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Finance, News, Politics

You Can Call A Spade A Spade, But You Still Have To Find It

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.


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.


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.


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.]

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3 thoughts on “You Can Call A Spade A Spade, But You Still Have To Find It

  1. OMG! It’s the end of socialism (for corporations) as we know it!

    Posted by Ben Hoffman | March 29, 2010, 9:07 am


  1. Pingback: Turns Out That ATT Is The New Material Girl « Not A Mystery - April 9, 2010

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