Panel examines role of derivatives in crisis

 Panel examines role of derivatives in crisis – The complex instruments at the heart of the financial meltdown, and the way two giant companies were wrapped around them and entwined with each other, are being examined by the special panel investigating the origins of the economic crisis. The Financial Crisis Inquiry Commission is turning its focus to derivatives at two days of hearings starting Wednesday. On the hot seat will be former executives of American International Group Inc., the insurance conglomerate saved from collapse by a $182 billion taxpayer bailout, and current officials of Goldman Sachs Group Inc., the finance powerhouse that has been one of Wall Street’s biggest derivatives dealers. Traded in an opaque global market valued at around $600 trillion, derivatives have caught a big part of the blame for the financial crisis that ignited in late 2008. The value of derivatives hinges on an underlying investment or commodity — such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.

LA braces for pink slips – Thousands of government workers throughout Los Angeles could begin losing their jobs this week with the start of the new fiscal year, even as officials make last-minute bids to save positions through further service cuts, tax hikes and union concessions. Up to 4,300 jobs could be cut next fiscal year from local government agencies, including the city, county and schools, if officials and unions fail to reach deals to slash spending.  Los Angeles Unified School District alone could shed up to 2,500 jobs this year, although that number is expected to fluctuate through the fall as officials negotiate with unions and monitor the state revenue picture.

Five Monterey County school districts face insolvency – The number of California school districts that appear headed for financial trouble has increased dramatically since March, with five in Monterey County making the list. King City Union, King City Joint Union High, North Monterey County Unified, Santa Rita Union and Washington Union were included in the list of 174 districts that must make significant cuts to remain solvent. The information is based on preliminary reports districts were required to submit to the state in April with information as of March 15. ""The number of California K-12 districts that could face financial difficulties went from 108 in 2009 to 174 this year, a number that has statewide officials concerned, given the realities of California’s budget woes.
Detroit Schools budget deficit grows 66% — The budget deficit for Detroit Public Schools has ballooned from $219 million last year to $363 million, according to budget documents released Tuesday by the district. The 66-percent spike in the debt occurred during the first full year of leadership under Robert Bobb, the state-appointed emergency financial manager. Bobb was appointed by Gov. Jennifer Granholm to help eliminate the district’s deficit. His term expires in March. A year ago Bobb pledged to end overspending and expected a $17 million surplus that would help whittle the $219 million deficit accumulated from previous years. In March, The Detroit News reported the district’s deficit was projected to instead grow to $317 million for the year, but in less than four months it has added $46 million.
"Broken" New York unemployment trust may cost $1.3 billion(Reuters) – New York’s "broken" unemployment trust could cost the state $1.265 billion in interest penalties over the next eight years because it has a $3.2 billion deficit, Governor David Paterson said Wednesday. By driving up unemployment, the recession has drained many state unemployment trusts, forcing them to rely on federal loans.New York is one of the few states that does not index its benefits for unemployed workers to the average weekly wage, the Democratic governor said in a statement. Benefits for unemployed New Yorkers have not been raised from $405 since 2000.


The state of Illinois is about to begin a new budget year that will involve debt, deficit and spending cuts.The old budget expires at midnight Wednesday. Gov. Pat Quinn says he will sign the new budget into law sometime before then.The state could be $13 billion short of all the money it will need in the coming year. Quinn and other officials have agreed to deal with that gap by borrowing money and letting more unpaid bills pile up.Quinn has also been given special powers to cut spending where he sees fit. The Chicago Democrat is scheduled to reveal on Thursday where he plans to cut.

New proposal would push retirement age to 70 for Social Security benefits — You could be forced to work until you’re 70 just to cash in your Social Security retirement benefits.  It’s an attempt to make up for the Social Security budget crisis. The current age to retire and receive Social Security benefits is 65, but House Republican Leader John Boehner proposed pushing the retirement age back to 70.  If approved, the new age would only affect those not set to retire for another 20 years. The proposal is being made to make up for the Social Security Administration’s budget crisis.

 The $5 trillion rollover – Banks around the world must refinance more than $5 trillion of debts in the coming three years, a massive rollover that poses threats to financial stability and growth. The need to replace these debts, which are medium and long term, will place pressure on bank profit spreads and in turn may either prompt deleveraging, where banks sell assets that they can no longer economically finance, or simply lead to a bout of credit rationing, where borrowers must pay more to borrow, thus crimping investment and economic growth. For banks in the UK, according to the  Bank of England Financial Stability Report, the refinancings amount to about $1.2 trillion by the end of 2012. If banks in Britain raise funds at the same pace they have been this year, they will only collect half of their needs in time. This is even before the fact that the banks need desperately to turn some of their riskier short-term funding into more reliable funding with a longer maturity.

 Bankers Who Broke Big Dig With Swaps Gone Awry Get Paid for Fix (Bloomberg) — The same bankers who sold Massachusetts interest-rate swaps that blew up the debt financing for the so-called Big Dig road and tunnel project in Boston — costing taxpayers $100 million — are getting even more money to fix what they broke.UBS AG bankers showed up at the Massachusetts Turnpike Authority in 2001 with a solution to a growing deficit at the state agency overseeing the $15 billion project. The bank gave the authority $29.1 million for an interest-rate swap linked to $800 million of Big Dig bonds, an agreement meant to cut the cost of paying back the debt and cover part of the budget shortfall. JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. made similar deals. The deal with UBS backfired as credit markets faltered two years ago, costing toll payers $36.3 million in extra interest and leading the Zurich-based bank to demand as much as $400 million to end the arrangement when the Big Dig bonds’ insurer lost its top credit ratings.

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