In this issue:

Top London Analyst Sees 'New Geometry in World Financial System'

London Times: 'Market Mayhem Stuns Investors'

Bloodbath on European Markets Continued Despite Wall Street 'Rally'

Insurance Companies Sink as Stock Markets Crash

Japan's Turn, as Creditor, To Make Demands on Washington


From the Vol.1, no.21 issue of Electronic Intelligence Weekly

WORLD ECONOMIC NEWS

Top London Analyst Sees 'New Geometry in World Financial System'

The situation on the international markets is so bad, that in addition to the U.S. "plunge protection" operation, other governments and central banks outside the U.S., will now engage in "covert" direct interventions in the stock markets, a senior European financial source told EIR July 25, the day before the "great rally" got underway on Wall Street last Wednesday.

An example of the type of interventions to be made, he said, is what was done openly on the Hong Kong markets during the Asia crisis in 1997-98.

"The core issue is that there is a systematic meltdown of one big corporation after another," he said. "The system can handle even one or two more Enrons, or Worldcoms, or what is going to hit with AOL Time-Warner, but just one big U.S. bank going, will break the dam."

It is only possible to understand what happened on July 24, by looking at the events since the end of last week, he said.

This situation is being intensely discussed "at the top" in political-financial emergency consultations since the end of last week.

A rundown:

*Friday, July 19: J.P. Morgan Chase issues an internal document, which said that circumstances are arising in which a full-scale activation of the Plunge Protection Team, including international activity, might be necessary.

*Sunday, July 21: Japanese Finance Minister Shiokawa makes a statement on television, that the U.S. ought to do something about its stock markets.

*Monday and Tuesday, July 22-23: Rumors about the accounting fraud and liquidity problems at Morgan Chase and Citibank escalate. These reach a crescendo on Wednesday, leading to panic.

As of noon on July 24, the J.P. Morgan top management organizes an international telephone conference, in an attempt to reassure the "big players" that Morgan is not about to go under. This has no effect.

Then, as has been leaked, Alan Greenspan, Treasury Secretary Paul O'Neill, and SEC chief Harvey Pitt hold an emergency meeting. They agreed that O'Neill will stay in the U.S. and not go to Latin America, as a signal that the U.S. government will not allow one of the big banks to go under—because this would lead to the immediate breakdown of the whole system.

The other G-7 nations are then told that they have to help, and they do.

London Times: 'Market Mayhem Stuns Investors'

Under the above banner headline, the ususally staid Times of London outlined many of the elements of the international operations to try to prop up the financial system. "Wall Street surges back as Blair and Bush move to end panic," the Times continued in a subhead. "Shares in New York recovered to make their second biggest gain ever last night after world leaders joined forces to try to rebuild investors' shattered confidence," the article began.

"A near-500 point rise on Wall Street raised hopes of a strong rebound in London when trading resumes today, hoisting the FTSE100 from yesterday's six-year low.

"Downing Street led a drive by politicians and central bankers on both sides of the Atlantic to stem further market panic in a day marked by extreme volatility on financial markets. The White House, a top Bank of England official, and European leaders joined the moves to try to bolster confidence and reassure investors that the global economy would weather the stock market storms.

"In the U.S., rumours of emergency action by the Federal Reserve helped Wall Street to stage its startling recovery after another plunge at the start of business. The Dow ended up 488 points, a recovery of more than 8% from the day's lowest point."

The Times article listed the "chorus of soothing noises" from both sides of the Atlantic, including Bank of England chief economist Charlie Bean; the official spokesman of PM Tony Blair; and President Bush's spokesman Ari Fleischer.

EU Commission president Romano Prodi proclaimed from Brussels: "If you ask me, do I see in front of us a 1929, I say no. No, because the fundamentals are good." (But then he added that financial strengthening is required.)

Frits Bolkestein, EU Internal Markets Commissioner, said that he saw no symptoms of U.S.-style accounting problems in Europe.

Finally, Bank of France head Jean-Claude Trichet said that the slump on markets is looking "overdone."

Bloodbath on European Markets Continued Despite Wall Street 'Rally'

While the U.S. Plunge Protection Team went into high gear to send Wall Street markets soaring July 24, the bloodbath on the European markets continued across the board, with the major markets collapsing between 2.61% and 5.34%, and smaller markets diving by up to 7.42%, as of 5.30 p.m. CET. The French CAC40 index fell by 2.98%, Germany's DAX index was down 4.38%, Italy's MIBTel 2.61%, and London's FTSE 5.34%. Denmark's KFX fell 6.16%, Finland's HEX 5%, the Dutch AEX 5.06%, Norway's OSEAX 5.59%, Sweden's SXAXPI 5.71%, and Russia's MTMS fell 7.42%.

The reasons offered by analysts were profit warnings or reported losses, among several of the largest industrial corporations, in addition to the continuing woes in the financial and insurance sectors. The figures below were reported at about noon, when the decline had not yet reached its climax: Industrial stocks:

*ABB, Europe's largest electrical-enginering company, slid 18%, after reporting a loss for the second quarter;

*Akzo Nobel, the world's largest maker of coatings, dropped 12%;

*Serono Sa, Europe's biggest biotechnology company, declined 15%;

*Siemens, Germany's largest engineering company, fell by 4.2%;

*Bayer, Germany's largest drug-maker, fell by 5.6%.

Financial:

*Axa, Europe's second-largest insurer, fell by 16%;

*Prudential, the UK's second-largest insurer lost 15%;

*Credit Suisse lost 8.1%;

*Commerzbank lost 11.8%.

In order to illustrate the mood among investors, the German newspaper Handelsblatt carried a picture taken from the Alfred Hitchcock movie "Psycho," of Janet Leigh screaming as she is about to be murdered in the shower.

Insurance Companies Sink as Stock Markets Crash

Within the past 28 months, about $7.7 trillion in paper value has been eliminated in U.S. stock markets, about $5 trillion in European exchanges, and a few more trillions of dollars in Asian markets. The big insurance companies—in particular, the life insurers, which, in Europe, play a role comparable to pension funds and mutual funds in the U.S.—have invested huge amounts of their customers' money in stocks. In Britain, insurance companies own one-fifth of all stocks. One-third of all German stocks are held by insurance companies. Now they are facing big losses, are no longer able to maintain the yields which they promised to customers, or are even going bankrupt.

Regulations require insurance companies to sell stocks once they have fallen below a certain level, thereby further increasing market turmoil. Furthermore, customers are now cancelling their contracts, forcing the insurers to sell assets to pay them out. As the Daily Telegraph reported July 21: "Emergency measures to prevent panic selling by private investors of life policies, pensions, and other equity-related products have been imposed by leading financial services groups." In an "unprecedented move," several insurers increased their penalties on early redemptions last week to 20% or more.

Aegon NV, the second-largest Dutch insurer, and Fortis, Belgium's biggest banking and insurance company, last week admitted a sharp decline in business due to the ongoing market crash. Many more will follow. In early July, the German financial supervisory agency BaFin had to take over a smaller German life insurance company, threatening retirement payments for 300,000 customers. According to a report in the German economic daily Handelsblatt, the German life-insurance sector is right now preparing for "worst-case scenarios," that is, creating a mutual "pool" for financial rescue operations once one of the large insurers goes under.

On July 22 alone, stock prices of Aegon and Zurich Financial plunged by 17%. Fortis, Axa SA (France), and Rentenanstalt (Switzerland) each lost 10%. Allianz and Munich Re of Germany fell 7% on July 22, and another 7% in early trading the following day. Stock prices of Allianz have already lost two-thirds of their value since the year 2000 peak. MLP, the financial services company which recently made it into the DAX index of Germany's 30 largest corporations, crashes to a new historic low every single day, and on July 22 was 85% below its year 2000 peak.

Japan's Turn, as Creditor, To Make Demands on Washington

A July 23 editorial entitled "WorldCom Failure" in Japan's leading daily Asahi News states that the WorldCom and other bankruptcies piling on the Enron disaster show that the entire U.S. financial system is out of control and a threat to the world. So now, "it's Japan's turn to urge the U.S. to clean up its act.... The U.S. government has repeatedly urged the Japanese government to 'promptly ' sort out the non-performing-loans problem," they write. "It is now Japan's turn, as the United States' biggest creditor, to call on the Americans to 'promptly' solve their problem."

Seen together with Bank of Japan Governor Masaru Hayami's veiled threats July 12-17 to dump the dollar, and the fact that Japan is sitting on $1.5 trillion in net foreign assets, including at least $1 trillion in U.S. Treasury debt, you might suspect there is a phase-change taking place.

"The danger of the [U.S.] stock markets' current instability spilling over into the corporate and banking sectors, in turn, sparking a financial crisis, cannot be ruled out," Asahi states, without naming the Morgan Chase-Citibank crisis which EIR has publicized widely in Japan. Since other nations will now be asked to bail out the U.S., they go on, we should have some say.

"The picture of the stock markets in the United States is bleak. The large fall in the share prices ... can be attributed to the back-to-back revelations of improper accounting at American companies and the resulting loss of investor confidence. WorldCom, which cooked its books on a massive scale, is typical of such fraudulent accounting practices.... Not only the stock markets, but the American economy as a whole, should be regarded as having entered a period of adjustment," a euphemism for depression.

As a result the whole world financial system is on the edge, they warn, and "Share prices are likely to remain jumpy all over the world for some time to come."

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