Armageddon California style updates for 02/09

Time to review the latest events in the California State Budget crisis. Notice I did not label this a progress report since there has not been enough of that to report. However, here are the highlights for this month.

First, John Chiang, the state controller announced suspension of all travel and per diem expense checks for all state employees including the legislators. They receive per diem checks of $173.00 to offset the expense of living in Sacramento. Let's do the math. 120 lawmakers times $173.00 a day is $20,760.00 daily savings. For a 5 day work week, that's $103,800.00 a week. This does not include the travel and per diem expenses for the rest of the state work force. Remember, this is just a suspension of payments due. When the legislators finally get around to passing a budget it will be paid.

Next, Governor Schwarzenegger tried to enact a 2 day a month furlough (days off without pay) for all state employees. John Chiang resisted the effort with the support of state employee unions, so Arnold had to take John to court to enforce it. The courts have already ruled that Arnold can do this since it is an emergency.

On February 10, Governor Schwarzenegger announced that the State of California will lay off 20% of its work force, letting go of those with the least amount of seniority. Wow, that's one out of 5 workers. California has about (for now anyway) 200,000 employees. I can't imagine that in a pool of 200,000 employees some wouldn't be willing to accept an early retirement if some of the payment reductions that usually apply to early retirements were waived. But then again, public employee pensions are very expensive. Maybe Arnold and the lawmakers made a good choice to let go of the least senior employees. If anyone has any thoughts on the subject, share them here.

Time for the USA to change its national bird.

US Treasury Secretary Timothy (doggone, I forgot to file my taxes!!!) Geithner announced a plan to set up a government and private investor partnership to buy up to $1 trillion+ (that's 12 zeroes and 4 commas) worth of troubled assets from the nation's financial firms. In Wall Street jargon this is known as a vulture fund. Since the distressed securities involved are close to dead, this moniker is very fitting, even explicit. Vulture fund investors take the risks involved with deeply discounted securities in hopes that the investments will eventually recover and then be sold at a profit. The biggest risk for VF investors is the market is right about the securities and they are wrong. Most VF investors minimize this risk by researching the companies in the VF to find out what the odds are of a recovery. They also make certain the fund is well diversified so that one failed security will not wipe out any hopes for future profits.
I just do not see how this $trillion+ vulture fund will work. The hope being that trading out these bad debt instruments with money or better debt instruments will encourage the firms to start lending to consumers and businesses again. First, where are the private investors going to come from? How many people will buy into the notion that a portfolio of mortgages issued to people who were not expected to afford them when they were issued has the potential for profit? Not many, that's for sure. Most investors would not touch these portfolios unless they were buying them at pennies on the dollar or if the government were to guarantee the investments in some way. (remember Bear Sterns, AIG, Citigroup, GM, Chrysler, Fannie Mae,Freddie Mac?)
Secretary Geithner's announcement was given a thumbs down response on Wall Street as investors voted with their wallets and sold off a lot of stocks. This in turn led to declines in world stock markets as well.