U.S. Economic/Financial News
Will Wall Street Synarchists Bankrupt Another Utility?
Moody's Investor Services has downgraded the credit ratings of Pepco, Baltimore Gas and Electric, and Delmarva Power to close to junk status, due to the continuing fight over how to deal with the wreckage caused by electricity deregulation, the McClatchy-Tribune News reported July 12. In Maryland, the cap on rates that can be charged customers expired on July 1. BGE had planned to impose a drastic 72% increase on its customers, which provoked outrage, and legislation was passed to stop it.
The legislature passed a proposal last month to phase in rate increases, starting with 15% this year, while deferring additional increases, which will be paid over the next ten years. But the 15% increase does not cover the rise in production costs to BGE, especially with the tripling of natural gas rates over the past two years. BGE is projected to go about $600 million into debt to finance the rate-referral plan, Moody's estimates. In response, Moody's has lowered BGE's credit rating, which will drive it deeper into debt by raising the interest rate it will have to pay financiers for the borrowing cost, and eliminates traditional sources of financing, such as pension funds.
Hedge Funds Transform Energy Into a Financial Market
The hedge funds, with their ability to pour huge amounts of money into markets in a short time, are increasingly using computers to spot opportunities and make trades, repeating with energy markets what they did with the foreign-exchange markets of the 1990s, the Wall Street Journal reported July 10. By 2005, the funds had poured $90 billion into the energy market, up from about $3 billion in 2000, according to the International Energy Agency. The average daily value of global crude-oil trading was $39.2 billion in May, up from $16.45 billion a year earlier, according to the Nymex and ICE exchanges. The number of funds operating in the energy markets stand at about 500, up from about 180 in late 2004, according to the Energy Hedge Fund Center.
"OPEC has become an audience watching from a distance," Qatar's oil minister, Abdullah al-Attiyah, said recently. "Now the market is completely controlled by geopolitics and speculators."
Corporate Debt Soars in First Half of 2006
During the first half of 2006, U.S. non-financial companies issued $84 billion in investment-grade debtup 72% from a year earlierand $47 billion in junk bondsup 25%, according to Thomson Financial. Part of this can be attributed to companies borrowing at lower interest rates in anticipation of further rate hikes, but some companies are using the money to buy back their own stock or pay shareholder dividends, the Wall Street Journal said July 11. Bank lending also soared, especially to companies looking for financing to back acquisitions and pay special dividends.
Execs' Pensions Eat Up 8-10% of Pension Funds
While Congressional negotiations on a so-called "pension reform" bill have broken down again, probably for the remainder of the summer, a new light is thrown on the so-called pensions crisis by a study published, oddly enough, by the Wall Street Journal June 23. The reporters thoroughly studied the long-term pension obligations of scores of large companies that offer "defined-benefit pension plans," the kind that are being cancelled right and left because of their supposed underfunding, burden on corporate investment, etc., etc. What they found was shocking.
Some 8%-10% of the "pension burden" at most of these large employers, consists of the obligations of the company for the pensions of a few top executives! It is literally the case that these few, at most companies, equal the pensions of many hundreds or even thousands of employees combined.
These executive pension obligations alone total from $1-4 billion each in the cases of GE, GM, AT&T, Exxon Mobil, IBM, Bank of America Corp., Pfizer, and other big employers. A company's obligation for a single executive's pension sometimes reaches the range of $100 million.
The companies "hide" these huge pensions by just including them in their general pension fund obligations, so that when they trim their employee pension benefits "to bring costs in line," they're often fattening up the executive pensions at the same time.
And, unlike the employee pensions, the executives' pensions are often not actuarially funded at allin other words, they often constitute the "unfunded liabilities" of pension funds which Congress and the PBGC pontificate about. But, though unfunded, the executives' pensions do get paid out, come bankruptcy, hell, or high waterat the expense of the employees.
Most of the companies wouldn't comment to the friendly Journal on this issue.