Mish's Global Economic Trend Analysis

Vallejo Bankruptcy Plan Offers Unsecured Creditors 5-20%; JPMorgan CEO Forecasts More Municipal Bankruptcies; Bernanke Will Not Rescue Cities
LA Mayor Says "No Question You’ll See Some Cities Default"; Mayor Daley Says "I wouldn’t doubt it"; NY Mayor Goes After Public Pensions
Nicole "Stoneleigh" Foss of the Automatic Earth, in Chicago Tonight
ECB Backs Off Rate Hikes; The Art of Buying Time
Groupon's Marketing Disaster in Japan

Vallejo Bankruptcy Plan Offers Unsecured Creditors 5-20%; JPMorgan CEO Forecasts More Municipal Bankruptcies; Bernanke Will Not Rescue Cities

Posted: 19 Jan 2011 09:49 PM PST

Vallejo is using federal bankruptcy laws to stick it to unsecured creditors. Please consider Vallejo Plan Would Give Unsecured Creditors 5 to 20 Cents on the Dollar

Unsecured creditors will receive 5 cents to 20 cents on the dollar for their claims under a reorganization plan Vallejo, Calif., filed Tuesday in federal court.

The plan to exit bankruptcy outlines the reorganization of debt the city owes its largest creditors, Union Bank and National Public Finance Guarantee. It also sets aside a pool of $6 million to pay unsecured creditors about 5% to 20% of their claims over two years, according to court documents filed in U.S. Bankruptcy Court for the Eastern District in Sacramento.

"The city regrets that it cannot pay a higher percentage," Vallejo officials said in the court filings. "The city lacks the revenues to do so while maintaining an adequate level of municipal services, such as the provision of fire and police protection and the repairing of the city's streets."

The formal legal plan is based on a five-year road map City Council members approved at the end of November, tackling $195 million in unfunded city pension obligations, cutting payments for retiree health care, reducing pension benefits for new employees, raising pension contributions for current workers, and creating a rainy-day fund.

Union Bank, the largest creditor, is owed $50 million after holding letters of credit on four series of defaulted COPs. The filing indicates Union Bank will get a new "lease-leaseback" obligation in exchange for canceling the COP series. It will also get $6 million of unspent proceeds from the COPs held under trust agreements.

Union Bank is slated to get 40% less than what it would have received from the original COP scheduled payments, according to the Vallejo filing.

Vallejo's exit strategy includes restructuring the debt owed to unsecured creditors, many of which are employees and retirees, by creating a $6 million pool of cash that will be paid out over two years. They will still be able to pursue one of the city's insurance pools to settle the liabilities, according to the documents.

The city received 1,013 proofs of claims. They are comprised of 969 general unsecured claims, 12 unsecured priority claims, and 32 secured claims, according to court documents. The claims totaled $479 million, with $262 million of general unsecured claims, $45 million of unsecured priority claims, and $172 million of secured claims.

Eventually, creditors will vote on the plan and the court will evaluate the voting before any approval is given.

Vallejo's Regrets

Bloomberg has additional details in Vallejo Bankruptcy Plan Would Pay Creditors as Little as 5%

No city or county has used federal bankruptcy laws to force creditors to take less than they are owed, according to Bruce Bennett, the lead lawyer for Orange County, California, when it filed the biggest municipal bankruptcy in the U.S. in 1994.

Vallejo's plan assumes the city can't provide essential services, like police and fire protection, while also paying its debts, he said. Should the city succeed, the case "may become an important precedent," Bennett said in an interview.

The creditors, who include retirees and former employees, would be paid $6 million over two years. The plan must first be voted on by creditors before U.S. Bankruptcy Judge Michael S. McManus decides whether to approve the proposal.

"While the city regrets that it cannot pay a higher percentage, the fact is that the city lacks the revenues to do so while maintaining an adequate level of municipal services such as the provision of fire and police protection and the repairing of the city's streets," Vallejo said in the filing.

The onetime U.S. Navy town of about 120,000 on San Francisco Bay sought protection from creditors under Chapter 9 of the U.S. Bankruptcy Code in May 2008 after the recession eroded tax revenue and unions rejected wage cuts. Chapter 9 allows municipalities to reorganize debt rather than liquidate.

The plan doesn't alter securities tied to designated revenue sources, such as about $175 million in water revenue bonds, and other special tax obligations secured by special revenue of the city's restricted funds, according to the documents.

Under the plan, Vallejo will restructure into a single transaction about $46 million of certificates of participation held by its biggest creditor, Union Bank NA, a unit of San Francisco-based UnionBanCal Corp., part of Mitsubishi UFJ Financial Group Inc., Japan's largest publicly traded bank. Leases on city property that backed the original debt will be consolidated into one lease assigned to Union Bank.

The restructuring will decrease the present value of the city's payments 40 percent by reducing the interest rate and deferring amortization, according to John Knox, a partner at Orrick, Herrington & Sutcliffe LLP, the law firm representing Vallejo that drafted the bankruptcy-exit plan. Union Bank will also keep $6 million of unspent proceeds of the original debt.

Vallejo's city council in November unanimously approved a five-year budget blueprint that is the basis for the exit plan. The blueprint aimed to pay down $195 million in unfunded pension obligations, trim retiree health-care premiums, curb benefits for new workers and create a reserve fund.

Busting Unions With Bankruptcy

Bloomberg writer Joe Mysak says Busting Unions With Bankruptcy Isn't Chapter 9 Way

January 6, 2011

There's nothing easy, or convenient, or cheap, or quick, or even predictable about Chapter 9. Those who talk about municipal bankruptcy as if it is any of those things, and the blogosphere is alive with such opinions right now, don't know what they are talking about.

Even the lawyers who specialize in it don't recommend municipal bankruptcy.

"Filing for bankruptcy protection under Chapter 9 should be considered a last resort, to be effected only after every effort has been made to avoid it," wrote John Knox and Marc Levinson, partners at Orrick, Herrington & Sutcliffe LLP in San Francisco in their 2009 publication, "Municipal Bankruptcy: Avoiding and Using Chapter 9 in Times of Fiscal Stress." Orrick is counsel to Vallejo, California, which in May 2008 entered bankruptcy and isn't out yet.

The reason bankruptcy is so rare in the municipal market is because it could blow up the borrowing costs of every government in a state, as well as the state itself.

The bankruptcy judge is there to help the parties negotiate a plan of adjustment, not as some avenging angel intent on gutting the police union.

Full-service municipalities don't enter Chapter 9 in order to liquidate or to fire the entire department of sanitation. They do so in order to continue as going civic concerns.

So even if a judge rejects some collective-bargaining agreements, the municipality will still be talking to the people who provide police, fire and sanitation services.

Remain Adults

"The best solution," Spiotto said, "is a negotiated resolution where both sides retain their adult state, recognize what is reasonable, attainable and affordable and recognize what promises can be lived up to and what cannot."

I like his reference to "adult state."

The "Adult State"

Hello Joe, what is it do you fail to understand about these simple arguments?

If you don't have the money you can't pay
Taxpayers are tired of being taxed to death and there is a Mayoral recall right now in Miami over it
Public unions refuse to bargain on reduced pension benefits that are bankrupting cities

Judge Rules Vallejo Can Void Union Contracts

Flashback March 17, 2009: In a groundbreaking ruling as well as a rare victory for common sense and the overall good of taxpayers, Bankruptcy Judge Rules Calif. City Can Void Union Contracts.

In the first ruling of its kind, a bankruptcy judge held the city of Vallejo, Calif. has the authority to void its existing union contracts in its effort to reorganize, holding public workers do not enjoy the same protections Congress gave union workers at private companies.

Municipal bankruptcy is so rare that no judge had yet ruled on whether Congressional reforms in the 1990s that required companies to provide worker protections before attempting to dissolve union contracts also applied to public workers' union contracts

"This will have a huge effect nationwide if it is upheld," said Kelly Woodruff, of Farella, Braun & Martel in San Francisco, representing the firefighters and electrical workers unions. Woodruff said the unions would certainly appeal if the city ultimately voids the existing contracts with the two unions. "And I think we have a good chance of success," she said.

"My understanding is that a lot of cities are watching this and particularly this motion," said Woodruff. "If the city of Vallejo succeeds in using bankruptcy to void union contracts I am sure others will follow," she said.

Vallejo attorney Norman C. Hile of Orrick, Herrington & Sutcliffe's Sacramento, Calif. office said, "This is a decision that is somewhat groundbreaking."

"There are a number of other cities and government entities watching it very closely," he said, but declined to speculate on whether others would take the step Vallejo took of seeking bankruptcy protection.

The decision will be particularly important to cities with large unfunded pension liabilities, according to James Spiotto, of Chapman & Cutler in Chicago and a specialist in municipal bankruptcy who helped advise the Senate Judiciary Committee on Chapter 9 reforms.

He said the unfunded pension liabilities for states and cities was $800 billion a few years ago and may be at $1 trillion today. "The question is whether it is an inability to pay or an unwillingness to pay. If municipalities can't provide basic services and still pay labor costs or pensions then that is a real issue," Spiotto said.

McManus held that because Congress did not impose limits on invalidating union contracts under Chapter 9, cities must only meet the requirements under the U.S. Supreme Court's ruling in NLRB v. Bildisco, 456 U.S. 513 (1984), which gives broader discretion to break the contracts in bankruptcy.

I commented on the ruling at the time in Judge Rules Vallejo Can Void Union Contracts.

I am hoping this gets settled in court rather than out of court. In that regard, it's good news that the sides are not talking.

The union wage and pension agreements were absurd; the union refused to give in; and now the union got what it deserved for bankrupting Vallejo, California. This is a victory for Vallejo taxpayers, and actually, taxpayers in general as this is likely to be a precedent setting case.

Expect to see more cities file bankruptcy or threaten to, in order to get major union concession on pension funding. I am tired of sky high taxes for the benefit of the few while most private plans have suffered.

This was a good ruling. A tip of the hat goes to U.S. Bankruptcy Judge Michael McManus.

Vallejo Blew It

My big problem with Vallejo's announcement today is the city had the opportunity to rewrite union contracts and failed to do so. Thus Vallejo failed to fix its structural problem.

However, the key ruling is Vallejo had the right to do so. The next city to file, and I expect we will see new laws in Michigan to allow just that, will not be as lenient on unions as Vallejo was.

The fact of the matter is that more cities would do take this action if their mayors were not 100% owned and beholden to public unions.

The simple fact of the matter is numerous cities in this country are bankrupt. Union contracts and pension obligations are the reason.

CPAs Declare "Houston Is Bankrupt"

The city of Houston is Bankrupt.

Houston, we have a problem. We are bankrupt.

That is the finding of Bob Lemer, CPA, Retired Partner at Ernst & Young; Aubrey M. Farb, CPA, Retired Partner at Grant Thornton; and Tom Roberts, CPA, Retired Partner at Fitts Roberts.

That is from October 2009. Obviously Houston has managed to kick the can down the road. In the end it does not matter. Rule number 1: You cannot pay, what you do not have. Rule number 2: taxpayers have had it.

Cities cannot pay up unless they slash services or raise taxes. If unions refuse to negotiate, and so far they haven't, then cities are going to have no choice.

So they kick the can down the road just as Illinois did.

Illinois Pension Plans are $208 Billion in the Hole

Flash forward to fiscal year 2010 and take a look at Illinois pension liabilities as shown in Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State?

Illinois pensions alone are $208 billion underfunded using realistic measures. The overall level of funding is 29%, the worst in the nation.

Click on the above link to see how your state fares.

The only problem here is states cannot go bankrupt. Fortunately, Congress is working on that now. However, states can default. And unless we get some "union adults" in the room, that is exactly what Illinois should do.

"No Question You'll See Cities Default"

Earlier today, before I saw the Vallejo plan, I noted a number of Mayors discussing bankruptcy. Please consider LA Mayor Says "No Question You'll See Some Cities Default"; Mayor Daley Says "I wouldn't doubt it"; NY Mayor Goes After Public Pensions

The gist of the story is Chicago Mayor Daley and Los Angeles Mayor Antonio Villaraigosa both warn of defaults. However, Mayor Villaraigosa downplays LA's default risk. He is mistaken. Police and firefighters have bankrupted the city. What cannot be paid, won't be paid and it is time for adults to realize that.

For more on LA, please see

L.A. to Shut Down City Departments in Budget Crisis; IBEW Local 18 Head: "How Taxpayers Feel Is Not Relevant"

Mayoral Graft and "Sacrifices" in L.A

L.A. Controller Says City Could Run Out of Cash by May 5

Please read those links. They show how and why LA is broke, how Villaraigosa is in bed with public unions, and why he is incapable of changing anything. Bear in mind, the links are about LA, but they are certainly representative of problems in many other cities.

Miami's Solution

Miami Mayor Carlos Alvarez is about to be kicked out on his ass, along with Commissioner Natacha Seijas. Both deserve it. Please consider Miami-Dade Commissioners set March 15 recall date for Alvarez and Seijas

Thursday's county commission meeting offered plenty of political drama, as the county's leaders set a date for a recall election for the mayor and one of their colleagues.

In the end, the commission voted to set one election for a recall vote for both Mayor Carlos Alvarez and Commissioner Natacha Seijas: March 15.

The inauspicious selection of the ides of March election date -- the day Julius Caesar was killed in the Roman Senate -- quickly echoed through the commission chambers. Seijas added to the Shakespearean atmosphere with her own "Et tu, Brute?" cry of betrayal, warning her colleagues: "Today it's me, tomorrow it might be you." After the vote, she told them: "It could come back to you and haunt you one day."

The recall drives erupted amid a public outcry last fall after commissioners adopted a new budget, proposed by the mayor, that raised the property tax rate while handing pay raises to most county employees.

Miami billionaire businessman Norman Braman took the lead in the campaign to oust the mayor. He hired professional consultants who gathered 95,499 petitions, about 43,000 more than the minimum needed to force a recall election.

Miami Voice, a political action committee headed by Vanessa Brito, is heading the effort to oust Seijas. Brito initially targeted five commissioners, but was able to get the needed signatures only in Seijas' case.

With an adult instead of a union sympathizer as Mayor of Miami, perhaps we will see an action Miami desperately needs: declaration of bankruptcy.

JPMorgan CEO Forecasts More Municipal Bankruptcies

Please consider JPMorgan's Dimon Forecasts More Municipal Bankruptcies

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he expects more U.S. municipalities to declare bankruptcy and urged caution when investing in the $2.9 trillion public-debt market.

"There have been six or seven municipal bankruptcies already," Dimon, 54, said yesterday at his company's annual health-care conference in San Francisco. "I think unfortunately you will see more."

Cities including Detroit and Harrisburg, Pennsylvania, have raised the prospect of bankruptcy. Still, the number of filings has declined.

"If you are an investor in municipals you should be very, very careful," Dimon said at the conference.

Edmund "Ted" Kelly, CEO of Liberty Mutual Holding Co., said yesterday that his firm had reduced holdings of municipal debt in Connecticut, California and Illinois.

"The market is being held up to some extent by the belief that the federal government will bail out" state and local issuers, Kelly said in an interview.

Bernanke Will Not Rescue Cities

The first major city to declare bankruptcy will send a massive stir in the municipal bond market.

Fortunately, Bernanke has already stated he cannot and will not come to defense of cities. I believe Bernanke for the simple reason he is beholden to banks and bailouts of banks not bailouts of cities.

Moreover, I doubt a Republican Congress will bail out cities or state either. Legislation is even in the works to allow states to go bankrupt. Given that Illinois is indeed bankrupt, with an adult governor instead of someone in the unions' pocket, bankruptcy is a viable approach and one I recommend.

That said, I do think Meredith Whitney has it wrong about the dollar amount of defaults. Most cities will probably pay off the bondholders and stiff the public unions. Vallejo blew it in that regard, by failing to fix its structural problem.

However, if Oakland, Miami, Newark, and Detroit all file bankruptcy and all stiff the public unions and renegotiate public union contracts, maybe a few adults in the public unions will step up to the plate and negotiate some appropriate haircuts in pension contracts before cities file.

Don't count on it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To scroll Thru My Recent Post List

LA Mayor Says "No Question You’ll See Some Cities Default"; Mayor Daley Says "I wouldn’t doubt it"; NY Mayor Goes After Public Pensions

Posted: 19 Jan 2011 06:13 PM PST

In a long overdue move, New York Mayor Michael Bloomberg is calling for increased retirement ages of public union workers, changes in union seniority rules, and the ability to negotiate directly with unions instead of the state setting pensions.

Chicago Mayor Daley and Los Angeles Mayor Antonio Villaraigosa both warn of defaults even though the LA Mayor downplays LA's default risk. In Washington state, Governor Christine Gregoire, a life-long bureaucrat and part of Washington's problem, at long last has her hands tied by voters refusing to accept more tax hikes.

New York Mayor Michael Bloomberg Goes After Public Pensions

The New York Post reports Bloomberg warns of deep budget cuts

Mayor Bloomberg warned in his "State of the City" address Wednesday that New York still faces deep budget problems and promised he would seek to cut pensions for government workers that he said were more generous than those found in the private sector.

In his speech on Staten Island, Bloomberg said reforms of the city's pension system will be his administration's number one priority in Albany in the weeks ahead. The mayor said he had enlisted the help of former mayor Ed Koch in the effort to wrest control of city-worker pensions back from the state.

The mayor said he wants to raise the retirement age to 65 for non-uniformed workers. The change, which would only apply to new hires, would save billions of dollars over the long term, Bloomberg said.

He said the city would ask state lawmakers to change the law to allow the city to negotiate pension benefits directly with the unions during collective bargaining. Right now, the state, not the city, sets pension benefits.

He vowed not to sign any contract with a salary increase unless it also included benefit concessions that save the city money.

Currently, most non-uniformed city workers can retire at the age of 57, while city teachers who have served at least 25 years can retire at the age of 55.

Year-end bonuses for future uniformed retirees would also be eliminated, saving about $200 million per year.

"City taxpayers just cannot be expected to give substantial holiday bonuses when so many of them are out of work or having their own wages frozen or cut," Bloomberg said.

Patrolmen's Benevolent Association president Patrick Lynch responded after the speech that the union intends to fight to protect the payments, which were promised in return for concessions in an earlier round of pension reforms.

City Comptroller John Liu sounded a note of caution regarding the mayor's proposal to cut pensions, and said workers' unions should be brought to the table on the matter.

"It's not accurate to characterize the pensions as generous," he said following the speech.

Public Pension Ponzi Scheme

City Comptroller John Liu has an impressive academic background, but is a fiscal illiterate.

It would be nice if we could afford to have teachers retire at age 55 but we can't. The average taxpayer cannot retire at age 55.

Quite frankly, Mayor Bloomberg was far too generous in his demands. Public pensions are nothing but a gigantic ponzi scheme. As boomers head to retirement, the effects are becoming widely known.

I am sick of public unions and public employees awarding themselves benefits far beyond what anyone in the private sector sees. One might think that with Liu's background he should be able to understand the economic infeasibility of it.

This is what happens when you put Mathematical Physicists (or bureaucrats in general) in positions that require a modicum of common sense.

Comptroller Liu should teach math or physics, or go back to Pricewaterhouse Coopers, a job he had before joining NY City Council.

Economic Insanity from the Patrolmen's Benevolent Association

There's still more to the story in Bloomberg Seeks NYC Pension Changes, No Tax Boost

New York Mayor Michael Bloomberg called for avoiding tax increases and raising some workers' retirement age as he laid out steps to plug a deficit that may be about 7 percent of a projected $67.5 billion budget.

The mayor, 68, enters the second year of his third term facing a $2.4 billion deficit, not counting at least $2 billion in state aid, which the city expects to lose, for education and health care.

"A new defining challenge confronts us: forcing government to live within its means," Bloomberg said in his speech, which lasted about 45 minutes. "The city's economic future is hanging in the balance."

Pat Lynch, president of the Patrolmen's Benevolent Association, said police officers paid for the benefit with more than $1 billion in past surplus pension earnings and $75 million upfront.

"Having realized billions in benefits, the city now wants to renege," he said in a statement. "We intend to hold them to it."

Paid For Benefits? No, Not Quite!

Another thing I am tired of hearing is how the union "paid for benefits".

The union did not pay for a damn thing. 100% of the salary that goes to public workers comes from taxpayers. Even if union members put a portion of their salary into pension plans, the source of that money is taxpayers.

The contribution rate for employees varies but seems to be approximately 5% (not counting employer (taxpayer) contributions. The reality as I stated above is that 100% of the contributions come from taxpayers, but let's focus on that 5%.

Assume an officer contributed 5% a year for 20 years on a salary of $100,000. That is a total contribution of $100,000. On that total contribution of $100,000 the officers expect to get $100,000 a year for life on retirement at age 58 or whatever.

That is how outrageous police and firefighter sense of entitlement is.

To be fair, I ignored compounding, but then again the stock market has been flat for 10 years. Moreover, Those officers were not making $100,000 twenty years ago when the the market was compounding at it greatest rate.

Thus the idea, that the police paid for their benefits is totally absurd in more ways than one.

The way to deal with this is via bankruptcy.

Bloomberg should declare the city to be fiscally insolvent. Then the Patrolmen's Benevolent Association can see what it is entitled to in bankruptcy court. I suggest about 25% of what they think.

Washington Govern Christine Gregoire Proposes $4.1 Billion in Cuts

It's sickening to listen to Governor Gregoire whine, but march on we must. Please consider Governor Gregoire Dismantling the Washington She Helped Build

Christine Gregoire began her career in 1969 as a prison-system typist. Last month, as Washington's governor, she proposed closing one of the state's 13 penitentiaries to save $17.6 million.

"I'm a long-term public servant," Gregoire, 63, said in a Dec. 15 interview in her Seattle office. "The budget I put out today is nothing like anything I would have expected ever to be put out in the state of Washington. And I am the last person I would ever have expected to put it out."

Voters in November rejected an income tax and restrained the state's ability to increase other levies. Gregoire, a lifelong state employee who was attorney general before becoming a two-term governor, says she now must slash health care, education and other programs to confront a projected $4.6 billion deficit.

"I created the Department of Early Learning," Gregoire said. "I put more money in K-12 than I think has been put in there in years, if not decades. I was really investing in higher education because I think education is the future for us. And I'm dismantling all of it."

Gregoire's plan calls for a 3 percent reduction in state employee pay, consolidating 21 agencies into nine and eliminating park funding and paying for them through user fees.

"We've cut into the bone already and now we're digging into the marrow," Remy Trupin, executive director at the Washington State Budget & Policy Center, a Seattle-based think tank that focuses on fiscal issues, said in a telephone interview. "We're in a place where unimaginable things are being offered."

Gregoire on Dec. 13 said she wants to reduce the $7 billion unfunded pension liability by 60 percent by ending automatic pay increases for those covered under older plans for teachers and public employees that were closed in 1977. Current plans are fully funded, according to the governor's office.

Cuts? What Cuts?

Hello Governor Gregoire, Remy Trupin. Get a grip. A 3 percent reduction in state employee pay is not even a down payment on what needs to happen. What about pension benefits? What about defined benefit plans that need to be eliminated?

How many of those state agencies you are whining about merging should exist at all? Instead of closing a prison, how about privatizing the prison guards? Then again, why not do both (and free those in for minor drug problems in the process)? Why not outsource everything to the lowest cost bidder?

Moreover, I see you bragging about education: "I created the Department of Early Learning. I put more money in K-12 than I think has been put in there in years, if not decades."

That's fantastic Governor. Pray tell what results do we have to show for it other than robbing taxpayers to give money to the teachers' union? Where are the results? At what cost?

I can easily see ways Washington can lower taxes, not raise them.

Dedicated bureaucrats like Christine Gregoire are a huge part of the problem. They think government has solutions to every problem. That's an incredibly nasty situation, especially in conjunction with vote buying by public unions and politicians like Gregoire who are willing to tax citizens to death so the union workers can get benefits everyone else just dreams about.

No Question You'll See Some Cities Default

Chicago Mayor Daley and Los Angeles Mayor Antonio Villaraigosa say City Bond Defaults Likely Amid Strain

The mayors of Los Angeles and Chicago said the financial strains still weighing on local governments in the wake of the recession may cause cities to default on their bonds.

Los Angeles Mayor Antonio Villaraigosa, a Democrat, said municipalities are being squeezed as states move to balance their own budgets, a step that can involve taking more funds that would otherwise be sent to towns and cities.

"There's no question you'll see some cities in default," Villaraigosa told reporters today at a press conference in Washington, where the U.S. Conference of Mayors is meeting. "The difference between us and the federal government is they can print money. The states balance their budget oftentimes on the backs of cities, counties and school districts. We actually have to balance a budget."

Villaraigosa said in an interview that he didn't think the number of defaults are going to be as large as some have speculated, saying they may be confined largely to small cities. He said it was a "nonstarter" for his city.

Chicago Mayor Richard Daley, a Democrat, said some cities are struggling to meet expenses, including costs for their employees' pensions.

"These are serious financial problems for many cities, especially the smaller cities that can't deal with the day-to- day cost of government," Daley said today at the press conference in Washington. Asked whether he expected to see a lot of cities default, he said: "I wouldn't doubt it."

Villaraigosa emphasized that Los Angeles, the second largest city in the U.S., isn't veering toward a default.

"We're going to do everything we have to do to balance our budgets," he said, referring to himself and other mayors.

"There is no scenario where we would ever be in the 'B' situation," he said, referring to municipal bankruptcy. "We don't even use that word."

The fact of the matter is Los Angeles is bankrupt already. So is Houston, Oakland, Miami, Harrisburg, San Diego, Newark, Detroit, and numerous other cities.

That is how deep in the hole city pension plans are. The only way out of this mess is to cram pension reform on public union workers whether they like it or not. Since they will resit, and since Villaraigosa is beholden to public unions, there is not much hope for anything other than bankruptcy.

For more on LA, please see

L.A. to Shut Down City Departments in Budget Crisis; IBEW Local 18 Head: "How Taxpayers Feel Is Not Relevant"

Mayoral Graft and "Sacrifices" in L.A

L.A. Controller Says City Could Run Out of Cash by May 5

Please read those links. They show how and why LA is broke, how Villaraigosa is in bed with public unions, and why he is incapable of changing anything. Bear in mind, the links are about LA, but they are certainly representative of problems in many other cities.

Mayor Daley, 6 Alderman Will Not Seek Reelection

Please consider Daley won't run for re-election: 'I have done my best'

Mayor Richard Daley says he will not run for re-election in 2011, saying it's "time for me, it's time for Chicago to move on."

"The truth is I have been thinking about this for the past several months," Daley said at a City Hall news conference that stunned the city. "In the end this is a personal decision, no more, no less."

Daley spoke for less than five minutes and took no questions

His announcement comes as he faces a record $655 million budget shortfall. Last month, the mayor said he's looking at hiring private firms to take over more city functions, including potentially running the Taste of Chicago, as a way to cut costs.

Daley limited his options this time around after raising property taxes in 2007, selling off parking meters and raising fees in 2008 and spending reserves last year. The mayor reiterated late last month that he won't be increasing taxes or fees or auctioning off more city assets.

The mayor joins at least a half-dozen aldermen who already have said they won't seek re-election next year.

The mayor's administration has been buffeted by a spate of summer violence, a weak economy and a high-profile failure to land the 2016 Olympics. Dissatisfaction abounds, over Daley's handling of the crime problem, his efforts to rein in government corruption and his backing of a controversial long-term parking meter system lease.

Mayor Daley understands the fiscal mess Chicago is in, at least partially. He also knows Governor Quinn will make matters worse.

He does not want to be mayor when the pension crisis blows sky high, when cramdowns are forced on the teachers', police, and firefighters' unions and when violence increases in the process.

In short, Mayor Daley hopes to escape the blame for everything that is about to happen. Six aldermen are bailing ship with him.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To scroll Thru My Recent Post List

Nicole "Stoneleigh" Foss of the Automatic Earth, in Chicago Tonight

Posted: 19 Jan 2011 01:10 PM PST

I received an email yesterday from someone informing me that Nicole Foss of The Automatic Earth blog will be in Chicago this evening.

Here is the time and place.

January 19, 2011 at 7:00 PM
United Church of Rogers Park
1545 W. Morse Ave., Chicago
Free parking (SW corner of Morse and Ashland)

Apologies for the late notice, but I just found out. She is a good speaker so if you live in Chicago, you might wish to show up. Requested donations are only $20, but no one will be turned away.

I just got off the phone with her. We chatted for an hour easily. She drove from Canada to Chicago, and except for overseas, normally drives everywhere she speaks. In June, she is on a speaking tour of numerous cities on the west coast. She plans on driving from Ontario, Canada, the whole way.

I invited her to spend a a night here. Perhaps we can setup a location nearby where the two of us can field questions on any topic. I won't charge for this, she can have 100% of donations to support her trip.

I do not have dates for this yet, but if you are interested, send an Email to StoneleighTravels @ gmail . com.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To scroll Thru My Recent Post List

ECB Backs Off Rate Hikes; The Art of Buying Time

Posted: 19 Jan 2011 11:06 AM PST

The Euro soared in conjunctions with a "successful" auction on Portugal (about 3.5% higher than German 10-Year Bonds) followed by comments from Trichet about rate hikes when the Euro was in a strenuously oversold condition.

Crashes come from oversold conditions, not overbought ones, and central bankers are well aware of it. Trichet got the reaction he wanted, now he attempts to "fine tune" investor expectations.

Please consider ECB Officials Retreat From Threat of Higher Rates

"The Governing Council of the ECB sees present interest rates as adequate," council member Ewald Nowotny said at an event in Budapest yesterday. "We do not see a need for an interest rate change in the foreseeable future." Bundesbank President Axel Weber also said he expects inflation to remain below the ECB's 2 percent limit in the medium term, softening his language on the risks to price stability.

"It looks like the ECB is now trying to fine-tune market expectations," said Laurent Bilke, global head of inflation strategy at Nomura International in London, who used to work as a forecaster at the ECB. "The market didn't get the ECB completely right, but at the same time policy makers will not be successful in telling the market that there hasn't been a shift in the policy stance."

The euro has risen five cents against the dollar since ECB President Jean-Claude Trichet last week warned that the central bank will act if needed to contain inflation risks, which he said "could move to the upside." Nowotny joins Athanasios Orphanides of Cyprus in suggesting markets may have over-reacted to the comments.

'One-Sided' Interpretation

"I think the statements of President Trichet at the last press conference have been perhaps interpreted in a rather one- sided way," Nowotny said. Orphanides said in an interview published on Jan. 17 that the ECB's policy statement was not "overly hawkish" and there is sometimes an "overreaction to the underlying message."

ECB officials "are trying to dampen rate expectations that have increased after Trichet's comments," said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. "The market did overreact."

A stronger currency could undermine European exports just as the euro region grapples with a sovereign debt crisis that's forced governments to cut spending, damping the outlook for economic growth. Higher ECB rates would also increase the burden on debt-strapped nations. The central bank has held its benchmark interest rate at a record low of 1 percent since May 2009.

Weber said in a speech in Frankfurt yesterday that while inflation risks "could increase," they are still "more or less balanced" and prices should remain contained in the medium term. Last week, he said risks to the medium-term inflation outlook "could well move to the upside."

The euro surged after on the comments and Citigroup Inc. immediately revised its forecast for the ECB's first rate increase to the second half of this year from the first quarter of 2012.

Trichet Has No Credibility

Trichet has violated everything he has ever stood for when he bought sovereign debt and allowed Ireland to print money backed by absolutely no collateral at all (see ECB Allows Irish Central Bank to Counterfeit 51 Billion Euros).

So how can Trichet be believed? For that matter, why should anyone believe Citigroup's analysts either?

Judging from the reaction and the recent comments by Trichet, it appears he wants an orderly decline in the Euro to help exports much the same the US wants an orderly decline in the dollar, Brazil wants an orderly decline in the Real, and every country on the planet wants an orderly decline in their currency as well, all so that everybody can increase exports. Mathematically it does not work, and never did.

Trichet did manage to buy time, and that is always one immediate goal of every central banker.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To scroll Thru My Recent Post List

Groupon's Marketing Disaster in Japan

Posted: 19 Jan 2011 02:33 AM PST

In a nice break from news about the Euro, China, or pensions, Mike "In Toyko" Rogers sent me an interesting email the other day regarding huge mistakes Groupon made in Japan.

Take a look at the New Year's dinner Groupon advertised, vs. what was delivered.

New Year's Dinner as Advertised

New Year's Dinner as Delivered

Those images are from Mike's article Groupon CEO Insults Japan With Simple Minded Apology

Over the New Year's holidays, Groupon Japan sold traditional New Year's dishes to the Japanese. It didn't go well. In fact it went so badly that dozens upon dozens of people complained about fraud and then the Japanese government actually stepped in and is currently investigating the situation. So, I guess I should say it was a disaster.

This has been very damaging to Groupon's reputation in this country. I think the Japanese are not forgiving when it come to this sort of fraud - especially when it deals with food.

Learning the Ropes

The Wall Street Journal commented on the marketing disaster in Groupon Learns Japan Ropes

Doing business in Japan can be a, well, tricky business. Just ask Andrew Mason, CEO of exponentially expanding online discount specialist Groupon, who ended up posting a personal apology video to customers here on YouTube (in English, with Japanese subtitles) after a flub in orders for Japan's prized traditional new year's meal.

"We featured a deal in Tokyo recently that we really messed up," said Mr. Mason, who goes on to explain how the overflow of orders hamstrung the restaurant that offered the initial deal to successfully fill the orders, "delivering the food late to many of our customers and in terrible condition to others…So what I really want to say is how terribly sorry I am and everyone at Groupon is. We know how important the New Year's holiday is in Japan."

Groupon's Apology

Mike Rogers was more than upset, citing among other things

"The problem was not only late deliveries and damaged product, the biggest complaint was people getting a product that doesn't look anything like advertised."

"If you do not understand Japanese culture and common business practices and norms in Japan, you shouldn't be doing business here."

Mike asked me what I thought about this, and I approached it from a different angle....

What's Groupon Worth?

In December, Google offered Groupon $4 billion, then upped it to $6 billion when Groupon balked. Groupon walked away from $6 billion as well.

I cannot conceive of rolling the dice on a $6 billion offer.

Look at Groupon's Model. They tell clients that if they make money, their offer is priced too high. That's does wonders for Groupon's phenomenal margins, but how much repeat business will there be and for how long is the model sustainable?

Let's sidetrack for a moment. Look at the offer Microsoft made for Yahoo, $32 a share. Yahoo turned it down. Yahoo's share price is now $16.50.

Look at MySpace. It collapsed under the rising star of Facebook.

Might not Groupon do the same? My point is 'Things Happen'.

Marketing wars in this space will become immense. With competition comes decreased margins. I guarantee it.

Look at the disaster in Japan. Those restaurants advertising the New Year's deal wanted to make a profit but couldn't, at least based on the images shown. So they offered something they could make a profit on, and look how it turned out. Customers are furious and Groupon did not even understand Japanese culture to know how to respond.

On a basic level, ignoring the disaster in Japan, Groupon is not doing its clients any favors if it bankrupts them in the process. Deals need to be win-win or clients will eventually tell Groupon to go to hell.

In the US, we see pictures of the classic sub sandwich or something like this.

What businesses can afford to offer 90% off and survive? Is that what happened in Japan?

As with all social trends, people (and businesses) will try the latest and greatest thing. However, struggling businesses won't be social butterflies forever.

What happens after a majority of businesses lose money on it? What happens if competition offers better deals? How quickly might better offers catch on via Facebook or Twitter?

Those are significant risks to Groupon.

Bear in mind, I do like Groupon's model. However, those margins are not sustainable. Of course Groupon can lower its margins, but then what is it worth? The answer is nowhere near as much, yet far more than if it suffers more disasters like we saw in Japan.

For that reason, I thought Google offered way too much. Yet Groupon turned it down.

Why Groupon Said No To Google's $6 Billion

The Business Insider discusses Why Groupon Said No To Google's $6 Billion

Each and every Groupon board member stood to gain millions, hundreds of millions, or even more than a billion dollars by accepting Google's $6 billion offer to acquire the company.

Groupon cofounders Brad Keywell and Eric Lefkofsky might have made as much as $600 million and $1.8 billion, respectively.

So how in a sane world could these people have told Google no?

How do you turn down hundreds of millions of dollars in personal wealth?

a source close to Groupon board members tells us that anti-trust concerns ultimately forced Groupon to turn down Google's $6 billion offer.

This source says the view on Groupon's board was that a Google-Groupon merger would draw more regulatory scrutiny than any other deal Google has ever done.

Because of this view – that Google-Groupon might not be allowed to go through and that it would take months and months to find out the bad news – board members decided they would need a significant break-up fee if they were to accept Google's offer.

How significant?

We don't know the number, but our source says the board wanted a break-up fee akin to the one Google gave DoubleClick.

Whatever the number Groupon's board wanted, Google balked.

The reason you've seen so many different numbers for Groupon's revenue run-rate in the press – $500 million, $800 million, $1 billion, and $2 billion – is that it keeps inflating at a non-linear rate.

A source close the company tells us Groupon added 4 million email subscribers in the last week. Groupon has 40 million subscribers total – up from 1.5 million this time last year and 400,000 the year before that.

Groupon employed 124 people in December 2009. In November 2010, it hired 190 in Chicago alone, raising its worldwide headcount to 3,100.

"Groupon is a spectacular company," says this source, echoing the board's sentiment.

"It's literally defining a new form of interaction with the Internet. It has created perhaps the greatest form of advertising ever conceived. It is perfect."

The Perfect Company?!

I think Groupon is perfect in the same sense Yahoo was perfect before Google came along, MySpace was perfect before Facebook came along, Netscape was perfect before Microsoft embedded free browsers, and dare I say it ... Google directly attacks Groupon's model with a competing product.

Had Groupon accepted the offer, I doubt Google would have let Groupon make rookie mistakes like it did in Japan, or if it did, there would have been a bigger, more sincere apology must faster.

I also think Google would be smart enough not to run its clients into the ground.

I cannot comment on the antitrust aspect except to say it seems to be a poor reason to turn down $6 billion. After all, if "Groupon is Perfect", it would no doubt still be perfect if the deal fell through.

Time will tell just how perfect Groupon is.

Addendum:

I struck the word "Eve" from the above post in several places. Mike Rogers informs me that in Japan, the New Year is a three day religious celebration, quite different than the big night before New Year's Eve celebration in the US.

For an update from Mike, please see Groupon CEO Insults Japanese People With His Callous Apology - Pt. 2

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To scroll Thru My Recent Post List

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