U.S. Economic/Financial News

U.S. Corporations Piling on Debt as Economy Contracts

The Aug. 17 Wall Street Journal ran a warning report on the way in which U.S.-based corporations are now piling on debt as mergers and acquisitions accelerate, often using the borrowed money for stock dividend payouts, stock buybacks, and other ways to pump up their stock prices in the context of mergers and acquisitions. U.S. corporate debt growth was 2.7% in 2004, the Journal reported; 5.1% in 2005; 6.3% (annual rate) in the first quarter of 2006; 7.3% in the second quarter. The "potential" problem, they hope, is that non-financial companies are doing this "in preparation for profit gains in a contracting economy," a recipe for extreme danger.

Lazard Crew's Scandalous 'Delphi Two' Plan for Dana Corp.

A scandal has erupted over the outrageous pay and bonuses promised to top executives of the bankrupt auto supplier Dana Corporation, in a bankruptcy plan developed by Lazard and Rothschild Inc. The Dana creditors' committee, and the United Auto Workers, have asked the bankruptcy court to throw the executive pay plan out, according to the Toledo Blade Aug. 15. The plan would perversely increase the pay of CEO Michael Burns, the more his management was able to cut the retiree pension and health-care benefits of Dana employees! Already last year, Burns' pay and bonuses, $11.7 million total, was equal to more than 10% of what the company paid in pension and health-care benefits to all 27,000 of its retirees. But this year, the Lazard consultants' plan was to raise Burns' compensation to $18 million; and it had announced in June that it also wants to cut the retiree benefits due to its bankruptcy.

A Dana spokesman tried to defend the plan by saying that it "was devised by outside compensation experts." The bankruptcy consultants of Dana are Lazard, Rothschild Inc., the Kirkland and Ellis law firm, and for debtor-in-possession financing, JP Morgan Chase—the same "team" advising the other big auto supply companies in bankruptcy, including Delphi, Tower Automotive, and Collins and Aikman.

Homes Sales Crash; Prices Plummet; Foreclosures Soar

Home sales crashed in more than half the U.S. states during the second quarter; and home prices fell in 26 metro areas, as foreclosures soared.

The National Association of Realtors reported Aug. 15, that 28 states and the District of Columbia saw home sales decline in the April-June quarter of this year compared with the same period in 2005. Nationally, sales were down 7% for April-June of this year, compared to the same period of last year.

The Realtors' survey showed that the biggest declines occurred in states that had enjoyed red-hot sales during the five-year housing boom. The five biggest declines were: Arizona, down 26.9%; Florida, down 26.7%; California, down 25.3%; Virginia, down 23.9%; and Nevada, down 23.5%.

In a separate survey of price changes in 151 metropolitan areas, NAR reported that in the April-June 2006 period compared to the same period last year, 37 metro areas experienced double-digit price increases.

Residential Foreclosures Climb in July

Foreclosure.com, a home-foreclosure monitoring service, reported Aug. 14, that there were 28,130 new residential home foreclosures nationwide in July of this year, a 5.0% increase over June, and a 10% increase over July of 2005. "New residential foreclosures across the nation are up this year, driven in large part by increases in adjustable-rate mortgages," said Brad Geisen, CEO of Foreclosure.com

The largest monthly increases in new residential foreclosures occurred in: Illinois, 11.6%; Colorado, 12.9%; Ohio, 14.3%; Alabama, 21.3%; Minnesota, 31.1%; Michigan, 38%; and Missouri, 48.2%. In Michigan, nearly one out of every 1,000 homes is in foreclosure.

Risky Mortgage Loans Place Trap Door Under Market

The riskiest form of mortgage loans increased during the first months of 2006, putting a trap door under the home-mortgage market. LoanPerformance, a loan-monitoring unit, reported that from January through May 2006, the "Option Adjustable Rate Mortgages" constituted 12.3% of all mortgage loan originations, versus 8.4% for all mortgage loan originations during 2005. The danger is that the Option variety of ARM loans is the leading edge of the $2 trillion in ARMs of all kinds that are scheduled to reset during the next two years. A collapse of the ARM loans will blow out the nearly $15 trillion U.S. home real-estate market.

Hedge Fund Specializes in Stealing Potential Capital Investments

The Paulson & Co. hedge fund, headquartered in New York, is making itself a leading exemplar of industrial destruction by financial locusts. Though not large (an estimated $800 million under its management), Paulson specializes in teaming with other hedge funds to quickly buy stock of companies with significant earned capital, and then tries to force the company to cough it up to its stockholders.

Paulson, along with Centauris hedge fund of London, was trying to force Royal Ahold Corp. to sell off its Giant and Stop & Shop grocery stores in the United States, calculating that this would raise the stock price and dividend by 25%, the Washington Post reported Aug. 15. Two months ago, the same two funds forced the Dutch industrial company Stork to put pieces of itself up for sale. In April, Paulson organized a successful stockholder blackmail of Algoma Steel of Canada, forcing Algoma to cancel building a new integrated steel mill in Manitoba, and instead to pay out $220 million in extra dividends to the looters. Late last year, Paulson did precisely the same thing to U.S.-based Mirant Energy, cancelling a planned capital investment to pay out an increased dividend instead.

Dura Automotive Hires Restructuring Firm

Auto parts supplier Dura Automotive Systems, a maker of pedals, parking brakes, and shift systems, with about 16,000 employees worldwide, has hired New York restructuring firm Miller Buckfire Lewis & Co. LLC to come up with a way to reduce its debt, the Wall Street Journal reported Aug. 16. Dura joins auto-parts maker Dana Corp, which in February had hired Miller Buckfire less than a month before filing for Chapter 11 bankruptcy protection. Already in 2006, hit by production cuts at automakers, heavy debt burden, and zooming commodities prices, Dura announced it will close up to ten plants.

Miller Buckfire, formed by 43 former employees of Dresdner Kleinwort Wasserstein and its predecessor firm Wasserstein Perella Group, is reportedly one of the four biggest in the restructuring business—along with The Blackstone Group and Lazard LLC.

Boeing Workers Brace for End of C-17 Production

Workers at the Boeing plant in Long Beach, California are bracing themselves for the end of production of the C-17 transport plane—one of the company's biggest programs. The Pentagon has been spending about $3 billion a year to purchase the plane. According to media reports Aug. 17, Boeing says that it has enough orders to keep building until 2008, but the Pentagon is saying that it will not be buying many more of them. Long lead times to get supplies and parts to build the C-17 have forced Boeing to possibly wind down operations. Barring any last minute deals, Boeing is expected notify their suppliers that they will have to shut down their lines. The shutdown will affect 25,000 workers, 6,500 of whom work for Boeing, the rest for Boeing's suppliers.

As a note on the increasing shutdown of the aerospace industry, Boeing earlier this year stopped production of the 717 passenger plane, also made at the Long Beach plant, which at one time was the main center for the aerospace industry on the West Coast.