Wednesday, January 20, 2010

Obama's Double-Dealing Bank Tax

Government Sachs, indeed.

Forget Goldman Sachs funding a housing bubble even while betting against it. Revisit the famous collapse of Long Term Capital Management, in which (according to a 2000 book by former Journal reporter Roger Lowenstein) Goldman used information gathered from its hedge fund client to bet against the client's positions.
Or revisit a column in this space, circa 1998, about Goldman holding a splashy event in Moscow to sell investors $1.25 billion in new Russian government bonds, which allowed Russia to pay off a $500 million loan to Goldman just before Russia defaulted on its international debts.
Goldman chief Lloyd Blankfein was understandably wide-eyed with wonder at last week's hearing of the Financial Crisis Inquiry Commission. He pointed out that the people on the other side of every Goldman housing-related trade were, for Jiminy Cricket's sake, professional investors.
[bw] Getty Images
He might have added that Goldman bets against its clients every time it buys something they want to sell or sells something they want to buy. He might have suggested that any client who doesn't understand Goldman is looking after its own interests (just as Goldman expects the same of its client) is an idiot and has no business being in business.
He could have, but for an exquisite sense of decorum, also pointed out that one of the things hampering recovery is Washington's own record of double-dealing with respect to bank investors.
Hark back a few months to the shadow play of the Obama bank stress tests. Crediting themselves with mending the crisis, President Obama and Treasury Secretary Tim Geithner ruled that banks were on a solid footing because private investors would provide fresh capital and banks would be free to book profits and earn their way out of trouble.
That was then. Today it's politically convenient to bash banks for the very same profits, and to punish the very same investors with a new Obama bank tax. First, the government coaxes banks into buying back the government's TARP stake (and therefore government's share of future earnings). Then it turns around and helps itself to a chunk of those earnings anyway.
Hmmm. At least Goldman doesn't tell you "We're all in this together" and then sell you short (it just sells you short).
In fairness to Team Obama, this habit didn't begin with them. Hank Paulson and the Bush administration were also guilty of the occasional bait and switch. When Fannie Mae and Freddie Mac were struggling, Mr. Paulson suckered several big-name fund managers into investing in their shares, declaring the housing lenders "well capitalized," insisting their ownership "status" wouldn't change, even gilt-edging the invitation with a ban on short-selling Fannie and Freddie shares.
Bam! No sooner had investors acceded to his invitation than Fannie and Freddie's shareholders were railroaded off to the moral hazard hoosegow when the two were seized and their ownership wiped out.
Of course, Mr. Paulson had a global crisis on his hands and needed to keep congressional support for his bailout efforts. The only crisis facing Mr. Obama last week was the Massachusetts Senate race.
Here's what's really going on. Like Mr. Paulson before them, Messrs. Obama and Geithner are sticking it to bank shareholders simply because it's safe to do so (safer, say, than threatening the Chinese with losses on their massive holdings of Fannie and Freddie IOUs).
Aside from slightly raising the banks' cost of uninsured borrowing, the new Obama tax would do nothing to reduce the well-founded expectation of their uninsured creditors that they will be bailed out next time the banks get in trouble. Meanwhile, the only lesson the shareholders who just recapitalized the banks at Washington's behest can possibly learn is the moral hazard of trusting Washington.
Let's hope the crisis is over. Let's hope the banks don't soon need fresh infusions of equity to deal with more bad loans. If investors didn't get the message before, they've got it now: There will be no upside allowed. Anytime the sector starts to show signs of recovery, Washington can swoop in and grab the profits as a "responsibility fee."
This may be politically expedient given populist blowback over bank bonuses, but it's not a step toward a competitive, responsible banking sector that takes appropriate risks without looking for government handouts or bailouts. On the contrary, it's a formula for turning the banks into what Fannie and Freddie have become: profitless channelers of taxpayer-guaranteed money into whatever loss-making loans politicians happen to want made. Compared to that, give us Goldman every time.


Tuesday, January 19, 2010

Restoring Faith in Financial Markets

It is time institutional investors exerted control over publicly held companies.

'Investing is an act of faith." So I wrote in 1999, the very first sentence of my book, "Common Sense on Mutual Funds." But as 2009 ended, writing in the updated 10th anniversary edition after the passage of this turbulent decade, I concluded that "the faith of investors has been betrayed."
How so? Because the returns generated by our corporate stewards have often been illusory, created by so-called financial engineering and produced only by the assumption of massive risks. What's more, too many of our professional money managers have failed to act as vigilant stewards of the money that we investors entrusted to them.
In short, far too many of our corporate and financial agents have failed to honor the interests of their principals—the mutual fund investors and pension beneficiaries to whom they owed a fiduciary duty. The ramifications were widespread—for the failure of money managers to observe the principles of fiduciary duty played a major role in allowing our corporate managers to place their own interests ahead of the interests of their shareholders.
Over the relatively brief span of a half century, our institutional agents have come to be the dominant force in corporate America. Institutional investors held less than 10% of all U.S. stocks in the mid-1950s, 35% in 1975, and 53% a decade ago, and now institutional investors own and control almost 70% of the shares of U.S. corporations. Mutual funds own the predominant amount, 26%; private pension plans another 11% and government pension plans another 9%.
Getty Images 
The rise of agency ownership has been steady, and seemingly inexorable. But this revolution in equity ownership—it is no less than that—has been accompanied by many shortcomings, in part because it linked the agents of corporate America with the agents of investment America. As Leo E. Strine, vice chancellor of the Delaware Court, observed in a speech in 2007, "No longer are the equity holders of public corporations diffuse and weak . . . (they) represent a new and powerful form of agency, which presents its own risks to both individual investors and . . . the best interests of our nation." Yet, he noted, professional money managers are no less likely "to exploit their agency than the managers of corporations that make products and deliver services."
First, the folly of short-term speculation has replaced the wisdom of long-term investing as the star of capitalism. A rent-a-stock system has replaced the earlier own-a-stock system. In 2009, the average stock turnover appears to have exceeded 250% (changed hands two and a half times), compared to 78% a decade ago, and 21% barely 30 years ago.
Result: The momentary illusion of the price of a stock took center stage, replacing the enduring reality of the company's intrinsic value—the discounted value of its future cash flow. Our newly empowered agents ignored the famous warning of Benjamin Graham in "The Intelligent Investor" that "in the short run, the market is a voting machine; in the long run, it is a weighing machine."
Two, the financial sector became the driving force in the U.S. economy. During the past decade, revenues of stock exchange firms (excluding trading gains or losses) rose to an estimated $375 billion from $200 billion, and mutual fund fees and expenses rose to nearly $100 billion from $47 billion. The higher these intermediation costs, of course, the lower the returns to investors as a group. Alas, in this Alice-in-Wonderland world of the financial markets, the investor feeds at the bottom of the food chain.
Three, innovation became the buzzword of the era. But innovation was dominated by complex new products, such as credit default swaps and collateralized debt obligations, designed to make money for Wall Street firms rather than for their clients. Former Federal Reserve Chairman Paul Volcker recently opined that the only financial innovation of the era that created value was the ATM. (He has also agreed that the index fund created substantial value for investors.)
Four, all of this speculative market activity and costly marketing activity seemed to lead institutional money managers to ignore the realities that drove the balance sheets and income statements of the companies held in their portfolios, a striking failure of professional security analysis. "Financial engineering" was left to run rampant and "anything goes" seemed to be the rule in the quest to meet earnings guidance. The late Robert Bartley, long-time editor of this newspaper, got it right when he wrote in The American Spectator (Dec. 2003-Jan. 2004), "true profits are represented by cash—a fact—rather than reported profit—an opinion."
Five, absent the check of their institutional owners, corporations pushed executive compensation to unprecedented heights. From 42 times the average worker's salary in 1980, the compensation of the typical chief executive of a U.S. corporation now approaches a staggering 400 times the average worker's salary. Despite the collapse in corporate earnings during the recent financial crisis, there are few signs that executive compensation has been significantly affected.
While many social forces contributed to these aberrations in capitalism, the dominance of our new agency system played the major role. Regulation alone will not be sufficient to correct these gross abuses, for the self-interest of our agents, abetted by powerful and well-financed lobbyists—paid for, finally, by the very corporate and mutual fund shareholders whom new regulations are designed to serve. There are few regulations that smart, motivated, targets cannot evade.
The process of restoring the faith of investors must begin with a demand that the agent/owners of investment America stand up for the rights of their principals/beneficiaries. What we need is congressional action to establish a federal principle of fiduciary duty—encapsulated by the phrase "no man can serve two masters."
This principle will require institutional managers (1) to act solely in the interests of their shareholders and beneficiaries; (2) to observe due diligence and professional standards in their investment practices; (3) to honor their responsibilities as owners by active participation in corporate governance; and (4) to eliminate conflicts of interests in their activities.
Together, these standards would require the giant financial institutions of investment America to behave as owners of corporate America, actively voting proxies in the interests of their principals; playing a role in dividend payouts and executive compensation as well as in mergers and acquisitions; limiting (or even eliminating) excessive stock options; and demanding the independence of directors from management (including the separation of the roles of chief executive and board chairman).
In addition, policy makers ought to be considering structural changes that would enhance the role of investors and diminish the role of speculators. For example, granting longer-term (say, two- to five-year holders of stock) extra voting rights and/or a higher dividend; a federal transfer tax on securities transactions; or a tax on short-term realized capital gains (say, shares held for less than six months), applicable to taxable as well as tax-exempt investors such as IRAs.
As the new year and the new decade begin, it is time to restore the faith of investors in our interlinked corporate and financial systems. This is not a task for the fainthearted, or for the impatient.
Early in 2002, I called for the creation of a Federation of Long-Term Investors, in which institutional investors—including the giant index fund managers who alone hold some 15% of U.S. stocks—would join together to force these long-overdue changes and exert their ownership power over our publicly-held companies.
Then, I found few allies. Today, perhaps, this is an idea whose time has come.
Mr. Bogle is founder and former chief executive of the Vanguard Group. The 10th anniversary edition of his "Common Sense On Mutual Funds" was published by Wiley last month.


Friday, January 15, 2010

Obama Unveils $90 Billion Bank Tax With Sharp Words

[0114obama] European Pressphoto Agency
President Barack Obama describes his plan to impose a tax to recoup taxpayer expenditures for the financial-sector bailout.
President Barack Obama unveiled his proposed $90 billion bank tax Thursday with some of his toughest rhetoric yet toward Wall Street, saying: "We want our money back, and we're going to get it."
The president's tough line dovetails with a political push by Democrats to capitalize on anger over bonuses and profits from banks that benefited from taxpayer bailouts during the nadir of the financial crisis.
Democratic leaders responded cautiously to the proposal, mindful that the president's pledge last year to retrieve bonuses paid to American International Group executives has yet to be fulfilled, according to senior leadership aides. One senior Democratic aide said the House wouldn't move forward on the tax proposal until leaders there were sure the Senate would follow suit.
Banks will be hit by a new tax that targets institutions that rely on short-term borrowing, such as Goldman Sachs, Morgan Stanley, and Citigroup.

Obama to Wall Street: Embrace Bank Fees

President Obama comments on Wall Street opposition to new bank fees. Video courtesy of Fox News.
While much of the banking industry is up in arms over the proposed tax, the impact would likely be a relatively modest dent to the companies' profits.
The 10-year assessment on bank liabilities—dubbed the Financial Crisis Responsibility Fee—would fall most heavily on the nation's top six banking companies: Citigroup Inc., J.P. Morgan Chase & Co., Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley and Wells Fargo & Co. Each would likely face an annual bill of $1 billion or more, with Citigroup and J.P. Morgan facing the largest liabilities, likely more than $2.4 billion apiece.
Betsy Graseck, a banking analyst at Morgan Stanley, estimated the tax would shave roughly 5% from top banks' bottom lines this year.
The White House pushed hard against opposition to the tax. The president spoke of "obscene bonuses" and the "twisted logic" of bank executives who oppose the tax. White House spokesman Robert Gibbs suggested the banks were trying to pass the tab for their woes to taxpayers.
Industry officials warned that the new tax could constrain bankers' ability to make new loans, which could hurt the economy. In addition, some analysts cautioned that the plan could encourage banks, to reduce their exposure to the fee, to shift more assets and liabilities into the types of off-balance-sheet vehicles that helped sow the seeds of the financial crisis.
Democratic political strategists say the president's plan could box in Republicans who are trying to harness the popular rage at Wall Street bailouts, but won't support a tax increase.
If Republicans oppose the tax, Democrats will accuse them of siding with bankers bailed out by taxpayers. If GOP candidates side with the president, they risk alienating antitax activists who are bringing renewed passion to the party.
"If you want to be on the side of the big banks, this is a great country. You're free to do so," Mr. Gibbs said.
Republican strategists saw no such trap. They focused their attention on the people who they say will ultimately pay the tax's tab: consumers facing higher bank fees and small businesses blocked from loans.
"Making it harder for families and small businesses to save, invest and hire would be the latest in a number of tone-deaf policies coming out of the Democratic Congress," said Ken Spain, spokesman for the National Republican Congressional Committee, which oversees House campaigns for the GOP.
Not all Democrats came on board. Sen. Kirsten Gillibrand, a New York Democrat, said she opposed the proposed tax, saying it "could disproportionately affect New York City's economic recovery, which relies on a growing financial-services industry."
If approved by Congress, the tax would force about 50 banks, insurance companies and large broker-dealers to collectively pay roughly $90 billion over 10 years.
Under the plan, a 0.15% tax would be levied on liabilities and would apply to a range of firms that received taxpayer assistance, excepting the Detroit auto makers. The tax would be levied on total assets, minus a type of capital considered high quality, such as common stock, and disclosed and retained earnings.
The nation's large regional banks would face smaller fees than their Wall Street counterparts, based on the composition of their balance sheets.
Some Democrats want to go further. Rep. Peter Welch (D, Vt.) has proposed a 50% tax on bonuses over $50,000 at any financial firm that took federal assistance during the financial crisis. That would be on top of the president's tax, he said.
"When people are robbing a bank, it's time to stop them," he said in an interview.
The president's plan could let some of the steam out of such proposals, while still giving Democrats a line of attack for the midterm elections.
White House officials said the president was serious about his bank-tax proposal, which has been under discussion since August. A provision inserted in the legislation authorizing the Troubled Asset Relief Program required the administration to come up with a way to recover money spent to save the financial system.
Investors shrugged off news of the proposed fee. Shares of most banks inched upward Thursday, with the KBW Bank Index climbing about 1.6%.
Analysts say the impact could be muted if the fee is tax-deductible, an issue that hasn't been addressed by the Treasury Department.
Still, it is the latest in a string of recent federal initiatives that could erode bank profits. In November, the Federal Reserve announced rules, set to take effect in July, that will bar banks from charging certain overdraft fees without explicit consent from their customers. And other changes that could be costly to the banking industry continue to work their way through Congress, such as legislation that would impose new restrictions on the trading of derivatives.
—Deborah Solomon contributed to this article. Write to Jonathan Weisman at and David Enrich at

Wednesday, January 13, 2010

Bashing Bankers Is a Political Duty

But don't overlook the fact that taxpayers are making out on the bailout too.

If you would know why bankers are enjoying a large and controversial deluge of annual bonuses, look no further than the monthly report of the New York State Comptroller's Office. The economy may be in the dumps, but Wall Street enjoyed record profits of $50 billion in the first nine months of last year—"nearly two and a half times the previous annual peak in 2000."
"Profitability," adds the state of New York, "has soared because revenues rose while the costs of doing business—particularly interest costs—declined" (in other words, thank you Federal Reserve).
That $50 billion may seem odd in relation to Wall Street's reported bonus pool of $90 billion, but compensation isn't paid out of profits, it's paid out of revenues. Goldman last year paid out about 44% of revenues as compensation, Citigoup about 30%. In contrast, an auto company pays out about 11% of revenues, but an auto company consumes a lot of other inputs—glass, steel, energy, advertising, aluminum—whereas Wall Street has only two inputs: smarts and money.

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Bonuses are a dominant part of compensation because Wall Street firms pay a large chunk of compensation as variable comp, for which the word bonus has been used. Now some firms are paying larger fixed salaries just so the public won't hear the word bonus.
But look at it this way: The $90 billion that will be distributed to employees is but a sliver of the massive capital Wall Street is sitting on. One firm, Goldman, cares for $880 billion, Citi another $1.9 trillion, JP Morgan another $2 trillion. Much of the nation's paper wealth rebounded sharply last year from depressed values after (choose your reason) Americans overbet on housing or the federal government briefly fumbled public trust in its ability to protect the financial system.
Getty Images 
Do bankers deserve it? Of course not. Do you deserve your good looks, good health or good luck in choice of parents and/or country you were born in?
Compensation in our society is not set by Henry Waxman and a committee of Congress, but as a matter of legal and instrumental obligation under circumstances of market competition. A firm's management, with its own interests strongly in mind, ultimately decides how much of a firm's revenue to spend pleasing the highly mobile employees who do the work of pleasing the firm's highly mobile clients and investors.
But didn't taxpayers bail out the financial system, so don't taxpayers deserve the bonuses? No. Taxpayers (aka voters) were acting in their own interests in bailing out the system. They weren't doing anybody a favor. Furthermore, government already stands to collect about 50% of any Wall Street cash bonuses in the form of income tax (which explains why the subject is of interest to the New York state comptroller).
What's more, despite a casual imputation that taxpayers were the suckers at the table, taxpayers did not, as commonly alleged, "spend" money to bail out the banks. They traded one claim for another. Mostly, they traded claims they printed (dollars) for claims on real assets, such as housing, commercial property and industrial equipment.
Taxpayers effectively acquired these assets on a bet that taxpayers' own intervention would raise their value, which had previously been depressed at least partly by fears that taxpayers wouldn't intervene. That bet has proved a good one so far (as bets often do when you control the outcome). Even the most notorious of the exchanges that taxpayers engaged in—dollars for securities held by Goldman Sachs that had been guaranteed by AIG—are accruing profits on the balance sheet of the Federal Reserve.
In fact, yesterday the Fed, whose balance sheet is about the size of Citigroup's, reported whopping profits for 2009 of $52 billion—just a few billion shy of what Wall Street as a whole is likely to report for the year. (All this throws a mocking light on the Obama administration's claim yesterday that a new tax must be imposed on banks to "recoup" bailout costs.)
None of this means Americans don't have an ancient and abiding interest in subjecting bankers to scorn. A rough socialism is fundamental to civilization: The most beautiful virgin must be sacrificed to make the other virgins feel better—a service politicians are especially keen to provide when the alternative might be looking at their own role in the reckless risk-taking of banks and homebuyers.
Still, looking at Washington's own role would be a good idea, since taxpayers' success (so far) in catching the falling knife is certainly no reason to repeat the experiment.


The Geithner AIG Story

Those emails and 'systemic risk.'

Timothy Geithner is back in piƱata mode, with House Oversight Chairman Edolphus Towns asking him to testify next week about bailout giant AIG. By all means Members should swing away at the Treasury Secretary, but only if they focus on the right questions.
The trigger for the Towns hearing is the release of emails between the Federal Reserve Bank of New York and AIG in November and December 2008. The New York Fed urged AIG to limit disclosure of its deal to buy out derivative trading partners at 100 cents on the dollar. But since AIG went ahead and disclosed it anyway, this line of inquiry doesn't get to the heart of the taxpayer interest.
Likewise, asking if Mr. Geithner helped write the emails to AIG will simply allow him to continue avoiding the bigger questions: Why did he believe AIG could not fail? Why should he receive more authority to declare firms systemically important, when he will still not fully explain his previous multibillion-dollar judgments in the name of countering "systemic risk"?
Mr. Geithner was president of the New York Fed when it began sending what has become $182.3 billion in taxpayer assistance to AIG in September 2008. Much of this money was used to meet collateral calls from big banks that had bought AIG's credit default swaps. AIG had resisted handing over more collateral. But once Mr. Geithner was in charge of AIG, the cash flowed freely to these bank counterparties.
Associated Press
Treasury Secretary Timothy Geithner

The Fed and AIG ultimately bought the underlying securities at par. This was not only much more than the counterparties might have received from a bankrupt AIG, but even a healthy AIG would never have handed over so much cash in the midst of a panic in which cash was king. Mr. Geithner's New York Fed demanded the 100-cents on the dollar deal for these counterparties, and it demanded that their identities be kept secret. The Journal nonetheless reported this sweet deal and the names of some beneficiaries, including Goldman Sachs, in early November 2008, but taxpayers had to wait months before AIG finally released the full story.
Given the sweet deal and the fact that Mr. Geithner sought to keep secret the identities of the beneficiaries, logic would suggest that the AIG intervention was intended as a bailout for these counterparties. Supporting this conclusion is the fact that Mr. Geithner has sold his plan to regulate derivatives as a way to prevent such problems in the future. Yet when asked directly by the inspector general for the Troubled Asset Relief Program why he opted to buy out the counterparties at par, Mr. Geithner said "the financial condition of the counterparties was not a relevant factor."

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Then last November, he suggested that the systemic risk was in AIG's traditional insurance business. "AIG was providing a range of insurance products to households across the country. And if AIG had defaulted, you would have seen a downgrade leading to the liquidation and failure of a set of insurance contracts that touched Americans across this country and, of course, savers around the world," he said. So which was it?
Taxpayers also still haven't been told why there couldn't have been any sunshine on Mr. Geithner's beloved AIG counterparties. If some of them really would have failed, with systemic consequences, why not announce that they were all getting a deal to bolster liquidity and allow them to resume lending? That is exactly what regulators had just done in October 2008 by naming recipients of TARP capital injections.
On the other hand, if the counterparties weren't the systemic risk, then what's the argument for regulating derivatives?
The evidence builds that AIG's "systemic risk" wasn't a mathematical answer to a rigorous and thoughtful review of data, but rather a seat-of-the-pants judgment by regulators in a panic. If that is the case, someone should ask Mr. Geithner why the American people should give him even more authority to make more such judgments from his hip pocket—with little public scrutiny.
Under the House regulatory reform, Mr. Geithner would chair a new Financial Services Oversight Council. The council could declare virtually any company in America a systemic risk, making them eligible for intervention on the taxpayer's dime. The law firm Davis Polk reports that since this council is not an agency, it will not be subject to the Administrative Procedure Act, the Freedom of Information Act or the Sunshine Act, among other laws intended to allow citizens to scrutinize government.
It's difficult to learn and apply the lessons of AIG because the New York Fed has done so much to conceal them. Mr. Towns appears to be getting closer to the truth, deciding yesterday to issue subpoenas focused on the New York Fed's decision-making, as opposed to whatever it told AIG to say in public. Let's hope lawmakers explore what the "systemic risk" actually was—and why Mr. Geithner should get nearly open-ended power to define it again.


Tuesday, January 12, 2010

U.S. Chamber warns of 'double-dip' recession because of Dem policies

By Ian Swanson - 01/12/10 09:44 AM ET
U.S. Chamber of Commerce President Tom Donohue warned the U.S. faces a double-dip recession because of the taxes and regulations under consideration by the Democratic Congress and President Barack Obama.

“Congress, the administration and states must recognize that our weak economy simply could not sustain all the new taxes, regulations and mandates now under consideration. It’s a sure-fire recipe for a double-dip recession, or worse,” Donohue said in a speech providing the Chamber's outlook for 2010.

Donohue said the lawmakers should not let former President George W. Bush's tax cuts expire at the end of year and lambasted Democratic efforts on healthcare and financial regulatory reform as well as climate change.
If the tax cuts are allowed to expire, “we will likely end up with even bigger deficits and greater economic misery,” Donohue said.
Many tax lobbyists expect Congress to extend the cuts for people with lower tax rates, but to allow higher rates to be reimposed on those in the top bracket.

He also faulted Obama and Democratic lawmakers for not doing more to create jobs.

Donohue criticized a separate tax on banks floated by the administration on Monday, and said that the rationale for any tax increases would be increased spending, not lowering huge budget deficits exacerbated by the recession.

“We are talking about a massive tax increase in a very weak economy — a tax increase whose clearly intended purpose is not to reduce the deficit, but to pay for more spending,” he said.

He also promised the Chamber would be more involved in the 2010 midterm election than it has been in any other before, and will hold accountable lawmakers who vote against the group's priorities.

Donohue’s speech follows a year in which the nation’s leading business lobbying group consistently butted heads with the Democratic White House, particularly on Obama’s keystone issues of healthcare and climate change.

The Chamber stumbled at times. Several high-profile members, including Apple, left the Chamber because of the group’s opposition to Obama’s pursuit of climate change legislation. Nike quit the Chamber’s board of directors over the same issue, publicly complaining that the business group was not representing all of its members on the issue.

In October, pranksters pretending to be Chamber officials held a fake press conference announcing the group had shifted its stance on climate change. Chamber officials trekked to the National Press Club after a wire service issued an incorrect story based on a fake news release put out by a group known as The Yes Men.

On healthcare, Donohue said the legislation under consideration by Congress would do nothing to rein in costs and was a prescription for “fiscal insolvency and an eventual government takeover of American healthcare.”

He said the House climate bill would raise energy costs and kill jobs.

Donohue also blasted the administration’s policies on trade, hitting it for not sending to Congress pending deals negotiated by the Bush administration with South Korea, Colombia and Panama.

“We need a bold and aggressive trade policy, something we don’t have today,” he said.

The Chamber is predicting the economy will grow at a rate of about 3 percent in 2010. The business lobby has set out a goal of creating 20 million new jobs over the next 10 years.

Saturday, January 9, 2010

Economy Still Bleeding Jobs

Employers cut another 85,000 jobs last month, dashing hopes of a turnaround in employment, even as the U.S. economy grows.
With December's losses, there were 7.2 million fewer jobs than in December 2007, when the recession began. Although the unemployment rate was unchanged at 10% from November, that's only because many workers stopped looking for work and weren't counted in the numbers. A broader measure of unemployment, including those who have quit job hunting as well as those working part time because they can't find full-time work, remained about the same at 17.3% in December from 17.2% in November.
December's dismal job figures, reported by the Labor Department Friday, demonstrate that companies remain skittish about hiring even as their outlooks improve. Economic figures released so far suggest that gross domestic product -- the broadest measure of the value of goods and services produced by the economy -- grew at a 5.4% rate in the last three months of 2009, according to Macroeconomic Advisers, a St. Louis forecasting firm.
United Parcel Service Inc. raised its fourth-quarter earnings target Friday, but the shipping company also said it will cut 1,800 jobs.
"We've come to realize that with technology and management systems, we can manage larger geographic areas than ever before," said UPS spokesman Norman Black.

News Hub: Finding a Job in Uncertain Times

With the jobless rate steady at 10%, Kathleen Madigan and Sarah Needleman discuss strategies for job seekers.

AM Report: Jobless Rate Stays at 10%

The New Hub panel parses the new employment data, which shows unemployment holding steady at 10%.
Even once jobs come back, the unemployment rate may continue to rise. To keep up with a growing population, the economy needs to add about 100,000 jobs a month just to keep the unemployment rate stable.
Moreover, many people have stopped looking for work in response to the poor jobs environment. As a result, they don't show up in the Labor Department's tally of the unemployed.
In fact, a key reason why the unemployment rate didn't increase in December was that work force declined by 661,000. As a result, as the labor market improves, and people re-enter the work force and begin looking for work, the unemployment rate could rise.
Stocks edged higher Friday, with disappointment over the jobs report offset by expectations that the news would keep the Federal Reserve from raising rates. The Dow Jones Industrial Average rose 11.33 points to 10618.19.
The labor market isn't deteriorating nearly as quickly as in the first half of 2009, when it lost an average of 560,000 jobs a month. And most economists believe the economy will begin generating jobs within the next few months.
Nevertheless, the economy has been growing since the middle of 2009, and the fact that job losses have continued for so long points to a tepid recovery in the labor market. Revised figures showed that the economy added 4,000 jobs in November -- the first month of job gains since the recession began -- instead of the 11,000 job loss that was initially reported.

U.S. Unemployment: Historical View

The Shifting Job Market

[job market] Click to enlarge graphic
Prior to the 1990s, the job market tended to recover alongside the overall economy after recessions. But in the recoveries that began in 1992 and 2001, jobs were slow to return. That was partly because firms facing increased global competition became even more focused on keeping costs down. Improved technology allowed companies to produce more with fewer workers. Rising profit margins and large productivity gains suggest that many companies are keeping tight control over labor costs -- one reason Federal Reserve officials believe that this recovery, too, will produce spotty job growth in its early stages.
"The employment picture overall has improved, and the outlook is certainly much brighter than one year ago," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a speech Friday. But he warned that "many firms are not yet ready to do new permanent hiring."
Lackluster job growth means downward pressure on wages and inflation and gives the Fed room to keep rates low. Manufacturers kept shedding jobs last month, though at a slower pace. Manufacturing payrolls fell by 27,000, compared with a drop of 35,000 a month earlier, the smallest loss in two years.
"We've gotten a little busier than six months ago, but it's nothing to be overly impressed with yet," said William Bachman, CEO of Bachman Machine Co. in St. Louis. The company, which makes plastic and metal parts mainly for the automotive industry, employs 89 workers, down from 125 a year ago.
Though Mr. Bachman believes business will continue to pick up, he doesn't expect to be hiring soon. "Not for the next three months, anyway," he said.
In the construction sector, hammered by the housing bust, the labor market worsened, with 53,000 jobs lost, compared with a November loss of 27,000. Nearly a third of the jobs lost were in the kinds of heavy-construction and engineering projects that much of the government's economic-stimulus efforts are directed at creating, said Michael Carey, an economist with Calyon Securities in New York. "It seems like it should be working the other way," he said.
Jeff Frankenfield's general-contractor business was growing by about 20% a year until October 2007. That's when "my phone stopped ringing," he says. "The consumer totally stopped spending money on remodeling." Now, instead of hiring and overseeing laborers to remodel homes in the San Francisco Bay area, he's doing such work himself, and earning about 30% less. "I kind of swallowed my pride because I need to pay bills," he says, adding that the competition for carpentry jobs is intense.
"People are shopping out the contractors," he says. "I did a job last year, a kitchen remodel, and the woman had nine estimates. Typically people get just two or three."
In brighter spots of the report, the temporary-help sector added workers for the fifth month, with 46,500 jobs gained. Gains in temporary employment often signal increases in overall hiring: Employers hire temps in the initial stages of recovery until they are confident the upturn will be sustained.
Tig Gilliam, CEO of Adecco North America, the largest staffing company in the U.S., said his firm is beginning to see more employers moving toward promoting temporary workers to full-time positions.
—Sarah E. Needleman, Jon Hilsenrath and Jennifer Levitz contributed to this article. Write to Justin Lahart at
Corrections & Amplifications:
Average hourly earnings rose to $18.80 from $18.77. An earlier version of this article incorrectly said average hourly earnings had risen from $18.74.

Friday, January 8, 2010

Washington and the Fiscal Crisis of the States

The strings on federal stimulus money are making it harder for states to cut spending and balance their budgets. 

As one whose interest in public service stems largely from the conviction that government can make a positive difference in people's lives, I have found the past year a paradox. From the financial crisis to health-care reform, the federal government has taken on challenges that urgently need to be addressed. Yet despite these actions—and sometimes because of them—the states, which provide most of the services that touch citizens' lives, are in their deepest crisis since the Great Depression. The state crisis has become acute enough to belong on the federal agenda.
New York State faces a budget deficit that could climb to $8 billion or $9 billion in fiscal year 2010-11 and the state could face another deficit in 2011-12 of about $14 billion to $15 billion. The causes of the larger deficits down the road include a drop off in federal stimulus funds, an increase in Medicaid costs, and the planned expiration of a state income tax surcharge, as well as the state's underlying structural deficit.
New York is in a tough spot, but few other states are immune from large and growing deficits. According to the Center on Budget and Policy Priorities, the states have faced and will face combined budget shortfalls estimated at $350 billion in fiscal years 2010 and 2011. Past experience suggests that these deficits will continue even if a national economic recovery takes hold. Moreover, we do not know how robust the recovery will be or what shape it will take. We know only that it will not spare the states the necessity of making acutely painful fiscal choices. New York and other states face draconian cuts in public services, higher taxes, or, more likely, a combination of both.

OpinionJournal Related Stories:

•Review & Outlook: States and the Stimulus
•Review & Outlook: The Deficit Commission Trap

The federal stimulus has provided significant budget relief to the states, but this relief is temporary and makes it harder for states to cut expenditures. In major areas such as transportation, education, and health care, stimulus funds come with strings attached. These strings prevent states from substituting federal money for state funds, require states to spend minimum amounts of their own funds, and prevent states from tightening eligibility standards for benefits.
Because of these requirements, states, instead of cutting spending in transportation, education, and health care, have been forced to keep most of their expenditures at previous levels and use federal funds only as supplements. The net result is this: The federal stimulus has led states to increase overall spending in these core areas, which in effect has only raised the height of the cliff from which state spending will fall if stimulus funds evaporate.
Until recently, some people predicted that the stimulus funds would not evaporate—that instead the federal government would rescue the states once more with another stimulus bill. But the prospect of this kind of help looks doubtful as an increasing number of lawmakers in Washington worry about the federal deficit and seem intent on taking serious steps to rein it in.
If those steps include neglecting the fiscal situation facing the states, the country could be headed for fiscal problems that are larger than the ones we face now. We are in a time of extraordinary economic change and Washington is struggling with the sometimes-conflicting demands of the federal deficit and the unemployment rate. But the states' growing deficits present their own urgent national problem that the federal government must place in the balance.
Federal policy makers do not have the option of assuming that the state fiscal crisis is temporary or will cure itself without further involvement by Washington. This crisis reflects the growing long-term pressures on the states from the health-care needs of an aging population and the maintenance needs of an aging infrastructure. Moreover, the $3 trillion municipal bond markets have begun to notice the states' deficits: Moody's recently downgraded the bond ratings of Arizona and Illinois because of the deficits those states face. The rating agency says it is waiting to see whether New York will reduce its budget gaps and has warned the state against trying to do so solely through one-time actions.
It seems almost inevitable now that the states' fiscal problems will have further effects on capital markets, possibly as soon as next spring and summer. If more cracks appear in the capital markets that handle municipal bonds, the U.S. Treasury and the Federal Reserve will be faced with an unattractive set of options: They can allow those markets to deteriorate or use federal tax dollars to shore them up and thereby increase the federal deficit.
It is safe to say that one way or another events will force federal policy makers to spend money in response to state deficits. Federal officials shouldn't wait for an emergency to begin to address two questions: Which services should the federal government provide and which should the states provide? And how should the costs of these services be split among federal, state, and local tax bases?
For example, Medicare, not Medicaid, is the primary payor of health-care costs for the elderly and disabled. About 17% of Medicare beneficiaries are low-income and, thus, also receive varying levels of state Medicaid benefits. These "dual eligible" beneficiaries account for some 40% of state Medicaid spending.
For these beneficiaries, the current system is a nightmare: They disproportionately suffer from chronic diseases but must navigate two separate bureaucracies and sets of rules in order to receive care. For the states, this system is a costly burden. From the perspective of a rational health policy, the system is an anachronism. It developed when Medicare did not provide income-based aid and did not have income-based information about those it served. Medicare now provides such aid and has the information and capacity to provide these benefits more effectively, with more potential for cost containment, than the current system.
A federal takeover of services to dual eligibles would cost about $70 billion per year. For many states, a share of this amount would be the difference between chronic fiscal crisis and a chance at structural budget balance. After the Troubled Asset Relief Program and health-care reform—with the cost of the latter estimated by the Congressional Budget Office at almost $900 billion from now through 2019 and $1.8 trillion in the 10 years from 2014 through 2023—the bill for such a takeover does not seem huge or disproportionate to the relief it would provide to state budgets.
Those of us responsible for the states' budgets have the unpleasant duty of imposing greater burdens on our citizens before we can reach legitimate balance between revenues and expenditures. It is not unreasonable for us to hope that federal policy makers will treat our state deficit problems with the same seriousness with which they are now preparing to address the national deficit.
Mr. Ravitch, a Democrat, is the lieutenant governor of New York.


Thursday, January 7, 2010

Big Business Creates Jobs Too

Many small businesses fail. And innovating can be easier with corporate backing.

A major focus of both political parties is job creation. Underlying the discussion is a glorification of the merits of the "small business" at the expense of "big business." The commonly quoted statistic from the Small Business Administration (SBA) is that 65% of all new jobs are created by small businesses, defined as any business employing 500 people or fewer. Armed with that bias, and appealing to populist sentiment, there is growing support in Washington for tax reforms aimed at helping small businesses by cutting the taxes they pay or by offering them tax breaks for new hires.
But here is what many people do not realize: 99.7% of all companies in America meet the SBA's definition of small business. This implies that the remaining 0.3% of American companies—big business—create 35% of all new jobs in this country. While cutting taxes in general is always a good idea for kindling economic vitality, ignoring the important role that big business plays in job creation is a short-sighted mistake.
Given the aforementioned statistic, combined with the fact that most low-paying companies fit into the small business definition, it is not a stretch to conclude that large companies are disproportionately responsible for creating both higher paying and stable jobs. Small companies clearly create jobs, and occasionally these companies provide stable, long-term employment. But the large majority of jobs created by this group are both very low-paying and highly unlikely to be around for the long term. According to the SBA, 56% of all startups fail within their first four years of operation.
It is actually within large companies that an entrepreneur can find, already in existence, much of what it takes to insure a venture's success. This includes the capital required to fund startup costs, the marketing presence to create a near-instant reach to customers, and the standing required to gain trust of both vendors and customers. The two largest bond fund managers in the world, Pimco and Blackrock, were born inside of existing large companies—Pacific Mutual Life and Blackstone, respectively—and flourished under entrepreneurial leadership. Blackrock then went on grow immensely after it was sold to Mellon Bank.
Associated Press 
Apple Computer, a great example of a small company success, at one point was solely focused on computers. Yet in the past several years Apple's success has been driven by many new business lines including the iPod and iPhone. These product-line successes illustrate how a big company can entrepreneurially exploit its brand name, related technological expertise in the industry, access to capital, and sales and marketing reach. There is no doubt that if someone tried to launch either the iPhone or the iPod from his garage the results would not be what they have been for Apple.
In my own career I've had a number of opportunities to build new businesses within existing big companies. In 1993, with financial backing from Nomura Securities, my partners and I built a commercial real estate finance business in which we applied securitization techniques to the market in a comprehensive way for the first time.
At our peak we directly employed approximately 500 people around the country and indirectly many more. At Nomura we were credited with having inspired the creation of the Commercial Mortgage-Backed Securities (CMBS) market, which peaked in 2007 at $230 billion in new issue volume that year. As a consequence, we directly created thousands of high-paying jobs and helped to create many more jobs indirectly through the related services required to serve the new market (including legal, accounting, and rating agency and more).
Recently I joined CB Richard Ellis Investors, another large company, to build a new business line addressing the financing needs of the commercial real estate industry. My partners and I have been seeded with some capital from our parent company along with many other extraordinary benefits that have allowed us to jumpstart our operation in a challenging business environment. We've hired about a dozen people thus far and our plan calls for significant growth which, if we are successful, will lead to the creation of many new jobs. Perhaps, as was the case with Nomura, our success will inspire other companies to follow in our footsteps and many more jobs will be created.
In sum, if the government wants to spur the creation of stable and high-paying jobs it would do well not to neglect big business when establishing policy.
Mr. Penner is executive managing director of CBRE Investors and the founder and president of CBRE Capital Partners.


Wednesday, January 6, 2010

Why Taxing Stock Trades Is a Really Bad Idea

Everyday investors shouldn't be punished for a subprime fiasco fueled by Fannie Mae and Freddie Mac.

The Democrat-dominated Congress has come up with a new way for President Obama to violate his campaign pledge to not raise taxes on families earning less than $250,000 per year. It's a tax on securities transactions—trading in stocks, options, futures and so on.
And why not single out trading for special taxation? We levy special taxes on tobacco, alcohol and other vices. Except that trading isn't a vice. The exchange and hedging of business interests is a virtuous—and utterly essential—activity in a free economy.
But you'd never know it from the angry anticapitalist rhetoric of the tax's proponents. Rep. Peter DeFazio (D., Ore.), who introduced the House bill establishing the tax—positions it as retribution for "the Bush administration's cowboy capitalism, markets know best, deregulation at all cost policies." Sen. Tom Harkin (D., Iowa), who introduced a similar Senate bill, says, "We need a shift in priorities in this country to ask not what America can do for Wall Street, but ask what Wall Street can do for America."
Are you just an ordinary American who trades stocks? You probably don't think of yourself as having much to do with "Wall Street," or of your trading as a vice that ought to be singled out for a special tax. And you surely don't think of yourself as someone who caused the recent financial crisis, which was, as Rep. DeFazio says, "brought on by reckless speculation in the financial markets."
If anything, you probably think of yourself as a casualty of the crisis, not its cause. Why should a stock market investor like you—or for that matter, even an investor literally on Wall Street—pay a tax as punishment for a crime of which you were the victim, not the perpetrator? The crisis was caused by excesses in the mortgage industry, led by government-sponsored entities such as Fannie Mae and Freddie Mac. How did stock transactions—or transactions in options or futures—have anything to do with this crisis?
The proposed tax would apply to commodity transactions as well. So here we find another class of victims being punished. When excesses in the mortgage market blew up the world economy in 2008, commodity investors were hammered as prices plunged in everything from crude oil to gold to corn. Many of them were ordinary businesses—far from Wall Street—trying to hedge themselves against the rising cost of energy.
To be fair, the tax would apply to credit default swaps, which were closely associated with the excesses in mortgage speculation. But if it's going to apply to stocks—which had nothing to do with the crisis except to be its victim—then why does the tax, as proposed by Rep. DeFazio, not apply to bonds? It was the bond market, not the stock market, that was the conduit for hundreds of billions of dollars of dodgy subprime mortgages. Could this possibly be related to the need for the federal government to issue Treasury bonds from here to eternity to finance the looming deficits from the cornucopia of programs being cooked up in Congress?
Setting aside the critical issue of why certain types of securities are singled out for tax, and others are not, the tax as currently proposed does not even succeed in fairly targeting speculators as opposed to investors. In fact, like most tax schemes, it is riddled with arbitrariness and capriciousness.
Suppose you buy a stock, and you hold the position for 20 years. You're an investor. Suppose the person who sold it to you was a day trader—who might end up buying the stock again 10 minutes later from someone else and then selling it after an hour. You both pay the same tax.
As proposed, you wouldn't have to pay a tax to buy or sell mutual funds. Yet mutual funds themselves would have to pay the tax on any trades they make in stocks. So as the owner of the mutual fund, you still end up paying the tax. According to the Investment Company Institute, the average turnover for stock-market mutual funds in 2008 was 60%, which would add up to a lot of taxes.
Transactions in retirement accounts would be exempted. So a corporation that invests to provide pensions to retired workers won't face higher costs. But a retired individual who has just sold his business and is living off the invested proceeds will pay the tax.
And don't believe the proponents of the tax when the say it's so small you'll never notice it. At one quarter of 1%, that would be a cost of $0.33 on a share of IBM. If you were to buy or sell $100,000 worth of IBM (or any stock), the tax would be $250. Single taxpayers would get an annual exemption of that amount. But trade again, and you're taxed $250. Again, another $250. Over and over. Each time, that's about 20 times the commission that a typical online broker would charge you to make that trade—yes, the greedy broker, the one on Wall Street.
More fundamentally, the proponents of the tax seem not to have thought through what effects it might have on America's global competitive position as the world's pre-eminent stock market. They simply wave away any concern with a flourish of moral indignation. Last summer, when Britain's Financial Services Authority Chairman Adair Turner proposed a trading tax for the United Kingdom, and set in motion a global movement toward such a tax, he called trading "socially useless."
We shouldn't have to "socially" justify any lawful activity. But surely it is "socially useful" to let free people transact freely, without regulators and legislators micromanaging them. If anything, given the spectacular failure of every regulatory authority and legislator to detect and deter the abuses in mortgage markets that led to a near-meltdown of the global economy, it is their activities that would appear to be "socially useless" and deserving of a special tax.
It's Economics 101 that the free actions of market participants cause supply and demand to reach equilibrium. And isn't that what investors—indeed, even speculators—do? Don't they try to buy things they think are cheap and sell things they think are expensive? Can they do it as well when facing the dead-weight costs of a transaction tax?
If not, then trading volume in our stock markets will fall. Beyond the tax, everyone—investor and speculator, great and small—who buys or sells stocks will pay more to transact in markets that are less liquid. And they will transact at prices that are not set as efficiently. In such a world, markets would necessarily be more risky, and the cost of capital for business would necessarily rise. The consequence of that is that innovation, growth and jobs would necessarily fall. That would be the full and true cost of the trading tax being proposed.
Mr. Luskin is chief investment officer at Trend Macrolytics LLC. Mr. Hynes is chief executive officer of Hynes Capital.


Monday, January 4, 2010

The Biggest Losers

Behind the Christmas Eve taxpayer massacre at Fannie and Freddie.

Happy New Year, readers, but before we get on with the debates of 2010, there's still some ugly 2009 business to report: To wit, the Treasury's Christmas Eve taxpayer massacre lifting the $400 billion cap on potential losses for Fannie Mae and Freddie Mac as well as the limits on what the failed companies can borrow.
The Treasury is hoping no one notices, and no wonder. Taxpayers are continuing to buy senior preferred stock in the two firms to cover their growing losses—a combined $111 billion so far. When Treasury first bailed them out in September 2008, Congress put a $200 billion limit ($100 billion each) on federal assistance. Last year, the Treasury raised the potential commitment to $400 billion. Now the limit on taxpayer exposure is, well, who knows?
Associated Press 
The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers. Said Fannie Mae in its most recent quarterly report: "We expect that, for the foreseeable future, the earnings of the company, if any, will not be sufficient to pay the dividends on the senior preferred stock. As a result, future dividend payments will be effectively funded from equity drawn from the Treasury."
The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures. Most of their losses are still coming from subprime and Alt-A mortgage bets made during the boom, but Fannie reported last quarter that loan modifications resulted in $7.7 billion in losses, up from $2.2 billion the previous quarter.
The government wants taxpayers to think that these are profit-seeking companies being nursed back to health, like AIG. But at least AIG is trying to make money. Fan and Fred are now designed to lose money, transferring wealth from renters and homeowners to overextended borrowers.
Even better for the political class, much of this is being done off the government books. The White House budget office still doesn't fully account for Fannie and Freddie's spending as federal outlays, though Washington controls the companies. Nor does it include as part of the national debt the $5 trillion in mortgages—half the market—that the companies either own or guarantee. The companies have become Washington's ultimate off-balance-sheet vehicles, the political equivalent of Citigroup's SIVs, that are being used to subsidize and nationalize mortgage finance.
This subterfuge also explains the Christmas Eve timing. After December 31, Team Obama would have needed the consent of Congress to raise the taxpayer exposure beyond $400 billion. By law, negative net worth at the companies forces them into "receivership," which means they have to be wound down.
Unlimited bailouts will now allow the Treasury to keep them in conservatorship, which means they can help to conserve the Democratic majority in Congress by increasing their role in housing finance. With the Federal Reserve planning to step back as early as March from buying $1.25 trillion in mortgage-backed securities, Team Obama is counting on Fan and Fred to help reflate the housing bubble.
That's why on Christmas Eve Treasury also rolled back a key requirement of the 2008 bailout—that Fan and Fred begin shrinking the portfolios of mortgages they own on their own account, which total a combined $1.5 trillion. Risk-taking will now increase, so that the government can once again follow Barney Frank's infamous advice that the companies "roll the dice" on subsidies for affordable housing.
All of which would seem to make the CEOs of Fannie and Freddie the world's most overpaid bureaucrats. A release from the Federal Housing Finance Agency that also fell in the Christmas Eve forest reports that, after presiding over a combined $24 billion in losses last quarter, Fannie CEO Michael Williams and Freddie boss Ed Haldeman are getting substantial raises. Each is now eligible for up to $6 million annually.
Freddie also has one of the world's highest-paid human resources executives. Paul George's total compensation can run up to $2.7 million. It must require a rare set of skills to spot executives capable of losing billions of dollars.
Where is Treasury's pay czar when we actually need him? You guessed it, Fannie and Freddie are exempt from the rules applied to the TARP banks. The government gave away the game that these firms are no longer in the business of making profits when it announced that the CEOs will be paid entirely in cash, though it is discouraging that practice at other big banks. Who would want stock in the Department of Housing and Urban Development?
Meanwhile, these biggest of Beltway losers continue to be missing from the debate over financial reform. The Treasury still hasn't offered its long-promised proposals even as it presses reform on banks that played a far smaller role in the financial mania and panic. Senate Banking Chairman Chris Dodd (D., Conn.) and ranking Republican Richard Shelby recently issued a joint statement on their "progress" toward financial regulatory reform, but their list of goals also doesn't mention Fannie or Freddie.
Since Mr. Shelby has long argued for reform of these government-sponsored enterprises, their absence suggests that Mr. Dodd's longtime effort to protect Fan and Fred is once again succeeding. It would be worse than a shame if, having warned about the iceberg for years, Mr. Shelby now joins Mr. Dodd in pretending that these ships aren't sinking.
In today's Washington, we suppose, it only makes sense that the companies that did the most to cause the meltdown are being kept alive to lose even more money. The politicians have used the panic as an excuse to reform everything but themselves.


Sunday, January 3, 2010

Mandatory Usury in One Lesson

How Congress dictated a 79.9% interest rate.

'You might have less-than-perfect credit and we're OK with that," read an October credit-card solicitation from South Dakota-based First Premier Bank. The interest rate, however, will strike some as usurious: 79.9%. That's a more than eightfold increase from the 9.9% the bank previously collected for a similar card.
Wait, wasn't Congress supposed to have passed legislation against predatory lending? As a matter of fact, yes. The whopping rate increase is First Premier's way of complying with the Credit Card Accountability, Responsibility and Disclosure Act of 2009. Among other provisions, that law prohibits fees of more than 25% above a card's credit limit. First Premier has been offering an account with a $250 limit and annual fees of $256. By law the latter figure must come down to $75. To compensate for the lost $181 in fees, the bank is raising the rate by 70% of $250, or $175, a year.
If it sounds like a rotten deal either way, it is—if you have good credit. But if you don't, the cost may be worth it to re-establish your rating. Banks that lend money to customers with poor credit histories have to charge more to cover the extra risk. If Congress makes this impossible, banks will respond by refusing to lend to such customers, so that it will be harder for them to re-establish their creditworthiness.
Banks can't be expected to give money away, even if Congress is in the habit of doing just that. Unlike lawmakers, banks and other businesses can collect revenues only by offering something of value in return.