The Mother of All Bailouts

Sunday night's announcement of another bailout of Citigroup came as no surprise, but the potential size goes beyond anything we've seen up to this point. It also stretches the finances of our government to the breaking point.

The deal adds another $20 billion from the Troubled Asset Relief Program (TARP). This is on top of the $25 billion they got last month. The expensive part, however, is the government's agreement to protect a $306 billion pool of Citi's "troubled assets," by paying for 90% of losses in excess of $29 billion.

This required contribution from several government agencies, and creates a real threat to the finances of our government. Under terms of the deal, the government's share of the $306 billion will be paid by Treasury ($5 billion), the FDIC ($10 billion), and the remainder by the Federal Reserve.

The Federal Reserve is already highly leveraged, and "if the Federal Reserve Bank were a commercial lender, it would be a candidate for receivership, based on its capital ratios," according to an article in Barron's this past weekend. The Citigroup agreement only makes matters worse.

Bush was enthusiastic in his support of the plan this morning, saying "The first step for recovery is to safeguard our financial system." Referring to the Citigroup rescue, Bush said "We have made these kind of decisions in the past. We made one last night and if need be we will make these kind of decisions to safeguard our financial system in the future."

So, after the spectacle of having the CEO's of GM, Ford, and Chrysler appear before Congress last week, we have a quick weekend deal behind closed doors that will cost far more than the $25 billion requested by the automakers. With the Citigroup bailout, there aren't 2.5 million jobs involved, but some things are more important than rising foreclosures and unemployment.

As it turns out, Bush's "trickle down" ideology applies to government bailouts as well as tax cuts for the wealthy. Citi's largest shareholder, Saudi Prince Alwaleed bin Talal, expressed his appreciation, saying "following that action Citi is now 'well-capitalized.'" The value of the Saudi Prince's holdings went up by more than $500 million today.

Not bad for a non-union worker.

Pension Bailouts

Nothing should surprise us these days, I suppose, but I was still taken aback by the AP article, "Companies push Congress for pension relief". Apparently, some 300 companies are pressuring Congress to suspend pension legislation passed only two years ago.

Underfunding defined benefit pension plans used to be a favorite way for companies to inflate earnings. Since this is a corporate expense, for every dollar that a company doesn't put in a pension fund, there's one more dollar of reported earnings. Underfund your pension, and all of a sudden you're no longer a mediocre CEO; you're a financial genius, and entitled to that $ 20 million annual bonus.

All this became a lot more difficult a couple of years ago when the Pension Protection Act of 2006 became law. By the way, Iowa Sen. Chuck Grassley should be commended for his leadership in gaining passage of this legislation.

It seems fairly simple: if a company promises its employees a pension, they must set aside funds to meet this obligation. The law requires companies to gradually raise their "funding target" for pension plans from 90 percent (the amount required before the PPA) to 100 percent over seven years.

The law doesn't force companies to offer traditional (defined benefit) pension plans and in recent years many companies have replaced these plans with defined contribution plans, such as 401(k) plans, which cost less. The law simply requires that they adequately fund commitments they've already made to the 44 million people (working and retired) that are still covered by traditional pension plans.

So how is this a bailout? Qualifying pensions are insured by a government agency called the Pension Benefit Guaranty Corporation (PBGC). They're already forecasting a deficit of $10 billion to $12 billion, as of September 30, 2008, so with the likelihood that additional companies will go bankrupt over the next few years, they don't really have a reserve. Taxpayers will need to make up the difference for companies that have underfunded their pensions.

Prior to the law, the PBGC estimated that plans of financially weak companies with a "reasonably possible" chance of bankruptcy or termination had plans with an estimated $96 billion in underfunding. I suspect the number would be higher today, and suspending requirements that companies adequately fund their pensions just makes the tab the PBGC will need to pick up that much bigger.

We only have the names of a few of the 300 companies that have joined in asking that these pension rules be suspended, but I suspect many are like Pfizer ($10.5 billion profits last year) and IBM ($11.4 billion profits last year). Many of these companies continue to pay high dividends to shareholders even as they ask for permission to underfund their pensions.

I can't wait to see if Exxon Mobil is on the list, after just reporting record profits a few weeks ago.

Republican Soul Searching

In the wake of this week's presidential election, the Republican Party is divided and trying to understand what went wrong. This is understandable and, while it will be painful, it is also necessary.

Sometimes when you take a wrong turn it's useful to backtrack a bit (in this case, 50 years). The following was written by John Eisenhower, son of President Dwight D. Eisenhower, as an explanation for his decision to vote for the 2004 Democratic nominee, John Kerry, after more than 50 years as a Republican. Had we followed his advice, there's little doubt we'd all be better off today.

The Presidential election to be held this coming Nov. 2 will be one of extraordinary importance to the future of our nation. The outcome will determine whether this country will continue on the same path it has followed for the last 3½ years or whether it will return to a set of core domestic and foreign policy values that have been at the heart of what has made this country great.

Now more than ever, we voters will have to make cool judgments, unencumbered by habits of the past. Experts tell us that we tend to vote as our parents did or as we “always have.” We remained loyal to party labels. We cannot afford that luxury in the election of 2004. There are times when we must break with the past, and I believe this is one of them.

As son of a Republican President, Dwight D. Eisenhower, it is automatically expected by many that I am a Republican. For 50 years, through the election of 2000, I was. With the current administration’s decision to invade Iraq unilaterally, however, I changed my voter registration to independent, and barring some utterly unforeseen development, I intend to vote for the Democratic Presidential candidate, Sen. John Kerry.

The fact is that today’s “Republican” Party is one with which I am totally unfamiliar. To me, the word “Republican” has always been synonymous with the word “responsibility,” which has meant limiting our governmental obligations to those we can afford in human and financial terms. Today’s whopping budget deficit of some $440 billion does not meet that criterion.

Responsibility used to be observed in foreign affairs. That has meant respect for others. America, though recognized as the leader of the community of nations, has always acted as a part of it, not as a maverick separate from that community and at times insulting towards it. Leadership involves setting a direction and building consensus, not viewing other countries as practically devoid of significance. Recent developments indicate that the current Republican Party leadership has confused confident leadership with hubris and arrogance.

In the Middle East crisis of 1991, President George H.W. Bush marshaled world opinion through the United Nations before employing military force to free Kuwait from Saddam Hussein. Through negotiation he arranged for the action to be financed by all the industrialized nations, not just the United States. When Kuwait had been freed, President George H. W. Bush stayed within the United Nations mandate, aware of the dangers of occupying an entire nation.

Today many people are rightly concerned about our precious individual freedoms, our privacy, the basis of our democracy. Of course we must fight terrorism, but have we irresponsibly gone overboard in doing so? I wonder. In 1960, President Eisenhower told the Republican convention, “If ever we put any other value above (our) liberty, and above principle, we shall lose both.” I would appreciate hearing such warnings from the Republican Party of today.

The Republican Party I used to know placed heavy emphasis on fiscal responsibility, which included balancing the budget whenever the state of the economy allowed it to do so. The Eisenhower administration accomplished that difficult task three times during its eight years in office. It did not attain that remarkable achievement by cutting taxes for the rich. Republicans disliked taxes, of course, but the party accepted them as a necessary means of keep the nation’s financial structure sound.

The Republicans used to be deeply concerned for the middle class and small business. Today’s Republican leadership, while not solely accountable for the loss of American jobs, encourages it with its tax code and heads us in the direction of a society of very rich and very poor.

Sen. Kerry, in whom I am willing to place my trust, has demonstrated that he is courageous, sober, competent, and concerned with fighting the dangers associated with the widening socio-economic gap in this country. I will vote for him enthusiastically.

I celebrate, along with other Americans, the diversity of opinion in this country. But let it be based on careful thought. I urge everyone, Republicans and Democrats alike, to avoid voting for a ticket merely because it carries the label of the party of one’s parents or of our own ingrained habits.

Perhaps the Republican Party of 50 years ago is obsolete. Maybe the Republican Party will choose to continue the Reagan/Bush policies that led to budget deficits, military actions for the benefit of business interests, destruction of the middle class, and near-collapse of our economy.

But they should at least understand the legacy they're giving up.