Tags: Bailouts

The Taxpayer Bailout of GM, Helping Them Sell Unsafe Cars


President Obama, December 2013:

In exchange for rescuing and retooling GM and Chrysler with taxpayer dollars, we demanded responsibility and results.

The news he alluded to, but did not directly mention that day:

The taxpayer loss on the GM bailout is $10.5 billion. The Treasury department said it recovered $39 billion from selling its GM stake, and had put $49.5 billion of taxpayer money directly into the GM bailout.

The news today:

It was nearly five years ago that any doubts were laid to rest among engineers at General Motors about a dangerous and faulty ignition switch. At a meeting on May 15, 2009, they learned that data in the black boxes of Chevrolet Cobalts confirmed a potentially fatal defect existed in hundreds of thousands of cars.

But in the months and years that followed, as a trove of internal documents and studies mounted, G.M. told the families of accident victims and other customers that it did not have enough evidence of any defect in their cars, interviews, letters and legal documents show. Last month, G.M. recalled 1.6 million Cobalts and other small cars, saying that if the switch was bumped or weighed down it could shut off the engine’s power and disable air bags.

The Times reports:

Since the engineers’ meeting in May 2009, at least 23 fatal crashes have involved the recalled models, resulting in 26 deaths.

In November 2008, automaker executives came to Washington and “pleaded for emergency government aid.” At the end of May 2009 — after that meeting about the potentially fatal defect in the Cobalts! — the Obama administration finalized its aid package and terms to GM, committing “another $30 billion on top of the $19.4 billion it has already given GM to cover its losses and fund its operations, in exchange for a 60% equity stake in the new company after restructuring, as well as $8.8 billion in debt and preferred stock.”

Great news, taxpayers. You spent $10.5 billion to save a company that sold defective, unsafe cars, and lied about it for years.

Note this wrinkle:

When questioned last week at a news conference whether government ownership had any impact on the regulatory response to the ignition switch problems, Attorney General Eric H. Holder Jr. responded: “I’m not sure that is necessarily true.”

Time to update that Obama 2012 slogan. “GM is alive, and 29 Cobalt drivers and passengers are dead.”

ABOVE: President Obama tapes his weekly address from a GM plant in
Detroit, October 14, 2011; there’s no word on whether the car behind him is one
of those with life-threatening defects that GM knew about but did not disclose.

Tags: GM , Bailouts , Barack Obama , Eric Holder

The Fine Print on Democrats’ ‘One Million Jobs Saved’ Figure . . .


One of the big Democratic talking points on the Sunday shows yesterday was the argument that the auto bailout, began under President Bush and expanded under President Obama, “saved one million jobs.”

The figure comes from the Center for Automotive Research. (The CAR is funded by . . . the federal government, state and local governments, and corporate contributions, and is affiliated with . . . General Motors and Chrysler. An equally applicable headline would be, “nonprofit group study surprisingly supportive of hand that feeds it.”)

However, that report also states, “At the rough price tag of $80 billion in government assistance, each job CAR said was saved during the last two years cost taxpayers nearly $57,000.” In other words, if you handed everyone with a job endangered by a traditional bankruptcy of GM and Chrysler a check for $50,000, you would save taxpayers almost $10 billion.

Keep in mind, if the U.S. government sold its GM stock today, it would lose $16.3 billion.

But at least GM sales are up, right? Well, here’s the fine print:  “Government purchases of GM vehicles rose a whopping 79 percent in June.”

Yes, taxpayer dollars are being used to buy products from a taxpayer-bailed-out company, to prove to taxpayers that the original bailout was a wise decision.

Tags: Bailouts , Barack Obama , Chrysler , GM

Armageddon at the Strip Mall


Remember 2007? Glory days, right? Everything was booming, and nothing was booming quite as much as real estate — especially commercial real estate. Malls, hotels, warehouses, industrial parks: Everything was being built, and everything was being financed on ridiculously generous terms. Remember interest-only loans? Good times.

But commercial real estate is different from residential in one important way: Your standard residential mortgage goes 20 to 30 years. Your standard commercial loan goes for five years, at the end of which you either make a big balloon payment (what it is that balloons remind me of?) or you refinance, the idea being that five years is long enough to get your project built or developed, to secure tenants and leases, get your cash flow flowing, etc. Five years: Seems like it was only yesterday. By my always-suspect English-major math, that means that a whole bunch of commercial mortgages written at that poisonous sweet spot when prices were highest but lending standards were lowest are coming due . . . oh, any minute now.

In New York City alone, there’s about $70 billion worth of commercial mortgages — some of which have been sold off as mortgage-backed securities, naturally — coming due this year. The national total is more than $150 billion, or a bit more than 1 percent of U.S. GDP. That’s going to be a little awkward: The value of U.S. commercial properties has declined by an average of 45.7 percent since their all-time high in 2007, according to Real Capital Analytics. Those 2007 vintage loans weren’t exactly bulletproof: Typical terms included a 20 percent down payment and a five-year payment schedule that required little more than interest payments. An $80 million mortgage on a $100 million property is not so bad, but an $80 million mortgage on what is now a $60 million property is a problem. More than half of the 2007-vintage loans are expected to have trouble refinancing, and maybe well more than half.

This is true even for borrowers who have never missed a payment. Banks are required to take into account a number of factors when rating commercial mortgages. One of the most important is the loan-to-value ratio, which has a lot of borrowers over a particularly uncomfortable barrel: They may have the cash to make their payments, and they may have the cash flow to continue making payments on a refinanced loan, but their properties still are worth less than their mortgages, so nobody wants to refinance. And those are the lucky ones: Just as those loans were mostly for five years, most commercial leases are for about the same length of time. With retail and office-space rentals down, lots of commercial borrowers are sitting on largely vacant properties that are not producing much in the way of cash flow. Among the more high-profile cases, the WTC 3 tower at the World Trade Center still has not located an anchor tenant, which could put the much of the project on ice. Thousands of strip malls across the fruited plains have empty storefronts, and thousands of office buildings have floor upon vacant floor.

Standard & Poor’s advises: “One-third of maturing loans are for office properties, for which five-year lease terms are fairly common — and if tenants don’t renew these leases, securing new, long-term lease commitments may be more difficult in the current environment. Those leases [were] signed in 2007, at peak rents will likely reset to lower levels as five-year leases roll.” S&P’s bottom line: “50%-60% of the 2007 vintage five-year-term loans maturing next year may fail to refinance, and retail loans are at the greatest risk.”

Translation: Armageddon at the strip mall.

And it’s not just a problem for New York City and other big, coastal cities. Richmond, Va., has it worse than Manhattan, Washington, or Los Angeles, according to the local Times-Dispatch, which reports that a dozen large commercial properties have gone into foreclosure recently and that 12 percent of the commercial properties in the Richmond-Norfolk market are “distressed.” In Bergen County, N.J., commercial foreclosures are up 7 percent this year over last year. In the first year of the recession, there were 373 foreclosure actions filed in Bergen County, while in 2011 there were 1,586. Commercial foreclosures are up 10 percent for the state as a whole.

In hard-hit Phoenix, about half of the commercial mortgages backing securities are at risk of default, and a couple of hundred, mostly strip malls and other retail, office buildings, and apartments, already are in default.

Taking a look at the commercial MBS (CMBS) market, Standard & Poor’s issued this advice: “Buckle Up.”

Trepp, a CMBS-analysis firm, in its most recent report (data as of October 2011) finds that the delinquency rate for multifamily-property mortgages is 16.73 percent; for hotels, 14.12 percent and rising; for offices, 8.95 percent and rising; for industrial properties, 11.59 percent and rising; and for retail, a steady 7.61 percent. Trepp managing director Matt Anderson does not sound like a ray of sunshine: “Overall, we do not expect 2012 to be a repeat of 2008, but there will be more disappointments than pleasant surprises in the New Year. The banking sector has not yet returned to ‘normal’ despite two years of earnings growth. With increased regulation and the temptation for banks to take additional risks in order to preserve margins, 2012 should be a very interesting year.”

Not as bad as 2008 — is there a better example of damning with faint praise?

Trepp gets to the real concern here, which is that these mortgages and mortgage-backed securities are sitting on the balance sheets of a bunch of still-wobbly banks. How wobbly? About 100 banks went under last year, and about 250 are expected to go under this year. Trepp finds that, of the banks that went toes-up in 2011, bad commercial real estate accounted for two-thirds of their failing loans.

This is a textbook case for the Austrian business-cycle theory: Artificially low interest rates and loose money produce overinvestment, by both bankers and builders, in a bubble — this time, offices, apartment buildings, and retail space — that can’t be sustained once the artificial stimulation comes to an end, as it must. In this case, that malinvestment has to be worked out at two levels: At the financial level, among the lenders and borrowers, but also at the physical level: There’s going to be a lot of dark storefronts out there, with serious long-term consequences for nearby neighbors and for local real-estate markets: Foreclosures will put more property onto the market, driving down rents and subsequently making existing loans less tenable as the cashflow of commercial properties is diminished. They called the Depression-era tent cities “Hoovervilles.” The next time you see a mile of half-abandoned strip malls, think “Obamaville.” 

Not as bad as 2008? Probably not — and let’s hope it is not even close. But there’s a $3 trillion commercial-mortgage market lurking out there, and a lot of CMBS investors — banks and insurance companies in particular — that Washington thinks are “too big to fail,” a problem we persistently refuse to address.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialismpublished by Regnery. You can buy an autographed copy through National Review Online here.

Tags: Bailouts , Banks , General Shenanigans

Fannie Times Five



Why am I not entirely confident that having five little Fannies and Freddies will be better than having two of them?

The U.S. government is not very good at being in the mortgage business. The GSEs have been sties of corruption and fraud, staffed by the worst sort of bottom-feeding political careerists this country is capable of producing. The distortions that government policy introduced in the housing and mortgage markets were a key factor (though not the only factor) in the housing bubble and the financial crisis of 2008.

Rather than liquidate the portfolios of Fannie Mae and Freddie Mac as a prelude to shutting down these government-backed financial malefactors and allowing the market to price mortgages (and houses) as it will, a bill unveiled today would replace the two GREs with five GREs, the securities of which would be explicitly guaranteed by the federal government. This is a “bipartisan compromise,” meaning that it is the product of roughly equal inputs from the Stupid Party and the Evil Party.

In the end, replacing Fannie and Freddie with Onesy, Twosy, Threesy, Foursy, and Fivesy would still leave taxpayers on the hook for bad mortgage-backed securities, meaning that securitizers, mortgage lenders, bankers, and everybody else on down the real-estate food chain would continue to have mortgage risk subsidized by the U.S. government, with all the problems that attend that situation.

Yes, there are some good things in the bill: The new entities would have significantly higher capital requirements, and their securities would be insured by an FDIC-style fund charging a premium for its services. All to the good — but that still leaves the fundamental problem of political manipulation of the mortgage market unaddressed.

The basic problem is this: Mortgages are long-term investments that a lot of lenders do not want to keep on their balance sheets — at least at current mortgage-interest rates. Socializing mortgage risk means that mortgage lenders are willing to write loans at lower rates, meaning that buyers can take on larger loans at lower payments — and everybody in the market is thereby encouraged to take on excessive debt and risk, bidding housing prices up. If the government ceases to socialize mortgage risk, then interest rates on mortgages probably will go up, borrowers will take on smaller loans, and there will be downward pressure on the price of houses, a bad thing if you’re a seller and an excellent thing if you’re a buyer. Mankind has been buying and selling real-estate for a few thousand years or so, and, for most of that time, central-government intervention was not thought to be necessary. This is a case in which we can predict with some confidence that markets will work.

We tend to think of home equity as being a general social good: Homeowners are thought to be, in effect, better citizens than renters. But as Reihan Salam has documented, it matters what kind of homeownership you’re talking about. Low-equity and negative-equity homeownership is probably a net loss, socially speaking, bringing none of the benefits of high-equity homeownership and imposes real economic costs — for instance, by trapping unemployed people in jobless areas.

The GRE compromise is the wrong kind of compromise. The real solution is to establish a reasonable timeline for selling off the GRE portfolios — ten years, twenty years, whatever — and allowing markets to price mortgages as they will, with the government explicitly disavowing any future guarantee of any privately issued security or private financial institution. Given that we have a shiny new “resolution authority” under the Dodd-Frank financial-reform bill, disavowing future bailouts should be no problem, right? Right?

—  Kevin D. Williamson is a deputy managing editor of NATIONAL REVIEW and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through NATIONAL REVIEW ONLINE here.

Tags: Bailouts , GSEs

DeMint: There Will Be No Bailout for the States


Here’s the question I put to Sen. Jim DeMint during a brief telephone interview last night:

Chances are pretty good that Illinois, California, and New Jersey, and maybe a dozen or more other states, are going to go broke — because they cannot meet their pension expenses. All told, the states are about $3 trillion short, and they’re going to come looking to Congress for a bailout. Are you going to write that check, or are you going to let them hang and watch the municipal-bond market collapse? Which angry mob do you want to face?

Senator DeMint did not exactly say, “We’re going to let the municipal-bond market collapse,” but it sure sounded a lot like that. Republicans have a three-part plan for the states’ fiscal crises:

First, create a legal process to allow states to renegotiate debts and union contracts in something akin to bankruptcy.

Second, forbid a congressional bailout of the states.

Third, forbid the Fed to buy states’ debt as part of a freelance Ben Bernanke bailout.

In other words, prepare a site for crash-landing state finances and then forcibly guide them to it.

That third part is interesting, no? Republicans are looking askew at the Fed’s new career as at-large bailout-maker.

The Republicans’ plan looks pretty ugly, but I do not see any plausible alternatives. And I see one big opportunity: This is the chance to pry the parasitic government-employee unions off the body politic. They have bankrupted the states, and the resulting crisis gives us the means and the opportunity to put an end to their plunder. When those contracts get renegotiated, Republicans should insist that they address more than pensions.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.

Tags: Bailouts , Debt , Deficits , Despair , the Fed , The States , Union Goons

Treasury Offloads Citi Stock


Uncle Sam is getting out of Citigroup. Hooray.

But we’ve still got that dodgy insurance company and automobile maker on our national balance sheet. And Fannie and Freddie.

We turned a little profit on our Citi stake, meaning that the nominal cost of TARP is now down to about $25 billion.

For those of you keeping score at home, that means that the foreclosure-prevention stuff passed on the coattails of the bank bailouts will end up costing at least three times what the bank bailouts themselves cost.

Tags: Bailouts

Citi: Ireland, R.I.P.


Ireland does not have enough money to both bail out its banks and pay its government debts, Citi’s top economist says.

Accessing external sources of funds will not mark the end of Ireland’s troubles.The reason is that, in our view, the consolidated Irish sovereign and Irish domestic financial system is de facto insolvent. The Irish sovereign cannot from its own resources ‘bail out’ the banks and make its own creditors whole. In addition, a fully-fledged bailout (permanent fiscal transfer) from EA [that's euro area] partners or the ECB is most unlikely. Therefore, either the unsecured non-guaranteed creditors of the banks, and/or the creditors of the sovereign may eventually have to accept a restructuring with an NPV haircut, even if it is not a condition for accessing the EFSF or the EFSM at present.

But in our view, it has long been clear that the sustainability of the debt of an EA sovereign — however difficult it is to establish in the first place — is not the only, and maybe not even the most important, factor to determine the incidence of sovereign debt restructuring, including haircuts. Political concerns about the survival of the EA play a role. But importantly, concerns about the liquidity of fragile banking systems (the risk of deposit runs or a freeze in wholesale funding) or the solvency of banks (the ability to stem losses resulting from haircuts on holdings of sovereign debt) have led EA policymakers to delay the day of reckoning for the sovereigns in the hope of muddling through without another round of bank bailouts. Less visibly, potential losses from sovereign restructuring to pension funds and insurance companies may also have featured.

If two insolvent halves make one insolvent whole, what do 27 or so insolvent states out of 50 add up to?

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

Tags: Bailouts , Debt , Deficits , Despair , Europeans

The Irish Bailout a “World Record”


That’s gonna sting!

The additional €35bn (£29.8bn) being ploughed into Ireland’s banks has shocked experts, who have expressed concern that tonight’s bailout would not contain contagion in the eurozone.

Brian Lucey, associate professor of finance at Trinity College Dublin said he was “stunned”, adding: “We’ve already put at least €32bn into them, so that’s going to be €67bn, which is 50% of GNP, that’s a world record”.

He also warned that a new government next year could rip up the deal. “Sovereign governments have a right to effectively do whatever they want,” he said.

The EU authorities had hoped that the Irish bailout would draw a line in the sand and halt the threat of Spain and Portugal needing international assistance. But tonight, investors and analysts were far from certain that this would be achieved.

Ashok Shah, chief investment officer at investment firm London & Capital, said Ireland might now enjoy some “temporary relief”, but that bond investors’ concerns could now switch to Portugal and Spain.

“Portugal is already in the borderline, it will have to be rescued soon, maybe within a matter of weeks. The market will also focus on Spain. It will remain very volatile.”

A bigger-than-expected bailout for Ireland — does anybody expect Portugal or Spain (or Italy) to do any better? And what if it’s not just the PIIGS?

Years ago, a fellow calling himself Gekko wrote a column for National Review, called “Random Walk.” He predicted that the euro would be inherently unstable, because the economies it covers are so different from one another. I suspect Gekko is starting to feel vindicated, and I hope he has invested accordingly.

Prediction: The fiscal imbalances about to be worked out, probably violently, in the markets and budget committees will change our lives more than Islamic terrorism has or will.

The European disease is headed to these shores. As Michael Barone points out today, California, Illinois, New Jersey, and possibly New York are headed toward insolvency. Once you look at the crisis in public-employee pensions, twenty or thirty U.S. states may be headed for insolvency. We may end up in a situation in which 35 states are looking to the other 15 to bail them out. And when the house of cards starts to tumble, it will happen faster than anybody expects. Texas isn’t going to be able to carry the Union by itself.

I am surprised to find myself writing so many agreeable words about Erskine Bowles lately, but the former Clinton man hit it right upside the head with this one:

“The markets will come. They will be swift and they will be severe and this country will never be the same.”

On the other hand, once politicians are cut off from the endless stream of free money that has made being in government so much fun for the past couple of generations, maybe they will make less trouble. I find that possibility inspiring.

Less inspiring is this from Mark Zandi of Moody’s:

It may seem odd given all this, but I’m optimistic. Our problems are big, but they are manageable. As the economy improves (believe me, it will) the deficit will narrow, tax revenue will grow, and the extraordinary government spending used to combat the Great Recession will wind down. Under reasonable assumptions, the annual deficit will shrink from its current $1.3 trillion to $800 billion. Unfortunately, this isn’t good enough. We have to knock an additional $350 billion off our annual deficit, otherwise the interest payments on our outstanding debt will swamp us. This will be difficult – for context we spend more than $100 billion a year in Iraq and Afghanistan – but it is doable.

Particularly encouraging is the intellectual consensus now forming. You can see it happening around recent proposals from two different bipartisan commissions formed to tackle long-term federal budget issues. While the proposals will not become law, they lay down important benchmarks and establish the basis for a healthy and ultimately successful debate.

What part of “unacceptable” is eluding Mr. Zandy, I wonder? That’s how Nancy Pelosi described the bipartisan proposal around which he believes a consensus may be forming. The Democrats are standing by her, the unions are howling, and President Obama is showing no signs of getting behind the chairmen of the deficit commission he appointed.

There will be reform. It may come from Republicans, over the protests of Pelosi, Reid, et al. I think more likely it will come from the bond-market vigilantes, and that it will be “swift and severe, and this country will never be the same.”

But, hey, everybody ran up their credit cards last Friday, and it some alternate universe that apparently is good news. Don’t worry: You’ll get to pay that Visa bill off in devalued dollars. Merry Christmas, suckers.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

Tags: Bailouts , Debt , Deficits , Despair , Europeans , General Shenanigans

Another Stimulus, Another Bailout


Pres. Barack Obama’s plan for yet another round (!) of stimulus spending, this time focused on highway infrastructure work, is, like so many products of this administration, something other than what it seems. What Obama is proposing is another backdoor bailout for spendthrift states, such as his political home state of Illinois, giving them large injections of federal money so that they can redirect spending that would be dedicated to highway projects to other areas—e.g., to the government-employees’ unions that are Obama’s most loyal constituency. Call it “No Blue-State Appropriator or Union Goon Left Behind, Part Whatever.”

The highway system in particular (and the transportation racket more generally) is a source of endless financial shenanigans and a rich seam of political patronage to be mined by Obama’s allies at the state and local levels. The federal highway system is maintained by a combination of federal and state spending (in a few cases, local spending as well) with the bulk of the states’ money coming from gasoline taxes and fees levied on car owners. Illinois, for example, levies a 39-cents-a-gallon tax on gas (the sixth highest in the nation, according to the Tax Foundation), and it also applies its general sales tax (another 6.25 percent) to gas. Once you figure in the total tax burden, government levies are probably a bigger contributor to the price of a gallon of gas in Illinois than is the crude oil from which it is distilled. So, what does Illinois get for its money?

Part of what it gets is the Illinois Department of Transportation (IDOT), one of those wonderfully, comically inept state agencies that does things that make political analysts laugh and taxpayers weep: things like deciding to suddenly stop doing roadwork because they are out of gas money (irony!) or threaten to start leaving roadkill on the highways unless the state gives them another $20 million.

Highway maintenance is important, of course. But that’s not all that IDOT does with its money. For instance, IDOT helps to maintain a vast network of full-employment programs for petty bureaucrats, called “regional planning agencies.” Every region in the state has one, and they are not small: The Chicago version lists 94 staffers on its website. Its budget of $16.7 million comes mostly from IDOT ($3.8 million) and the Federal Highway Administration ($11.5 million), with money reshuffled from other government agencies, local levies, and our friends over at the Environmental Protection Agency (no, really!) kicking in another $1 million or so. Nearly a hundred bureaucrats spending state transportation money, FHA money, and EPA schmundo, doing . . . what? Overseeing roadwork? Not exactly.

Because our entire government is turning into a bank, IDOT is in the business of making low-interest loans and grants for business-related projects that it likes under its Economic Development Program (EDP). These are supposed to be transportation-oriented projects, but “economic development” is a famously elastic definition under which to operate.

May I give you a little flavor for how carefully this economic-development business is managed? Here’s an excerpt from the minutes of a recent meeting of the Chicago Metropolitan Agency for Planning, or CMAP. Mr. Blankenhorn is CMAP’s executive director, Ms. Powell its chairman:

Mr. Blankenhorn said IDOT’s FY2010-11 budget includes $5 million to fund Metropolitan Planning Organizations statewide, with CMAP due to receive $3.5 million of that. He said the drawback is that all the money is supposed to be used for transportation planning, and while some of CMAP’s programs, such as community and economic development, can be tied in, most cannot. He said IDOT has promised to be flexible in what spending it will allow, but it’s really up to the General Assembly to provide funding for an agency it created to do more than transportation planning. He urged CAC members to mention the need for funding other areas if they meet with their legislators or people in leadership roles at other state agencies. Mr. Mellis asked if this means CMAP is fully funded for next year. Mr. Blankenhorn said the funding is buried in IDOT’s budget, but it’s in there. Ms. Powell said CMAP is technically not fully funded if it has programs it can’t pay for. Mr. Blankenhorn agreed and said he will no longer use the term‚ fully funded.

Buried in its budget, but they’ll be flexible! Sweet.

So, what does CMAP spend money on? Personnel, mostly — more than half of its budget goes to salaries and compensation: Just over $9.3 million is budgeted for FY2011, or about $100,000 for each of the 94 staffers listed. (I’m looking to see how lavishly compensated the top staffers are and will update you when I get the information.) If you start pumping billions of dollars into bridges and highway resurfacing, you free up a lot of money for the CMAPs and such of the world. But given the sorry record of previous “shovel ready” stimulus programs, don’t be surprised if the bridge-and-blacktop stuff is skipped altogether and the money goes straight into “community development” projects.

This is the sort of horsepucky upon which President Obama proposes to lavish another $50 billion. Stop him.

Kevin D. Williamson is deputy managing editor of National Review.

Tags: Bailouts , Debt , Deficits , Democrats , Despair , Doom , Fiscal Armageddon , Illinois , Obama , Stimulus

Bobby Bailout: Casey to Put Taxpayers on Hook for Teamsters’ Shenanigans


Sen. Robert Casey (D., Pa.) and Rep. Earl Pomeroy (D., N.D.) are pushing legislation that would commit taxpayers’ dollars to bailing out the Teamsters’ retirement pension fund. The financial crisis and the Great Recession may have upset your retirement plans, but that’s not reason that politically connected union thugs have to share the pain.

Here’s the deal, as former Department of Labor official Vincent Vernuccio, now an analyst at the Competitive Enterprise Institute, tells Exchequer: Under the Democrats’ plan, the U.S. Pension Benefit Guaranty Corp., which is basically a pension-insurance fund run by the federal government, would be able to receive tax dollars to bail out so-called orphan pensions — pensions for which employers have ceased making contributions, usually for reasons of insolvency. Under normal circumstances, PBGC does not use taxpayer money to bail out pensions; it charges an insurance premium to the funds it covers and uses that money to make good on pension obligations if a particular pension fund goes bankrupt. It’s like an FDIC for pension funds: If a fund is sufficiently mismanaged, PBGC can step in, take it over, and take care of its obligations.

The Casey bill would change all that, creating a “fifth fund” within PBGC that would receive taxpayer support. Currently, federal law carefully specifies that PBGC obligations are not obligations of the U.S. government. Casey-Pomeroy would reverse that, mandating that “obligations of the corporation that are financed by the [fifth fund] shall be obligations of the United States.” In other words: You, sucker, are paying the bill.

This is worrisome for a lot of reasons, as Vernuccio points out: First, it establishes a precedent for taxpayer-funded bailouts of union pensions. As galling as it would be to bail out the Teamsters and their other private-sector union buddies — whose meatheaded management of their pensions has left them with as much as $165 billion in unfunded obligations, according to Moody’s — things would immediately get much, much worse if that precedent were used to justify a bailout of the public-sector unions, whose unfunded pension liabilities run into the trillions. (President Obama’s home state of Illinois is leading the way down the toilet when it comes to state-employee retirements. California’s pension shortfall, Vernuccio notes, is larger than the GDP of Saudi Arabia.) Casey-Pomeroy wouldn’t authorize public-sector bailouts, but it would establish an all too easily expandable template.

Second, Casey-Pomeroy almost certainly would lead to a broader union bailout. PBGC already has more obligations than it can meet, and its operations already are larger and more complex than most Americans imagine. According to its web site, “PBGC pays monthly retirement benefits, up to a guaranteed maximum, to nearly 744,000 retirees in 4000 pension plans that ended. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, PBGC is responsible for the current and future pensions of about 1,476,000 people.” Unsurprisingly, PBGC already is more than $20 billion in the red — which is to say, the guys who are supposed to cover you when your pension fund cannot cover its obligations cannot cover their obligations — and its own analysis suggests it will be $34 billion short by 2019. Guess who they’ll be going to for that money?

And that is the truly worrisome part: Casey’s bill would allow for the transfer of money from the “fifth fund” to other PBGC funds. In other words, we could end up paying for the whole thing. “It takes a couple of leaps,” Vernuccio says, “but, long term, you can see this being a backdoor bailout of PBGC.” There is no statutory limit on the amount of taxpayer money that could be committed to bailing out union pensions under the Casey bill. Taxpayers already have an unlimited commitment to bailing out Fannie Mae and Freddie Mac — do we really want to offer a bottomless well of public money to the Teamsters, too?

– Kevin D. Williamson is deputy managing editor of National Review.

Tags: Angst , Bailouts , Democrats , Despair , Fiscal Armageddon , General Shenanigans , Pensions , Unions

Where’s My Bailout?


“Where’s My Bailout?” Right after the great Rick Santelli rant, that slogan had its day in the sun. It was a T-shirt, a bumper sticker, a protest sign, and a really bad song. Where’s your bailout, Joe Average? Funny you should ask.

The public debt of the United States is a terrifying hogzilla of a beast, but the household-debt situation is a big fat ugly ogre, too. The household debt of the United States went from about 30-odd percent of GDP in the post-war era, climbed up to about 50 percent by the 1960s, and held steady until the late 1980s — at which point, the graph looks like a rocket liftoff. U.S. household debt was 100 percent of GDP by 2007, a level it had not hit since 1929, a coincidence that makes financial types faint in their Froot Loops. There’s been some superficially good news on that front: Just like the Wall Street bankers, Americans huddled around the ol’ kitchen table are doing a little financial deleveraging, paring down their mortgages and credit-card debts. Yay, Americans! The down side is that they’re mostly doing it through defaulting on their mortgages and credit cards, rather than paying them off. Boo, Americans!

Here’s the deal: Since 2008, Americans have reduced their total household debt by $372 billion. Banks have written off about $210 billion in defaulted mortgages, delinquent credit-card debt, and other uncollectable loans. But, as the Wall Street Journal points out, that $210 billion doesn’t tell the whole story: Just like mortgages, a lot of credit-card loans and other forms of consumer debt are securitized and sold to investors, and those losses wouldn’t show up on the banks’ write-offs. The Journal’s conservative estimate is that the real losses from charge-offs are about twice what the banks themselves have reported, a total of $420 billion or so. And it could be a lot more than that.

So how can we have $420 billion in household debt written off but only see a $372 billion reduction in household debt? Apparently, somebody’s still burning up the MasterCard. The only way to account for the numbers is that Americans are still borrowing at a pretty steady clip, a fact that is obscured in the data by the fact that so many of them are defaulting on their mortgages and credit cards.

Translation: Yikes.

The credit-card scene is getting worse. Earlier this month, Fitch reported that the charge-off rate for credit cards (which is to say, the portion of delinquent loans they abandon as unrecoverable) climbed to 11.1 percent from 10.9 percent in April. It’s been above 10 percent for more than a year now. The credit-card companies are pretty robust, and their business models assume a pretty high rate of default, one that is much more realistic than, say, what the mortgage banks assumed. (It would almost have to be, no?) But still, there’s about $1 trillion in credit-card debt in the United States, much of it packaged into securities, much as mortgages have been. Nobody wants to see another bond-market meltdown. And that’s why you’re getting a bailout in the form of an interest-rate subsidy.

In spite of the build-up of household debt, Americans are spending less of their paychecks on the mortgage and credit-card bills, currently laying out 12.46 percent of income, down from 13.96 percent in 2007. How is that possible? In short, it’s because the Federal Reserve is keeping interest rates at basically zero, which eases the pressure on mortgages, credit-card interest, and other consumer-debt burdens. That’s your bailout, Mr. American Consumer: Little old ladies who put their money into Treasuries and good old-fashioned savings accounts are getting a return of +/- squat, approximately, partly to subsidize the wicked ways of spendthrift mortgage borrowers and credit-card junkies. Borrowers get bailed out, savers get hosed. It won’t last. In spite of the rather expansive fiscal attitude of the Obama administration and its allies in Congress, there hasn’t been much sign of consumer-price inflation, so the Fed is under pressure to keep interest rates at approximately zilch. But those rates aren’t going to stay low forever — nor should they.

The Fed’s cheap-money policy during the real-estate-boom years was a major contributor to the bubble, and repeating that policy now simply lays the groundwork for another bubble. But when interest rates start going up, it’s reasonable to assume that defaults on mortgages and credit cards are going to go up, too. Those defaults are going to go careering through the markets like Artie Lange in a co-starring role with Jack Daniels — which is to say, it’s going to be a lot of fun to watch for those who don’t get run over. Until then, enjoy your cheap money.

Tags: Bailouts , Household Debt

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