Tuesday, March 31, 2009

Viva La Vida G20?

A follow-up to yesterday's comment on the giant experiment, someone sent me a WSJ blog article stating that Cerberus's equity stake in Chrysler's auto company to be eliminated:

Cerberus Capital Management will lose its equity stake in Chrysler LLC’s struggling automotive company as a condition of the Treasury Department’s bailout deal with the U.S. auto maker, according to several people familiar with the matter.

The New York private-equity firm purchased an 80% stake in Chrysler in 2007, promising to bolster the auto maker’s performance by operating as an independent company. The plan, however, collapsed due to an unprecedented slowdown in the U.S. auto industry and a lack of capital at the auto maker to weather the storm.

One Obama administration official, speaking on the condition of anonymity, said Cerberus’s equity stake no longer holds value and said the firm’s ownership will come to an end. In term sheets released by the Treasury Department on Monday, the government said Chrysler’s restructuring “at a minimum will require extinguishing the vast majority of Chrysler’s outstanding secured debt and all of its unsecured debt and equity.”

Cerberus will maintain a controlling stake in Chrysler’s financing arm, Chrysler Financial, according to two people briefed on the plan. Cerberus will utilize the first $2 billion in proceeds from its Chrysler Financial holding to backstop a loan allocated to Chrysler automotive in December by the Treasury Department.

In December, when Chrysler was lobbying Congress for financial support, Cerberus said it would make considerable concessions in order to encourage the government to prop the auto maker up, including surrendering equity, foregoing profits and giving up board seats.

“A viable long-term restructuring of Chrysler’s auto manufacturing business will require concessions by all relevant constituencies,” Cerberus said in a statement at the time. “In order to achieve that goal Cerberus has advised the Treasury that it would contribute its equity in Chrysler automotive to labor and creditors as currency to facilitate the accommodations necessary to affect the restructuring.”

Cerberus still holds a portion of Chrysler’s secured debt, and that likely will also be restructured under new terms the Obama administration is laying out for Chrysler.

The Treasury Department lent Chrysler $4 billion in December, and is considering lending billions more to keep it afloat.

The move comes as Mr. Obama’s auto task force is looking to hammer out over the next 30 days an alliance between Chrysler and Italian auto maker Fiat LLC. The government is offering an additional $6 billion in capital if the two sides can hammer out an acceptable deal.

Fiat would take a stake in Chrysler in exchange for giving the auto maker technology, such as fuel-efficient car platforms and engines. Under the deal, Fiat would be required to build cars and engines in the U.S., and Chrysler would have to pay back the $6 billion before Fiat can take control of Chrysler.

Global Pensions reports that interim loans advanced to General Motors by the governments of Canada and Ontario cannot be used to shore up underfunded pension liabilities:

In a joint statement, the two governments said they would advance up to C$3bn (US$2.4bn) to General Motors of Canada and C$1bn for Chrysler Canada to assist the companies while they undertake additional work as part of their ongoing restructuring efforts.

But it said the loans could not be used for pension scheme funding or to pay off debts to parent companies or taxes.

Canada minister of finance Jim Flaherty said: "Together with the Government of Ontario, we are working in conjunction with the US Government to create a viable industry and to maintain Canada's share of Canada-US production going forward.

"The interim loans to General Motors and Chrysler reflect our priorities to both protect our economy and exercise firm oversight over taxpayer dollars."
Canada minister of industry Tony Clement said: "While the restructuring plans represent progress, they do not go far enough to ensure the long-term viability of these companies.

“Therefore, we are not certifying their proposals. Together with our US counterparts we believe that further fundamental changes are needed."

In conjunction with the US Government, the governments of Canada and Ontario are requesting that both companies undertake additional work to ensure their future competitiveness and that all stakeholders contribute appropriately to improving the overall cost structures in their plans.

It will be interesting to see how unions handle the contentious issue of underfunded pensions at the big auto companies. All I can say is that they'd better take a closer look at the health of their pension plans and get outside expert advice to make sure they are being properly managed.

In other pension news, Dutch pension funds ABP and PME announced their recovery plans:

The €208bn (US$281bn) ABP pension fund will increase contributions by 3 percentage points, withhold indexation and de-risk some of its investments in a bid to return to solvency within five years.

The scheme, which saw its coverage ratio fall dramatically as a result of the financial crisis, announced a 1 percentage point increase to contributions as of 1 July this year, with a further 2 point increase between January 2010 and 2014, and changes to its risk allocation.

Doing so, ABP said it hoped it would be able to protect member benefits and not have to cut payments, although it added indexation would not take place.

The fund also said it would reduce the risk of its investments during the recovery period, as required by the FTK law which governs pension plans.

In a statement, ABP chairman of the board of governors Elco Brinkman said “We must now take measures to make ABP healthy again in both the short and long term. We will do all we can to avoid reductions of pension rights.

“Unfortunately, the measures have consequences for our participants and former participants. We have strived to distribute the worst effects in as balanced a manner as possible between employers, employees, former participants and pensioners.”

ABP said it projected a return to minimum solvency in four years and expected to reach a funding ratio above the minimum 105% within five years, reducing the need for drastic measures.

At the end of 2008 its coverage ratio stood at around 90%. It added, even without alterations to its contribution, indexation and risk policies, it would return to solvency in this time.

The fund added it hoped to return to ‘full’ funding of 125% within 13 years and would monitor the situation. If the economy improved more rapidly than projected, it would revise its recovery plan and reduce contributions accordingly.

Should the situation deteriorate, it reserved the right to make further changes.

Under Dutch law, all pension funds with a funding level below 105% must submit a recovery plan to the Dutch pensions regulator De Nederlandsche Bank (DNB) ahead of 1 April.

In late February by the Dutch government announced an extension to the recovery period, from three years to five, as a result of the severity of the crisis and uncertainty over the global economic outlook (Globalpensions.com; 23 February 2009).

The €18.7bn Dutch metal workers’ pension scheme PME also announced details of its recovery plan.

The fund, which saw its coverage ratio fall from 135% at the end of 2007 to 90% by the end of 2008, said it expected to reach 105% solvency in five years.

It would achieve this through a 1 percentage point increase in contributions, from 22% to 23%, and by not offering indexation on pension payments while the coverage ratio remained below 105%.

Yesterday, the health service retirement system PFZW announced details of its own recovery plan, which would see pension indexation frozen for four years (Globalpensions.com; 30 March 2009)
As you can read above, Dutch laws take pension funding very seriously. If a pension fund is underfunded, it has to present a recovery plan to authorities and follow-up on its progress on returning to minimum solvency again.

But there are bigger issues at hand. As leaders prepare to meet in London for the G20, the London Times reports that France's President Nicolas Sarkozy threatened to walk out of the global summit:

President Sarkozy yesterday threatened to wreck the London summit if France’s demands for tougher financial regulation are not met.

France will not accept a G20 that produces a “false success with language that sounds good but contains no commitments”, his advisers said.

Asked if this meant a possible walk-out, Xavier Musca, Mr Sarkozy’s deputy chief of staff for economic affairs, said: “A basic rule with nuclear deterrence is that you do not say at what point you will use the weapon.”

The French threat dramatically raised the temperature hours before President Obama arrives in London today. If carried through, it would ruin a summit for which Mr Brown and Mr Obama have high ambitions, believing it vital to international recovery.

Mr Sarkozy, who blames the “Anglo-Saxons” for causing the economic crisis, told his ministers last week that he would leave Mr Brown’s summit “if it does not work out”.

A deal to tighten regulation will be one of the key features of the G20 accord but France wants a global financial regulator, an idea fiercely opposed by the United States and Britain. Mr Brown has described the notion as ridiculous.

Germany and other nations are reported to be against a global regulator and sources said that President Sarkozy must know that the proposal would not make progress.

Instead, countries will agree that their national regulators should cooperate more. So-called colleges of supervisors are likely to be established to monitor the activities of companies that operate in several countries.

British officials said it looked as if Mr Sarkozy was picking a fight he could present as a victory back home.

Mr Sarkozy’s threat underlines the emerging splits between world leaders. Germany and France have led opposition to plans to coordinate public spending, championed by the Administration of President Obama.

The importance of action to ease the economic decline will be underlined today by a report from the OECD, the umbrella group for Western democracies. It now expects the economies of its 30 member nations to slump by 4.3 per cent this year, against the 0.4 per cent drop that it forecast last November.

The group also warns that unemployment will reach 10 per cent by next year in most developed nations.

The Toronto Star reports that British Prime Minister Gordon Brown called today for a new morality in the halls of high finance as he sought to set a positive note for the sharply divided meeting of G20 world leaders:

Brown has been grasping for ways to bring a sense of unity to Thursday's meeting of the G20, which includes major economies from around the globe.

But his hope that leaders would agree to kick-start their economies with massive new government spending has been pushed aside after strong objections from European nations led by Germany and France.

And, on the eve of the summit, a report on French President Nicolas Sarkozy's attitude toward the whole exercise has added to the internal tensions within the G20. The French daily Le Figaro is saying that Sarkozy has told associates he will walk out ofthe conference if nations do not agree to his radical proposal to bring financial markets under international regulation.

The idea is a non-starter with the United States, Britain and some other G20 countries.

With many of the leaders – including U.S. President Barack Obama and Canadian Prime Minister Stephen Harper – scheduled to arrive in London later today, Brown continued his intense efforts to set the stage for the meeting on the global economic recession.

In a speech at London's historic St. Paul's Cathedral, he sought to speak to the growing public conviction in Britain and elsewhere that the current financial meltdown was the result of unrestrained greed and risk-taking by banks and financial houses with an international reach.

"I believe that the unsupervised globalization of our financial markets did not only cross national boundaries – it crossed moral boundaries," he said. "Most people want a market that is free, but not values-free, a society that is fair but not laissez-faire.

"And so across the world, our task is to agree global economic rules that reflect our enduring values."

Restoring faith in financial markets will be one of the key aims of G20 leaders. Although the summit is unlikely to adopt the French idea of international control of banks, the leaders will endorse the imposition of a new era of tighter control of financial institutions by individual governments.

The meeting begins with a working dinner hosted by Brown tomorrow night, followed by formal discussions on Thursday.

The G20 has its work cut out for them. According to the latest IMF forecast, global activity is expected to decline by around ½ to 1 percent in 2009 on an annual average basis, before recovering gradually in the course of 2010:

Turning around global growth will depend critically on more concerted policy actions to stabilize financial conditions as well as sustained strong policy support to bolster demand.

  • Restoring confidence is key to resolving the crisis, and this calls for tackling head-on problems in the financial sector. Policymakers must resolve urgently balance sheet uncertainty by dealing aggressively with distressed assets and recapitalizing viable institutions.
  • Since financial market strains are global, greater international policy cooperation is crucial for restoring market trust. Monetary policy should be eased further by reducing policy rates where possible, and supporting credit creation more directly.

Delays in implementing comprehensive policies to stabilize financial conditions would result in a further intensification of the negative feedback loops between the real economy and the financial system, leading to an even deeper and prolonged recession.

Two additional issues will have a significant impact on the outlook: the effectiveness of the fiscal policy response to the crisis; and external financing risks and banking sector vulnerabilities in emerging economies.

The G20 needs to unite and tackle the most serious global economic slowdown in post-war history. In doing so, it needs to consider ways it can curb the negative effects of Casino Capitalism on the real economy and on retirement plans.

On October 10th, 2008, I asked whether the G7 will prevent Dow 3600. So far, it looks as if that disaster was averted.

But we are not out of the woods yet. The leaders of the G20 need to reconcile their differences, fight mounting protectionism, and come up with a coordinated response to this global crisis.

As the masses gather in London to march and protest, there is a global awakening happening across the world. People are fed up with the way politicians have handled this crisis, pandering to the financial oligarchy.

Finally, take the time to read Michael Hudson's latest counterpunch article, Financing the Empire. I quote the following:

The financial oligarchy’s idea of “regulation” is to make sure that deregulators are installed in the key positions and given only a minimal skeleton staff and little funding. Despite Alan Greenspan’s announcement that he has come to see the light and realizes that self-regulation doesn’t work, the Treasury is still run by a Wall Street official and the Fed is run by a lobbyist for Wall Street. To lobbyists the real concern isn’t ideology as such – it’s naked self-interest for their clients. They may seek out well-meaning fools, especially prestigious figures from academia. But these are only front men, headed as they are by the followers of Milton Friedman at the University of Chicago. Such individuals are put in place as “gate-keepers” of the major academic journals to keep out ideas that do not well serve the financial lobbyists.

This pretence for excluding government from meaningful regulation is that finance is so technical that only someone from the financial “industry” is capable of regulating it. To add insult to injury, the additional counter-intuitive claim is made that a hallmark of democracy is to make the central bank “independent” of elected government. In reality, of course, that is just the opposite of democracy. Finance is the crux of the economic system. If it is not regulated democratically in the public interest, then it is “free” to be captured by special interests. So this becomes the oligarchic definition of “market freedom.”

The danger is that governments will let the financial sector determine how “regulation” will be applied. Special interests seek to make money from the economy, and the financial sector does this in an extractive way. That is its marketing plan. Finance today is acting in a way that de-industrializes economies, not builds them up. The “plan” is austerity for labor, industry and all sectors outside of finance, as in the IMF programs imposed on hapless Third World debtor countries. The experience of Iceland, Latvia and other “financialized” economies should be examined as object lessons, if only because they top the World Bank’s ranking of countries in terms of the “ease of doing business.”

The only meaningful regulation can come from outside the financial sector. Otherwise, countries will suffer what the Japanese call “descent from heaven”: regulators are selected from the ranks of bankers and their “useful idiots.” Upon retiring from government they return to the financial sector to receive lucrative jobs, “speaking engagements” and kindred paybacks. Knowing this, they regulate in favor of financial special interests, not that of the public at large.

The problem of speculative capital movements goes beyond drawing up a set of specific regulations. It concerns the scope of national government power. The International Monetary Fund’s Articles of Agreement prevent countries from restoring the “dual exchange rate” systems that many retained down through the 1950s and even into the ‘60s. It was widespread practice for countries to have one exchange rate for goods and services (sometimes various exchange rates for different import and export categories) and another for “capital movements.” Under American pressure, the IMF enforced the pretence that there is an “equilibrium” rate that just happens to be the same for goods and services as it is for capital movements. Governments that did not buy into this ideology were excluded from membership in the IMF and World Bank – or were overthrown.

The implication today is that the only way a nation can block capital movements is to withdraw from the IMF, the World Bank and the World Trade Organization (WTO). For the first time since the 1950s this looks like a real possibility, thanks to worldwide awareness of how the U.S. economy is glutting the global economy with surplus “paper” dollars – and U.S. intransigence at stopping its free ride. From the U.S. vantage point, this is nothing less than an attempt to curtail its international military program.

Michael has written a series of excellent articles on the financial crisis and it's too bad none of the G20 pea brains read any of them. I also doubt they are aware of the pension crisis threatening public finances across the world.

I remain deeply skeptical that the leaders of the G20 will come up with any serious solutions to this global financial crisis. The masses will march and protest in vain as their voices will not be heard.

Who knows, if they're lucky, they might get to hear another live concert by Coldplay (see video below). That might help distract them till the next G20 meeting where they'll be fed more empty promises.

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