In this issue:

Thirty-Year Mortgage Rates Rise Above Six Percent

Regulatory Changes Planned for Fannie and Freddie

Highly Leveraged Bond Market Facing Huge Blowout

Fears of '94-Style Bond Market Massacre, Only Bigger

Fed Considers How To Handle Looming Bond Market Crash

New Home Foreclosures Soar in Chicago, S.F. Bay Area

Number of Jobless Without Benefits Climbs; Congress Punts

Cheney-Bush Team Pushes Steep Hikes in Insurance Costs to Workers


From Volume 3, Issue Number 18 of Electronic Intelligence Weekly, Published May 4, 2004

U.S. Economic/Financial News

Thirty-Year Mortgage Rates Rise Above Six Percent

Interest rates on 30-year mortgages rose 17 basis points to 6.01% during the week ended April 23, according the Mortgage Bankers Association. Thirty-year mortgage rates have risen half a percentage point in the past year, and have now passed the "psychologically key 6% level for the first time this year," Reuters said April 28. The MBA's refinancing index—a measure of demand for mortgage refinancing—fell 5.8% to 2,043 for the week, the fifth consecutive week it has fallen. Refinancings accounted for 44% of the week's activity. Adjustable Rate Mortgages, which initially offer lower rates (currently 3.67%) than 30-year fixed-rate loans accounted for 33% of the home loans processed by lenders during the week.

Regulatory Changes Planned for Fannie and Freddie

The Office of Federal Housing Oversight Board (OFHEO) is drafting rules to allow it to put Fannie Mae or Freddie Mac into a "liquidating conservatorship" so it could wind them down, liquidating assets and paying creditors, should such a move be necessary, the Wall Street Journal reported April 28. The Treasury Department is considering ways it could restrict the two companies' borrowing, which have ballooned to $1.7 trillion in recent years, making them among the world's largest debtors. Meanwhile, the Dept. of Housing and Urban Development is taking a tougher stand in holding them to their "mission" of helping more low- and moderate-income people buy houses, and is considering more vigorous enforcement of its approval power on new financial products the companies develop. Fed governor Ben Bernanke said last week that higher interest rates could imperil Fannie's and Freddie's risk-management strategies. The Bush Administration is determined to bury the idea that the U.S. government stands behind the two companies, the Journal said.

Highly Leveraged Bond Market Facing Huge Blowout

The U.S. bond market is in its most highly leveraged condition in history. Even a small upward movement in U.S. interest rates, organized by Fed chairman Alan Greenspan, could set off a de-leveraging process that would bring down the house of cards.

Many financial institutions—commercial banks, investment banks, hedge funds—have borrowed money on the international markets at the London Interbank Offered Rate (LIBOR), which is hovering around 1.25%. They then turned around and bought 5- or 10-year U.S. Treasury bonds, the latter of which had been paying 3.75%. They earned a spread of 2.5%, which looked like a sure bet. In these trades, called the "carry trade," they were borrowing very short-term money, and investing it long-term, for 10 year.

In 1990, the Net Borrowing by Primary Dealers—borrowing by bond-market players to buy U.S. Treasury securities—was negligible, less than $50 billion. It rose to $400 billion by March 2001 and then exploded to almost $800 billion by March 2004. The amount of money borrowed to play the Treasury bond market is five times that borrowed to play the stock market.

Such a highly leveraged bond market can have catastrophic consequences, as happened in 1994 (see below). For instance, just on April 2 of this year, when the Bush team released its faked jobs report, those investors who were engaged in the carry trade, and had borrowed money to buy Treasury bonds, lost three-quarters of all the profits they had made between Jan. 1 and April 1. More losses are in store.

Fears of '94-Style Bond Market Massacre, Only Bigger

Fears of a new bond market crash, far worse than that of 1994, are haunting Wall Street. Then, interest rates were 3%, and Fed chairman Alan Greenspan moved them up to 6%. But after the first few increases of interest rates by small increments, all hell broke loose.

There are eerie parallels between then and now. In an April 13 article in Bloomberg.com, entitled, "What if 2004 is Really Like 1994?" Caroline Baum draws out the comparison:

"Both periods saw the U.S. economy emerge from a recession that was technically shallow ... yet devastating in terms of job losses and disappointing in terms of ensuing job gains. Both periods came on the heels of extended monetary policy accommodation, with the funds rate below the rate of inflation. Both periods witnessed soaring industrial commodity prices."

Further, "The 'carry trade' was the rage in 1994, just as it is now. Ensured of cheap financing by the Fed—the funds rate was 3 percent from September 1992 until February 1994—leveraged accounts, including banks, bond dealers and hedge funds, took advantage of it, borrowing at a low rate of interest, buying higher yielding Treasury notes and pocketing the difference, a positive carry."

Then, in February 1994, the Fed started to raise interest rates, at first by small amounts, which nonetheless totally upset this leveraged paper's equilibrium. During the course of 1994, the total return on long-term U.S. Treasury bonds (including price change and coupon income) plummeted 11.97%, the steepest single-year fall recorded since 1926.

But ominously, today the market is much more leveraged. In 1994, the Net Borrowing by Primary Dealers in Treasuries stood at less than $200 billion; today it is almost $800 billion.

Fed Considers How To Handle Looming Bond Market Crash

On April 1, Federal Reserve Board Governor Donald L. Kohn delivered a presentation, "Monetary Policy and Imbalances," at Widener University in Pennsylvania, which assessed what would happen if the Federal Reserve were to start raising interest rates. Kohn looked at the effects on all the markets that had been fed with easy money, most especially, the over-leveraged U.S. bond market. As could be expected, Kohn presented a placid picture that likely all would work out well, but two paragraphs at the end of his speech jump out:

"Investors, too, must be aware that short-term rates, and hence the opportunity cost of their longer-term investments, will increase. Borrowing short and lending long is risky and not a sure-fire way to eternally high profits. Investors are unlikely to be able to exit from these bets before the market starts to adjust; it is highly probable that many folks in similar circumstances will be trying to squeeze through the same door at the same time, in which case prices could adjust sharply.

"[R]egulators of financial institutions should strive to ensure that these institutions have risk-management systems in place that help to assess and control vulnerability to potential adjustments in interest rates and asset prices. In doing so, supervisors reinforce market discipline. Banking supervisors at the Federal Reserve, for example, in the course of the ongoing examination process, have been paying close attention to the sorts of vulnerabilities we have reviewed and have been discussing these risks with the commercial banks they oversee" (emphasis added).

Of course, at the point of a crisis, "risk-management systems" are worthless. But if the Fed is already telling its supervisors to examine these "sorts of vulnerabilities," they doubtless are simultaneously putting other measures—which they will not discuss publicly—into place. These other measures have zero chance of success.

Lyndon LaRouche noted that you could increase interest rates under a regulated economy, but you can't do it under this deregulated economy. An increase of 3.5% should blow up the system.

New Home Foreclosures Soar in Chicago, S.F. Bay Area

The number of homes entering the foreclosure process in the Chicago metro area remains extremely high, amid relaxed loan qualification standards as well as rising long-term unemployment. "We're seeing an average of 508 new filings per week for the month of March and the first two weeks of April," said foreclosures.com president Alexis McGee. "That's almost double the normal historic baseline of 260 per week for the six Chicago metro counties." Lenders hooked many people into getting mortgage loans they really couldn't afford.

Meanwhile, in California, mortgage defaults show that many homeowners are in "financial distress." In eight of nine San Francisco Bay Area counties, 4,654 default notices were filed in the first three months of 2004; and in Los Angeles, 1,872 in March alone.

Number of Jobless Without Benefits Climbs; Congress Punts

The number of unemployed workers who have exhausted their jobless benefits and receive no other assistance, jumped to nearly 1.5 million, as of April 30, according to a reported released April 26, by the Center on Budget and Policy Priorities. According to its analysis, the number of Americans exhausting their regular state unemployment benefits in March without qualifying for any additional Federal unemployment assistance, surpassed the record high that was set only two months ago, in January 2004. In March, about 354,000 more jobless workers used up their regular benefits without being able to receive additional Federal aid—the highest monthly level ever, according to Labor Department statistics going back to 1971.

Moreover, since Dec. 20, 2003 a whopping 1.47 million unemployed workers will have exhausted their state jobless benefits—without receiving extra aid, through the end of April. This is also a record number of such unemployed during a four-month period.

Yet, the April 2 phony jobs "recovery" report, showed a worsening in both the number and proportion of long-term unemployed workers. The number of Americans out of work at least 27 weeks, rose to 1.988 million in March, at the same time that a purported 308,000 jobs were created. The proportion of the unemployed who are "long-term unemployed" increased to 23.9%—nearly one in four; this is the largest ratio in more than 20 years.

Congress failed to even renew the Temporary Extended Unemployment Compensation (TEUC) program, which provided up to 13 weeks of Federally funded benefits to jobless workers who have run out of state-funded benefits, when it lapsed on Dec. 20.

Cheney-Bush Team Pushes Steep Hikes in Insurance Costs to Workers

On April 23, the Administration's Equal Employment Opportunity Administration put out a new rule allowing employers to terminate company retirement-plan health benefits to their retirees who are 65 and qualify for Medicare. Now a feature of the Medicare Reform Act rammed through by House Majority Leader Tom DeLay and company is becoming clear in a national survey of employers reported in USA Today on April 26: Employers who offer health insurance plans to current employees, can more than triple the deductibles those employees pay for each medical event.

"Sharply higher health insurance deductibles to hit workers in the next two years," wrote USA Today, reporting that 73% of employers in the national survey already plan to "offer" to their workers the Health Savings Accounts called for in the Medicare Reform Act. This is "a major market change," which will "shift the cost of health care to workers," the paper forecast. The current national average health-insurance deductible, for an individual under employer group health-insurance plans, is $300. But under the provision for Health Savings Accounts in DeLay's Medicare Act, these accounts "must be coupled with insurance policies with annual deductibles of at least $1,000 for individuals." The employer "offering" the Health Savings Accounts privilege to employees can set the deductible higher than that, and 40% of them plan to do so.

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