Month: December 2008

Once High-Flying Developers Now Looking for Federal Aid

Opponents of the auto industry bailout, who warned that it would prompt other business sectors to ask for similar consideration, are probably feeling vindicated. Only days after the Bush Administration did an end run around Senate Republicans and agreed to provide a Detroit rescue package using bank bailout funds, the Wall Street Journal is reporting that commercial real estate developers are seeking their own federal assistance package. They are warning that, without such aid, thousands of office complexes, shopping centers, hotels and the like could join the country’s foreclosure tsunami.

There’s one major difference between the auto industry and commercial real estate that justifies a bailout for one and not the other: the number and quality of jobs at stake. The Big Three provide hundreds of thousands of well-paying jobs (too well-paying according to certain Southern Senators) that have helped workers achieve a middle-class standard of living. Real estate developers, by contrast, are primarily responsible for substandard retail and janitorial positions. While the Service Employees International Union has helped improve wages and benefits for some building services workers, most of those jobs don’t take people far out of poverty. While it would be a shame for janitors and clerks to lose their jobs, preserving those positions does not have the same urgency as saving the estimated 1.2 million direct and indirect jobs linked to the Big Three.

Rather than bailing out their employers, it would make more sense to use federal funds to help retail and janitorial workers find better jobs elsewhere in the economy. In the speculative boom of recent years, the real estate business built far too many office buildings and shopping centers, and many of those properties will probably not survive the current shakeout. While there is a strong case that the country needs a domestic auto industry, it is much harder to argue that every commercial property needs to be kept in operation.

And if Congress does decide it is necessary to prevent a commercial real estate meltdown, it should keep in mind that these same developers now looking for aid have repeatedly pressured local governments for property tax abatements and other subsidies. A report I wrote last year (with two colleagues) on the big mall owner General Growth Properties, which is now struggling to survive, found that the company had received more than $200 million in such subsidies and another $9 million in savings as a result of aggressive filing of property tax assessment appeals. Previous (unpublished) research I did on the country’s largest mall operator, Simon Properties, found $380 million in subsidies and savings from assessment appeals. In both cases, the data come from an examination of only a portion of the malls owned by the company. Also remember that Wal-Mart used a gimmick called captive real estate investment trusts to avoid paying an estimated $2.3 billion in state taxes.

Perhaps Congress should require developers to use part of any bailout to repay the subsidies they received from local governments that are now facing dire fiscal conditions.

But even that would not provide a compelling case for a commercial real estate bailout. In a country that still hasn’t devised a comprehensive plan for stopping home foreclosures, we shouldn’t be worrying about saving the owners of superfluous office towers and big box stores.

Wanted: The Big Fish

In its waning days, the Bush Administration’s Environmental Protection Agency wants us to think that it is a serious crime-fighting organization. The agency’s enforcement division recently announced plans to “enlist the public in tracking down fugitives accused of violating environmental laws and evading arrest.” The innovation is a web page called EPA Fugitives, an online version of the wanted posters traditionally displayed in post offices.

There’s nothing wrong with such an initiative, but the two dozen culprits featured on the site are all decidedly small fish. Some are charged with serious offenses such as the dumping of hazardous wastes, while others are accused of less than monumental crimes such as illegally importing automobiles that don’t meet emissions standards or “aiding and abetting false entries into an Oil Record Book” of a ship.

Where is the agency’s zeal for highlighting the environmental crimes of large corporations? It’s been greatly diminished amid a general downplaying of enforcement activity. Last year the Environmental Integrity Project put out a report showing a sharp decline in enforcement efforts during the Bush Administration. “The bad news here is that it now costs less to pollute,” EIP Director Eric Schaeffer said at the time.

This is not to say that the EPA has let large corporations entirely off the hook. In fact, just this week the agency announced a settlement with Exxon Mobil under which the oil giant will pay $6.1 million in civil penalties for violating the terms of a 2005 consent decree concerning air pollution caused by the company’s refineries in Texas, California and Louisiana.

It apparently takes truly brazen actions such as those of Exxon to trigger real action by the EPA against a big company (though a $6 million fine is not much of a hardship for a company currently earning about $5 billion a month). If you look at the archive of the agency’s press releases on enforcement actions, the offending parties are most often small firms and individuals.

Perhaps the Obama Administration’s EPA should consider a new web page of its own: a rogue’s gallery of the large corporations that are doing the most to pollute the environment and exacerbate the climate crisis.

Siemens’s $1.3 Billion Slap on the Wrist

The German electronics and engineering giant Siemens, embroiled for the past two years in a massive international bribery scandal, has reached settlements with U.S. and German prosecutors. The company will pay $450 million to the U.S. Justice Department to resolve criminal charges under the Foreign Corrupt Practices Act (FCPA) and another $350 million to the Securities and Exchange Commission to settle related accounting violations. The total payments of $800 million are by far the most any company has paid in an FCPA case. Siemens also made a deal with German prosecutors involving a payment of about $540 million.

Siemens’ s total payout of $1.3 billion is huge in relation to the usual puny penalties imposed on even the most egregious corporate malefactors, but it is actually a bargain for the company. With annual revenues of more than $100 billion and profits of more than $5 billion, it can absorb the penalties without much difficulty.

Most significant is the fact that, by making deals with the prosecutors, Siemens avoided a guilty plea or verdict that would have disqualified it from continuing to do business with lucrative customers such as the United States government. According to the FedSpending website, Siemens has been awarded between $250 million and $350 million in federal contracts annually during the past few years, much of it from the Department of Homeland Security. According to its most recent 20-F filing with the SEC, Siemens derives about one-fifth of its total revenues from government and civilian customers in the United States.

While it is good for prosecutors to get companies to disgorge larger amounts of their ill-gotten gains, there is little evidence that monetary fines that are still in the realm of the affordable for large corporations can serve as an effective deterrent against future wrongdoing. Until the penalties threaten the continued existence of the company, they can be seen as nothing more than a cost of doing business aggressively.

In the case of Siemens, that wrongdoing was said to include the payment of more than $1 billion in bribes, taken from slush funds and sometimes transported in suitcases, to government officials in countries ranging from Argentina and Venezuela to Russia, China and Vietnam. It was also said to have paid kickbacks to the former government of Saddam Hussein in Iraq to secure business under the United Nations Oil for Food program.

How thoughtful it was for prosecutors to make sure a company such as this can continue to do work funded by taxpayer dollars. Whatever the feds take in penalties will soon be earned back in contracts. In a country where street criminals still face harsh sentences, large corporations continue to be treated with kid gloves.

Richard Shelby: United States Senator or Foreign Corporate Agent?

Alabama Senator Richard Shelby has emerged as the leader of Republican opposition to a federal rescue of the Big Three U.S. automakers. Shelby would have us believe that his position flows out of a deep belief in market forces. “The strength of the American system,” he said recently,” is it allows us to take risks—to create, to innovate, to grow, to succeed and sometimes to fail.”

While Shelby (seen in photo with Saddam Hussein) is credited by some for consistency in that he also opposed the big federal bailout of financial institutions, he’s been called a hypocrite because his home state lavished major economic development subsidies on Asian and European automakers—a total of more than $750 million to Mercedes, Honda, Toyota and Hyundai over the past 15 years. These transplants, all non-union, have given the Yellowhammer State one of the country’s largest auto sectors, albeit one that is foreign controlled.

Shelby insists that Alabama’s handouts to the foreign automakers are not relevant to the current debate, but what he and his critics are both ignoring is that the funds channeled to the likes of Mercedes and Honda have not been only state and local. The federal government has also provided assistance to the transplants, and Shelby, along with other members of the Alabama Congressional delegation, helped that happen.

A stroll through the archives of Alabama’s newspapers on Nexis makes this clear. In 1993, when Mercedes was lured to the state with a $250 million incentive package, Shelby praised the deal, stating: “Alabama put together a smart investment package that in both the short and long term will yield solid results for our state” (Birmingham News, 9/29/93). Federal money helped pay for some of the highway improvements that were promised to Mercedes to make the site more appealing (Birmingham News, 10/21/93).

In 1999, when Honda was induced to build a plant in Alabama with a $250 million package of its own, the Alabama delegation quickly mobilized. On May 7, 1999, Michael Brumas of the Birmingham News reported: “Alabama members of Congress said Thursday they will be looking for ways the federal government can help underwrite part of the costs associated with building the new Honda plant at Lincoln. And the lawmakers pledged to help the automaker maneuver through the federal bureaucracy as it prepares to build the plant.” The article said Shelby, as chair of a transportation appropriations subcommittee, was expected to funnel money for road projects near the site.

In 2001, when the Korean automaker Hyundai was deciding where to locate its first U.S. plant, Shelby and other members of the Alabama delegation met with the company (Birmingham News, 10/11/01). After the state won the plant with yet another package of around $250 million, Shelby arranged for $445,000 in federal funds to go to the Alabama Tombigbee Regional Commission, which planned to arrange free bus and van service to take construction workers to the Hyundai site (Montgomery Advertiser, 9/10/02). And these are only the cases that found their way into the press.

Shelby is far from the only senator to have used his office to arrange for federal funds to help a company in his state. But the fact that Shelby has worked so hard for the foreign automakers and now opposes measures deemed necessary to protect the jobs of three million American workers in the auto industry and related sectors makes one wonder whether he should be seen as a U.S. Senator or a foreign corporate agent.

Chicago Sit-In and the Future of Green Jobs

The sit-in at Chicago’s Republic Windows & Doors brings together a host of issues such as labor rights in a plant closing, the refusal of a major bank receiving billions in federal bailout funds to invest in a struggling company, and the fragility of blue-collar employment in the weakening economy. Let me add another to the mix: the fate of green jobs.

Coverage of the labor dispute tends to treat Republic as an old-line manufacturer desperately trying to survive in a new economy. On the contrary, Republic’s business – the production of replacement windows – is a key component of the clean energy revolution being so widely touted these days. Installing those windows lowers the amount of energy used by homes and commercial buildings, thereby reducing the need for new fossil-fuel-burning power plants. The Apollo Alliance is calling for a national energy efficiency commitment to reduce energy use in new and existing buildings at least 30 percent by 2025.

Before it fell on hard times, Republic was promoting green principles not just in terms of the uses of its windows but also in the way its products were made. In December 2003 the company issued a press release announcing that it was developing a “cradle to cradle” design system that would allow the materials in its windows to be fully recycled, thus avoiding the generation of waste. The project received funding from the Chicago Department of the Environment. In a follow-up interview with Industry Week, company executive Les Teichner said Republic was also looking into ways to expand the life span of window frames so they could remain in place longer while the company would replace and recycle window sashes more frequently.

It’s not clear to what extent Republic was able to follow through on its ambitious environmental plans and what role they played in the company’s competitive and financial circumstances. It is also not yet known whether the announced closing of the company last week was more the result of a shutoff of credit by Bank of America or a decision by the company’s owners to move the operations out of state.

In any event, the situation serves as a cautionary tale for proponents of green jobs. We cannot assume that the clean-energy revolution will happen spontaneously nor that the kinds of jobs it creates will necessarily meet the highest standards. Aggressive government enforcement of labor laws and strong union advocacy of the sort being demonstrated by the UE at Republic will be necessary to fulfill the promises of the green-collar economy.

Rank-and-file activism like that being employed by the Republic workers will also be a key part of the equation. The Republic sit-in harkens back to the labor militancy of the 1930s but it also looks forward to the coming struggle to create a future of secure, well-paying and environmentally-friendly jobs.

Congress Busts the UAW

The United Automobile Workers has been effectively decertified as the collective bargaining representative of workers at General Motors, Ford and Chrysler. And the main union buster was not management, but rather the Congress of the United States.

That’s only a slight exaggeration of the facts. The UAW, fearing that its contracts at the Big Three would be voided if the automakers filed for bankruptcy, has made major new contract concessions to satisfy Congressional critics of a bailout that the auto companies insist is the only way they can avoid Chapter 11. In order to save its union contract, the UAW is being forced to destroy it.

It is infuriating that the UAW was put in this situation. First, there’s the obvious and widely noted double standard. The federal government has spent vastly more on the rescue of the financial sector while imposing no real conditions beyond token restrictions on executive compensation. By contrast, the auto industry, especially its workforce, is being put through the wringer.

Second, many of the members of Congress speaking out against the auto industry bailout are from Southern states where Japanese, Korean and European automakers have set up non-union plants with the aid of huge state subsidy packages. These lawmakers are functioning more like foreign agents than legitimate representatives of the United States.

And then there are the Congressional leaders who think they can remake the auto industry by insisting that the Big Three come up with new business plans to merit the federal intervention. Pressuring Detroit to move faster on the development of clean cars may be a good thing, but these would-be industrial policymakers are ignoring the fact that a bailout of the auto industry at this point is justified mainly as a way to prevent an accelerated collapse of the overall economy.

Yet, by pressuring the UAW to give up, for instance, what remains of the jobs bank program (a job security measure that provides nearly full pay for laid off workers), Congress is assuring that more people will end up on the unemployment rolls instead, thus taxing already strained state government budgets. Another of the main givebacks consented to by the UAW were delays in company payments to retiree health plans. This raises the odds that those plans, over which the UAW was previously pressured to assume administrative control, will collapse, forcing participants to turn to taxpayer-funded healthcare.

And these measures, which UAW leaders could implement without a vote of the membership, will apparently be followed by more wage concessions. Just when Congress is desperately trying to stimulate job creation and prop up family income in the larger economy, it is pressing the auto industry to take steps that will have the opposite effect.

The notion that the problems of the U.S. auto industry are the result of overpaid union workers (as opposed to managerial incompetence) is a long-standing myth that has been trotted out time and time again over the past quarter century. What’s amazing is that this fairy tale continues to be employed even after the UAW has made repeated concessions, and basic union wage rates (especially for new hires) are now not significantly different from pay levels at the U.S. operations of companies such as Toyota and Nissan. And what’s even more amazing is that the Democratic leadership of Congress has in effect compelled the UAW to make sacrifices that diminish the difference between union and non-union working conditions almost to the vanishing point.

The Democrats will be congratulating themselves if the auto bailout is approved, but they should be held accountable for making union workers pay so dearly for their survival.

Full disclosure: I am a member of UAW Local 1981, the National Writers Union.

Taking Our Money and Running Overseas

It was only about week ago that the Treasury Department, the Federal Reserve and the FDIC rushed to put together an emergency rescue package for Citigroup consisting of a $20 billion capital infusion and protection against up to $306 billion in losses on the financial giant’s portfolio of mortgage-backed securities. This was in addition to an earlier $25 billion investment in Citi as part of the effort to prop up the country’s largest banks.

Now comes the news that an arm of Citigroup agreed to pay $10 billion to buy a Spanish toll road operator called Itinere Infraestructuras SA. Funny, I don’t recall Treasury Secretary Henry Paulson mentioning that the taxpayers were bailing out Citi so that it could speculate in the foreign infrastructure privatization market.

This caused me to wonder what else major financial institutions have been doing with their federal infusions other than expanding credit for U.S. consumers and businesses. We already know about the way in which some banks have used their money from Uncle Sam to buy competitors and the tendency of AIG executives to treat themselves to lavish retreats at public expense, but is Citi the only recipient that is sending some of its money overseas?

To answer this question I started with the tally of bailout recipients maintained by ProPublica and searched for recent announcements by those companies. I found, for example:

* Bank of America ($25 billion received) gave notice of its plan to exercise the remainder of its option to purchase shares in China Construction Bank Corporation (CCB) from China SAFE Investments Limited (Huijin). The purchase will increase B of A’s holdings in CCB from 10.8 percent to 19.1 percent. The cost was not reported.

* JP Morgan Chase ($25 billion) announced an enhancement of its cash management and trade services in India, which represented part of a $1 billion plan to expand the bank’s worldwide cash management and treasury business.

* Bank of New York Mellon ($3 billion) announced that it had received a license to initiate banking operations in Mexico.

Under normal circumstances, such announcements would merit no comment. But at a time when these institutions are receiving massive amounts of taxpayer funds, they take on a new significance. While the infusions of federal money were designed to expand the flow of credit in the United States, banks are using some of the funds to expand their foreign operations and investments. They are taking our money and running overseas.

And all this is happening while an anonymous U.S. Senator has placed a hold on the nomination of Neil Barofsky to serve as the special inspector general for the bailout. Apparently, some parties don’t want any close scrutiny of how hundreds of billions of dollars of public money are being bestowed on the financial sector by a federal government acting like an overindulgent parent at Christmastime.