ECONOMICS NEWS DIGEST
Merrill Lynch Investors Take a Bubble Bath
As Lyndon LaRouche has been warning you, it's not just Enron: Now, the most established Wall Street firms are exposed in the latest scandal. New York State Attorney General Eliot Spitzer has widened his investigation of Wall Street money managers, who are charged with knowingly promoting bad investments to enrich themselves and their firms. The probe, which began with the venerable Merrill Lynch, now includes some of the Street's biggest names.
Spitzer issued new subpoenas for documents April 10 to bubble-builders Credit Suisse First Boston, Morgan Stanley Dean Witter, Bear Stearns, and Salomon Smith Barney. State investigators are also targetting Lazard Freres, Goldman Sachs, Lehman Bothers, and UBS PaineWebber in the scam.
Merrill Lynch et al. will be interrogated, Spitzer declared, in a series of public hearings; he added that he may file criminal charges against analysts or firms that he believes deliberately hyped losing stocks.
On April 8, Spitzer charged, in a filing with the State Supreme Court, that Merrill Lynch's Internet research analysts, led by the since-departed Henry Blodget, were guilty of "manipulating research coverage for the purpose of attracting and keeping investment banking clients, thereby producing misleading ratings that were neither objective nor independent." By issuing ratings that "in many cases did not reflect the analysts' true opinions of the companies," Merrill converted its five-point rating scale (Buy, Accumulate, Neutral, Reduce and Sell) "into a de facto three-point system" in which Reduce and Sell ratings were never given. This represented a "serious breakdown" of the "Chinese Wall" between Merrill's banking and research departments.
In one case, Blodget admitted in an internal e-mail that there was nothing interesting about a particular company except the fees it paid Merrill Lynch. The analysts would, among themselves, refer to stocks as "a piece of s--t" or "such a piece of crap," while giving them public ratings of "Accumulate." Under this regime, the filing stated, even Merrill Lynch's highest investment rating "could not be trusted."
"This was a shocking betrayal of trust by one of Wall Street's most trusted names," Spitzer said at the news conference, adding that "Merrill Lynch ... may be the tip of the iceberg."
Even the establishment news media, which has merrily gone along for the dot.com roller-coaster ride, feigned outrage: A Washington Post editorial, "Wall Street's 'Big Lie,'" attacked this "mad boosterism," "corruption," and the "huge incentive that analysts have to deceive investors." "Disinformation on Wall Street," the New York Times headlined its editorial, stating that Spitzer's affidavit seems to be a "smoking gun." "[Spitzer's] findings should convince Federal regulators of the need to do more to protect investors and the integrity of the nation's financial markets," the editorial concluded.
Add an Oil Shock, and Myth of Economic Recovery Completely Explodes
All that's keeping up the pretense that the U.S. and global financial system and economy are working, are purely "psychological" factors. Meantime, the looming "oil shock" is set to explode both the myths and the already disintegrating financial system.
On April 8, oil futures rose by 6% in one day, with the benchmark North Sea and West Texas prices in the range of $27-29/barrel. By April 10, the price rise "settled down" for a few hours, but the impetus has not. The usual speculator-sharks are manipulating the situation by their oil trading operations--à la Enron--but real production factors are coming into play as well. Supplies are at risk from Ariel Sharon's drive for general Mideast war. On processing and distribution, the merger-mania of oil and gas companies, has reduced U.S. refinery capacity and workforce way below reliability levels.
There are other factors. On April 9, a 24-hour nationwide general strike began in Venezuela, to join the 14,000 oil industry workers. By Friday night, April 12, Venezuelan President Hugo Chavez had been forced to resign; by April 14, he was apparently back in power. With an increasing percentage of U.S. oil imports coming from Venezuela, the question of the hour is "what comes next?" (see IBERO-AMERICAN NEWS DIGEST).
A world oil price soaring to the $35-$45 range means mass insolvency. As it is, what remains of industry, agriculture, transportation can't pay their debts and expenses. Chain-reaction effects are already spreading through all sectors of the U.S. economy, and among whole nations--Argentina, Mexico, and many others. In Japan this week, it was announced that bad loans in the banking sector are at least an "official" $300 billion--with no solution in sight!
Reality of Physical-Economic Breakdown Exposes Myth of 'Recovery'
Machine-Tool Use: U.S. machine tool consumption this year, has dropped below the levels of 2001. In February 2002, U.S. industry consumed $193.8 million worth of machine tools, an increase over January, when consumption was $155.2 million, according to the American Machine Tool Distributors Assocation. This decline is even more dramatic, considering that January's figure was one of the lowest in a decade. Now compare the first two months of 2002, at $349.0 million, to the same period in 2001, at $476.5 million: This represents a steep decline of 26.8%.
Here are the figures for the past five years:
U.S. Machine Tool Consumption, on an annual basis ($ billions)
1997: 5.56
1998: 4.91
1999: 3.90
2000: 3.99
2001: 2.67
Thus, U.S. machine tool consumption in 2001 is already in a depression, only half the level of 1997. Because machine tools incorporate into their designs the most advanced scientific conceptions and, by transmitting those conceptions, increase the scientific productivity of the economy, the picture that emerges is one of a rapidly disintegrating physical economy.
State and Municipal Budget Crises: Heralding anticipated revenue fall-off from this month's individual and corporate tax filers, Stateline.org headlines its analysis, "States Brace for April Surprise." During the 1990s, April tax filings brought "pleasant surprises," but "this one could be more bust than boon." The "poor performance of the stock market" in 2001 (no mention of accelerated layoffs), means "there's no upside surprise, and the possibility of a downslide surprise," said Nick Jenny of the Rockefeller Institute of Government.
Forty states are running shortfalls from a half-billion dollars to multi-billions of dollars, a fact which has already necessitated slashing budgets. About 50% of all state tax filings are made in April. Depending on the extent of April revenue shortfalls, most states "will have to cut more deeply and quickly to balance their books" by June 30, the fiscal year's end. But some cities and states are already at the brink. Here are a few recent examples.
*Buffalo, N.Y.: Faced with $8.9-million shortfall this year, the city has already laid off 75 city workers, increased garbage user fees, left fireman positions vacant, among other austerity measures. Looking at an expected $21-million shortfall in the upcoming fiscal year, Mayor Anthony Masiello has proposed draconian measures, which could take effect as of July 1, such as laying off 190 police officers and 38 supervisors, and hundreds of fire-fighters, closing firehouses, and requiring police and fire fighters to "contribute" more to their pensions and health care. Police and fire unions in the city are up in arms.
*New Jersey: Democratic Governor James McGreevey took office in January, and is now faced with a $2.9-billion shortfall. He has already issued pink slips to 600 state workers and proposed other cuts. If, as expected, revenues come in $1 billion short of last year's take, the state will have to make big cuts before the end of June.
*Kansas: Governor Bill Graves' Budget Director announced this week that the state is "operating hand-to-mouth," while it awaits April tax filings. It needed $17 million to meet its payroll on April 12, but had $3.8 million in the bank; meanwhile, it is borrowing from other funds to make the payroll. School districts, which received only half of the $136 million due them from the state on April 1, may not see the other half until May.
*Colorado: The state's first budget crisis in a decade is a whopper: $930 million as of March. Governor Bill Owens has imposed a hiring freeze, halted most capital improvement projects affecting prisons, universities, and a human services project.
Layoffs, Plant Shutdowns: Levi Strauss, apparel-maker since 1873, announced on April 8 that it will close six of its eight U.S. plants, eliminating 3,300 jobs (20% of its workforce), as it shifts toward marketing rather than owned-and-operated manufacturing.
Telecommunications equipment maker Lucent Technologies said it will cut an additional 5,000 jobs by the end of June.
General Motors will shut down its Detroit-Hamtramck Assembly plant for one week, starting on April 15, affecting 3,200 workers.
California State Senator Charges Enron Manipulated Prices
California State Senator Joseph Dunn (D-Garden Grove) presented testimony to the U.S. Senate Commerce Committee April 11 that, prior to the energy crisis in California, Enron was manipulating the price of electricity by betting that it would go up. Dunn's testimony is based on internal Enron records obtained by his state investigating committee. "We know from the daily position reports, which Enron provided our committee, that as the summer of 2000 approached, Enron's traders had taken increasingly 'long' positions in the market, meaning they had a growing amount of electricity to sell."
Dunn also said that while Enron was lobbying California officials to deregulate the state's electricity market, and promising big savings for customers, company documents showed that its "internal predictions do not appear to support" these "hyperbolic promises."
And, Dunn asserted, in 2000, before natural gas prices rose, Enron went from being "short," or betting that prices would fall, to betting that prices would rise. "Staggering shifts ... from short to long positions are found in Enron's own books," he said.
Lyndon LaRouche, during his campaign for the Democratic nomination for President in 2000, told California, and the rest of the nation, that Wall Street speculators were manipulating energy prices.
More Trouble for Enron: Top Andersen Auditor Pleads Guilty; Will Cooperate
David Duncan, Arthur Andersen's senior auditor in charge of the Enron account, pleaded guilty to the charge that he did "knowingly, intentionally and corruptly persuade and attempt to persuade other persons ... to withhold records, documents and other objects from an official proceeding, namely an investigation by the Securities and Exchange Commission." He described how he ordered Andersen employees to shred documents on Oct. 21, 2001, two days after he learned that the SEC was investigating Enron.
Under the plea deal, Duncan is immune from any further prosecution related to the Enron case, as long as he continues to cooperate, fully, with Federal authorities--which could include testimony at future trials--and agrees not to sell his story or otherwise profit from the debacle. Duncan presumably has knowledge of the partnerships used by Enron to keep millions of dollars in debt off its books.
Euro Brings Hyperinflation to Germany; Munich in 'Debt Trap'
In an unusually blunt article, the April 6-7 edition of the Munich tabloid AZ rings alarm-bells about the danger of hyperinflation, pointing to dramatically rising prices, and the escalating rate of personal bankruptcies. Germany is especially sensitive to the dangers of hyperinflation, since it was in large part the out-of-control Weimar German hyperinflation of 1923, that triggered the social upheaval that led, ultimately, to Adolf Hitler's ascension to power in 1933.
The paper reports that already, 100,000 people in the Munich, the third-largest city in Germany (1.3 million inhabitants) are caught in a "debt trap"--double the number at the end of last year. Thirty-five percent of all Munich households have borrowed in order to buy cars, furniture, or housing. The Munich municipal debtors' consultation office says it is being overwhelmed by telephone calls from people who can no longer manage their debt burden. AZ predicts that "at the latest, by Christmas, every third citizen of Munich will fall into financial chaos." The reason for this, as given by the municipal office: Since January, when the euro was introduced, prices have risen by 30%.
Also, Germans, like Americans, have started to pay for everything with credit cards: "Money has become more and more virtual, people lose their connection to it." Young people, who think they are earning more, are also outspending their incomes. "If prices then increase suddenly massively, these people are trapped."
Munich economist and social scientist Dr. Dieter Korzcak predicts "a socially more explosive situation, with more visible poverty, drugs, robbery in shops, increase of criminality in general."
Meanwhile, the city has been hit by a dramatic fall in municipal tax revenues, leading to a budget crisis, a situation affecting virtually every German city. For example, the city of Wiesbaden announced a budget deficit of 30 million euros this year, because two big corporations will pay, respectively, 25 million euros and 5 million euros less in corporate taxes, than estimated.
Not surprisingly, at the same time, Bavarian banks have been hit by a wave of bankruptcies, and Munich, whose economy depends largely on banking, insurance, and new economy firms, is feeling the effects.
Hospital Association Survey Reveals: U.S. Hospitals in Cardiac Arrest
After two decades of HMO/managed-care-dictated takedown of America's medical infrastructure, the U.S. hospital system is collapsing. "One in three emergency rooms is so crowded that ambulances are diverted to other hospitals," according to a just-released American Hospital Association (AHA) survey conducted in November 2001, and reported in the New York Times March 29 and April 9. The ambulance diversions often occurred at least one hour a day. More than 1,500 hospitals were surveyed, and the AHA said the results represent a national pattern. "Emergency Department over-crowding itself is a symptom ... of a health-care system that's broken," Carmella Coyle, a senior AHA vice president for policy, told the Times.
An earlier Times story, describing the severe shortage of hospital beds in New York City, noted, "What makes the increases [of patients] difficult is fewer hospitals and fewer beds. Since 1985, the number of hospitals has declined about 14%, with the number of beds shrinking 18%, the AHA says." A 2001 EIR study found that, from 1985 to 1999, New York State lost 15.8% of its hospitals, and 12.7% of its beds.
The consequences are devastating. "At Brooklyn Hospital Center, emergency room patients were waiting more than two days for beds." Emergency room nurses find themselves responsible for more patients than they can care for. Long Island Jewish Medical Center closed its ER to ambulances for 25 hours in January and February this year.
Nationwide, according to the AHA, hopsital occupancy has zoomed to 64%. But New York City's average occupancy rate in 2000 was already 82%! Averages, however, do not give the true picture, the Times reports. "New York-Presbyterian [Hospital] had an average occupancy of 90%" in 2001, "but it rose to 102% on some days."
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