Finance and Economic

DETROIT — Retirement health care for as many as three-quarters of a million Americans will be placed at high risk if conditions proposed as part of auto rescue loans are enforced by the incoming Congress and Obama administration, labor experts say.

At issue is a condition of the loans that calls for General Motors Corp. and Chrysler to use company stock or the equivalent to pay half, or $10.5 billion, of the cash owed to a union retiree health care trust.

"It’s as if we, as a nation, learned nothing from Enron, essentially risking the health care of retired and active workers in such a cavalier fashion," said Harley Shaiken, a professor at the University of California at Berkeley who specializes in labor issues. "The great Enron lesson was: Don’t put all your eggs in one basket. … Putting half your eggs in the trust-fund basket is still a high level of risk."

Enron workers lost the lion’s share of their retirement savings when the company’s once fast-gaining stock became worthless. Workers received their matching contributions in Enron stock — then were prohibited from selling it until they were 50 — and many invested their 401(k) contributions in the shares.

Since Enron’s collapse, many corporations have limited the amount of company stock employees can hold in 401(k) accounts. Legislators and shareholder advocates argued for tougher regulations to protect individual investors.

That is why, Shaiken said, it is shocking that President George W. Bush "apparently bowed to political pressures from the Republican right in the Senate" and called for the retiree health care of so many Americans to be placed in jeopardy.

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Shaiken says he believes the new Democratic Congress and President-elect Barack Obama will revisit conditions placed on the UAW, and particularly on the funding of the voluntary employee beneficiary association when they take office next year.

But others say it may not be possible for the automakers to achieve the degree of cost-cutting required to meet conditions of the federal loans by the end of March without abiding by the terms set by Bush’s administration.

The White House agreed to provide as much as $17 payday cash loan.4 billion in loans to carry GM and Chrysler through the first three months of 2009. But the automakers must demonstrate viability by March 31 or they will be forced to immediately pay back the loans or file for bankruptcy. As part of the deal, the federal government set targets for restructuring including union wage concessions, the change in VEBA funding and cutting bond debt by about two-thirds.

While the automakers can deviate from these targets, "absent a near-term economic recovery," Citigroup auto analyst Itay Michaeli wrote in a note to investors this week, "we believe it would be difficult to deviate significantly from these targets and still demonstrate viability."

Gary Chaison, professor of industrial relations at Clark University in Worcester, Mass., said that while the changes to VEBA funding are not optimal for the approximately 750,000 people for whom the new fund was supposed to provide health coverage beginning in 2010, it still may ensure more benefits than they otherwise would have received in retirement.

"I think this makes the best of a bad situation," Chaison said. "If they pay a portion of the VEBA now, they might have enough to pay for the health care benefits of the current retirees and they might get more later."

But, Chaison said, his impression even from the time the UAW and automakers agreed to the VEBA in late 2007 was that it was questionable whether the health care trust would last long enough to keep the commitments the UAW and automakers made.

Although the UAW described the VEBA as a solid plan to provide benefits to retirees and workers who were active as of the contract agreements last year, it was in part a defensive maneuver intended to protect workers from corporate bankruptcies that typically wipe out retiree benefits.

And it might not even have come to that, the UAW said when it pitched the VEBA to members. The automakers could have sought court approval to simply terminate retiree medical benefits.

At the time the UAW agreed to it, workers and analysts believed a VEBA would protect them from the risk of bankruptcy. While an automaker’s default seemed possible, just a year ago, few thought it would happen before the VEBA was funded and took effect in 2010.

But with the risk of illiquidity now an imminent possibility, the UAW on Dec. 3 agreed to postpone until 2012 the VEBA payments that were due from GM and Chrysler in 2010.

Now the government is asking the trust to accept half cash and half stock.

A UAW spokesman declined to comment.

GM retiree Ralph Herndon said he isn’t worried about getting half of the VEBA funding from GM stock — he has faith the company will survive.

"GM stock doesn’t bother me," he said. "I’m not going to worry about the VEBA, because all the worrying we do is going to change nothing. I’m cautiously optimistic it will work out. … But if you expect me to save for my own retirement, someone needs to manage the managers on Wall Street better."

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Fannie Mae, the largest provider of money for U.S. residential mortgages, on Wednesday said its regulator named nine board members, including a former Morgan Stanley executive.

The appointment of David Sidwell, who was Morgan Stanley’s (MS, Fortune 500) chief financial officer from March 2004 to October 2007, and eight others comes after the government in September forced the company and rival Freddie Mac into conservatorships under their regulator, the Federal Housing Finance Agency.

Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) have lost billions of dollars as the housing slump boosted delinquencies, raising alarm among regulators and lawmakers who are counting on the companies to help stabilize the market for U.S. home mortgages.

The other directors are Fannie Mae Chief Executive Officer Herb Allison; Dennis Beresford, former chairman of the Financial Accounting Standards Board; William Thomas Forrester, former CFO of the Progressive Corp (PGR, Fortune 500) cash advance.; Brenda J. Gaines, former CEO of Diners Club North America, a subsidiary of Citigroup Inc (C, Fortune 500).; Charlynn Goins, former chairman of New York City Health and Hospitals Corp.; Frederick "Bart" Harvey III, former chairman of the board of trustees of Enterprise Community Partners; Egbert Perry, chairman and CEO of the Integral Group LLC; and Diana Taylor, a former managing director for Wolfensohn & Company.

Beresford and Gaines have served as Fannie Mae directors since 2006. Harvey has been a director since August 2008. 

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GMAC won Federal Reserve approval to become a bank holding company Wednesday, enabling the auto lender to tap the Treasury’s $700 billion financial bailout fund and help keep General Motors Corp. in business.

To comply with rules about who can own a bank, GMAC’s majority owner, Cerberus Capital Management LP, agreed to distribute its stake to its investors, and minority owner GM will cede all control.

The Fed order said the plan would benefit the public by strengthening GMAC’s ability to fund the purchases of vehicles manufactured by GM.

Saving GMAC may improve the chances of salvaging General Motors, which received $9.4 billion in U.S. loans this month to stave off collapse at least until January. That package didn’t include support for GMAC, which finances about 75 percent of the inventory at GM dealers. The lender also served as a major source of loans to GM car buyers until it was frozen out of credit markets after losses totaling $7.9 billion.

GMAC’s request was approved even though the Detroit-based lender didn’t satisfy the capital requirements laid out when it applied to become a bank in November payday loans.

GMAC said it needed three-quarters of investors that held $38 billion in bonds to exchange the notes as part of a plan to reduce debt. As of Dec. 17, holders of 58 percent of eligible notes had tendered and with two days until the deadline, GMAC hadn’t provided an update. GMAC has been unable to raise cash by selling bonds backed by auto loans since May as concerns mount that cash-strapped households will be unable to pay bills.

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Gasoline prices increased for the fourth day in a row Friday, according to a daily survey of gas station credit card swipes.

The price of regular unleaded rose 0.3 cents to a national average of $1.6730 a gallon from $1.67 on Thursday, according to motorist group AAA.

Average gas prices ticked higher on Saturday for the first time in nearly three months, according to AAA. They briefly retreated for one day before resuming their upward climb.

The price of gasoline has fallen in tandem with the price of crude oil, which has shed more than $100 a barrel since July. Oil demand has declined rapidly as the world economy has slowed.

According to the Transportation Department, Americans drove 100 billion fewer miles between November 2007 and October 2008, compared with a year earlier.

Local prices: Gas is currently selling below $2 a gallon in nearly all states, with the exception of Alaska, where gas prices averaged $2.648 a gallon, and Hawaii, where gas was $2.402 on average.

Gas was cheapest on average in Wyoming, at $1.477 a gallon, according to AAA. Missouri, the first state to see average prices drop below $1.50 a gallon, saw prices bounce back above that mark on Friday to $1.513.

Out of major U.S. cities, Anchorage, Alaska, has the highest average gas prices, at $2.404 a gallon, according to GasBuddy individual health insurance.com, a service that lets motorists post local fuel prices online. Salt Lake City, Utah, had the lowest average, at $1.383.

Diesel: The price of diesel fuel, which is used in most trucks and commercial vehicles, fell Friday by 1 cent to a national average of $2.519 a gallon, according to AAA.

Diesel prices have fallen more than $2 a gallon since hitting a record high of $4.845 on July 17.

Ethanol: The price of E85, an 85% ethanol blend made primarily from corn, fell by nearly a penny to an average of $1.499 a gallon in Friday’s survey, according to AAA.

E85 can be used in place of regular gas in specially configured "flex-fuel" vehicles, but it is not readily available in some states.

The AAA figures are state-wide averages based on credit card swipes at up to 100,000 service stations across the nation. GasBuddy prices are averages of local regular unleaded gasoline prices that about 700,000 volunteer gas prices spotters have posted online. Individual drivers may see lower fuel prices in different areas of each state.

CNNMoney.com staff writer Kenneth Musante contributed to this report.  

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President George W. Bush bailed out automakers on Friday with $17.4 billion in emergency loans as he sought to stave off a collapse that would have cost hundreds of thousands of jobs.

Bush, seeking to bolster his legacy and bucking some fellow Republicans who would prefer the car industry to deal with its problems without government aid, said it would be irresponsible in a time of economic crisis to let carmakers die.

The government will offer up to $17.4 billion in loans to the U.S. automakers, reeling from a slump in consumer demand, and expects General Motors and Chrysler LLC to access the money immediately. The White House said the loan agreements had been signed.

Ford Motor Co, the other firm in Detroit’s storied Big Three, said its liquidity was adequate for now and it did not need a loan at this point.

“If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers,” Bush said, warning that to do nothing would deepen and prolong the U.S. recession.

U.S. stocks rose on the news of the lifeline to the sector, with GM shares jumping 10.9 percent.

The White House moved on its own after Republicans in the Democratic-controlled Congress blocked a deal last week. That plan followed weeks of negotiations that included desperate pleas on Capitol Hill from the auto chiefs.

Some $13.4 billion of the total package will be made available in December and January from a $700 billion Wall Street bailout fund originally designed to rescue struggling financial institutions savings account payday loans.

Bush attached a string of conditions to the three-year loans and set a deadline of March 31 for the companies to prove they can restructure enough to ensure their survival or have the loans called back.

But the White House opted against a “car czar” proposal that was a cornerstone of the failed bailout efforts in Congress, and handed oversight responsibility to Treasury Secretary Henry Paulson instead.

“We don’t think that’s something that we should impose … just for 31 days when the next administration may or may not have a different view about how they want to handle it,” deputy White House chief of staff Joel Kaplan said.

Democratic President-elect Barack Obama, who takes over from Bush on January 20 and will inherit the handling of the deal, welcomed the loan move as a necessary step. But he said he wanted to make sure workers did not bear the brunt of the restructuring.

“My top priority in this administration is to create 2.5 million new jobs and I want some of those jobs to be in the auto industry,” Obama said at a news conference.

Obama has been calling for short-term loans to the sector based on steps toward long-term viability.

LABOR TERMS 

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Chrysler, which is halting factory operations for at least a month as sales and cash dwindle, will not abandon its involvement in the NASCAR racing circuit but will reduce spending by about one-third, a top executive said on Thursday.

A day after the cash-strapped automaker said it will idle North American plants starting Friday, Mike Accavitti, director of Chrysler’s Dodge brand and head of motorsports, said the automaker will cut spending next year by more than 30 percent.

“We’re not going to pull out. We are going to throttle back,” he told Reuters. “NASCAR is not exempt from anything else that we do to market and promote vehicles.

“We have to reduce our spend. We have to get our expenses in line with our revenues,” he added in a telephone interview. “The market right now for automobiles is at a low point that hasn’t been seen in decades. As we resize the company and resize our expenses, our NASCAR spend is not exempt.”

While cutting spending, Chrysler will honor its contracts with three race teams it sponsors — Gillett Evernham, Penske Racing and Petty Enterprises — as well the track in Talladega, Alabama, Accavitti said.

Chrysler, along with General Motors Corp, is seeking a U.S. government bailout it says it needs to survive in the near term. Democratic lawmakers and industry sources have said any financial assistance would likely cover GM and privately held Chrysler, and total up to $14 billion.

GM has said it is cutting its marketing and promotions budget, which includes NASCAR, by about 20 percent. It has reduced advertising, walked away from expiring sponsorship deals with such teams as the New York Yankees and even ended its endorsement deal with popular pro golfer Tiger Woods faxless pay day loans.

Ford Motor Co said it plans to cut NASCAR spending by about 20 percent, while Japan’s Toyota Motor Corp has said its spending will be lower but has not said by how much.

“TURNING POINT”

“The show will go on, but it might be a reduced-fans-in-the-stand type of show,” said Michael Pitts, associate professor of strategic management at Virginia Commonwealth University.

“This is a real turning point,” he added. “Maybe we find out now the fans really don’t care about the brand of car.”

The automakers have been big backers of the sport in the belief it boosts their brand images as well as sales.

At NASCAR’s peak, GM spent as much as $130 million on the sport, Ford less than $100 million and Chrysler less than that, estimated Peter DeLorenzo, publisher of website www.autoextremist.com. Chrysler is probably spending around $50 million now and is heading toward $30 million, he added.

“Once corporate America starts walking away, what are they going to do?” DeLorenzo said of NASCAR officials.

One industry observer has said the sport should take a break because of the automakers’ struggles. In a column on Slate, self-described fan Robert Weintraub suggested “euthanizing” NASCAR. www.slate.com/id/2206711/ 

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U.S. stocks fell Monday, wiping out last week’s gains, after manufacturing showed a worsening economy that may hurt earnings at companies, including JPMorgan Chase & Co. and Apple Inc.

JPMorgan tumbled 7.5 percent on Merrill Lynch & Co.’s prediction that the biggest U.S. bank by assets may post a quarterly loss, while Apple slid 3.6 percent after the maker of iPods was downgraded to neutral at Goldman Sachs Group Inc.

Ingersoll-Rand Co. and Textron Inc. lost more than 3.1 percent as industrial production decreased for the third time in four months and the New York Federal Reserve’s regional economic index contracted the most on record.

"There’s a lot of uncertainty right now as we start the week," said John Wilson, co-director of equity strategy at Memphis, Tenn.-based Morgan Keegan, which manages $120 billion. "Right now, the concern is the depth and duration of the recession that we’re in."

The Standard & Poor’s 500 Index slipped 1.3 percent to 868.57 as financial and technology shares were the biggest drags on the gauge. The Dow Jones Industrial Average declined 65.15 points, or 0.8 percent, to 8,564.53. The Russell 2000 Index of small U.S. companies decreased 3.4 percent.

The first simultaneous recessions in the U.S., Europe and Japan since World War II have dragged the S&P 500 down almost 45 percent since its October 2007 record.

Apple slid $3.52 to $94.75 after being cut from buy at Goldman Sachs on concern that consumer spending will weaken further. David Bailey reduced his 12-month share-price estimate to $115 from $125 500 fast cash payday loan.

JPMorgan fell $2.31 to $28.63. The stock was cut to underperform from neutral at Merrill Lynch, which said it is increasingly clear that credit costs in the U.S. will get much worse. Merrill also slashed JPMorgan’s share-price target by 39 percent to $27. Merrill’s Guy Moszkowski is the only analyst tracked by Bloomberg to rate JPMorgan the equivalent of sell.

Financial companies in the S&P 500 lost 4 percent as a group, while computer-related shares retreated 1.7 percent.

Morgan Stanley and Goldman Sachs, which report earnings this week, both retreated. The firms, which have each lost more than 69 percent this year, probably will report fourth-quarter losses on shrinking asset values and a decline in fees for businesses such as merger advice, trading and money management, according to the average estimate of analysts surveyed by Bloomberg.

Morgan Stanley declined 1.5 percent to $13.64 after Deutsche Bank AG analyst Michael Mayo said earnings per share will drop 59 percent in 2009 as revenue declines to the same level as 2005.

Goldman Sachs fell 1.9 percent to $66.46. Bank of America Corp. slid 5.5 percent to $14.11, and Wachovia Corp. lost 3.4 percent to $5.11.

Telephone companies in the S&P 500 slid 3.1 percent as a group after AT&T Inc., the biggest U.S. phone company, was downgraded to neutral from buy at Goldman Sachs, which noted that the economic slowdown led to a drop in its employee pension fund. AT&T shares lost 3.7 percent to $27.13.

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If Japan’s experience is any guide, the historic plunge in U.S. Treasury yields may deepen as the Federal Reserve’s moves toward unconventional policy tools — such as outright purchases of government bonds — to revive the economy.

As part of the Bank of Japan’s quantitative easing policy launched in March 2001 to fight against deflation, the central bank began buying government outright to drag down long-term rates after having already driven short-term rates to zero.

Benchmark 10-year Treasury yields may test all-time lows struck in the 1940s near 1.60 percent if the Fed decides to start scooping up government bonds as part of any new policy, a prospect Fed Chairman Ben Bernanke has raised.

The Fed is widely expected to cut rates to 0.5 percent or lower this week and possibly lay out new initiatives on top of its array of interventions to prop up frozen markets for commercial paper, mortgage and asset-backed securities.

U.S. banks and Wall Street financial firms are already following a similar pattern seen in Japan that is reinforcing the drop in Treasury yields.

Japanese commercial banks, which were badly hurt by the bursting bubble in stock and real estate prices, turned into hefty buyers of government bonds while repairing their balance sheets and cutting back on traditional lending.

“After the injection of public funds into Japanese major banks in 1999, domestic bank holdings of JGBs kept rising until 2004 or 2005,” said Kazuhiko Sano, chief fixed-income strategist at Nikko Citigroup direct payday loan lenders. “Their behavior may give hints on the future actions of U.S. banks.”

Data from the Fed shows that commercial bank holdings of Treasuries and agencies have surged and reached a record $1.284 trillion in October.

But those holdings of Treasuries and agencies make up just 10 percent of their $12 trillion in total assets, near the lowest proportion in the past 30 years.

In Japan, bank holdings of government bonds are still 36 percent of total assets, up from 9 percent in 2000.

BACK TO THE FUTURE

The 10-year Treasury yield fell as low as 2.48 percent last week, the lowest since 1954, and remain at just 2.58 percent.

Despite concerns about heavy Treasury debt issuance to pay for more fiscal stimulus and the next tranche of the Treasury’s $700 billion TARP program, yields will likely tumble if the Fed chooses to buy big amounts of long-term bonds, analysts said.

The BOJ’s purchases, starting at 400 billion yen ($4.3 billion) a month, drove 10-year yields down to a low of 1.02 percent at the time they were announced.

When the BOJ boosted monthly JGB purchases to 1.2 trillion yen in October 2002, within the next year the 10-year yield slid to just 0.430 percent in 2003 — the lowest benchmark government bond yield in history. 

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As the U.S. government nears a deal to save General Motors Corp (GM.N: Quote, Profile, Research, Stock Buzz), a debate rages over whether Chief Executive Rick Wagoner’s job should be spared in the bailout or its most visible symbol of shared sacrifice.

With pressure mounting on Wagoner to step aside, GM on Tuesday asked its white-collar employees to add their names to a petition of support to be forwarded to the U.S. Senate.

U.S. Sen. Christopher Dodd, a Connecticut Democrat, touched off the latest controversy over Wagoner’s role at the top U.S. automaker when he said on Sunday Wagoner should step aside as Congress weighs a $15 billion industry rescue.

But with the steady backing of GM’s board, Wagoner has faced down previous threats to his leadership, including one in early 2006 as GM’s sales began to sputter and losses mounted.

Now, with GM at the brink of collapse, Wagoner’s allies have rallied to his defense and argue switching management now would risk deepening the crisis for a fragile industry.

Lee Iacocca, made famous as the CEO who steered Chrysler through a turnaround on the strength of $1.5 billion in federal loans in the early 1980s, endorsed Wagoner and his peers at Chrysler LLC and Ford Motor Co (F.N: Quote, Profile, Research, Stock Buzz) in a statement on Tuesday.

“They’re by far the best shot we have for success. I say give them their marching orders and then let them march. They’re the right people to get the job done,” Iacocca said.

Tim Leuliette, chief executive of auto supply firm Dura Automotive Systems, said calls for management changes could make a bad situation worse.

“The refueling plane is poised to link up mid-air and give them jet fuel, but the guys on the ground are calling for a change in pilots before the planes link up,” he said car insurance quotes.

CRITICS LINE UP

Critics, including governance experts, are unmoved by defenses of Wagoner, Detroit’s longest-serving CEO, who ascended to the top spot at GM in 2000.

Ford Motor Co (F.N: Quote, Profile, Research, Stock Buzz) CEO Alan Mulally joined that company in 2006 from Boeing Co (BA.N: Quote, Profile, Research, Stock Buzz). Bob Nardelli, controversial for a $210 million severance package from the top job at Home Depot (HD.N: Quote, Profile, Research, Stock Buzz), was named Chrysler CEO in 2007.

“I just find it very perplexing,” said Jonathan Macey, a Yale law professor who has studied the failures of corporate boards. “Clearly, changes have to be made in these auto companies to make them competitive. It’s also clear that Wagoner’s not the right person for the job.”

Others see GM’s slide toward failure under Wagoner’s tenure as sufficient grounds to oust him and to shake up a complacent board that has failed in its role as watchdog. Eight of the 13 directors on GM’s board have served with Wagoner since 2003.

“I think the removal of the CEO has to be part of the picture,” said David Allon, portfolio manager at Firstrust Financial Resources in Philadelphia, who owns GM preferred stock. “I think the board has to recognize that Wagoner is in a self-preservation mentality.” 

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Sprint Nextel Corp plans to cut costs and use cash to pay back its $3 billion of debt due in 2009 and 2010, rather than raise new financing in tight capital markets, its finance chief said on Monday.

Chief Financial Officer Bob Brust plans to prepare a cost cutting plan for the board in January that may include layoffs, more outsourcing and a reduction in network expansion plans.

“The main focus for 2009 is cash, keeping the company completely liquid in this economy,” Brust told Reuters. “We’re going to carefully look at the cost structure …. Everything’s on the table.”

He said that Sprint, which has already been offering buyouts to employees, could cut jobs, eliminate expensive contractors, and outsource some information technology functions.

While the company will continue spending to maintain its network quality, it would likely hold back on any expansion until the economy starts to improve, Brust said.

“You can always postpone things until after the storm passes,” said Brust.

But he said the company would not be looking to sell assets because it would be difficult to find a buyer in the current credit squeeze.

SAVING

Brust took over as CFO in May after previous CFO Paul Saleh left in a management reshuffle a few months before. The No. 3 U.S. wireless service has been suffering from such losses because of weak network capacity and poor customer service since its 2005 purchase of Nextel Communications fast pay day loans.

The company has $600 million of debt due to be paid in May 2009 and another $2.4 billion in 2010, but it plans to avoid requiring new capital in the next two years, Brust said.

As well as paying down debt, he said the company, which has about $4 billion in cash, also needs to reallocate some savings to boost advertising and other efforts aimed at stemming customer losses.

While Chief Executive Dan Hesse will make the ultimate decision on such efforts, Brust said he would advise that Sprint not use cellphone service price cuts as part of its efforts to help retain users or attract new ones.

Brust said Sprint’s outlook was unchanged from November 7 even as the U.S. economic situation has deteriorated significantly.

“So far on the wireless side there’s been no mass disruption I can see,” he said. “So far we’re where we were when we did the announcement in November …. We’ve seen pressure from the recession but nothing crazy.”

Sprint on November 7 forecast downward pressure on average monthly revenue per user in the fourth quarter and continued pressure on postpaid subscriber numbers. However, it noted that gross customer additions would stabilize, with customer cancellations at a similar rate to that in the third quarter. 

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