Not A Mystery

It’s not a secret that California is fiscally challenged, with the legislature locked in partisan battles and unable to compromise on a budget.

California [began] a new budget year … without a spending plan in place and with no agreement imminent between state legislators and Gov. Arnold Schwarzenegger on how to close a $19.1-billion deficit.

State employees and others who depend on government money were bracing for the possible fallout … Community colleges and vendors that do business with the state are on edge, their payments in jeopardy because of the budget delay.

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So it’s nice to know that they can still get the really important things done. Like stripping Serpentine, the State Rock of it’s rights.

The bill to defrock the [state] rock — which recently passed the full State Senate and is awaiting a vote in the Assembly — is sponsored by Senator Gloria Romero, a Los Angeles Democrat, with the strong support of the Asbestos Disease Awareness Organization.

Declaring that serpentine “has known health effects,” the bill would leave California … without an official rock. Asbestos occurs naturally in many minerals, and indeed some serpentine rocks do serve as a host for chrysotile, a form of asbestos. But geologists say chrysotile … would be a danger — like scores of other rocks — only if a person were to breathe its dust repeatedly.

“There is no way anyone is going to get bothered by casual exposure to that kind of rock,” said Malcolm Ross, a geologist who retired from the United States Geological Survey in 1995. “Unless they were breaking it up with a sledgehammer year after year.”

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It could be worse. They might have passed a law requiring that any officer engaged in a lawful stop, detention or arrest should, when practicable, ask whether that person is carrying a serpentine rock, when a reasonable suspicion exists that the person is in the U.S. illegally.

But that would be rock profiling, which might be going too far.

Being an expert must be harder these days.

Nobody seems to have any good answers to tough questions about the economy.

Morningstar pundits are usually pretty good when it comes to personal financial advice. But in is a recent answer on how to maintain yourself in retirement, they managed to coin the phrase ‘pre-tire’ when recommending that you just keep working.

… most retirees are going to have to make some hard choices … [it's] hard to generate a livable income unless you have a lot of money, [so] working longer is going to be part of the solution for a lot of pre-retirees.

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Which is probably not the solution most people are looking for.

But whether you like that or not, at least they were working in the present, or near future.

On the other hand we have Mohamed A. El-Erian, CEO and co-CIO of PIMCO, who at the end of a good piece on The Real Tragedy of Persistent Unemployment suggests that,

… policy makers should also come up with a comprehensive strategy that focuses on improving human capital, particularly through a greater emphasis on education and training; expanding infrastructure and technology investments, in part by creating a more friendly tax system; encouraging a bigger translation of scientific advances into economy-wide productivity gains; and better protecting the most vulnerable segments of society …

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And while I can’t disagree with Mr. El-Erian, the time-frame for his solutions are measured in generations.

It’s a good time to remind ourselves that the fun is in the journey and not the destination.

And Somebody Already Mortgaged The Parachutes

J. Wellington Wimpy was many years ahead of his time, and at least honest, when he offered that, “I will gladly pay you Tuesday for a hamburger today.”

The US Congress is getting close to passing new financial regulation, attempting to rein in our friends on Wall Street. Pending legislation would limit Investment Banks’ ability to trade for their own accounts, and effectively bar them from trading derivatives.

The bankers are pushing back.

Surprised?

The big banks argue that the Volcker proposal is misguided, for several reasons … the banks assert that the financial crisis of 2008 was a lending-based crisis caused by reckless loans made to unqualified home buyers. It was not, they say, a trading crisis.

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Wall Street Bankers "Getting Wood" Over The Volcker Rule

This is not quite the truth, or even a close approximation to the truth. It’s an outright lie.

• Investment banks packaged, securitized and re-sold the fraudulent loans made by originators, ‘enabling’ them to keep the hustle going.
• Investment banks deliberately ‘gamed’ the rating agencies so that sub-prime loans were magically converted to investment grade bonds.
• Investment banks invented new vehicles to peddle (trade) their products called Special Purpose Vehicles.
• Investment banks obfuscated what they were doing by re-branding (renaming) the slime that was inside these investments; for example No-Doc (Liar) loans became known as Alt-A loans.

And to say that the crisis was lending based? Get this. When Investment banks ran out of loans to repackage and sell, because their suppliers couldn’t make them fast enough, they invented a totally new class bonds called Synthetic CDOs that didn’t even require real mortgages at all!

It was truly breathtaking.

If you read only one book exposing the underbelly of Wall Street, get a copy of The Big Short by Michael Lewis. If you have an audible.com account, I can highly recommend the audio version read by Jesse Boggs. Listen while you are in the gym, and the adrenalin rush when you hear about these Wall Street thieves will definitely improve your workout.

If you are not familiar with the term “wood”, then here is your link to the Urban Dictionary. Caution, this link is not rated GP.

Ah, the immigration debate ramps up again.

It shouldn’t take a Rocket Scientist to figure out, that by definition, enforcement requires a way to distinguish between the legals and illegals.

Common sense should tell you that the only way to do that on a day-to-day basis is with a National Identity Card authenticated by some form of biometric technology.

Unfortunately we have politicians who don’t agree.

The [reform] blueprint, written primarily by Mr. Schumer, includes a proposal for a Social Security card containing a biometric chip that all workers, including American citizens, would have to present to an employer when being hired.

Conservatives, while supporting stronger enforcement, have long opposed national identity cards, or making the Social Security card a de facto one.

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When they are not blocking legislation, they can listen to Fairy Tales to pass the time. It’s a nice world they live in,  where anyone can just look around and pick out the illegal immigrants.

We Don't Need Secure ID's In Our Fantasy World

And go to Arizona when it’s time for their R & R.

In a nutshell, the way financial institutions (Big Bank) make their money is by knowing more than the other guy (that would be you). They will famously say that their priority is to serve their customers, and that capitalism depends upon them for the efficient allocation of capital. Also, that they are all in favor of shining the light of day on their operations.

Whatever.

We're Here To Allocate Your Capital

A better characterization of Big Bank’s approach to transparency and customer service is found in The Hitchhiker’s Guide to the Galaxy.

In The Hitchhiker’s Guide to the Galaxy, a notice ordering the demolition of someone’s house is found “on display” in a lightless, stairless cellar, in the bottom of a locked filing cabinet, in a disused lavatory, with a sign on the door saying “Beware of the leopard”.

A fine example of Big Bank’s drive for obfuscation is their lobbyist’s demands to not force them to trade derivatives on open exchanges. The reason Big Bank opposes exchanges is that,

Currently, the only way to trade many derivatives is to call up various dealers and ask for the price at which they are willing to buy or sell. The securities dealer profits from the difference between the prices at which it buys from one party and sells to another. Investors rarely, if ever, see details on the other side of the trade. Wall Street has signaled that it can live with a clearinghouse approach, but it is strongly opposed to exchange trading of derivatives, which would introduce price competition and lower the profits.

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But wait, it gets better. For those folks whose only connection with reality is the Adam Carolla podcast, here is an example of Big Bank’s service to customers and community.

The Securities and Exchange Commission filed a civil lawsuit against Goldman Sachs for securities fraud [last Friday]… charging the bank with creating and selling mortgage-backed securities that were intended to fail … Goldman let John Paulson, a prominent hedge fund manager, select mortgage bonds that … were most likely to lose value and … sold [those bonds] to investors … [which then] plunged in value …

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What’s been famously reported in the media is that Paulson made $1 billion on this scam (although he hasn’t been charged by the SEC along with Goldman). So, speaking of service to their community,

What’s not been noted is that as a hedge fund manager Paulson collects only (sic) 20% of the profits he generates for his investors, which means his investors made $5 billion dollars on that scam.

What’s not been noted is that as a hedge fund manager Paulson pays income tax on his fees as capital gains, not ordinary income like us ordinary folks. This saves him approximately $200 million in taxes on that $1 billion income.

What’s not been noted is that because these profits are capital gains to the investors also, neither Paulson nor his investors pay Medicare withholding of 1.45%, thus depriving Medicare of $102 million in payments.

What’s not been noted is that in many instances hedge fund profits are collected off-shore and so can be immune from any US taxes. We don’t know that this is the case with Paulson’s fund, but just mention it as a possibility.

Thank goodness we don’t depend on Big Bank for the Answer to the Ultimate Question of Life, the Universe, and Everything.

42.

Last week we noted ATT’s whining about a $1 billion [non-cash] charge they were being forced to take because of Obamacare. In fact the new law just eliminated a 7-year old scam allowing them to ‘double-dip’ by taking a tax deduction on healthcare premiums that were actually being paid (for them) by the government.

A simple back-of-the-envelope calculation showed us ATT had saved so much money over the past 7 years, that the new $1 billion charge still left them with a $1.6 billion profit. Not a bad return on a smallish lobbying investment.

But now we learn that by their own standards of what is material information ATT shouldn’t even have brought the matter to anyone’s attention in the first place.

So, This Is The New AT&T

Turns out that ATT has been mum (F2U Rio Linda, that means ‘silent’) about another significant liability making that $1 billion write-off look like chump change.

AT&T Inc. is seeking to dismiss a long-running pension case alleging age discrimination that seeks $2.3 billion in damages, according to documents filed this week in a federal court. The suit alleges a 1998 pension change effectively froze the pensions of 40,000 older management employees at AT&T, in some cases for years, but not those of younger employees …  Legal papers filed Monday… include the first publicly disclosed estimate for potential damages. The $2.3 billion potential claim dwarfs the well-publicized $1 billion noncash charge the company will take to reflect the recent loss of its deductions for health-care subsidies it receives from the government.

But because this case includes an age-discrimination claim, under federal law the judge could send it to a jury trial. If a jury found that the company willfully discriminated against older workers, it could award punitive damages that would double the size of the claim to $4.6 billion.

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So how is it, you might ask, that ATT neglected to tell their shareholders about this potential damage to their share price?

Last May, the Securities and Exchange Commission asked AT&T why it hadn’t disclosed its potential exposure in the pension case. AT&T responded that it didn’t think the case met the reporting threshold for disclosure, SEC filings show.

I guess the SEC will need to re-write their regulations so that we take into account politics when deciding what is and is not material.

But wait, it gets even better.

To butress their case ATT revealed that even if they lost a $2.3 billion cash judgement it would have no real impact because the retirement account is so well-funded it could simply absorb that hit. At the same time we are being told that the Obamacare $1 billion non-cash write-off could trigger a loss of such magnitude that ATT might have to cancel or cut back retiree health benefits.

This simply boggles the mind. Or maybe not.

This teaching moment is in the spirit of our continuing drive for bipartisanship.

It was Tip O’Neill who, as Speaker of the House, famously battled President Reagan, but still managed to get along. It would be a positive change if the relationship between Speaker O’Neill and President Reagan became a model for today’s politicians.

[The] rivalry between O’Neill and Reagan was comparable to that of President Bill Clinton and Speaker Newt Gingrich in the 1990s … O’Neill called Reagan the most ignorant man who had ever occupied the White House. [But] privately, O’Neill and Reagan were always on cordial terms, or as Reagan himself put it in his memoirs, they were friends “after 6PM.” [Reagan] once joked he had received a valentine card from O’Neill: “I knew it was from Tip, because the heart was bleeding.”

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We need more of this personal respect after hours, it would defuse a lot of tension and improve our national debate.

Since the first step on the road to recovery is to admit your addiction, let’s own up to our own toxic methods of debate, which are perfectly illustrated in this Monty Python clip.

Sometimes laughter is the best medicine, especially when you don’t have a lot of choices.

As we approach April 15th., otherwise known as Tax Day, it’s time once again to mention the staggering corruption of the US Senate, the world’s ‘greatest deliberative body’.

For well over three years (!) there has been an attempt to get rid of a loophole in the tax code granting hedge fund managers a lower tax rate than ordinary people who work for a salary. A gift that cuts their tax rate in half, assuming they even pay any taxes.

And what group is proudly standing in the way of tax reform? The US Senate, whose members are worried about damage to their own cash hoards.

The World's Greatest Body, Deliberating

Is corruption too strong a word? I don’t think so; especially at this time of year when I am writing my own check to Uncle Sam.

Riding high on the bank bailout, hedge fund managers posted record paydays in 2009 … the top 25 managers earned $25.3 billion in 2009 … [meanwhile] the government reported that unemployment was stuck at 9.7 percent, with 15 million Americans out of work … To add insult to injury, some hedge fund managers and, more commonly, private equity fund managers are able to pay a much lower rate of tax than the typical working professional.

The tax disparity results from an outdated rule that lets a money manager in a private partnership treat a chunk of his fees as if they were long-term capital gains, taxed at a special low rate of 15 percent. Fees for managing someone else’s money should be taxed as ordinary income, like wages and salary, at rates as high as 35 percent.

President Obama has included a provision to end that special treatment in his most recent budget. For three years running, the House has passed a bill to close the loophole. In the Senate both Democrats and Republicans have resisted, all for fear of losing lucrative campaign donations.

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It does get even better for the fund managers. What’s not reported, because it adds some complexity to the story, is that capital gains have another wonderful trait when it comes to taxes. Unlike ordinary income, capital gains can be offset with capital losses.

Then the tax rate goes to Zero.

So here, free of charge, is my suggestion to lower the temperature of our political debates.

Replace the metaphor for our clash of ideas, which is currently WAR, with something else.

And since the Democrats and Republicans can’t yet agree on anything, I will offer up a custom metaphor for each side.

The Repubs will henceforth think of, and refer to the Dems as their Red-Headed Stepchild. And the Dems will begin to picture their Crazy Uncles when they think of the Repubs.

I think you’ll agree that these images surely elevate our current political debate.

Lowering The Political Temperature One Metaphor At A Time

The Republicans already think the Democrats are Socialists/Communists, so the Red color fits. And there is even an (admittedly remote) link to the Democratic’s Iconic Donkey if we replace it with a Rented Mule. Even better, the Repubs will love the image …

“Beating you like a red-headed stepchild” refers to a terrible beating. It is a variation of “beating you like a rented mule.”

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On the flip (sic) side, President Obama has already used the Crazy Uncle metaphor during the Presidential Campaign. Although he was referring to Rev. Jeremiah Wright, we know he was really thinking about the Republicans.

And when Mitch McConnell smiles, there is an uncanny resemblance to Steve Balmer.

Although Uncle Mitch hasn’t been smiling much these days.

The usual suspects are shocked, shocked they say, over last week’s annoncement by ATT and several other large corporations that they would have to take (non-cash) write-offs because of new rules in ‘ObamaCare’ taking effect immediately.

In ATT’s case the number was $1 billion.

The charges relate to prescription-drug benefits for retirees. Companies that provide this benefit, as AT&T does, receive a federal subsidy, plus they can deduct the value of this subsidy from their taxes. The health overhaul cancels the deductibility of the subsidy.

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Omigod. We all knew this was going to cost us, but we never imagined it would happen within days! The destruction of capitalism is even closer than we thought.

A little digging however, turns up the fact that the current health care bill just reverses a payoff to those same companies made 7 years ago.

The charges are related to a 2003 law providing a prescription-drug benefit under Medicare. At the time it was adopted, some companies were threatening to drop drug coverage for their retirees, since this would now be available through Medicare. Congress voted them a 28% tax-free subsidy for continuing to provide coverage to retirees eligible for Medicare.

The subsidies caused the cost of companies’ obligations for retiree benefits to decline. AT&T, for example, saw its obligation drop by $1.6 billion at the time.

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A back-of-the-envelope calculation says that the $1.6 billion gift to ATT compounded over the past 7 years is worth something like $2.65 billion today if we grant the financial wizards at ATT the ability to get 7.5% return on their capital. Not so bad. That’s still $1.65 billion of extra profit to keep compounding into the future.

What’s really going on here, is that the corporations taking these write-offs are signaling that they may use this ‘increase in costs’ as an excuse to cut back on their retirees’ health benefits. To be generous we’ll call their statements a case of mis-direction.

Which brings to mind the classic game of mis-direction:

The three-card Monte game itself is very simple. To play, a dealer places three cards face down on a table [and] … shows that one of the cards is the target card, e.g., the Queen of Spades, and then rearranges the cards quickly to confuse the player [who] … is then given an opportunity to select one of the three cards. If the player correctly identifies the Queen of Spades, the player wins an amount equal to the amount bet; otherwise, he loses his stake.

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Mis-Direction Is The Name Of This Game

It would be nice if corporations would call a spade a spade, but that’s not in the cards.

[Tip: If you clicked the WSJ link and want to get past Rupert's pay-wall, here's your key.]

Republicans might want to start thinking about who leads their parade.

Our enemy is now clearly defined. We know who they are: Anybody with a D beside their name. There’s no moderate Democrat or pro-life Democrat. There’s no Blue Dog, lap dog, hot dog, back dog Democrat. If it’s a D, they are the enemy, and they need to be reacted to as such.” -Rush Lambaugh

Turns Out That Politics And Entertainment Don't Always Mix

F2U Rio Linda, the good news is that Act II promises even more entertainment.