Staying a step ahead
Leaders keep a close eye on Wall Street, but City Hall says the fundamentals of Pasadena’s economy remain sound
By André Coleman , Joe Piasecki 10/02/2008
Local leaders this week were monitoring America’s financial meltdown and congressional efforts to pass a $700 billion rescue package — or Wall Street bailout, depending on who you talk to — designed to help stabilize the economy by saving shaky financial institutions and aiding struggling homeowners.
Cries for Wall Street welfare began two weeks ago when insurance giant AIG and mortgage lender Lehman Brothers failed, leaving financial markets in chaos.
As the news came Monday that Congress had rejected the Bush administration plan by a vote of 228-205, the Dow Jones Industrial Average plummeted 777.68 points — the biggest percentage drop in history, equaling more than $1 trillion dollars in losses in retirement accounts and 401k plans, according to published reports.
“I believe the plan proposed by Treasury Secretary Paulson was not sufficiently protective of taxpayer dollars, and I opposed it,” said Pasadena Democratic Congressman Adam Schiff Monday in a statement posted on his Web site. A majority of Democrats, however, voted for the bill. Republican representatives voted against it at a rate of 2 to 1.
Later that day, Citigroup stepped in to purchase Wachovia Bank’s banking operations as Wachovia tottered, its shares having dropped in value by 90 percent, according to the Philadelphia Business Journal.
Washington Mutual’s failure last Thursday was the largest bank collapse in US history. Almost immediately after being taken over by the FDIC, all of the bank’s deposits, loans and branches were sold to JP Morgan Chase for $1.9 billion. According to a Kiplinger.com story, not much will change for WaMu customers: They can continue to use their ATM cards and bank at WaMu branches and will soon receive Chase debit and credit cards and be able to use Chase branches.
Despite the economic downturn, Pasadena’s financial condition remains strong, said Mayor Bill Bogaard.
“The Pasadena economy is well-diversified, and through June 30 I have not been able to discern a significant downturn,” said Bogaard. “Obviously we have a ways to go in dealing with the various challenges that face us — including the credit crunch, high rates of foreclosure and increasing costs in the basics that every family needs — but so far things have been strong in Pasadena. Our restaurants and retail stores continue to do a good level of business, even though some have had difficulties and we see some signs on doors. My hope is, with Pasadena’s inherent strengths, that residents need not anticipate troubled times ahead.”
City Hall itself also has its feet planted on firm financial ground, said City Treasurer Vic Erganian.
“In general we’re pretty healthy, pretty strong,” he said. “We’re well-positioned to absorb any shocks in the economy. There are many cities that may not if this [financial chaos] is prolonged.”
Earlier this year, the city received a AAA bond rating from Standard & Poor’s, one of a handful of California cities to do so.
“The economic downturn is going to affect all cities, but we have a diversified revenue source,” said Erganian, explaining that foreclosure rates and drops in sales tax revenue are not nearly as high in Pasadena as many other cities — especially some in Riverside and San Bernardino counties that had experienced a housing construction boom before the mortgage meltdown. “Relative to the county of Los Angeles average, we’re much, much better off. But then again, the economic slowdown coupled with the credit crisis in the financial markets will ultimately have some impact on the city’s finances, as it will on all local governments.”
The economy is a major concern for members of Pasadena’s Fire and Police Retirement System Board, who learned during a Sept. 18 meeting that the pension fund had lost millions of dollars due to the nation’s economic woes — a good portion of the losses over the prior 10 days.
The fund had a market value of $122.5 million as of June 30, which was a decrease of $5.8 million from the beginning of this year. And although diverse stock and securities investments left little exposure to failed or failing firms such as AIG and Lehman Brothers, investment consultants estimated at the meeting that the retirement system’s value had dropped as much as another $1.5 million from Sept. 9 to 18 — and that was before Monday’s Dow bloodletting.
If the value of the retirement system drops below a certain amount, the city could be required to contribute funds to meet cost-of-living adjustment obligations, said one board member.
A negative turn in the economy could also affect the Pasadena Unified School District’s attempt to pass a $350 million school improvement bond, Measure TT, in November. Taxpayer anticipation of federal tax hikes to pay for any Wall Street bailout could inhibit voter support for the bond and its increase in property taxes.
“It is certainly a concern,” said Pasadena Board of Education President Tom Selinske. “The economic environment makes it tough for people to consider supporting the bond measure. However, it’s different because it starts locally and is spent locally. It could be an economic stimulus for our community — whenever possible we want to use local construction companies and generate jobs. … I am hopeful the voters will understand that.”
Troubled times are ahead, said President Bush at a Tuesday news conference, if Congress does not pass a plan to aid Wall Street. Banks would be forced to cut back the amount of loans they issue, further depressing housing prices and exacerbating the credit crunch.
“I recognize this is a difficult vote for members of Congress. ... But the reality is that we are in an urgent situation, and the consequences will grow worse each day if we do not act,” said Bush.
For his part, Bogaard — a business attorney who years ago was instrumental in the merger of First Interstate and Wells Fargo banks — offered support for Wall Street aid.
“I prefer the stability that is provided by the program developed over the weekend than to test the implications on our global and national and local economy without that program,” said Bogaard, a Democrat who supports presidential candidate Barack Obama.
Some national polls show a lack of support for bailing out companies that were fiscally irresponsible, and a degree of mistrust in Bush’s judgment about the emergency and its solution — based in part on his previous bogus claims of weapons of mass destruction in Iraq and the rush to pass the PATRIOT Act after the Sept. 11 attacks.
But according to the Wall Street Journal, more bank failures are expected. The paper estimated that as many as 150 of the nation’s 7,500 banks could fail over the next 18 months and that others are likely to close branches or seek mergers.
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Let's not kid ourselves. The big banks are in trouble and when they suffer, we suffer. The bailout will not help this and the impact will trickle down. Everyone should start looking for ways to protect their money. This basically comes down to either taking your money out of the market and cutting discretionary spending or diversifying and investing some overseas. I personally use offshore bank accounts and they have helped me with diversification and asset protection. If you want to read more on why offshore investing is smarter, feel free to visit my website.
Best,
Frank Miller
http://www.theoffshorebankaccount.com