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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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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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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Offshore haven Liechtenstein has agreed a landmark deal with the U.S. to drop bank secrecy in cases of tax evasion and could make similar concessions in the European Union, a diplomat from the Alpine nation said.

Prince Nikolaus, a member of Liechtenstein’s ruling royal family who brokered the deal, told Reuters on Wednesday the tiny principality had agreed a “significant” change to bank secrecy rules that entitles the U.S. to bank account information when probing a tax dodge.

The prince said he was prepared to grant similar concessions within the European Union but wanted double-taxation agreements as well a commitment by countries to deal leniently with citizens that had hidden money from the taxman in Liechtenstein.

“We accept that more cooperation is necessary because there is more acute pressure,” the prince, the brother of Liechtenstein’s ruling monarch and the country’s ambassador to Brussels, told Reuters by phone from Brussels.

“People understand better today than a year ago that this is a hot issue,” said the prince. “It is of high political importance to many countries. Money is a rare species for states — they need every penny.”

Liechtestein is together with Monaco and Andorra one of three countries blacklisted by the Organization for Economic Cooperation and Development and was the target of a German investigation into thousands of citizens suspected of parking untaxed income in the principality.

The deal brokered with Washington, due to be signed this month, means banks in Liechtenstein could be forced to hand over bank account information to the U cash advance.S. authorities should they suspect tax evasion.

Previously, the U.S. had to prove a deliberate tax fraud — a standard so high it made bank accounts in the small country impenetrable to outsiders.

The Swiss banking association denied that the deal could pressure neighboring Switzerland — the world’s biggest offshore center — to take a similar step as it has a long-standing taxation agreement with the United States.

“We are in a different position and we are not under any pressure now and we have not heard any demands from the U.S. govt with regards to renegotiating that agreement,” a spokesman said.

EU DEAL?

Wedged between Austria and Switzerland, Liechtenstein is not an EU member and is under pressure from nearby EU countries to disclose bank data of non-residents.

An EU official confirmed that talks with Liechtenstein were in an advanced stage.

“The European Commission is in the advanced stages of negotiating an agreement with Liechtenstein on cooperation to fight financial fraud, including direct taxation, but so far there is no concrete deal for EU states and Liechtenstein to sign,” the official said.

Germany and France have been pushing for such an agreement to include banking secrecy, which set back the negotiations. 

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A global credit crisis that has felled large investment banks and prompted multi-billion dollar bailout packages is also hurting unlikely victims half a world away: small south Asian businesses dependent on microfinance.

Microfinance has helped poor women and farmers in Bangladesh and India set up businesses and grow crops since the 1970s.

But as credit tightens and largesse from corporations and socially-minded investors dries up, microfinance will be hit, impacting poor people who have no other access to finance.

“A liquidity crisis is the very worst-case scenario for microfinance institutions,” said Roy Jacobowitz, managing director of development and communications at ACCION International in Boston, which backs microfinance institutions.

“The demise of microfinance will be devastating. It will leave people that depend on it in a very, very bad situation: they could go from a level of success back to poverty.”

South Asia accounts for the most microfinance borrowers, making up more than half of global demand, according to Sa-Dhan, an association of community development finance institutions.

While ACCION hasn’t seen a “catastrophic impact” on MFIs there yet, Kashf Foundation, an MFI in Pakistan, whose economy is tanking, is now seeking international lines of credit, he said credit score.

In India and Bangladesh, microfinance has given hope to hundreds of thousands, especially women, who have built successful businesses that have changed their lives.

But these may now be under threat because of tighter credit.

“There’s less money out there, so there’s less money for MFIs,” said Siddhartha Chowdri, a manager for ACCION in India.

“For MFIs, the cost of their funds has gone up, and at the same time, they’re under pressure not to raise lending rates to their borrowers. At some point that becomes unsustainable.”

REGULAR INCOME

Microfinance shot into the spotlight in 2006 when the Nobel Peace Prize went to Bangladesh’s Muhammad Yunus and his Grameen Bank that pioneered giving small loans without collateral.

But today in Bangladesh, one of the poorest nations in the world, microfinance borrowers and workers are a worried lot.

Kulsum Bibi, a 45-year-old mother of three, set up a nursery with a loan of 3,000 taka ($44) from Bangladesh Rural Advancement Committee (BRAC), after her husband left her and their children. 

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BONN–Deutsche Post AG is poised to announce thousands of job cuts at its DHL Express operations in the United States, possibly as early as today, a German weekly reported yesterday.

The Bonn-based express mail and logistics company was poised to announce the cutbacks at its DHL operations in the United States would affect between 12,000 and 13,000 jobs, the report in the Frankfurter Allgemeine Sonntagszeitung said.

The cuts are part of a wider plan to curtail operations in the U.S., including ground deliveries, and would likely affect drivers, shipping clerks and warehouse workers. The express unit employs some 18,000 workers.

The expected move will not signal Deutsche Post’s exit from the U Faxless pay advances.S., where it faces strident competition from UPS Inc. and FedEx Corp.

The report said the company’s U.S. logistics unit, which employs some 25,000 people, would not be affected and some staff at DHL would remain.

Deutsche Post itself did not comment yesterday.

Deutsche Post said earlier this year that competition, rising fuel prices and other factors have put its U.S. DHL operations on track to lose 1.3 billion euros ($1.6 billion U.S.) by the end of the year.

Associated Press

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Shares of Hartford Financial Services Group Inc. plummeted more than 50% on Thursday after a handful of analysts downgraded and cut profit estimates for the insurance company on concerns of rating agency downgrades and a possible capital raise.

Late Wednesday, the Hartford, Conn.-based insurer reported a $2.6 billion loss for the third quarter and cut its full-year profit outlook. The company now expects 2008 earnings to range from $4.30 and $4.50 per share, less than half its estimate in July of $9.20 to $9.50 per share. The quarterly loss was in line with the company’s results which were preannounced earlier this month.

"The risk of a rating agency downgrade and the inability of management to provide comfort on the level of their capital cushion make it very difficult to assess the downside or to argue that there is significant upside in the near term," wrote Fox-Pitt Kelton analyst Gary Ransom in a research note to clients.

Ransom, who downgraded Hartford (HIG, Fortune 500) shares to "In-Line" from "Outperform" and reduced his 2008 profit estimate to $4.30 per share from $5 per share, added that it is difficult to rule out the possibility of an additional capital raise by the company due to "considerable uncertainty" in the financial markets.

Earlier this month, Hartford bolstered capital with a $2 freecreditreport.5 billion infusion from German insurer Allianz SE (AZ).

Insurers have been under pressure to maintain solid capital positions in order to avoid damaging downgrades by ratings agencies. Keeping high ratings is key for insurers because lower ratings can mean higher costs, and in some cases, even a loss of business.

Deutsche Bank analyst Darin Arita also lowered his yearly outlook to $4.45 per share from $5.40 per share, and said in a note to clients, "The life insurance business is suffering from capital strain."

Arita slashed his price target by $18 to $36, but maintained a "Buy" rating on the company’s shares.

Analyst Bijan Moazami of Friedman, Billings, Ramsey lowered his yearly outlook to $4.30 per share from $5.20 per share, and cut his price target on Hartford shared by $3 to $37.

On average, analysts surveyed by Thomson Reuters forecast an annual profit of $5.25 per share.

Shares fell $10.28, or 51.4%, to $9.38 in heavy afternoon trading and earlier bottomed at a multiyear low of $8.23. 

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Pakistan must secure a loan from the International Monetary Fund within a week, the German foreign minister said Tuesday, as the country scrambles for aid to avert a run on its currency and a default on its international debt.

Without help, the fight against terrorism in the nuclear-armed nation could be complicated by out-of-control price increases, fewer jobs and rising public anger in the country of 160 million people.

German Foreign Minister Frank-Walter Steinmeier said Tuesday that Pakistan’s problems were so urgent it had no choice but to seek an IMF loan.

"I can only hope that the decision is taken quickly, because a loan in six months or six weeks will not help, but only if it is approved within the next six days," Steinmeier told reporters after talks here with Pakistani officials. "Then one can perhaps avoid the most difficult situation in Pakistan."

While Pakistan has already approached the IMF to help solve its balance of payments crisis, it has held out hope that it can raise about $5 billion from other lenders — avoiding an IMF austerity program.

Steinmeier said Germany, Europe’s biggest economy, and other countries were discussing a separate package of assistance for Pakistan to boost faltering economic growth.

"That is the only way to stabilize the situation," Steinmeier said. Pakistani Foreign Minister Shah Mehmood Qureshi said Steinmeier had been "very supportive" of Pakistan in talks with its foreign backers one hour cash loan. He did not mention the IMF.

High oil prices and dwindling overseas investment have left Pakistan with a yawning balance of payments deficit. The gap is draining its foreign currency reserves and pushing it toward a default on its international debt.

Pakistani officials had hoped to persuade allies such as the United States and Saudi Arabia, as well as institutions including the World Bank, to provide soft loans or accelerate pledged development aid.

But with many governments preoccupied with the global banking crisis, Pakistan has received no firm public commitments of assistance. An IMF program would be politically unpopular in Pakistan because it likely will come with tough conditions.

The government insists it already has taken action to slash unsustainable subsidies on food and fuel — measures that hurt in a country where about three-quarters of the population live on no more than $2 a day.

There is speculation that an IMF loan might come with demands to slash the government’s own budget, including defense spending. In a sign of the times, the army on Tuesday halted work on a new general headquarters in the capital, saying it "shares the nation’s quest for economic stability through a spirit of sacrifice."  

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KUWAIT CITY – Kuwait's Central Bank stepped in Sunday to prop up one of the country's biggest banks and said it was considering guaranteeing deposits in domestic banks – in one of the first concrete signs that the global financial crisis may next hit the oil-rich Gulf.

In Saudi Arabia, meanwhile, the government said it would deposit $2.7 billion into the Saudi Credit Bank to help lower-income citizens deal with financial difficulties, the country's Al-Ektisadiya newspaper reported.

The two moves came just a day after finance ministers from the six-nation Gulf Cooperation Council held an emergency meeting to echo assurances, which they have repeatedly voiced over the past few weeks, that the region's banks face no liquidity crisis.

Kuwait's decision to stop trading in shares of Gulf Bank sent a shock wave through the country's bourse, which closed down almost 3.5 per cent and brought its year-to-date losses to over 19 per cent.

"The halting of Gulf Bank shares spread panic in the bourse today, because the government has been saying banks are safe from (global financial crisis) losses," said investor Ahmed al-Fadhli in a telephone interview.

The central bank order said trading in Gulf Bank shares would be suspended pending an investigation into the derivatives deals that caused the losses. The bourse's statement said some investors had balked at covering their losses, but neither the central bank nor Gulf Bank indicated the scope or timeframe of the bank's losses.

But one banking official with access to the information estimated the bank's losses at up to $749 million. The official spoke on condition of anonymity because of the sensitivity of the issue.

Over the past few weeks, Kuwaiti investors have voiced clear concerns about the market. One stockbroker unsuccessfully sued to temporarily close the bourse while other traders last week stormed out of the exchange, demanding the government intervene to halt their near-daily losses.

Investor al-Fadhli said about 40 brokers walked Sunday from the exchange to the nearby seaside Seif Palace, demanding to see the prime minister, Sheik Nasser Al Mohammed Al Sabah, to ask for more government intervention.

The Gulf Bank news further fuelled market turbulence in the broader GCC, not just in Kuwait, a tiny country which is far more dependent on oil revenue than many of its other Gulf counterparts.

Oman's stock exchange was down about 8.29 per cent while Qatar's exchange was off almost 9 per cent. Saudi's benchmark Tadawul index was down a moderate 3.06 per cent, a day after plummeting over 8 per cent.

Sunday is a normal business day in the Arab Mideast, which usually observes Friday as the weekend no teletrack payday loans.

So far, the Gulf countries have been thought to be protected from the crisis, in part because of the cushion of oil money many of them have built up during years of high oil prices. However, because most of the region's banking sector is privately held, not much is known about the institutions' true risk exposure levels.

The Gulf Bank news also appeared to have pushed the Kuwaiti government to take a step it has so far resisted – guaranteeing deposits. The country currently makes no deposit guarantees.

The central bank said it would propose an urgent bill to guarantee bank deposits in an effort to "boost confidence in our banking sector and enhance its ability to compete with banks in countries where deposits were guaranteed by the state" but gave few details on specifics.

The guarantee would cover local Kuwaiti banks.

The various Gulf countries have taken a range of measures to maintain market confidence, including cutting interest rates and pumping billions into their economies.

In tandem, officials have repeatedly said the region is not exposed to the kind of toxic debt that has led to massive losses in the United States and spread to other global markets.

But the move to deposit funds in the Saudi Credit Bank, to be used interest-free by lower-income Saudis, showed the push many of the GCC countries were undertaking to ensure that their citizens are not affected by the current international crisis.

Much of that effort is funded by the countries' massive cash surpluses, accrued from oil wealth. But with crude prices falling, analysts say some spending may be curtailed.

The draft bill to guarantee deposits could prove to be the necessary catalyst for stability, analysts said.

But some, including independent financial analyst Ali al-Nimesh, have criticized demands to stop trading, arguing that such a step was counterproductive and unnecessary since the daily losses have not exceeded 4 per cent, compared to a more than 8 per cent drop in the benchmark Saudi Tadawul index on Saturday, for example.

"Unfortunately, Kuwaitis have been used to demanding help and getting it … and parliament has played a negative role in this," al-Nimesh said.

Legislators have passed pay hikes and set up a state fund to buy bad consumer debts despite strong Cabinet opposition.

The government believes oil revenues should be used for development instead of "popular" demands that do not take into consideration that oil prices might fall sharply, dragging down state revenues in tow.

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