It’s time for Sheila Bair to stop worrying about bailout politics and hit Uncle Sam up for some dough.
Bair is the chairman of the Federal Deposit Insurance Corp., the federal agency that administers the insurance fund that stands behind the savings of millions of Americans.
The fund is paid for by the banks that benefit from it, but it has been depleted by a wave of bank failures that isn’t expected to abate any time soon.
The FDIC board is scheduled to meet Tuesday to discuss how to raise money to restock the fund. There aren’t a lot of good options.
Bair could easily borrow the cash from Treasury, where the FDIC has a standing credit line. But the agency hasn’t done so in nearly 20 years, since the trough of the last banking crisis. And with bailout rage lingering in the air, Bair has made clear she’s not eager to break that precedent.
She said last week that whether to tap the Treasury credit line is a "philosophical question" for bankers and their regulators. The central issue: Is the Treasury backstop there for foreseeable losses or for "unexpected emergencies?"
That comment reminded listeners that as heavy as the FDIC’s burden has been — 95 banks have failed this year, on top of 25 last year — the agency is still wary about the possible collapse of a giant, multibillion-dollar institution.
But another danger is that if the FDIC fails to take prompt and transparent action, the public could again lose faith in the financial system — at a time when bad news about failing banks is certain to continue.
"I don’t understand why Sheila just does not use her Treasury line to recapitalize the fund in the same way that she encourages banks in similar situations to recapitalize themselves," said Ken Thomas, a Miami-based banking consultant who has testified before Congress on deposit insurance funding.
"By doing this," Thomas added, "she would put an end to all of this growing and troubling uncertainty about the shrinking fund, which does nothing but detract from confidence in the FDIC which is the most important concern."
What Bair would rather do is what the agency typically does — collect funds directly from banks — or turn to what she describes as other tools, such as raising money by issuing debt to banks.
The FDIC has warned banks that they may have to pony up another special fee to support the insurance fund, whose balance fell to a 17-year low of $10 billion this summer.
But the banks, which have been socked with one special fee this year, are warning that a tax on their already weakened profits could push a number of them over the edge and stall the economic recovery that has gingerly taken hold since spring.
And for once, they may not just be blowing smoke. The industry posted a $3.7 billion loss in the second quarter, when one in four institutions were unprofitable. The FDIC classifies more than 400 institutions — nearly 5% of its membership — as troubled.
Whatever the industry’s problems, many commentators have dismissed the prospect of the FDIC using its Treasury credit line as another bailout. The agency has a $100 billion standing credit line with Treasury — and, thanks to a law passed this year, the authority to borrow as much as $500 billion through 2010 in an emergency.
Given that the industry paid essentially no insurance premiums for a decade, it’s easy to see why there might be some resentment over a fresh demand for taxpayer funds.
Between 1997 and 2006, the industry made $1.28 trillion in pretax operating profits, according to FDIC data. During that period, thanks to a 1996 law that prohibited the agency from assessing well capitalized banks, the banks paid just $672 million in insurance premiums.
Yet given the banks’ current problems — and the federal laws that oblige the industry to, over time, fully repay any Treasury borrowings — the option of drawing on the credit line is gaining backers in unexpected places.
Rep. Barney Frank, D-Mass., chairman of the House Financial Services committee, said this week he believes using the credit line is the "cleanest" way to solve the FDIC’s funding questions.
And Thomas — who twice last decade proposed boosting the minimum size of the deposit insurance fund, so that the FDIC fund would never repeat its brush with insolvency in the early 1990s — dismisses the bailout talk as a red herring.
"This idea that she does not want to go to the Treasury because of the perception of a federal ‘bailout’ does not make sense, since everyone knows that FDIC is ultimately backed by the full faith and credit of the U.S.," said Thomas.
Whatever outsiders think, the FDIC board — led by Bair and staffed by two members of the FDIC and two other federal banking regulators — will soon decide. An FDIC spokesman said it’s likely the agency will put some proposals out for public comment Tuesday, rather than making a decision on the spot.
The shifting debate seems to have left even the politically savvy chairman a bit bemused.
"The political dynamic on this is interesting," Bair said this month after her speech at Georgetown University. "People are shifting from not wanting this to go to taxpayers to wanting it to go to taxpayers."
It has been 31 years since the last trains left Union Station. And 24 years since its $140 million renovation as a hotel, shopping and entertainment spot on Market Street. But today the station is a shell of what it once was.
Banana Republic? Gone. Talbot’s? Gone. Body Shop, Brookstone, Nature Co.? Gone, gone, gone.
The space formerly occupied by Nature Co. is a gift shop called Fat Sassy’s. Nearby, a shop that calls itself a newsstand has one magazine rack near the front door and several shelves of liquor behind the counter.
But don’t write of this downtown landmark just yet.
A large expansion by Marriott, which in December took over the station’s hotel from Hyatt, is about to get under way. Marriott will move the front desk to the atrium near the station’s western end, allowing greater use of the barrel-vaulted Great Hall for
private events. Marriott also will extend its meeting and restaurant space into much of the retail area along the midway.
As a result, Union Station’s shops will be concentrated along the eastern concourse, where the food court is situated beneath the arched train shed, which dates to 1894. Whether this transformation — the station’s most extensive since the 1980s — will revive the place is yet to be seen.
Barbara Geisman, deputy mayor for development, said city officials hope better times are ahead.
"We would certainly like to see as much retail as possible in Union Station," she said. "As the downtown residential and business population grow, we think there’s a market for more mainstream retail there."
Resuscitating shopping at Union Station will require "some big-time marketing," Geisman said.
"A lot of this is that you get a name draw and then that kind of sets the tone for the rest of it," she said. "We think the station presents opportunities for larger retail."
Bass Pro Shops, based in Springfield, Mo., took a look a few years ago but passed on Union Station, Geisman said. She added that shopping habits have changed since the 1980s, when "festival markets" such as Quincy Market in Boston, South Street Seaport in New York and Union Station drew big crowds. All have faded.
"Things have changed a lot since then," Geisman said. "Instead of people going there on a whim because they want to see a neat old building, you now have a lot of people with disposable income who like to shop."
Frances Percich, Union Station’s marketing manager, said "serious" discussions are under way with two retailers, including one that would be new to St. Louis. She declined to name them. Percich said the station will continue to market itself as a tourist attraction with numerous spring and summer events.
"When people walk in here expecting a mall, they will be disappointed," she said. "We’re not a mall. We have no anchor store."
Among the few Union Station visitors one afternoon last week were Russ and Donna Clark of Yuba City, Calif. They were staying at the Marriott for a meeting. The Clarks said they had been unsure whether Union Station’s emptiness resulted from a renovation still under way or from a lack of business.
Told that the renovation was completed in 1985 and that the station had been in decline for years, Donna Clark said: "Wow, that’s a shame. This looks like a great idea. It’s disappointing not to see a lot of people."
Union Station’s current retail occupancy is 79 percent, Percich said. Ownership has changed in recent years. In 2003, the inability of St. Louis Station Associates, the investment group behind the 1980s renovation, to pay the mortgage led to foreclosure by Regency Savings Bank of Oak Park, Ill. Park National Bank of Chicago bought the property from Regency and owns it through Union Station Holdings LLC.
Doug Dean, the Marriott’s general manager, said the hotel renovation will restore some of the inn’s original 1890s configuration. He noted that the original front desk was off the atrium, remarkable for its glass-block floor. All 539 rooms, including the 67 in the station’s original "headhouse," will be redone. Dean declined to specify the overall cost, saying it remained "a moving target."
Four meeting rooms and a restaurant will be built near the new lobby. One floor above, the existing restaurant will be used mainly for private events. Beginning with a ballroom freshening done by November, the renovation project will be completed in late 2011, he said.
Hotel and shopping areas will remain open during the renovation.
Across Market from Union Station is the western end of the Gateway Mall, the milelong park that extends east to the Old Courthouse. Tricia Roland-Hamilton, head of the project to redo the mall, said that to thrive, the Union Station area must have more offices, residents and stores.
"The key to livening up that space, not just Union Station but that part of the mall, is density," she said. "And we don’t have that right now."
Nintendo said it is cutting the price of its popular Wii video-game console by $50 to $199.99.
The 20% price drop on the Wii, which features a motion-sensor remote, will take effect Sunday, according to a Nintendo statement released early Thursday.
The new price is the first reduction since the console launched in November 2006.
The interactive Wii immediately proved wildly popular across demographics — including rehabilitation centers, to aid patients’ recovery — and demand for the console outstripped supply more than a year after its initial release in November 2006.
Earlier this year, Nintendo Chief Executive Satoru Iwata said the company had sold 50 million Wii units.
The company said in a statement Thursday that it hoped the new price would attract consumers who were on the cusp of becoming gamers. According to its own research, Nintendo said there are about 50 million Americans who fall into that category.
Nintendo’s price cut mirrors recent moves by two rivals. In August, Microsoft (MSFT, Fortune 500) slashed the price of its high-end Xbox 360 "Elite" model by $100 — just days after Sony (SNE) cut its console PlayStation 3 by the same amount.
‘It’s-a me, Mario’
In its statement, Nintendo also confirmed the release date of "the first truly multiplayer" game in its ever-popular "Mario Brothers" series no fax cash advances.
The "New Super Mario Bros." for Wii will hit stores Nov. 15. It’s the first title in the classic series that allows four users to play the game at the same time.
Customers can try this and other games at a "sampling tour" coming to three cities in October.
"Differentiating between thousands of [game] alternatives is nearly impossible," said Nintendo in a statement, adding that the ideal solution is allowing consumers to test drive the games before they plunk down cash for a game or system.
Users will be able to try out one of several Wii games, including "Sports Resort" and "Wii Fit Plus," as well as DS titles like "The Legend of Zelda: Spirit Tracks."
The tour will come to Long Beach, Calif., Oct. 2-4; to Philadelphia Oct. 9-11; and end in New York City Oct. 16-18.
The housing industry has been universal in its opposition to the Home Valuation Code of Conduct, and on Tuesday leaders met with New York Attorney General Andrew Cuomo to discuss modifying the rules.
The code was originally designed to protect appraisers from pressure to inflate their home valuations because such actions helped fuel the housing bubble and resulting bust.
In fact, the code grew from case in which Cuomo went after now-defunct lender Washington Mutual because it pressured a title company to raise appraisal values in order to push deals through.
But realtors, mortgage brokers and builders have charged that one result of the code has been an increase in below-market valuations that have killed sales and further slowed already moribund housing markets. A recent survey from the National Association of Realtors reported that 20% of its members claimed to have lost at least one deal due to low valuations.
"The good news is they were very concerned" said Jerry Howard, the CEO of NAHB, "and they offered to be part of the solution."
He said few specifics came out of this meeting but that the lead attorneys from the AG’s office agreed to join with a "summit" of industry representatives next month, in which Howard expects to refine the details of the HVCC.
Prohibitions
Right now, the HVCC bans loan officers, realtors, mortgage brokers and builders — anyone, basically, whose compensation depends on home sales — from ordering appraisals or exerting undue influence on appraisers. And mortgage giants Freddie Mac and Fannie Mae won’t back any loan that doesn’t comply with the HVCC standards.
Everyone agrees that’s a noble goal and one that should be maintained, but there is a lot of room for confusion and misinterpretation of the guidelines.
"The HVCC does not prohibit interaction between housing professionals and appraisers," said Bill Garber, spokesman for the Appraisal Institute, a trade group. "But it could state more clearly what it’s legal to do."
What the codes says and what it has been interpreted to mean are two very different things, according to John Brenan, Director of Research and Technical Issues with The Appraisal Foundation. "Communication boundaries have not been interpreted consistently and that has limited the amount of information available to appraiser," he said.
Real estate professionals are scared they’ll be accused of violating HVCC, which can impact their bank accounts. If a mortgage loan does not follow HVCC guidelines, neither Fannie nor Freddie will buy it or guarantee it. That essentially kills the deal — and any commission — because there’s virtually no operating secondary market for loans not backed by those agencies.
Howard would like to see a new set of guidelines, done in a frequently-asked-questions format, that more explicitly spells out the rights and responsibilities of everyone involved. That way, a home builder would know exactly how much input he could give to appraisers without going over the line.
This would be especially helpful to those operating in areas where foreclosures are predominant. These are hot zones for strife between realtors and appraisers as they try to determine what qualifies as a comparable home sale on which to base valuations.
"To say a house that needs $200,000 in repairs to make it livable should appraise at the same level as a new house next door is ridiculous," said Howard. "Right now, using these foreclosures as comparables without adjusting for condition can go unchallenged."
Realtors and builders want to be able to discuss why homes were valued at a certain level and show other comparables without fearing violation of HVCC.
Brenan believes the HVCC will reach its goal of preserving interaction while protecting appraisers from intimidation. "Over time, HVCC will evolve and will benefit all the parties," he said.
Singapore’s largest sovereign wealth fund GIC said on Tuesday it had halved its stake in Citigroup to below 5%, making a profit of $1.6 billion as global equity markets rebound.
The stake sale came after Singapore’s smaller fund Temasek Holdings lost an estimated over $4 billion in Bank of America-Merrill Lynch and Barclays in hasty exits around the start of 2009.
Analysts said GIC, also known as the Government of Singapore Investment Corp., took advantage of a rally in world stocks to take some money off the table and the sale suggested the fund may have some concerns about the outlook for global banks.
"Perhaps timings-wise, GIC benefited from the rally," said Song Seng Wun, an economist at CIMB.
"The sale also reflects underlying concerns that although global institutions may have seen their darkest days, there could still be uncertainty ahead as OECD countries in particular could see patchy growth as a result of the recession," he said.
From late 2007, GIC ploughed billions of dollars into Citigroup (C, Fortune 500) and UBS (UBS) and like other sovereign funds, had suffered initial losses in battered global banks as the financial crisis hit companies.
Ng Kok Song, group chief investment officer of GIC, which manages an estimated $200 billion-plus in assets, said the fund realized a profit of $1.6 billion from the sale of Citigroup shares.
The Singapore investor had a profit including unrealized gains of about $3.2 billion based on Citigroup’s closing price of $4.43 on Sept. 21, he said.
On Sept. 11, GIC exchanged its $6.88 billion holding of Citigroup convertible preferred stock into ordinary shares at $3.25 a share as part of a rescue package, gaining in the process a more than 9% stake in the U.S. bank.
"A stake below 5% reflects GIC’s goals and desire to be a portfolio investor," it said in a statement. "GIC will continue its investment in Citigroup as we are confident of its long-term prospects."
With a growing number of homebuyers depending on government-insured loans, the Obama administration is taking steps to shore up the Federal Housing Administration program.
Rising demand and a slower-than-expected rebound in home prices are pushing one of FHA’s reserve accounts below the 2% ratio mandated by Congress, said Commissioner David Stevens. The capital reserves are a cushion against expected losses in the program, which has suffered soaring defaults amid the housing collapse.
The FHA has skyrocketed in popularity during the mortgage crisis since it backstops banks if borrowers stop paying. Housing experts are growing increasingly concerned about the agency’s ability to handle rising numbers of defaults.
The drop in reserves, however, will not require a taxpayer-funded infusion into the housing agency, nor an increase in insurance premiums that FHA borrowers pay, Stevens said. The capital reserves, which are determined by an independent auditor and reported to Congress in November, will rise above the minimum threshold within a few years as the housing market recovers.
The agency’s overall reserves stand at more than $30 billion, a record level thanks to the large influx of premium-paying borrowers, Stevens said. It covers more than 4.4% of its insurance commitments.
"To be clear, the fund’s reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new congressional action," Stevens said.
Still, the agency is taking a number of steps to reduce the riskiness of the program, which allows borrowers to purchase a home with as little as 3.5% down. It plans to hire its first chief risk officer in its 75-year history and to increase net-worth requirements for approved lenders to $1 million, up from $250,000. Lenders will also be responsible for any losses resulting from fraud on the part of mortgage brokers.
The changes may eliminate some smaller FHA lenders and will likely weed out some of the riskier borrowers, Stevens said.
These moves, particularly hiring a chief risk officer, are important steps that need to be taken, said Howard Glaser, head of the The Glaser Group, a financial services analytics firm. The agency grew so quickly that it was difficult to monitor the quality — and riskiness — of the loans being made.
While the FHA may want to raise borrower premiums or tighten its underwriting standards if defaults continue to rise, Glaser said the agency’s $30 billion reserve is enough to cover its current loss estimates.
"It’s surprising they are doing as well as they are," said Glaser, a former Clinton administration housing official.
FHA propping up housing market
As banks have clamped down on mortgage lending, the FHA program has emerged as one of the few ways people can buy a home these days. Banks are more willing to make FHA loans because they come with a federal guarantee to cover losses if the borrower defaults. And borrowers can more easily qualify for FHA loans because they only need 3.5% down and can have lower credit scores.
As a result, demand for FHA loans has exploded. FHA loans now account for 23% of the market, up from 2% in 2006, Stevens said. Some 80% of first-time homebuyers go through the agency.
The agency, however, has also seen a spike in delinquencies amid the mortgage meltdown. Some 14.42% of FHA loans were past due in the second quarter, up .58 percentage points from the same period a year earlier, according to the Mortgage Bankers Association. Just under 3% of FHA loans were in foreclosure, up .22 percentage points.
Concerned about rising defaults, the agency has raised its standards for new borrowers. Only 7.5% of the portfolio has a credit score below 620, down from 50% two years ago. The average score is 690, versus 630 two years ago.
"The quality of the current FHA book is significantly better than anything seen in the FHA portfolios in recent years," Stevens said.
Capping a week that highlighted the one-year anniversary of the financial collapse, a panel aimed at getting to the bottom of its cause is just now getting on its feet.
The Financial Crisis Inquiry Commission’s members want to "shed light" on why the collapse happened and make recommendations to avoid future crises. Their final report is 15 months away, but congressional leaders are already pushing ahead on bills to revamp financial rules to avoid the next crisis.
The congressionally appointed group, funded with $8 million, met for the first time publicly on Thursday and pledged that its work will serve as more than window dressing for politicians worried about the appearance that they allowed the financial crisis to happen.
"There’s no question that this commission had a political birth," said the committee’s second-in-command, Bill Thomas, a retired Republican congressman from California who ran the powerful Ways and Means Committee. "You can sulk about your birth or get on with your life. And frankly, this commission’s life is very, very important."
The commission plans to release interim reports as it gathers information, said the group’s chairman, Phil Angelides, a former California state treasurer who warned about financial sector abuses back in 2002 and lost a 2006 gubernatorial bid. It also plans to stay in close contact with Capitol Hill committees leading the reform of the financial system.
The group has subpoena power over records and can demand interviews with key decision-makers to figure out what caused the crisis.
One model for the panel is the Pecora Commission, which examined the 1929 Wall Street crash and other events that caused the Great Depression. That group came up with recommendations that helped redefine the financial system.
The group is most often compared with the Sept allied insurance. 11 commission, which found that the government had ignored warning signs of terrorist threats.
But unlike the 9-11 commission, which was made up of equal numbers of Democrats and Republicans, the financial crisis commission has six Democrats and four Republicans.
Such differences in opinion came out in opening statements, as panel members highlighted the issues they want to focus on.
Several Republican appointees, including former White House official Keith Hennessey, talked about the need to examine the housing crisis and "politically popular laws passed by Congress that exacerbated" the problems.
Hennessey, an economic adviser under President George W. Bush, wants to delve into the "relaxation of lending standards" and people buying homes they could not afford. Republican lawmakers often talk about such homeownership policies as a major cause of the financial crisis.
By contrast, former Sen. Bob Graham, a Florida Democrat, said the commission needs to explore how consumer protections went awry because that’s high on the congressional agenda.
Brooksley Born, former chairman of the Commodities Futures Trading Commission, called for stronger regulation of complex financial products like derivatives, which she warned about in the 1990s.
"The erroneous belief in the effectiveness of self-regulation has played a major role in bringing our economy to its knees and has cost the taxpayers trillions of dollars," Born said.
The crisis commission aims to hire top staff in October and start gathering information before the end of November.
More than a year before stock markets crashed in the fall of 2008, Paul Dau noticed a steep drop in the number of customers entering his furniture store on Manchester Road in Ellisville.
Instead of whole-room makeovers, they might buy a few pieces of furniture. As time went on, even those purchases dwindled.
By the end of 2008, sales were off 18 percent. As 2009 started, the numbers got worse.
"There were evenings I didn’t sleep well," said Dau. As the fourth-generation of his family to run Dau Home Furnishings, he determined long ago not to see it close on his watch.
He cut his own pay. Then did it again. And once more in April.
"You do what you have to do,” he said.
But increased traffic and sales in the past few months are raising the optimism of some furnishings dealers, including Dau, who thinks he might soon be able to restore at least part of his salary.
"I do feel confident that we’ve bottomed out and we’re turning," he said.
It’s been a dreary decade for the home decor business.
"Ever since 9/11, it’s been in a spiral," said Jackie Hirschhaut, vice president of marketing for the American Home Furnishings Alliance, the nation’s largest trade association for furniture manufacturers.
Then came last year’s market meltdown.
People put off purchases and delayed projects. Nationally, sales by furniture and home furnishing stores totaled $7.7 billion in June, down more than 10 percent from last year and almost 20 percent from June 2007.
"For many mainstream consumers there’s just a lot of uncertainty," Hirschhaut said. "They may be working now, but there are no guarantees."
Changing customer habits forced many businesses to find new strategies to survive.
In addition to his pay cuts, Dau trimmed inventory by almost 20 percent, slashed advertising by nearly a third and reviewed every contract, from building maintenance to snow removal. Because he didn’t want to cut his 18-member staff, Dau used warehouse employees instead of contractors to trim bushes, wash windows and perform other duties. He cut back some full-time positions to part-time jobs and didn’t replace two employees who left.
"What hits you most is concern for all these families," he said of his employees. "They need their incomes to run their households. That’s the scary thing weighing on you."
Brook Dubman, who owns Carol House Furniture stores in Valley Park and Maryland Heights, said that despite a small decline in traffic and sales in the wake of the recession he’d also avoided laying off any of the company’s 140 employees.
"We didn’t change the way we did anything,” he said. "I think that helped us do better."
Customers often linger longer over decisions to buy and make smaller purchases, but Dubman said that traffic and sales in August were up substantially over last year and that September started off well.
"Our Labor Day weekend was gang busters,” Dubman said. "I’m pretty optimistic that we will be consistently better."
If not for his wealthier clients, Alan Richardson wonders if he’d still be in business payday loans online.
The owner of English Living, situated on Washington Avenue in downtown St. Louis, said that since the first of the year the entry-level home buyers and younger home owners who used to be a substantial part of his customer base have all but disappeared.
"The only thing that kept us going well through that was the high-end … very-upscale clients … that are spending a lot of money on their home," Richardson said. "They were our biggest contributors through some pretty tough times."
Although he said sales were "exceptionally slow" in July and August, Richardson saw an increase in traffic that has translated into sales in September.
"In the first ten days of this month we did as much as we did in all of July, and that’s unusual," Richardson said.
But he’s not ready to declare the dark days over.
"We’ve had slow downs before," he said. "The strange thing about this one is you’ll have days you think it’s starting to turn and then it all stops again."
Bruce Bernstein bought a 39-year-old company a few months before the 2008 crash. He immediately sought to re-brand Sunshine Drapery and Interior Design as up to date and offering the highest-quality products.
While still offering sales, the company eliminated the 85 percent discounts the previous owners promoted. Bernstein also updated what he called the company’s "industrial looking" website and reached agreement with a furniture chain to allow Sunshine displays in their stores and to refer business to each other.
He trimmed his fabric inventory, cut hours and laid off and brought back some of his 60 or so employees as the sewing workload required.
Sales the last three months are running about two percent ahead of last year, he said.
"If I had continued on the same route as the previous owner … I don’t know if we would be getting the same business,” he said.
Not everyone struggled through the downturn.
In Belleville, Mueller Furniture Company saw a double-digit increase in sales last year and is on pace to do the same this year.
Owner Lynwood Mueller credited Scott Air Force Base, two nearby hospitals and area school districts, among others, for providing a steady supply of customers. Mueller said much of his merchandise was American made, a point the store emphasizes in its marketing. "People seem to respond to that," he said.
Mueller said that if anything, he’d increased his advertising and promotion in the recent downturn and emphasized customer service. "When times are tough, I think people appreciate that more," he said.
It has helped the family business endure difficult days in the past. Mueller’s grandfather opened the store just two years before the stock market crashed in 1929 and plunged the country into the Great Depression. When the younger Mueller entered the business in the mid-1970s, Belleville was home to 11 furniture stores, he said. One moved. The others closed.
"We’re a survivor," he said.
The stock price of AMR Corp. surged on Thursday after the American Airlines parent company said it obtained $2.9 billion in new financing.
AMR’s (AMR, Fortune 500) stock was up more than 20% one hour after the opening bell.
The company, which owns American Airlines and American Eagle, said the funds included $1.3 billion in new liquidity, including $1 billion in cash from the advance sale of AAdvantage frequent flyer miles to Citi (C, Fortune 500), and nearly $300 million via a cash loan from GE Capital Aviation Services.
The remaining $1.6 billion comes from sale-lease finance commitments for Boeing 737 aircraft that were previously owned by the company, AMR said.
AMR said it will use the funding to purchase additional aircraft and to add first class cabins to existing aircraft. The company also said it will shift more capacity to hubs in Dallas-Forth Worth, Chicago, Miami and New York City.
Throughout the recession, the airline industry has been cutting back on flights to cut costs in the face of fuel price volatility and reduced air travel. But AMR said that capacity is actually expected to increase by 1% in 2010.
"Today’s announcement is obviously positive for the company and our employees, as this new financing will help us navigate through a tough environment and lay the groundwork for future success," said AMR Chief Executive Gerard Arpey, in a press release.
Congress has raised the debt ceiling four times in the past two years and will probably have to do it again in the next month.
With the government borrowing record amounts of money, the nation’s current debt ceiling of $12.1 trillion will be pierced soon.
That ceiling is the cap on how much the country allows itself to have in debt. In credit card parlance, the ceiling is the U.S. credit limit. At the end of August, U.S. debt totaled $11.8 trillion. That’s roughly $349 billion shy of the statutory limit.
The ceiling is meant to serve as a brake on spending because lawmakers would have to think very seriously before they breach the limit and take a very difficult political vote to do so. In reality, lawmakers really don’t have a choice but to raise the ceiling and they know it.
Put simply, if they don’t raise the ceiling, the country will go into default on its debt. The domino effect would be painful, to say the least.
Treasury bonds would come due but the Treasury wouldn’t have the authority to borrow more money to pay holders of those securities.
The government might be able to come up with some cash by, for instance, borrowing from the federal employee retirement trust fund.
The Treasury Department also said Wednesday that it was taking steps to "preserve flexibility" in how it manages its debt. It will reduce the amount of money in its financial rescue reserve — essentially setting aside cash in the event that lawmakers don’t raise the ceiling in a timely manner.
But such measures can only stave off the inevitable temporarily. After Treasury exhausts its options, barring an increase in the ceiling, the value of U.S. bonds, would sink, jeopardizing the portfolios of countries and investors around the world who invest in U.S. debt cheapest personal loan rates.
"Our credit as a nation would plummet immediately and throw the world economy into a depression," said Charles Konigsberg, chief budget counsel for The Concord Coalition, a deficit watchdog group.
In the hands of Congress
The debt ceiling was implemented decades ago. Lawmakers have raised it 90 times in the past 69 years, according to data from the Office of Management and Budget.
Earlier this year, the House passed a joint resolution that would raise the debt ceiling to $13.029 trillion for fiscal year 2010. The Senate has yet to weigh in.
While lawmakers are almost certain to support an increase, the issue is expected to spark a firestorm on the House and Senate floors.
That’s because the statutory debt limit is more of a political hammer used most often by whichever party is in the minority to blame the majority for the soaring debt. Konigsberg said he expects the debates in all likelihood to be "0% substance and 100% politics. It comes down to two parties arguing about who’s responsible for the debt."
But one quid pro quo that fiscal conservatives might propose is an amendment to create a deficit reduction commission, which is an idea that could generate bipartisan support, he said.
In any case, the debates over the debt ceiling may be particularly heated because of the unprecedented government interventions that were launched in the past 18 months to curtail the financial and economic crises.
A debate over the debt ceiling will also intersect with the fight over health care reform, which could cost as much as $800 billion to $1 trillion over the next decade.
Powered by WordPress -- XHTML 1.0