Don't Cry For Me Bank Of America Stockholders

My bank's CEO will step down at the end of the year, a fitting end for someone with a role in nearly destroying the world financial markets, as well as nearly toppling his own company after the purchase of Merrill Lynch, with shares down 50% year over year. When someone intimately involved with such bad performance steps down in the real world, they are lucky if no tomatoes hit them on the way out the door. Because this is Wall Street fantasy land, Lewis will collect $53 million dollars.

Ken Lewis doesn't have a golden parachute, but he's all set for a comfortable landing -- unlike his long-suffering shareholders.

The Bank of America (BAC, Fortune 500) chief executive officer said Wednesday he'll step aside at year-end after eight years at the helm. Based on the company's most recent proxy statement, he will have $53 million in pension benefits waiting for him when he leaves.

That should give him about $3.5 million a year in pension payouts for the rest of his life -- at a time when people who bought the stock when he took the reins in 2001 are underwater on their investments.

Although the bank swore off employment contracts and eliminated golden parachutes seven years ago, Lewis can thank a pension plan that dates back decades for his rich retirement rewards.

I'd say that parachute is golden enough, thanks.

I don't want to start railing against pensions, because most people pay into them and earn what they get. But I think a cap slightly below $53 million dollars is probably sufficient. Especially for people like Ken Lewis.

The Bondholders Crack

Looks like GM's bondholders jumped aboard at the last minute:

The revised offer to the holders of $27 billion in unsecured GM bonds amounted to a take-it-or-leave-it ultimatum: Go along with what the government auto task force's proposal or be left holding the assets a new GM doesn't want — ones with presumably little value at all.

In addition to the 10 percent of the stock in a newly formed GM that was originally rejected by bondholders, the new offer would give them warrants to acquire an additional 15 percent stake at a deep discount. That would come only if they agree to support selling the company's assets to a new company under bankruptcy court protection.

Basically, the government made them an offer they could not refuse. I think they got a worse deal than Chrysler's bondholders.

As long as I view this as basically an extension of the stimulus package, I think I can live with it. But I still worry about the autoworker pensions coming out of these bankruptcies. That hasn't been well-defined just yet. And this isn't pleasing:

"We will come out of this rid of some of the historic legacy costs that have been dragging us down for the last 20 years or so," GM Vice Chairman Bob Lutz said Thursday at an Automotive Press Association luncheon in Detroit. "We will come out of it with an all new focus on product development."

I guess the retiree health fund gets a piece of the company in this deal, so maybe they can save something for the workers. But really this is just a bad scenario, especially if it fails to save GM or Chrysler. It's hard to feel good about these deals.

Pension Guarantee Money Set Ablaze On Wall Street

From the Boston Globe, a terrifying report about how the Pension Benefit Guaranty Corporation, the agency that insures retirement funds, decided to play in the stock market at precisely the wrong time:

WASHINGTON - Just months before the start of last year's stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.

Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.

The agency refused to say how much of the new investment strategy has been implemented or how the fund has fared during the downturn. The agency would only say that its fund was down 6.5 percent - and all of its stock-related investments were down 23 percent - as of last Sept. 30, the end of its fiscal year. But that was before most of the recent stock market decline and just before the investment switch was scheduled to begin in earnest.

The PBGC is a backstop against major losses by private pension funds and the parent companies slipping into bankruptcy. Especially at this time, with the economy struggling, the PBGC could be called on more than ever to help protect pensioners. Just as an example, a structured bankruptcy by GM or Chrysler would mean that huge liabilities would be passed on to this agency. Which apparently gambled and lost tons of money. That's exactly the opposite investment strategy that should be taken by what amounts to an insurer.

David Kurtz is blunt and right on the money.

A finance professor who had previously advised the agency not to make the switch away from bonds compared the move to an insurance company writing policies to cover hurricane damage and then investing the premiums in beachfront property.

Bush was able to do for the PBGC what he tried and failed to do for Social Security.

Josh Marshall concurs. These were Bush Administration officials who, in the wake of losing their battle to privatize Social Security, had this big pot of money - close to $64 billion - that they sunk into stocks, providing more money to Wall Street for them to keep pushing asset values higher. The timing of it happening just at the time before the market began to crash suggests that the Administration viewed this as perhaps a last-ditch effort to prop up Wall Street. The director of the PBGC, who advised and directed this strategy, is Charles E.F. Millard, a former managing director at LEHMAN BROTHERS, just to give you some more assurance. In the article he practically admits that he was just taking a whirl at the casino with public money:

He said the previous strategy of relying mostly on bonds would never garner enough money to eliminate the agency's deficit. "The prior policy virtually guaranteed that some day a multibillion-dollar bailout would be required from Congress," Millard said.

He said he believed the new policy - which includes such potentially higher-growth investments as foreign stocks and private real estate - would lessen, but not eliminate, the possibility that a bailout is needed.

Asked whether the strategy was a mistake, given the subsequent declines in stocks and real estate, Millard said, "Ask me in 20 years. The question is whether policymakers will have the fortitude to stick with it."

I don't think policymakers will be sticking with it, because there's probably almost no money left in that portfolio. Money that was designed to insure pensions.

This is a crime.

The Health And Welfare Crisis

The combination of soaring costs and economic meltdown means that more and more people have to forego health insurance, which is a given. That's what part of the stimulus tries to stop by offering subsidies to keep the jobless on their old coverage through COBRA. But since health insurance does not translate into health care, we're seeing an additional crisis - people with insurance scrimping on treatment because they can't afford the co-pays.

Take South Dade Realtor J. Berry Hamilton, 57. She's gone to a policy with a $5,000 deductible, meaning she has to pay most costs out of her own pocket. Recently, she brushed off her doctor's request for a diagnostic exam when she got a sinus infection. As her business has declined, she figures: "Let me see if the antibiotic works first, and if it doesn't then maybe I'll have the X-ray."

"Patients are spending less, no question about it," says Bernd Wollschlaeger, a primary care doctor in North Miami Beach. "A patient needs a echocardiogram. And they say they can't afford the $100 or $200 co-payment, so they're deferring. In the long run, this just can't be good for healthcare."

People are certainly pinching their pennies. For the five hospitals in Baptist Health South Florida, Vice President Karen Godfrey reports that patients are now hesitating on tests and procedures even with co-pays as low as $15, "which is very surprising.

"One of the registration managers was telling me some are negotiating for services. If a woman gets a prescription for a mammogram and an ultrasound, she wants to know the co-pay for both," then pick the test with the cheaper co-pay.

I should mention that this is the DESIRED state of health care for Republicans. It's what they've argued for years. They think Americans should all be smart shoppers with health care and then the spending won't be as wasteful. Of course, when this means neglecting needed drugs or tests, it cuts into preventive care, which when used effectively actually saves the patient and the system money. So a short-run savings causes long-term catastrophic costs, and raises overall spending. Not to mention the fact that people get sicker as a result.

This is not to say that there aren't wasteful treatments and procedures offered to patients - that's why comparative effectiveness research, to measure and weed out those treatments, is an important element of reform. But that's a far cry from what's happening now, which actually is the dreaded "rationing" that Republicans like to warn everyone about. In fact, controlling costs and making treatment more affordable is the only way to actually be able to improve health outcomes. Right now we spend and spend, more in some regions, less in others, without value for that spending.

And if you're aging and have some aches and pains and need to be freaked out more than just about the fact that health care becoming too expensive, your pension just shrunk, too.

A wave of US companies are suspending payments to their staff 401(k) retirement plans in a bid to cut costs amid the economic downturn.

Saks, General Motors, newspaper group McClatchy, clothing company J.Crew, FedEx, UPS, Coca-Cola Bottling, Reader’s Digest, Motorola, Regions Financial and Sprint Nextel are among the growing list of companies which have suspended contributions in recent months.

Even the AARP, the influential advocacy group formerly known as the American Association for Retired Persons, will suspend contributions to its staff 401(k) plan from March 22 for the rest of the year.

The growing number of suspensions appears to strike a blow against the viability of 401(k) plans, which were introduced 30 years ago as the main way that Americans should save for retirement, replacing defined benefit pension plans. Companies typically offered to match employee contributions up to 5 per cent of annual salary.

Considering that so much of that 401(k) wealth vanished in the stock market, maybe this isn't such a bad idea. But with defined-benefit pensions going the way of the dinosaur, these defined-contribution plans were, other than a meager Social Security benefit, the only retirement planning a lot of people had. And now that's evaporating.

Have a Smurfy day!

...and by the way, this is why we have to tackle multiple challenges at once. Of course the economy and the financial sector needs to be managed, but our craptacular social services structure was decaying in the 1990s, and just barely limped along during the post-9/11 jobless recovery. A downturn just finishes it off, and we have no choice but to rebuild it.