stock, which led to the Dow Jones average dropping by 362 points.

This precipitated widespread fear, and prompted the U.S. Federal Reserve, through three separate interventions, to inject $41 billion in short term liquidity into the U.S. banking system—all on Nov. 1, the largest one-day intervention since September 2001, after the 9/11 attacks.

The Citigroup situation is made more dangerous by two further problems. First, were there ruptures at Citigroup, this could detonate its derivatives holdings of $34.9 trillion in notional value, which would bring down the world's $750 trillion-plus derivatives market, and the entire world monetary system. Second, Citigroup is America's largest bank, and thus at the heart of the world's dollar-based system. A meltdown here would have many other far-reaching consequences.

The `Genius' Goldman Sachs Firm Reported Fake Third Quarter Profits

Nov. 5, 2007 (EIRNS)— Even amid the world financial meltdown, as many of the world's largest banks reported for the third quarter, immense write-downs and loan losses, Goldman Sachs reported that it made a $2.8 billion profit. The alleged success was presented as Goldman Sachs' talent as "financial wizards."

Now, Goldman's magic wand is snapped, and it appears that Goldman is not only hiding large losses, but may have more impending losses than most other banks.

A new accounting rule, SFAS157, which is scheduled to go into effect at the end of the first quarter 2008, would require that banks divide their "tradeable assets"— ie, the loans that they have made, the Mortgage-Backed Securities that they own, etc. — into three "levels" according to how easy it is to get a market price for them. Level 1 assets would have quoted prices in active, liquid markets. At the other extreme, Level 3 assets would only have assets which are very difficult to get a market price for, largely because they are untradable. The gimmick is the banks are permitted to value Level 3 assets according to the bank's own internal model. Needless to say, the banks would not devalue their Level 3 assets, but claim that they are worth their full original purchase price.

Goldman Sachs decided to disclose its Level 3 assets during the third quarter, 2007, six months before required to do so. Goldman classified a whopping $72 billion of assets as Level 3. Further, Goldman claimed profits from its Level 3 assets; in reality, had it actually valued them properly, it should have been taking a huge write-down.

To understand how large this would be, when Nomura Securities exited the U.S. mortgage business and sold its mortgage portfolio, during the third quarter, it took a write-down of 28% on these assets, according to the Nov 3 Asia Times. Were that percent applied to Goldman Sachs' Level 3 assets, Goldman would be required to write off $20 billion in assets, which is 56% of Goldman's capital base of $36 billion, seriously imperiling the company. Goldman's boast of third quarter profits is a chimera.

The Goldman Sachs dangerous accounting gimmick was also employed by Lehman Brothers, JP Morgan Chase, and Bear Stearns.

Chronology of the Banks' Collapse

Nov. 4, 2007 (EIRNS)—During the past week, as Wall Street shook from the twin firings of the CEO of the largest commercial bank in the world—Citigroup—and the CEO of one of the three largest investment banks in the world—Merrill Lynch—physical economist Lyndon LaRouche's repeated and uniquely correct warnings that the entire world financial and monetary system is irreversibly finished, were definitively confirmed. This is not the crisis of a week, but of the past 40 years, which has been gathering force during the past two years. The timeline below details some inflection points this process, which is being acknowledged, increasingly, by competent financial insiders, but still denied by leading Democrats and Republicans. Were they to acknowledge this, they would have to muster the courage to urgently implement LaRouche's proposal to put the world financial system through bankruptcy reorganization.

  • During May and June of 2005, the Standard & Poor rating agency downgraded General Motors' and Ford's credit rating, on the more than $450 billion of the two companies' debt, to junk-bond status. This set off an implosion of collateralized debt obligations (CDOs)—a form of highly speculative instrument—which caused hedge funds to lose hundreds of billions of dollars, nearly tiggering the melt-down of the world financial system.

  • In September 2006, the Greenwich, Connecticut-based Amaranth Advisers hedge fund, which had $9 billion under management, went bust, the largest hedge fund failure in history. This caused strong reverberations in the natural gas market— where Amaranth speculated—and among other hedge funds, which scrambled for liquidity, although the deniers of reality shouted that "the event wasn't as big as LTCM."

  • During January and February 2007 the sub-prime mortgage crisis, which had been festering since the last half of 2006, erupted full force, as banks began to acknowledge sizeable sub-prime defaults. The foundations of the $20 trillion U.S. housing bubble began to shake. On March 13, New Century, the second largest sub-prime lender (after Countrywide), once a hot property, was delisted by the New York Stock Exchange, and effectively ceased to exist. New Century's market capitalization had evaporated from $1.75 billion to a mere $55 million at the point it was put out of its misery.

  • During the period between mid-Summer 2006 and November 1, 2007, 178 U.S. mortgage-related lending companies went out of existence. According to projections based on data provided by Foreclosures.com, during 2007, U.S. home foreclosures will reach 2.02 million, 52% greater than during 2006.

  • During July 2007 in the United States, banks rang up spectacular losses in asset-backed securities, particularly Mortgage-Backed Securities (MBS). Then on August 9, France's BNP Paribas, one of the world's largest banks, announced that it was suspending all transactions in three of its "dynamic investment funds," which all held mortgage-backed securities. German banks announced five similar funds were being shut down. The crisis had now hit Europe, and expanded globally, causing markets to freeze up—ranging from junk bonds to commercial paper, far beyond the sub-prime mortgages and MBS. Between late July and the end of the October, the Bank of England, the U.S. Federal Reserve, and the European Central Bank, frantically pumped in more than three- quarters of a trillion dollars in short-term and medium-term funds, to prevent markets from melting down, and banks from folding. This set the ground for a Weimar-style hyperinflation.

  • During September and October, the U.S. banks recorded $35 billion in third-quarter write-downs and loan loss provisions, capped by these banks losing nearly a quarter trillion in market capitalization. But the losses were only a fraction of the actual losses that the banks carry on their books. During the last week of October, and first week of November, the crisis entered a new phase. With the more than $1.5 trillion SIV, conduit, and CDO markets frozen, Merrill Lynch announced an $8.4 billion third quarter write-down, and Citigroup a $6.5 billion write-down. But there were much worse financial convulsions going on inside these two companies, behind the scenes. Stanley O'Neal, and Charles Prince III were forced out as CEOs of Merill Lynch and Citigroup, respectively.