New York Close to Bankruptcy
Cue the flashbacks of New York City in 1975, when it had also faced bankruptcy. This is not the first time the big metropolis has been extremely close to going under. However, the playbook was already set in how to fix and deal with the bankruptcy situation back then. Many argue that this situation is different and more dire due to the number of outside factors and complex securities that affect the markets today.
Ed Koch was ushered in as mayor in 1977 after Abe Beame went to then President, Gerald Ford, begging for a handout/bailout for the city. The famous headline from that time was Gerald Ford telling New York City to “Drop Dead.” Ford was a fiscal conservative who did not believe in bailing out cities, companies and the like.
Ed Koch is credited for the sound financial practices that were established that would enforce the city to follow the GAAP and balance its books/budget on an annual basis. So under law, New York City cannot be running deficits.
So far, Mayor Bloomberg is following the playbook to a “T,” but he still has a ways to go to ensure that bankruptcy does not become an option for the city. It is also important to note that Mayor Bloomberg is only being paid a salary of $1.00/year – something that no other mayor would probably accept.
Sweeping layoffs of government employees are needed to prevent New York going bankrupt, Mayor Michael Bloomberg said Thursday.
Bloomberg, who is in tense negotiations with municipal workers’ unions, said an extra 7,000 jobs would have to go unless major reductions are made in employee benefits.
“We cannot continue. Our pension costs and health care costs for our employees are going to bankrupt this city,” he said in comments broadcast on NY1 television.
Bloomberg, running for a third mayoral term at the end of this year, said that proposals from unions so far were “nowhere near what is adequate.”
The possible job cuts, first announced Wednesday, would be on top of 1,300 already proposed and another 8,000 that could be axed through attrition.
Department heads have until Monday to propose cuts and Bloomberg must present the city budget by the end of the month. The city is barred by law from running deficits.
The recession and the Wall Street crisis have knocked a huge hole in city finances that traditionally relied heavily on taxes from financial companies.
The budget office on Wednesday said that 7,000 extra job cuts would allow the city to cut a further 350 million dollars in expenditure.
Biggest Bank Failure of 2009 [Cost of $670 Million - FDIC]
New Frontier Bank, one of Colorado state’s biggest banks, was closed down by state regulators, the Federal Deposit Insurance Corporation said in a statement.
Based in Greeley, Colorado, New Frontier had, as of March 24, total assets of two billion dollars and and total deposits of about 1.5 billion, the FDIC said.
It was the 23rd bank closed to business since January. Until New Frontier, the biggest bank failure this year had been California’s Merced Bank, with 1.7 billion in assets.
Unable to have a rival bank take charge of New Frontier’s credits and deposits, the FDIC said it “created the Deposit Insurance National Bank of Greeley (DINB), which will remain open for approximately 30 days to allow depositors time to open accounts at other insured institutions.”
New Frontier’s failure will cost the FDIC around 670 million dollars.
After suffering no bank failures at all in 2005 and 2006, the US banking system saw three banks going under in 2007, followed by 25 in 2008 and 23 so far this year.
Now the question is – what will this news do to the markets on Monday and what does the cash on hand at the FDIC look like these days?
In February, 2006, George w. Bush signed into law the FDIRA, the Federal Deposit Insurance Reform Act which merged the old Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) together under one fund called the Deposit Insurance Fund (DIF). Having the funds separate created much of the turmoil in the 80′s with the savings and Loan (S&L) crisis.
A March 2008 memorandum to the FDIC Board of Directors shows a 2007 year-end Deposit Insurance Fund balance of about $52.4 billion, which represented a reserve ratio of 1.22% of its exposure to insured deposits totaling about $4.29 trillion. The 2008 year-end insured deposits were projected to reach about $4.42 trillion with the reserve growing to $55.2 billion, a ratio of 1.25%.
As of June 2008, the DIF had a balance of $45.2 billion. Bank failures typically represent a cost to the DIF because FDIC, as receiver of the failed institution, must liquidate assets that have declined substantially in value while at the same time making good on the institution’s deposit obligations. In July 2008, IndyMac Bank failed and was placed into receivership. The failure was initially projected by the FDIC to cost the DIF between $4 billion and $8 billion, but shortly thereafter the FDIC revised its estimate upward to $8.9 billion. Due to the failures of IndyMac and other banks, the DIF fell in the second quarter of 2008 to $45.2 billion. The decline in the insurance fund’s balance caused the reserve ratio (fund’s balance divided by the insured deposits) to fall to 1.01 percent as at 30 June 2008, down from 1.19 percent in the prior quarter. Once the ratio falls below below 1.15 percent, FDIC is required to develop a restoration plan to replenish the fund, which is expected to involve requiring higher contributions from banks which deal in riskier activities.
In light of apparent systemic risks facing the banking system, the adequacy of FDIC’s financial backing has come into question. Beyond the funds in the Deposit Insurance Fund above and the FDIC’s power to charge insurance premia, FDIC insurance is additionally assured by the Federal government. According to the FDIC.gov website (as of January 2009), “FDIC deposit insurance is backed by the full faith and credit of the United States government”. This means that the resources of the United States government stand behind FDIC-insured depositors.” The statutory basis for this claim is less than clear. Congress, in 1987, passed a non-binding resolution to this effect, but there appear to be no laws strictly binding the government to make good on any insurance liabilities unmet by the FDIC.
Insurance Qualifications
To receive this benefit, member banks must follow certain liquidity and reserve requirements. Banks are classified in five groups according to their risk-based capital ratio:
-Well capitalized: 10% or higher
-Adequately capitalized: 8% or higher
-Undercapitalized: less than 8%
-Significantly undercapitalized: less than 6%
-Critically undercapitalized: less than 2%
When a bank becomes undercapitalized the FDIC issues a warning to the bank. When the number drops below 6% the FDIC can change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized the FDIC declares the bank insolvent and can take over management of the bank.
As the balance of the FDIC gets depleted the “backing from the government” means that the taxpayers will be held accountable.
Obama Receives Donation for Congressional Seat from a Bailout Executive in December 2008!?
Where is the outcry and the outrage? Shouldn’t this be a conflict of interest? Shouldn’t this donation be treated much the same as those AIG bonuses? That’s taxpayer money in the hands of that executive and his “donation” is going towards Obama.
A top executive of a Wall Street firm that had received federal bailout money was among the donors who contributed to President Obama’s 2010 Senate re-election campaign after he resigned his Illinois seat, the Washington Times reported.
Bruce A. Heyman, managing director at Goldman Sachs, which received a $10 billion bailout last year, donated a maximum $2,300 to the Obama 2010 fund the day after Christmas, the newspaper reported.
In all, the fund received four contributions totaling $4,800 on Dec. 26, according to Federal Election Commission reports.
Obama formally left the Senate on Nov. 16 and had a surplus in his Senate campaign treasury, making the donations unusual but not illegal.
Federal election law allows Obama and five other former members of Congress now serving in his Cabinet or the White House to retain congressional campaign funds for years and spend the money for any political purpose, even if they don’t plan to run for Congress again.
Very Fishy Mr. Obama…
The Auto Companies Manage to Hang On: Obama will Provide Another Bailout with Strings
Can we please just let them go under? What is the point of keeping companies that can no longer compete, produce or create profit and value? We may as well not have bankruptcy law anymore… I mean you can just ask for a bailout and the taxpayers will just keep your business afloat. I need to quit my job and just create a bad business, hoping that it fails, so I don’t have to pay anything – Taxpayers and those who do produce will just pay for me.
I come from a GM family, my father has been a GM mechanic for over 30 years, and he has quite a few ideas of his own – but being a peon and a lowly mechanic will not get you heard on Capitol Hill these days nor in the board rooms of the auto giants, which really is too bad. My Dad believes the following:
“File for bankruptcy, Chapter 11, restructure the debt, the union contracts and the management of the company – consolidate the brands (there are too many) – regain focus on only several lines of cars (i.e. get rid of cars like Buick, Saturn etc.) – create the focus much like the foreign car companies in the U.S. with a luxury-end vehicle (Cadillac) and the “regular” class vehicle (Chevrolet). Still keep some of the cars like Pontiac, or GM trucks etc. and their bodies/frames which are recognizable and likable, but just name everything Chevrolet again.”
I whole-heartedly agree with him and believe that bankruptcy is the best option for the companies, the taxpayers and everyone else involved whether they moan and groan or not. Filing Chapter 11 allows a company to hold off creditors while it attempts to restructure its finances. Which is why I do not understand the following quote from Obama’s recent Online Town Hall…
“We will provide them some help,” Obama said. “I know that it is not popular to provide help to auto workers — or to auto companies. But my job is to measure the costs of allowing these auto companies just to collapse versus us figuring out — can they come up with a viable plan?”
He added: “If they’re not willing to make the changes and the restructurings that are necessary, then I’m not willing to have taxpayer money chase after bad money.”
Earth to Obama – then let them file Chapter 11 – that’s the best way to force them to restructure!
