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| Sheikh Nasser Al-Mohammad Al-Ahmad Al-Sabah, Prime Minister of the State of Kuwait ringing the Opening Bell at the New York Stock Exchange on Monday, Sept 22, 2008 - - US companies are dependent on investments from the Middle East and Asia to replenish their depleted capital. |
The US $700bn financial bailout will raise the national debt to more than 70 percent of GDP - - highest since 1954. Meanwhile, widely held Lehman bonds may result in losses of $110bn
Bloomberg says today that the last time American taxpayers owed as much as 70 percent of GDP on the national debt was in 1954, when the nation was still paying down costs incurred during World War II.
The government reaching the requested debt limit would entail every man, woman and child in the US owing more than $37,000 each. The median US income last year was $50,233.
Bloomberg says if Treasury spends the entire amount next year, as some economists expect, it would drive next year's budget deficit, now projected to be around $500 billion, to $1 trillion or more. That would increase the annual shortfall to about 7 percent of GDP, a record level. The deficit rose to 6 percent of the economy in 1983, when then-President Ronald Reagan was ramping up Cold War-era defense spending and cutting taxes.
The Financial Times says today that investors owning Lehman Brothers bonds face potential losses of nearly $110bn, reflecting the sharp reductions in the value of assets that are likely to be left to be paid out to creditors.
The FT says that those who sold protection against a default or Lehman bankruptcy will likely recover 18 cents on the dollar when the contracts settle in a complicated auction October 10.
Lehman bonds were widely held by investors such as pension funds and mutual funds. This means the losses will have a far-reaching effect on ordinary investors.
The Federal Agricultural Mortgage Corp, or Farmer Mac, a federally chartered entity that expands financing for US farmers, ranchers and rural homeowners, said it would have losses on its holdings of $60m of Lehman senior debt, which raised questions as to whether it could meet its capital requirements.
Just one week before Lehman filed for bankruptcy, its $110bn of senior bonds were quoted at close to 95 cents on the dollar.
Bond prices then plunged to 35 cents a week ago. They are now trading at about 18 cents to the dollar.
Subordinated debt, which is lower down the pecking order of claims to be paid to creditors and of which Lehman holds $17bn, was on Monday quoted at one cent on the dollar.
The Wall Street Journal reports that New York regulators are attempting to tame parts of the unregulated credit-default-swaps market by requiring some sellers of these contracts to become insurance companies.
On Monday, the New York Insurance Department under Eric Dinallo reversed a previous position and issued guidelines that declared some CDS contracts are "insurance and therefore subject to state regulation," it said in a statement.
Credit-default swaps are privately negotiated contracts that act like insurance and protect investors against a default on bonds and loans that they own. Swap buyers make regular payments to sellers, which in turn agree to make large payouts if defaults take place.
The rules, which are supposed to take effect in January 2009, would cover swaps bought by investors that also own the actual bonds or loans referenced by the swaps.
The market has grown to more than $62 trillion of contracts in recent years - - read why investor Warren Buffett, termed them time bombs in 2003.
