Let the Pension Fund Games Begin

Chapter 11 for The Fairchild Corp.

March 19 (Bloomberg) — The Fairchild Corp., once the largest U.S. maker of commercial aircraft, sought bankruptcy protection after missing two pension fund payments, which totaled about $2 million.

The McLean, Virginia-based seller of aircraft parts and motorcycle apparel listed assets of $89.4 million and debt of $228.1 million, according to a Chapter 11 petition filed yesterday in U.S. Bankruptcy Court in Wilmington, Delaware.

Fairchild sought protection from creditors after suffering “operating losses for more than 10 years,” Mark Collins, a Wilmington, Delaware-based lawyer for the company, said in a court filing yesterday. Donald Miller, Fairchild’s chief restructuring officer, didn’t immediately return a call for comment.

Fairchild failed to make a quarterly pension payment of less than $1 million on Jan. 15 because of “financial hardship,” the company said in a U.S. Securities and Exchange Commission filing. Fairchild also missed a quarterly pension- funding payment of about $1 million that was due Nov. 14.

The worldwide economic decline hurt sales of Fairchild’s products, which include aircraft parts and motorcycle helmets, Collins said in court filings. Fairchild officials also are dealing with “legacy liabilities” left over from former Chief Executive Officer Jeffrey Steiner’s tenure, he added.

Steiner’s Perks

Steiner, who died in November, had been criticized by investors for approving excessive salaries and loans for himself. Shareholders also questioned why the company picked up the tab for his aircraft fees and apartments in London and Paris.

The company wants a judge to allow it to auction off its Banner Aerospace unit as part of the bankruptcy case, according to a court filing. Phoenix Group, a private-equity firm, has made an undisclosed bid for the unit, Collins said in the filing. He noted that Phoenix bought a 31 percent stake in Fairchild in December 2007.

Fairchild officials said a Chapter 11 reorganization provides the “best platform from which to quickly realize” the value of the unit’s assets, according to the filing.

On March 12, the company agreed to sell its Hein Gericke Deutschland motorcycle clothing unit for $1.4 million to a group of four Hein Gericke managers, the company said in a regulatory filing.

Fairchild traces its history to the Fairchild Aerial Camera Corp., founded by Sherman Mills Fairchild in 1920, according to the company’s Web site. Sherman Fairchild was a pioneer in aerial mapping the five boroughs of New York City in 1924, the site said.

$170 Million Sought

In the 1920s, Fairchild developed the first commercially successful U.S. cabin monoplane. For the military, Fairchild developed the P-47 Thunderbolt, the C-119 cargo plane, the PT-19 trainer and the F-105 Thunderchief, according to the Web site, which says the company was once the nation’s largest maker of commercial aircraft.

Fairchild’s 40 largest unsecured creditors of the company contend they are owed about $170 million, according to court documents.

In 2005, Steiner agreed to pay $3.76 million to resolve shareholder lawsuits challenging his pay and benefits as excessive. A Delaware judge rejected his initial $1.5 million offer to settle the case.

Investors zeroed in on Steiner’s pay and benefits after Fairchild disclosed that it paid $5.6 million to cover the CEO’s legal fees in a French court case.

Suspended Sentence

Steiner received a suspended sentence and a 500,000-euro ($632,775) fine in 2003 for misusing funds of Elf Aquitaine SA, an oil company now owned by Total SA.

The charges stemmed from an eight-year French probe of illegal commissions Elf Aquitaine paid to businessmen and political leaders in exchange for contracts.

“All of the debtors’ businesses have been hampered by numerous legacy liabilities, including under-funded pension obligations, retiree benefits, environmental claims, tort and other litigation,” Collins said in yesterday’s court filing.

The case is In re The Fairchild Corp., 09-10899, U.S. Bankruptcy Court, District of Delaware (Wilmington).

look out for potential inflation trades

March 19 (Bloomberg) — Copper climbed to a four-month high and crude oil, wheat and soybeans advanced on speculation the Federal Reserve’s debt purchase plan aimed at bringing down borrowing costs may revive growth in the world’s largest economy.

Commodities gained as the dollar slumped to a two-month low against the euro after the Fed said it planned to buy as much as $300 billion of U.S. government bonds and increase purchases of mortgage bonds, expanding its balance sheet by as much as $1.15 trillion. The move may loosen credit and boost home sales.

“Markets have become more optimistic about the outlook for the U.S. economy in anticipation that this new policy will improve things,” said David Moore, a commodity strategist at Commonwealth Bank of Australia Ltd. “The U.S. dollar has weakened quite dramatically.”

Copper for three-month delivery advanced as much as 3.3 percent to $3,880 a metric ton on London Metal Exchange, the highest since Nov. 11, before trading at $3,860 a ton at 3:53 p.m. Singapore time. Crude oil for April delivery rose as much as $1.69, or 3.5 percent, to $49.83 a barrel, nearing $50 for the first time in two months.

Copper is an indicator for the world economy and sets the pace for other industrial metals because an average of 400 pounds (181 kilograms) is used in homes and 50 pounds in cars, according to the Copper Development Association.

‘Last Resort’

“This plan to buy debt seems to be one of the last resorts by the Federal Reserve to resuscitate the U.S. economy,” Yang Zhenqiang, analyst at Yide Futures Brokerage Co., said from Tianjin. The U.S. is the second-largest copper user after China.

The Dollar Index may drop for an eighth day, the longest stretch in a year, against its major trading partners after falling yesterday by the most in 23 years as the Fed prepared to flood the market with dollars as part of the debt buyback.

“Quantitative easing on such a large scale can only mean near-to-medium term inflation, which is supportive of commodities,” said Yang. Quantitative easing refers to using injections of funds into the economy as the main policy tool.

Gold, which usually climbs when the dollar drops and inflation expectations increase, fell 1 percent today to $932.95 an ounce as the rally in global equities reduced its appeal as an alternative investment. The precious metal jumped 3.6 percent yesterday, the most since Jan. 23, on the Fed decision.

Corn, soybeans and wheat gained on the outlook for increased demand for U.S. crops. May-delivery wheat advanced as much as 2.5 percent to $5.4325 a bushel. Soybeans for May delivery rose as much as 3 percent to $9.42 a bushel.

Type 5 people

March 19 (Bloomberg) — The rally that pushed the dollar to the highest levels since 2006 is in danger of crumbling as the Federal Reserve starts buying Treasuries and ramps up its purchases of mortgage debt, adding to a flood of greenbacks.

“The implications of today’s Fed decision are unambiguous,” currency strategists at Citigroup Inc. wrote in a research report within a half hour of the Fed’s decision yesterday. The dollar “should weaken,” they said.

Fed policy makers said yesterday they plan to buy as much as $300 billion of U.S. government bonds and step up purchases of mortgage bonds, expanding the central bank’s balance sheet by as much as $1.15 trillion. The extra supply of dollars threatens to overwhelm investors just as the budget deficit swells.

The trade-weighted Dollar Index, which tracks the currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, tumbled 2.7 percent to 84.595, its biggest one-day drop since 1971. That pushed its decline to 5.6 percent since reaching 89.62 on March 4, the highest in almost four years.

It fell yesterday by the most in nine years versus the euro, to $1.3474, and traded at $1.3433 as of 6:10 a.m. in London. The dollar dropped today against Japan’s currency to a three-week low of 95.27 yen.

“Sell the dollar!” said Scott Ainsbury, a portfolio manager who helps manage about $12 billion in currencies at New York-based hedge fund FX Concepts Inc. “This is huge, huge. It’s equivalent to the Plaza accord. This is the last thing they have in the closet, and they used it a bit early.”

In 1985, the U.S., U.K., France, Japan and West Germany agreed at New York’s Plaza Hotel to coordinate the devaluation of the dollar against the yen and the deutsche mark.

Rally Reversal

The Dollar Index started to slide in 2005 on concern about the widening current-account deficit and reached a record low in the first quarter of 2008 as credit market losses mounted following the crash of the subprime mortgage market.

It then rallied in the second half of last year as the global recession spurred demand for haven assets such as Treasury bills. Rates on bills fell below zero percent in December. UBS AG currency strategist Benedikt Germanier in Stamford, Connecticut, said he is sticking with his forecast for the dollar to trade at $1.30 per euro over the next month.

Yields on 10-year Treasuries declined the most since 1962 after the Fed said it would concentrate purchases in notes due from two to 10 years. The central bank is expanding its quantitative easing policy, which already includes agency and mortgage debt, to more than $1.85 trillion in securities.

The purchases will bolster concern that inflation will accelerate as borrowing costs fall, said Jessica Hoversen, a foreign exchange analyst with MF Global Ltd. in Chicago.

‘Dollar is Done’

“The Fed is basically financing our deficit by buying the debt issued by the Treasury,” she said. “If the Obama administration pushes through another stimulus package, the dollar is done.”

President Barack Obama is seeking Congressional approval for a $3.55 trillion budget for the year starting in October that would increase spending by 32 percent to kick start the economy. Goldman Sachs Group Inc. estimates the U.S. will almost triple debt sales this fiscal year ending Sept. 30 to a record $2.5 trillion.

The euro will probably rise to $1.3590 in two weeks provided it holds above $1.3330 through March 20, Hoversen predicted. It may rally above $1.39 “sooner than we think,” Citigroup analysts Tom Fitzpatrick in New York and Shyam Devani in London wrote in a research note yesterday.

Breaking Through

Trading patterns also suggest the dollar is poised to weaken. Europe’s common currency took 26 days to break through $1.3117 on Dec. 11, before appreciating to the 200-day moving average above $1.47, the Citigroup analysts wrote. Yesterday’s break occurred 27 days after the euro established a resistance level on Feb. 9, suggesting it may “explode” higher, they wrote.

The euro, the Norwegian krone and the Australian dollar will outperform as those nations’ central banks hold out longer against the temptation to print money, said Dale Thomas, head of currencies at Insight Investment Management, which oversees about $121 billion in assets.

“All the major central banks may end up in the same position,” London-based Thomas said. “The way we look to play it is to see which goes the first and which one lags, and try to explore the timing difference between the two.”

Central banks are grappling with how to steer their economies when interest rates are already close to zero.

Bank Moves

The Bank of England is buying government bonds and corporate debt to unlock trading in frozen credit markets and stimulate the economy. The Bank of Japan is snapping up government notes and making subordinated loans to banks, and the Swiss National Bank is selling francs to prevent gains against the euro.

Fed policymakers have committed to buy or lend against everything from corporate debt, mortgages and consumer loans to government bonds as they try to end the seizure in credit markets.

The extra yield relative to benchmark interest rates that investors demand to own debt backed by consumer loans has soared amid concern that defaults will climb.

Bond Spreads Wide

Spreads for top-rated bonds backed by auto loans are trading at about 300 basis points more than the one-month London interbank offered rate compared with 65 basis points in January 2008, JPMorgan Chase & Co. data show. One-month Libor, borrowing benchmark, is currently 0.55 percent. A basis point is 0.01 percentage point.

“We cannot rule out that this will place additional pressure on other central banks to follow suit,” wrote David Woo, the global head of foreign-exchange strategy at Barclays Capital in London. “Should this turn out to be the case, deflationary concerns in the market may begin to give way to longer-term worries about monetary inflation.”

While markets are up the gains seem unimpressive

March 19 (Bloomberg) — Stocks climbed, sending the MSCI World Index to the longest stretch of gains since 2006, as the Federal Reserve said it will buy $300 billion of government bonds to combat the first global recession since World War II.

The MSCI World advanced for an eighth day, led by banks and raw-material producers, the past year’s worst performers. Standard & Poor’s 500 Index futures fell after U.S. stocks closed at a one-month high yesterday as some investors questioned whether the Fed’s efforts will end the economic contraction. European government bonds soared, while U.S. Treasury notes advanced after surging the most in more than four decades yesterday. Copper, oil, wheat and soybeans rallied.

“We’re unsure if this is a sucker’s rally,” said Staffan Sevon, chief investment officer at Nordea Asset Management in Helsinki, which has $231 billion. “The Fed is doing the right thing. Even though it is probable this will end well and we won’t be living in the forest eating berries, there will be enough nasty surprises to scare the market.”

The MSCI World added 1.6 percent at 10:09 a.m. in London as UBS AG led a rally in banks, Xstrata Plc advanced with metals, and Hermes International SCA and Prudential Plc climbed on profit that beat analysts’ estimates.

The gauge of 23 developed countries has surged 16 percent since March 9 as Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. said they made money during the first two months of 2009 and the Fed signaled its determination to avoid a repeat of the Great Depression.

Futures on the S&P 500 slipped 0.5 percent after yesterday’s rally cut its 2009 drop to 12 percent from as much as 25 percent on March 9. The Fed will use newly created money to fund the purchases, increasing the supply of funds in the market and helping to drive down rates.

‘Key Foundations’

The Fed’s move “is very much one of the key foundations for eventual recovery,” Jeremy Batstone-Carr, an equities analyst at Charles Stanley & Co. in London, said in a Bloomberg Television interview. “This is an important step. We need to see further action taken in Europe. This is another piece in the jigsaw.”

Europe’s Dow Jones Stoxx 600 Index gained for the first time in three days, adding 0.8 percent. The MSCI Asia Pacific Index rose for a fifth day, climbing 2.1 percent. Mitsubishi UFJ Financial Group Ltd., Japan’s biggest publicly traded lender, increased in Tokyo, where the central bank said it will buy more bonds from banks.

UBS, European Banks

UBS, the European bank hardest hit by the credit crisis, added 7.5 percent to 12.69 Swiss francs, extending its eight-day gain to 48 percent. Switzerland’s biggest bank offered to buy back 1 billion euros ($1.34 billion) in debt to boost capital adequacy and said it will seek authority from shareholders to raise capital in the future if needed.

Bank of Ireland Plc jumped 18 percent to 42 euro cents. Allied Irish Banks Plc advanced 12 percent to 58 cents. Ireland has been advised to set up a “toxic debt” company to take over souring property loans from the country’s banks, the Irish Independent said, without saying where it got the information.

Xstrata, which produces copper and is the world’s biggest exporter of power station coal, gained 10 percent to 419 pence. StatoilHydro ASA, the largest offshore oil and natural-gas operator, added 3.3 percent to 118.1 kroner.

Copper for three-month delivery advanced as much as 3.3 percent to $3,880 a metric ton on the London Metal Exchange. Crude oil for April delivery rose as much 3.5 percent to $49.83 a barrel, nearing $50 for the first time in two months.

Soybeans, Wheat

Corn, soybeans and wheat gained on an outlook for increased demand for U.S. crops. May-delivery wheat advanced as much as 2.5 percent to $5.4325 a bushel. Soybeans for May delivery rose as much as 3 percent to $9.42 a bushel.

Hermes rose 5.3 percent to 75.72 euros. The company reported 2008 net income of 290.2 million euros ($390 million), beating the average analyst estimate of 287.5 million euros.

Prudential advanced 11 percent to 280 pence. The U.K.’s second-largest insurer said Chief Executive Officer Mark Tucker will step down as the company posted operating profit that beat analysts’ forecasts.

Mitsubishi UFJ rose 2.3 percent to 489 yen. Mizuho Financial Group Ltd., Japan’s second-biggest lender, gained 1.5 percent to 209 yen.

The Bank of Japan said yesterday it will buy 1.8 trillion yen ($18.3 billion) of government debt from banks each month, up from 1.4 trillion. The central bank said on March 17 that it may provide as much as 1 trillion yen in subordinated loans to banks.

Treasuries, Yen

The yield on the 10-year Treasury note fell three basis points to 2.51 percent after sliding 47 basis points yesterday on the Fed’s announcement. The yield on the 10-year German bund, Europe’s benchmark government security, slid as much as 22 basis points to 3 percent.

The yen rose to a three-week high versus the dollar, after gaining the most since December yesterday, as speculation the U.S. and Europe are committed to keeping down yields boosted the appeal of Japanese assets.

The dollar’s drop, which reduces the profitability of revenue generated abroad for Japan’s exporters, help push Japan’s Nikkei 225 Stock Average down 0.3 percent.

Toyota Motor Corp., which gets 37 percent of sales from North America, lost 2.2 percent to 2,965 yen. Honda Motor Corp. slumped 3 percent to 2,230 yen.

Enough with the AIG shit

The AIG bonuses outrage has Congress moving at warp-speed.

House Democratic leaders announced that a bill designed to tax the bonuses out of existence will come to the House floor Thursday, mere days after the news of the $165 million payout to employees of the embattled American International Group.

The legislation would levy a stiff 90 percent tax on bonuses paid by any financial firm receiving more than $5 billion in federal funds from the Troubled Asset Relief Fund.

“What happened with these bonuses was a mugging on Wall Street,” said Rep. Steve Israel (D-N.Y.), who worked on the legislation. “When you get mugged you want two things to happen. You want justice and you want your money back.”

“We’re just not going to say that we’re not going to anything” about irresponsible Wall Street executives getting bonuses with taxpayer money, said House Ways and Means Chairman Charles B. Rangel.

The $5 billion bar set by the legislation is not very high considering the piles of cash the government has poured into financial institutions since the fall. Indeed, it would hit banks such as J.P. Morgan Chase, which took the TARP money only at the insistence of then-Treasury Secretary Henry Paulson to ensure that the bank rescue plan would work.

The legislation would only affect employees whose total family income exceeds $250,000 per year, and would cover all bonuses received after Jan. 1, 2009.

Asked why they didn’t impose a full 100 percent tax on the bonuses, Rangel said he “figured that the local and state officials would take care of the other 10 percent.”

House Majority Leader Steny Hoyer (D-Md.) said he expected the bill to pass with overwhelming bipartisan support. He and Pelosi also said they’re working on additional legislative responses to the executive compensation issue.

I’m sick of AIG…this might be worse than Madoff

(CNN) — President Obama said Wednesday he’ll “take responsibility” for AIG executives receiving controversial bonuses while the company took $173 billion in government bailouts.

“We didn’t draft these contracts. We’ve got a lot on our plate. But it is appropriate when you’re in charge to make sure stuff doesn’t happen like this,” Obama told a town hall meeting in Costa Mesa, California.

Obama’s comments came just more than an hour after Sen. Christopher Dodd, the Senate banking committee chairman, told CNN that he was responsible for language added to the federal stimulus bill to make sure that already-existing contracts for bonuses at companies receiving federal bailout money were honored.

Dodd acknowledged his role in the change after a Treasury Department official told CNN the administration pushed for the language.

Both Dodd and the official, who asked not to be named, said it was because administration officials were afraid the government would face numerous lawsuits without the new language.

At the town hall meeting, Obama said he was “outraged” at the bonuses that AIG executives have received while the company was getting “extraordinary assistance from taxpayers to keep its doors open.”

“For everybody in Washington who is busy scrambling trying to figure out how to blame somebody else, just go ahead and talk to me, because it’s my job to make sure that we fix these messes even if I don’t make them,” Obama said.

“But what’s just as important is that we make sure we don’t find ourselves in this situation again, where taxpayers are on the hook for losses in bad times, and the wealth generated in good times goes to those who are at the very top of the income ladder.

“… So I’m absolutely committed to ensuring we have the tools we need to prevent the kinds of abuses that sent AIG spiraling.”

Earlier Wednesday, Obama said no one in his administration had been responsible for supervising ailing insurance giant AIG but that ultimately, the buck stops with him. Video Watch Obama blast AIG bonuses »

“People are right to be angry. I am angry. … People are rightly outraged about these particular bonuses,” he said. Obama said he held discussions with his economic team and with Rep. Barney Frank, D-Massachusetts, chairman of the House Financial Services Committee. Frank presided over hearings Wednesday on the AIG bonus controversy.

On Wednesday afternoon, AIG chief executive Edward Liddy told Congress that he has asked employees of the bailed-out insurer who took home more than $100,000 in bonuses to return at least half. Video Watch the AIG CEO ask executives to pay back some of the bonuses »

Liddy, saying he knew that the public’s patience is “wearing thin,” said some employees have decided on their own to return their entire bonuses to the company.

Obama also defended his criticized Treasury secretary, Tim Geithner, saying he “is making all the right moves in terms of playing a bad hand.”

“There has never been a secretary of the Treasury, except maybe Alexander Hamilton, right after the Revolutionary War, who has had to deal with the multiplicity of issues that Secretary Geithner’s having to deal with,” he said.