U.S. ECONOMIC/FINANCIAL NEWS
Crisis Points Toward Implosions at America's Major Banks
During the past week, EIR has received reports that of America's three largest banksCitigroup, J.P. Morgan Chase, and Bank of Americaat least one, and perhaps all three, have experienced internal implosions, and are receiving emergency rescue treatment from Federal Reserve Board chairman Alan Greenspan. Although the mushrooming of bad loans held by these banks would feed this process, it appears that the main factor precipitating the crisis is major problems in the banks' giant derivatives portfolios.
The crisis threatens the core of the U.S. financial system.
Cognizant of the banks' growing vulnerability to financial shock, the Anglo-American financier oligarchy moved to tackle another simultaneous problem: the fall of the U.S. stock markets, which has reached epic proportions. Since Jan. 1, 2002, through the third week of July, the Dow Jones industrial average had fallen by 22.3%; the Standard and Poor's 500 index, by 28.6%; and the Nasdaq index, by 34.2%. Domino-style, the fall of these markets had occasioned falls in the major European stock markets.
So, on July 24, Wall Street deployed the President's Working Group on Financial Marketsknown as the Plunge Protection Committee, which consists of the heads of the Federal Reserve Board, the Treasury Department, the Securities and Exchange Commission, and the Commodity Futures Trading Commissionto channel a huge stream of money into the stock market. The Dow Jones rose 488 points for the day. After the same group applied the same procedure on July 29, the Dow Jones rose by 447 points.
But while it is possible to manipulate the stock market for certain periods of time, it is quite something else to address and correct the fundamental systemic financial-economic breakdown crisis now unfolding, which means the stock market is fundamentally rotten. That fundamental correction, is what the Bush Administration, as well as Wall Street and the City of London, refuse to do.
Continuing to deny reality, on July 30, Treasury Secretary Paul O'Neill declared that, "America's fundamentals are sound." But reality refutes that: The U.S. trade deficit is at a record level, while durable goods orders plunge; the Brazil crisis rages; and America's Big Three banks are at the point of going under. - The Banking Crisis -
The crisis of America's largest banks is deep-seated and longstanding, although it has manifested itself most strongly within the last two months. This is evident in America's two biggest banks: the $1.06-trillion-in-assets Citigroup, and the $713-billion-in-assets J.P. Morgan Chase. Since Jan. 1, their stock prices have fallen by 30% and 40%, respectively. Moreover, since 2001, the market capitalization of J.P. Morgan Chase has fallen from $107 billion to $40 billion, i.e., by more than half.
This is the tell-tale sign that something at these banks is terribly wrong. Citigroup and Morgan Chase are exposed and vulnerable to some of the world's riskiest, most cancerous financial loans and investments. For example, they are two of the largest lenders to the energy-trading firms, and also to the New Economy telecom sector. Between 1996 and 2001, Citigroup and Morgan Chase alone extended 49.3% in credit to the U.S. telecom sector. Further, they created the condition to float derivatives, on top of the telecom and energy-trading bubbles. Morgan Chase and Citigroup have $24.0 and $9.2 trillion, respectively, of derivatives outstanding. Citigroup and Morgan Chase were also two of the largest lenders to Enron, and Senate hearings reveal that they schemed to artificially build up Enron's fund flows, while hiding a good part of Enron's debts.
Now the energy and telecom bubbles are punctured; so are a huge volume of Citigroup's and Morgan Chase's loans to these sectors, not all of whose impairment they have fully reported. Further, Citigroup and Morgan Chase have considerable credit exposure to the U.S. housing bubble, as well as in the Brazilian and Argentine crises.
Thus, the evaluation that one or both of Citigroup and Morgan Chase are being secretly rescued by the Fed, is credible. But given the unaddressed enormous underlying problems, such a rescue cannot work, engendering ominous consequences for the world financial system.
The Fed's bailout of America's major banks, if that is occurring, will work just as disastrously as the Plunge Protection Committee's prop-up of the stock market; starting from the financial system's endemic problems, a fundamental reorganization is necessary.
Adapted from an article by Richard Freeman in The New Federalist of Aug. 5.
The Recovery That Never Was
More evidence of the non-existent "recovery":
*Official (that is, faked) Gross Domestic Product (GDP) rose an anemic 1.1% in the second quarter of 2002, only half the expected figure, from the first quarter's growth which was revised down to 5.0% from a previously reported 6.1% (a difference of 1.1%), based on an increase in consumer spending, as well as a rise in business inventories, the Commerce Department reported on July 31. After revision, GDP, in 2001, fell for three straight quarters, not just one as previously announced; GDP grew by 0.3%, rather than 1.2%, for the year.
*Construction spending fell 2.2% in June, from May, to the lowest level since August 2000, with non-residential construction plunging 20%, compared to a year earlier, the Commerce Department reported Aug. 1. Downtown office vacancies, rose in the second quarter to 14.1%, the highest level in more than five years, according to Cushman & Wakefield.
*The Institue for Supply Management's manufacturing index fell to 50.5% in July, from 56.2 in June (where a number above 50 represents growth, and below 50, contraction).
*Continuing claims for unemployment benefits, rose to 3.5 million last week.
Wall Street Police Blotter
Former WorldCom chief financial officer Scott Sullivan, and former comptroller David Myers, were charged in a seven-count criminal complaint of one count of conspiracy to commit securities fraud, one count of securities fraud, and five counts of filing false statements with the Securities and Exchange Commission. Sullivan, released on $10 million bond, and Myers, freed on $2 million bond, each face up to 65 years in prison. The complaint filed in Manhattan Federal Court, alleges that Sullivan directed Myers to conceal about $3.85 billion in expenses, to show profits when the company was actually losing money.
Attorney General John Ashcroft, in a Washington news briefing on the case, invoked the "invisible hands" of Jeremy Bentham and Adam Smith, to mete out to "corrupt corporate executives no better than common thieves," the "judgment they fear and the punishment they deserve." The "survival of the free market," he said, depends on reliable, truthful information, "the invisible hand that directs our economy."
AOL/Time Warner is under investigation by the Justice Department for its accounting practicies, as DOJ prosecutors work in tandem with the Securities and Exchange Commission. The SEC is probing how the media company used "unconventional" advertising deals to inflate revenue by $270 million during 2000-2002, according to the Washington Post July 18.
Pension Plan Meltdown Will Cost Billions
"Hemorrhaging corporate pension plans are rapidly becoming Wall Street's biggest new worry," BusinessWeek Online reported Aug. 5, noting that company plans "have lost hundreds of billions of dollars." Were the companies in the S&P 500 to see a 5% increase in the value of stocks and securities in their plans this year, they would still fall $40 billion short of their projected pension obligations, and a 5% drop would put them $150 billion in the hole, according to Morgan Stanley estimates. In 1999, the S&P 500 plans had a $292-billion surplus and a 30% cushion over their commitments; that year, 78% of the S&P 500 plans had surpluses, but by the end of this year, less than 26% will have them. A record 60% of pension-plan assets were invested in stocks in early 2000, when the stock market began its decline.
Hardest hit are the companies with defined-benefit plans, in which the companies guarantee the payouts to pensioners, and must cover the investment losses themselves, in contrast to companies which have adopted defined-contribution plans, like 401(k)s, in which the individual employees take the hits.
Fears of Massive Debt-Default Shake Banks, Bondholders
U.S. and European banks and bondholders lent an estimated $500 billion to the U.S. gas-and-power sector, raising fears of bankruptcy at cash-strapped energy traders such as Dynegy and Williams Co. Lenders fear "a further string of corporate failures" after Enronwith heavy losses for banks, including Citigroup and J.P. Morgan Chase, the Financial Times wrote July 28. The enormous debt figure probably underestimates the banks' total exposure because of large amounts of undisclosed, off-balance-sheet debt.
"We are past the point of no return on significant levels of debt default in the energy industry, which will dwarf WorldCom and Global Crossing," said Karl Miller, who set up Enron's European trading business. "There is no doubt we will see multiple bankruptcies shortly."
Williams, the Tulsa, Oklahoma-based energy trader and pipeline company, must come up with a $1 billion secured bank loan to offset building pressure to file for bankruptcy, as it faces $800 million in debt payments due this week. The company lost $349.1 million in the second quarter as revenue fell 26%, with its trading and marketing unit posting a $497.5 million loss, compared to last year's $262.2 million profit. Shares have plunged 97% in the past year. A conference call which had been set for July 29, was postponed.
And Speaking of Energy Pirates: Who's Walking the Plank This Week?
Dynegy slashed its profit forecast by about 80% for 2002, after a $328-million second-quarter loss, including a $212 million reduction in the value of its global communications business and $80 million in a natural-gas marketing business.
Mirant posted a $151-million second-quarter loss, as revenue fell 20% from a year ago, and said it overstated as much as $253 million in asssets and liabilities in 2001.
Chevron Texaco said second-quarter earnings plunged 81% to $407 million, from $2.11 billion a year ago, as revenue fell 15%, as the oil company wrote down the value of its 27% stake in Dynegy.
'Consumer Confidence' Swooned in JulyAnd it Ain't Just the Weather
"Consumer confidence" plunged in July, by the largest amount since October of 2001just after the Sept. 11 eventsa turnaround which is attributed to the stock-market collapse and job fears, despite the Bush Administration's Hoover-style attempts to reassure Americans there's a "recovery." According to the monthly survey by the New York-based Conference Board, consumer confidence fell to 97.1 from 106.3 in June, with the percentage of respondents who rated jobs "hard to get" rising to the highest level in more than six years.
Shades of the 'Eighties: Junk Bond Defaults Zoom Again
Eighty-nine companies defaulted on a record $64 billion in junk bonds, in the first half of 2002, with $42.6 billion in the second quarter alonea pace about 16% above last year's record total of $110.2 billion, according to Moody's Investors Service. WorldCom, with $23 billion in bonds, is not included, because it began 2002 as an investment-grade company.
The largest defaults came from cable operators NTL Communications, Adelphia, and United Pan-Europe Communications.
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