Monday, May 21, 2007

Signs of the Economic Apocalypse, 5-21-07

From Signs of the Times:

Gold closed at 662.00 dollars an ounce Friday, down 1.6% from $672.30 at the close of the previous Friday (and down 4.2% over the last two weeks). The dollar closed at 0.7403 euros Friday, up 0.2% from 0.7391 at the previous week’s close. That put the euro at 1.3508 dollars compared to 1.3530 the Friday before. Gold in euros would be 490.08 euros an ounce, down 1.4% from 496.90 euros for the week. Oil closed at 64.94 dollars a barrel Friday, up 3.9% from $62.51 at the close of the week before. Oil in euros would be 48.08 euros a barrel up 4.1% from 46.20 for the week. The gold/oil ratio closed at 10.19 Friday, down 5.6% from 10.76 at the close of the previous Friday. In U.S. stocks, the Dow closed at 13,556.53 Friday, up 1.7% from 13,326.63 for the week. The NASDAQ closed at 2,558.45 Friday, down 0.1% from 2,561.91 at the end of the week before. In U.S. interest rates the yield on the ten-year U.S. Treasury note closed at 4.80%, up 13 basis points from 4.67 for the week.

Consumer sentiment was up in early May in the U.S.. Why? I would just chalk it up to the fact that, in the northern temperate zone, ANY kind of sentiment is up in May. How could it not be the case with warmer weather, lilacs in bloom, leaves opening on trees and birds chirping? It almost can make a person forget all the stormclouds on the horizon.

Not least among those stormclouds is the move towards private equity firms taking public corporations private. This month’s purchase of the Chrysler Corporation by Cerberus Capital Management is still reverberating. I find it interesting that Cerberus was named after the demon dog who guards the gates to Hades, the underworld realm of the dead, allowing the spirits of the dead to enter but none to exit. Nice.

Who is Cerberus and what do they want to do with Chrysler?

The Cerberus takeover of Chrysler—what it means for auto workers

Shannon Jones
17 May 2007

Chrysler CEO Tom LaSorda called for cuts in retiree health benefits one day after the announced sale of the North American unit of DaimlerChrysler to the private equity firm Cerberus Capital Management. The statement by LaSorda, who will continue to head Chrysler under Cerberus ownership, confirms that the sell-off of Chrysler is the preparation for a wholesale assault on North American auto workers.

The sale of the Michigan-based automaker to Cerberus has been widely presented by politicians, the media and the leadership of the United Auto Workers as a blessing for Chrysler workers. The change of ownership, it is said, will help shore up and stabilize the automaker’s operations and ultimately benefit the workforce.

The reality is that Cerberus, a firm notorious for stripping companies of their assets in order to resell them at a profit, is preparing to brutally slash the jobs, wages and benefits of Chrysler workers. Since its founding in 1992, Cerberus has amassed enormous wealth from the contraction, not the expansion, of corporate entities ranging from retail chains to auto parts and supply companies. It has left a trail of battered companies either drastically downsized or dismantled.

Last year, for example, Cerberus bought 600 Albertson’s supermarkets. Within months it had laid off 1,000 workers. In 2004, Cerberus purchased the Mervyn department store chain. The next year it closed 62 Mervyn stores, eliminating 4,800 jobs. It recently closed a bus plant in Canada and several textile mills in the US. It has also been involved in the downsizing of the car rental firms Alamo and National.

The sale of Chrysler to Cerberus “will shake the ground under people’s feet in a huge way,” Kevin Boyle, a professor at Ohio State University and a noted historian, told the New York Times in a May 14 article entitled “Cerberus Emerges from the Underworld.”

The Wall Street Journal on May 15 quoted Peter Pestillo, the former CEO of auto parts maker Visteon and for a time the Ford executive in charge of UAW talks, as saying, “This deal by Cerberus sets things up for very significant changes in Detroit. It will shake up GM and Ford as well.” Cerberus, Pestillo continued, doesn’t “soldier on with bad contracts. They shine things up and sell.”

Unlike mutual funds, private equity funds operate largely outside of government regulation, since their stock is not publicly traded. They pool huge amounts of private capital seeking the largest return in the shortest time. The modus operandi of firms like Cerberus is not to create profit through the development of new products and technologies, but to plunder the assets of existing companies.

An article in the May 14 edition of the German magazine Der Spiegel, entitled “Hellhound Snaps up Chrysler,” had this to say: “Venture capital firms like Cerberus invest in or purchase other companies that are about to go bankrupt. After buying them, they either take control as the largest creditor, rationalize the business and re-sell it—or they carve it up into pieces. Originally, Cerberus primarily bought the debt of bankruptcy candidates from their creditors. Since then, the portfolio has expanded to all kinds of problem-ridden assets. Firms like Cerberus have earned the nickname of ‘vulture funds.’”

One asset Cerberus undoubtedly has its eye on is Chrysler’s profitable auto finance unit Chrysler Financial. Cerberus already owns a majority stake in General Motors Acceptance Corporation Financial Services (GMAC), which it bought from General Motors last year. It is likely that Cerberus will attempt to carve Chrysler Financial, with net assets of $5.5 billion, out of Chrysler and merge it with GMAC, creating a massive and potentially highly profitable entity.

Cerberus’s owners have reaped enormous profits since the company’s start-up in 1992. Company founder, Stephen Feinberg, formerly worked at corporate buyout firm Drexel Lambert, notorious in the 1980s for popularizing so-called “junk bonds.” Fortune magazine in 1999 listed Feinberg as one of the richest Americans under the age of 40. At that time his net worth was $274 million.

According to an October 3, 2005 report in BusinessWeek, some of the top personnel at Cerberus earn up to $40 million a year. An article in CNNMoney from November of 2006 noted that private equity firms returned 22.5 percent on investments, as compared to an average of 6.6 percent for companies included in the Standard & Poor’s 500 list.

Such extraordinary returns are not possible from more traditional business operations, and certainly not from the production and sale of automobiles. The functioning of firms such as Cerberus often involves complex and risky transactions that have absolutely nothing to do with the creation of real value.

A piece in the March 16, 2006 edition of USA Today states that the secret of private equity firms “is the use of debt—usually as much as seventy cents of every dollar they invest. Because they pile debt onto the companies they buy, private equity firms free up their own cash, allowing them to make additional investments and maximize their potential returns.”

In some cases, private equity fund managers have been accused of taking out loans against the assets of companies they have purchased so as to award themselves fat payouts, regardless of what happens to the takeover target.

Underlying the rise of private equity is the ready availability of investment cash. Following the 2000 stock market collapse, private equity became a preference for investors seeking big returns.

Increasingly, private equity funds have obtained investment capital from public pension funds, which accounted for about one quarter of all new money raised by private equity firms last year. According to a report in the May 15 New York Times, among the investors in Cerberus are the Los Angeles Fire and Police Pension System and the Pennsylvania Public School Employees Retirement System.

Thus, workers’ pension funds are being used to help underwrite the takeover and destruction of companies and the consequent elimination of the jobs and benefits of other workers.

Further, given the highly speculative nature of private equity ventures, the increasing turn by pension funds to private equity investment is exposing workers’ retirement benefits to substantial risk. There is already talk in some circles of a “private equity debt bubble” (Boston Globe, May 1, 2007).

Who runs Cerberus?

A look at the leading personnel of Cerberus underscores the socially reactionary character of this enterprise. Feinberg has assembled a management team comprised of individuals from politics and business whose names are associated with job-cutting and other anti-social polices carried out by the US and international ruling class over the past several decades.

* The chairman of Cerberus is John W. Snow, formerly Bush’s treasury secretary. Snow led the drive for massive tax cuts for the rich.
Prior to his tenure in the Bush cabinet, Snow headed CSX Corporation, the railroad conglomerate.

* Former Republican Vice President Dan Quayle is another notable at Cerberus. Since joining Cerberus in 2000, he has focused on international operations, using his political connections to assist in acquisitions in Japan and Germany.

* Former US Secretary of Defense Donald Rumsfeld was an investor, according to a report filed in 2001.

* David Thursfield, a senior member of Cerberus’s automotive and industrial team, gained a reputation at Ford as a savage cost-cutter. His push to force parts suppliers to reduce prices produced so much tension within Ford management that he was forced to leave the company in May 2004, the same month he joined Cerberus.

* A new figure at Cerberus is Wolfgang Bernhard, a former executive at Chrysler and Mercedes Benz. According to a report in the May 14 New York Times, “At both companies he wielded a cost-cutting ax, ruffling the feathers of the labor unions and higher-ups.”

* Another important team member, assisting Cerberus operations in Europe, is former German Defense Minister Rudolf Scharping, who is said to be an advisor. Scharping was dismissed from his government post in 2002 following several scandals.

For the UAW bureaucracy to praise the sale of Chrysler to Cerberus, claiming it is in the “best interests” of workers, says much about the reactionary interests the UAW serves.

China is now getting into the Private Equity game:

China says to take $3 billion stake in Blackstone

May 20, 2007

NEW YORK (Reuters) - China on Sunday said it plans to make a $3 billion investment in the Blackstone Group, one of the world's largest and most aggressive private equity groups that is based in the United States.

China, in a joint release with Blackstone, said the country's soon-to-be-established state foreign exchange investment company would make the investment in the form of non-voting common units of Blackstone.

China said it will have less than a 10 percent equity stake in Blackstone immediately after Blackstone completes its planned initial public offering, and aims to hold its investment for at least four years.

"We are very pleased to be able to make the State Investment Company's very first investment in such a well-respected firm as Blackstone," Lou Jiwei, head of the working group of the State Investment Company, said.

All these mergers and acquisitions have helped push the U.S. stock market to more record highs but there is little doubt that they will dump millions of workers with lots of debt onto the job market. Rumors of massive job cuts at IBM ( in the 150,000 range) seem realistic. Unions at IBM called a 15 minute work stoppage to protest the rumored cuts:

IBM union calls work stoppage to protest U.S. layoffs

Nancy Gohring

May 15, 2007

An IBM labor union is calling for a 15-minute work stoppage to protest job cuts at the company.

The stoppage is scheduled for Tuesday at 3 p.m. Eastern Time across the U.S. Workers at IBM in Italy are also planning a similar action in support of the U.S. employees.

The union, Alliance@IBM, is asking employees to stop work for 15 minutes, including leaving phones and instant messages unanswered.

"Tell IBM to stop abandoning good U.S. jobs," on its Web site.

A recent posting on the Robert X. Cringely blog at suggesting that IBM might lay off about 150,000 U.S. employees may have contributed to concern about impending job cuts at the company. The posting set off a flurry of comments across the Web.

On a newsgroup on the Alliance@IBM Web site, several IBM employees posted a note they received from management calling Cringely's blog posting inaccurate and based on gross exaggerations. The letter confirms that the company has recently implemented a "focused resource reduction in the U.S." but says that IBM currently only has about 130,000 employees in the U.S.

Alliance@IBM said in early May that IBM recently laid off more than 1,300 U.S. workers from its global services division.

Over the past few years, IBM has quickly grown its operations in India and China and some employees may fear that growth will come at the expense of the U.S. operations.

As of Jan. 1, IBM had 53,000 employees in India.

It’s not hard to see the whole thing unravelling soon. George Ure sees the following:

This all adds up to one of those "perfect storm" kinds of things for this fall. Picture continuing droughts, escalation of prices for food while housing crashes hitting at the same time that IBM is belt-tightening, and all the recent merger activity results in huge layoffs, which is typically how M&A deals are penciled out to make sense -- cutting employees to become more efficient. Remember, if productivity is high enough, no one has a job.

Stef Zucconi found an interesting list on the CIA website:
You’ve got to laugh…

This just tickled meFrom the CIA World Fact Book - National current account balances for 2006 ranked by size...The Top 10 -

Then 143 other countries…

Then the bottom 10 [the numbers in parentheses are negative, in other words, deficits] –

What I find fascinating about the bottom five is that each of those countries have suffered a neocon takeover, France being the latest. Is it more than a coincidence? Cause? Effect? Correlation? A clue may lie in the one country in the bottom five that was taken over by but later escaped escaped the grip of the neocons, Spain. The editors of Signs of the Times made the following comment on an article describing Spain’s financial difficulties.

The article asks the question: "Where has the money gone?" The central bank of any country is not owned or controlled by the government, the central bank of any country is in fact the government's creditor, it calls the shots from a financial point of view, and to be viable, any government is 100% dependent on finances. If it so chose, a central bank could engineer a financial crisis of a nature that, with the help of the media, could force a government out of power. The question then is, who owns the central bank, in this case, the Banco de España?

International bankers?

What is interesting is that Spain's potential financial crisis looms large just after Sarkozy takes power in France. Spain's current government is definitively socialist, Zapatero even allowed himself to be photographed last year with a Palestinian scarf around his neck. Spain is Europe's last significant anti-globalist government. When it goes, the ZioCon lock down will be complete. If Spain's socialist government is toppled, will it be as a result of a "financial crisis"? And who will be to blame? No one of course, we all know that these things "just happen"...

Maybe the psychopathic parasite weakens the host first by draining a country of its financial reserves before consuming it.

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