August 01, 2004

Another Bailout Coming?

During Poppy Bush's administration the American public were asked to pick up the tab for the Savings & Loan debacle. It seems that Junior's administration is driving to another industry bailout, paid for by the American taxpayer. News reports today warn of a looming crisis in the pension funds as Airlines seek to shed their pension obligations.

In an echo of the savings and loan industry collapse of the 1980's, the federal agency that insures company pensions is facing a possible cascade of bankruptcies and pension defaults in the airline industry that some experts fear could lead to another multibillion-dollar taxpayer bailout.

"The similarities are incredible," said George J. Benston, a finance professor at Emory University in Atlanta who has written extensively on the regulatory failures that led to the costly savings and loan bailout.

Deposits in savings institutions are, like pensions, guaranteed by a federal insurance program. The savings industry first sickened because changes in market conditions made the traditional way savings and loans operated unprofitable, but government delays and policy missteps then made the situation much worse. In the end taxpayers bailed out the industry at a cost, according to various estimates, of $150 billion to $200 billion.

Now experts say they see similar forces gathering in the pension sector, with United Airlines perhaps the first to go down the path. Operating in bankruptcy, United is striving to attract the lenders and investors it needs to survive. It said last month that it would no longer contribute to its pension plans; United also seems intent on shedding some or all of its $13 billion in pension obligations as the only way to succeed in emerging from bankruptcy proceedings.

If United manages to cut itself loose from the costly burden of its pension plans, it might force others determined to keep their costs similarly under control to emulate its move. "Rivals may feel they are at a competitive disadvantage and follow suit, raising the specter of a domino effect in the industry," said Bradley D. Belt, the executive director of the government's Pension Benefit Guaranty Corporation, which insures pensions. If every airline with a traditional pension plan were ultimately to default, the government would be on the hook for an estimated $31 billion. Its insurance coverage is limited, so some employees would have their benefits reduced.

...That is what happened in the steel industry. LTV Steel's pension fund fell to the government in March 2002, and its unencumbered assets - steel mills, coke and lime plants, railroads and other properties - were snapped up at once. That put pressure on other tottering steel companies to shed their pension plans as well.

Seven more failing steel plans went to the government before the year was out, including the current record-holder among pension defaults, the Bethlehem Steel plan, which cost the pension agency $3.9 billion to take over.

...As the pension system has weakened, some specialists have called for measures that would discourage the riskiest investments. As director of the pension agency, Mr. Kandarian proposed charging higher insurance premiums to companies that invested their pension funds in riskier assets, particularly companies that were in bad shape themselves. No one paid attention.

"I was nave," Mr. Kandarian said.

Along with Mr. Kandarian, current officials at the pension agency and at the Treasury Department have also been calling for a tightening of the rules requiring pensions to set aside enough money to meet their obligations. In April, Congress loosened the rules instead. The biggest flexibility was given to the most troubled industries, making their pension funds look healthier.

"Doctoring the numbers is all they're doing, and they're especially doing it for steel and airlines," Mr. Benston said. "Shades of the savings and loan crisis. Same darn thing."

What's a few hundred billion between friends?

Posted by Mary at August 1, 2004 10:53 AM | Economy | TrackBack(1) | Technorati links |
Comments

For what it is worth, having watched the Bush Admin work for the past 3 11/2 yrs, the end game for the Airlines according to the GOP rules are to become non-union. So what if the government ends up picking up the tab, only to find out that the airlines goes thru bankruptcy, and then discards are union working agreements. Have you noticed that the after the 911 disaster the airlines were susposed to be able to get goven'mt loans as they were the worst hit by 911 aftermath.
Each loan request by United has been turned down, and they will be until the union gets booted.

Posted by: Tom Farley at August 3, 2004 03:53 PM