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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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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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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The devastating economic malaise gripping the United States has finally infected Canada’s job market, which shed nearly 71,000 positions in November, the largest monthly net loss in 26 years.

The higher-than-expected job losses pushed the country’s unemployment rate to 6.3 per cent, up one-tenth of a percentage point from October.

"If you needed one piece of evidence to prove that Canada has finally entered that slippery slope toward recession, this would be it," said Michael Gregory, a senior economist at BMO Capital Markets.

Canada posted a net gain of 133,000 jobs in the first 11 months of the year, compared with almost two million jobs lost in the United States over the period.

The picture was especially bleak in Ontario, Canada’s manufacturing heartland, where 66,000 jobs evaporated. Those losses drove the province’s unemployment rate to 7.1 per cent, up from 6.5 per cent the month before.

And this likely won’t be the end of gloomy unemployment reports. With Canada’s economy poised to contract, said CIBC World Markets economist Krishen Rangasamy, "things will certainly get worse before they get better." He sees the unemployment rate "creeping up steadily toward 7 per cent," with another 100,000 job losses expected over the next few months.

Manufacturing was hit particularly hard in November, with net job losses of 38,000. The sector has seen employment decline by 388,000 positions since a peak in 2002, Statistics Canada said.

In Ontario, where barely a day goes by without manufacturers announcing layoffs or plant closures, manufacturing job losses were even steeper, totalling 42,000 last month. That number is poised to rise after recent layoff announcements take effect, including 850 job cuts at two Magna auto-parts plants in the GTA, and 700 temporary layoffs announced yesterday at General Motors in Oshawa.

The dismal Ontario jobs picture "really is consistent with our thinking that Ontario is the epicentre of the impact of the U.S. slowdown in Canada," said Glen Hodgson, chief economist at the Conference Board of Canada.

Other sectors that are particularly vulnerable to U.S. fortunes, including transportation and warehousing, also showed substantial job losses, Gregory said payday loan online.

But the situation is even worse in the United States, which recorded 533,000 net job losses in November, the largest one-month decline since 1974. That pushed the U.S. unemployment rate up from 6.5 per cent to 6.7 per cent.

The Bank of Canada is expected to drop its key interest rate by half a percentage point to 1.75 per cent Tuesday as the outlook for Canada’s economy continues to weaken.

The feeble Canadian employment numbers prompted more calls for a government stimulus package, which likely will have to wait until the federal budget, which is slated for Jan. 27. Governor General Michaëlle Jean agreed to prorogue Parliament at the request of the Conservative government.

"We needed a massive stimulus package two months ago, not two months from now," said Jim Stanford, an economist with the Canadian Auto Workers union. "It’s absolutely jaw-dropping that Parliament has been closed down … when we should be moving dramatically to try to stop this crisis from getting worse."

At Queen’s Park, opposition parties said the huge jump in Ontario’s unemployment rate is proof that Premier Dalton McGuinty’s efforts to fight the economic downturn and retrain workers are a failure.

"Everyone could see this coming. Everyone knew this situation was going to get worse and worse," NDP Leader Howard Hampton said.

Economic Development Minister Michael Bryant acknowledged the jobless numbers were "brutal" but said Ontario’s effort at boosting the economy is "not intended to, nor can it, address the global economic crisis."

Hodgson said job losses in Canada probably won’t last as long as in the U.S. due to widely expected stimulus packages in both countries.

But, he said, "even with a big Obama package in the United States, the U.S. economy is going to have a really, really tough 2009. And if you’re sitting in Ontario, that translates into weak sales for whatever you do."

With files from Rob Ferguson

and the Star’s wire services

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WASHINGTON – U.S. sales of existing homes fell more than expected last month as economic fears made buyers leery even though prices plunged to the lowest levels in more than four years.

And the decline is expected to steepen because October's results reflect sales finalized before Wall Street's nosedive.

The National Association of Realtors said Monday that sales of existing homes fell 3.1 per cent to a seasonally adjusted annual rate of 4.98 million units in October.

That compared with a downwardly revised pace of 5.14 million in September. Sales had been expected to fall to a rate of 5.05 million, according to economists surveyed by Thomson Reuters.

The median price – half of homes sold for more, half for less – plunged 11.3 per cent from a year ago to $183,000.

That was the largest year-over-year drop on records going back to 1968, and the lowest median sales price since March 2004.

The realtors group is calling on Congress and president-elect Barack Obama to spend $50 billion to subsidize mortgage rates, projecting this would stimulate 500,000 more home sales.

"If home prices overshoot downward, than it can lead to collateral damage to the economy," said association economist Lawrence Yun. The cost, he added, would be "very reasonable" compared with the billions the government is spending to rescue major banks.

Since the October sales numbers reflect contracts signed in August and September, sales could fall further amid the fallout from the sinking economy.

Evelyn Krazer, sales manager with Johnson Realty in St. Louis, said activity has slowed to "practically nothing" in recent weeks.

"Everybody's afraid of losing their job," she said. "People who are thinking about moving are holding off."

Global Insight economist Patrick Newport said many Americans are moving in with relatives after losing their homes to foreclosure, while lenders "are trying to protect themselves by holding cash."

Still, other economists were encouraged that sales did not fall below June's sales rate of 4 business card.85 million, the lowest point to date in the current housing bust.

"The market is showing signs of bottoming out," said David Resler, chief economist with Nomura Securities.

Compared with last month, sales were down in much of the country. But in the West sales were up 40.5 per cent compared with October last year, as buyers in places like Las Vegas and Orange County, Calif., snapped up distressed properties at bargain prices.

Nationwide, the realtors group estimated distressed properties made up 45 per cent of all property sales in October.

There were 4.23 million unsold homes on the market in October, down slightly from a month earlier, but analysts say that until inventory falls substantially from ongoing historically high levels the housing slump is likely to persist.

"There are still way too many houses being offered and that is likely to stay that way for quite some time as we work through the foreclosure problem," said Joel Naroff, an economist and president of Naroff Economic Advisors in Holland, Pa.

Soaring foreclosures are a driving force behind the credit crisis that has upended Wall Street and caused the government to spend billions rescuing major banking institutions.

President George W. Bush argued Monday that the government's $20-billion-plus rescue of Citigroup, announced late Sunday, was necessary to "safeguard the financial system" and help the economy recover. Bush said there could be more such moves if other institutions need help.

Meanwhile, Obama pledged to honour the commitments the outgoing Bush administration has made, and urged the incoming Congress to immediately pass a major economic stimulus package.

He declined to specify how big a spending package he contemplates, but said: "It's going to be costly."

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Have money, will buy Mercedes and mobile phone.

That seems to be the mantra in India, where sales of luxury cars and mobile subscriptions are bucking the overall trend of lower consumer demand and slowing economic growth.

India’s benchmark stock market is down more than half in 2008, industrial production has fallen and analysts expect economic growth could slow to below 7 percent in the year to March 2009 from 9 percent or higher in the past three years.

But that has not stopped mobile phone operators in the fastest growing market for mobile phone services from adding a record 7.7 million mobile users in October to their GSM networks.

Leader Bharti Airtel alone added 2.7 million new subscribers, while No. 3 Vodafone Essar rang in its highest numbers ever, a whopping 2.1 million.

Subscriber additions can continue at the same fast clip if operators stick to their expansion plans, said Usha Rajeev, head of the telecom practice at PricewaterhouseCoopers.

“Generally, in times of trouble, people feel a heightened need to stay connected and keep up with the news,” she said.

“Also, the mobile phone is not considered a luxury product anymore; it’s almost an essential commodity,” she said.

Young consumers see the mobile phone “as an extension of themselves,” Rajeev said, and would not cut spending on it, while for new users from small towns and villages, staying connected may be critical to earning a livelihood short term cash loans.

With just over a quarter of its billion-plus population owning a mobile, consultancy Gartner forecasts India’s mobile user base will increase to 737 million by 2012, helped by call rates as low as 1 U.S. cent a minute and handsets at $15.

MORE CONVICTION

At the other end of the spectrum is demand for luxury cars with a sticker price of more than 2 million rupees ($41,000), which has stayed strong despite a slump in car sales overall.

Car sales in India fell for the third time in four months in October as high borrowing costs and tighter credit depressed demand, with some firms including top vehicle maker Tata Motors Ltd shutting plants to avoid a build-up in inventory.

Car sales fell nearly 7 percent from a year earlier to 98,900 units in October, but Mercedes-Benz has already met its full-year target with sales of 3,141 units so far this year, a 47 percent increase from the same period a year earlier.

BMW’s sales have more than doubled this year. 

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American International Group’s CEO said Monday that the troubled insurer should start selling off pieces of its sprawling global business by year end.

Some 15 to 20 buyers may each walk away with a unit of the troubled insurer, Chief Executive Edward Liddy told CNNMoney.com.

Liddy declined to comment on the prices the divisions are commanding, saying it is "too soon." But he expects to be able to repay the $85 billion government loan AIG (AIG, Fortune 500) received last month to keep it afloat as it unwinds its $1 trillion in assets.

"We were in a heck of a mess," Liddy said. "It’s solvable. We can work our way out of it."

Liddy took charge of the company after the Federal Reserve arranged the unusual financing to prevent further turmoil in the already strained financial markets. In return, the government took a 79.9% stake in the company and gave the AIG two years to repay the debt by selling its assets.

The company does not expect to need additional financing beyond the $85 billion to continue operating, Liddy said. It has already drawn down $69 billion of that loan.

The Federal Reserve of New York said Oct. 8 that it would lend AIG up to $37.8 billion in exchange for investment-grade, fixed-income collateral.

The second loan was needed because AIG couldn’t access the frozen credit markets to fund its daily operations, Liddy said. Depending on how the capital markets value its securities assets in the future, it might need more, he said payday advance lender.

Liddy has spent the last month deciding which parts of the company to sell. In early October, the beleaguered insurance giant announced it would hold onto its property and casualty insurance businesses and retain a majority stake in its foreign life insurance operations. The property and casualty lines bring in more than $40 billion in revenue annually.

Everything else is on the table, Liddy said. The businesses include its aircraft leasing unit, asset management division, retirement services and U.S. life insurance operations.

Liddy said he regrets the company threw a $440,000 one-week retreat at the St. Regis Resort in Monarch Beach near San Diego, Calif., just days after the bailout. He said he was not aware of the junket at the time, but would look into recouping the costs and disciplining those involved.

AIG agreed Thursday to curb such expenditures after heavy criticism from Congress and New York state Attorney General Andrew Cuomo. The company canceled 160 conferences and events - some that carried price tags of as much as $750,000. It also has put on hold a nearly $10 million severance payment to outgoing chief financial officer Steven Bensinger.

"I apologize to the American people for those things," Liddy said on CNN. "They were terribly insensitive."  

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When Tony Tan, executive director of Singapore’s biggest sovereign wealth fund, warned in July the world might plunge into its worst recession in 30 years, many shrugged off his remarks as too gloomy.

Three months later, Tan’s prophecy of doom is becoming a reality as the credit crisis ravages U.S. and European banks and takes a growing toll on the global economy.

Tan’s Government of Singapore Investment Corp (GIC) is meanwhile sitting with 7 percent of its estimated $300 billion portfolio in cash and another 26 percent in G7 government bonds.

Tan, a 68-year old former finance minister, professor and banker, and his team are now cautiously sifting through the financial carnage to shop for distressed assets in the United States in an effort to boost long-term returns for Singapore’s central bank.

GIC released its first performance report last month, after increased scrutiny of sovereign funds by Western lawmakers who want them to be more transparent, and revealed a 4 (best payday loan).5 percent real return in Singapore dollar terms over 20 years.

“We should not assume that the worst is over and we continue to be watchful and prudent in our assessment of the economic risks and in our investments,” Tan, also the fund’s deputy chairman, told reporters at the launch of the report.

Song Seng Wun, a Singapore-based economist with Malaysia’s CIMB, said Tan’s long stint with the private and public sector makes him experienced enough to guide GIC through the crisis.

“I don’t think you can compare him to an investor like Warren Buffett,” he said. “But he is an old hand who has seen the ups and downs of the Singapore economy and it is good to have someone like him steering the ship.” 

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