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Saturday, August 13, 2005

You Are Innocent? Congress Says You Still Pay

A few months ago, in a close vote of 413 to 10, Congress approved legislation to “reform” deposit insurance. One part of this courageous legislation is to increase insured deposits from $100,000 to $130,000 as well as double cover limits for certain types of IRAs and 401(k)s and increase coverage limits for municipal deposits. This should make us all feel confident that another bailout like the one we saw in savings and loans 15 years ago will occur some time soon.

Why? Has anyone read about the real estate bubble?

Per the NYT in many locations real estate has experienced marked price reductions or decelerations. While I do not adhere to the real estate market gloom, realtors are reporting that houses are taking longer to sell. Rather than a real estate bust, there may be a shift towards a market in equilibrium for buyers and sellers. Such places as Boston, Long Island and San Diego have the highest “risk indicators” (factors include home prices, the labor market and home affordability). As we all know, there has been a proliferation of interest-only mortgages provided by lenders over the past 3 years. Thus, many higher-risk borrowers are imperiling the financial future of many lenders. Should people default on there loans, can bank failures be far off?

Meanwhile, Delta Air Lines is looking at declaring bankruptcy again. This imperils the government program protecting employee pensions. Delta owes $135 million in pension contributions for 2005. As George Will reported last January the Pension Benefit Guaranty Corp and "is taking over the pilots' pension plan of United and will soon have all of US Airways' pensions, just as in recent years it took over many from the steel industry."

In both instances, government "protection" allows parties on both sides of the negotiation to avoid risk. The ante can be upped since there is a waiting guarantor.

Allowing the free market to provide parties clear information about the risk of any transaction and to individually pay for mistakes has been replaced with financial risk to people uninvolved in the transaction. You and I have no stake in these deals. We certainly do not gain. If we deposit our money in wise banks, those banks must pay the same premium as the profligate ones. FDIC premiums are unaffected by underwriting considerations that private insurance applies.

You and I can sit by and hope for the best. Decisions are being made that will affect our lives without our input. There were 10 stalwarts who voted against the FDIC increase.

4 Comments:

At 10:04 AM, Anonymous Anonymous said...

NYRA pension fund short by $44.7 million
Saturday August 13, 2005
ALBANY, N.Y. (AP) The New York Racing Association's employee pension fund is short by $44.7 million and the company faces a new lien against Saratoga Race Course because of its continuing failure to make pension payments, federal officials said.

The latest lien is for $1.1 million. It follows a $4.5 million lien on the Saratoga track, filed in May, for missing payments last year. The liens were filed by federal Pension Benefit Guaranty Corp.

A third lien, for $1.3 million, will be filed soon because NYRA missed its second-quarter pension payment, said Gary Pastorius, a spokesman for the guaranty corporation. The missed payments total about $7 million.

NYRA spokesman William Nader said the liabilities will be paid in September. By then, he said, NYRA will owe about $8 million to the benefit authority for pensions.

Nader said NYRA received a deferral to make the payments and said the company is not in default.

He said the $44.7 million underfunding of the plan would only cause a problem if every potential NYRA employee retired today and was eligible for a pension.

Earlier this month Gov. George Pataki authorized the creation of an oversight board for NYRA, which is trying to right itself after years of scandal and investigation.

The NYRA oversight board will monitor all transactions and operations of the private organization that holds an exclusive franchise to run races at the state's Aqueduct, Belmont and Saratoga thoroughbred tracks scheduled to expire in 2007.

NYRA's future, however, depends on how well its new management transforms the agency that is under federal indictment for tax evasion.


Information from: Times Union, http://www.timesunion.com


(Copyright 2005 by The Associated Press. All Rights Reserved.)

In the interest of timeliness, this story is fed directly from the Associated Press newswire and may contain occasional typographical errors.

 
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