U.S. ECONOMIC/FINANCIAL NEWS
White House Gives Incoming Governors Coal in Their Stockings
Following a day-long White House budget conference for incoming Governors, it became clear that states, desperate for Federal aid to balance budgets and provide services, were out in the cold. Minnesota Governor-elect Tim Pawlenty (R) said that the Bush Administration's message was twofold: On the one hand, it will make Federal/state programs more flexible; but on the other, it will not send a dime more. Pawley said of the flexibility message, "I think that's to comfort us, because the other message was, 'We're sending you no money.'... [T]he basic message was, 'You're on your own.' And they gave us a nice pen."
Likewise, at the National Conference of State Legislators Fall Forum, the same message was delivered: Between the "significant Federal budget deficit," mounting costs to conduct the "war on terrorism," and Bush's tax cut, domestic spending will be squeezed. The NCSL's staff director for the Senate Budget Committee told the forum that the best they could hope for from the incoming Congress is extension of unemployment benefits, some anti-terror funds for first-responders, partial funding for election reform, and continued transportation program funds, but with no increase.
U.S. Mayors: Steep Rise in Hunger, Homelessness a 'National Disgrace'
Emergency food requests jumped by an average of 19% over the past year in 25 major cities surveyed, while requests for emergency shelter rose by 19% in 18 cities, the steepest rise in a decade, according to the 18th annual Report on Hunger and Homelessness, issued Dec. 18 by the U.S. Conference of Mayors. For the first time, every city in the survey reported an increase in hunger. The report cited high housing costs, low-paying jobs, and unemployment as leading causes of hunger.
Some of the findings:
*Hunger: On average, 16% of the emergency food requests were unmet. In 32% of the cities, emergency food assistance facilities may have to turn away people in need, due to lack of resources.
As need increased, the level of resources available to emergency food assistance facilities decreased in 52% of the cities. More than half of the cities surveyed said they are not able to provide adequate food to those in need.
Almost half of the requests for emergency food, came from families with children. Some 38% of the adults requesting food aid were employed.
*Homelessness: Cities were unable to meet an average of 30% of requests for emergency shelter by homeless people overall, and 38% of requests by homeless families. In 60% of the cities, shelters may have to turn away homeless families.
Requests for shelter by homeless families increased by 20%.
People remained homeless for an average of six months, a figure that increased from a year earlier in all but four cities.
Families with children comprise 41% of the homeless population.
In 40% of the cities, families risked being broken up in order to be sheltered.
*Political action: The Mayors announced an impotent "call to action" including aid to the homeless, a national housing agenda, and streamlined Federal anti-hunger programs. Impotent because it failed to get on the bandwagon for Lyndon LaRouche's "Super TVA" policy, as an FDR-style solution to the deepening depression.
Record Demand for Food Relief in High-Unemployment Areas
According to statistics released in November by the U.S. Department of Agriculture (USDA), there is a "hunger belt" in the Far West, stretching from New Mexico to Washington State, in particular. This pattern of hunger results from a combination of factors, including job loss and relatively higher living expenses. Oregon has 5.8% of the nation's households experiencing hunger each year, with the next in line being Washington, Utah, Idaho, Alaska, New Mexico, and Montana.
A few items from local media reports show the many locations across the country now reporting sharp rises in requests for food aid:
*In Queens, New York, with a population of around 1.5 million, increased demand for food relief is reported at more than 85% of the borough's 174 donation centers; at least 17% of them report that they cannot feed everyone who comes to them for help. About 12,000 jobs were lost in Queens at the airports and airport-support sectors, according to a study by the Queens County Overall Economic Development Corp. (Both major New York airports, JFK and LaGuardia, are in Queens.) These job losses have both contributed to increased demand for food relief, and to a drop in food donations. "Most people who make donations are not the mega-rich. Low-income and middle-class people are suffering. We're looking at the real possibility of people who were donors becoming recipients," said Joel Berg, executive director of the New York City Coalition Against Hunger.
*Minnesota had the biggest annual jump in food-aid requests since record keeping began 20 years ago. Janine Laird, director of Hungry Solutions, a coalition of state food-aid agencies, said, "This is big. It's related to the economy. These people who were cut off, had their hours cut, [and they] pay a lot for housing. Fingerhut and others have laid off. As of Sept. 30, there was a 10% rise in visits to food shelves for aid, from a year earlier. Half the people are employed. At St. Cloud Catholic Charities, request for food is up 37% over last year."
*In Lynchburg, Va., the lack of food, relative to need, has never been so bad as now, according to Sharon Cash, who has been the director of food assistance there for 15 years. "I believe it's a lot of people that are out of jobs right now with the layoffs that we have had," Cash said, adding, "We have a lot more what we consider the working poor in our area, and that's where both people are working but they still just can't meet their needs."
*In Oakland, Calif., at the Mary Ann "Mother" Wright Foundation, "The need is just greater in the community this year," said operations manager David Ammons." Another said, "People here can pay rent, but they can't buy food, or they can buy food but they can't pay rent. That's a heartbreaking thing here in our rich city."
Bush Plan To Cut Energy Assistance to Poor Will Leave Many in the Cold
More than half a million American families, 532,000 nationally, will be denied emergency financial aid granted to those whose utilities have been cut off for non-payment. State officials who run the grant program in Minnesota, Vermont, and Illinois have already reported a 20-70% increase in demand this December over last. The states with the highest number of households targetted for cut-off from the program are New York with 80,000 homes, and Michigan with 65,000.
The Bush Administration plans to cut the Low-Income Home Energy Assistance Program (LIHEAP) by $300 million, putting it 18% below last year's level, despite expectation of higher fuel costs. The Energy Information Administration (EIA) says energy prices could increase $100 to $300 per household this winter. EIA's October "Short-Term Outlook" forecast prices to rise by 19% for natural gas, 45% for heating oil, and 22% for propane. The National Energy Assistance Director's Association estimates that, in light of these price increases, a minimum of $344 million would be necessary for this fiscal year to keep the same purchasing power of FY 2002 which just ended.
Verizon To Lay Off 3,500 in Northeast
Verizon Communications announced that it will lay off 2,400 employees in New York State, 400 workers in New Jersey, and another 500 throughout New England. Those laid off are Communications Workers of America (CWA) membersmostly installation and service technicians.
Of the New York layoffs, 1,300 will be in New York City and Long Island, and about 1,100, upstate.
Verizon blamed the slow economy and competition for the cuts. The CWA said the company wanted to cut the workforce all along, and offered only limited job security for massive concessions, which the union refused.
Virginia Unemployment Benefits Reduced for 2003
Unemployment benefits in Virginia will be reduced from the current maximum of $368 per week to $318 per week, as a result of the action of Virginia General Assembly in 2002.
The reduction applies to those who file for unemployment benefits after Jan. 1, 2003. Those who file before the first of the year will continue to receive the higher rate. Similar actions may have occurred in other states.
Feds Move To Take Over Bethlehem Steel Pension Plan
The Federal government's Pension Benefit Guaranty Corp. has moved to take control of the Bethlehem Steel pension plan, which covers 95,000 workers and is underfunded by $4.3 billion. Bethlehem Steel, now operating in Chapter 11 bankruptcy, is the third-largest steel producer in the United States. Workers covered by the plan will continue to receive pension checks, although at a somewhat reduced payment level. Last week, the PBGC moved to assume the pension plans of National Steel, also operating in Chapter 11 bankruptcy. The United Steelworkers of America questioned the PBGC move to assume control of the Bethlehem pensions, stating that it was intended to limit the Federal government's liability, which would be greater if Bethlehem emerged from Chapter 11 bankruptcy after restructuring, or if a mooted sell-off of Bethlehem to ISG goes through.
NYC Transit Settlement Averts Strike; Fare Increase Possible
Averting a paralyzing transit strike, Transit Worker Union (TWU) Local 100 president Roger Toussaint came out of the negotiations Dec. 16 to state: "It gives me pleasure to announce to the entire citizenry of New York that we have a proposed agreement." New York City's is the nation's largest mass-transit system.
The agreement reached includes the following: 1) the MTA giving a $1,000 lump-sum payment to all workers in the first year of the three-year contractequivalent to not quite a 2% raise; and 2) a 3% raise the next two years. It is tentative and it must be voted on by the 34,000 TWU members. These terms are a far cry from the 6% raise the union was demanding, but the down-to-the-wire negotiations, and threats to impose mega-fines against the TWU and jail its members determined the conditions for the agreement.
Only two days later, the city's Metropolitan Transit Authority (MTA) authorized public hearings on a fare increase.
'Landslide of Defaults' Predicted for New Year; Retailers Gloomy
"You will see a landslide of defaults and bankruptcies after the bills come in January," said the founder of the not-for-profit Budget & Credit Counselling Services in New York. People go into denial over the holidays, says Luther Gatling, and spend more on credit cards than they can afford. "People try to hide from reality. It's the time to be jolly and pay for it next year," he said.
However, apparently even overspending by debt-strapped consumers isn't enough to lift the gloom from retailers' bottom lines, as even deep discounts fail to counter weak holiday shopping this season. Some examples:
*FAO Inc., owner of upscale toy retailer FAO Schwarz, warned that it "likely" will file for bankruptcy protection unless its creditor, Wells Fargo Retail Finance, relaxes borrowing terms. FAO has cancelled orders from some vendors and plans to close a number of stores early next year, because it expects extremely weak sales this month. FAO lost $23.7 million in the third quarter, more than double its losses a year earlier.
*Kmart Corp., which filed for bankruptcy protection in January, is assessing the chain's 1,832 stores to decide which to close. As many as 598 storesabout 30%in the United States and Puerto Rico could be closed, according to retail consultants. In March, Kmart closed 283 stores.
Kmart stock will be delisted from the New York Stock Exchange, effective Dec. 19, because it has traded at less than $1 a share for more than a month.
*Target, the second-biggest U.S. discount chain, said that December sales were "well below" its expectations.
*Wal-Mart, the world's largest retailer, has met only the lower end of its sales targets.
*McDonald's warned it would post its first-ever quarterly loss since going public in 1965; it will cut up to 600 corporate jobs and close about 175 "restaurants," as sales plunged despite price reductions on some items.
Conseco Files in Third-Largest Bankruptcy in U.S. History
Conseco, Inc., the insurance and finance giant hit by rising defaults on mobile-home loans, filed for the third-largest bankruptcy in U.S. history. The Dec. 18 filing, made in bankruptcy court in Chicago, covers holding company Conseco and its troubled loan operation Conseco Finance Corp. and some related units. The company listed $51.1 billion in debts, and $52.3 billion in assets, behind only WorldCom and Enron. Conseco's insurance units, by law, cannot declare insolvency.
There is real tragedy lurking behind these numbers: Life in trailer-parks is only a step away from homelessness, and it appears that households who lose their mobile homes (house trailers), often become homeless.
Conseco's $6-billion purchase in 1998 of Green Tree Financial Corp. (renamed Conseco Finance), the largest U.S. mobile-home lender, left it saddled with losses as customers increasingly missed debt payments on the high-risk loans. Piling on more risky debt, Conseco bundled the loans and sold them as securitiessimilar to bankrupt National Century Financial Enterprises.
Conseco faces a Federal investigation of its accounting for gains from securitizing its loans.
The company has tentatively secured $125 million in debtor-in-possession financing to continue operating. Conseco reached tentative agreement with bondholders owed $2.5 billion and banks that are due $1.5 billion. Holders of preferred securities, owed $2.5 billion, did not reach a deal.
In an effort to pay down debts, Conseco Finance will be sold, subject to court approval, to CFN Investment Holdings, an investment group that includes former Goldman Sachs Group partner Christopher Flowers.
Corporate Defaults Hit Record in 2002
Corporate defaults worldwide hit a record $157.3 billion in 2002, as investment-grade companies defaulted in record numbers, according to rating agency Standard & Poor's. In 2002, some 3.49% of all rated companies defaulted, up from the previous record of 3.48% in 2001. Of the $157.3 billion in 2002 defaults, $123.6 billion is from U.S. companies and $14.6 billion is from the European Union.
In 2002, some 0.44% of investment-grade companies defaulted, almost double the previous record of 0.24% in 2001.
Wall Street Police Blotter
*Former Cisco Systems executive Robert Gordon, who admitted stealing more than $52 million from the computer network equipment maker, was sentenced Dec. 20 to five and one-half years in prison. He was charged with transferring Cisco-owned stock and company funds to his own account from 1997 to 2000.
On the same day, Wall Street's biggest brokerage firms agreed to pay $1.44 billion to resolve charges that they inflated stock ratings to win investment banking business. The settlement, negotiated by New York Attorney General Eliot Spitzer, the Securities and Exchange Commission, and other regulators, calls for 10 firmsincluding Citigroup, Goldman Sachs and Credit Suisse First Bostoneach to pay millions of dollars in fines, sever the ties between research and investment banking, and fund stock research by independent companies.
The firms neither admit nor deny charges of misleading investors.
Citigroup's Salomon Smith Barney brokerage unit will pay the largest fine: $300 million. Credit Suisse will pay $150 million. Goldman Sachs, J.P. Morgan Chase, Bear Stearns, Morgan Stanley, Lehman Brothers, Deutsche Bank and UBS Warburg will each pay $50 million.
*The former lead director of troubled conglomerate Tyco International, Frank Walsh pleaded guilty to a securities fraud charge for failing to disclose to the board $20 million in payments for helping broker Tyco's acquisition of finance company CIT Group in June 2001. Manhattan District Attorney Robert Morgenthau filed an indictment charging Walsh with violating the Martin Act, the state's principal securities-fraud law.
Walsh agreed to repay the "finder's fee" and pay a $2.5 million fine as part of a settlement with Morgenthau's office.
Former Tyco CEO Dennis Kozlowski and Walsh had agreed, that if the acquisition were approved, Walsh would get $10 million directly, and that Tyco would contribute another $10 million to the Community Foundation of New Jersey.
He also settled civil fraud charges, filed by the Securities and Exchange Commission, by agreeing to be barred from working as an executive for a public company.
*U.S. Technologies chief executive officer C. Gregory Earls was charged Dec. 19 with securities fraud for bilking investors out of $13.8 million they put into the now-virtually bankrupt investment company, a scandal that led to former FBI director William Webster's stepping down as head of a new Federal accounting oversight board, and contributed to Harvey Pitt's resignation as chairman of the Securities and Exchange Commission. (Webster had headed the auditing committee of the firm). A criminal complaint, filed by the U.S. Attorney's office in Manhattan, alleges that Earls diverted investors' money to an educational trust fund for his children, investors in other failed ventures, and his ex-wife.
Earls was charged with one count of securities fraud, one count of mail fraud and eight wire fraud counts.
The securities fraud count carries a maximum prison term of 10 years and a $1 million fine. The other counts each carry a possible maximum five-year prison term and $250,000 fine.
Beginning in April 1998, Earls allegedly misled investors of USV Partners, a company that he controlled, that their funds would be used to buy and hold U.S. Technologies stock and securities. Instead, he allegedly stole about $13.8 million of the $20 million that he raised.
*HCA agreed on Dec. 18 to pay an additional $888.5 million to settle health-care fraud charges brought against it by the U.S. Department of Justice following a seven-year investigation of the nation's largest for-profit hospital cartel, and to settle all claims from state Medicaid agencies. Combined with previous settlements, HCA will have paid a total of more than $1.7 billion in civil and criminal penalties, by far the largest amount ever secured by Federal prosecutors.
"This litigation has included allegations of overcharging the government on HCA's cost reports, payment of kickbacks, and other improper renumeration to physicians in exchange for referral of patients, and overcharging in connection with the company's agreements for management of its wound-care facilities [operated at HCA hospitals by Curative Health Services]," the DOJ said in a statement.
Under the agreement, which is subject to final approval by the Justice Department, HCA would pay the U.S. government $631 million, and $17.5 million to state Medicaid agencies; as well as $250 million to resolve outstanding Medicare expense claims.
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