PENSION BLOWUP IS NEXT
By JOHN CRUDELE
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OLD FRIENDS:
Retirees, like the two men (above) at a Parkchester Senior Citizen's Center, may be worried that their companys may have underfunded pension funds.
- NYP: Bolivar Arellano
August 22, 2002 -- THE next big blow for corporations: underfunded pensions.
Here's what happened: Companies were just as stupid as everyone else during the stock market bubble and they became dependent on abnormally large investment gains to keep pension tills full.
But that trick isn't working anymore. And, according to an important new Merrill Lynch & Co. report, of the 346 companies in the S&P 500 index that have old-fashioned retirement plans, 82 percent were overfunded by just $1.1 billion at the end of last year.
That's an incredible drop from the $215 billion overfunding level at the end of 2000.
And, you guessed it, there may be no pension surplus at all after the woeful performance of the stock market this year.
Worse, the 346 companies were actually underfunded by an aggregate $245 billion at the end of 2001 when health care benefits to retirees were included in the calculations.
Health care and other post-retirement plans are not required by the government to be funded.
Merrill Lynch also calculated that earnings for the Standard & Poor's 500 companies would have been 6.1 percent lower in 2001 if the impact of pension funds, including interest costs and expected asset returns, were not included.
There are more than enough problems already weighing on corporate profits. The slipping economy, of course, is the most important. So is the issue of whether stock options should be expensed.
And there is still the little matter of whether corporate profits can be trusted in the first place.
Dozens of companies hedged on their certification filings last week, and that leaves open the possibility that more scandals might be coming.
Merrill Lynch says the companies with the greatest underfunding when health care costs were included are General Motors, Ford, Exxon Mobil, Delphi Automotive Systems, DuPont, SBC Communications, Boeing IBM, Philip Morris and AMR Corp.
Another batch of companies would be hard hit if the impact of pensions were not included in their profit statements. Companies whose earnings per share would fall 10 percent or more are BellSouth, Boeing, General Electric, IBM, Marsh & McLennan, SBC Communications and Con Edison.
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Even though the Federal Reserve decided not to cut interest rates this month, it doesn't mean Alan Greenspan will sit idle if the economy weakens.
The Fed could - and probably will - start making massive repurchases of government securities. This is where the real Fed power lies.
As I said before, Greenspan has pretty much used up the benefits of lower interest rates after 11 cuts in two years. The Fed is virtually powerless in compelling people and companies to borrow money if they don't want to borrow.
Wall Street thinks more rate cuts will come later this year, perhaps as early as September - or even in between policy meetings.
Maybe yes, maybe no. But any further moves to reduce rates would be irrelevant and perhaps even counterproductive.
So instead, the Fed's next move could very well be to further liquefy the banking system. This is delicate stuff, because the financial markets here and abroad could be bothered if Greenspan looks as if he is not even paying lip service to inflation.
And with the Fed's pool of money already growing at a strong 8 percent a year, letting the presses at the mint run overtime is a problem.
The Fed repurchases government securities all the time as part of its regular operations. What the pros will be looking for are repurchases over and above those needed to keep interest rates where the Fed wants them.
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The new definition of EBITDA: Earnings Before I Tricked Da Auditors.
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How dead is the mergers and acquisitions business?
The hottest sector in the financial industry during the second quarter was thrifts, which are usually drop-dead boring. And Citigroup's $5.9 billion acquisition of Golden State Bancorp accounted for 10 percent of deals, according to SNL Financial.
That's up from just $2.7 billion in first-quarter deals and $34.6 billion in thrift acquisitions in the second quarter of 2001.
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Rumors come up daily that the U.S. will attack Iraq, and I'm sure crazyman Saddam Hussein is glad to get the heads up. This week's rumor had something to do with the American government leasing ships - and it sent the price of crude oil temporarily higher.
Prudential Financial recently tried to give investors a warning on what to expect if there's a war - or, I guess you should say, another war.
The firm says that fear of conflicts like this usually hurts U.S. stock prices, but that the markets tend to hit a bottom at moments of maximum peril. And, it says, Wall Street typically pays more attention to the economy than to military action.
Here are two problems I see.
First, only in retrospect do you know when you've reached the period of maximum peril. And, second, if war with Iraq means more domestic terrorism, then watching the war will be just like watching the economy.
* Please send e-mail to:
jcrudele@nypost.com
