United States Postal Service Faces October Default Along With...

This is making the rounds, so we thought we might include both this article and its source article, with some commentary.

The postal unions are raising red flags, and using the "D" (default) word to bring attention to a gap in the forward funding of their retirement benefits which they see coming in the autumn.

Most federal agencies pay their retirement costs as they are incurred. The Postal Service pre-funds their projected retirement benefit costs a few years in advance.

The issue here with the unions is a bit bigger than just the September preparyment. The Postal Service has funds set aside for future retirement costs in a way that is similar to Social Security. Indeed, one might think of this system as their version of Social Security.

There is about $32 billion set aside (on paper) for their needs. The unions would like the postal service to get access to that money now. Think of it as taking the Social Security Trust Fund out of the Treasury and making it available for management by some private entity now.

What's the issue? Since the system has been in place for so long, and only now is such a fuss being raised, there is an obvious fear on the part of the Postal Employees of a government default and a devaluation of their pension fund, along with Social Security.

Make sense? I think it does when viewed in that light. Employees close to the government are fearful of a general default at the end of September that will erode the value of their own Pension Trust Fund.

There are other explanations of course. Union Management may wish to take over the management of their $32 billion pension fund to allow some of the Wall Street banks to help them 'improve earnings' and generate hefty fees.

The fear of default driven by rumours circulating amongst Federal employees and their kin makes a bit more sense, but we will not know for certain until the fall.

My Federal Retirement
USPS May Be Unable to Make Payroll in October and Retiree Health Plan Costs, Unions' Letter to White House Says
July 19, 2009

On July 14, unions representing United States Postal Service (USPS) workers wrote the White House with "extreme urgency" asking for a meeting to address lack of funding for both employee payroll in October and health benefits for retired employees.

The letter, which the FederalTimes.com blog provided a scanned copy late last week, says:

"[USPS] top executives are now saying that the USPS will default on a $5.4 billion payment to prefund future retiree health benefits on September 30, 2009. And its government affairs representative are now telling Congressional staff that the Postal Service may not be able to make payroll in October and will be forced to issue IOUs instead."

The letter was co-signed by the presidents of the American Postal Workers Union, National Rural Letter Carriers' Association, National Association of Letter Carriers and National Postal Mailhandlers Union, and sent to White House Deputy Chief of Staff, Jim Messina.

GovExec.com reported more on the letter in this column on July 17 which is included here below:

Postal unions seek White House help on pay, benefits
By Carrie Dann
CongressDaily
July 17, 2009

Four unions representing the nation's postal workers are pleading for a meeting with the White House to address possible funding shortfalls for workers' payroll and retiree health benefits, according to a letter obtained by CongressDaily.

The presidents of the American Postal Workers Union, National Rural Letter Carriers' Association, National Association of Letter Carriers and National Postal Mailhandlers Union co-signed the Tuesday letter to White House Deputy Chief of Staff Jim Messina, warning that the U.S. Postal Service is at risk of defaulting on a $5.4 billion payment to prefund retiree health benefits at the end of September.

The letter alleges that USPS "may not be able to make payroll in October and will be forced to issue IOUs instead."

Yvonne Yoerger, a spokeswoman for USPS, confirmed that the unions wrote the letter but disputed the claim that payroll deadlines will be missed.

"That's not something that's been discussed at all," she said. "We are committed to making payroll."

Yoerger said USPS will continue to work with OMB and the Office of Personnel Management to determine if and how the Postal Service can meet the Sept. 30 deadline to pay forward $5.4 billion in future health liability costs.

The Postal Service is required by law to set aside funds for future retiree health care costs, rather than paying recipients as costs are incurred as other government agencies do. As a result of a $3 billion loss to date this year, the unions wrote, no money is available for those future payments, and regular payroll deadlines may not be met unless other funds are tapped.

"Such a [financial] collapse can be averted without resort to a taxpayer bailout by reforming the retiree health prefunding provisions of the law and [by] giving the Postal Service access to its own resources in the Postal Service Retiree Health Benefits Fund, which now has a balance of $32 billion," the unions wrote.

But that transfer of funds would require congressional approval, and the unions fear that pressure from the White House will be needed to prompt quick action. "We believe that the Obama administration must intervene now to avoid both a political and economic train wreck," they wrote.

Reps. John McHugh, R-N.Y., and Danny Davis, D-Ill., introduced legislation this year that would amend the law to allow USPS to reach deeper into the flush Retiree Health Benefits Fund, but the unions argue the measure would not do enough to fix the financial problems.

CIT Averts Bankruptcy: Another Sunday Night Save (Perhaps)

It is good to hear that the 'well capitalized' CIT may strike an eleventh hour deal with its creditors and financiers to avoid an ugly bankruptcy for now.

Now if only the United States can do the same thing for itself with its bondholders...

Let's see if it is real, and what happens. Remember that what is being discussed here is 'bridge financing' for a company that is in a debt death spiral. The plan for their recovery will be more important than any temporary deal.

Financial Times
CIT seals rescue package
By Henny Sender and Francesco Guerrera in New York
July 20 2009 04:31

CIT on Sunday night clinched a two-year, $3bn rescue financing with its creditors that will enable the troubled US finance group to avoid a bankruptcy filing.

After round-the-clock weekend talks that included the possibility of a Chapter 11 filing, CIT and its main creditors sealed an agreement on the financial lifeline, according to people close to the situation.

“This paves the way for an orderly restructuring of the balance sheet with time and capital,” said one participant in the likely financing. “And it will give CIT’s customers plenty of capital.”

The company, which provides finance to nearly a million small and medium-sized companies in the US, and its creditors had to move quickly to arrest a slide into bankruptcy and prevent its best customers from defecting for fear that the lender could no longer support them. (We had thought the problem was that their customers had no alternative - Jesse)

The group of at least six creditors who are planning to provide the capital comprise a mix of traditional money management firms and hedge funds who bought into the debt at much less than 100 cents on the dollar. They include Baupost, a Boston-based hedge fund, CapRe, hedge fund and private equity firm Centerbridge Partners, Oaktree Capital, Pimco and Silverpoint Partners. Barclays is expected to act as agent on the financing package.

CIT’s board met on Sunday night and approved the financing. If the agreement holds, CIT will have enough time to work out which, if any, assets it should sell. The next step will likely involve cajoling other holders to exchange their debt into equity and then, having demonstrated that CIT has a viable survival plan, to go to the government and ask for help.

Jeff Peek, CIT’s chief executive who led negotiations with creditors, was likely to stay on following the financing, people close to the situation said. The management has been criticised for diversifying into high-risk businesses such as subprime lending and student loans and relying on capital markets to fund CIT’s balance sheet.

CIT’s creditors stepped in after it became clear that the government was not willing to provide any emergency assistance, whether in guaranteeing CIT’s debt, or in accepting assets in exchange for cash from the Federal Reserve or in allowing CIT to transfer more assets into the bank holding company it set up at the end of December.

The rescue financing will come as a relief to the government – had CIT filed for bankruptcy protection, the Treasury would likely have lost the $2.3bn of bailout funds CIT received late last year.

It would also have been a huge embarrassment for the Fed, which had described CIT as adequately capitalised when it approved of its banking application.

The creditor-led rescue of CIT may stave off political criticism of the government’s handling of the crisis. If CIT had gone under, at least some of its smallest customers in the business world would probably have had a hard time finding alternative sources of capital, adding to economic weakness.

New Silver Fund

Silver Bullion Trust, an all silver fund from the CEF/GTU closed-end fund group, has its roadshow going on now.

Initially it will only be available in Canada. It will trade on the TSX to start, then on the AMEX once it has risen to $75 million of assets which is a similar process used in the introduction of GTU.

It will trade in Canada in both U.S. and Canadian dollars.

The initial offering is reported to be for up to $200 million, so the $75 million threshold could be met immediately depending on the bid size of the deal.

It is expected to price at around US $10 (1 share + 1 $10 warrant) by July 29th.

This could be a interesting alternative to SLV and to CEF for those who wish to invest more heavily in silver.