FDIC Broke!

September 30, 2009

Banks to Prepay Assessments to Rescue F.D.I.C.

By STEPHEN LABATON

WASHINGTON — Acknowledging that they had greatly underestimated the problems plaguing the nation’s banks, federal officials on Tuesday proposed a $45 billion plan financed by the industry to rescue the ailing insurance fund that protects bank depositors.

They also announced that the fund, which had more than $50 billion before the crisis began last year, had been so battered by bank collapses that it would be in the red this week.

The plan proposed by the Federal Deposit Insurance Corporation would, in effect, have the industry lend money to the insurance fund by ordering banks to prepay their annual assessments that would otherwise have been due through 2012.

If adopted, the proposal, the agency’s third restoration plan for the fund in a year, would raise $45 billion from the banks to replenish the fund.

That would almost certainly wipe out the industry’s earnings for this year — in the first half of the year the banking industry reported $1.8 billion in income.

Regulators have told the banks that they will not have to record the prepayments as an expense until the fees would ordinarily have been due, postponing the hit to balance sheets until a time when officials believe the industry will be better able to weather the costs.

Senior officials emphasized that the plight of the fund would have no impact on insurance for bank deposits. Accounts are protected up to $250,000.

With nearly 100 bank failures so far this year, the fund has encountered its greatest crisis since the savings and loan debacle of the 1980s and ’90s. In May, officials projected $70 billion in losses to the fund to rescue failed banks. That estimate was a $5 billion increase from earlier in the year.

On Tuesday the F.D.I.C. increased that estimate by more than 40 percent, to $100 billion in total losses — mostly over this year and next. That would be on top of the nearly $20 billion in losses to the fund last year, when the crisis began and 25 banks failed.

Officials said that as of this week, the fund, which began the year at more than $30 billion and had about $10 billion over the summer, would have a negative net worth.

The officials said that if nothing was done, the fund would be holding almost exclusively hard-to-sell real estate and other unmarketable assets by early next year. At its last report this summer, the fund had about $22 billion in cash and other marketable securities. As more banks have collapsed, most of its liquid assets have been exchanged for less marketable assets seized from the failed institutions, like foreclosed property.

Officials said that the plan disclosed Tuesday was less expensive than a direct loan from the banks, an idea that many banks supported, because no interest would have to be paid and the plan would not be voluntary. And it was preferable to a loan from the Treasury, which some lawmakers and industry executives supported, because even though it would be paid back by the industry, such a loan could be seen as yet another taxpayer bailout.

“It’s clear that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy for every problem,” said Sheila C. Bair, chairwoman of the F.D.I.C. “In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer.”

Regulators are permitting the banks to record the prepayments as an asset known as a “prepaid expense” until the time that the payments would ordinarily have been due.

In addition, beginning in 2011, the banks will face an increase in their annual assessments of 3 cents for every $100 in deposits. The healthiest banks now pay 12 to 16 cents on every $100 in deposits.

Created in 1933 to restore confidence and arrest a wave of bank runs that contributed to the Great Depression, the insurance fund now stands behind some $4.8 trillion in deposits. The insurance fund is financed by the industry and is backed by the United States. Officials have the ability to borrow $100 billion from the Treasury immediately, and up to $500 billion with the approval of the Treasury secretary and the Federal Reserve.

The plan proposed by the deposit insurance agency was a partial victory for industry executives and lobbyists who fought against the idea of another special assessment. Last May the government imposed an assessment of 5 cents for every $100 in deposits, on top of the regular premiums.

But some bank executives expressed concern about the increase in premiums in two years.

The premium increase was a surprise, said Edward L. Yingling, president of the American Bankers Association. “The industry agrees that this is a better alternative to what clearly would have been several special assessments, but this prepayment will decrease the ability to lend.”

The agency agreed to accept comment on the proposal for 30 days before deciding how to proceed. Troubled banks can seek a waiver from the prepayments.

There was a split in the industry about whether to seek a loan for the fund from the Treasury, as the fund had after the savings and loan crisis.

Some viewed it as a low-cost way of replenishing the fund, while others opposed it because of the fear that it would be seen as another taxpayer bailout and come with a new round of conditions on the banks in such areas as executive pay. Some executives also expressed concern that the proposal could limit the ability of banks to expand lending.

“This prepayment will be a short-term asset, like an investment, but particularly for banks with a high percentage of loans, the prepayment will mean they have less money to lend as it will be tied up in this asset,” Mr. Yingling said.

“There will and should be a discussion of whether it makes sense to use the Treasury line. Banks will pay the whole thing one way or another, but the line will not constrict lending as much in the short term.”

Ms. Bair said that the prepayment proposal would have little impact on the ability of most banks to continue their lending businesses, since the payments were a tiny fraction of the industry’s available assets. She also said that the banks did not face a significant liquidity problem now because of the many lending programs created by the Treasury and the Federal Reserve.

Former Beneficial CEO Finn Caspersen Dies in Apparent Suicide

By Michael Moore and Phil Milford

Sept. 9 (Bloomberg) -- Finn M.W. Caspersen, the former chairman and chief executive officer of Beneficial Corp., was found dead from an apparently self-inflicted gunshot wound to the head, authorities said. He was 67.

Police, responding to a call to check on him, found Caspersen on Sept. 7 behind an office building in the Shelter Harbor community of Westerly, Rhode Island, where he owned a home, said spokesman Edward St. Clair. He died from a single gunshot wound, the medical examiner said.

“Finn was always a gentleman and always made his resources available,” said Rhode Island state Senator Dennis Algiere, who represents the seaside region, just across the state line from Connecticut. “He was a very charitable individual. He donated a lot of time and money to various organizations in our community over the years.”

Caspersen sold consumer-finance company Beneficial to Household International Inc. in 1998 for more than $8 billion, His father, Olaus W. Caspersen, had joined Beneficial in 1920 and ran the company for 18 years. Finn Caspersen was paid almost $24 million in severance and other payments from the sale to Household, which became HSBC Finance Corp.

A graduate of Harvard Law School, Caspersen donated $30 million to the school in 2003 to help jump-start a capital campaign. He was also a graduate of Brown University.

An equestrian who specialized in carriage driving, Caspersen won three national championships and represented the U.S. in three world championships. He had been a board member of the U.S. Equestrian Team since 1982, was named president in 1990 and chairman in 1992.

No One ‘More Caring’

“I don’t think you could find someone more philanthropic or caring,” said Tucker Johnson, an equestrian and a friend of Caspersen’s, according to a statement on an equestrian Web site.

Former New Jersey Governor Thomas H. Kean said Caspersen gave away tens of millions of dollars to charity, according to the Newark Star-Ledger. While running Beneficial, Caspersen built a corporate headquarters in Peapack-Gladstone, New Jersey, the newspaper said.

Caspersen gave about $590,000 to the Republican Party between 1998 and 2001, according to the Center for Responsive Politics.

He was chairman of Knickerbocker Management, a private firm overseeing the accounting and investments of various trusts, foundations and individuals, according to a 1999 press release from the Hodson Trust, a philanthropic organization.

Caspersen was chairman of the board of trustees of the Peddie School, his high school alma mater in Hightstown, New Jersey. The school has 530 students and an endowment of $218 million, according to its Web site.

Caspersen is survived by his wife, Barbara, and four children, according to the equestrian Web site.

Police Eye Mysterious Death of Financier

Danny Pang, a 42-year-old Southern California businessman accused of a massive fraud by federal securities regulators, died over the weekend in a Newport Beach hospital after being rushed from his nearby home by paramedics.

An autopsy was done on Sunday by the coroner division of the Orange County Sheriff's Department. A coroner spokesman said a cause of death wouldn't be given until the results of toxicology tests are known, which usually takes two to three months. He said there wasn't evidence of foul play.

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Danny Pang leaving court in July; he died over the weekend in California.

A neighbor said he saw police remove four or five small bags of evidence from the Pang house. Sgt. Evan Sailor, a spokesman for the Newport Beach police, said procedures call for an investigation if authorities suspect suicide or foul play. Sgt. Sailor said the police hadn't found evidence of foul play but didn't know if Mr. Pang's death was due to natural causes or was self-induced.

A statement released by Mr. Pang's family said they were "shocked and saddened by Danny's sudden and tragic passing. Danny was a wonderful husband, loving father, and honest businessman. For the past five months, Danny was subjected to a relentless attack of innuendo and false allegations, and was denied any opportunity to defend himself."

The statement added that the family members "remain steadfast in our belief that Danny would have been vindicated if he had been given that opportunity." A spokesman for the Pang family said he didn't have details about the cause of death.

A front-page article in The Wall Street Journal in April raised questions about Mr. Pang's business activities as well as past educational and employment claims. A former president of the firm Mr. Pang headed -- Private Equity Management Group Inc. in Irvine, Calif. -- told the Journal that the Taiwanese immigrant had admitted to him that part of the enterprise involved a Ponzi scheme.

Two weeks after the Journal stories appeared, the Securities and Exchange Commission filed suit against Mr. Pang in Santa Ana, Calif., federal court. The SEC suit alleged Mr. Pang defrauded investors, mostly in Taiwan, of hundreds of millions of dollars. The SEC said Mr. Pang told investors he would produce profits by buying life-insurance policies at a discount. The SEC alleged the insurance policies didn't generate enough profit to cover costs or meet the promised investor returns. Instead, some investors were paid from money obtained from new investors, the SEC said.

From the Archive

• Highflying Financier Faces Questions Over Fund Empire
  04/15/09

Archived Video

• Financier Danny Pang Is Arrested (4/29/09)
• Accusations Mount Against PEM Group (4/16/09)
• Danny Pang's Background Under Scrutiny (4/15/09)

A federal judge froze Mr. Pang's assets and appointed a receiver. A court filing by Mr. Pang, who denied wrongdoing, alleged that "in its zeal to avoid further criticism arising from its failure to identify the Bernard Madoff ponzi scheme, the SEC has created the illusion of an emergency in order to seize an ongoing business and to vilify defendant Danny Pang."

In late April, federal prosecutors charged him with illegally structuring cash transactions to avoid reporting requirements. Mr. Pang pleaded not guilty and was confined to his Newport Beach home by a judge.

SEC and Justice Department officials declined to comment on Mr. Pang's death.

In 1997, Mr. Pang's wife was shot to death in their home, and an acquaintance of Mr. Pang's was charged. At the trial, the attorney for the accused introduced a police and Federal Bureau of Investigation memo saying Mr. Pang might have Taiwanese organized-crime ties.

The trial ended in a hung jury and prosecutors didn't retry the defendant. Mr. Pang wasn't charged. Mr. Pang denied wrongdoing in his business activities and said he had nothing to do with his wife's murder and didn't have organized-crime ties.

Mr. Pang was born in Taipei on Dec. 15, 1966. His father, he told associates, was in the trading business, while his mother hailed from an affluent furniture-manufacturing family. He went to the prestigious Lih Jen International Private Elementary and Middle School in Taiwan and arrived in the U.S. as a teen.

He became active as a student leader at the University of California, Irvine, in the late 1980s, at one point serving as chairman of an Asian students group. But school records indicate he never actually enrolled, except for one summer term.

Over the next decade or so he worked at a real-estate development company and a Silicon Valley venture-capital firm before setting up what became Private Equity Management Group, or PEMGroup, around 2002. That firm eventually raised more than $800 million, principally through banks in Mr. Pang's native Taiwan that distributed PEMGroup's notes to thousands of their investors.

A court-appointed receiver in the SEC case accused Mr. Pang of using PEMGroup as his "personal piggy bank," misappropriating millions for himself while using investor funds to pay for three company jets and other expenses. Amid an uproar in Taiwan over the scandal, the banks agreed to cover their investors' losses. Taiwanese banks already have booked hundreds of millions of dollars in losses.

Last October, six months before crisis struck his firm, Mr. Pang made a visit to his old school in Taipei. As hundreds of excited kids dressed in Halloween costumes sat in the courtyard, Mr. Pang was introduced as one of the prestigious school's most successful alumni. The principal says Mr. Pang encouraged the students to study hard for future success.

chief executive officer of New York investment firm Rockefeller & Co., died Sunday

Sept. 15 (Bloomberg) --James McDonald, chief executive officer of New York investment firm Rockefeller & Co., died Sunday from a single gunshot wound that was probably self- inflicted, officials in Massachusetts said.

His body was found in a car behind an auto dealership in Dartmouth, Massachusetts, said Gregg Miliote, a spokesman for the Bristol County district attorney’s office in New Bedford. While police didn’t find a note, McDonald had called his wife earlier in the day, Miliote said.

McDonald, who was 56, headed Rockefeller & Co. for more than eight years, building the former family office founded by oil man John D. Rockefeller in 1882 into a wealth manager with $25 billion in client assets. Paris-based Societe Generale SA last year bought 37 percent of Rockefeller Financial Services, parent of Rockefeller Co., to add wealthy clients in the U.S.

“He was a highly regarded figure in the business here in Boston,” said Tim Vaill, chief executive officer of Boston Private Financial Holdings Inc., which competes in the same field.

A graduate of Harvard college, McDonald ran Pell, Rudman & Co., a Boston-based wealth management firm, before joining Rockefeller. He was a board member at NYSE Euronext and chairman of New York’s Japan Society, a nonprofit organization that provides information about Japan, according to its Web site.

McDonald was appointed to CIT Group Inc.’s board of directors in October 2007 and retired from the money-losing lender in May, two months before the Federal Deposit Insurance Corp. refused to guarantee the company’s debt, driving it toward a possible bankruptcy.

Family Office

Rockefeller & Co. was set up in 1979 by members of the Rockefeller family as a successor to the family office, according to a company release. The firm today manages money for individuals, families and institutions, according to its Web site.

Thomas Coyle, editor of Family Wealth Report, a newsletter based in Bangor, Maine, said the firm still manages money for members of the Rockefeller family. In a telephone interview, he described the company as a “high-touch operation” that provides trust services, tax help and concierge services to well-to-do clients.

At a press conference announcing the Societe Generale deal, McDonald said the firm would offer services to clients with at least $30 million to invest.

“Jim McDonald was an exceptional individual who provided strong leadership of Rockefeller and Co. for over eight years,” said Colin Campbell, the firm’s chairman of the board, in an e- mailed statement.

Austin Shapard, Rockefeller’s chief operating and financial officer, has assumed leadership of the firm on an interim basis, the company said in the statement.

Freddie Mac Chief Found Dead

The acting chief financial officer of troubled US mortgage giant Freddie Mac was found dead in an apparent suicide this morning.

David Kellermann, 41, was found dead in his home in Vienna, Virginia on the outskirts of Washington, before dawn. Fairfax county, Virginia police said no foul play was evident and that the cause and manner of death was under investigation by the state medical examiner. CNN reported Kellermann had hung himself, citing a law enforcement source. Police spokeswoman Lucy Caldwell said police responded to the house just before 5am (10am BST). She would not say who called police but said others were in the house.

Kellermann was named acting chief financial officer in September, after Anthony Piszel resigned following a government-takeover of the firm and a dramatic internal shake-up of the management. He reported directly to Chief Executive Officer John Koskinen. Before that he was senior vice-president and led the company's accounting and finance operations.

Kellermann had been with the company 16 years in a variety of positions.
As acting chief financial officer, Kellermann was charged with certifying the truth and accuracy of the company's financial statements and certain regulatory filings.

Multi-millionaire banker who disappeared with shotgun found dead

Huibert Boumeester, 49, a father of two who had been depressed after recently losing his job, went missing a week ago with one of his registered weapons.

His body was found with gunshots wounds on Saturday in woodland in Winkfield, Berkshire, according to the Daily Mail.

The Dutchman, a former board member of ABN Amro, recently taken over by RBS, last seen alive on June 22 and was reported missing after failing to attend a business meeting.

A police spokesman said: "Police are currently at the scene of an unexplained death. They discovered the body of a man who is believed to have died from gun shot wounds. It is too early at this stage to speculate or confirm the man's identity."

However, the Daily Mail said police sources had confirmed that the body was that of Mr Boumeester.

Officers last week searched for him in vain at his two homes in London and his estate in Scotland. Appealing last week for information about his disappearance, police said he had been "feeling down of late".

He had been on the board of the Dutch bank ABN Amro and a number of other City firms but the firm was taken over by RBS in a £50bn deal.

Records show Mr Boumeester was paid a £440,000 salary at ABN.

Mr Boumeester's brother-in-law, Willem Vandervarm, 45, said last week that the banker had not acted any differently after losing his job. "I saw him this weekend and he was completely normal," he said. "We did not suspect anything was wrong."

Treasury Auctions Exploding

Treasuries Fall as Five-Year Notes Draw Higher Yield at Auction

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By Cordell Eddings and Ruby Madren-Britton

Sept. 23 (Bloomberg) -- Treasuries fell as the government’s record $40 billion sale of five-year notes drew weaker-than- forecast demand before the conclusion of the Federal Reserve’s two-day policy meeting.

The notes drew a yield of 2.47 percent, compared with a forecast of 2.4625 percent in a Bloomberg News survey of four of the Fed’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.40, compared with 2.51 at the previous sale in August and an average of 2.23 at the past 10 auctions.

“The auction was surprisingly weak given the performance of the two-year note and the price action heading in,” said Lawrence Dyer, an interest-rate strategist in New York at HSBC Securities USA Inc., one of the 18 primary dealers required to bid at Treasury auctions. “The market seemed to be saying, why should I pay a premium when there will be more to buy next month?”

The existing five-year note yield rose three basis points to 2.45 percent at 1:26 p.m. in New York, according to BGCantor Market Data. The 2.375 percent security maturing in August 2014 fell 1/8, or $1.25 per $1,000 face amount, to 22 21/32. The 10- year note yield rose three basis points to 3.49 percent.

Indirect bidders, a class of investors that includes foreign central banks, bought 44.8 percent of the notes, compared with 56.4 percent at the August auction. The average at the past 10 sales is 40.6 percent.

Fed Meeting

“Indirects will continue to be strong and sevens are in that mix for sure so I would expect people to show up for the auction tomorrow,” said William O’Donnell, U.S. government bond strategist at primary dealer RBS Securities Inc. in Stamford, Connecticut.

The amount of five-year notes offered by the Treasury has surged from $14 billion at the start of 2008 to $40 billion this month as President Barack Obama borrows unprecedented amounts to revive the economy and service record deficits.

The Treasury is scheduled to sell $29 billion of seven-year debt tomorrow. Over the past three months, returns totaled 0.9 percent for two-year notes, 2.2 percent for five-year debt and 2.8 percent for 10-year Treasuries, according to indexes compiled by Merrill Lynch & Co.

Fed officials may signal that the U.S. economy has started to recover while maintaining their pledge to keep the benchmark interest rate near a record low for an “extended period.”

Central bank officials may also discuss changing the size and duration of their plan to buy as much as $1.25 trillion of mortgage-backed securities and $200 billion of agency debt by the end of this year, said former Fed governor Laurence Meyer, now vice chairman of St. Louis-based Macroeconomic Advisers LLC.

Reverse Repos

Fed officials have started talks with bond dealers to use so-called reverse repurchase agreements to drain some of the cash the central bank has pumped into the economy, according to people with knowledge of the discussions. There’s no sense that policy makers intend to withdraw funds anytime soon, said the people, who decline to be identified.

The FOMC is scheduled to issue its statement at around 2:15 p.m. Futures contracts on the Chicago Board of Trade show just a 6.7 percent likelihood of the Fed increasing its benchmark rate this year, down from odds of 12.5 percent a month ago. The central bank cut the rate to a range of zero to 0.25 percent in December to help combat the recession.

The Fed has helped support Treasuries by scooping up as much as $300 billion of the debt to cap consumer borrowing costs, a program it began in March and plans to finish in October.

The central bank’s efforts have helped bring down U.S. 30- year fixed mortgage rates to 5.16 percent yesterday from this year’s high of 5.74 percent in June, according to Bankrate.com in North Palm Beach, Florida. Average interest rates on new car loans fell to 3.43 percent from 8.42 percent at the end of last year, according to the central bank.

Fannie, Freddie

U.S. banks increased holdings of government securities and debt of mortgage companies Fannie Mae in Washington and Freddie Mac in McLean, Virginia, to $1.37 trillion in the week ended Sept. 9 from $1.16 trillion a year earlier, Fed data show.

A Bloomberg survey of banks and securities companies projects 10-year rates will climb to 3.58 percent by year-end, with the most recent forecasts given the heaviest weightings.

U.S. home resales and orders for long-lasting goods probably rose in August, extending gains that have signaled the U.S. is emerging from the worst recession since the 1930s, economists said before reports tomorrow and Sept. 25.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Ruby Madren-Britton in New York at rmadrenbritt@bloomberg.net.

Protectionism rising despite G-20 vows on trade

WASHINGTON (AP) -- Leaders of the world's 20 top economies vowed to resist protectionism last November and again in April as they charted a joint strategy for confronting the worst global downturn in generations. As they meet again, they'll get this progress report: Most of their economies are on the mend -- and trade tensions and protectionism are on the rise.

A U.S.-China spat over Chinese tires and American chicken exports is just the latest example of how hard it has been to live up to those lofty fair-trade pledges. Nearly all 20 nations whose leaders meet next week in Pittsburgh have violated the no-protectionism pledges made earlier in Washington and London, according to reports from international monitoring groups.

As economies escape the grips of recession, the pressure to work together appears to be lessening.

National self-interest is reasserting itself. That includes a desire to protect battered home industries from overseas competition as governments look toward the day when they can dial back stimulus measures such as extra government spending and low interest rates.

Also, participants are arguing over issues such as proposed limits on bankers' compensation, how far to go with international financial regulation and alarming recession-fueled budget deficits, especially in the U.S.

Standing back from the cliff, the world leaders are shifting their focus.

The words are starting to heat up a little bit. I think they're starting to get a little frustrated that the urgency is being lost -- that crisis feel," said Heather Conley, an assistant deputy secretary of state for Europe in the Bush administration and now a scholar at the Center for Strategic and International Studies.

Yet economists say pulling together is extremely important now to keep still-fragile recoveries from being derailed.

"It is very important that, as they unwind, they don't do it in a haphazard fashion, that they think about it and work together so that everybody knows what everybody else is doing," said Colin Bradford, a former World Bank economist who is now a scholar on global finance at the Brookings Institution.

"You've got a sequence of meetings going on, coordinated action instead of everybody shooting from the hip," Bradford said.

In London in April, the leaders renewed a pledge they made in November to "refrain from raising new barriers to investment or to trade in goods and services (or) imposing new export restrictions." They said that pledge was good until the end of 2010.

But the Geneva-based World Trade Organization issued a report this week that cited "continued slippage toward more trade restricting and distorting policies." It listed 91 new potentially protectionist measures by G-20 members just between the April summit in London and the end of August, 15 of them by the United States.

Global Trade Alert, a trade watchdog group with ties to the World Bank, separately said more than 100 "blatantly discriminatory measures" are poised to be implemented by G-20 nations.

Trade warfare of the 1930s is widely blamed for prolonging and expanding the Great Depression.

President Barack Obama pledged to avoid "self-defeating protectionism" in continuing the effort to get the U.S. and other major world economies back on their feet. Still, he told a Wall Street audience on Monday, "no trading system will work if we fail to enforce our trade agreements."

Steps taken by the United States widely seen by other nations as protectionist include "Buy American" provisions in the Obama administration's $787 billion stimulus package, restrictions keeping Mexican trucks off most U.S. roads and provisions of auto bailouts requiring vehicles benefiting from the program to be built in the United States.

China has funneled its extensive stimulus spending to Chinese-only companies and enterprises. Russia plans sweeping tariff increases. Japan is taking steps that will further restrict food imports. And South Africa is changing its purchasing rules to favor domestic producers.

The U.S. continues to press its claim that the European countries subsidize Airbus, winning a preliminary ruling from a WTO panel earlier this month. European countries have counter claimed that the Pentagon and NASA are effectively subsidizing rival aircraft manufacturer Boeing, with a ruling expected early next year.

Mike Froman, a White House adviser on international economics, said there's no doubt that since the London meeting in April "the situation has changed dramatically. ... Then people thought we were perhaps on the edge of depression. And now I think we're debating the pace of recovery."

Froman said Obama would emphasize that governments should make plans for winding down stimulus measures but it is still "too early to execute on those exit strategies."

Finance ministers of the 20 countries meeting in London two weeks pledged to maintain stimulus measures -- for now. But some European countries, particularly Germany, are not that keen to keep up high levels of spending.

Obama to impose tariffs on Chinese tires

Obama imposes tariffs on Chinese tires for 3 years

• By Jennifer Loven, AP White House Correspondent
• On Friday September 11, 2009, 10:12 pm EDT

WASHINGTON (AP) -- President Barack Obama has slapped punitive tariffs on all car and light truck tires entering the United States from China in a decision that could anger the strategically important Asian powerhouse but placate union supporters important to his health care push at home.

Obama had until Sept. 17 -- next week -- to accept, reject or modify a U.S. International Trade Commission ruling that a rising tide of Chinese tires into the U.S. hurts American producers. A powerful union, United Steelworkers, blames the increase for the loss of thousands of American jobs.

The federal trade panel recommended a 55 percent tariff in the first year, 45 percent in the second year and 35 percent in the third year. Obama settled on slightly lower penalties -- an extra 35 percent in the first year, 30 percent in the second, and 25 percent in the third, White House press secretary Robert Gibbs said Friday.

"The president decided to remedy the clear disruption to the U.S. tire industry based on the facts and the law in this case," Gibbs said.

By taking "this unprecedented action, the Obama administration is now at odds with its own public statements about refraining from increasing tariffs above current levels," said Vic DeIorio, executive vice president, GITI Tire (U.S.), the largest manufacturer of tires in China.

The decision comes as U.S. officials are working with the Chinese and other nations to plan an economic summit of the Group of 20 leading rich and developing nations in Pittsburgh, to be held Sept. 24-25. China will be a major presence at the meeting, and the United States will be eager to show it supports free trade.

Many of the nearly two dozen world leaders Obama is hosting have made strong statements critical of countries that protect their key industries. Obama, too, has spoken out strongly against protectionism, and other countries will view his decision on tires as a test of that stance.

Governments around the world have suggested the United States talks tough against protectionism only when its own industries are not threatened. U.S. rhetoric on free trade also has been questioned because of a "Buy American" provision in the U.S. stimulus package.

The decision could have ramifications in other high-priority areas, too.

The White House badly needs Chinese help to confront climate change, nuclear standoffs with Iran and North Korea and global economic turmoil. China is the world's third-largest economy and a veto-holding member of the United Nations Security Council.

Beijing says the duties would be a violation of global free-trade principles and has complained about U.S. protectionism.

And Roy Littlefield, executive vice president of the Tire Industry Association, which opposes the tariff, said it would not save American jobs but only cause tire manufacturers to move production to another country with less strict environmental and safety controls, less active unions and lower costs than the United States.

At the same time, Obama needs support from unions -- also a key backer of the Democratic Party in elections -- as he makes a high-stakes push for national health care legislation.

To reach a compromise on health care, Obama may need concessions from pro-labor Democrats who support a strong stand against China.

The steelworkers union brought the original case in April, accusing China of making a recent push to unload more tires ahead of Obama's expected action. The union says more than 5,000 tire workers have lost jobs since 2004, as Chinese tire overwhelmed the U.S. market.

The U.S. trade representative's office said four tire plants closed in 2006 and 2007 and three more are closing this year. During that time, just one new plant opened. U.S. imports of Chinese tires more than tripled from 2004 to 2008 and China's market share in the U.S. went from 4.7 percent of tires purchased in 2004 to 16.7 percent in 2008, the office said.

"When China came in to the (World Trade Organization), the U.S. negotiated the ability to impose remedies in situations just like this one," U.S. Trade Representative Ron Kirk said. "This administration is doing what is necessary to enforce trade agreements on behalf of American workers and manufacturers. Enforcing trade laws is key to maintaining an open and free trading system."

The new tariffs, on top of an existing 4 percent tariff on all tire imports, take effect Sept. 26.

Obama's action marks a shift from the Bush administration, which was routinely criticized for being too delicate in confronting Beijing's alleged trade violations. Obama promised during his presidential campaign that he would do it differently.

For the Chinese government, the tire dispute threatens an economic relationship crucial to China's economic growth. There was speculation before the decision that new tariffs could produce public pressure on Beijing to retaliate, potentially sparking a dangerous trade war.

Soaring Chinese imports of American chicken meat already have been mentioned by Chinese state media as a possible target. Beijing also could sell some of its extensive holdings of U.S. Treasury debt, which could unsettle markets.

Associated Press writer Foster Klug contributed to this report.

Millions of Seniors to Receive Smaller Social Security Checks in 2010

Group to Call for Emergency COLA Legislation

By: PR Newswire | 02 Sep 2009 | 09:04 AM ET

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WASHINGTON, Sept 02, 2009 /PRNewswire-USNewswire via COMTEX/ -- Millions of seniors will receive smaller Social Security checks next year, and none of the 37 million seniors who receive Social Security will get an increase, according to an August forecast from the Congressional Budget Office (CBO). The CBO is also forecasting a zero COLA for 2011.

In June, The Senior Citizens League (TSCL) became the first national group to call for an Emergency COLA for 2010. Since then, Sen. Bernie Sanders (I-VT) announced plans to introduce an Emergency COLA bill, expected later this month.

Next year would mark the first time since automatic Cost of Living Adjustments (COLA) went into effect in 1975 that seniors would fail to get an increase.

Since automatic raises were established, seniors have never failed to receive an annual increase of less than 1.3 percent.

Millions of seniors will receive cuts due to the soaring costs of prescription drug plans, which many beneficiaries have automatically deducted from Social Security checks.

"Just as more seniors than ever before are slipping into poverty and filing bankruptcy, the government thinks it's acceptable to eliminate COLAs and cut benefits," said Daniel O'Connell, chairman of The Senior Citizens League. "We wholeheartedly support any effort in Congress that would provide seniors with an Emergency COLA next year." Almost 70 percent of beneficiaries depend on Social Security for 50 percent or more of their income. Social Security is the sole source of income for 15 percent of beneficiaries.

See "Night in America," our latest video about seniors at risk, at www.YouTube.com/SeniorCitizensLeague.

Proponents of a zero COLA argue for its fairness in a deflationary period. But they do not mention that the way the COLA is calculated does not accurately track senior costs. TSCL supports a change in the Consumer Price Index (CPI) used to determine the COLA.

The government currently calculates the COLA based on the CPI for Urban Wage Earners and Clerical Workers (CPI-W), a slow-rising index that tracks the spending habits of younger workers who don't spend as much of their income on health expenditures.

However, the government does track the spending patterns of older Americans, and has done so since 1983 with the CPI for Elderly Consumers, or CPI-E. By tying the annual increase in the COLA to the CPI-E, seniors would see much needed relief in their monthly checks. For example, a senior who retired with a monthly benefit of $676 in 1984 would have received $17,596 more throughout their retirement with the CPI-E.

TSCL supports two CPI-E bills in the current Congress: H.R. 2429 and H.R. 2365, as well as any impending Emergency COLA legislation.

The Coming Deposit Insurance Bailout

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Another lesson that federal guarantees aren't free.

Americans are about to re-learn that bank deposit insurance isn't free, even as Washington is doing its best to delay the coming bailout. The banking system and the federal fisc would both be better off in the long run if the political class owned up to the reality.

We're referring to the federal deposit insurance fund, which has been shrinking faster than reservoirs in the California drought. The Federal Deposit Insurance Corp. reported late last week that the fund that insures some $4.5 trillion in U.S. bank deposits fell to $10.4 billion at the end of June, as the list of failing banks continues to grow. The fund was $45.2 billion a year ago, when regulators told us all was well and there was no need to take precautions to shore up the fund.

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Associated Press

FDIC Chairman Sheila Bair

The FDIC has since had to buttress the fund with a $5.6 billion special levy on top of the regular fees that banks already pay for the federal guarantee. This has further drained bank capital, even as regulators say the banking system desperately needs more capital. Everyone now assumes the FDIC will hit banks with yet another special insurance fee in anticipation of even more bank losses. The feds would rather execute this bizarre dodge of weakening the same banks they claim must get stronger rather than admit that they'll have to tap the taxpayers who are the ultimate deposit insurers.

It isn't as if regulators don't understand the problem. Earlier this year they quietly asked Congress to provide up to $500 billion in Treasury loans to repay depositors. The FDIC can draw up to $100 billion merely by asking, while the rest requires Treasury approval. The request was made on the political QT because, amid the uproar over TARP and bonuses, no one in Congress or the Obama Administration wanted to admit they'd need another bailout.

But this subterfuge can't last. Eighty-four banks have already failed this year, and many more are headed in that direction. The FDIC said it had 416 banks on its problem list at the end of June, up from 305 only three months earlier. The total assets of banks on the problem list was nearly $300 billion, and more of these assets are turning bad faster than banks can put aside reserves to account for them. The commercial real-estate debacle is still playing out at thousands of banks, even as the overall economy bottoms out and begins to recover.

Meantime, even as it "resolves" and then sells failed banks, the FDIC is also guaranteeing the buyers against losses on tens of billions of acquired assets. This is known in the trade as "loss sharing," which is another form of taxpayer guarantee that taxpayers aren't supposed to know about. Most of the losses won't be realized if the economy recovers. But this too is a price of taxpayers guaranteeing deposits. Even as Treasury and the press corps broadcast that the feds are making money on TARP repayments, these guarantees go largely unnoticed.

FDIC Chairman Sheila Bair continues to say that deposits will be covered up to the $250,000 per account insurance limit, and of course she's right. But we wish she'd force Congress—and the American public—to face up to the reality of what deposit insurance costs. Amid the panic last year, Congress raised the deposit limit from $100,000. While this may have calmed a few nerves—though the worst runs were on money-market funds, not on banks—it also put taxpayers further on the hook.

The $250,000 limit was supposed to expire at the end of 2009, but in May Congress extended it through 2013, and no one who understands politics thinks it will return to $100,000. The rising bank losses mean that the FDIC's ratio of funds to deposits is down to 0.22%, far below its obligation under the insurance statute to keep it between 1.15% and 1.50%.

Rather than further soak capital from already weak banks, the FDIC ought to draw down at least $25 billion from its Treasury line of credit. Ms. Bair is going to have to ask for the cash sooner or latter, and she might as well do it before the fund hits zero and we get another round of even mild depositor anxiety. We suppose Congress could raise a faux fuss, but these are the same folks who ordered the FDIC to broaden the insurance limit. They need to face the political consequences of their promises.