U.S. Economic/Financial News
Fed Oversight Agency Wants Receivership Authority in Case Fannie Mae/Freddie Mac Fail
The Office of Federal Housing Enterprise Oversight (OFHEO), which regulates Fannie Mae and Freddie Mac, government-sponsored Enterprises involved in the secondary mortgage market, sent a report on Feb. 4 to the Senate Banking Committee and the House Financial Services Committee, titled "Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO." In it, OFHEO called on Congress to grant it receivership authority, "to allow the Agency to close and appoint a receiver to manage the affairs of an insolvent Enterprise," by amending the Federal Housing Enterprises Financial Safety and Soundness Act of 1992. If an Enterprise is not viable, the report stated, then OFHEO should have authority to "place it into receivership and wind down the business of the company"liquidate or otherwise dispose of its assets, and use the proceeds to pay the institution's creditors.
OFHEO also recommended that Congress permanently fund the Agency, and exempt it from the appropriations processso OFHEO has adequate resources to deal with "serious problems."
Major global securities firms and commercial banks that serve as counterparties to the financial derivatives contracts that the Enterprises use, OFHEO warned, would face "serious [credit] exposures" and "solvency or liquidity problems," were one of the Enterprises to fail. More than 30% of commercial banks with assets above $1 billion, OFHEO estimated, held debt of Fannie or Freddie exceeding 10% of their equitywhile one bank with over $50 billion in assets (unnamed, but unmistakably JP Morgan) held Fannie Mae debt in excess of 25% of its equity. "Changes in market conditions in securities or derivatives markets, could impose losses on, and increase the risk of, Fannie Mae and Freddie Mac and other financial institutions that participate in those markets." The interdependencies are so large that, "if either Enterprise became insolvent or illiquid, investors in its debt and, potentially, its derivatives counterparties could incur losses."
OFHEO considered three "hypothetical" scenarios of deteriorating financial conditions. In Scenario #1, a period of reduced liquidity, the Enterprises help to lessen systemic risk. In Scenario #2, one Enterprise develops serious solvency problems but remains liquid, there are few adverse economic effects, and no "systemic event" occurs.
In Scenario #3, Enterprise A suffers large losses and becomes illiquidresulting in a "systemic event." Investors doubt the Enterprise is viable and "are uncertain about whether it will default, about the size of any credit losses they may incur, and about the future liquidity of its debt." As a result, there is widespread selling of the Enterprise's debt, as well as a large decline in the market prices of its mortgage-backed securities.
Under some circumstances, the sell-off becomes a panic. "Illiquidity in the market for Enterprise A's debt and the plunge in the market value of its MBS, exacerbate liquidity problems at many banks and thrifts. Those problems increase the risk of contagious il-liquidity spreading through the banking system, the markets for the obligations of other GSEs, and the financial sector as a whole, adversely affecting the U.S. and the global economy." For example, foreign investors would sell dollar-denominated assets. Mortgage rates would skyrocket, GDP and employment would plummet; pension funds would be hit hard. In this case, OFHEO stated, "The Federal government faces difficult choices." Without government action, "The potential decline in aggregate economic activity may be very large."
The potential that an Enterprise failure could seriously threaten a collapse of the housing finance system, or a disruption of the global financial markets, OFHEO warned, is much greater now than it was in 1992when Fannie/Freddie's outstanding debt was much lower, and they were just beginning to use financial derivatives. Fannie and Freddie had $1.7 trillion in derivatives outstanding at the end of 2001, according to OFHEO Director Armando Falcon, up from $72 billion at the end of 1993. Fannie Mae's debt has increased fivefold, and that of Freddie Mac by 20 times.
(Falcon, by the way, was fired from the Bush Administration just hours before he released this two-year study, according to the Washington Post of Feb. 6presumably for the contents of the report.)
Economy Collapsing Faster Under Bush Than Under Hoover
U.S. stocks have lost $4.8 trillion of value since Bush took office, falling from $14.7 trillion on Jan. 20, 2001, to $9.9 trillion last week, and in percentage terms, the market has fallen more in Bush's first two years than in the first two years of any modern President, including Herbert Hoover, wrote Allan Sloan in a commentary appearing in the Washington Post and Newsweek. He cited a study by Philly money management firm Aronson+Johnson+ Ortiz (AJO). The AJO study also shows Bush leading the pack in the decline of the S&P 500 at 33%, compared to Hoover's 29%, even though Hoover's first two years included the crash of 1929. Unemployment is up more than 40% since Bush took office, gigantic projected Federal surpluses have turned to deficits, and the dollar has plunged sharply against the euro, Sloan said.
Furthermore, notes Sloan, the Bush plunge can't be blamed on 9/11, since stocks fell at a much faster rate from his inauguration through Sept. 10, 2001, than they have since; the S&P 500 fell at an annual rate of 28% before 9/11, versus less than half that rate after.
Bush's OMB projects that the fiscal 2003 deficit could be $300 billion, but that includes the $175 billion Social Security surplus, "so the government is really in the hole by $475 billion," which, at a 4% interest rate, means $19 billion a year in interest payments (more than the $15 billion a year Bush proposed for his Africa AIDS initiative).
"The dreary economic numbers make you wonder whether Bush's remedies have a chance of curing the patient anytime soon," Sloan says. "His prescriptioncut taxesis exactly what he prescribed when the economy seemed healthy. With the patient not responding, he wants to cut taxes more. With Bush, it always seems to be tax- cut time."
"None of this is to say that Bush is fated to go down in history as an economic failure like Herbert Hoover," Sloan continues. "It's only halftime; the game's not over. So far, the president has talked a great game but hasn't played anything resembling a great game. It's time to start watching what the scoreboard has to say, rather than relying on the mere word of the cheerleader in chief. Optimism certainly mattersbut the numbers are what really matter. And they're not good."
Curiously, Sloan comes to the conclusion that "Sooner or later the economy will fix itself, because it always does. The question is whether Bush's policies will advance the recoveryor delay it."
U.S. Aviation Sector Contracting
* Northwest Airlines announced the closing of four aircraft-maintenance stations and layoffs of 60 more pilots to cut costs.
* American Airlines will cut 750 flight-attendant jobs in St. Louis by May, because too few attendants took leaves from their jobs in the last round of cuts, and so crews are considered by accountants to be "overstocked"!
* American Airlines stock down 88% since January 2002. The management firm for part of American's 401(k) plan says the stock of AMR (American's parent company) is too risky for American workers to have in their portfolio! U.S. Trust dropped AMR stock last week, in its first action after being hired as the independent fiduciary for the employee stock-purchase portion of the 401(k).
* American is losing $5 million cash a day, according to wire reports in USA Today and the Washington Post.
* American execs are asking for a 25%$1.8 billionworker pay cut per year for five years, in a formal request made Feb. 4 by AMR management (owners of American Airlines). In addition, American is seeking concessions from its vendors, and is shutting two (Norfolk and Las Vegas) of its 10 domestic reservation offices, and eliminating 910 reservation-agent jobs.
The pattern here is cut-and-gut, to the point that the entire operation is killed in the name of "saving" it.
Meanwhile, the head of Amtrak last week declared that U.S. train service will never make a profit, and that Amtrak must have more than what's in President Bush's new budget even to exist. David Gunn said Amtrak has approximately $4 billion in debtmuch acquired after the 1997 Amtrak Reform Council was created. The new Bush budget and Transportation Department commentary, mandate the elimination of many long-distance routes, in the name of "saving" the railroad by killing it.
Already, Amtrak has scaled back the Philadelphia-Chicago route to a New York-Pittsburgh route, and has cut Louisville from the stations the Kentucky Cardinal serves.
Amtrak spokesman Dan Stessel told CNN Feb. 3, "It remains our position that maintaining a national network of trains is a Federal responsibility, and we're committed to preserving that network."
Boeing Warns of Further Downturn in Airlines
Phil Condit, chairman of Boeing Corporation, the world's largest aerospace-defense group, warned Jan. 30 that the year "2003 looks a lot like 2002 from the [new plane] order standpoint," and that the downturn in commercial aviation "remains severe."
The severity of the problem is underscored by two points: of the 275-300 planes Boeing has projected for delivery in 2004, three-quarters are to non-U.S. companies; the U.S. market for new planes has dried up, amid the bankruptcy of U.S. Airways, United Airlines, etc. Second, at the start of 2001, Boeing had projected that it would deliver 470 planes in 2003. Thus, even Boeing's hopeful projection of a 2004 "pickup," falls 37%-42% below what it expected back in 2001.
Boeing will also be affected by the explosion of the Columbia Space Shuttle. Rockwell International built the Shuttle, but Boeing acquired Rockwell in 1996, and is one of the two largest contractors in building and maintaining NASA's manned space missions. Boeing represents a tremendous, integrated capability of advanced machine-tool design and skilled workers, now being dismantled.
U.S. Steel Industry in De-Structuring Madness
*Bethlehem Steel has agreed to be bought out by the International Steel Group (ISG), backed by the Wall Street scavenger house of W.L. Ross & Co., according to Bethlehem's announcement Feb. 5. On Feb. 8, Bethlehem's Board of Directors will meet to vote on the deal, after which the Federal bankruptcy court has to approve it.
*U.S. Steel buyout of National is still a live option. A.K, Steel, which outbid U.S. Steel, has been declared the official "stalking horse" (lead bidder) in Federal bankruptcy court. Among other things, this did not sit well with the United Steelworkers Union (USWA), which had just concluded a year-long labor dispute with A.K. and which clearly prefers a U.S Steel buyout. Neither bidder plans to pick up legacy costs, and buyout will proceed along the lines of new USWA contact with ISG or worse, as will the Bethlehem buyout, in which Bethlehem seeks to shed pension and health insurance plans for retired workers.
States' Aggregate Deficits Soar 50% in Two Months
From November 2002 to end of January 2003, the cumulative revenue shortfall for all U.S. states grew from an estimated $17.5 billion to $26 billion, according to a just-released survey done by the National Conference of State Legislatures (NCSL). The primary decline has been in income tax revenue collections, as layoffs mount. And this is not the worst of it. NCSL projects a aggregate deficit for states in the next fiscal yearwhich in all but four states begins July 1will be $68.5 billion, with one-third of the states not yet reporting estimates for FY 2004. So even this "official," and EIR believes understated, estimate will get bigger.
The rose-colored glasses have come off, and NCSL now reports, "State budgets are under siege. The faltering economy, declines in the stock market, contractions in the manufacturing and high-tech sectors, and soaring health costs have combined to undermine the stability of state budgets." The full depth of the economic collapse, however, has yet to be acknowledged.
Budget gaps between revenues in and expenditures for FY 2004 already exceed 5% in 33 states, with 18 of those having gaps bigger than 10%. For example, a conservative estimate of California's gap is 30%, while New Jersey's is estimated at 18.5%, and Minnesota's is 15%.
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