THIS IS WHY PENSIONS ARE UNDERFUNDED ...

Want to know why many public pension funds are sucking wind these days? While the right wing blogosphere wants you to think it's due to spiraling costs and overly generous pension plans this simply is not true. Corporate arrogance, market fraud, and our recent market collapse have done more to underfund and rob pensions of their market value than anything else.

Here's how it happened ...

Take My Pensions, Please
In the area of corporate theft - what William C. Black might call "control fraud" - we need to begin by understanding that when large firms file for bankruptcy protection they can, and they will, dump their pension obligations on the federal government, through the Pension Benefit Guaranty Corporation (PBGC). 

But dumping private obligations on the American taxpayer isn't necessarily the problem. The PBGC has traditionally been a conservative investor and trustee of pensions (more on this below). What we've learned is that in an effort to boost their bottom line corporate chieftains would deliberately pay less into their employee's pension plans.

This tactic boosted profits, allowed corporate executives to pay themselves more in the short-term, and helped keep stock prices artificially high. But it also left the federal government with big financial holes to fill when "private" pension plans were dumped on to the American taxpayer during corporate bankruptcy proceedings (as I pointed out last year).

These financial holes - again, made possible because the private sector deliberately underfunded pensions - now make it appear that underfunded government guaranteed pensions are out of control. In fact, many of these once private plans were underfunded to begin with, and became a burden for the federal government American taxpayer only after companies like Bethlehem Steel, U.S. Air, Nortel Networks, etc. declared bankruptcy and dumped them on us.

I'm From Wall Street & I'm Smart ... Seriously
Today the federal government is now left trying to fill in shortfalls with new investment strategies that don't always pan out. Apart from the general risk of market collapse, the American taxpayer has to deal with overly zealous market players in key government positions who make extremely dumb investment decisions, as the following makes abundantly clear.

If ever there was a story that should put an end to the "Public-Pensions-Are-Too-Expensive/Let's-Cut-Benefits" crowd, this is it.

WASHINGTON - Just months before the [2008] stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.

Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.

Got that? Believing in the magic of the market - in spite of red flags that were going up all around him - Bush administration PBGC director, Charles E.F. Millard, implemented a new aggressive market strategy. He began directing billions of dollars in public retirement funds away from safe government bonds and into the stock market, right before the market collapsed.

Guess who has to live with the consequences of this decision after 2008? Not Mr. Millard.

On the bright side, for Wall Street and the institutional players who were able to get their hands on these retirement funds, many of Wall Street's fat cats and investment firms won big fees and, no doubt, even bigger bonuses for bringing in these accounts.

I'm Not Just Ignorant, I'm Arrogant Too
We now know that corporate America deliberately underfunded private pension plans. We also know that they dumped their underfunded pensions on the American taxpayer when they declared bankruptcy. Then, in an effort to make up anticipated shortfalls, Mr. Millard - a former managing director of Lehman Brothers - took public funds and dumped them on to Wall Street right before the market collapsed (no word on whether Millard shoveled the money into Lehman Brothers, or toward other institutions where his buddies worked).

It was like throwing money down a drain.

Not only was this a classic case of "Heads you win, tails we lose", but it was a case of corporate welfare and public subsidies at its finest.

Incredibly, Mr. Millard isn't too concerned over the losses. As a former Wall Street genius, Millard said that his "new investment policy is not riskier than the old one." Asked whether the stock over bonds strategy was a mistake, especially given the subsequent decline in stock and real estate prices, Millard offered the classic sociopath's "Don't blame me" response,

Ask me in 20 years. The question is whether policymakers will have the fortitude to stick with it.

I don't know which is worse. Millard's arrogance or his ignorance.

Either way, putting more public money - like trillions of dollars in social security funds - into our current market environment would be little more than an undeserved market reward, and another bailout, for Wall Street.

At the end of the day, they don't deserve it. And we can't afford it.

- Mark

Update: Here's an update, which focuses on the implications of the market crash and total obligations as they compare to corporate pensions.

WHY MAIN ST. WILL CONTINUE TO STAGGER ... AND HOW WE BREAK THE BANK'S "REFINANCING" STRIKE

"The American Republic will endure

until the day Congress discovers that it

can bribe the public with the public's money."

- Alexis De Tocqueville, author of Democracy in America (1835) 

With corporate America sitting on more than $2 trillion dollars in cash, and the banks flush with bailout money and government guarantees, one has to wonder why our business class isn't spending any money. But, contrary to prevailing opinion from the right wing blogosphere, it has nothing to do with regulations, our tax code, and out of control "socialist" spending.

Think about it. Over 30 years of deregulation freed corporate America to extract wealth and to pillage the American economy. Today, due to deregulation and other corporate gifts from congress, wealth gaps in America are similar to what they were during the Roaring Twenties and during the time of the Robber Barons (though, to be fair, the Robber Barons actually created something of value).

As well, can anyone say with a straight face that Steven Jobs waited for the capital gains tax to drop before he had the Apple idea? Did Bill Gates develop Microsoft because he was in the right tax bracket? A good idea is a good idea (moreover, capital gains taxes are lower now than they were under Reagan).

Finally, it's sheer lunacy to claim that we're sliding into socialism when Federal spending represents 25% of the economy this year vs. 23.5% under Reagan during a similar period in his presidency (and Reagan didn't have to deal with two failed wars and a collapsed economy bordering on Depression Economics).

The simple reality is that corporate America - and this includes the banks - don't trust what's going on with the banks and their partners in crime in the financial sector. And this is NOT suddenly a new development.

Why Corporate America is Not Investing (It's not new)
As I pointed out in December 2007, "banks are in a financial storm of doubt and edginess because of the mess caused by fraud, stupidity, and the outright greed of big lending institutions." By December 2007 one institution after another was reporting that they were writing off billions of dollars in losses because of the toxic assets and other sub-prime lending packages they were sitting on.

As a result the financial sector found themselves short on cash, drawing on reserves, or seeking out other institutions, in the hopes that they would lend them operating funds. But banks were lying to themselves and to each other about what they had in the books. Doubt and distrust was in the air.

Investors and banks were reluctant to lend to anyone, especially each other. In December of 2007 the Wall Street Journal reported why:

Financial institutions remain suspicious of each other after multiple rounds of announcements of mortgage-linked losses, and are anticipating more. They also are eager to hold onto cash to shore up their troubled balance sheets.

Nine months later - with banks and other financial institutions hemorrhaging money - the Federal government had to step in and bailout Wall Street. The only problem is that the Federal government didn't demand changes in the operating status quo. Nor did it do anything to force financial institutions who received bailout money to clean up their books in exchange for their bailout and other market guarantees.

In effect, we said to Wall Street, "Here, take the money. You don't need to do anything for mortgage holders, or other Americans who are in debt ... in spite of wrecking the economy we'll let you muddle along with toxic debts on the books by creating mind-numbingly stupid "mark-to-market" arrangements that allow you to reprice toxic assets on your books.

And while we're at it, we'll create neat, but complex, programs for you to dump your toxic financial waste on the American taxpayer (Maiden Lanes, TALF, etc.)."

As if this wasn't enough, the Federal government (under Bush and Obama) pretty much told our moneyed elite, "And, by the way, if you want to gamble like idiots again, or purchase public debt with the money you've swindled out of the taxpayer, go ahead. The American taxpayer - who just bailed you out - will pay the interest on the Treasury debt too."

And just like that, Wall Street was able to walk away with bailout money courtesy of the taxpayer Washington, and then take that money to gamble on Wall Street (again), or to walk down the street and purchase interest paying U.S. debt securities.

Corporate America sees and understands this. Why invest $2 trillion if the banks haven't been disciplined, and continue to act like pigs at the trough?

But herein lies the problem. After forgiving Wall Streets stupidity and greed, we didn't do anything for the American consumer, or for U.S. mortgage holders.

Worse, after being forced to hand Wall Street trillions in cash and market guarantees, we didn't turn around and force Wall Street to take a financial hit and refinance Main Street's upside down mortgages (especially by reducing loan principal) and/or renegotiating it's debts. With financial credits and other guarantees in their pocket, the toxic waste on the bank's books could remain, indefinitely.

Why Main Street (and the economy) Will Continue to Stagger
As Christopher Whalen points out, today "the largest banks remain profoundly troubled by bad assets on their books as well as claims against these same banks for assets sold to investors." In layman's terms? No one trusts the banks, including other bankers, because they continue to hold toxic assets that they don't want to - and don't have - refinance or renegotiate.

Because Washington didn't demand any concessions from Wall Street - which could have provided relief to the American consumer and it's debt holders - the banks have been able to “muddle along” and pick and choose which recovery path is most profitable for them. In the mean time U.S. workers and households struggle along under a "death by a thousand cuts" threat of unemployment, lost jobs, record bankruptcies, collapsed home values, foreclosures, wage cuts, economic uncertainty, and on-going debt loads, among others.

Worse, because the Federal Reserves cheap money policies, and the bailout programs (referred to as "quantitative easing", or QE) , are designed to save the biggest banks, they've "broken the mechanism" which traditionally converted interest rate drops into debt refinancing for American debtors. But one former Federal Reserve official, who worked in the banking industry for decades, says that our problems are much deeper.

In this last easing ... [the biggest] banks have conspired to break the transmission mechanism for monetary policy and are now strangling the U.S. economy to save themselves from past errors.

Put more bluntly, as was the case in 2007, the banks that can afford it are hoarding cash. Our bailed out financial institutions can afford it. So no one's lending. The big banks aren't lending to the small banks. The small banks aren't lending to small businesses or the American consumer.

It doesn't matter that the American taxpayer footed a multi-trillion dollar bailout for Wall Street and it's largest financial institutions. Because both the Bush and Obama administrations failed to extract any concessions from either group, the American consumer, and the American economy, will continue to stagger in a cesspool of economic uncertainty.

How to Break the Bank's "Refinancing" Strike
According to Christopher Whalen, if our bailed out financial institutions don't care to help the American taxpayer and the American consumer - and they won't, no matter how much taxpayer help they received - the Obama Administration needs to do the following:

1. DEBT RELIEF: Use the power provided in the Dodd-Frank legislation to force an accelerated cleanup of bad assets and to mandate refinancing and principal loan reductions for performing loans with viable borrowers. If any banks resist, the Treasury should use the power under current federal law to remove recalcitrant officers and directors of these same banks.

2. REFINANCE MORTGAGE DEBT: Because the market collapse forced consolidation in the mortgageg industry it is "now dominated by a cozy oligopoly of Too Big To Fail banks" (the top three banks control 55% of all mortgage originations, while the top 10 banks control 95%). The Treasury needs to force these institutions to make rules changes to allow for the refinancing of all existing residential mortgages, if only to reduce the current cost of the debt and increase disposable income for households.

3. END TAXPAYER SUBSIDIES TO BANKS: With Federal Reserve rates so low, currently loan origination margins (what they get for setting the loan up) for the top four banks have gone from a minimum of ½ point to over 4 points in the last two years. This is a subsidy for Wall Street, especially since the zero interest rate policy of the Fed was designed to benefit Main Street by getting cheap money into their pockets. This subsidy needs to end.

There's more in Whalen's piece that needs to be considered. For the true die-hards, you can find even more in this Wall Street Sector Selector piece from John Nyaradi.

But one thing is clear. Without legislation or executive action to force our taxpayer bailed out financial institutions to begin making concessions in the form of loans, negotiations, and write-downs, our economy will continue to stagnate. We can no longer afford to place our trust in the "private" banking sector. And why should we? They don't even trust one another.

As long as the mission of the largest banks remain unchanged all the talk of pumping more money into the financial system (referred to as QE II) will NOT do any good. Without reconstituting the banks - by forcing them to work with the American taxpayer and consumers who saved their hides - even John Maynard Keynes would not support the cause.

And besides, simply pumping more taxpayer funded money into the economy because the banks don't trust one another, only delivers us to the steps of Alexis De Tocqueville's warning noted above, which was made over 175 years ago (hat tip to Fortune's Keith R. McCullough for the quote):

"The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."

We need to stop the undeserved market subsidies, and force our bailed out banks to renegotiate and write-down loans. Otherwise we should prepare for ourselves for another market meltdown, or worse.

- Mark

BANKS STOLE TAX DOLLARS EVEN BEFORE THE TAXPAYER FUNDED BAILOUT

As if state and local governments didn't already have enough financial problems ...

State and local governments regularly raise $400 billion a year through taxes, which are used to build needed infrastructure projects. The money raised is used to build schools, hospitals, roads, parks, and all the good stuff that makes communities work. Voters and elected officials understand this, which explains why they will vote to fund certain measures. It makes good community sense to invest in things like parks and roads.
 

Now, thanks to the same banksters who brought down the market by gambling on useless derivatives, billions in taxpayer funded infrastructure project money was illegally siphoned off because of bribes and inside kick back schemes orchestrated by money managers from Goldman Sachs, Bank of America, etc. In effect, the banksters stole taxpayer dollars, even before they facilitated the 2008 market collapse and got a taxpayer funded bailout!

Here's how it happened.

Imagine that a community or a state needs money to build schools, parks, or some roads. Voters and elected officials like the idea and will vote to fund infrastructure projects with taxpayer money. Money is secured through taxes, but in most cases can't be spent immediately. As a result, state and local governments must find financial institutions to "hold" the money. With billions at stake, you can imagine that financial institutions want a piece of the action. This is where the trouble begins.

* Municipalities and other governments send their money to financial institutions to hold taxpayer money, where it can earn interest before public agencies spend it (the process operates like a CD would).

* Many financial institutions who got these funds, to hold in trust, paid government "advisors" to steer deposits their way. Court documents show that payoffs ranged from $4,500 to $475,000 per deal.

* After the financial institutions got the money (cheaply) they then lent it out at higher rates (or used it to gamble on derivatives), and then paid off the financial advisors for their efforts.

To recap. Advising firms, working with firm like Goldman Sachs and Bank of America, colluded with each other and then deliberately withheld information from municipalities and other governments about higher paying programs. This cost taxpayers and governments in the form of lost interest income.

Or, as Bloomberg.com put it, "Wall Street’s biggest banks were cheating cities and towns during the same decade in which they were setting the stage for a global economic collapse." Nice.

- Mark

REPUBLICANS: KEEPING GAS PRICES HIGH

By way of Crooks & Liars, Democratic Rep. Peter Fazio really takes it to the Republicans and the White House. Here Fazio's pointing out how the Bush administration and Republicans are assisting the Saudis in keeping gas prices high in America through collusion (via the Organization of Petroleum Exporting Countries, OPEC).



Here's one of the pieces of legislation that Fazio is referring to in his speech on the House floor: H.R. 2264. In a few words, H.R. 2264 would amend the Sherman Anti-Trust Act and make it illegal to have market collusion in the oil industry.

- Mark

ON TROJAN HORSES, AND SHINY SPOONS

I'm sure most have already seen the NY Times story detailing the Bush administration's use of retired military officers to sell the war in Iraq to the American public. Still, it's worth posting again since our TV media seems bent on ignoring a story that exposes their culpability in promoting a war of choice by using compromised "analysts."

Specifically, the NY Times reports that the medias use of Pentagon planted military "analysts" was a problem because:

... Hidden behind that appearance of objectivity, though, is a Pentagon information apparatus that has used those analysts in a campaign to generate favorable news coverage of the administration’s wartime performance ... Most of the analysts have ties to military contractors vested in the very war policies they are asked to assess on air ...

But there's something worse than former military officers using their air-time to promote wars that military contractors, no doubt, profit from.

... Records and interviews show how the Bush administration has used its control over access and information in an effort to transform the analysts into a kind of media Trojan horse — an instrument intended to shape terrorism coverage from inside the major TV and radio networks.

The report goes on to outline how the Bush administration used the military officers by providing them with "briefings." The military officers would then use these briefings as evidence that they had access to Bush's Pentagon to military contractors.

This explains why the 4th Estate is so distracted with Rev. Wright and Hillary's mistaken sniper memory. It allows them to highlight the mistakes of others. To do otherwise would mean having to admit they're simply too lazy to dig for real facts, and are easily distracted by the increasingly dim lights of political power.

Oh, look, a shiny spoon ...

- Mark

THE "SAUDI PRIZE" ... A BUSH IN THE WHITE HOUSE

It was 1986, conservation efforts were paying off, competition in the oil industry was returning, and gas prices were plummeting. In The Prize: The Epic Quest for Oil, Money & Power, author Daniel Yergin details the efforts of then Vice President George Bush to assure the Saudis – and U.S. domestic oil producers – that the U.S. should support artificially high prices in energy. On a trip to the Middle East VP Bush made it clear to the Saudis that, as Yergin put it, "market forces had gone too far" and had the potential to cripple America’s energy industry.

Well, I’m sure Papa Bush would be quite content with the following.

At its March 2000 meeting, OPEC set up a price band mechanism, triggered by the OPEC basket price, to respond to changes in world oil market conditions. According to the price band mechanism, OPEC basket prices above $28 per barrel for 20 consecutive trading days or below $22 per barrel for 10 consecutive trading days would result in production adjustments …

And, just like that, competition is mugged by collusion. Think about this the next time you hear some Talking Head drone on about “market” forces in the oil industry.

But I really liked this comment: “At its January 30, 2005 meeting, OPEC decided that market changes had rendered the band unrealistic, and decided to temporarily suspend the price band mechanism” … Translated this says “OPEC’s already making so much stinking money they no longer have to manipulate production levels.”

Papa Bush is no doubt pleased.

- Mark

THE ROOTS OF MARKETS & WEALTH

As I've been doing from time to time, what's posted below is a piece from the book I've been working on, The Roots of Markets and Wealth ... And, yes, it's almost done. To the left is a photo of John D. Rockefeller.





... Whatever the roots of his “scathing disdain for the ‘waste’ of unbridled competition” John D. Rockefeller’s pursuit of monopoly power in the late 1800s helped bring organization and, perhaps more importantly, steady profits to the oil industry. However, by the early 1930s oil profits were again threatened by too many competitors. Indeed, by August 1931 producers in Oklahoma and Texas were so plentiful and productive that the price of crude dropped to thirteen cents a barrel and, by the spring of 1933, saw some ‘hot oil’ runners get little more than two cents a barrel. And this occurred after Texas Governor Ross Sterling had, in effect, “declared war” on East Texas by sending the National Guard and Texas Rangers to cut off rogue producers, and then “rammed” a bill through the legislature which allowed market prorationing.

To stabilize prices, the oil industry turned to the federal government. After initially going after black market producers Interior Secretary Harold Ickes sought to reduce production by sending production quotas to the governors of each oil state. And why not? Acording to Ickes, after the Depression many business leaders were shell-shocked and “crawling to Washington on their hands and knees…to beg the Government to run their businesses for them.”

Unfortunately for Ickes, and FDR, the Supreme Court declared much of the National Industrial Recovery Act – which gave the federal government its authority in oil – unconstitutional. Still, with memories of ten cents a barrel still fresh, the states decided to follow federal government determined quotas on a voluntary basis.

To insure cooperation, the Interstate Oil Compact was passed in 1935 and provided a “forum for states to exchange information and plans, to standardize legislation, and to coordinate prorationing and conservation in production.” To check the flow of foreign oil, which might undermine the “informal” quota system, Congress imposed tariffs on foreign crude, fuel oil, and gasoline. This cut U.S. oil imports in half, stabilized sales, and put the U.S. oil industry firmly under a government escorted quota and tariff system.

As was the case during Rockefeller’s time, the post-Depression oil industry was able to establish regular profits at “market prices” only after competition had been brought under control. Perhaps more importantly, the organizational mold that would inspire the creation of the Organization of Petroleum Exporting Countries (OPEC) had been cast ...


- Mark