States Repudiate Pensions

"Many states are acknowledging this year that they have promised pensions they cannot afford and are cutting once-sacrosanct benefits, to appease taxpayers and attack budget deficits. ... 'We can't afford to deny reality or delay action any longer,'said Gov. Pat Quinn of Illinois, adding that his state's pension cuts, enacted in March, will save some $300 million in the first fiscal year alone. But there is a catch: Nearly all of the cuts so far apply only to workers not yet hired. Though heralded as breakthorugh reforms by state officials, the cuts phase in so slowly they are unlikely to save the weakest funds and keep them from running out of money. Some new rules may even hasten the demise of the funds they were meant to protect. ... That vaunted $300 million in immediate savings? The state produced it by giving itself credit now for the much smaller checks it will send retirees many years in the future--people who must first be hired and then, for full benefits, work until age 67. By recognizing those far-off savings right away, Illinois is letting itself put less money into its pension fund now, starting with $300 million this year. ... 'We're within a few years of having some of the pension funds run out of money,' said E. Eden Martin, president of the Commerical Club of Chicago, a business group that has been warning of a 'financial implosion' for several years. 'Funding for the schools is going to be cut radically. Funding for Medicaid. As these things all mount up, there;s going to be a lot of outrage.' ... If a state pension fund ran out of money, the state would be legally bound to make good on retirees' benefits. But paying public pensions straight out of general revenue would be ruinous. In Illinois's case, it would consume about half the state's cash every year, bringing other vital state services to a standstill", my emphasis, Mary Walsh at the NYT, 20 June 2010, link:

http://www.nytimes.com/2010/06/20/business/20pension.html.

The pensioners will not get paid all they were promised. Current services will be maintained. Who are Illinois CPAs? Price Waterhouse, the guys who audited AIG and Vampire Squid? Or some other Big 87654 firm? Anyone with eyes open saw this disaster coming decades ago.

LA End Game

"Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy. Yet Mayor Antonio Villaraigosa [AV] and the City Council have been either unable or unwilling to face this fact. ... Even if [AV] were to enact drastic pension reform today--which he shows no sign of doing--the city would only save a few hundred million per year. ... Five thousand is the number of employees added to the city's payroll during [AV's] first term as mayor. According to California's Economic Development Department, when [AV] took office there were 4.73 million jobs in Los Angeles and 252,000 unemployed people. Today, there are just 4.19 million jobs in [LA] and over 632,000 unemployed people. ... How have city leaders responded to this crisis? Pension officials have played accounting games, like smoothing the investment return over seven years rather than five years. ... And most egregiously, rather than laying off employees, city officials have shifted certain workers to agencies like the Department of Water and Power and the airport, which have their own funding. ... He continues to insist that bankruptcy is not an option for [LA] even as anyone who can count understands there is no other option", Richard Riordan & Alexander Rubalcava (R&R) at the WSJ, 5 May 2010, link:

http://online.wsj.com/article/SB10001424052748704608104575218392603082622.html.

Riordan is a former LA mayor. Rubalcava is an investment advisor. Yes, R&R, LA's bankruptcy looks inevitable. Got muni bonds? Sell!

Einhorn on Truth

Greenlight Capital's David Einhorn (DE) has an interesting 27 May 2010 post at the NYT:

http://www.nytimes.com/2010/05/27/opinion/27einhorn.html. DE asks, "how long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms. And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts--that is, by the printing of money? ... Despite the promises by the [Fed] chairman, Ben Bernanke, not to print money or 'monetize' the debt, when push comes to shove, there is a good chance the Fed will do so, at least to the point where significant inflation shows up even in government statistics. ... " DE raises other issues I have. My bottom line: eventually all will see the emperor is naked.

Illinois Deficit

"Illinois lawmakers were in disarray Thursday as they groped for stopgap measures to address a $13 billion deficit equaling nearly half of the state's general-fund revenue. ... But the confusion in the legislature indicates that serious steps to fix state finances won't be taken until after the November elections--if then. ... An income-tax increase proposed by Democratic Gov. Pat Quinn is going nowhere. Even temporary steps, such as borrowing to make pension payments, have stalled. Illinois is months late on many of its bills and has no plan for catching up. ... A bill under consideration in the state House would give Mr. Quinn greater leeway to shift money among state funds and to require agencies to set aside part of their budgets now in case of future cuts. ... 'We are lucky in that we can still borrow,' [Donne] Trotter said, noting that lawmakers responded to rating-agency concerns last month by reducing pension benefits and lifting the retirement age for new state employees to 67 from 60. Lawmakers also are weighing the idea of postponing pension payments for the first half of the fiscal year until January, Mr. Trotter said. ... Mr. Quinn presented a budget in March that would still leave the state with a $10.6 billion deficit. His plan projected a deficit of $4.7 billion for the coming fiscal year beginning July 1--which he planned to cover through borrowing--and a $5.9 billion deficit carried over from the current budget. ... California officials said this week that April personal income tax collections lagged projections by 30% Federal estimates don't bode well for states, either", Amy Merrick at the WSJ, 7 May 2010: http://online.wsj.com/article/SB10001424052748703686304575228582377071698.html.

Illinois budget looks worse than California's. An old Chinese curse was, "May you live in interesting times". An updated version might be, "May your portfolio consist of 50% Illinois and 50% California muni bonds".

Peasants Wave Pitchforks!

"As a new day damned over the Illinois State Legislature one morning in March, a 39-page bill hit the floor like none seen in decades. Public Act 96-0889 proposed slashing $71 billion from future state budgets. it did so by requiring newly hired state employees to work up to a dozen years longer than employees had to in the past, until age 67, to draw full pensions. ... Instead, by dinnertime that very day, virtually every memebr of Springfield's bluest of blue-state legislatures had voted in favor of making the bill law. ... In the shadow of financial Armageddon an outraged populace is beginning to stir. Yes, Washington is still goring on the public plastic by issuing trillions of dollars in ew debt. States and cities, however, fo not have their own printing presses and cannot count on the Chinese to fund their profligacy. ... After decades of ever bigger public payrolls and cushier benefits, the breaking point has arrived. It is giving rise to a potentially profound political realignment", Stephanie Fitch & Christopher Steiner at Forbes, 7 June 2010, link: http://www.forbes.com/forbes/2010/0607/outfront-pension-retirement-benefits-taxes-states-fiscal-hawks.html.

Financial Armageddon? Did anyone ask Michael Panzner about this?

Uncle Sam and SFAS 106

"Texas doctors are opting out of Medicare at alarming rates, frustrated by reimbursement cuts they say make participation in government-funded care of seniors unaffordable. ... 'This new data shows the Medicare system is beginning to implode,' said Dr. Susan Bailey, president of the Texas Medical Association. 'If Congress doesn't fix Medicare soon, there'll be more and more doctors dropping out and Congress' promise to provide medical care to seniors will be broken.' ... The largest number of doctors opting out comes from primary care, a field already short of practitioners nationally and especially in Texas. ... The opt-outs follow years of declining Medicare reimbursement that culminated in a looming 21 percent cut in 2010. Congress has voted three times to postpone the cut, which was originally to take effect Jan. 1. It is now set to take effect June 1. ... Guy Culpepper, a Dallas-area family practitioner [said] 'The only way to provide cost-effective care is outside the Medicare system, a system without constant paperwork and headaches and inadequate reimbursement.' ... The issue caused the Texas Medical Association to break with the American Medical Association and oppose health care reform efforts throughout 2009. ... US Sen. John Cornyn, R-Texas, said he isn't surprised by the new opt-out numbers, allowing that Congress' inability to reform Medicare is leaving 'seniors without access and breaking the promise we made to them'," Todd Ackerman at the Houston Chronicle, 18 May 2010, link:

http://www.chron.com/disp/story.mpl/metropolitan/7009807.html.

"One of the many fashionable notions that have caught on among some of the intelligentsia is that old people have 'a duty to die,' rather than become a burden to others. ... Already the government-run medical system in Britain is restricting what medications or treatments it will authorize for the elderly. Moreover, it seems almost certain that similar attempts to contain runaway costs will lead to similar policies when American medical care is taken over by the government. ... If a government-run medical system is going to save any serious amount of money, it is almost certain to do so by sacrificing the elderly", my emphasis, Thomas Sowell at Townhall, 11 May 2010: http://townhall.com/columnists/ThomasSowell/2010/05/11/a_duty_to_die.

Let's repeal the 13th Amendment with respect to doctors. Problem solved. Didn't we get an Obamacare cost estimate for the next ten years? Aren't you comfortable with it? Didn't the CBO say it would be $849 billion? Various goverments will break many promises over the next ten years. Got bonds? Sell! As I've written before, "Kill the old white women"! That's how Medicare costs will will be reduced. I wonder if a Big 87654 firm would opine on the CBO's estimate?

I agree with Sowell. Kill the old white women!

Greece Today, America Tomorrow

"Are Europe and America headed to where Athens is today? ... Protected by the [US] through a half-century of Cold War, Europe cut back on defense and ratcheted up spending for La Dolce Vita. ... As the cradle-to-grave welfare states rose, an ever-increasing share of the labor force left the private sector for the security of the public sector. ... The fertility rate of Greece and every European nation fell below 2.1 births per woman needed to replace an existing population. Greece's birth rate has been below zero population growth for three decades. ... Were Greece a company, the solution would be bankruptcy. ... Because, should Greece decide not to take a chainsaw to her welfare state, but walk away from her debts and default, she would blow a hole in the balance sheets of the biggest banks in Europe. ... Rather than savage their welfare-state programs, and risk riots in the streets and a massacre at the polls, Madrid and Lisbon, too, might look ageeably at default. ... For how much longer will Greeks work longer, retire later and live on smaller pensions, so holders of Greek bonds can get their interest payments right on time? ... But the crisis will return. For the nations of Europe have made commitments beyond their capacity to keep, given their growing debts and aging population. ... And the unfunded liabilities of Social Security, Medicare and federal pensions rival those of Western Europe. States like California and New York, larger than Greece, look a lot like Greece. ... While the temptation is great for Washington to bail them out again, the [US] government itself has now begun to attract the concerned notice of holders of US debt", my emphasis, Pat Buchanan at World Net Daily, 6 May 2010, link:

http://www.worldnetdaily.com/index.php?pageId=150649.

"Crisis--from the Greek word 'Krisis'--is one of the many English words we owe to the ancient Athenians. Now their modern descendants and reminding us what it really means. ... So serious was the situation that it took a European version of the 2008 TARP bailout of US banks to save the euro. ... If fully implemented, it will be the mother of all bailouts--and one of the biggest admissions of error in modern financial history. The design of the European currency has been fatally flawed from the outset. It just took the Greek crisis to expose it. .... It would end forever the exchange-rate volatility that has bedeviled the continent since the breakdown of the Bretton Woods system of fixed exchange rates in the 1970s. ... A single European currency also seemed to offer a sweet deal. Countries with excessive public debt would get German-style low inflation and interest rates. And the Germans could quietly hope that the euro would be a little weaker than their own super-strong Deutsche mark. ... But the worst defect in the design of the Economic and Monetary Union (EMY), we argued, was that it united Europe's currecies but left its fiscal policies completely uncoordinated. ... The design of the EMU illustrates a profoundly important truth about human institutions. Just because you don't create a formal procedure for something you would rather not happen, that doesn't mean it won't happen. ... Problem solved? Unfortunately not. ... For one thing, it's simply not credible that the Greek government will be able to deliver the fiscal tightening it has promised at a time of deep recession. ... It will surely be at least a year before investors wake up to the fact that the fiscal predicament of the [US] is actually worse than that of the euro zone", Niall Ferguson at Newsweek, 24 May 2010, link:

http://www.newsweek.com/id/237645.

In about 1985 I remember reading a Fortune interview of Barton Biggs (BB). The substance of what BB said was, "The notion of 250 million South Americans slaving away in the hot sun to repay some New York banks does not comport with my notion of political reality". Well said BB Mine neither. Between now and 2017 I expect the "Venezuelanization" of most of Europe and the US. Got bonds? Sell while there's still time.

I disagree with NF. The Greek bailout did not save the euro. It saved banks holding Greek paper. It will kill the euro. There is nothing any European country could have done with respect to taxing and spending before the coming of the euro it couldn't do after. The euro was and is a "whole lotta nuttin". The euro was sold as a piece of financial engineering!

EU in Wonderland

"The bailout package for eurozone governments facing debt troubles has created another urgent challenge for European policy makers: how to keep free spending governments in line. ... Because there was no currency risk, banks, insurance companies and pension funds in every euro-zone economy became the biggest investors in the bonds issued by governments of other countries using the euro. .... Although the budget policies of euro-zone members were tied together in this way, without people really noticing, there were no mechanisms to prevent governments from overspending. ... But, in practice, the pact had no bite. ... These packages circumvented rules that many had assumed prohibited bailouts within the euro zone. They also weakened market incentives for governments to get their houses in order. ... 'Profligate countries now can count on the ECB to alleviate market pressure that could provide the only disciplining device before a crisis situation is reached,' Mr. [Marco] Annuziata says. ... As a step toward improving it, Olli Rehn, the EU economic commissioner, is set Wednesday to propose rules, with clear enforcement mechanisms, both to prevent excessive government debts and deficits, and to act more decisively in a debt crisis", my emphasis, Stephen Fidler at the WSJ, 11 May 2010, link: http://online.wsj.com/article/SB10001424052748704879704575236572824559304.html.

This is laughable. There no "rules" for governments, unless you have your own army to enforce them. Unless the EU has its own army and will use it to "enslave" millions of Greeks, Greece's debt will be repudiated. One way or another. What part of this don't you understand? Sovereign debts are usually repudiated. Openly. Or by inflation. Government bonds are a sell. Treasuries, Bunds, Gilts, etc. They all stink. You want to restrain government spending? Have your government go back to the gold standard. "[T]here were no mechanisms to prevent governments from overspending". Of course. As Yves Smith asks, "feature or bug"? What "circumvented rules"? What "clear enforcement mechanisms" short of an army? Will the EU hire the Crips or Bloods to collect from Greece? For a small "emolument", they could likely be enticed into collecting. How small? Say 10% of whatever they collect. Hell, for 10% of say $150 billion, you might be able to get the Zetas to collect for you.

Greece and California

"In formally requesting Euro45 billion ($60 billion) from the [IMF] and [EU] Friday, Greek Prime Minister George Papandreou sought to end the drama over whether Greece can pay its bills. ... What it would do instead is open a wide new world of moral hazard--for Greece, for the countries providing aid, and for the future of the entire euro-zone. ... Thursday's market turmoil left Greek bonds in emerging markets territory at 8.7% on 10-year debt--5.7 percentage points about the German benchmark. This came after the EU's statistical agency, Eurostat, said it still lacked confidence in Greek figures and raised its 2009 deficit estimate to 13.5% of GDP from 12.7%. ... Meanwhile, tens of thousands of Greek public workers took to the streets to protest the government's austerity measures, such as they are. Could there be a greater disconnect? ... But over the next five and a half years, Greece will face some Euro240 billion in debt-service and refinancing costs-roughly equal to Greece's gross domestic product. ... Loans might delay, but cannot prevent, a radical restructuring of Greek debt. ... Further austerity measures demanded as a quid pro quo might take some domestic heat off Mr. Papanderou, but the IMF's policy history does not bode well for future economic growth. ... If Greece is bailed out, the markets will rightly conclude that a line has been crossed, and that Portugal and even Spain will be rescued too. Even the Germans don't have that much money. ... Mr. [Wolfgang] Schauble is so worried about Berlin's finances that he opposes tax cuts for Germans, but he nonetheless wants to bail out a spendthrift Greece. In an interview Monday in Der Speigel, he warned that, 'We cannot allow the bankruptcy of a euro member state like Geece to turn into a second Lehman Brothers,' adding that 'Greece is just as systematically important as a major bank.' ... Far better for the EU to draw the line now, force Greece and its creditors to take their pain, and to demonstrate to markets that there won't be a rolling series of bailouts. To adapt Mr. Schauble's Lehman analogy, better to stop the moral hazard at Bear Stearns, lest Spain become Lehman. ... Greece's problems are familiar across Europe: a welfare-entitlement state that is unaffordable given the country's anemic economic growth. This is what has to change, but it won't as long as the Greeks marching in the street believe their standard of living will be salvaged by German or French taxpayers", my emphasis, WSJ Editorial, 24 April 2010, link:

http://online.wsj.com/article/SB10001424052748703876404575200013667934980.html.

I agree with the WSJ noting the WSJ does not cite Islamic immigrants as a welfare-state problem in Europe. Nor does it compare Greece to California. Or the US. So I will.

My Brother's Keeper?

"Employees and retirees of Minneapolis publisher Augsburg Fortress [AF] are suing their employer, alleging in their complaint that it allowed their pension plan to fail, and used its connection to the Lutheran church as a legal shield to avoid paying them all their pensions. ... The plan had only $8.6 million to pay $24.2 million in pension obligations to 500 employees and retirees, said the company, which publishes books for the Evangelical Lutheran Church of America, including hymnals, the works of theologian Dietrich Bonhoeffer, and Garrison Keillor's latest book. ... Beth Lewis, [AF's] president [said], 'We did what we thought was most equitable for the largest number of plan participants.' ... But when the law was enacted in the 1970s, churches were exempt unless they opted in. In the 1980s, the IRS definition of 'church plan' widened to include almost any organization affiliated with a religious group. That includes recreational groups, hospitals and publishers like [AF]. ... Church plans don't have to file annual reports with the [IRS] disclosing their pension obligations, assets and investment managers, among other details. ... The publisher had asked the church for help, but 'the church-wide organization advised us that it had no obligations or fiduciary duties' to do so, Ms. Lewis said. ... [AF] is a separately incorporated unit under the ELCA church-wide organization", Ellen Schultz at the WSJ, 22 April 2010, link:

http://online.wsj.com/article/SB10001424052748704448304575196061466485430.html.

Apparently the ECLA, like Vampire Squid, does "God's work". Sure. Elevating "form over substance" fits well with Uncle Sam's current zeitgeist, see my 16 September 2008 post:

http://skepticaltexascpa.blogspot.com/2008/09/sarbox-scam-2.html. No one should assume his pension is safe, no matter who he works for. Or thinks he works for.

Multistate Debt Crisis

"California, New York and other states are showing many of the same signs of the debt overload that recently took Greece to the brink--budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay. And states are responding in sometimes desperate ways, raising concerns that they, too, could face a debt crisis. ... Connecticut has tried to issue its own accounting rules. Hawaii has inaugurated a four-day school week. California accelerated its corporate income tax this year, making companies pay 70 percent of their 2010 taxes by June 15. And many states have balanced their budgets with federal health care dollars that Congress has not yet appropriated. Some economists fear the states have a potentially bigger problem with their recession-induced budget woes. If investors become reluctant to buy the states' debt, the result could be a credit squeeze, not entirely different from the financial strains in Europe, where markets were reluctant to refinance billions in Greek debt. ... California's stated debt--the value of all of its bonds outstanding--looks manageable, at just 8 percent of its total economy, But California has big unstated debts, too. If the fair value of the shortfall in California's big pension fund in counted, for instance, the state's debt burden more than quadruples, to 37 percent of its economic output, according to one calculation. ... Unstated debts pose a bigger problem to states with smaller economies. ... State officials say a Greece-style financial crisis is a complete nonissue for them, and the bond markets so far seem to agree. All 50 states have investment-grade ratings, with California the lowest, and even California is still considered 'average,' according to Moody's Investors Service. The last state that defaulted on its bonds, Arkansas, did so during the Great Depression. ... Some states have taken even more forceful measures to build creditor confidence. New York State has a trustee that intercepts tax revenues and makes some bond payments before the state can get to the money. California has a 'continuous appropriation' for debt payments, so bondholders know they will get their interest even when the budget is hamstrung. ... In fact, New Jersey and other states have used a whole bagful of tricks and gimmicks to make their budgets look balanced and to push debts into the future. ... Some economists think the last straw for states and cities will be debt hidden in their pension obligations", my emphasis, Mary Walsh at the NYT, 30 March 2010: http://www.nytimes.com/2010/03/30/business/economy/30states.html.

Why shouldn't Connecticut have its own accounting rules? Doesn't Zimbabwe Ben? Who cares what state officals or the rating agencies say? NY's trustee does nothing for me. His existence is purely cosmetic. Do you still want to own muni bonds?

Cash Balance Baloney

"AT&T Inc. is seeking to dismiss a long-running pension case alleging age discrimination that seeks $2.3 billion in damages, according to documents filed this week in a federal court. The suit alleges a 1998 pension change effectively froze the pensions of 40,000 older management employees at AT&T, in some cases for years, but not those of younger employees. ... "we believe the conversion to our cash balance plan was appropriate and in accordance with all legal obligations,' said spokesman Mark Siegel. 'We believe our filing speaks for itself in explaining why we have no additional liabilities to these retirees.' ... Legal papers filed Monday in federal court in Newark, NJ, include the first publicly disclosed estimate for potential damages. ... Last May, the [SEC] asked AT&T why it hadn't disclosed its potential exposure in the pension case. ... If a jury found that the company willfully discriminated against older workers, it could award punitive damages that would double the size of the claim to $4.6 billion. ... In its motion for dismissal, AT&T is asking the judge to throw out the case without a jury trial. ... Minutes of a 1997 meeting of AT&T's pension consultants, included in court documents, notes that 'employees in 40s could lose, [and] have to wait 10 years for benefits'," Ellen Schultz at the WSJ, 7 April 2010, link:

http://online.wsj.com/article/SB10001424052702304172404575168240583359882.html.

I wish the AT&T employees well. Having attended actuaries cash-balance plan conversion seminars, I assure you, the conversions are made to reduce current employees' pension obligations. See my 11 February 2008 post on Uncle Sam's position on cash-balance plan conversions: http://skepticaltexascpa.blogspot.com/2008/02/treasury-and-working-class.html.

The Next Pension Disaster

"BMW AG's deal to unload E3 billion ($4.65 billion) of UK pension risk to Deutsche Bank Ag's Abbey Life unit is likely to be followed by similar deals as companies seek affordable solutions to mitigate their pension problems, a cash cow for banks and insurers. ... Pensions consultant and actuaries group Hymans Robertson [HR] said it expects more companies to agree to large longevity hedging deals this year. 'we think the longevity swaps market will cover more than Pound 10 billion of liabilities this year,' up from Pound 4.1 billion in 2009, said James Mullins, a longevity swap expert at [HR]. ... Abbey Life, in partnership with specialist pension insurance company Paternoster, are insuring the plan against the risk that around 60,000 retirees live longer than expected. BMW will pay a premium for the insurance, while Deutsche Bank will spread the risk among a consortorium of reinsurers, including Hannover Re AG, Pacific Life Re and Partner Re. ... One appeal of longevity hedging is that it doesn't require a major upfront cost. Paternoster business development executive Myles Pink said. Instead the company pays a monthly premium for the insurance. ... Hedging part of a pension plan's risk reduces the costs compared with selling the entire plan to an insurer", my emphasis, Kathy Gordon at the WSJ, 23 February 2010, link:

http://online.wsj.com/article/SB10001424052748704454304575080983997544158.html.

More terrible WSJ reporting. Spread the risk? Haven't we heard this song before? This is more derivative nonsense, another accounting scam. How can the insurers charge BWM less than the present discounted value of the "risk transferred"? How can BWM gain from this zero-sum game? Seek affordable solutions? Longevity swap expert? Hahahahaha! No upfront cost? What is the monthly payments' present value? This is absurd. BMW should fire Frederick Eichener, its CFO immediately! Does KPMG, BMW's CPAs, have anyone who understands what's going on here?

BusinessWEAK vs. Pat Buchanan

"They are called the PIGS--Portugal, Ireland, Greece, Spain. What they have in common is that all are facing deficits and debts that could bring on national defaults and break up the European Union [EU]. Who brought the PIGS to the edge of the abyss? All are neo-socialist states that provde welfare for poor people, generous unemployment, universal health care, early retirement and comfortable pensions. Most consume 40 percent to 50 percent of their gross domestic product annually, a crushing burden on the private sector. ... For 30 years, the fertility rate of Europe has been below the 2.1 children per woman necessary to replace a population. In Russia and Ukraine, a million people disappear yearly. In Western Europe, the passing of the native-born goes on quietly, as Third World peoples come to fill the empty spaces left by the aborted and unconceived. ... These newcomers have neither the education nor the skills of the Europeans. Hence, they earn less and contribute less in taxes, but consume more per capita in social benefits. ... Thus the burden of pensions and health care grows steadily and the need for higher taxes and larger worker contributions increases. ... Greece is the first European nation to hit the wall. ... The EU'c crisis would then be like a crisis in the [US] should California default on its state bonds and interest rates on other municipal bonds surged to double digits. ... In every Western nation, government is growing beyond the capacity of taxpayers to bear", my emphasis, Pat Buchanan at Vdare, 9 February 2010, link:

http://www.vdare.com/buchanan/100209_pigs.htm.

"The [EU's] experiment with a single currency is deep in crisis because Europe failed to learn from the Greeks. ... Today's Sirens are the investors and traders of the global bond market, who lure nations into tapping abundant credit at low rates when times are good. ... Greece has fallen into precisely that trap. It got low-interest loans by promising to behave responsibily and keep its budget deficit low. ... At this point, Greece and the [EU] have no good choices left. It's hard to see how Greece can muddle through on its own. ... Yiannis Kelekis, 68, a retired construction worker who joined a demonstration in rainy Athens, complained: 'The people that caused the crisis are now asking for others to make sacrifices.' ... If the EU] refuses aid, the government could find itself unable to issue $26 billion worth of debt as scheduled this spring. ... Trouble is, extending aid isn't a great choice, either. ... For now, investors are pouring money into the US Treasury market as a safe refuge. ... When Greece joined the euro zone, its borrowing costs fell to near-German levels because bond investors bought into the theory that Greece had finally become fiscally responsible. ... According to economists Kenneth S. Rogoff of Harvard University and Carmen M. Reinhart of the University of Maryland, Greece has been in default for half of the time since it won independence from the Ottoman Empire in 1829. ... Greece and the EU wouldn't be in this no-win situation if they had followed their own rules from the start. But coming up with a failsafe mechanism that forces sovereign nations to do what's right when they feel like cheating is pretty much impossible", my emphasis, Peter Coy (PC) at Businessweek, 22 February 2010: http://www.businessweek.com/magazine/content/10_08/b4167018421438.htm.

Gary North's (GN) 17 February 2010 post at Lew Rockwell is about the PIGS: http://www.lewrockwell.com/north/north814.html. GN asks, "How wise is to to lend to wicked people? Not very". Consider what this implies for Treasury paper.

Obamacare anyone? California anyone? What's controversial about this?

PC is PC. He never suggests Greece reduce spending. Anyone who buys sovereign debt does it at his peril. The article was titled, "The Bond Vigilantes Who Left Greece in Ruins". Imagine, the bond market did it, not Greek government spending. Failsafe mechanism? Try the gold standard. "Lure nations"? Is Greece a naive 14-year old girl being seduced by Casanova?

TBTF-TIFT

"As Washington spins its wheels on financial reform, it's becoming painfully clear that the problem of entities that are too interconnected or 'too politically powerful to fail' is also too hard for our policy makers to tackle. ... We can't be sure who the specific members of this club are--regulators simply say they know 'em when they see 'em. But this much is certain: They've seen a lot of them lately. ... But because we are footing the bills for these rescures--and will do so again if more crises occur--don't you agree that we should know what these implied federal guarantees will cost us? ... An expert on government guarantees, his wholly sensible view is that it is dangerous for possible bailout costs to remain unmeasured and, of course, unrecognized in the budget. 'If we are extending the safety net, extending the implied guarante to the debts of a lot of other financial institutions, and we know those guarantees are valuable and costly, then we ought to start budgeting for it,' Mr. [Marvin] Phaup said in an interview. ... He was the researcher at the Congressional Budget Office in 1996 who undertook the first efforts to assign a value to the implied federal guarantee backing Fannie and Freddie. When he prognosticated on the matter, the bailouts of those two hobbled entities were more than a decade away, but his CBO report quatified the billions in benefits that the mortgage finance companies reaped each year for their implicit government backstop. ... The CBO report enraged Fannie and Freddie because it also showed how much of that financial benefiit--fully one-third--the companies kept for themselves, their managers and their stockholders. Mr. Phaup's analysis showed that, counter to the companies' claims, Fannie and Freddie did not pass along all the benefits to homeowners in the form of lower mortgage rates. Moreover, who actually believed that the government would ever have to bail out Fannie and Freddie? Perish the though and shame on silly researchers like Mr. Phaup for even considering such possibilities. ... But owning up to future obligations associated with government backing is something that lawmakers are likely to fight vigorously. (Consider Social Security). ... Edward J. Kane, a professor of finance at Boston College, agrees that the costs associated with providing a safety net for complex and politically connected companies should be quantified. 'People talk about systemic risk, but they have no metric of measuring it,' he said", my emphasis, Gretchen Morgenson at the NYT, 14 February 2010, link:

http://www.nytimes.com/2010/02/14/business/economy/14gret.html.

See my previous posts on "government accounting". Also yesterday's post on Greece. Who believed in 1996? Your Skeptical CPA did. That's who! He goes further. He believed and always believed, F&F were created to conceal their costs and expected bailouts! As Yves Smith would say of their future bailouts, "It was a feature, not a bug". Not "too hard". Washington is just afraid of Wall Street. Metric? Janet Tavakoli, do you want to take a shot?

Pension Funding

"Public pension funds needing to boost their returns but frustrated with hedge funds and private-equity investments are turning to one of the oldest investment strategies--using borrowed money to boost performance. The strategy calls for leveraging pension funds' safest asset--government or other high-grade bonds--while reducing exposure to stocks. ... Low interest rates make it impossible to meet those targets with simple bond investments. ... That public pensuion funds would contemplate the use of borrowed money so soon after a credit crisis stoked by financial leverage is setting off alarms for some in the industry. ... In previous years, consultants pitched a strategy called portable alpha, an aggresive bet involving leverage and hedge funds that magnified returns when the stock market was surging but aggravated losses when the market turned down", Craig Kramin at the WSJ, 27 January 2010, link:

http://online.wsj.com/article/SB10001424052748704905604575027601300360196.html.

Depending on the rates the pension funds issue debt, this may turn out better for them than the skeptics think. That pension funds, like Wisconsin's, resort to this shows many pension funds are insolvent in substance. Do you still want to buy muni bonds?

Pravda on 401(K)s

"As the [US] moves into a new decade of military overreach abroad and national bankruptcy at home, Washington is in a desperate search for more revenue and a solution to the future financing of the trillions in national debt obligations currently held by foreign central banks and investors. ... Although the historical government solution to unsustainable government debt loads has always been the destruction of the debts by currency depreciation and eventual hyperinflation, there is always an intermediate step used to buy more time for the politicians in power. ... The largest source of liquid private wealth remaining in the [US] are the $15 trillion in private retirement funds and the ultimate ownership, control and future of these funds have already been compromised and exchanged for the favorable tax treatment of private retirement plans. ... The retirement trap I'm writing about is only a proposal at the present time and since it may well begin in the latter years of the Obama Administration assuming the Democrats can somehow maintain their majorities in Congress, I'm calling it the "Obama Retirement Trap'. But make no mistake, the government need for current revenue and their frenzied search for a short-term fix to fund the backstop of liquidity to buy future government debt obligations when no credible investors will buy them is an unspoken quest of both political parties. ... The protoype for their plan was devised in 1991 by Alicia H. Munnell, then Director of Research for the Federal Reserve Bank of Boston. She presented the idea in a paper entitled 'Current Taxation of Qualified Pension Plans: Has the Time Come?' ... After years of deficits, the greatest hazard to our economy is a run on the dollar and on Treasury securities by foreign investors", Ron Holland at Pravda, 15 January 2010, link:

http://english.pravda.ru/opinion/columnists/111678-retirement-0.

Pravda is a far-right, wing-nut publication. Welcome aboard wing-nut. Theresa Ghillarducci, you've been found out. Even in Russia!

Jiyza for California?

"There isn't a single compelling reason to provide the girly-man of American gubernatorial fiscal responsibility, Arnold Schwarzenegger [AS], with a nickel from our federal coffers. ... It's clearly time to start killing and slashing. For decades California has enabled its spendthrift legislators, feather-bedding public-sector employee unions and welfare recipients (comprised of both native-born and illegal immigrants) to the tune of a $21 billion annual deficit with no sign of sufficient tax revenue in sight. Meanwhile the confiscatory tax policies and unfriendly business environment of the Granola State continue to hemmorhage both businesses and jobs to more enlightened states. According to the IBD, California is home to more than 1/3 of the nation's welfare recipients. ... In addition, California is rated 48th out of the 50 states in terms of tax-competitiveness with over $493 billion worth of new tax regulations for businesses since the year 2000. Where is the light at the end of this tunnel? ... Why should we contribute to ensure expensive gold-plated retirement packages for the 'the public employee unions that have systematically looted the public' coffers of California and now come looking for more sensible Americans to fund their fiscal insanity. Let 'em hit the wall and file bankruptcy. It's time for the insolvent public sector in California to start turning away welfare recipients, closing government offices, and defaulting on public employee union benefits including pensions until they can be renegotiated in light of fiscal responsibility to all Californians, not just the special pleaders", Ralph Alter at American Thinker, 27 December 2009, link:

http://www.americanthinker.com/blog/2009/12/not_one_nickel_for_california.html.

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"The US economy survived the traumas of 2009, thanks to good policy and good luck. What worries me, looking ahead, is what might be called the 'Californiazation' of America--the growing tendency of our political system to make promises in social spending programs that it isn't prepared to pay for with tax increases. ... What's worrisome this year isn't economic decline but political dysfunction. And nowhere is that clearer than in California, where politicians--despite some serious bipartisan efforts--haven't been able to make the decisions that would put the state on a sound financial footing. The political forces that generate deficits are just too strong: a Democratic Party in hock to public-employee unions and a Republican Party in love with tax cuts. ... What many state governments want is a federal bailout, which would free them of the consequences of overspending. It's a classic case of what economists call 'moral hazard'--in that the bailouts would allow the irresponsible behavior to continue, rather than force a halt. One prominent economist argues that if the states were countries, the International Monetary Fund would grant relief only if it came with conditions that imposed fiscal discipline. So will Washington become like California? Some would argue that has already happened, with the fiscal disaster masked by the federal government's ability to sell its massive debt cheaply and print money to pay the bills", David Ignatius at Washington Post, 3 January 2010: http://www.realclearpolitics.com/articles/2010/01/03/the_californiazation_of_america_99749.html.

"Gov. [AS] of California was on the mark when he said this week that the state needed to change policies that spend more money on prisons than on the state's once-vaunted higher education systems, which are being bled to death in budget cuts. Mr. [AS] was way off the mark when he suggested that the answer was to privatize prison services or to pass yet another constitutional amendment, this time to limit prison spending. ... It would generally be impossible for the state to unilaterally lower prison spending without first cutting the prison population dramatically. ... The only real way for California to cut prison costs is to reverse sentencing policies that have filled its prisons to bursting and have driven up costs by about 50 percent over the last decade alone", NYT Editorial, 8 January 2010, link: http://www.nytimes.com/2010/01/08/opinion/08fri3.html.

"Republican Gov. [AS] asked for $6.9 billion in federal funds in his state-budget proposal Friday and warned that state health and welfare programs would be threatened without the emergency help. ... 'It's time to enact long-term reforms that will change the way the most populous state and the federal government work together,' Mr. Schwarzenegger said. He and state legislative leaders plan to visit Washington to lobby for federal bailout money. White House budget officials weren't available to comment on the governor's request. ... The governor said California deserved the federal funds because the state sends far more tax money to Washington than it receives in return. Federal mandates, he added, 'force us to spend money that we do not have,' ... Mr. Schwarzenegger called the state legislature into a special budget session. He proposed cutting $2.4 billion from health and welfare spending and $1.2 billion from prison spending. He also called for cuts in salaries and pensions for state workers. ... State Senate President Darrell Steinberg, a Democrat, said: 'I have one reaction: You've got to be kidding me.' He and other legislative leaders said they were opposed to any more cuts to welfare and health programs. Instead they said they preferred federal help or taxes on, for example, oil drilling and tobacco sales. ... The state has delayed billions of dollars of payments and issued IOUs to keep the government from defaulting. ... 'My concern at this point is that the negotiations could go on longer than the amount of cash the state has on hand,' said Gabriel Petek, analyst at Standard & Poor's Corp. which has California on a negative ratings outlook", Stu Woo & Jim Carlton at the WSJ, 9 January 2010, link: http://online.wsj.com/article/SB126297948893221947.html.

I agree.

I said this was coming decades ago. This is no surprise.

I agree with the NYT. Repeal Caifornia's drug laws. Now. Prison privatization is another panacea, see my 7 November 2009 post: http://skepticaltexascpa.blogspot.com/2009/11/wait-listed-by-jail-11.html.
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California is hopeless, unless you're an illegal alien or anchor baby. If neither, leave.

Wal-Mart Pays Retail

"How strange, then, that in a world of 8,000 mutual funds, for the 1.2 million participants of what is the world's most populous 401(k) plan, Wal-Mart assembled a measly selection of ten funds--most of them at everyday high retail prices. ... Among the eight actively managed offerings, fees were discounted nary a penny from what a lone individual with no buying power would pay. It was as if the greatest retailer in history had consigned its employees to shop for retirement services in a Soviet department store. ... Unfortunately for tens of millions of workers, 401(k) plans are riddled with skimpy fund selections, poor cost disclosure and fees that fail to take advantage of bulk buying power. ...Jeremy Braden, a Wal-Mart store employee in Ozark, Mo., alleges in a class action filed in March 2008 that by failing to demand institutional rates for the 401(k) funds, or to disclose details of the revenue-sharing deals between Merrill and eight outside firms with funds on the plan's menu, Wal-Mart breached its fiduciary duty under the Employee Retirement Income Security Act. ... 'Merrill Lynch [ML], with Wal-Mart's blessing, was choosing mutual funds based on payments that the funds would make to [ML],' says Braden attorney Derek Loeser of Keller Rohrback in Seattle, Wash. ... Because the case involved the giant retailer and controversial practices common across defined contribution palns, a ruling that requires Wal-Mart and [ML] to reveal more about the motives that went into assembling the fund menu, and how it was priced, could prove a watershed for the $2.3 trillion (assets) 401(k) business. ... The crux of Braden's case is the question of whether it is sufficient for Wal-Mart and Merrill to tell participants what they are paying in total for investment services, or whether they have the right to know how--and why--money is passed around behind the scenes. ... Such arrangements raise a multimillion-dollar question: ... Or did [the administrator] stuff the 401(k) with the funds of managers who were willing to kick back the largest fees, as Braden contends? ... Wal-Mart has never explained how its 401(k)'s funds were picked. In fact, it signed a nondisclosure agreement with [ML], preventing it from revealing details about revenue-sharing deals", Stephanie Fitch at Forbes, 18 January 2010, link:

http://www.forbes.com/forbes/2010/0118/investing-walmart-retirement-401k-paying-retail.html.

It seems ML is an aider and abettor and should be sued too. Where were the SEC and Labor Department while this went on? No administrator like ML should be permitted to have a secret arrangement hidden from 401(k) plan participants. Period. Kick backs on Wall Street? Never. How can you think such a thing?

Argentina's Lock Box

"Argentine President Cristina Kirchner's [CK] political troubles turned into an open standoff Wednesday, when the country's central banker rejected her request to resign following his refusal to transfer billions in foreign-currency reserves to pay the country's debt. ... Mrs. Kirchner, along with her husband and predecessor Nestor Kirchner, have tried to assert more control over the economy--nationalizing pension funds and an airline--even as their popularity has declined among Argentines. The latest conflict puts the couple on a collision course with both the central bank and a newly invigorated congressional opposition. ... Mrs. Kirchner announced the creation of the 'Bicentennial Fund for Stability and Reduced Indebtedness,' [BF] to be funded with central-bank reserves, on Dec. 14. ... Financial markets had welcomed the creation of the fund, coming as Argentina plans to start borrowing again after eight years of being largely frozen out of markets in the wake of a massive 2002 debt default", my emphasis, Matt Moffett & Matthew Cowley (M&C) at the WSJ, 7 January 2010, link:

http://online.wsj.com/article/SB126282620632718915.html.

"Argentine President [CK] said she was firing the country's central-bank chief Thursday, escalating a battle over foreign-currency reserves into a nascent constitutional crisis. ... Some Argentine legal specialists also said the president doesn't have the authority to unilaterally dismiss the top banker, saying the dismissal decree is unconstitutional. ... The announcement came after markets closed Thursday. It was unclear how the opposition-dominated Congress would respond, but some if its leaders called for Mr. Redrado not to comply with the decree. ... Argentina's decree, signed by all cabinet members and issued late Thursday afternoon, followed two days of mounting government pressure on Mr. Redrado to transfer $6.57 billion in reserves to a fund Mrs. Kirchner unveiled in December to conver some of Argentina's debt payments. ... The opposition maintains Mrs. Kirchner and her husband and predecessor, Nestor Kirchner, are trying to steamroll the central bank, as they already have the media, the national statistics bureau, agribusiness and other institutions to seize foreign-currency reserves so they can boost patronage spending and sustain their power", my emphasis, Matt Moffett at the WSJ, 8 January 2010, link: http://online.wsj.com/article/SB126289800502920289.html.

"A federal judge blocked President [CK] from using foreign-currency reserves to pay Argentina's national debt and revoked the dismissal of the central-bank chief who opposed that policy. ... On Friday morning, federal judge Maria Hose Sarmiento granted an injunction request by two opposing parties barring the central bank from transferring money into the so-called [BF], which Mrs. Kirchner had hoped to create with $6.57 billion from the reserves. A few hours later, Judge Sarmiento ordered the reinstatement of the bank president, Martin Redrado, whom Mrs. Kirchner dismissed on Thursday for refusing the make the transfer. ... Earlier in the day he defended his action in defying Mrs. Kirchner. 'The reserves belong to all Argentines and if they are to be used for some purposed besides backing the currency, ther matter should go before Congress,' he said. ... Underlying the dispute is the Kirchner administration's need for funds to sustain the Peronist patronage machine. Last year, public spending grew at three times the rate of revenue. ... Now the whole idea of the [BF] may have boomeranged, revealing the fragility of Argentina institutions. ... Roberto Sifon Arevalo, a director in the Latin America Sovereign Ratings Group at Standard & Poor's said compromising central-bank authority is disturbing to investors. 'There is a conceptual reason why people focus on the independence of the central bank,' he said", my emphasis, M&C at the WSJ, 9 January 2010, link: http://online.wsj.com/article/SB126296529801421655.html.

"Few Argentine politicians are prepared to pay the political cost of spending cuts or tax rises to pay off bondholders. As it is [CK] may have turned the Central Bank chief into a martyr for the cause of integrity in public policy", Economist, 9 January 2010, link: http://www.economist.com/world/americas/PrinterFriendly.cfm?story_id=15213761.

My idea: let's swap Redrado for Zimbabwe Ben (ZB) and Robert Schiller! What idiocy, to welcome creating a paper fund instead of reductions in Argentine spending. This fund would have as much substance as the Social Security "lockbox". CK wanted this fund to further her confidence game.

Bienvenidos a Argentina. Was this article really about Argentina, or the Obama administration?

How closely are ZB and Peter Orzag following this?

I await ZB's following Redrado's lead.