Robert Gates, the US secretary of defence, has said that he intends to leave his post sometime in 2011.
In an interview with the US magazine Foreign Policy,Gates said "it would be a mistake to wait until January 2012".
"This is not the kind of job you want to fill in the spring of an election year", he told the magazine.
Gates, 66, took office in December 2006 under President George Bush but was kept on the job after Barack Obama assumed the presidency in 2009.
If he stays in office into 2011, he will be the fifth-longest-serving defence secretary in American history.
'Wilder ideas'
As defence secretary, Gates has managed the wind-down of the war in Iraq and a changing Pentagon whose budget he aims to trim.
He has also overseen the war in Afghanistan and Obama's surge of some 30,000 military personnel, who will finish arriving this year even as the United States promises to begin withdrawing from the country in July 2011.
"What you saw with Robert Gates, particularly ... under Barack Obama, was someone who was able to take some of his wilder ideas for transforming the way the defence department does its job and actually start putting into play some of those ideas," Al Jazeera's Rosalind Jordan, reporting from Washington DC, said.
In 2009, Gates and a team of reviewers decided to eliminate, defund or restructure 33 programmes within the defence department, according to the Foreign Policy article.
Among the more controversial was Gates' decision to halt the production of the F-22 Raptor stealth fighter plane, a darling of the Air Force that would have cost the US tens of billions of dollars over the coming years.
"The question is whether someone who follows [Gates] can see that process through", Jordan said.
Afghan review
In the Foreign Policy interview, Gates noted that the Obama administration's upcoming assessment of its strategy in Afghanistan will be complete by the end of December.
"The point ... is I think that by next year I'll be in a position where, you know, we're going to know whether the strategy is working in Afghanistan. We'll have completed the surge. We'll have done the assessment in December. And it seems like somewhere there in 2011 is a logical opportunity to hand off", he said, according to a transcriptposted on the magazine's website.
Gates also said he fears it will be harder to find an adequate replacement for himself in 2012, as the Obama White House gears up for a likely re-election campaign.
"I think we might have trouble getting the kind of person they want if there's a possibility that they might only be in the job for a year", he said, referencing the chance that Obama could lose an election.
"You know, who knows what the election situation will look like. But also I just think this is not the kind of job you want to fill in the spring of a presidential election. So I think sometime in 2011 sounds pretty good".
Successor speculation
In another post on Foreign Policy's website,reporter Josh Rogin listed some notables in the American capital rumoured to be possible choices should Obama need to replace Gates.
They include Michèle Flournoy, the undersecretary of defence for policy, John Hamre, the president of the Centre for Strategic and International Studies, Leon Panetta, the director of the Central Intelligence Agency, and Richard Danzig, a former secretary of the navy.
Source: Al Jazeera
Monday, August 16, 2010
Financial Services - Call for Careful Overhaul of US Mortgage Lending - CNBC
The US does not intend to wind down completely Fannie Mae and Freddie Mac, the large government-sponsored mortgage companies that are eating up billions of taxpayer dollars, given the fragile state of the housing market.
Administration officials say that any credible proposal to overhaul the government-sponsored enterprises, as Fannie and Freddie are called, would need to include a “thoughtful approach” to prevent house prices from dipping lower.
Fannie [FNMA 0.3755 0.0005 (+0.13%) ] and Freddie [FMCC 0.4 --- UNCH (0) ] buy or guarantee more than 90 percent of loans currently being issued.
Without government backing, some large investors have said they would stop buying mortgage bonds, a development that would be catastrophic both for the housing market and the broader economy.
The overhaul of Fannie and Freddie remains one of the most challenging problems of the financial crisis, and one that was noticeably absent from the reform regulation signed into law earlier this summer.
Pressure is building on the Obama administration, which has promised to submit a proposal to Congress by January, to find a solution.
Since being taken over by the government in 2008, Fannie and Freddie have absorbed nearly $150 billion in aid, making them by far the costliest part of a bail-out that rescued carmakers and financial institutions.
The Treasury has been canvassing a wide array of private sector bankers and public policy experts, many of whom are listed to speak at a conference tomorrow, which will be chaired by Tim Geithner, Treasury secretary, and Shaun Donovan, the secretary for housing and urban development.
Treasury officials have been reading more than 300 comments received in response to seven questions posted earlier this year in a public forum.
No one wants to see the GSEs survive in their current form, but neither do they want to upset the mortgage market at such a crucial time. Beyond that there is little agreement on how to proceed.
Conservatives argue that the private markets, not the government, should provide financing for home loans. But liberals say the government should have some role. They point out that the private markets seized up during the credit crisis.
“It’s clear there is no good short-term solution,” said Rajiv Setia, of Barclays Capital.
Last month Mr Geithner promised that an overhaul of Fannie and Freddie would bring “fundamental change” and that they would not survive “in anything like their current form”.
But he added: “I think there’s going to be a good case for taking a look at preserving or putting in place a carefully designed guarantee so, again, homeowners have the ability to borrow to finance a home, even in a very difficult recession.”
Administration officials say that any credible proposal to overhaul the government-sponsored enterprises, as Fannie and Freddie are called, would need to include a “thoughtful approach” to prevent house prices from dipping lower.
Fannie [FNMA 0.3755 0.0005 (+0.13%) ] and Freddie [FMCC 0.4 --- UNCH (0) ] buy or guarantee more than 90 percent of loans currently being issued.
Without government backing, some large investors have said they would stop buying mortgage bonds, a development that would be catastrophic both for the housing market and the broader economy.
The overhaul of Fannie and Freddie remains one of the most challenging problems of the financial crisis, and one that was noticeably absent from the reform regulation signed into law earlier this summer.
Pressure is building on the Obama administration, which has promised to submit a proposal to Congress by January, to find a solution.
Since being taken over by the government in 2008, Fannie and Freddie have absorbed nearly $150 billion in aid, making them by far the costliest part of a bail-out that rescued carmakers and financial institutions.
The Treasury has been canvassing a wide array of private sector bankers and public policy experts, many of whom are listed to speak at a conference tomorrow, which will be chaired by Tim Geithner, Treasury secretary, and Shaun Donovan, the secretary for housing and urban development.
Treasury officials have been reading more than 300 comments received in response to seven questions posted earlier this year in a public forum.
No one wants to see the GSEs survive in their current form, but neither do they want to upset the mortgage market at such a crucial time. Beyond that there is little agreement on how to proceed.
Conservatives argue that the private markets, not the government, should provide financing for home loans. But liberals say the government should have some role. They point out that the private markets seized up during the credit crisis.
“It’s clear there is no good short-term solution,” said Rajiv Setia, of Barclays Capital.
Last month Mr Geithner promised that an overhaul of Fannie and Freddie would bring “fundamental change” and that they would not survive “in anything like their current form”.
But he added: “I think there’s going to be a good case for taking a look at preserving or putting in place a carefully designed guarantee so, again, homeowners have the ability to borrow to finance a home, even in a very difficult recession.”
Financial Services - US Banks Get Securities Buy-Back Window - CNBC
The Dodd-Frank financial reform bill has opened a 90-day window for banks to buy back $118 billion in high-cost securities, a move that would enable them to replace the instruments with cheaper capital but is likely to cause tensions with regulators and investors.
Wall Street executives and lawyers say several banks are considering redeeming “trust preferred securities” (Trups) – a hybrid of debt and equity – by taking advantage of a clause triggered by the new rules.
Trups – equity instruments that pay interest like bonds – became popular in the financial crisis when banks sold more than $40 billion-worth to investors ranging from Warren Buffett to small savers. Financial groups are interested in buying back the securities because Trups are an expensive form of capital. Banks needed to offer high interest rates to entice investors.
Banks have an extra incentive to redeem Trups because the new law states that they will no longer count as tier one capital – a key gauge of financial strength – from 2013.
The banks can buy back the securities now because most Trups’ contracts state that a legal change gives issuers three months to redeem them at face value. The removal of Trups from tier one capital amounts to such an event, lawyers say.
“It is a big issue,” said a top US lawyer. “The question for banks is: do you want to keep paying high interest rates knowing that Trups are going to lose their status as tier one?”
However, some executives counter that redeeming Trups could upset regulators, who are against reductions in bank capital, and investors, who bought them to hold for the long term.
“Banks may find it desirable to redeem Trups but they have to think about what they are going to say to investors next time they want to raise capital,” said Chip MacDonald at law firm Jones Day.
The dilemma over Trups is emblematic of the regulatory morass faced by banks trying to navigate the effects of the new US law as well as ongoing uncertainty over new international capital standards.
Moody’s estimates that US banks have about $118 billion of Trups outstanding. The securities account for a significant part of tier one capital at lenders like Bank of America [BAC 13.23 0.1675 (+1.28%) ], JPMorgan Chase [JPM 37.50 -0.31 (-0.82%) ], Morgan Stanley [MS 25.90 -0.22 (-0.84%) ] and Citigroup [C 3.88 0.01 (+0.26%) ], according to the credit rating agency.
Wall Street executives and lawyers say several banks are considering redeeming “trust preferred securities” (Trups) – a hybrid of debt and equity – by taking advantage of a clause triggered by the new rules.
Trups – equity instruments that pay interest like bonds – became popular in the financial crisis when banks sold more than $40 billion-worth to investors ranging from Warren Buffett to small savers. Financial groups are interested in buying back the securities because Trups are an expensive form of capital. Banks needed to offer high interest rates to entice investors.
Banks have an extra incentive to redeem Trups because the new law states that they will no longer count as tier one capital – a key gauge of financial strength – from 2013.
The banks can buy back the securities now because most Trups’ contracts state that a legal change gives issuers three months to redeem them at face value. The removal of Trups from tier one capital amounts to such an event, lawyers say.
“It is a big issue,” said a top US lawyer. “The question for banks is: do you want to keep paying high interest rates knowing that Trups are going to lose their status as tier one?”
However, some executives counter that redeeming Trups could upset regulators, who are against reductions in bank capital, and investors, who bought them to hold for the long term.
“Banks may find it desirable to redeem Trups but they have to think about what they are going to say to investors next time they want to raise capital,” said Chip MacDonald at law firm Jones Day.
The dilemma over Trups is emblematic of the regulatory morass faced by banks trying to navigate the effects of the new US law as well as ongoing uncertainty over new international capital standards.
Moody’s estimates that US banks have about $118 billion of Trups outstanding. The securities account for a significant part of tier one capital at lenders like Bank of America [BAC 13.23 0.1675 (+1.28%) ], JPMorgan Chase [JPM 37.50 -0.31 (-0.82%) ], Morgan Stanley [MS 25.90 -0.22 (-0.84%) ] and Citigroup [C 3.88 0.01 (+0.26%) ], according to the credit rating agency.
Sunday, August 15, 2010
Japan's Growth Slows Down Sharply Amid Yen Worries - CNBC
Japan's economic growth slowed markedly in April-June and analysts predict further slowdown, adding to policymakers' difficulties as they grapple with deflation and a rise in the yen that threatens an export-reliant recovery.
Slowing growth in Japan's key export destinations such as the United States and China clouds the outlook, while policymakers step up efforts to talk down the yen after it surged to a 15-year high against the dollar this month of 84.72 per dollar.
Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa are likely to meet later this week to discuss the yen's strength and possible responses, although analysts say likely options would be limited.
"I think the Bank of Japan and the government need to take decisive action against currency moves. Solo currency intervention is possible if the yen approaches 80 to the dollar. If that is accompanied by monetary easing by the Bank of Japan, it may have a certain effect," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
The quarterly expansion of 0.1 percent in gross domestic product (GDP) translates into an annualised growth of 0.4 percent, well below the median market forecast of 2.3 percent annualised growth and much less than the 2.4 percent annualised growth in the United States in the same quarter.
That followed a revised 4.4 percent annualised growth in the first quarter, as export growth moderated and a stimulus-driven recovery in consumption ran out of steam.
It was the third straight quarter of expansion.
"Consumption was flat, showing government payouts to households with children didn't give much of a boost to private spending," Minami said, adding that the yen's rise may begin to hurt export growth in the latter half of the current fiscal year.
Japan's economy has been spotty since emerging from its worst recession since World War Two in the second quarter of 2009 on the back of exports, particularly to Asia, and government stimulus for spending on energy-efficient cars and electronics.
Slowing growth in Japan's key export destinations such as the United States and China clouds the outlook, while policymakers step up efforts to talk down the yen after it surged to a 15-year high against the dollar this month of 84.72 per dollar.
Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa are likely to meet later this week to discuss the yen's strength and possible responses, although analysts say likely options would be limited.
"I think the Bank of Japan and the government need to take decisive action against currency moves. Solo currency intervention is possible if the yen approaches 80 to the dollar. If that is accompanied by monetary easing by the Bank of Japan, it may have a certain effect," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
The quarterly expansion of 0.1 percent in gross domestic product (GDP) translates into an annualised growth of 0.4 percent, well below the median market forecast of 2.3 percent annualised growth and much less than the 2.4 percent annualised growth in the United States in the same quarter.
That followed a revised 4.4 percent annualised growth in the first quarter, as export growth moderated and a stimulus-driven recovery in consumption ran out of steam.
It was the third straight quarter of expansion.
"Consumption was flat, showing government payouts to households with children didn't give much of a boost to private spending," Minami said, adding that the yen's rise may begin to hurt export growth in the latter half of the current fiscal year.
Japan's economy has been spotty since emerging from its worst recession since World War Two in the second quarter of 2009 on the back of exports, particularly to Asia, and government stimulus for spending on energy-efficient cars and electronics.
Economy - Double Dip? A Tipping Point May Be Near - CNBC
Like a car spinning its wheels, the American economy hasn’t been getting much traction. Many financial indicators are issuing worrisome signals, millions of people are still out of work, and growth is slowing.
Will the economy pick up momentum or slip back into recession? Unfortunately, the answer is very much in doubt.
“We are at a very critical moment in the business cycle,” said Lakshman Achuthan, the managing director of the Economic Cycle Research Institute, a private forecasting group with an excellent track record. After the economy began to recover last summer, in his estimation, “growth has definitely slowed.” But he said he wouldn’t have enough data until at least the fall to know “whether we’re dipping back into recession.”
Even the Federal Reserve chairman, Ben S. Bernanke, calls the current economic outlook “unusually uncertain.” And the financial markets have certainly noticed.
“The market is favoring investments thought to have no risk, like Treasuries, as opposed to assets with risk, like stocks — and that’s been becoming more and more pronounced,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco, the big bond manager.
In the bond market last week, safety-seeking investors bid up the prices of Treasury securities, driving down yields to extraordinarily low levels along a broad range of maturities — and extending the astonishing rally of long-term Treasury bonds, which continue to outperform the stock market and nearly every other asset class.
For the year, for example, long-term Treasuries have returned more than 15 percent, as gauged by the Barclays Capital U.S. 20+ Year Treasury Bond index. By comparison, the Standard & Poor’s 500-stock index has lost more than 2 percent, including dividends. And over the decade through July, long-term Treasuries outperformed the S.& P. 500 by more than 8.6 percentage points, annualized, according to Morningstar data.
The stock market was particularly shaky last week. On Wednesday, the Dow Jones industrial average dropped 265.42 points, or 2.5 percent, its biggest decline since June. For the week, the Dow lost more than 350 points, or 3.3 percent, closing at 10,303.15, while the S.& P. fell more than 42 points, or 3.8 percent, to 1,079.25.
This preference for bonds over stocks, which has emerged periodically since the financial crisis began in 2008, came into high relief after the Fed’s announcement on Tuesday that it would recycle the proceeds of its mortgage bond portfolio into Treasuries.
Considering the Fed balance sheet — now approximately $2.3 trillion, up from $900 billion before the financial crisis — the central bank’s latest move was modest. It will translate into $200 million to $400 million in purchases of Treasuries over 12 months, according to an estimate by Bank of America Merrill Lynch. But it was the direction the Fed was taking — its decision to maintain an expansive monetary policy through “quantitative easing,” rather than to begin monetary tightening — that was most striking.
“Ben Bernanke’s motto seems to be that he will do whatever it takes to avoid a depression and avert deflation,” said Edward Yardeni, president of Yardeni Research. “He has been very successful so far,” lowering interest rates along the yield curve and thereby stimulating the economy.
The Fed may need to go it alone over the next several months, several analysts said, because with midterm elections approaching, additional fiscal stimulus legislation may be too controversial.
Mr. Achuthan of the Economic Cycle institute said a weakening in the economy’s growth rate began to appear in the institute’s leading indicators early in the winter. “Now, that slowdown is baked in the cake, it’s already happening,” he said.
The Fed acknowledged as much last week. In a statement on Tuesday, its Open Market Committee said that the recovery pace had “slowed” and that growth “is likely to be more modest in the near term than had been anticipated.”
It’s too early to know whether the economy will tip into an actual decline, Mr. Achuthan said. The institute’s Weekly Leading Index ticked up again on Friday, after a steep plunge through late June. It’s possible that the Fed “will be able to use its influence” to engineer a soft landing and avert another, immediate recession, he said. In September or October, he said, there may be more clarity.
Mr. Gross of Pimco said the growing American trade deficit — it jumped to $49.9 billion in June, its highest level since October 2008, according to a report on Wednesday — is cutting into the G.D.P., “implying that second-quarter G.D.P. is going to be in the 1 to 2 percent range.”
In turn, he said, “that implies that the momentum of the economy from the first to the second quarter was downhill, and therefore we think “it’s quite possible that we might actually be somewhere between zero and 1 percent — in other words, very close to a double-dip recession.”
He put the probability of a recession — and of an accompanying bout of deflation — at 25 to 35 percent.
Still, the economic signs are ambiguous. After falling in the spring, industrial commodity prices have risen, suggesting that there is still surging demand from manufacturers. Shipping indexes, which had declined, have ticked upward again over the last month. Mortgage rates are dropping. And thanks in large part to fierce cost-cutting, very low interest rates, and strong demand in developing countries, corporate profits have been strong.
What’s been lacking is broad consumer demand, a revival of the housing market and sufficient business confidence in large-scale hiring. And, of course, there are deep structural economic problems — the highest ratio of public debt to gross domestic product since World War II, for example — that will need to be dealt with over many years.
Nonetheless, if there is good news in the fall — if it becomes clear that the pace of recovery has begun to accelerate — there could easily be another burst of stock market exuberance, Mr. Achuthan said. “Interest rates are very low,” he said, “and if you were to combine that with economic growth, you’ve got a wonderful recipe for profits.”
In the meantime, Mr. Gross said, with the Fed funneling money into Treasuries, the improbable rally in the bond market may still have a way to go.
This story originally appeared in the The New York Times
Will the economy pick up momentum or slip back into recession? Unfortunately, the answer is very much in doubt.
“We are at a very critical moment in the business cycle,” said Lakshman Achuthan, the managing director of the Economic Cycle Research Institute, a private forecasting group with an excellent track record. After the economy began to recover last summer, in his estimation, “growth has definitely slowed.” But he said he wouldn’t have enough data until at least the fall to know “whether we’re dipping back into recession.”
Even the Federal Reserve chairman, Ben S. Bernanke, calls the current economic outlook “unusually uncertain.” And the financial markets have certainly noticed.
“The market is favoring investments thought to have no risk, like Treasuries, as opposed to assets with risk, like stocks — and that’s been becoming more and more pronounced,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco, the big bond manager.
In the bond market last week, safety-seeking investors bid up the prices of Treasury securities, driving down yields to extraordinarily low levels along a broad range of maturities — and extending the astonishing rally of long-term Treasury bonds, which continue to outperform the stock market and nearly every other asset class.
For the year, for example, long-term Treasuries have returned more than 15 percent, as gauged by the Barclays Capital U.S. 20+ Year Treasury Bond index. By comparison, the Standard & Poor’s 500-stock index has lost more than 2 percent, including dividends. And over the decade through July, long-term Treasuries outperformed the S.& P. 500 by more than 8.6 percentage points, annualized, according to Morningstar data.
The stock market was particularly shaky last week. On Wednesday, the Dow Jones industrial average dropped 265.42 points, or 2.5 percent, its biggest decline since June. For the week, the Dow lost more than 350 points, or 3.3 percent, closing at 10,303.15, while the S.& P. fell more than 42 points, or 3.8 percent, to 1,079.25.
This preference for bonds over stocks, which has emerged periodically since the financial crisis began in 2008, came into high relief after the Fed’s announcement on Tuesday that it would recycle the proceeds of its mortgage bond portfolio into Treasuries.
Considering the Fed balance sheet — now approximately $2.3 trillion, up from $900 billion before the financial crisis — the central bank’s latest move was modest. It will translate into $200 million to $400 million in purchases of Treasuries over 12 months, according to an estimate by Bank of America Merrill Lynch. But it was the direction the Fed was taking — its decision to maintain an expansive monetary policy through “quantitative easing,” rather than to begin monetary tightening — that was most striking.
“Ben Bernanke’s motto seems to be that he will do whatever it takes to avoid a depression and avert deflation,” said Edward Yardeni, president of Yardeni Research. “He has been very successful so far,” lowering interest rates along the yield curve and thereby stimulating the economy.
The Fed may need to go it alone over the next several months, several analysts said, because with midterm elections approaching, additional fiscal stimulus legislation may be too controversial.
Mr. Achuthan of the Economic Cycle institute said a weakening in the economy’s growth rate began to appear in the institute’s leading indicators early in the winter. “Now, that slowdown is baked in the cake, it’s already happening,” he said.
The Fed acknowledged as much last week. In a statement on Tuesday, its Open Market Committee said that the recovery pace had “slowed” and that growth “is likely to be more modest in the near term than had been anticipated.”
It’s too early to know whether the economy will tip into an actual decline, Mr. Achuthan said. The institute’s Weekly Leading Index ticked up again on Friday, after a steep plunge through late June. It’s possible that the Fed “will be able to use its influence” to engineer a soft landing and avert another, immediate recession, he said. In September or October, he said, there may be more clarity.
Mr. Gross of Pimco said the growing American trade deficit — it jumped to $49.9 billion in June, its highest level since October 2008, according to a report on Wednesday — is cutting into the G.D.P., “implying that second-quarter G.D.P. is going to be in the 1 to 2 percent range.”
In turn, he said, “that implies that the momentum of the economy from the first to the second quarter was downhill, and therefore we think “it’s quite possible that we might actually be somewhere between zero and 1 percent — in other words, very close to a double-dip recession.”
He put the probability of a recession — and of an accompanying bout of deflation — at 25 to 35 percent.
Still, the economic signs are ambiguous. After falling in the spring, industrial commodity prices have risen, suggesting that there is still surging demand from manufacturers. Shipping indexes, which had declined, have ticked upward again over the last month. Mortgage rates are dropping. And thanks in large part to fierce cost-cutting, very low interest rates, and strong demand in developing countries, corporate profits have been strong.
What’s been lacking is broad consumer demand, a revival of the housing market and sufficient business confidence in large-scale hiring. And, of course, there are deep structural economic problems — the highest ratio of public debt to gross domestic product since World War II, for example — that will need to be dealt with over many years.
Nonetheless, if there is good news in the fall — if it becomes clear that the pace of recovery has begun to accelerate — there could easily be another burst of stock market exuberance, Mr. Achuthan said. “Interest rates are very low,” he said, “and if you were to combine that with economic growth, you’ve got a wonderful recipe for profits.”
In the meantime, Mr. Gross said, with the Fed funneling money into Treasuries, the improbable rally in the bond market may still have a way to go.
This story originally appeared in the The New York Times
Saturday, August 14, 2010
American Cars - Detroit Goes From Gloom to Economic Bright Spot - CNBC
After a dismal period of huge losses and deep cuts that culminated in the Obama administration’s bailout of General Motors and Chrysler, the gloom over the American auto industry is starting to lift.
Jobs are growing. Factory workers are anticipating their first healthy profit-sharing checks in years. Sales are rebounding, with the Commerce Department reporting Friday that automobiles were a bright spot in July’s mostly disappointing retail sales.
The nascent comeback is far from a finished product. Foreign competitors are leaner and stronger, accounting for more than half of all car sales in this country. The sputtering economic rebound is spooking investors and consumers alike, threatening to derail some of Detroit’s gains. And talks next year on a new contract with the United Automobile Workers could revive old hostilities.
Still, the improving mood here reflects real changes in how Detroit is doing business — and a growing sense that the changes are turning the Big Three around, according to industry executives and analysts tracking the recovery.
Ford made more money in the first six months of this year than in the previous five years combined. G.M. is profitable and preparing for one of the biggest public stock offerings in American history. Even Chrysler, the automaker thought least likely to survive the recession, is hiring new workers.
Many of the excesses of the past — overproduction, bloated vehicle lineups, expensive rebates — are gone. All three carmakers have shed workers, plants and brands. And a new breed of top management — the three chief executives are outsiders to Detroit, as is the newly named G.M. chief executive — says it is determined to keep the Big Three lean, agile and focused on building better cars that earn a profit.
“What we’ve come out of this with,” said Sergio Marchionne, who runs both Chrysler and its Italian owner Fiat, “are much more rational, more grounded players making moves for the long term.”
The proof is emerging in dealer showrooms, where customers are buying more of Detroit’s cars and paying higher prices. In July, G.M., Ford and Chrysler sold their vehicles at an average price of $30,400 — $1,350 more than a year ago and higher than an overall industry gain of $1,100, according to the auto research Web site Edmunds.com.
With fewer factories churning out products, inventories are smaller and sales incentives like rebates and low-interest financing are gradually declining. “They were nibbling at these issues before, a little bit here and a little bit there,” said Jeremy Anwyl, Edmund’s chief executive. “It’s just different now that they are in fighting shape.”
Detroit has vowed to change before, slimming down when sales slumped or pouring resources into vehicle quality to catch up to foreign competitors. Those efforts stalled or failed. But many auto analysts say the current makeover has a more permanent feel, largely because of the presence of the outsiders at the top and the lessons learned from the near-death experience of last year’s bankruptcies at G.M. and Chrysler.
Ford’s [F 12.15 -0.12 (-0.98%) ] chief executive, Alan R. Mulally, broke the mold four years ago when he came from Boeing and set out to streamline Ford’s bureaucracy and integrate its worldwide operations.
At G.M., Edward E. Whitacre Jr., a former AT&T chief, has replaced dozens of top officials with outsiders and younger executives, and driven the company to make decisions faster. Those efforts are likely to be accelerated under Daniel F. Akerson, who was named on Thursday to succeed Mr. Whitacre as chief executive in September.
And at Chrysler, Mr. Marchionne, an Italian raised in Canada who is both a lawyer and an accountant, is systematically upgrading the carmaker’s aged product lineup and revamping its plants in Fiat’s image.
“Fundamentally this thing has been reshaped, resized and rethought,” Mr. Marchionne said of Detroit. The biggest difference, he said, is that the Big Three have finally broken the habit of reflexively raising incentives to increase sales volumes.
“We’re not trying to kill each other for this month’s market share,” he said. “Those days are over. We’re not offering $7,000 checks to try to sell a car.”
Wave after wave of plant closings and worker buyouts in recent years has brought Detroit’s production more in line with the demand for its vehicles. Since 2000, the number of Big Three assembly plants in North America has dropped to 40, from 66, according to the consulting firm Oliver Wyman. In turn, overall capacity has shrunk to about eight million vehicles a year, from 13.7 million.
That still may be too much. After several years of sales topping 16 million vehicles, the industry nosedived to 10.4 million last year — the lowest since 1982. At current levels, sales are projected to edge up to about 12 million this year, with Detroit’s share running at 46 percent.
“They carved out a lot of capacity, but I’m not sure it was enough,” said Peter Morici, an economist at the University of Maryland. “There’s still an excess.”
Even under the most hopeful assumptions, a resuscitated United States auto industry in the end would account for less than 3.5 percent of the country’s economic output, economists estimate, compared to 4.6 percent in the late 1970s. But the Obama administration, which argues that the comeback is long-term and sustainable, contends that the Big Three have downsized enough to be profitable with fewer sales.
“They were just barely making money or breaking even in a market of 16 to 17 million a year,” said Brian Deese, a member of President Obama’s auto task force. “The companies are positioned now to move forward in an environment of 11 to 12 million in sales.”
Some Republicans and other critics of the administration are less bullish, and suggest it is too early to know if the restructuring will stick or how much credit the federal assistance is due. That debate will likely play out in the November midterm elections, but in the meantime some of the raw numbers are falling Detroit’s way.
The bankruptcies at G.M. and Chrysler slashed debt, jobs and labor costs, and revised union contracts have brought manufacturing expenses more in line with factories in this country operated by Toyota and other foreign automakers.
The average production worker at G.M. earns $57 an hour in wages and benefits, compared to $51 at Toyota, according to a study by the Center for Automotive Research in Ann Arbor, Mich.
Those costs should continue to fall as the companies hire new workers at lower pay grades agreed to by the U.A.W.
“What’s come out of this crisis is a realization that the interests of both sides are aligned,” Harley Shaiken, a labor professor at the University of California, Berkeley, said of workers and management.
That alignment could be tested next year when the Detroit companies negotiate a new contract with the U.A.W. The union’s president, Bob King, has vowed to get back some of the concessions made in the bankruptcies.
For now, though, the industry is adding jobs for the first time in a decade. More than 330,000 jobs were lost by the American automakers and their suppliers in 2008, White House officials said, while 55,000 jobs have been added since Chrysler and G.M. emerged from bankruptcy in the summer of 2009.
Chrysler, which cut more than half its work force since 2005, has added 3,100 jobs this year, including white-collar jobs at its headquarters in suburban Detroit. The company is recruiting again on college campuses and bringing in entry-level engineers and managers.
One of the first new hires was James Kim, an electrical engineer who recently graduated from the University of Michigan. Mr. Kim also had job offers from Verizon and other companies.
“I saw an opportunity to get into a company that was rebuilding itself from the ground up,” said Mr. Kim. “It’s almost like going to a start-up business.”
Another new white-collar worker, Davida Redmond, joined Chrysler after taking a buyout from Caterpillar. “I felt like the worst was over in Detroit,” she said. “The storm is behind us.”
But for the recovery to last, some economists say, several things need to happen, including continued improvements in quality, a relentless focus on cutting costs — and some luck on the economy’s overall strength.
“Their recovery is not sustainable yet,” said Mr. Morici, the economist. “They need to reduce their costs more if they’re going to be competitive in the long term with the Japanese, the Koreans and ultimately the Chinese.”
Top management says it is well aware of the rough patches ahead. “We still have important work to do,” said Mr. Akerson, the incoming G.M. boss.
Even so, optimism is building in the offices and plants and engineering labs of the Detroit companies, employees say. And promising new electrified vehicles like the Chevrolet Volt and small cars like the Ford Fiesta are slowly changing consumer perceptions that the Big Three are behind the times.
“It wasn’t long ago that people had just written them off,” said Mr. Shaiken, the labor professor. “But they live to fight another day.”
This story originally appeared in the The New York Times
Jobs are growing. Factory workers are anticipating their first healthy profit-sharing checks in years. Sales are rebounding, with the Commerce Department reporting Friday that automobiles were a bright spot in July’s mostly disappointing retail sales.
The nascent comeback is far from a finished product. Foreign competitors are leaner and stronger, accounting for more than half of all car sales in this country. The sputtering economic rebound is spooking investors and consumers alike, threatening to derail some of Detroit’s gains. And talks next year on a new contract with the United Automobile Workers could revive old hostilities.
Still, the improving mood here reflects real changes in how Detroit is doing business — and a growing sense that the changes are turning the Big Three around, according to industry executives and analysts tracking the recovery.
Ford made more money in the first six months of this year than in the previous five years combined. G.M. is profitable and preparing for one of the biggest public stock offerings in American history. Even Chrysler, the automaker thought least likely to survive the recession, is hiring new workers.
Many of the excesses of the past — overproduction, bloated vehicle lineups, expensive rebates — are gone. All three carmakers have shed workers, plants and brands. And a new breed of top management — the three chief executives are outsiders to Detroit, as is the newly named G.M. chief executive — says it is determined to keep the Big Three lean, agile and focused on building better cars that earn a profit.
“What we’ve come out of this with,” said Sergio Marchionne, who runs both Chrysler and its Italian owner Fiat, “are much more rational, more grounded players making moves for the long term.”
The proof is emerging in dealer showrooms, where customers are buying more of Detroit’s cars and paying higher prices. In July, G.M., Ford and Chrysler sold their vehicles at an average price of $30,400 — $1,350 more than a year ago and higher than an overall industry gain of $1,100, according to the auto research Web site Edmunds.com.
With fewer factories churning out products, inventories are smaller and sales incentives like rebates and low-interest financing are gradually declining. “They were nibbling at these issues before, a little bit here and a little bit there,” said Jeremy Anwyl, Edmund’s chief executive. “It’s just different now that they are in fighting shape.”
Detroit has vowed to change before, slimming down when sales slumped or pouring resources into vehicle quality to catch up to foreign competitors. Those efforts stalled or failed. But many auto analysts say the current makeover has a more permanent feel, largely because of the presence of the outsiders at the top and the lessons learned from the near-death experience of last year’s bankruptcies at G.M. and Chrysler.
Ford’s [F 12.15 -0.12 (-0.98%) ] chief executive, Alan R. Mulally, broke the mold four years ago when he came from Boeing and set out to streamline Ford’s bureaucracy and integrate its worldwide operations.
At G.M., Edward E. Whitacre Jr., a former AT&T chief, has replaced dozens of top officials with outsiders and younger executives, and driven the company to make decisions faster. Those efforts are likely to be accelerated under Daniel F. Akerson, who was named on Thursday to succeed Mr. Whitacre as chief executive in September.
And at Chrysler, Mr. Marchionne, an Italian raised in Canada who is both a lawyer and an accountant, is systematically upgrading the carmaker’s aged product lineup and revamping its plants in Fiat’s image.
“Fundamentally this thing has been reshaped, resized and rethought,” Mr. Marchionne said of Detroit. The biggest difference, he said, is that the Big Three have finally broken the habit of reflexively raising incentives to increase sales volumes.
“We’re not trying to kill each other for this month’s market share,” he said. “Those days are over. We’re not offering $7,000 checks to try to sell a car.”
Wave after wave of plant closings and worker buyouts in recent years has brought Detroit’s production more in line with the demand for its vehicles. Since 2000, the number of Big Three assembly plants in North America has dropped to 40, from 66, according to the consulting firm Oliver Wyman. In turn, overall capacity has shrunk to about eight million vehicles a year, from 13.7 million.
That still may be too much. After several years of sales topping 16 million vehicles, the industry nosedived to 10.4 million last year — the lowest since 1982. At current levels, sales are projected to edge up to about 12 million this year, with Detroit’s share running at 46 percent.
“They carved out a lot of capacity, but I’m not sure it was enough,” said Peter Morici, an economist at the University of Maryland. “There’s still an excess.”
Even under the most hopeful assumptions, a resuscitated United States auto industry in the end would account for less than 3.5 percent of the country’s economic output, economists estimate, compared to 4.6 percent in the late 1970s. But the Obama administration, which argues that the comeback is long-term and sustainable, contends that the Big Three have downsized enough to be profitable with fewer sales.
“They were just barely making money or breaking even in a market of 16 to 17 million a year,” said Brian Deese, a member of President Obama’s auto task force. “The companies are positioned now to move forward in an environment of 11 to 12 million in sales.”
Some Republicans and other critics of the administration are less bullish, and suggest it is too early to know if the restructuring will stick or how much credit the federal assistance is due. That debate will likely play out in the November midterm elections, but in the meantime some of the raw numbers are falling Detroit’s way.
The bankruptcies at G.M. and Chrysler slashed debt, jobs and labor costs, and revised union contracts have brought manufacturing expenses more in line with factories in this country operated by Toyota and other foreign automakers.
The average production worker at G.M. earns $57 an hour in wages and benefits, compared to $51 at Toyota, according to a study by the Center for Automotive Research in Ann Arbor, Mich.
Those costs should continue to fall as the companies hire new workers at lower pay grades agreed to by the U.A.W.
“What’s come out of this crisis is a realization that the interests of both sides are aligned,” Harley Shaiken, a labor professor at the University of California, Berkeley, said of workers and management.
That alignment could be tested next year when the Detroit companies negotiate a new contract with the U.A.W. The union’s president, Bob King, has vowed to get back some of the concessions made in the bankruptcies.
For now, though, the industry is adding jobs for the first time in a decade. More than 330,000 jobs were lost by the American automakers and their suppliers in 2008, White House officials said, while 55,000 jobs have been added since Chrysler and G.M. emerged from bankruptcy in the summer of 2009.
Chrysler, which cut more than half its work force since 2005, has added 3,100 jobs this year, including white-collar jobs at its headquarters in suburban Detroit. The company is recruiting again on college campuses and bringing in entry-level engineers and managers.
One of the first new hires was James Kim, an electrical engineer who recently graduated from the University of Michigan. Mr. Kim also had job offers from Verizon and other companies.
“I saw an opportunity to get into a company that was rebuilding itself from the ground up,” said Mr. Kim. “It’s almost like going to a start-up business.”
Another new white-collar worker, Davida Redmond, joined Chrysler after taking a buyout from Caterpillar. “I felt like the worst was over in Detroit,” she said. “The storm is behind us.”
But for the recovery to last, some economists say, several things need to happen, including continued improvements in quality, a relentless focus on cutting costs — and some luck on the economy’s overall strength.
“Their recovery is not sustainable yet,” said Mr. Morici, the economist. “They need to reduce their costs more if they’re going to be competitive in the long term with the Japanese, the Koreans and ultimately the Chinese.”
Top management says it is well aware of the rough patches ahead. “We still have important work to do,” said Mr. Akerson, the incoming G.M. boss.
Even so, optimism is building in the offices and plants and engineering labs of the Detroit companies, employees say. And promising new electrified vehicles like the Chevrolet Volt and small cars like the Ford Fiesta are slowly changing consumer perceptions that the Big Three are behind the times.
“It wasn’t long ago that people had just written them off,” said Mr. Shaiken, the labor professor. “But they live to fight another day.”
This story originally appeared in the The New York Times
Saturday, August 7, 2010
Battle Looms Over Huge Costs of Public Pensions - CNBC
There’s a class war coming to the world of government pensions.
The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide.
The have-nots are taxpayers who don’t have generous pensions.
Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks.
At stake is at least $1 trillion. That’s trillion, with a “t,” as in titanic and terrifying.
The figure comes from a study by the Pew Center on the States that came out in February. Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers in the way of retiree pension, health care and other benefits and the money they currently had to pay for it all. And some economists say that Pew is too conservative and the problem is two or three times as large.
So a question of extraordinary financial, political, legal and moral complexity emerges, something that every one of us will be taking into town meetings and voting booths for years to come: Given how wrong past pension projections were, who should pay to fill the 13-figure financing gap?
Consider what’s going on in Colorado — and what is likely to unfold in other states and municipalities around the country.
Earlier this year, in an act of rare political courage, a bipartisan coalition of state legislators passed a pension overhaul bill. Among other things, the bill reduced the raise that people who are already retired get in their pension checks each year.
This sort of thing just isn’t done. States have asked current workers to contribute more, tweaked the formula for future hires or banned them from the pension plan altogether. But this was apparently the first time that state legislators had forced current retirees to share the pain.
Sharing the burden seems to be the obvious solution so we don’t continue to kick the problem into the future. “We have to take this on, if there is any way of bringing fiscal sanity to our children,” said former Gov. Richard Lamm of Colorado, a Democrat. “The New Deal is demographically obsolete. You can’t fund the dream of the 1960s on the economy of 2010.”
But in Colorado, some retirees and those eligible to retire still want to live that dream. So they sued the state to keep all of the annual cost-of-living increases they thought they would be getting in perpetuity.
The state’s case turns, in part, on whether it is an “actuarial necessity” for the Legislature to make a change. To Meredith Williams, executive director of the Public Employees’ Retirement Association, the state’s pension fund, the answer is pretty simple. “If something didn’t change, we would have run out of money in the foreseeable future,” he said. “So no one would have been paid anything.”
Meanwhile, Gary R. Justus, a former teacher who is one of the lead plaintiffs in the case against the state, asks taxpayers in Colorado and elsewhere to consider an ethical question: Why is the state so quick to break its promises?
After all, he and others like him served their neighbors dutifully for decades. And along the way, state employees made big decisions (and built lifelong financial plans) based on retiring with a full pension that was promised to them in a contract that they say has the force of the state and federal constitutions standing behind it. To them it is deferred compensation, and taking it away is akin to not paying a contractor for paving state highways.
And actuarial necessity or not, Mr. Justus said he didn’t believe he should be responsible for past pension underfunding and the foolish risks that pension managers made with his money long after he retired in 2003.
The changes the Legislature made don’t seem like much: there’s currently a 2 percent cap in retirees’ cost-of-living adjustment for their pension checks instead of the 3.5 percent raise that many of them received before.
But Stephen Pincus, a lawyer for the retirees who have filed suit, estimates that the change will cost pensioners with 30 years of service an average of $165,000 each over the next 20 years.
Mr. Justus, 62, who taught math for 29 years in the Denver public schools, says he thinks it could cost him half a million dollars if he lives another 30 years. He also notes that just about all state workers in Colorado do not (and cannot) pay into Social Security, so the pension is all retirees have to live on unless they have other savings.
No one disputes these figures. Instead, they apologize. “All I can say is that I am sorry,” said Brandon Shaffer, a Democrat, the president of the Colorado State Senate, who helped lead the bipartisan coalition that pushed through the changes. (He also had to break the news to his mom, a retired teacher.) “I am tremendously sympathetic. But as a steward of the public trust, this is what we had to do to preserve the retirement fund.”
Taxpayers, whose payments are also helping to restock Colorado’s pension fund, may not be as sympathetic, though. The average retiree in the fund stopped working at the sprightly age of 58 and deposits a check for $2,883 each month. Many of them also got a 3.5 percent annual raise, no matter what inflation was, until the rules changed this year.
Private sector retirees who want their own monthly $2,883 check for life, complete with inflation adjustments, would need an immediate fixed annuity if they don’t have a pension. A 58-year-old male shopping for one from an A-rated insurance company would have to hand over a minimum of $860,000, according to Craig Hemke of Buyapension.com. A woman would need at least $928,000, because of her longer life expectancy.
Who among aspiring retirees has a nest egg that size, let alone people with the same moderate earning history as many state employees? And who wants to pay to top off someone else’s pile of money via increased income taxes or a radical decline in state services?
If you find the argument of Colorado’s retirees wanting, let your local legislator know that you don’t want to be responsible for every last dollar necessary to cover pension guarantees gone horribly awry. After all, many government employee unions will be taking contrary positions and doing so rather loudly.
If you work for a state or local government, start saving money outside of the pension plan if you haven’t already, because that plan may not last for as long as you need it.
And if you’re a government retiree or getting close to the end of your career? Consider what it means to be a citizen in a community. And what it means to be civil instead of litigious, coming to the table and making a compromise before politicians shove it down your throat and you feel compelled to challenge them to a courthouse brawl.
“We have to do what unions call givebacks,” said Mr. Lamm, the former Colorado governor. “That’s the only way to sanity. Any other alternative, therein lies dragons.”
The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide.
The have-nots are taxpayers who don’t have generous pensions.
Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks.
At stake is at least $1 trillion. That’s trillion, with a “t,” as in titanic and terrifying.
The figure comes from a study by the Pew Center on the States that came out in February. Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers in the way of retiree pension, health care and other benefits and the money they currently had to pay for it all. And some economists say that Pew is too conservative and the problem is two or three times as large.
So a question of extraordinary financial, political, legal and moral complexity emerges, something that every one of us will be taking into town meetings and voting booths for years to come: Given how wrong past pension projections were, who should pay to fill the 13-figure financing gap?
Consider what’s going on in Colorado — and what is likely to unfold in other states and municipalities around the country.
Earlier this year, in an act of rare political courage, a bipartisan coalition of state legislators passed a pension overhaul bill. Among other things, the bill reduced the raise that people who are already retired get in their pension checks each year.
This sort of thing just isn’t done. States have asked current workers to contribute more, tweaked the formula for future hires or banned them from the pension plan altogether. But this was apparently the first time that state legislators had forced current retirees to share the pain.
Sharing the burden seems to be the obvious solution so we don’t continue to kick the problem into the future. “We have to take this on, if there is any way of bringing fiscal sanity to our children,” said former Gov. Richard Lamm of Colorado, a Democrat. “The New Deal is demographically obsolete. You can’t fund the dream of the 1960s on the economy of 2010.”
But in Colorado, some retirees and those eligible to retire still want to live that dream. So they sued the state to keep all of the annual cost-of-living increases they thought they would be getting in perpetuity.
The state’s case turns, in part, on whether it is an “actuarial necessity” for the Legislature to make a change. To Meredith Williams, executive director of the Public Employees’ Retirement Association, the state’s pension fund, the answer is pretty simple. “If something didn’t change, we would have run out of money in the foreseeable future,” he said. “So no one would have been paid anything.”
Meanwhile, Gary R. Justus, a former teacher who is one of the lead plaintiffs in the case against the state, asks taxpayers in Colorado and elsewhere to consider an ethical question: Why is the state so quick to break its promises?
After all, he and others like him served their neighbors dutifully for decades. And along the way, state employees made big decisions (and built lifelong financial plans) based on retiring with a full pension that was promised to them in a contract that they say has the force of the state and federal constitutions standing behind it. To them it is deferred compensation, and taking it away is akin to not paying a contractor for paving state highways.
And actuarial necessity or not, Mr. Justus said he didn’t believe he should be responsible for past pension underfunding and the foolish risks that pension managers made with his money long after he retired in 2003.
The changes the Legislature made don’t seem like much: there’s currently a 2 percent cap in retirees’ cost-of-living adjustment for their pension checks instead of the 3.5 percent raise that many of them received before.
But Stephen Pincus, a lawyer for the retirees who have filed suit, estimates that the change will cost pensioners with 30 years of service an average of $165,000 each over the next 20 years.
Mr. Justus, 62, who taught math for 29 years in the Denver public schools, says he thinks it could cost him half a million dollars if he lives another 30 years. He also notes that just about all state workers in Colorado do not (and cannot) pay into Social Security, so the pension is all retirees have to live on unless they have other savings.
No one disputes these figures. Instead, they apologize. “All I can say is that I am sorry,” said Brandon Shaffer, a Democrat, the president of the Colorado State Senate, who helped lead the bipartisan coalition that pushed through the changes. (He also had to break the news to his mom, a retired teacher.) “I am tremendously sympathetic. But as a steward of the public trust, this is what we had to do to preserve the retirement fund.”
Taxpayers, whose payments are also helping to restock Colorado’s pension fund, may not be as sympathetic, though. The average retiree in the fund stopped working at the sprightly age of 58 and deposits a check for $2,883 each month. Many of them also got a 3.5 percent annual raise, no matter what inflation was, until the rules changed this year.
Private sector retirees who want their own monthly $2,883 check for life, complete with inflation adjustments, would need an immediate fixed annuity if they don’t have a pension. A 58-year-old male shopping for one from an A-rated insurance company would have to hand over a minimum of $860,000, according to Craig Hemke of Buyapension.com. A woman would need at least $928,000, because of her longer life expectancy.
Who among aspiring retirees has a nest egg that size, let alone people with the same moderate earning history as many state employees? And who wants to pay to top off someone else’s pile of money via increased income taxes or a radical decline in state services?
If you find the argument of Colorado’s retirees wanting, let your local legislator know that you don’t want to be responsible for every last dollar necessary to cover pension guarantees gone horribly awry. After all, many government employee unions will be taking contrary positions and doing so rather loudly.
If you work for a state or local government, start saving money outside of the pension plan if you haven’t already, because that plan may not last for as long as you need it.
And if you’re a government retiree or getting close to the end of your career? Consider what it means to be a citizen in a community. And what it means to be civil instead of litigious, coming to the table and making a compromise before politicians shove it down your throat and you feel compelled to challenge them to a courthouse brawl.
“We have to do what unions call givebacks,” said Mr. Lamm, the former Colorado governor. “That’s the only way to sanity. Any other alternative, therein lies dragons.”
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