I continue to work on what will be the short version of "Gambling With Borrowed Chips," my discussion of the role of leverage, speculation, and regulation in a modern economy. I'm making great progress.
Perhaps it is a sign of my progress that I have now abandoned the original outlines I wrote of the final chapters . Indeed, as the book has moved along the difference between the actual content of each chapter and the original plan/outline has expanded.
At one time, I had contemplated that chapters 13 to 17 would have the following titles:
13. Bankruptcies and Rescues
14. Public and Private Pensions
15. Home Ownership
16. Energy
17. Conclusions.
According to the latest plan, whatever actually will be their titles, their content will be respectively thus:
13. Early Responses to The Crisis
(Especially focusing on the first year of the Obama administration and things that didn't work.)
14. Labor Unions and Pensions
(Working analytically, from the basic justifications for labor unions to their newer roles and the demographics.)
15. The Ideology of Home Equity
(I'd like to present this in the form of a fable.)
16. Health Care
(The key to the second year of the Obama administration, and its business-cycle significance, along with some philosophizing about biology.)
17. Final Thoughts
(Final thoughts.)
Yes, that might not seem to hang together when put thus, but I've learned that the teller should not fight the tale.
Showing posts with label pensions. Show all posts
Showing posts with label pensions. Show all posts
14 July 2011
30 April 2011
Public and Private Pensions
A passage from what will become chapter 14.
Let's talk about pensions. In the simple dictionary sense, a pension is a fixed amount paid by an employer to a retiree or a former employee's survivors in consideration of past services.
A pension plan is a fund established with an eye to subsequent such payments.
Pension plans are often divided into two general types, "defined benefits" and "defined contribution". The labels are self explanatory. But just to be very clear ... in a defined contribution plan, the sponsor/employer on the one hand and the employee on the other will make specified contractual contributions to the fund over the period of employment. The benefits are not defined, and so they will be determined by non-contractual factors, notably, how successfully those contributions are invested over the period before the fund has to make payments to the retiree/beneficiary.
In a defined benefit plan, on the other hand, the employer/sponsor becomes the guarantor of the contracted-for benefits, regardless of how well the fund does.
The golden age of defined-benefits plan was also the era of U.S. hegemony and self-confidence. It was the post-World War II era -- Bretton Woods tied the dollar to gold and tied every other currency in the world to the dollar, which seemed only right, given U.S. strength and centrality. Nobody ever expected that the major US corporations, those that hired the much maligned men in the gray flannel suits, would not always be around, or would not always be good for the money they were promising in decades to come.
In Detroit, the golden age of defined contributions was the time of Alfred Sloan and Walter Reuther, the heads of General Motors and the United Auto Workers respectively at the time of the "Treaty of Detroit" in 1950. GM was coming off a very profitable year (1949 was a record maker for it) and felt sufficiently flush to declare a stockholder dividend of $190 million when it decided to ensure itself against labor unrest by paying half of employees' hospital and medical insurance, and offering a pension of $125 a month. As measured by the value of the U.S. dollar at the time of the 2008 crisis, that would be the equivalent of $1,040 a month.
In his 1963 memoir Sloan would congratulate himself on introducing "an element of reason, and of predictability" into GM's labor relations.
But of course, it was an element of "predictability" only because continued prosperity for General Motors was deemed predictable. Further, the precedent once established, buying peace in this way became a habit, because at each negotiation cycle thereafter the issue would be one of embellishing the benefits offered in the existing system.
Both sides of such a negotiation could benefit by billing the future, by creating an ever more expensive defined benefits plan to be financed however-it-would-be and paid at a future date. The corporate bosses avoided strikes, keeping their shareholders happy. It was easier to promise benefits in subsequent decades than it would have been to make here-and-now salary concessions. For the same reasons, the Labor bosses were happy. They had a win with each round, and could brag to their rank-and-file about how tough they were.
Under the heading of public pensions, there is this.
Let's talk about pensions. In the simple dictionary sense, a pension is a fixed amount paid by an employer to a retiree or a former employee's survivors in consideration of past services.
A pension plan is a fund established with an eye to subsequent such payments.
Pension plans are often divided into two general types, "defined benefits" and "defined contribution". The labels are self explanatory. But just to be very clear ... in a defined contribution plan, the sponsor/employer on the one hand and the employee on the other will make specified contractual contributions to the fund over the period of employment. The benefits are not defined, and so they will be determined by non-contractual factors, notably, how successfully those contributions are invested over the period before the fund has to make payments to the retiree/beneficiary.
In a defined benefit plan, on the other hand, the employer/sponsor becomes the guarantor of the contracted-for benefits, regardless of how well the fund does.
The golden age of defined-benefits plan was also the era of U.S. hegemony and self-confidence. It was the post-World War II era -- Bretton Woods tied the dollar to gold and tied every other currency in the world to the dollar, which seemed only right, given U.S. strength and centrality. Nobody ever expected that the major US corporations, those that hired the much maligned men in the gray flannel suits, would not always be around, or would not always be good for the money they were promising in decades to come.
In Detroit, the golden age of defined contributions was the time of Alfred Sloan and Walter Reuther, the heads of General Motors and the United Auto Workers respectively at the time of the "Treaty of Detroit" in 1950. GM was coming off a very profitable year (1949 was a record maker for it) and felt sufficiently flush to declare a stockholder dividend of $190 million when it decided to ensure itself against labor unrest by paying half of employees' hospital and medical insurance, and offering a pension of $125 a month. As measured by the value of the U.S. dollar at the time of the 2008 crisis, that would be the equivalent of $1,040 a month.
In his 1963 memoir Sloan would congratulate himself on introducing "an element of reason, and of predictability" into GM's labor relations.
But of course, it was an element of "predictability" only because continued prosperity for General Motors was deemed predictable. Further, the precedent once established, buying peace in this way became a habit, because at each negotiation cycle thereafter the issue would be one of embellishing the benefits offered in the existing system.
Both sides of such a negotiation could benefit by billing the future, by creating an ever more expensive defined benefits plan to be financed however-it-would-be and paid at a future date. The corporate bosses avoided strikes, keeping their shareholders happy. It was easier to promise benefits in subsequent decades than it would have been to make here-and-now salary concessions. For the same reasons, the Labor bosses were happy. They had a win with each round, and could brag to their rank-and-file about how tough they were.
Under the heading of public pensions, there is this.
31 December 2010
Top Financial Stories 2010
I generally ask myself at this time of year what were the biggest stories of the past twelve months, in business/financial news.
By "stories," I don't mean themes, such as "China Rising" or "EU unraveling." I mean stories, such as one might have seen in a particular newspaper on some specific day. Of course, I choose the ones I do largely because they illustrate an important theme. But the theme itself isn't the story.
Further, I don't rank them, as in a top ten list. I generally assign one top story to each of the twelve months.
All that said, here is this year's list.
January. Google announcement. Google said that it was no longer willing to censor its searches in the People's Republic of China in accord with the desires of the authorities there. This was part of an escalating dispute that would lead to Google pulling out of China altogether in March.
February. Two competing biotech companies in Denmark claimed a break through in the production of commercially viable cellulosic ethanol.
March. U.S. health care reform bill finally passed -- though the actual changes are to be phased in over a period of years. Judicial challenges to the new law are an ongoing story as the year ends.
April. Greek bonds. The S&P rating for these bonds was lowered to junk level. The unfortunate acronym "PIIGS" for the 'periphery' countries of the EU receives some currency. (For the record, that's Portugal, Ireland, Italy, Greece, and Spain.)
May. The EU Finance Ministers. The Finance Ministers over-rode the strong objections of both the outgoing and the incoming UK government, approving the Alternative Investment Fund Manager (AIFM) Directive.
June. The Gulf of Mexico oil spill. This spill had begun with an explosion on the Deep Horizon platform in April, but it grew as a story week after week, and only this month did it attain totemic full-sh!t-storm significance, even at the level of diplomacy between US and UK.
July. The Dodd-Frank bill reforming the way the financial services industry in the U.S. is regulated, passed. Obama signed it. Much of it kicks the can forward, authorizing reports and possible new regs by a variety of agencies. Some obvious reforms, like the consolidation of CFTC with SEC, go still unmade.
August. The Hong Kong Monetary Authority. The HKMA announced the tightening of its rules on mortgage lending. This reflected its concerns about a developing real estate bubble in the Special Administrative Region.
September. Muncipal bonds in the U.S. Meredith Whitney put out a 600 page report predicting big trouble ahead for the municipal bond market in the US. By serendipity, she released this just as Harrisburg, PA was getting into big fiscal trouble.
October. Sarkozy, President of France. This month, the President pushed pension reforms through the French legislature despite crippling nationwide strikes. (And since we're talking about France, this was also the month that Kerviel was sentenced.)
November. Midterm elections in the US. The most remarkable development here, from the point of view of this list, was the defeat of a proposition designed to suspend AB32, in California, and the election of a Governor committed to enforcing same. AB32 is California's cap-and-trade bill regarding carbon emissions. This development has kept cap-and-trade alive, despite its political failure at the federal level.
December. Ireland. In crisis, and after cutting a deeply unpopular deal with the IMF, Ireland enacts legislation that readies a sweeping re-organization of the banking sector there. Memories of the "Celtic tiger" are just that.
A quick perusal of this list shows that it is much less of a US-centric compilation than most of its precursors in this blog. I have a hometown bias. In this case, though, only five of the stores that strike me as the biggest in their respective months are US-oriented. Five are European, and the other two are Chinese. What does that mean? Nothing much, I suppose.
Happy new year everyone.
By "stories," I don't mean themes, such as "China Rising" or "EU unraveling." I mean stories, such as one might have seen in a particular newspaper on some specific day. Of course, I choose the ones I do largely because they illustrate an important theme. But the theme itself isn't the story.
Further, I don't rank them, as in a top ten list. I generally assign one top story to each of the twelve months.
All that said, here is this year's list.
January. Google announcement. Google said that it was no longer willing to censor its searches in the People's Republic of China in accord with the desires of the authorities there. This was part of an escalating dispute that would lead to Google pulling out of China altogether in March.
February. Two competing biotech companies in Denmark claimed a break through in the production of commercially viable cellulosic ethanol.
March. U.S. health care reform bill finally passed -- though the actual changes are to be phased in over a period of years. Judicial challenges to the new law are an ongoing story as the year ends.
April. Greek bonds. The S&P rating for these bonds was lowered to junk level. The unfortunate acronym "PIIGS" for the 'periphery' countries of the EU receives some currency. (For the record, that's Portugal, Ireland, Italy, Greece, and Spain.)
May. The EU Finance Ministers. The Finance Ministers over-rode the strong objections of both the outgoing and the incoming UK government, approving the Alternative Investment Fund Manager (AIFM) Directive.
June. The Gulf of Mexico oil spill. This spill had begun with an explosion on the Deep Horizon platform in April, but it grew as a story week after week, and only this month did it attain totemic full-sh!t-storm significance, even at the level of diplomacy between US and UK.
July. The Dodd-Frank bill reforming the way the financial services industry in the U.S. is regulated, passed. Obama signed it. Much of it kicks the can forward, authorizing reports and possible new regs by a variety of agencies. Some obvious reforms, like the consolidation of CFTC with SEC, go still unmade.
August. The Hong Kong Monetary Authority. The HKMA announced the tightening of its rules on mortgage lending. This reflected its concerns about a developing real estate bubble in the Special Administrative Region.
September. Muncipal bonds in the U.S. Meredith Whitney put out a 600 page report predicting big trouble ahead for the municipal bond market in the US. By serendipity, she released this just as Harrisburg, PA was getting into big fiscal trouble.
October. Sarkozy, President of France. This month, the President pushed pension reforms through the French legislature despite crippling nationwide strikes. (And since we're talking about France, this was also the month that Kerviel was sentenced.)
November. Midterm elections in the US. The most remarkable development here, from the point of view of this list, was the defeat of a proposition designed to suspend AB32, in California, and the election of a Governor committed to enforcing same. AB32 is California's cap-and-trade bill regarding carbon emissions. This development has kept cap-and-trade alive, despite its political failure at the federal level.
December. Ireland. In crisis, and after cutting a deeply unpopular deal with the IMF, Ireland enacts legislation that readies a sweeping re-organization of the banking sector there. Memories of the "Celtic tiger" are just that.
A quick perusal of this list shows that it is much less of a US-centric compilation than most of its precursors in this blog. I have a hometown bias. In this case, though, only five of the stores that strike me as the biggest in their respective months are US-oriented. Five are European, and the other two are Chinese. What does that mean? Nothing much, I suppose.
Happy new year everyone.
17 January 2009
Lending out the TARP funds
So ... what should banks do with their TARP funds -- the money Uncle Sam has given them under the bail-out program Congress enacted in September?
Given them to their top executives? Good idea. "Job well done guys, you led your company into so much trouble that the feds had to give you money. Here's your personal chunk!"
Let's assume, just for giggles, that some of it won't simply be divvied up among the honchos in charge as takehome. What should they do with the rest? Lend it out to the buyers of homes or of cars and large appliances? lend it out to businesses and entrepreneurs for start-up ventures or expansions?
Or just sit on it and call it a capital reserve? There has been some sentiment that larger capital reserves are good. If the balance sheet looks better, that fact might increase the confidence of bank counter-parties, hastening a return to normalcy.
Frankly, it seems to me that the argument gives much too much importance to cosmetics.
Banks can only be self-sustaining private corporations, then can only cease to be wards of the state, if they get themselves back in the loan-extending business.
Does this mean government should use its new leverage as the provider of the capital infusion to order them to make loans? Heaven forbid! Japan's policy of directed credit, once seen as part of the "Japan Inc." juggarnaut, is now regarded by almost all who've studied it as a colossal failure. South Korea's efforts at directing credit have likewise amounted to waste and the promotion of stagnation.
So, you might ask: what should be done? If banks aren't lending out the money, and should be lending out the money, then how can they be induced to do so?
IMHO, the down side of the housing cycle simply has to play itself out. There won't be any lending activity in that particular field for awhile. A burnt cat doesn't get right back on the stove.
The automobile market is a different matter. If banks were convinced that there was once again a basis for a sound US auto industry, they would resume lending both to that industry, to its accessories (auto parts and the like), AND to their customers for the purpose of buying their products. So the solution to the question: what to do about the banks? depends in large part upon the answer to the question: what to do about automobiles?
And the answer to that is: consolidation. It appears that in the world market and given locked-in cost considerations such as pension commitments, there is only room for one domestic US automobile manufacturer. The government may have a positive role to play (I seldom type those nine words): enter into negotiations and facilitate a merger of the three battered and torn-up US auto makers. They can, together, constitute ONE decent productive auto maker.
That one in turn will enliven the ancillary industries, and together they'll give the banks some one to whom to make loans again.
Given them to their top executives? Good idea. "Job well done guys, you led your company into so much trouble that the feds had to give you money. Here's your personal chunk!"
Let's assume, just for giggles, that some of it won't simply be divvied up among the honchos in charge as takehome. What should they do with the rest? Lend it out to the buyers of homes or of cars and large appliances? lend it out to businesses and entrepreneurs for start-up ventures or expansions?
Or just sit on it and call it a capital reserve? There has been some sentiment that larger capital reserves are good. If the balance sheet looks better, that fact might increase the confidence of bank counter-parties, hastening a return to normalcy.
Frankly, it seems to me that the argument gives much too much importance to cosmetics.
Banks can only be self-sustaining private corporations, then can only cease to be wards of the state, if they get themselves back in the loan-extending business.
Does this mean government should use its new leverage as the provider of the capital infusion to order them to make loans? Heaven forbid! Japan's policy of directed credit, once seen as part of the "Japan Inc." juggarnaut, is now regarded by almost all who've studied it as a colossal failure. South Korea's efforts at directing credit have likewise amounted to waste and the promotion of stagnation.
So, you might ask: what should be done? If banks aren't lending out the money, and should be lending out the money, then how can they be induced to do so?
IMHO, the down side of the housing cycle simply has to play itself out. There won't be any lending activity in that particular field for awhile. A burnt cat doesn't get right back on the stove.
The automobile market is a different matter. If banks were convinced that there was once again a basis for a sound US auto industry, they would resume lending both to that industry, to its accessories (auto parts and the like), AND to their customers for the purpose of buying their products. So the solution to the question: what to do about the banks? depends in large part upon the answer to the question: what to do about automobiles?
And the answer to that is: consolidation. It appears that in the world market and given locked-in cost considerations such as pension commitments, there is only room for one domestic US automobile manufacturer. The government may have a positive role to play (I seldom type those nine words): enter into negotiations and facilitate a merger of the three battered and torn-up US auto makers. They can, together, constitute ONE decent productive auto maker.
That one in turn will enliven the ancillary industries, and together they'll give the banks some one to whom to make loans again.
11 September 2008
Delphi liquidation
In early August, General Motors agreed to yet another infusion of capital into bankrupt auto parts manufacturer Delphi. Specifically, it said that it would increase the size of an expected loan from $650 million to the $950 million now seen as the minimum in liquidity for any newly viable Delphi.
The background to all this, aptly described in a recent book on America's pension crises by Roger Lowenstein, takes us at least as far into the hinterlands of memory as 1950.
That was the year of a crucial settlement between GM and the United Auto Workers union under Walter Reuther. GM felt flush at that time. It had earned record profits in 1949 and had just declared a stockholder dividend of $190 million. Only labor unrest could disturb its serenity, and it decided to buy off the union by picking up half of the tab for the members' hospital and medical insurance, and offering a pension of $125 a month—the equivalent of $1,040 a month in 2008 dollars.
Fortune hailed this as "the Treaty of Detroit." In his 1963 memoir, Alfred Sloan, who was GM's chairman at the time of this "treaty," patted himself on the back over introducing "an element of reason, and of predictability" into GM's labor relations.
But it was easy to fudge the issue of adequate funding for those promises. This became easier in subsequent contract talks, when the issue wasn't creating a pension system but embellishing the benefits offered in the existing system.
Forward now quickly to 1999. It was in that year that GM spun Delphi off into (nominal) independence. It was also the year that an analyst at Goldman Sachs analyzed the significance that pension numbers had come to hold for the parent. The analyst, Gary Lapidus, concluded that 90% of GM's value was committed to its retirees.
"For various reasons," Mr. Lowenstein wrote, "Delphi was even less prepared the handle the legacy burden than General Motors. Its pension plan, $1.7 billion in the red at the time of the spin-off, had been falling deeper in the hole ever since. Delphi was a strange creation—a newborn conceived with the hardened arteries of an old man."
The spinoff and the continuing mutual dependence of Delphi and GM meant that the same losses, required by pension and health benefit obligations, that otherwise would have accumulated within a single corporate entity were now split between two. Mr. Lowenstein cited estimates that Delphi has been producing spark plugs for $2.05 each. The same plugs can be purchased in China for $1.05. By contract, GM buys them from Delphi for $1.70. Each party to the supply contract is suffering a loss. GM is paying 65 cents more than it otherwise would, and its supplier is losing 35 for the privilege of making the sale.
GM's management seems increasingly to be coming around to the conclusion that the federal government should take health care costs off its hands through a nationalized insurance system. In a 10Q quarterly report filed with the Securities and Exchange Commission in May 2006, the company said that it "will support public policies at the federal and state level that will enable all Americans to have health insurance."
All this provides background for a story that appeared in the Wall Street Journal on August 29. Despite even the latest agreement by GM to up its ante, there may bot be any feasible re-organization plan for Delphi on the horizon. It might be necessary for the court to liquidate Delphi, and in the process to return its physical assets, the plants, to the parent company.
The pension obligations already vested would presumably go back to GM's balance sheet as well. As Batman said (back when "Batman" was a corny television show, not an increasingly dark movie franchise): "Sometimes you just can't get rid of a bomb."
The background to all this, aptly described in a recent book on America's pension crises by Roger Lowenstein, takes us at least as far into the hinterlands of memory as 1950.
That was the year of a crucial settlement between GM and the United Auto Workers union under Walter Reuther. GM felt flush at that time. It had earned record profits in 1949 and had just declared a stockholder dividend of $190 million. Only labor unrest could disturb its serenity, and it decided to buy off the union by picking up half of the tab for the members' hospital and medical insurance, and offering a pension of $125 a month—the equivalent of $1,040 a month in 2008 dollars.
Fortune hailed this as "the Treaty of Detroit." In his 1963 memoir, Alfred Sloan, who was GM's chairman at the time of this "treaty," patted himself on the back over introducing "an element of reason, and of predictability" into GM's labor relations.
But it was easy to fudge the issue of adequate funding for those promises. This became easier in subsequent contract talks, when the issue wasn't creating a pension system but embellishing the benefits offered in the existing system.
Forward now quickly to 1999. It was in that year that GM spun Delphi off into (nominal) independence. It was also the year that an analyst at Goldman Sachs analyzed the significance that pension numbers had come to hold for the parent. The analyst, Gary Lapidus, concluded that 90% of GM's value was committed to its retirees.
"For various reasons," Mr. Lowenstein wrote, "Delphi was even less prepared the handle the legacy burden than General Motors. Its pension plan, $1.7 billion in the red at the time of the spin-off, had been falling deeper in the hole ever since. Delphi was a strange creation—a newborn conceived with the hardened arteries of an old man."
The spinoff and the continuing mutual dependence of Delphi and GM meant that the same losses, required by pension and health benefit obligations, that otherwise would have accumulated within a single corporate entity were now split between two. Mr. Lowenstein cited estimates that Delphi has been producing spark plugs for $2.05 each. The same plugs can be purchased in China for $1.05. By contract, GM buys them from Delphi for $1.70. Each party to the supply contract is suffering a loss. GM is paying 65 cents more than it otherwise would, and its supplier is losing 35 for the privilege of making the sale.
GM's management seems increasingly to be coming around to the conclusion that the federal government should take health care costs off its hands through a nationalized insurance system. In a 10Q quarterly report filed with the Securities and Exchange Commission in May 2006, the company said that it "will support public policies at the federal and state level that will enable all Americans to have health insurance."
All this provides background for a story that appeared in the Wall Street Journal on August 29. Despite even the latest agreement by GM to up its ante, there may bot be any feasible re-organization plan for Delphi on the horizon. It might be necessary for the court to liquidate Delphi, and in the process to return its physical assets, the plants, to the parent company.
The pension obligations already vested would presumably go back to GM's balance sheet as well. As Batman said (back when "Batman" was a corny television show, not an increasingly dark movie franchise): "Sometimes you just can't get rid of a bomb."
Subscribe to:
Posts (Atom)
