U.S. Economic/Financial News

Third Major Subprime Mortgage Lender Goes Belly-Up

Another large subprime mortgage lender stopped originating loans, third to shut down in the last month. Mortgage Lenders Network USA, ranking 15th nationwide in the U.S. with $3.31 billion of subprime loans in the third quarter of 2006, announced it will "temporarily discontinue" wholesale lending operations, saying market conditions had "deteriorated dramatically" during November and December 2006, according to Jan. 2 press reports. MLN also said it is in "strategic negotiations" with several Wall Street firms about its loan operations. And it has laid off about 80% of its 1,800 employees.

This follows the bankruptcy filing of Ownit Mortgage Solutions at the end of December, and after Sebring Capital Partners ceased operations on Dec. 1.

U.S. Homebuilder Scales Back Building Plans

Lennar Corp, the third-largest U.S. builder, as measured by unit sales, announced Jan. 3 that it would take up to $500 million in land-related write-downs, leading to its first quarterly loss in a decade. Lennar CEO Stuart Miller warned, "[W]e have not yet seen tangible evidence of a market recovery."

Heavily exposed in the once red-hot housing markets in the West and Southeast U.S., Lennar said it had slashed its land holdings in Southern California. The firm, along with LNR Property Corp, agreed to sell a 62% stake in their LandSource joint venture that owns one of the largest residential developments in Los Angeles County—a proposed 20,000-home, 15,000-acre project in the Santa Clarita Valley.

Big International Banks Driving Takeover Bubble

More revelations continue to make clear that it is the lending banks—the biggest international investment and commercial banking groups—which are driving the bubble in takeovers, by private equity funds and hedge funds which are the banks' creatures, according to TheStreet.com and the New York Times Jan. 2.

For example, "stapled financing packages" in leveraged takeovers—a 100% pure conflict-of-interest violation by the banks involved—accounted for $82.5 billion in 50 leveraged takeover deals in 2006. What is it? Banks like UBS, Goldman, JP Morgan Chase, and others first advise a potential "target" firm to seek to be taken over. At the same time, the banks arrange large non-investment grade (high-interest) loans, from themselves and other banks, for the takeover—hence, a "stapled" package of takeover financing, ready to go. Then they shop the loan package around to private equity funds to get one of them to take the financing and take over the target! The banks collect large fees from all sides, and are in multiple conflicts of interest. Sometimes targets' boards object; they are usually bought off.

In 2006, JP Morgan arranged $2.67 billion for SSA Global Technologies (target) and got Infor Global Systems to take SSA over. In 2005, Credit Suisse advised Toys 'R Us, arranged the loans, and brought in KKR to take them over for $7.5 billion. Delaware Chancery Court Judge Leo Strine said he found an "appearance of impropriety" in the fact that Credit Suisse collected $10 million in fees for arranging the financing for the deal, even as it was advising Toys 'R Us in the buyout. In 2006, Goldman Sachs made an $18 billion package for takeover of Clear Channel radio, while advising Clear Channel to find a buyout. Initially, Clear Channel's board rejected the idea citing Goldman's clear conflict of interest; but then changed its mind.

In another example already reported, Australia-based Macquarie Bank's practice is to "advise itself" as both takeover firm and bank lender/adviser, and loot the fees—$800 million worth in 2006. Macquarie specializes in taking over both public- and privately owned infrastructure (PPPs).

Now the Massachusetts Secretary of State William Galvin is investigating UBS AG's practice of hot-housing new hedge funds in "hedge fund hotels"—space leased by UBS to new hedge fund managers, complete with staffs, communication-systems specialists, etc. The hedge funds then turn around and pay exorbitant "trading fees" to the same banks, to pay for the space and staff; however, the hedge funds' investors are not told that these are extra fees, and are being charged for them.

Malthusian Warns Ethanol Hoax Will Lead To Starvation

Population-control guru Lester Brown's Earth Policy Institute held a conference call Jan. 4 to release a paper by Brown saying that the people promoting the ethanol bubble are using facts and figures that are vastly understated respecting corn volume. Brown states that the U.S. Department of Agriculture projects that distilleries will only require 60 million tons of corn from the 2008 harvest. But his Institute says that it will take 139 million tons of corn, which is half of the projected 2008 corn harvest. Brown says that this will drive food prices to record levels, pricing it out of reach for millions of people. He is calling for a moratorium on the licensing of new distilleries. If there is not a moratorium, the increased use of the harvest corn will affect world food-aid programs and could lead to urban food riots in developing countries. Brown is asking the incoming Democratic Congress to adopt the moratorium.

In the overall corn ethanol boom, Monsanto reported a 535% jump in first-quarter profits on demand for corn seeds and Roundup herbicide. Monsanto is saying that the 2007 corn plantings may increase by 9.45 million acres to 85.9 million acres.

Auto Industry Productive Employment May Be Shrinking

The announcement of breakup and liquidation of the large auto supplier firm Collins & Aikman is a "Delphi II" which poses the question: Just how fast is the U.S. auto industry workforce and capacity now shrinking? The Bureau of Labor Statistics has no overall figures past September 2006, at which point national shrinkage had been 22% since July 2000 (from 1.330 million to 1.047 million). But MLive.com published a survey of the auto industry in the western New York region, which shows a much faster disappearance. There, during 2006-2007 alone (including some bought-out workers who have will leave in early 2007), there is a 27% shrinkage of employment taking place, from 10,400 in mid-2005 to 7,630 or less by mid-2007. "It could get worse" depending on U.S. auto sales. This survey is a cross-section of the industry, and includes the plants of GM, Ford, Delphi, Visteon, American Axle, and Continental Automotive Systems in the region.

Nationally, Collins & Aikman shows what is being lost. This is a 163-year-old family-owned firm, with a high proportion of R&D, machine-tool, and product development in acoustical materials, instrument panels, turbines for small aircraft, etc. The firm has three tool-and-die centers and three other design centers, comparable to GM or Ford with 5-7 times the workforce. C&A owns at least 45 plants in North America with 14,000 employees, and through a partnership with Dura Automotive (also in bankruptcy), as many as 60 plants with 20,000 employees being impacted by the breakup/liquidation plan announced two weeks ago. Clearly, a second Delphi disaster, but more rapid. At least two plants will shut down this month, in Georgia and New Hampshire.

Ford orders had been about one-quarter of C&A revenue; total revenue was $2.8 billion in 2005, of which Ford $710 million; but Ford paid them only $540 million in 2006. Other makers also pressured them to cut costs while in bankruptcy, to the point that C&A stopped parts shipments to Ford in October 2006, over pricing. One Ford plant in Hermosillo shut down as a result. This pushed C&A over the edge and they changed their bankruptcy exit plan to breakup, and liquidation selloff of most assets.