In this issue:

United Airlines Bankruptcy Is 'Virtually Inevitable'

Longshore Union Claims Victory in West Coast Port Settlement

State and Local Budget Crises Escalate

U.S. Home Foreclosures Rise Sharply

U.S. Bankruptcy Filings Hit All-Time Record for FY02

Bush 'Stimulus' Package Revives Ghost of Herbert Hoover...

...As Fed Governor Calls for Weimar Solution

WALL STREET POLICE BLOTTER


From Volume1, Issue Number 39 of Electronic Intelligence Weekly, Published Dec. 2, 2002

U.S. ECONOMIC/FINANCIAL NEWS

United Airlines Bankruptcy Is 'Virtually Inevitable'

A bankruptcy filing by United Airlines, number two in the U.S., is "virtually inevitable," said Standard & Poor's credit rating agency Nov. 29, as it slashed the carrier's rating. S&P's action followed the rejection Nov. 27 by United mechanics of $700 million in wage and benefit cuts as part of a $5.2-billion "restructuring" plan. United, facing a $375-million debt payment Dec. 2, acknowledged the cost cuts are essential to obtain a $1.8-billion Federal loan guarantee, thereby avoiding a Chapter 11 bankruptcy filing. Shares in United's parent company, UAL, plummeted 23% on the news.

Meanwhile, seeking to avert bankruptcy, United announced plans for $14.1 billion in cost cuts, capacity reductions, and "revenue enhancements" over the next five and one-half years, including $5.2 billion in labor cuts. The cuts are being made to obtain $1.8 billion in Federal loan guarantees by Dec. 2, when United faces a presently unpayable $300-plus-million debt payment. In exchange for cutting wages, the airline will grant stock options to all U.S.-based employees who do not already own stock!

Nationalization of the airlines could become necessary, acknowledged the president of the Air Transport Association, Carol Hallett, if the causes of the airline sector's dire situation are not fixed soon.

In a related development, US Airways, already in Chapter 11 bankruptcy, plans to lay off an additional 2,500 employees during the next three months, and has asked mechanics and fleet service workers to let it outsource plant and ground equipment maintenance, aircraft catering, mail and cargo, and other operations. A heavy maintenance hangar in Tampa will be closed immediately, and a reservations center in Orlando will close Jan. 10. The airline had already met its target of $1.2-billion cost reduction set by the Air Transportation Stabilization Board for a $900-million Federal loan guarantee, but the economic crash has forced further cuts.

Longshore Union Claims Victory in West Coast Port Settlement

Bargaining under the terms of a Taft-Hartley injunction, the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association on Nov. 25 reached a tentative six-year agreement, which will become final when approved by a vote of the ILWU Longshore Division Caucus (scheduled for mid-December) and a secret ballot of the entire union membership.

While the union hailed the settlement as a victory, the few details which are available raise doubts. On the issue considered key by the union, control of clerking jobs created by marginal new technologies being introduced (such as the use of optical scanners), some kind of compromise seems to have been reached, and the union may have given ground to secure a better pension plan. Pensions are supposed to be increased by 50%, while wages will increase by $3 an hour over six years, according to unofficial accounts being leaked to the media.

National Federal Mediator Peter Hurgen made it clear that both sides moved to compromise only under his explicit threat of an imposed settlement (which would have involved special Congressional legislation).

State and Local Budget Crises Escalate

The following is a roundup of reports on the grim and grimmer conditions states and cities are facing, as the U.S. economy goes deeper into the hole. Until state and local governments decide to break with the recent paradigm of privatization, deregulation, and deindustrialization, and adopt LaRouche's "Super-TVA" infrastructure-building solution, they will be forced to adopt even worse austerity policies, policies whose results are already costing uncounted numbers of lives.

*State Pension Funds Decimated by Stock Market Collapse. Pennsylvania and New Jersey state pension funds have each lost $20 billion over the past two and one-half years, the Philadelphia Inquirer reported Nov. 24. State workers' and teachers' pension assets in the two states have dropped from about $85 billion each, to less than $65 billion each since the stock-market collapse started in March 2000. State officials are panicked that the pensions will need bigger state subsidies "unless investment values recover quickly."

The collapse of pension assets is also a major factor in Philadelphia Mayor John Street's announcement last week of plans to lay off 10% of the city's workforce, to deal with a projected budget shortfall of $700 million through 2007. The "poor performance" of the city's $4-billion pension fund is projected to cost the city an extra $520 million over the next five years.

In a discussion of the state financial crisis with EIR, a Pennsylvania State Representative remarked that the Legislature had just voted to open state liquor stores for five hours on Sundays to try to increase revenues. EIR asked the legislator: "Do you think you will raise $20 billion selling booze on Sundays, or is the idea to get everyone drunk so they won't notice they no longer have a pension or retirement!?" The State Rep was not amused.

*Governors: States Faces Worst Crisis Since World War II. The National Governors Association (NGA) and the National Association of State Budget Officers (NASBO) released their biennial "Fiscal Survey of States," which concludes simply that "states face the most dire fiscal situation since World War II."

The NGA/NASBO survey asserts there are four major factors for this crisis: 1) the outmoded tax system, 2) an explosion of health-care costs, 3) the collapse of capital gains, and 4) slow economic growth. Incredibly, the Governors fail to realize that the so-called outmoded tax system, is actually the collapse of the tax-revenue base, caused by their stubborn insistence on a deregulated, post-industrial economy. It does admit, however, that states have already "exhausted" budget cuts and one-time expenditure fixes to get through fiscal year 2002 which ended, in 46 states, on June 30.

Several findings from the survey make the point: 37 states cut their FY '02 enacted budgets by $12.8 billion; 41 states collected less revenue in FY '02 than targetted; total state balances plummeted 70% since the 2000 peak; 16 states had negative expenditure growth in FY '02; two-thirds of states say spending grew by less than 5%; FY '03 adopted budgets projected a 6.7% increase of revenues over the bad FY '02 collections--wildly optimistic; 24 states will cut FY '03 budgets by more than $8.3 billion.

Last spring, NGA worked to get a band-aid "relief" package for states through Congress; it passed the Senate in July, but then, a revised version died in committee. Another pot of gold which states were hoping for, Homeland Security funding for first responders, has not materialized--and likely won't, as the Federal budget deficit is already growing by leaps and bounds.

*California's Budget Debate Is Characterized as a 'Fiscal Train Wreck.' "Rigid battle lines" have been drawn between state Democrats, who are pushing tax hikes with some spending cuts, vs. Republicans, who want no tax hikes with big cuts--both non-solutions to the huge budget deficit problem. Responding to Gov. Davis's plan for $5 billion in emergency mid-year cuts, Senate Republican leader Jim Brulte said, "We think he can do significantly more than that." The Assembly Speaker, Herb Wesson (D-Los Angeles), called the GOP stand on taxes "a prescription for disaster." Wesson insisted that the deficit "is so vast, that even if we fired every single person on the state payroll, we'd still be more than $6 billion short." While Democrats control both chambers of the Legislature, they don't have the votes to pass a budget without at least two Senate and five House Republicans voting with them.

*State Legislatures Called into Special Session Before Christmas To Impose Budget Cuts. Special sessions have been called in California, Connecticut, and South Carolina. In addition, budget issues are expected to be taken up when Indiana's Legislature reconvenes on Jan. 7, and Virginia's on Jan. 8.

Since Nov. 22, several Governors have swung the budget axe in states which do not require legislative approval: California (froze all agencies spending); Colorado (another 6% cut to all agencies, on top of 4% two months ago); Connecticut ($68 million to all agencies, state aid to localities takes the biggest hit, $22.4 million); Kansas ($78 million cut to agencies and $48 million in aid to localities); Michigan (about $470 million in cuts to be announced Dec. 5); Virginia (an additional $1 billion in cuts before June 30); and West Virginia ($30 million, about 2% cuts to agencies).

*New York City Attempts To Plug Budget Hole with Property-Tax Hike. In a 41 to 6 vote, the New York City Council voted to impose an 18.5% property tax starting Jan. 1, 2003, as a means to generate revenue for the city's empty coffers. Mayor Michael Bloomberg's budget-cutting plan, issued a few weeks ago, called for a 25% property tax, but the Council scaled it back. Councilman Peter Vallone (D-Queens) said he had been assured by the Mayor that this would be a "temporary 'wartime' tax." Just before the Council passed the tax, Bloomberg refused to rule out further tax increases next year, as the city is facing an even bigger budget gap then. The new tax will produce between $840 million and $2.6 billion, only a drop in the bucket of the $7.5-billion deficit to be covered by June 30, 2003. According to the New York Post Nov. 26, a "budget deal" was reached between Council members and the Mayor, whereby the tax would be voted up in return for some funding to be restored for programs and services.

U.S. Home Foreclosures Rise Sharply

Between 1999 and the end of the second quarter of 2002, the number of conventional mortgage loans in America that have been foreclosed on, has climbed 45% to 76,256--the highest level in 11 years, the Mortgage Bankers Association (MBA) reports. Moreover, during the three months ending in June, lenders began foreclosing on 134,885 conventional mortgages, which is a rate of about one in every 250, the highest in 30 years, the MBA says.

The situation is even worse in the "sub-prime market," where borrowers with impaired credit histories must pay a significantly higher interest on their mortgages: Of the 5.4 million sub-prime mortgages, 150,000 were being foreclosed upon in June alone.

What is rocking the mortgage market is the growing unemployment, which renders a household unable to pay its mortgage. For example, in Marion County, Indiana (where Indianapolis is located), a state where unemployment has risen sharply, Maj. Shirley Challis of the County Sheriff's Department reports that, whereas five years ago she conducted sales of fewer than 1,000 foreclosed homes per year, this year she has listed 5,532 such homes for sale.

In the U.S., home mortgages total $5.75 trillion; as well, there is an additional $5 trillion in mortgage-related derivatives, such as mortgage-backed securities, that Fannie Mae and Freddie Mac are responsible for; thus, combined mortgages and mortgage-related paper totals $10.57 trillion. The growing mortgage defaults and home foreclosures will implode this pyramid, triggering a meltdown of the entire U.S. financial system.

U.S. Bankruptcy Filings Hit All-Time Record for FY02

Americans filed for bankruptcy protection in record numbers during the 12-month period ending Sept. 30, Reuters reported Nov. 25. Bankruptcy cases for fiscal year 2002 (Oct. 1, 2001-Sept. 30, 2002) totalled 1.548 million--the highest in U.S. history--up 7.7% from bankruptcy filings for fiscal year 2001, according to the Administrative Office of the U.S. Courts. The previous 12-month record, for the period ending June 30, was 1.505 million. Personal bankruptcy filings rose to a record 1.509 million; business filings totalled 39,091. In the three months through September 2002, filings for bankruptcy protection jumped to 401,306--11.6% higher than the same period a year ago.

During the five-year period Oct. 1, 1997-Sept. 30, 2002, more than 7.0 million bankruptcies have been filed.

Bush 'Stimulus' Package Revives Ghost of Herbert Hoover...

The Bush Administration is planning a bogus economic "stimulus" for next year. "Early next year President Bush will propose new action for economic growth and job creation," Treasury Secretary Paul O'Neill told the Confederation of British Industry in Manchester, England, Bloomberg reported Nov. 25. The Hoover-style proposal would likely include accelerating the $1.35-trillion income-tax cut passed last year (scheduled to take effect in January 2004), in addition to making the tax cuts permanent; expanding individual retirement accounts (IRA) and 401(k) retirement plans through tax cuts and higher contribution limits; and tax incentives for businesses through a write-off for equipment purchases.

...As Fed Governor Calls for Weimar Solution

The U.S. government has a "printing press ... that allows it to produce as many U.S. dollars as it wishes at essentially no cost," fantasized Federal Reserve governor Ben Bernanke, ignoring the threat of Weimar-style hyperinflation. Bernanke, echoing Federal Reserve chairman Alan Greenspan's claim that there is no limit to the liquidity the Fed can pump into the financial system, said that the government, to fight the lagging economy and fend off deflation amid a real negative interest rate, could print as much money as it wants. Alternatively, he said, the Fed could make low-interest-rate loans to banks, or make "unlimited purchases" of Treasury securities maturing within two years. He made his pitch at a Nov. 21 meeting of the National Economists Club in Washington, D.C.

New York Post columnist John Crudele lambasted Bernanke, writing that MIT and Harvard, where Bernanke went to school, apparently don't teach the history of 1920s hyperinflation in Germany--which led to the political upheavals that brought Hitler to power.

"Who says it's not happening now?" responded Lyndon LaRouche.

WALL STREET POLICE BLOTTER

*Former Enron executive Lawrence Lawyer, pleaded guilty Nov. 27 to filing false tax returns that hid kickbacks for his work on an off-the-books partnership that was involved in an Enron wind-farm project. He has agreed to cooperate with the criminal case against Andrew Fastow (Enron's former chief financial officer), as well as with the inquiry into dealings in the bankrupt energy pirate's broadband unit. Lawyer faces a maximum prison term of up to three years.

*Broadway National Bank pleaded guilty Nov. 27 to not following anti-money-laundering rules--a failure that allowed drug dealers and other criminals to move more than $120 million through the Manhattan bank to other countries. Broadway pleaded guilty to three felony charges for not reporting suspicious banking activity during 1996-98, and will pay a $4-million fine. A grand jury continues to investigate the case.

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