Signs of the Economic Apocalypse, 3-12-07

From Signs of the Times:


Gold closed at 650.10 dollars an ounce Friday, up 0.7% from $645.90 at the close of the previous Friday. The dollar closed at 0.7625 euros Friday, up 0.6% from 0.7580 at the previous week’s close. That put the euro at 1.3115 dollars compared to 1.3193 at the end of the week before. Gold in euros would be 495.69 euros an ounce, up 1.2% from 489.58 euros for the week. Oil closed at 60.05 dollars a barrel Friday, down 2.4% from $61.47 at the end of the week before. Oil in euros would be 45.79 euros a barrel, down 1.7% from 46.59 for the week. The gold/oil ratio closed at 10.83, up 3% from 10.51 at the close of the previous Friday. In U.S. stocks, the Dow closed at 12,276.32, up 1.1% from 12,138.77 for the week. The NASDAQ closed at 2,387.55 up 0.6% from 2,374.12 at the close of the Friday before. In U.S. interest rates the yield on the ten-year U.S. Treasury note closed at 4.58%, down seven basis points from 4.51 for the week

The stabilizing of stock markets, caused by halfway decent U.S. employment numbers last month (97,000 jobs added) or by the Plunge Protection Team, take your pick, calmed a lot of nerves. I guess last week wasn’t the time the Plunge Protection Team either couldn’t or wouldn’t stop the plunge. Here is Mike Whitney on the PPT:

Juicing the Stock Market
The secret maneuverings of the Plunge Protection Team

By Mike Whitney03/07/07

The Working Group on Financial Markets, also known as the Plunge Protection Team, was created by Ronald Reagan to prevent a repeat of the Wall Street meltdown of October 1987. Its members include the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the SEC and the Chairman of the Commodity Futures Trading Commission. Recently, the team has been on high-alert given the increased volatility of the markets and, what Hank Paulson calls, "the systemic risk posed by hedge funds and derivatives.”

Last Tuesday’s 416 point drop in the stock market has sent tremors through global system. An 8% freefall on the Chinese stock exchange triggered a massive equities sell-off which continued sporadically throughout the week. The sudden shift in sentiment, from Bull to Bear, has drawn more attention to deeply rooted “systemic” problems in the US economy. US manufacturing is already in recession, the dollar continues to weaken, consumer spending is flat, and the sub-prime market in real estate has begun to nosedive. These have all contributed to the markets’ erratic behavior and created the likelihood that the Plunge Protection Team may be stealthily intervening behind the scenes.

According to John Crudele of the New York Post, the Plunge Protection Team’s (PPT) modus operandi was revealed by a former member of the Federal Reserve Board, Robert Heller. Heller said that disasters could be mitigated by “buying market averages in the futures market, thus stabilizing the market as a whole.” This appears to be the strategy that has been used…

In fact, as Ambrose Evans-Pritchard of the U.K. Telegraph notes, Secretary of the Treasury, Hank Paulson has called for the PPT to meet with greater frequency and set up “a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis. The top brass will meet every six weeks, combining the heads of Treasury, Federal Reserve, Securities and Exchange Commission (SEC), and key exchanges”.

This suggests that the PPT may have been deeply involved in last Wednesday’s “miraculous” stock market rebound from Tuesday’s losses. There was no apparent reason for the market to suddenly “go positive” following a ruinous day that shook investor confidence around the world. The editors of the New York Times summarized the feelings of many market-watchers who were baffled by this odd recovery:

“The torrent of bad news on housing is only worsening, with a report yesterday that new home sales for January had their steepest slide in 13 years...Manufacturing has already slipped into a recession, with activity contracting in two of the last three months. How is it then that investors took Mr. Bernanke’s words as a “buy” signal?”

How indeed; unless other forces were operating secretly behind the scenes?

Market Rigging

“Gaming” the system may be easier than many people believe. Robert McHugh, Ph.D. has provided a description of how it works which seems consistent with the comments of Robert Heller. McHugh lays it out like this:

“The PPT decides markets need intervention, a decline needs to be stopped, or the risks associated with political events that could be perceived by markets as highly negative and cause a decline; need to be prevented by a rally already in flight. To get that rally, the PPT’s key component — the Fed — lends money to surrogates who will take that fresh electronically printed cash and buy markets through some large unknown buyer’s account. That buying comes out of the blue at a time when short interest is high. The unexpected rally strikes blood, and fear overcomes those who were betting the market would drop. These shorts need to cover, need to buy the very stocks they had agreed to sell (without owning them) at today’s prices in anticipation they could buy them in the future at much lower prices and pocket the difference. Seeing those stocks rally above their committed selling price, the shorts are forced to buy — and buy they do. Thus, those most pessimistic about the equity market end up buying equities like mad, fueling the rally that the PPT started. Bingo, a huge turnaround rally is well underway, and sidelines money from Hedge Funds, Mutual funds and individuals’ rushes in to join in the buying madness for several days and weeks as the rally gathers a life of its own.” (Robert McHugh, Ph.D., “The Plunge Protection Team Indicator”)

If a secret team is interfering in the stock market, it presents serious practical and moral issues. For one thing, it disrupts natural “corrections” which are a normal part of the business cycle and which help to maintain a healthy and competitive slate of equities.

More importantly, outside intervention punishes the people who see the weaknesses in the stock market and have invested accordingly. Clearly, these people are being ripped off by the PPT’s back-channel manipulations. They deserve to be fairly compensated for the risks they have taken.

Moreover, artificially propping up the market only encourages over-leveraged speculators and smiley-face Pollyanna’s who continue to believe that the grossly-inflated market will continue to rise. Rewarding foolishness only stimulates greater speculation.

The tinkering of the PPT is sure to erode confidence in the unimpeded activity of capital markets. It’s astonishing to think that, after years of singing the praises of the “free market” as the ultimate expression of God’s divine plan; these same conservative ideologues and “market purists” favor a strategy for direct intrusion. The actions of the Plunge Protection Team prove that it’s all baloney. The “free market” is merely a public relations myth with no basis in reality. Saving the system will always take precedent over ideology; just as the “invisible hand” will always be overpowered by the manicured and mettlesome fingers of banking elites and Wall Street big wigs. It’s their system and they’re not going to let it get wiped out by some silly commitment to principle.

The free market system is supposed to be “self cleansing” through cyclical purges of over-inflated equities and over-extended speculators. Do we really want “central planning” from an unelected, Market-Nanny that re-jiggers the system according to its own economic interests?

The Plunge Protection Team may wrap itself in pompous rhetoric, but it operates like a Fiscal Politburo inserting itself into the market in way that promotes the narrow interests of its own constituents. It’s an outrage.

Besides, the market is so fragile it trembles every time someone halfway around the world sells a fistful of equities. It needs a good shakedown.

The years of deregulation have taken their toll. The market is resting on a foundation of pure quicksand. Collateralized debt, rickety hedge funds, shaky sub-prime equities, and an ocean of margin debt are just a few examples of deregulation’s excesses. These untested debt-instruments are presently bearing down on Wall Street like a laser-guided missile. It’ll take more than Hank Paulson and his PPT “plumber’s unit” to prevent the implosion…

The upshot is a one-sided bet for investors. They have explicit assurances from regulators and policy makers that almost anything goes when the markets are hot, and implicit assurances — based on past experience — that the Fed would lower interest rates to contain a financial crisis should one erupt. Unfortunately, there is no guarantee that easing up on rates would have the same powerful effect in a future crisis as it had in the past.

The next crisis appears to be building around weakness in the United States, not in Russia or Asia or South America. That means money could flow out of the country if markets were rattled. That would weaken the dollar and require speedy and complex remedial action by the world’s central banks — not just a rate cut by the Fed.” (NY Time)

...This is the biggest equity bubble in history. Neither increasing the money supply nor lowering interest rates will fend off the impending catastrophe. We need to address the mushrooming risk that has arisen from lending hundreds of billions in sub-prime loans, and from overexposure in the hedge funds and derivatives markets. These things need to be confronted immediately as they pose a “clear and present danger” which could set off a chain reaction of defaults and bankruptcies.

The world’s markets are facing a global liquidity crisis which will become more evident as the real estate sub-prime market continues to deteriorate. This will undoubtedly be accompanied by larger and more ferocious gyrations in the stock market.

Does “Hans Brinker” Paulson really believe he can stop the flood by sticking his well-burnished finger in the dike?

It’s All Uphill from Here on Out

The U.S. economy faces daunting challenges in the near-future; a steadily shrinking manufacturing sector, increasing job losses in housing, a nascent currency crisis, and a real estate market that is in full retreat. Additionally, the “always dependable” American consumer is showing signs of fatigue which is pushing investors towards foreign markets.

This explains why “the SEC said it aims to slash margin requirements for institutions and hedge funds on stocks, options, and futures to as low as 15pc, down from a range of 25pc to 50pc.The ostensible reason is to lure back hedge funds from London, but it is odd policy to license extra leverage just as the Dow hits an all-time high and the VIX 'fear' index nears an all-time low – signaling a worrying level of risk appetite. The normal practice across the world is to tighten margins to cool over-heated asset markets.” (Ambrose Evans-Pritchard, “Monday View: Paulson Reactivates Secretive support team to prevent markets meltdown” UK Telegraph)

This is yet another red flag. The stewards of the system are actively seeking larger infusions of marginal debt just to keep the faltering market on its last legs.

That’s not reassuring and it is clearly a step in the wrong direction. It further illustrates the worrisome level of recklessness at the top rungs of the decision-making apparatus…

The precariousness of our present economic situation has caused these dramatic changes and strengthened the conjugal relationship between the privately-owned Central Bank, major corporations and the state. The market is more vulnerable now than anytime since the late 1920s, a fact that was emphasized in a statement by the IMF just 2 months ago:

“Financial markets have failed to price in the risk that any one of a host of threats to economic security could materialize and deliver a massive shock to the world economy. It is clear that risks are on the downside of a sharper than expected slowdown in house prices that would produce weaker-than-expected growth that would have implications for global growth and financial markets.” (“IMF: Risk of global crash is increasing” UK Independent)

Risk, over-exposure, cheap money, shaky loans, a falling dollar, low reserves and a confidence deficit; these are the crumbling cinder-blocks upon which America’s Empire of Debt currently rests. The possibility of a major disruption grows more likely by the day. Consider the world's 8,000 unregulated hedge funds with $1.3trillion at their disposal or the wobbly derivatives market and the effects that a sudden downturn might have. Kenneth J. Gerbino put it like this in his recent article “The Big Sell Off” on kitco.com:

“With a global market panic starting in a low interest rate and, so far, low inflation environment, one has to be wonder about the real reason for (Tuesday’s) sell-off. Easy money almost everywhere leads to leverage and speculation. No where is this more prevalent than in the global derivatives market. It is not out of the question that third party defaults and risk aversion designed instruments that collapse and go sour may someday overwhelm the financial markets. Latest figures from the Bank of International Settlements: $8.3 trillion of real money is controlling $313 trillion in derivatives. That’s 38 to 1 leverage. These figures are just for the over - the - counter derivatives and do not include the global exchange traded derivatives in currencies, stocks and commodities which are another $75 trillion.”

“$8.3 trillion of real money is controlling $313 trillion in derivatives!”

This illustrates the sheer magnitude of the problem and the economy-busting potential of a miscalculation. That’s why Warren Buffett calls derivatives “weapons of mass destruction”. If there’s a fire-sale in hedge funds or derivatives, there’s nothing the Plunge Protection Team or the Federal Reserve will be able to do to stop a meltdown. The market will crash leaving nothing behind.

We are reaping the rewards of a lawless, deregulated system which has removed all the safeguards for protecting the small investor. There is no government oversight; it’s a joke. The stock market is a crap-shoot that serves the sole interests of establishment elites, corporate plutocrats, and banking giants. The small investor is trapped beneath the wheel and getting squeezed more and more every day. He has no way to fix the markets like the big guys and no lobby to promote his interests. He must arrive at his decisions by researching publicly available information and then plunking down his money. That’s it. He’d be better off in a casino; the odds are about the same.

Whitney has a point. Why did the market rally when all week the news on the subprime mortgage front was grim? As we discussed last week, defaults in the mortgage market in the United States will have effects going beyond financial corporations and far beyond the borders of the United States:

GM May Take Almost $1 Billion Charge for Mortgages

By Greg Bensinger

March 6 (Bloomberg) -- General Motors Corp., the world’s largest automaker, may take a charge of almost $1 billion to cover bad mortgage loans made by its former home-lending unit, according to a Lehman Brothers Holdings Inc. analyst.

Residential Capital LLC relies on loans to people with poor or limited credit records or high debt burdens, for more than three-quarters, or $57 billion, of its loan portfolio, Lehman analyst Brian Johnson wrote in a research report. Delinquency rates on such subprime loans made last year are at a record high.

Detroit-based GM, struggling to reverse more than $13 billion in losses over the last seven quarters through Sept. 30, delayed filing its fourth-quarter and full-year earnings to as late as March 16 in order to restate results. The company in November sold a 51 percent stake in General Motors Acceptance Corp. for $14.4 billion to a group led by Cerberus Capital Management LP. Residential Capital, or ResCap, is part of GMAC.

The subprime market is “a key factor to see what the earnings power of GM’s remaining interest in GMAC is going to be,’’ Johnson said in an interview.
GM may have to spend as much as $950 million to make up the difference between the original value of the finance unit and any losses for subprime loans made by ResCap, he said last month.

Rising Delinquencies

About 13 percent of the subprime loans backing bonds issued in 2006 and rated by S&P are delinquent, with 6.65 percent of the loans behind in payments by 90 days or more, according to Standard & Poor’s. More than 20 lenders have closed or are seeking buyers since the beginning of 2006. Subprime mortgages typically have rates at least two or three percentage points above safer prime loans.

“Some traders are expressing their view that we’re a pure mortgage market play, whether that’s appropriate or not,” Louise Herrle, ResCap’s treasurer, said in an interview last week.

ResCap may have lost $160 million to $520 million in the fourth quarter because of subprime mortgages, Citigroup Inc. analyst Jon Rogers in New York said on Feb. 28…

The news last week that Barclays Bank revealed $1 billion in exposure to the sub-prime lender New Century Financial Corporation shows that it will not only be imprudent United States people who will pay for this, but also the thrifty Europeans.

The whole world feels American subprime pain

Andrew Leonard
Salon

When How the World Works first began checking in on the state of the U.S. housing market, the rationale for including such a topic in a blog ostensibly about globalization was straightforward:

American consumers are the locomotive pulling the global economy forward. The rapid appreciation of home prices in the great housing boom of the early 21st century gave those consumers access to a seemingly unlimited ATM of home equity financing. If the housing bust turned off that spigot, then the global economy might go off the tracks.

A year ago, HTWW had little clue that the subprime mortgage lending market would be the first great casualty of a popped housing bubble (although as far back as last April, I did note that some Wall Street hedge funds had begun to bet on a bust). But a separate fixation of this space has always been the exotic world of derivatives trading, and it has been enlightening to watch how the housing bust has become a narrative about derivatives. The repackaging of subprime mortgage bonds into "collateralized debt obligations" -- a derivative instrument that has boomed in popularity over the past decade -- is the stuff of daily coverage in the financial pages today, with no one particularly sure whether what we are seeing is the Achilles' heel of the global economy finally exposed or proof that modern financial systems are sophisticated and resilient enough to survive any shock.

Whatever the case is, the narrative provides another angle on globalization. As the Wall Street Journal reports today, European investors are discovering that they unwittingly exposed themselves to the U.S. housing bust by buying collateralized debt obligations that included repackaged American subprime mortgage loans.

Investors are realizing they may own more exposure to subprime-mortgage-loan pools than they thought.

That exposure is surfacing because of the way fixed-income investments can be layered. Banks sell asset-backed securities, known as ABS, backed by mortgages to investors. The ABS can ultimately end up in complex structures called collateralized debt obligations, or CDOs. Institutional investors invest in CDOs, sometimes not realizing they have subprime mortgages in them.

"There are European investors who until a few weeks ago did not know an awful lot about what subprime was who are realizing that they actually have exposure through some of their CDOs," said Citigroup credit strategist Hans Lorenzen. "I've spoken to one investor who said that their portfolio had exposure to subprime and they just knew that it had some American ABS exposure. They hadn't gone through enough detail" of their investment to realize they owned loans to Americans with spotty credit records.

Because derivatives trading is relatively unregulated and exceedingly complex, no one really knows how exposed European investors (or big American players like Goldman Sachs or Citigroup) are to the subprime mess. It's also true, as the New York Times reports today, that if you were smart enough to bet on a housing bust coming true, you are making good money now off of subprime misfortune. Maybe risk has been sufficiently spread around and hedged in so many different directions that for every loser there will be a winner and it will all balance out in the end. That would be nice, for the global economy.

But the deeper story is that the evolution of derivatives trading, in which ever-more-complex securities that are created by repackaging underlying assets (home loans, car loans, stocks and bonds and futures options and so on) in ever more innovative ways, is resulting in a global economy where investors all over the world, whether they know it or not, have a finger sticking in everyone else's pie. So the risk for a home loan made to a Californian with bad credit may end up partially borne by a hedge fund in Latvia. And a meltdown anywhere ripples into everywhere.

But, thanks to the Plunge Protection Team, we can relax for a little while (weeks? days?).

Irresponsible bubble creation, lack of real political alternatives, and general political and economic idiocy is unfortunately not exclusive to the United States. Here is Stef Zucconi on future U.K. prime minister and current Chancellor of the Exchequer, Gordon Brown:

Gordon Brown, Chancellor of the Exchequer and Prime Minister in waiting, came out with a blinder yesterday and announced that health and other public sector workers were going to receive a below inflation pay rise this year.In the words of good old Gordie..."The overall awards come within the inflation target at 1.9% demonstrating our total determination to maintain discipline and stability and continue with an 11th year of sustained economic growth."
Gordon neglected to mention that, whatever La La Land inflation targets the government may set, the real rate of inflation for ordinary people is something like 4 to 9% which means nurses will be receiving an effective pay cut of as much as 5% in real terms.
He also neglected to mention that giving lower paid staff an effective pay cut will have virtually f*** all impact on the rate of inflation.

Inflation has a LOT more to do with the 800 billion pounds of personal debt (all paying a lovely rate of interest to the banks) that's been whisked out of thin air and pumped into the country since he took charge and nothing to do with whether a nurse can pay her electricity bill next month or not.Could that staunch socialist Gordon be making low paid workers scapegoats for the excesses of the financial services industry (it's been a cracking year for bonuses BTW)?Perish the thoughtThat 800 billion pound increase in personal debt and all the lovely shopping that went with it has also been the major contributory factor to those 11 years of sustained 'growth'. The only problem being that people are starting to have trouble servicing it.
F*** it, I'll write it out in full

800,000,000,000 ... pounds
that's on top of the

600,000,000,000 ... pounds
that was there before Brown took over. Making a total of, give or take the GDP of a few small countries

1,400,000,000,000 ... poundsof personal debt which was sp***** away on over-priced housing and tat that's mostly in a landfill by now and which people will be obliged to pay off, with interest, at some point

Hmmmm, lots of lovely debt and lots of lovely pay cuts for low-waged people who can't keep up with the price rises facilitated by that debt.

And there's no way Gordon doesn't know all this. Only he's not owning up to it.

Naughty Gordon

My money's on him hoping to distract everyone with a spot of Terror and some Enviro-twaddle. Tony's been doing a pretty decent warm-up act

Media pundits are predicting that Gordon is going to take over as leader of the Labour Party and consequently become Prime Minister in a few months' time because there are no other Labour MPs who are strong enough candidates to oppose him, and even if there were they wouldn't muster enough support from their fellow MPs to be nominated.

Which says a lot for just how terminally f***** the Labour Party is

And the really hysterical thing is that they're running the place

And it gets even funnier

The only viable alternative is to vote the Conservatives in

My, how we laughed

Everyone is going to have to download twice as many ringtones to straighten this particular mess out

... and remember, in times of economic uncertainty gold is always a safe investment…

Clearly the political and economic elite don’t have our best interests at heart. But how do they think what they are doing will benefit them? Someone who wrote into George Ure’s website sketched out a plausible scenario:

Suppose you are a member of TPTB. You see the coming of Peak Oil, and your advisors tell you its real. You are aware of upcoming climate changes (Not the warming part, but the subsequent and rapid arrival of continental glaciation). You are managing your family's fortune for future generations. How to prepare for the coming chaos and die off?

You look to the traditional source of your wealth - cities. That's where business banking really takes place. And cities have long been centers of manufacturing, etc, in a low fungibility energy status (which we are not right now, but are headed towards.) Big problem, you see. Since the second world war, formerly vibrant cities have become shells: donuts, if you will. Empty centers, with the value around them. Good paradigm for making money growing into those green fields, and you've made bundles doing so. But hard to secure, hard to protect, and not very energy efficient. What you want in the future is an updated version of the medieval walled cities - cosy inside, with nice tough security and minimal energy needs to sustain a quality life style for your heirs. You want cities to be Danish pastries, with nice juicy, rich fillings, and a uniform layer of housing supporting it all. But you have a few too many undesirables living in those hollow centers. How to recreate your cities in the most profitable manner?

You create the conditions for maximal subprime lending. Drop the rates. Set up special subprime lending institutions - they will ultimately be the fall guys and sit thru the Congressional testimonies, but for now they are necessary. You begin by having them lend further and further down the food chain. Then come the ARMs. Then the zero down, interest only notes. On it goes. Until it ends.

Then the interest rates come up - not too much; just enough. The notes come due; the chickens come home to roost. The subprime lending institutions take the hits. Your mega banks come in and secure the loans and their collateral (the housing areas you wanted all along). There is some friction - squatting, etc. You call in the authorities. Clashes. Fires. But the squatters move on. You now have untenable former housing. Bummer, it seems.

Except that you now sort the portfolios. What will be inside the city walls gets bulldozed, and rebuilt - upscale. Very upscale. Unaffordable except to those you want living inside the walls when the walls go up. The properties outside the walls either become purpose built (i.e. "throwaway") low income housing, or get bulldozed and turned back into greenbelt, with a special nod to the environmentalists.

Within a decade, you have rebuilt significant portions of formerly blighted urban areas. The gentry come back. Mixed use returns. Cities blossom. Property values inside the walls skyrocket. And you and your family control it all. Things in the former suburbs get gritty. Violence rises there, while falling in the city center. A reason for management of access to your now nice urban areas? You betcha. The walls go up.

Twenty years on, you are set, living the good life inside restored, safe, controlled, vibrant, urban areas, served by farmers markets as well as the remaining industrial farming. There's a green belt around the walls of truck farms, and then, outside that, the rather dangerous exurbs and crumbling former fringe suburbs. But you have little reason to ever go there, except to fly over them on your way to another of the nice oasis lily pads you have built over the first two decades of the 21st century…

The scenario leaves out one important part: depopulation. The wealthy in the urban cores won’t be needed 7 billion people to work for them. What is interesting about that scenario, though, is that it fits the way cities were for most of history and still are in most places: the rich in the inner city and the poor and lawless in the suburbs. It was only in the United States that the equation was reversed.

In any case, the past week gave a chilling reminder of how much the Powers That Be care about us or “the children” in New Bedford, Massachusetts:

More than 300 seized in Massachusetts immigration raid

Kate Randall
9 March 2007

Federal immigration authorities carried out a massive raid on a New Bedford, Massachusetts, plant Tuesday morning, detaining 300 to 350 immigrant workers and charging the company’s owner and three managers with knowingly hiring undocumented workers. The company holds a multimillion-dollar contract with the Defense Department producing supplies for the US military and runs a poverty-wage operation employing mostly Central American labor.

The sweep at Michael Bianco Inc. (MBI) began shortly after 8 a.m., as about 300 agents of the US Immigration and Customs Enforcement (ICE) and New Bedford police converged on the three-story building. Police surrounded the plant, and a Coast Guard helicopter hovered overhead to prevent the workers—mainly women with young children—from escaping. Buses lined up outside waiting to haul workers away.

Witnesses inside the plant described a horrifying scene of one the largest immigration raids ever conducted in the area. The workers—most of them Guatemalans and Salvadorans, working as seamstresses—were ordered to remain at their sewing machines as authorities reviewed their immigration status. Mayhem ensued as some attempted to flee, only to be turned back by police and the bitter winter cold outside the factory.

Tina Pacheco, a supervisor with 14 years at MBI, described the situation to the Boston Globe. “When we realized what was going on, a lot of people were screaming and crying. They told American citizens to stand in one area and the people without papers to stand in another area. It was terrible, they were crying and didn’t know what was going to happen.”

Police guarded the exits while other officers grabbed workers attempting to flee and ordered them to lie on the ground. Some agents brandished handguns. Workers were handcuffed behind their backs with plastic ties and were instructed not to use their cell phones.

Viviana Luis Hernandes, 25, a stitcher whose husband also worked at MBI, said she was forced to wait in the factory for nine hours, handcuffed, while authorities reviewed her case. Like many of the workers, she feared for the welfare of her young child if she were taken away. “When this first happened, all I thought about was my baby,” she said. Her husband was also arrested, and she was eventually released because there would be no one to care for her one-year-old.

About 320 undocumented workers were detained. The ICE said 45 workers were released following the raid because of pregnancy or other medical issues, or family and childcare concerns. The remaining 275 were eventually driven by bus about an hour and a half away to Fort Devens, a former military base now used by the Army Reserve, for questioning. About 300 government officials were involved in processing those detained.

An additional 15 women were released from Fort Devens. All those determined by authorities to have no documentation—including those released—will be required to appear in immigration court to determine their status. The majority reportedly will be flown outside the state—some as far away as Texas—to appear before an immigration court judge for deportation proceedings.

The workers include immigrants from Mexico, El Salvador, Honduras, Guatemala, Cape Verde, Portugal and Brazil. Many have lived and worked in New Bedford for years. If deported, they will be returned to lives of poverty and possible political repression in their native countries. During a press conference following the raid, Rev. Marc Fallon of Catholic Social Services described many of the detained workers as “refugees of civil war” who suffer from post-traumatic stress disorder.

Many of those detained are frantic because young children have been left on their own as a result of the raid. Immigration advocates estimate that as many as 200 children are missing a parent caught up in the sweep. Many were left at babysitters and daycare centers for hours following the raid, with caregivers receiving no word from their mothers or fathers. Corinn Williams, director of the Community Economic Development Center of Southeastern Massachusetts, commented: “It’s been a widespread humanitarian crisis here in New Bedford.”

As details became known following Tuesday’s raid, a picture emerged of virtual slave-labor conditions at Michael Bianco Inc., with workers toiling long hours for minimal pay and subjected to brutal reprisals at the hands of management. The vast majority of workers employed by MBI had no documentation. A government investigation revealed that company management steered workers to a source to obtain phony work papers—at $120 apiece—and then preyed on their fear of deportation to exploit them.

MBI, once a small operation manufacturing high-end handbags and other leather goods, won Defense Department contracts between 2001 and 2003 worth $10 million to produce two types of airmen’s survival vests. In 2004, the company won another $82 million to make lightweight backpacks for the military. The workforce at the plant skyrocketed from 85 employees in 2001 to more than 500 by 2005, and the owner was granted $57,000 in tax breaks by the city.

Company owner Francesco Insolia, 50, along with payroll manager Ana Figueroa, plant manager Dilia Costa and office manager Gloria Melo, are charged by federal authorities with “conspiring to encourage or induce illegal aliens to reside in the United States, and conspiring to hire illegal aliens.”

US Attorney Michael J. Sullivan commented on the charges: “It is alleged that MBI, Insolia and others knowingly and intentionally exploited the government by recruiting and hiring illegal aliens without authorization to work, exploited the workforce with low-paying jobs and horrible working conditions, and exploited the taxpayers by securing lucrative contracts funded by our legal workforce.”

The government’s allegations are small comfort to the hundreds of immigrants who will most likely be deported back to their home countries. In many cases, they will also be forced to make the wrenching decision to either leave behind their young children—many of them US citizens—or take them to a country where they have never set foot.

A three-year ICE investigation of MBI found that Insolia ran “a sweatshop” where workers earned only $7.00 to 7.50 an hour, received no benefits, and were paid no overtime. In reality, wages were far lower after deductions for violations of draconian company policy.

Workers were docked 15 minutes’ pay for every minute they were late for work. They were fined $20 for spending more than two minutes in the restroom, with second violations resulting in dismissal. They were also fined $20 for leaving work before the break bell sounded or for talking during work. The company provided only one roll of toilet paper per stall in the restroom, which ran out in less than an hour.

With the fear of deportation constantly hanging over them, workers were afraid to speak out against the deplorable conditions, as better jobs are virtually nonexistent. With 9.4 percent unemployment, Greater New Bedford has the highest jobless rate in the state of Massachusetts.

Many of the area’s small manufacturing plants have shut down. Just this week, Revere Copper Products, founded by American revolutionary Paul Revere in 1801, announced that it will close the plant within the next six months. Presently employing 85, the company had 1,200 workers at its peak.

For centuries, immigrants have formed the backbone of this coastal New England city and the surrounding area, manning whaling fleets, working in seafood processing and working in textile and other small mills. Today, those without documentation live in constant fear of being rounded up. In a number of families, one parent has residence status while the other has navigated the immigration system for years in attempts to gain it, to no avail.

An estimated 3,000 Central Americans—mostly young men from Guatemala—currently work in New Bedford’s fish-processing industry. In December 2005, an early-morning sweep by the US Coast Guard and immigration authorities resulted in the arrest of 13 men at the AML International and other fish processing plants on New Bedford’s waterfront. Those picked up in the raid included seven men from Guatemala, three from El Salvador, two from Mexico and one from Honduras.

As word of the raid spread by cell phone, plants emptied out across the city. Frank Ferreira, plant manager at AML, told the Globe, “People were just leaving because they didn’t want to get in trouble. Even the legal ones left. Nobody knew what was going on. It looked like an invasion.”