Today's Effort-- Notes and Resources

Important Insight on the Health Care Debate

rwtwain@yahoo.com (R.W. Twain) — Wed, 09 Dec 2009 22:01:00 +0000

Below is an article found in the Washington Post regarding one of the hidden costs of employer-provided health care: the fact that individual employees do not have the right to negotiate their own policy and, for that matter, often do not know how much their employers pay for group plans for employees. Importantly, the author examines the correlation between rising health care costs and declining wages arguing that employers, with only one predetermined basket of money available for both wages and benefits, necessarily shaft employees on wage compensation in a highly inflationary environment for health care costs. Reader thoughts are welcome in the comments section.

The medical bill you need to see
By Ezra Klein
www.washingtonpost.com , Tuesday, December 8, 2009

We've had a pretty good discussion this year on the public option and on "death panels." But for all the hype over health-care reform, we have not done a very good job of talking about the health-care system itself -- in particular, why our system is so expensive. As a result, we're not doing a very good job of fixing it. There's still time to change that, but not much.

The doomsaying is by now familiar: Left unchecked, health-care reform will bankrupt our nation. It will grow to consume every dollar of gross domestic product. And Congress isn't contemplating anything nearly radical enough to avert the emergency.

The reason is not that people haven't heard grim warnings about the future. It's because they don't understand what's going on in the present. In 2009, the average employer-sponsored health-care plan cost a bit less than $13,500. But virtually no one cut a check for $13,500. Employers generally pay more than 70 percent of their employees' health-care costs. To employees, that seems like a good deal, particularly given how fast costs are growing. A "benefit," as it's called.

But health-care coverage is not a benefit. It's a wage deduction. When premium costs go up, wages go down. When premium costs go down, wages go up. Yet workers don't know that. In fact, the information is hidden from them. That means that cost control seems like all pain and no gain, which makes it virtually impossible for Congress to pass. It's like asking someone to diet when they don't realize it will help them lose weight.

Cost control is not, in fact, all pain and no gain. It's some pain in return for a fat raise. A 2006 study, for instance, by Harvard's Katherine Baicker and Amitabh Chandra used malpractice payments to estimate the effect of premium increases on wages. They found that a 10 percent increase in health-care premiums "results in an offsetting decrease in wages of 2.3 percent" and an increase in unemployment of 1.2 percentage points. Compensation is basically a set sum for employers, and they don't seem to care much whether it goes into wages or into health-care costs.

Workers saw this in the 1990s. This was the era of the managed-care revolution, which most remember as a horrifying failure. Famously, audiences applauded when Helen Hunt broke out into a profanity-laden rant against HMOs in the movie "As Good as It Gets." The popular backlash was so intense that by the turn of the century the managed-care experiment was virtually over. The problem with this historic failure? The data showed the experiment to be a tremendous success.

From 1989 to 1995, median wages actually fell a bit. Then, managed care kicked in. Annual growth in health-care costs fell from more than 10 percent in the early 1990s to less than 5 percent in the late '90s. Meanwhile, wages shot through the roof, rising more than 11 percent from 1995 to 2000. Then we ended the managed-care experiment, and health-care costs resumed their normal speed of growth. Predictably, wages slumped back down from 2000 to 2006. "By every observable indicator," says Harvard's David Cutler, "managed care was a huge success. It cut spending, cut the growth of spending and didn't seem to kill anyone. And yet everyone hated it."

Of course they hated it. They didn't see its benefits, only its costs. They knew they were suddenly trapped in networks and being hassled by their insurers. As for their raises, those were nice, but why are you changing the subject?

When Americans rejected managed care, in other words, they didn't know they were ending wage increases, too. But since 1990, wages have tracked changes in premiums more closely than they've tracked the growth of GDP. Maybe if more workers knew that, they would be more interested in efforts to control health-care costs.

One of the best reforms that could be made this year would be to give workers that information. So far, however, efforts have been unsuccessful. During the Senate Finance Committee's negotiations, Ron Wyden (D-Ore.) offered to give employees the option to reject their employer's offerings in return for a voucher that would help them choose their own insurance on exchanges, which meant they would save money if they chose cheaper plans. Much more modestly, Chuck Grassley (R-Iowa) floated an idea to simply require employers to report their health-care spending on workers' W-2 forms. Both were stymied by an odd-bedfellows alliance of employers and unions.

It's not too late, though. Perhaps the easiest way to dramatize the issue for workers would be to attach health-care costs to each paycheck. If employers listed the cost of health care alongside the bite taken by payroll taxes, it would be much clearer to workers that health-care coverage was coming out of their wages, not out of their employer's largess. That, at least, could help them see the costs of the system more clearly, which is, unfortunately, something that all the congressional debate isn't helping anyone do.

Why We'll Never Win the War in Afghanistan

rwtwain@yahoo.com (R.W. Twain) — Sat, 14 Nov 2009 06:18:00 +0000

The following article appeared in the November 30, 2009 edition of The Nation. It is an excellent piece of investigative journalism, but one that is surely to get no traction in the mainstream media. how many more examples of waste, fraud and abuse of taxpayer dollars will we tolerate before pulling the plug on our government's foreign follies?

How the US Funds the Taliban

By Aram Roston

On October 29, 2001, while the Taliban's rule over Afghanistan was under assault, the regime's ambassador in Islamabad gave a chaotic press conference in front of several dozen reporters sitting on the grass. On the Taliban diplomat's right sat his interpreter, Ahmad Rateb Popal, a man with an imposing presence. Like the ambassador, Popal wore a black turban, and he had a huge bushy beard. He had a black patch over his right eye socket, a prosthetic left arm and a deformed right hand, the result of injuries from an explosives mishap during an old operation against the Soviets in Kabul.

But Popal was more than just a former mujahedeen. In 1988, a year before the Soviets fled Afghanistan, Popal had been charged in the United States with conspiring to import more than a kilo of heroin. Court records show he was released from prison in 1997.

Flash forward to 2009, and Afghanistan is ruled by Popal's cousin President Hamid Karzai. Popal has cut his huge beard down to a neatly trimmed one and has become an immensely wealthy businessman, along with his brother Rashid Popal, who in a separate case pleaded guilty to a heroin charge in 1996 in Brooklyn. The Popal brothers control the huge Watan Group in Afghanistan, a consortium engaged in telecommunications, logistics and, most important, security. Watan Risk Management, the Popals' private military arm, is one of the few dozen private security companies in Afghanistan. One of Watan's enterprises, key to the war effort, is protecting convoys of Afghan trucks heading from Kabul to Kandahar, carrying American supplies.

Welcome to the wartime contracting bazaar in Afghanistan. It is a virtual carnival of improbable characters and shady connections, with former CIA officials and ex-military officers joining hands with former Taliban and mujahedeen to collect US government funds in the name of the war effort.

In this grotesque carnival, the US military's contractors are forced to pay suspected insurgents to protect American supply routes. It is an accepted fact of the military logistics operation in Afghanistan that the US government funds the very forces American troops are fighting. And it is a deadly irony, because these funds add up to a huge amount of money for the Taliban. "It's a big part of their income," one of the top Afghan government security officials told The Nation in an interview. In fact, US military officials in Kabul estimate that a minimum of 10 percent of the Pentagon's logistics contracts--hundreds of millions of dollars--consists of payments to insurgents.

Understanding how this situation came to pass requires untangling two threads. The first is the insider dealing that determines who wins and who loses in Afghan business, and the second is the troubling mechanism by which "private security" ensures that the US supply convoys traveling these ancient trade routes aren't ambushed by insurgents.

A good place to pick up the first thread is with a small firm awarded a US military logistics contract worth hundreds of millions of dollars: NCL Holdings. Like the Popals' Watan Risk, NCL is a licensed security company in Afghanistan.

What NCL Holdings is most notorious for in Kabul contracting circles, though, is the identity of its chief principal, Hamed Wardak. He is the young American son of Afghanistan's current defense minister, Gen. Abdul Rahim Wardak, who was a leader of the mujahedeen against the Soviets. Hamed Wardak has plunged into business as well as policy. He was raised and schooled in the United States, graduating as valedictorian from Georgetown University in 1997. He earned a Rhodes scholarship and interned at the neoconservative think tank the American Enterprise Institute. That internship was to play an important role in his life, for it was at AEI that he forged alliances with some of the premier figures in American conservative foreign policy circles, such as the late Ambassador Jeane Kirkpatrick.

Wardak incorporated NCL in the United States early in 2007, although the firm may have operated in Afghanistan before then. It made sense to set up shop in Washington, because of Wardak's connections there. On NCL's advisory board, for example, is Milton Bearden, a well-known former CIA officer. Bearden is an important voice on Afghanistan issues; in October he was a witness before the Senate Foreign Relations Committee, where Senator John Kerry, the chair, introduced him as "a legendary former CIA case officer and a clearheaded thinker and writer." It is not every defense contracting company that has such an influential adviser.

But the biggest deal that NCL got--the contract that brought it into Afghanistan's major leagues--was Host Nation Trucking. Earlier this year the firm, with no apparent trucking experience, was named one of the six companies that would handle the bulk of US trucking in Afghanistan, bringing supplies to the web of bases and remote outposts scattered across the country.

At first the contract was large but not gargantuan. And then that suddenly changed, like an immense garden coming into bloom. Over the summer, citing the coming "surge" and a new doctrine, "Money as a Weapons System," the US military expanded the contract 600 percent for NCL and the five other companies. The contract documentation warns of dire consequences if more is not spent: "service members will not get food, water, equipment, and ammunition they require." Each of the military's six trucking contracts was bumped up to $360 million, or a total of nearly $2.2 billion. Put it in this perspective: this single two-year effort to hire Afghan trucks and truckers was worth 10 percent of the annual Afghan gross domestic product. NCL, the firm run by the defense minister's well-connected son, had struck pure contracting gold.

Host Nation Trucking does indeed keep the US military efforts alive in Afghanistan. "We supply everything the army needs to survive here," one American trucking executive told me. "We bring them their toilet paper, their water, their fuel, their guns, their vehicles." The epicenter is Bagram Air Base, just an hour north of Kabul, from which virtually everything in Afghanistan is trucked to the outer reaches of what the Army calls "the Battlespace"--that is, the entire country. Parked near Entry Control Point 3, the trucks line up, shifting gears and sending up clouds of dust as they prepare for their various missions across the country.

The real secret to trucking in Afghanistan is ensuring security on the perilous roads, controlled by warlords, tribal militias, insurgents and Taliban commanders. The American executive I talked to was fairly specific about it: "The Army is basically paying the Taliban not to shoot at them. It is Department of Defense money." That is something everyone seems to agree on.

Mike Hanna is the project manager for a trucking company called Afghan American Army Services. The company, which still operates in Afghanistan, had been trucking for the United States for years but lost out in the Host Nation Trucking contract that NCL won. Hanna explained the security realities quite simply: "You are paying the people in the local areas--some are warlords, some are politicians in the police force--to move your trucks through."

Hanna explained that the prices charged are different, depending on the route: "We're basically being extorted. Where you don't pay, you're going to get attacked. We just have our field guys go down there, and they pay off who they need to." Sometimes, he says, the extortion fee is high, and sometimes it is low. "Moving ten trucks, it is probably $800 per truck to move through an area. It's based on the number of trucks and what you're carrying. If you have fuel trucks, they are going to charge you more. If you have dry trucks, they're not going to charge you as much. If you are carrying MRAPs or Humvees, they are going to charge you more."

Hanna says it is just a necessary evil. "If you tell me not to pay these insurgents in this area, the chances of my trucks getting attacked increase exponentially."

Whereas in Iraq the private security industry has been dominated by US and global firms like Blackwater, operating as de facto arms of the US government, in Afghanistan there are lots of local players as well. As a result, the industry in Kabul is far more dog-eat-dog. "Every warlord has his security company," is the way one executive explained it to me.

In theory, private security companies in Kabul are heavily regulated, although the reality is different. Thirty-nine companies had licenses until September, when another dozen were granted licenses. Many licensed companies are politically connected: just as NCL is owned by the son of the defense minister and Watan Risk Management is run by President Karzai's cousins, the Asia Security Group is controlled by Hashmat Karzai, another relative of the president. The company has blocked off an entire street in the expensive Sherpur District. Another security firm is controlled by the parliamentary speaker's son, sources say. And so on.

In the same way, the Afghan trucking industry, key to logistics operations, is often tied to important figures and tribal leaders. One major hauler in Afghanistan, Afghan International Trucking (AIT), paid $20,000 a month in kickbacks to a US Army contracting official, according to the official's plea agreement in US court in August. AIT is a very well-connected firm: it is run by the 25-year-old nephew of Gen. Baba Jan, a former Northern Alliance commander and later a Kabul police chief. In an interview, Baba Jan, a cheerful and charismatic leader, insisted he had nothing to do with his nephew's corporate enterprise.

But the heart of the matter is that insurgents are getting paid for safe passage because there are few other ways to bring goods to the combat outposts and forward operating bases where soldiers need them. By definition, many outposts are situated in hostile terrain, in the southern parts of Afghanistan. The security firms don't really protect convoys of American military goods here, because they simply can't; they need the Taliban's cooperation.

One of the big problems for the companies that ship American military supplies across the country is that they are banned from arming themselves with any weapon heavier than a rifle. That makes them ineffective for battling Taliban attacks on a convoy. "They are shooting the drivers from 3,000 feet away with PKMs," a trucking company executive in Kabul told me. "They are using RPGs [rocket-propelled grenades] that will blow up an up-armed vehicle. So the security companies are tied up. Because of the rules, security companies can only carry AK-47s, and that's just a joke. I carry an AK--and that's just to shoot myself if I have to!"

The rules are there for a good reason: to guard against devastating collateral damage by private security forces. Still, as Hanna of Afghan American Army Services points out, "An AK-47 versus a rocket-propelled grenade--you are going to lose!" That said, at least one of the Host Nation Trucking companies has tried to do battle instead of paying off insurgents and warlords. It is a US-owned firm called Four Horsemen International. Instead of providing payments, it has tried to fight off attackers. And it has paid the price in lives, with horrendous casualties. FHI, like many other firms, refused to talk publicly; but I've been told by insiders in the security industry that FHI's convoys are attacked on virtually every mission.

For the most part, the security firms do as they must to survive. A veteran American manager in Afghanistan who has worked there as both a soldier and a private security contractor in the field told me, "What we are doing is paying warlords associated with the Taliban, because none of our security elements is able to deal with the threat." He's an Army veteran with years of Special Forces experience, and he's not happy about what's being done. He says that at a minimum American military forces should try to learn more about who is getting paid off.

"Most escorting is done by the Taliban," an Afghan private security official told me. He's a Pashto and former mujahedeen commander who has his finger on the pulse of the military situation and the security industry. And he works with one of the trucking companies carrying US supplies. "Now the government is so weak," he added, "everyone is paying the Taliban."

To Afghan trucking officials, this is barely even something to worry about. One woman I met was an extraordinary entrepreneur who had built up a trucking business in this male-dominated field. She told me the security company she had hired dealt directly with Taliban leaders in the south. Paying the Taliban leaders meant they would send along an escort to ensure that no other insurgents would attack. In fact, she said, they just needed two armed Taliban vehicles. "Two Taliban is enough," she told me. "One in the front and one in the back." She shrugged. "You cannot work otherwise. Otherwise it is not possible."

Which leads us back to the case of Watan Risk, the firm run by Ahmad Rateb Popal and Rashid Popal, the Karzai family relatives and former drug dealers. Watan is known to control one key stretch of road that all the truckers use: the strategic route to Kandahar called Highway 1. Think of it as the road to the war--to the south and to the west. If the Army wants to get supplies down to Helmand, for example, the trucks must make their way through Kandahar.

Watan Risk, according to seven different security and trucking company officials, is the sole provider of security along this route. The reason is simple: Watan is allied with the local warlord who controls the road. Watan's company website is quite impressive, and claims its personnel "are diligently screened to weed out all ex-militia members, supporters of the Taliban, or individuals with loyalty to warlords, drug barons, or any other group opposed to international support of the democratic process." Whatever screening methods it uses, Watan's secret weapon to protect American supplies heading through Kandahar is a man named Commander Ruhullah. Said to be a handsome man in his 40s, Ruhullah has an oddly high-pitched voice. He wears traditional salwar kameez and a Rolex watch. He rarely, if ever, associates with Westerners. He commands a large group of irregular fighters with no known government affiliation, and his name, security officials tell me, inspires obedience or fear in villages along the road.

It is a dangerous business, of course: until last spring Ruhullah had competition--a one-legged warlord named Commander Abdul Khaliq. He was killed in an ambush.

So Ruhullah is the surviving road warrior for that stretch of highway. According to witnesses, he works like this: he waits until there are hundreds of trucks ready to convoy south down the highway. Then he gets his men together, setting them up in 4x4s and pickups. Witnesses say he does not limit his arsenal to AK-47s but uses any weapons he can get. His chief weapon is his reputation. And for that, Watan is paid royally, collecting a fee for each truck that passes through his corridor. The American trucking official told me that Ruhullah "charges $1,500 per truck to go to Kandahar. Just 300 kilometers."

It's hard to pinpoint what this is, exactly--security, extortion or a form of "insurance." Then there is the question, Does Ruhullah have ties to the Taliban? That's impossible to know. As an American private security veteran familiar with the route said, "He works both sides... whatever is most profitable. He's the main commander. He's got to be involved with the Taliban. How much, no one knows."

Even NCL, the company owned by Hamed Wardak, pays. Two sources with direct knowledge tell me that NCL sends its portion of US logistics goods in Watan's and Ruhullah's convoys. Sources say NCL is billed $500,000 per month for Watan's services. To underline the point: NCL, operating on a $360 million contract from the US military, and owned by the Afghan defense minister's son, is paying millions per year from those funds to a company owned by President Karzai's cousins, for protection.

Hamed Wardak wouldn't return my phone calls. Milt Bearden, the former CIA officer affiliated with the company, wouldn't speak with me either. There's nothing wrong with Bearden engaging in business in Afghanistan, but disclosure of his business interests might have been expected when testifying on US policy in Afghanistan and Pakistan. After all, NCL stands to make or lose hundreds of millions based on the whims of US policy-makers.

It is certainly worth asking why NCL, a company with no known trucking experience, and little security experience to speak of, would win a contract worth $360 million. Plenty of Afghan insiders are asking questions. "Why would the US government give him a contract if he is the son of the minister of defense?" That's what Mahmoud Karzai asked me. He is the brother of President Karzai, and he himself has been treated in the press as a poster boy for access to government officials. The New York Times even profiled him in a highly critical piece. In his defense, Karzai emphasized that he, at least, has refrained from US government or Afghan government contracting. He pointed out, as others have, that Hamed Wardak had little security or trucking background before his company received security and trucking contracts from the Defense Department. "That's a questionable business practice," he said. "They shouldn't give it to him. How come that's not questioned?"

I did get the opportunity to ask General Wardak, Hamed's father, about it. He is quite dapper, although he is no longer the debonair "Gucci commander" Bearden once described. I asked Wardak about his son and NCL. "I've tried to be straightforward and correct and fight corruption all my life," the defense minister said. "This has been something people have tried to use against me, so it has been painful."

Wardak would speak only briefly about NCL. The issue seems to have produced a rift with his son. "I was against it from the beginning, and that's why we have not talked for a long time. I have never tried to support him or to use my power or influence that he should benefit."

When I told Wardak that his son's company had a US contract worth as much as $360 million, he did a double take. "This is impossible," he said. "I do not believe this."

I believed the general when he said he really didn't know what his son was up to. But cleaning up what look like insider deals may be easier than the next step: shutting down the money pipeline going from DoD contracts to potential insurgents.

Two years ago, a top Afghan security official told me, Afghanistan's intelligence service, the National Directorate of Security, had alerted the American military to the problem. The NDS delivered what I'm told are "very detailed" reports to the Americans explaining how the Taliban are profiting from protecting convoys of US supplies.

The Afghan intelligence service even offered a solution: what if the United States were to take the tens of millions paid to security contractors and instead set up a dedicated and professional convoy support unit to guard its logistics lines? The suggestion went nowhere.

The bizarre fact is that the practice of buying the Taliban's protection is not a secret. I asked Col. David Haight, who commands the Third Brigade of the Tenth Mountain Division, about it. After all, part of Highway 1 runs through his area of operations. What did he think about security companies paying off insurgents? "The American soldier in me is repulsed by it," he said in an interview in his office at FOB Shank in Logar Province. "But I know that it is what it is: essentially paying the enemy, saying, 'Hey, don't hassle me.' I don't like it, but it is what it is."

As a military official in Kabul explained contracting in Afghanistan overall, "We understand that across the board 10 percent to 20 percent goes to the insurgents. My intel guy would say it is closer to 10 percent. Generally it is happening in logistics."

In a statement to The Nation about Host Nation Trucking, Col. Wayne Shanks, the chief public affairs officer for the international forces in Afghanistan, said that military officials are "aware of allegations that procurement funds may find their way into the hands of insurgent groups, but we do not directly support or condone this activity, if it is occurring." He added that, despite oversight, "the relationships between contractors and their subcontractors, as well as between subcontractors and others in their operational communities, are not entirely transparent."

In any case, the main issue is not that the US military is turning a blind eye to the problem. Many officials acknowledge what is going on while also expressing a deep disquiet about the situation. The trouble is that--as with so much in Afghanistan--the United States doesn't seem to know how to fix it.

The Trial of the Century: Will it be televised? Would it matter?

rwtwain@yahoo.com (R.W. Twain) — Sat, 14 Nov 2009 04:59:00 +0000

The following are excerpts from a Washington Post story, with my observations in bold. Enjoy.

Accused 9/11 defendants to be tried in N.Y. court
By Peter Finn, Carrie Johnson and Debbi Wilgoren
Washington Post Staff Writer
Friday, November 13, 2009
washingtonpost.com/wp-dyn/content/article/2009/11/13/AR2009111300740.html

"Khalid Sheik Mohammed -- the self-proclaimed mastermind of the Sept. 11, 2001, attacks -- and four co-defendants will be tried in federal court in New York instead of a military commission, with prosecutors likely to seek the death penalty, U.S. Attorney General Eric H. Holder Jr. announced Friday."

The writer's lede is carefully crafted not to use the standard "alleged" or"accused" language typical for normal defendants. Instead, "self-proclaimed mastermind" is just snarky enough to convey guilt by admission while still remaining factually correct. A lede tailored to fit the prevailing belief that KSM had anything to do with 9/11.

"I am absolutely convinced that Khalid Sheik Mohammed will be subject to the most exacting demands of justice," Obama said. "The American people insist on it, and my administration will insist on it."

Just like it insisted on a public option, or better yet its insistence on transparency in the bailouts of the financial and auto industry, or the stimulus dollars? Admit it, you caved to pressure from the left to wind down Gitmo and now figure a dog and pony show in Lower Manhattan will cause everyone to unite in vigilante justice and be distracted from their daily domestic woes.

"While in CIA custody, Mohammed was subjected to a series of coercive interrogation techniques, culminating in waterboarding. Asked about the prospect that defense attorneys could use the acknowledged waterboarding to derail the case, Holder said he would not have authorized the prosecutions if he were not convinced the outcome would be successful."

That's Eric holder putting his job on the line. What a gamble-- it's like wondering if an Israeli court would have found Hitler guilty and executed him. I wonder what will happen? Just don't forget, if this was any one of the tens of thousands of other capital case defendants tried in a domestic court, the acknowledged torture of a defendant would sink any chance for prosecution. How about false imprisonment-- will the defense lawyers challenge the Bush policy of indefinite detention at Gitmo for the last eight years? Because KSM was held there effectively uncharged for so long, can any statements he made at that time be considered coerced, or at least made under duress? Unless the government has evidence of KSM planning the attacks, and is willing to reveal how it obtained that evidence (which it won't-- claiming state secrets), then any conviction based on statements made by KSM at Gitmo will be illegitimate.

"Our nation has had no higher priority than bringing those who planned and carried out the attack to justice,' Holder said."

Then call in Bush, Cheney, Pataki, Guiliani, Bernie Kerik, Larry Silverstein, George Tenet, Norman Mineta and the myriad other vermin who have profited from the attacks and ensuing wars while escaping any accountability for their failures that day. Cui bono? is the first question to ask in any crime-- and it's clear to me that neither KSM nor the shady al-Quaeda gained anything from those attacks.

"We applaud the administration's recognition that both the law of war and domestic criminal law are appropriate tools" against al-Qaeda, said Kate Martin, director of the Center for National Security Studies. "It makes sense that those who killed civilians in New York face justice in federal court there. And using military tribunals to try those who attack military objectives overseas as part of a self-declared war on the United States is consistent with the law of war so long as those trials are in fact fair."

That's Juror # 1-- bitch already has him convicted before the trial starts.

Mohammed and his co-defendants have said at Guantanamo Bay they want to be executed so to achieve martyrdom.

So just let them do it-- it'll save us all time and money. Otherwise, just for fun, let them see if they can pull off a similar attack. If ten thousand unlikely, simultaneous civilian and military failures happen again and, defying all laws of physics, it's a successful attack, then we'll know we have the right guys. As an added upside, and with the proper stories planted in the proper places (is Maureen Dowd still around? Nic Kristof?), the American people could easily be led to believe that the terrorists were supported by the governments of Iran and Venezuela. Nothing better than another war to rev up the economy and cut those jobless numbers...

The Fed & Treasury Auctions: Is there any real money being paid?

rwtwain@yahoo.com (R.W. Twain) — Thu, 29 Oct 2009 18:25:00 +0000

Interesting exchange in the comment section of MarketWatch for this article on the Fed buying T-bills at Treasury auction. Here's the exchange:

Q: Can anyone explain to me how they issuers of debt, can be the buyers of the same debt? This doesn't make sense on any kind of level.

A: (Gooby) Here's how they do it.

The Fed loans (interest free money) to the TARP minions (JP Morgan, GS, and foreign central banks that Bernanke will not reveal) so that they can drive the market and gold back up in order to sucker the ordinary investors into jumping in with their hard-earned wealth. Then the minions will play their microtrades, skim off their profits, make the market dump, pay back the Fed and buy more TREASURIES......

Ordinary investors are funding TARP minions buying US Debt. ..........so we get screwed when we get the bill for the TARP bailouts and then we'll get screwed when we also get taxed to cover the interest on the TREASURIES.

A: (Wil-E-Coyote) US Treasury issues the bonds, Federal Reserve buys them (effectively retiring them).

Magic money then credited to the US Treasury account, without the need for taxes.

(Repeat until currency is worthless).

A: (Freefall) Like Coyote said, US treasury sells the bonds, the Fed buys them with their printing press. However, these buybacks are not purchased directly from the Treasury per se as treasury floats debts through auction. The Fed purchases them through primary dealers effectively increasing liquidity(more cash available to lend). They used to control liquidity through 'temporary open market operation' or 'permanent open market operation.' However, after the crisis, the Fed only does buybacks and POMO which are effectively retiring those debt instruments off the market permanently.

A: (Woodsmoke52) A lot of people are consoling themselves that the coming inflation holocaust spawned by the Fed/Treasury collusion will push stock prices higher. Yes, inflation is likely to drive stock prices higher, but there's a catch. Stock prices rose in the 1970s, but they didn't keep pace with inflation and they won't do so this time. Stocks are not historically a good hedge against steep monetary inflation. Real estate does better, but even real estate falls short of CPI increases. And 18.8 million empty housing units say that today is not a good time to buy residential real estate. If you want to park wealth in real estate, I would suggest an old farm in the midwest. Someplace you can unload a shotgun or a 7mm mag without upsetting the neighbors.

With the big-spending 45-54 year old demographic shrinking and baby boomers beginning to retire and sell stocks out of their retirement plans, there is nothing to support stock prices for years to come. The government is increasing the money supply at a rate many times that of GDP growth. Ultimately, that can have only one outcome. It is consumer essentials that will go up the most, not paper assets.

CPI inflation is modest now (about 6%-7% according to shadowstats.com) but when the economy begins to show a real uptick in consumption, the velocity of money will pick up. As soon as that happens, inflation will run wild. Think about it: millions of unemployed people are no longer producing goods and services, but still consuming. If government keeps mailing out the food stamp cards, extending unemployment checks and granting 100% LTV mortgages through the GSE's, consumption will overwhelm actual production.

Do not sell gold when the price reaches $2000.

A Bursting Seam: Will Kurdistan Tear Iraq Apart?

rwtwain@yahoo.com (R.W. Twain) — Thu, 29 Oct 2009 06:20:00 +0000

An excellent article from CFR on both the recent history of, and challenges currently facing, the relationship of the Kurdish regional government and the Iraqi federal government. Given the immense oil reserves at stake in and around Kirkuk, it's no wonder that the referendum on the city's status has been delayed repeatedly, and that violence pervades the city today.

The Kurdish Issue Flares Up in Iraq
Author: Daniel Senor, Adjunct Senior Fellow for Middle Eastern Studies

July 21, 2009
Wall Street Journal

At their White House meeting today, President Barack Obama and Iraqi Prime Minister Nouri al-Maliki will discuss the escalating conflict between Iraq's Arabs and Kurds. Tensions have almost turned into warfare in recent months, especially following the Iraqi Army's deployment of its 12th Division in Kirkuk late last year. It is a critical time for the U.S. to play a constructive role, but this cannot happen if Mr. Obama throws away his most potent card: a clear signal that he is prepared to slow down planned U.S. troop withdrawals.

How did Iraq arrive at this new flashpoint? Between the end of the first Gulf War in 1991 and the fall of Baghdad in April 2003, Iraqi Kurds lived in a semi-autonomous region. The informal border-called the Green Line-stretched from just north of Diyala and Kirkuk, and cut through part of Ninewa. Ever since, the Kurds have had their own parliament and ministries, control over all the cultural institutions in the region, and their own militia called the peshmerga.

Providing the Kurds with a protected region made perfect moral and geopolitical sense. Saddam had repeatedly attempted genocidal campaigns against them: the Anfal depopulation campaign in 1987-88, in which the Baathist regime killed or expelled hundreds of thousands of Kurds; the expulsion of thousands of Fayli (Shiite) Kurds from northern Iraq into Iran; and the 1988 slaughter of 5,000 Kurds with chemical weapons in Halabja.

In April 2003, the peshmerga helped the U.S. fight Saddam-not just in the Kurdish area but also south of the Green Line. When it came to Kirkuk, however, the Kurds moved in during the war and never left. With Saddam gone, the Kurds quickly set up Kurdish Regional Government (KRG) offices in the city and began to establish facts on the ground.

From the Kurdish point of view, all this was natural and just. Before Saddam's brutal expulsions during his Arabization campaign, Kirkuk had a Kurdish majority.

Iraq's post-Saddam interim constitution-which we in the Coalition Provisional Authority helped the Iraqis draft-recognized Kurdish authority only over the territories that the Kurds controlled before the fall of the regime. The permanent Iraqi Constitution went a step further in requiring a referendum to determine the future status of Kirkuk. While both articles clearly left Kirkuk outside the jurisdiction of the KRG in the near term, the language also conceded that Kirkuk and other nearby areas were "disputed territories." In the eyes of the Kurds, this ambiguity left the door open.

At that time, resolving the Kurdish issue was subordinated to the urgent need to address the Sunni insurgency and the growing power of Moqtada al-Sadr's Mahdi militia. Today the threats from Iraqi al Qaeda and the Sadrists are significantly diminished.

Two factors will drive the Kurdish-Arab issue to a boiling point over the next six months unless the Obama administration heads them off. First, oil. There is still no federal Iraqi hydrocarbons law. The KRG and the Iraqi government rely on different interpretations of Article 111 of the Iraqi Constitution, which declares that "oil and gas are the property of all the Iraqi people in all the regions and governorates."

Kirkuk's oil is a big issue for the national government in Baghdad. When Mr. Maliki's government wrote its federal budget for 2009, oil prices were hovering around $150 per barrel. And while the Iraqi government had wisely forecast prices to fall to $80 per barrel-and made budget projections accordingly-oil prices were still 50% below their projections by mid-year. This has caused panic at Iraq's Oil and Finance Ministries.

From the Kurds' standpoint, oil is part of a broader KRG strategy to draw international pressure on Baghdad to grant further Kurdish autonomy. It is no coincidence that on the eve of Mr. Maliki's visit to Washington, the KRG's Ministry of National Resources released an embarrassing document contrasting its success in attracting foreign energy investors with the national government's approach, which has been stalled.

Second, politics. On Saturday, the Kurds vote on a new parliament and president. While polls show that President Massoud Barzani and the two largest Kurdish parliamentary parties will be re-elected, the dynamic of this election is making Kurdish leaders nervous. Historically, Kurdish elections turned on the KRG's power struggle with the national government. But in this election, the Iraqi Kurds seem to be more preoccupied with local governance issues such as KRG corruption. This may be prompting KRG officials to foment tension with Baghdad in the hope that the perception of external threats will strengthen their position at the polls.

As for Mr. Maliki, he must prepare for national elections in January. Tapping into Iraqi-Arab nationalism is to his political advantage. In short, the political schedule all but ensures that there will be no grand Baghdad-Erbil bargain soon.

Kurdish leaders are deeply concerned about the withdrawal of U.S. forces. Under the current timeline, most U.S. troops will be out of Iraq by the end of the summer 2010, with 35,000 to 50,000 remaining through the end of 2011, at which point all U.S. forces must be gone. Mr. Obama should consider slowing the withdrawal schedule. The willingness of the Kurds to negotiate will decrease if they believe U.S. forces will not be there to help enforce an agreement. In addition, the U.S. government must be sensitive to the possibility that al Qaeda may see an opportunity in the north to support an Arab cause.

There is pressure building within the Pentagon to cut forces in Iraq even faster than planned to send more troops to Afghanistan. That pressure should be resisted. We must not do in Iraq what Mr. Obama, when campaigning last year for the job of commander in chief, said we did in Afghanistan: lose a key fight by focusing too intently on another theater.

Mr. Senor is an adjunct senior fellow at the Council on Foreign Relations. He served as a senior adviser to the coalition in Iraq and was based in Baghdad in 2003 and 2004.

To read about the history of Kurdistan, see an essay here from my archive.

Seeing the Forest, Not just the Trees

rwtwain@yahoo.com (R.W. Twain) — Sat, 24 Oct 2009 05:24:00 +0000

An excellent article that, read in conjunction with Taibbi's "Counterfeit Ecomony," captures the essence of the millions of mindless securities insurance transactions that form the backbone of today's investment economy. The little guy can't even play in this game, let alone win at it.

Wall Street on the lam

By Eugene Robinson
Friday, October 23, 2009
Originally posted @ http://www.washingtonpost.com/wp-dyn/content/article/2009/10/22/AR2009102203866.html?

Slashing executive salaries, bonuses and perks at the seven bailed-out companies that gorged most gluttonously at the public trough is emotionally satisfying, but it shouldn't be. It's like arresting jaywalkers while ignoring the bank robbery that's happening in broad daylight down the block.

Don't get me wrong. The Obama administration's "pay czar," Kenneth Feinberg, is right to put a lid on compensation at the Not-So-Magnificent Seven: Citigroup, Bank of America, General Motors, Chrysler, GMAC, Chrysler Financial and the unforgettable AIG. Twenty-five of the biggest earners at each of those firms will have their overall compensation cut roughly in half, and most of that will come as restricted company stock, not cash. This means that what they ultimately reap, when they are eventually allowed to sell the stock, will depend on how well the company performs -- which will depend on how well the executives do their jobs.

Tying pay to performance: What a concept.

Feinberg even muscled outgoing Bank of America chief executive Kenneth Lewis into accepting no pay or bonus for this year. But Lewis will still have an estimated $70 million retirement package to keep him warm at night, so hold your tears.

It's nice to know that there must be some pooh-bah at B of A, Citigroup or AIG who will have to live without the new $90,000 Porsche Panamera he was planning to buy. But Feinberg's writ of imperial decree doesn't extend beyond those seven companies, and the rest of Wall Street gives no indication of remotely understanding what the big deal is about compensation. Goldman Sachs, for example, has a bonus pool this year of at least $16 billion and perhaps as much as $23 billion.

But all this is just a sideshow. The main event is the limited, far-too-modest attempt by the Obama administration and Congress to curb the irresponsible Wall Street practices that led to the financial meltdown -- and, if unaddressed, will lead inexorably to the next crisis.

Deregulation allowed the financial marketplace to devolve from an institution that served the overall economy -- by allocating capital most efficiently to the companies that could put it to best use -- into an institution whose primary mission was to serve itself.

The vast over-the-counter trade in instruments known as derivatives, nominally worth a staggering $600 trillion worldwide, is largely an exercise in make-believe. Firms make highly leveraged investments in exotic securities whose true value is opaque. Then they hedge these investments by buying insurance against potential losses, although the insurer doesn't have a fraction of the money it would need to make good on all its promises.

All this investing and hedging generate huge transaction fees and big profits, which can be skimmed off the top each year. Everything's fine, until there's some disruption in the real economy -- a downturn in the housing market, say. If the disruption is severe enough, the web of make-believe deals starts to unravel. At which point the government steps in and bails everybody out.

The White House and Treasury Department have proposed reforms that would ameliorate, but not eliminate, this ridiculous cycle. What the administration won't do is outlaw some kinds of derivative products or transactions; officials say that if they went down that road, they would always be one step behind Wall Street's inventiveness and greed. I think it would be worth a try.

The administration did propose that derivatives transactions go through clearinghouses and be conducted on transparent, regulated exchanges. But as reform legislation begins to work its way through Congress, Wall Street firms -- including companies that received bailout funds -- have boosted their spending on lobbying and political donations.

As a result, legislation approved Wednesday by the House Agriculture Committee -- which has jurisdiction over the futures markets -- would exempt up to 30 percent of derivatives transactions from new regulations. A bill approved Thursday by the House Financial Services Committee that would create a Consumer Financial Protection Agency, strongly opposed by most luminaries on Wall Street, was amended in the committee to exclude mortgage insurers, title insurers, accountants, lawyers and others.

Banks, meanwhile, are jacking up overdraft charges and instituting new kinds of credit card fees before any new limits kick in. Hey, get it while you can.

Capping salaries and bonuses is fine. But we need to pay attention to the guys in ski masks with bulging bags of money slung over their shoulders. They're about to jump into the getaway car.

A Mighty Wind: How Centralized Government Has Taken the Lead in Alternative Energy Generation and Component Manufactuing

rwtwain@yahoo.com (R.W. Twain) — Mon, 12 Oct 2009 20:31:00 +0000

Blown away: China is set to become world's biggest wind power
By: Alex Salkever
Published here

Holland has the windmill. Will China's new cultural icon be the 21st-century version -- the wind turbine? Moves taken by the Middle Kingdom could ultimately position the country to dwarf the United States in terms of total wind power installed and would make China far and away the globe's premier wind power, according to alternative energy expert Ryan Wiser, a scientist at Lawrence Berkeley Laboratories.

Before 2009 draws to a close, China will already match or surpass the U.S. in terms of total amount of wind-power generation capacity installed, says Wiser, one of the top authorities on alternative energy development and planning. By 2011, it will definitely have surged ahead, he adds. And China's ambitions are growing. This year, the Chinese government will likely significantly expand its targets for wind-generation energy, with a goal of generating up to 150 gigawatts of wind-generated power by 2020.

I've posted before on how China is assuming leadership in the rush to green the world. China showed it was serious earlier this week when it announced plans for a pilot carbon exchange, or what is basically a platform that allows parties to trade permits to pollute. But for a better view on what is happening in China in the alternative energy space, I hung out with Wiser at this week's REFF West Conference in San Francisco.

As a point of comparison, total wind power installed in the U.S. at the end of the second quarter of 2009 was 2.9 gigawatts. Today, the U.S. is roughly on par with China. China's goals mean the country is aiming for a 50-fold increase in wind power over a mere 10 years.

And China is prepared to pay for it. In August 2009, the Chinese central government set up a national feed-in tariff for wind power. That means anyone building a wind farm can count on selling the power that the farm generates back to utilities at a set price, which is likely to be higher than the market price for power.

This made it much easier to build wind-power farms by setting a power price that can be used to calculate whether or a not a project will be profitable. To date, the U.S. has not established a national feed-in tariff for wind.

Wiser said China has done a number of things right. "China's recent leadership in wind has been driven by a number of things," said Wiser. The country has an ability and willingness to aggressively pursue manufacturing-cost advantages to drive down the cost of wind equipment. This results from a targeted industrial policy that encourages wind turbine manufacturing in China. By law, 70 percent of the materials used in China's wind farms must be manufactured in country.

This has resulted in complaints of protectionism by foreign suppliers. But China has fostered the growth of its own wind-technology sector sufficiently to allow homegrown companies not only a chance to compete with foreign suppliers, but even to break into the export market for wind gear.

The government has also been willing to require the electric transmission needed to bring wind to market. Due to its command economy, China's ability to develop sufficient electric transmission is an area where it has an inherent advantage. It has also invested in that transmission on an accelerated time scale.

By comparison, building high-capacity power transmission lines in the U.S. is a nightmare that requires huge environmental impact studies, approvals of right-of-ways by private owners, buy-in by states and regional power organizations, and sundry other approvals. The net result, says Wiser, is that it can take 10 years or more for a transmission line to be built in this country.

China faces no regulatory approval logjams. It is in the process of building out a new power grid that would make a utility engineer in the U.S. green with envy. Over the longer term, a much better grid will prove to be a powerful economic-growth driver, as the growth in an economy is closely related to power generation and electricity demand.

What's more, its pricing and regulatory system encourages the country's major, state-owned enterprises to aggressively pursue wind-energy development opportunities. Included in this system are the feed-in tariffs, tax breaks and subsidies designed to encourage utilities to build wind farms.

China has been particularly aggressive in rolling these things out, to the point of underwriting 50 percent or more of project costs and making it nearly impossible to lose money by building an alternative-energy power generation facility. The feed-in tariffs, too, make a huge difference because it makes it possible to build an economic model for a power-plant project, something that is difficult to do with fluctuating wholesale energy costs.

These steps that China has taken all go against some powerful political or business element in the more chaotic environment of the U.S. Manufacturing subsidies, while given out in many industries, are generally fought by potential competitors and are taboo in the minds of conservative politicians.

Big transmission projects inevitably draw huge fire from environmentalists, homeowners, counties and states. Feed-in tariffs are unpopular with powerful utilities, who prefer not to pay extra for power. And subsidies for construction of power plants inevitably meet resistance from competing energy lobbies for coal, natural gas, and oil.

In that light, it's no surprise China is rushing ahead and will soon blow by the U.S. in wind energy.

The Economic Implosion from 30,000 Feet

rwtwain@yahoo.com (R.W. Twain) — Mon, 12 Oct 2009 09:59:00 +0000

What follows is a remarkably pithy yet insightful explanation of both the underpinnings of, and casual damage to, the increasingly fragile American body economic. Moreover, the snarky, tough guy tone of the author serves as an excellent mechanism for the distribution of this analysis. Enjoy-- and then go fix the world.

Source: http://master-of-none.tumblr.com/post/207991990/reprogram-the-reaganites

Reprogram the Reaganites

In BusinessWeek, a Harvard Business School (HBS) alumnus blames the MBA farms for the current crisis. I think he’s right to blame the schools, in part, but wrong about why.

The author says we went astray by orienting business education away from relationships (good managers, customer service) and towards processes (efficiency, business channel segmentation). And this supposedly leads companies to make bad decisions. I don’t buy it.

He is correct, however, when he says that ethics don’t enter into the debate: “Subordinating everything to shareholder value is, literally, anti-ethical.”

Anti-ethical, and yet this is what we require from our CEOs and management teams. By law, the CEO is required to do everything legally possible to achieve gains for his shareholders.

If we are getting bad outcomes from this arrangement, we need to make more bad stuff illegal.

And the reason we haven’t made more bad stuff illegal is because of two ideas popularized in the 1980’s:
Free markets are good (courtesy of Milton Friedman, University of Chicago)
Markets are efficient (courtesy of Eugene Fama, University of Chicago)

For the record, I do believe that free markets are usually a good thing (i.e. self-interest is a strong natural motivator), and I agree that large well-trafficked markets are usually efficient. The dangers to society (and the bad outcomes) happen when these theories are taken to the extreme, like religious fanaticism.

Some academics, many management teams, almost every bank CEO, countless right-wing think tanks, and the mainstream media (especially CNBC), will absolutely demonize any deviation from these two principles (or for that matter any deviation from the belief that stocks outperform in the long-run, which happens to be grossly inaccurate).

But, in any case, society is harmed by both of the extreme versions of these theories.

Do you like really free markets? How about we bring back slavery, then? And I suppose people don’t really need to be licensed to practice medicine? Where do we draw the line? How dangerous is too dangerous for an outsourced petrochemical plant? Profit-seeking managers will likely generate worse outcomes than than a robust legislative system, when it comes to this type of debate.

Efficient markets don’t get a free pass, either. The article’s use of the mortgage industry as an example is a good one: “It was completely redesigned since the 1980s along good HBS guidelines—to maximize efficiency, lower costs, and increase liquidity. Collateral damage: no relationships, skewed incentives, incompetent regulation, and greed run amok.”

What really happened was that “easy” short-term profit-seeking activities (how hard is it to swindle from the poor uneducated masses, really?) undermined the long-term viability of corporate institutions (and therefore the entire financial system). If markets are efficient, they will allocate capital to viable long-term enterprises with net positive returns. That didn’t happen. Not by a long shot.

So, we need to re-educate the Reagan generation:
Fair markets, with strong rules that don’t let corporations hurt societies, are good
Some markets are efficient, others aren’t, and irrationality exists

There. Now go fix the world.

(A cynic would argue that right now the short-term profit seekers are getting in the way of making more bad stuff illegal. Call it regulatory capture. Or state-capture. But as Alton Brown would say, that’s another show.)

Elizabeth Warren: An Ode to the Middle Class

rwtwain@yahoo.com (R.W. Twain) — Sat, 10 Oct 2009 07:41:00 +0000

Elizabeth Warren is a professor @ Harvard Law School and, in the words of Cornell "Not Related To Kayne" West, a "decent sister." Belwo is an excerpt from an interview she did with the Washington Post. Full text of interview here.

WARREN:we're in trouble on so many fronts.

I will start with credit. We clean up the credit mess. This is like sewing up a hole in the bottom of someone's pocket. This is literally tens of billions of dollars that are just falling out of the pockets of middleclass families and making their way over to a handful of very large financial institutions. We can change some laws, and we can fix that one.

I have to say on health care, I do studies on families filing for bankruptcy in the aftermath of serious medical problems. Whatever else is going on in the debate is the reminder that even with people with health insurance are paying enormous sums for medical care, whether it's about copays, things that are denied and higher prices that they're paying for their health insurance. So whatever we can do to bring those costs under control for middle class families will help enormously.

Sending the kids to college, the costs are just out of control. And we are putting debt loads on children unlike those we have ever imagined.

The housing crisis. The way in which most American families build wealth is not through the stock market. It's by buying a home and paying it off. That is, for most Americans, their retirement account. They'll get that house paid off, live on Social Security. That'll be the in heritance for the children if they don't have to spend it down for medical care.

The chaos in the housing market is destroying wealth for middle-class families. To the extent we're popping a bubble, I get it. That's what it's going to have to be. But I worry now about overshooting in the other direction. You know, that just like a bubble pushes up too high, the collapse pushes down too low.

We're watching more and more families go underwater on their mortgages and not by 5 percent, going underwater by 25 and 30 percent. And this is going to intersect with unemployment. As unemployment keeps going up, more and more people are going to lose their houses. That means it depresses the value of the houses next door because it's all downward pressure on prices.

And, of course, the last one I would mention is the income front. As the pie grew throughout the 20th century, the portion that went to workers, went to the median earning family in the United States, it stayed the same percentage wise, but that meant a bigger and bigger pie was a bigger and bigger slice of pizza.

That began to shift in the '70s, and, ultimately, what happened is that the pie kept getting bigger. It's measured through productivity. It's measured through GDP. But the proportion that middleclass families got in income began to shrink.

As we talk about things, like what we produce in the United States, do we really have any manufacturing base, if not hard manufacturing, do we have other intellectual products where we think we have a comparative advantage, those kinds of issues about how workers get back in the role of participating in the growth in our economy, that's whether or not we're going to have a strong and vital middle class.

And, you know, at the end of the day, it's about these economic factors, but we have to remember we have fundamentally changed as a country.

In the 1950s and the 1960s, coming out of World War II, we said as a government, as a people, what can we do to support the middle class. You know that's what FHA was to help people get into homes, right? VA, GI loans on education, we looked at policies, like whether or not they strengthen and support the middle class.

Somewhere, that began to change in the late 1970s, early 1980s, and the middle class instead became like a resource to be pulled from, and you know, they became the turkey at the Thanksgiving dinner. Who could who could carve off a piece? Who can get this little piece? Who could make a profit from this piece and that piece or squeeze down on the wages? And the middle class has gotten shakier and shakier, hollowed out.

The consequences of that are far more than economic. The middle class is what makes us who we are. It's affects the poor. A strong and vital middle class is a middle class that can offer a helping hand to the poor. A strong and vital middle class is a middle class that has room, is creating new jobs to ¿ basically to suck the poor up out of poverty and into middleclass positions. The middle class is what gives us political stability. It's what gives us an America that's all bought into the whole process that what we do is not just about a handful of folks at the top who profit from it. We all profit from it, and that's why we work, and that's why we vote, and that's why we accept that the outcome of elections. And that's why we're safe to walk our streets, because we have a middle class for which this ultimately works, this country.

And every time we hollow that out, every time we take away a little piece of that, we run the risk that some of what we understood at America, some of what we know as America begins to die. That's what scares me.

Tax credits, subsidies and pernicious threats: Business still does not understand that to get along, it must go along

rwtwain@yahoo.com (R.W. Twain) — Tue, 06 Oct 2009 18:59:00 +0000

As noted in the article below, the State of Michigan simply can't win in its dealings with big business. The story is equally applicable in all forty-nine other states, where the incentives required to lure a few hundred jobs from another state often costs the "winner" more than would have been lost in refusing to extend unwarranted subsidies to unappreciative business vermin-- the same cabal that will relentlessly continue to socialize the risk of economic failure while privatizing the benefit of profit. If this trend continues (and there's no evidence of it is waning), then the economy of the States, and the nation as a whole, will continue to deteriorate as the Electrolux's of the world exploit cheap foreign labor while demanding access to the American market and the protection of its laws.

In Michigan, A Yellow Light For Green Jobs:
Some Question Focus of Ailing State's Governor

By Dana Hedgpeth
Washington Post Staff Writer
Tuesday, October 6, 2009

LANSING, Mich. -- If the future of American manufacturing lies in green industries, the Michigan governor's pursuit of jobs offers a cautionary tale.

Four years ago, Jennifer M. Granholm set out to remake her state, which took an exceptional walloping with the decline of the auto industry, as a pioneer in creating environmentally friendly jobs. Today, however, jobs are still disappearing much faster than she can create them, raising questions about how long it will take Michigan and other hard-hit states to find new industries to employ their workers.

Since taking office in 2003, Granholm has created 163,300 positions, her office says. She expects that a recent infusion of more than $1 billion from the Obama administration aimed at nurturing car battery and electric-vehicle projects will generate 40,000 more positions by 2020.

In the past decade, however, as the auto industry has grown smaller, Michigan has lost 870,000 jobs -- about 632,000 of them during Granholm's tenure. The number is expected to reach 1 million by late next year, the end of her term.

In her effort to attract employers, the governor has taken up the latest arms in the economic arsenal -- tax credits, loans, Super Bowl tickets and a willingness to travel as far as Japan for a weekend to try to persuade an auto parts company to bring more jobs to Michigan. She has won solar and wind energy, electric car batteries, and movie production jobs. About 10,800 of the new positions came from overseas companies, according to her office, the fruits of visits to seven countries.

"We have great bones as a state," she says. "We know how to build stuff. We will build on that strength and diversify this economy. We will lead the nation in creating jobs in renewable energy. We're not going to be viewed as Luddites."

In a state hit so hard by the recession, though, securing every new job has required enormous effort: mobilizing the state bureaucracy, negotiating tax deals with a politically divided legislature, dispelling impressions that Michigan is a pro-union state and inhospitable to business.

Supporters and detractors alike call the 5-foot-7-inch blonde "Jenny the cheerleader" because of her relentless optimism. She prefers zealot. Those qualities were severely tested three years ago when appliance maker Electrolux closed its century-old refrigerator plant in Greenville, 160 miles northwest of Detroit, and moved to Mexico, taking 3,000 jobs from the town of 8,000.

As Granholm told the story in her office, overlooking the state Capitol, tears welled up in her eyes. She had spent months calling, e-mailing and meeting with city and state officials trying to sway the company to take a package worth about $70 million in tax breaks to stay in Michigan. Electrolux left anyway.

Granholm visited with workers at an orchard near the plant within days of the last refrigerators coming off the assembly line, and the employees ate a "last supper" of boxed lunches while a band played. Her staff had scheduled 45 minutes. She stayed three hours, listening to workers' stories.

"I went to say, 'I'm sorry,' " Granholm said. "We couldn't save it. I can't even say it now. I stayed until the last guy left."

A 48-year-old man with tattoos and a ponytail, who had worked at the plant since high school, described how his grandfather and father had worked there, too.

"He told me, 'I don't know anything else. Who is going to hire me?' " the governor recalled.

Granholm remembered coming home and telling her husband, "I just don't know what to do for people."

A $37 million tax package helped persuade Michigan-based United Solar Ovonic -- she wooed the chairman with a trip to the 2006 Super Bowl in Detroit -- to build a solar panel production plant on the Electrolux property instead of pursuing a South Carolina offer. To retrain workers, she secured money from the legislature and later developed "No Worker Left Behind." With new skills and a new plant, the people of Greenville would have new opportunities.

Except, she discovered from a workforce training agency, only about 20 percent of the 400 jobs at the new plant, which opened in 2007, went to former Electrolux workers. Many simply didn't have the skills; some were fearful about their ability to learn.

"You had people who were testing in at sixth-grade math," she said, "when they'd gotten awards as line workers."

Granholm had a community college and a state workforce training agency set up a separate program so they wouldn't feel humiliated beside more skilled students.

"It was taking one step forward and then one step back, and then two steps forward," she said. "We still didn't get the numbers we wanted to get."

Residents remember the time and effort invested in seeking to preserve the Electrolux jobs.

"She put everything she had into trying to save that little town," said Dick Long, a former national political director for the United Auto Workers union. "I've never seen somebody work so hard and get so frustrated in trying to save them. She just didn't give up. But in the end, we lost them."

Although Granholm's critics admire her determination and concede that creating jobs and transforming the economy are long-term goals, they say that she has not done enough to streamline state government and regulations and that she is too enamored of alternative-energy jobs, which they say represent a relatively small number of positions.

Genesee County Treasurer Daniel T. Kildee, like Granholm a Democrat, said she is "too concerned about finding consensus with the legislature and interest groups."

He worries that the focus on green-energy jobs detracts from fixing problems such as those facing schools and municipal governments. "The green economy is not going to replace jobs of an industrial era," he said. "It is an important part of the new economy. But it is not the next GM."

Granholm says she is trying to diversify the economy, going after defense-related firms, robotics and life sciences along with green jobs.

State Senate Majority Leader Michael Bishop (R) says Granholm has been remiss in not reshaping Michigan's business tax.

The state, he said, needs to change its image and "create an environment where taxes are low, labor costs are low, and not send so many negative vibes."

Granholm's office said that she has offered business tax proposals but that she has met opposition from the legislature and some business leaders.

Michigan felt the recession first and hardest. The state ranks fifth in foreclosures and last in attracting new residents. Nearly 20 percent of its citizens are on Medicaid. As the auto industry has shrunk, so has tax revenue. The state government technically shut down for nearly two hours early Thursday over a budget crisis, and the legislature and governor are still tussling over how to resolve a projected $2.8 billion deficit. Underlying all of the grim statistics is the loss of jobs. Michigan has had the nation's highest unemployment rate -- now 15.2 percent -- for most of the past three years.

"This is not a time for wimps," Granholm says to her two dozen cabinet members one recent morning. "The message is to continue to play offense -- go get jobs."

Granholm's résumé is well known in her state: Michigan's first female attorney general and governor; mentioned as U.S. Supreme Court candidate; graduated summa cum laude from the University of California at Berkeley, Harvard Law School, beauty queen, mother of three. The 50-year-old is a native of Canada who settled in Detroit in the mid-1980s after marrying a Michigan man; she was a federal prosecutor there for four years.

Her quick focus pleases businessmen such as David Hardee, top executive of California-based Clairvoyant Energy, who encountered Granholm at a meeting after spending three months negotiating with her economic development officials over a green-energy development.

"We were on the third slide and she politely interrupted and said, 'I get it. What do you need? I'm here,' " Hardee said.

With a tax incentive package worth more than $100 million, Michigan beat out Arkansas, Missouri and Oklahoma, as well as Spain, in getting Hardee's company and two other alternative-energy firms -- one from Texas and one from Switzerland -- to take a factory that once made the Lincoln Continental and Ford Thunderbird about 40 miles northwest of Detroit in Wixom and turn it into a solar panel and battery storage pack manufacturer employing 4,000 workers.

In the spring of 2008, Granholm returned to Greenville to tour the United Solar plant that replaced the Electrolux factory.

"They had product orders all the way out until June 2009 back then," said Greenville Mayor Ken Snow. "But the global economy shifted. That left them with more product than orders that need to be filled."

Since March, United Solar has been feeling the downturn, and so have the workers in those hard-won positions. Some have been furloughed for six days each month.

There are no easy victories in the fight for jobs.

"You can't give up," Granholm says. "You gotta keep moving."

How much would you pay for 1,400 acres of farmland near Shanksville, Pennsylvania?

rwtwain@yahoo.com (R.W. Twain) — Tue, 01 Sep 2009 03:46:00 +0000

If you answered $9.5 million ($6,810/acre), then you must be Interior Secretary Ken Salazar. According to the following article from the NY Times, the Feds, already projected to run a $1.6 trillon deficit this fiscal year, are printing up $9.5 million to purchase the 1,395 acres as the site for the Flight 93 memorial.

If you wondering what the market rate is for acreage in Sommerset County, Pennsylvania, I point you to this sample-- a nice 405 acre parcel near Confluence, PA, for the grand bargain of $1.5 million, or $3,700/acre. Granted, the sample land is not as close to the cosmopolitan city of Shanksville, and likely never was reported to have had a 757 nosedive into it, but still, it's basically listed at half-off the government rate. Don't worry too much though as Larry Hoover, the yokel quoted below, noted that despite the inconvenience of haggling for nearly eight years to only get double the market rate, he has settled with his conscience that he's getting a "fair deal" on his 5 acres. Moreover, if you were worried that the Fed's broke the Treasury with their generosity, you should also know that the FIRST phase of the memorial is slated to cost a mere $58 million. No word yet on if the money appropriated for this fiasco was a line item inserted by John Murtha (with a concomitant kickback from the appraiser, of course), whether Haliburton received a no-bid contract to construct the memorial, or if Blackwater/Xe will provide security for the project...

Path Cleared for Memorial to Flight 93
By SEAN D. HAMILL

Work will begin this fall on a memorial to those killed aboard United Airlines Flight 93 on Sept. 11, 2001, now that agreements have been reached to buy the last key pieces of land in Pennsylvania, Secretary of the Interior Ken Salazar said Monday.

The federal government will pay about $9.5 million to the owners of nine parcels near Shanksville, in rural southwestern Pennsylvania, totaling 1,395 acres, including the site where the plane crashed and one right-of-way, Mr. Salazar said.

“Thanks to the collaborative efforts of the landowners, the Families of Flight 93 and the employees of the National Park Service, we have reached this important milestone,” he said.

Flight 93 was traveling from Newark to San Francisco when it was diverted by hijackers, who crashed the plane as passengers tried to wrest control of the cockpit. All 33 passengers and seven crew members died.

The announcement ends years of bargaining with landowners.

Negotiations intensified at the end of last year when, with some parcels still in limbo, the Families of Flight 93, a nonprofit group that has been helping with the purchases, asked the Bush administration to get something done before it left office.

This summer, with time running short to get the first $58 million phase of the memorial completed in time for the 10th anniversary of the crash, the Interior Department set a deadline for the remaining landowners and threatened to take the land through condemnation.

That prompted Senator Arlen Specter to intercede and bring in Mr. Salazar to talk to the landowners himself, which got negotiations moving.

“It really took all the elements to align these stars,” said Patrick White, a lawyer and member of the Families of Flight 93, who helped with negotiations.

Larry Hoover, whose family owned two parcels, totaling five acres, would not say how much his family would receive for the land that held his summer home and a year-round home for his son.

“It was an honorable figure for both sides,” he said. “Did we get everything we wanted? Probably not. But it was fair.”

Originally published at http://www.nytimes.com/2009/09/01/us/01penn.html?ref=us

Because I Can

rwtwain@yahoo.com (R.W. Twain) — Thu, 27 Aug 2009 07:36:00 +0000

http://www.motherjones.com/politics/2009/08/foreclosure-rescue-mirage#comment-194653

Too Bad
Submitted by Anonymous (not verified) on August 26, 2009 - 5:34am.

It's difficult to feel sorry for the individual homeowners who don't get the government to magically erase their problems. My husband and I bought a $50,000 fixer-upper in Vermont in 2003, and put our own money into it to basically renovate everything. We knew that the payment was low enough that we could continue to afford it even if only one of us was working, which was what happened when I decided to stay home with our kids. And because the payment was low, we managed to continue to save money to float us by when my husband was recently laid-off for three months.

People signed onto loans that they should have known that they could not afford. It doesn't take a PhD in math to figure out what would happen if the rate changed or a person lost a few months of income. This isn't saying that the government is also to blame for its lax rules. But people should take some kind of personal responsibility.

But as I sit here in my modest home reading about people losing their "dream homes," I really don't feel sorry at all for them. Maybe I don't have my "dream home" yet, but I still have my home. They thought they deserved a great McMansion right off the bat and now they are paying the price. They should have known better. Now taxpayers like me who did know better are supposed to bail them out. No Thanks.
recommend this (1) reply

Heartless and Smug
Submitted by I'm Just Sayin' (not verified) on August 26, 2009 - 6:47am.

O.K., "Too Bad" we get it. You don't care about millions of families dispossessed from their homes; desperately struggling folks and their children literally forced out onto the streets to fend for themselves. Neighborhoods filled with abandoned homes that these same families could have continued to occupy as renters, if someone in D.C. or even say, Vermont, cared a little more about regular folks than about bankers. That doesn't bother you. We get it.

But for the rest of us folks (even those of us who regularly make our mortgage payments) we DO give a damn, even about folks who make mistakes, or more often than not were misled by unscrupulous mortgage brokers. And maybe you should too since you're so concerned about your tax money being wasted. Chew on this-- if these default rates aren't significantly reduced in the near future, you can kiss the possibility of a meaningful economic recovery goodbye, in which case, get ready to have a lot more of your precious tax dollars wasted on attempting to keep insolvent zombie banks in business. If they can't make a market for those CDOs then they will not become solvent anytime soon and we will continue to bail them out over and over again. Maybe you need to rethink the situation as you sit there in the warmth of your modest Vermont home. Cause if we don't stop these defaults soon it will be "too bad" for all of us! I'm just sayin'.
recommend this (2) reply

Jesus Christ in a birchbark canoe
Submitted by RW Twain (not verified) on August 27, 2009 - 12:20am.
tagged as: solution

"Maybe you need to rethink the situation as you sit there in the warmth of your modest Vermont home."

Perhaps you should stop and think about the situation altogether.

You assert that it is a justifiable power of government to save individuals, or to tax the whole for the benefit of the few, either wealthy or impoverished. You place full blame on mortgage brokers for sins they could not commit alone, while pushing for intervention on stop-gapping CDS defaults as the panacea for saving the economy. Given that tripe, you launched a salvo against the Vermont poster for smugness?

The VT poster was simply enunciating a view that success and overall happiness in life are dependent upon personal responsibility in a person's actions. That poster did not overpay for the house, and apparently made the commitment to labor sweat equity in to the "modest Vermont home" to provide for her own comfort. Repairs weren't likely financed on credit cards or a cash out HELOC, but spent from dollars that the poster would rather not have taxed for the benefit of those who failed to exercise the type of financial responsibility required in adulthood.

You seemingly argue for tax dollars to be used for the ongoing support of the disendomiciled and flipperquesters, but not for corporate welfare. I agree on the latter point, but am repulsed by the former. I'll pay taxes for the convenience of the roads, rails and post, willingly endure expenditure of my earned, but lost wealth for police, fire, schools and the like (perhaps even universal health care), but I will never condone the taking of my wealth for use in unjustified wars, bureaucratic inefficiency, fraudulent public spending or welfare for individuals who failed to comprehend the long-term consequences of their instant, exhibited avarice. Calculating that as a total, I unwillingly endure 75% of all current federal spending and perhaps 15% of state spending.

A recovery won't be obtained from rewarding those you have failed. Support for those who are justifiably downtrodden underlies the eventual recovery of the US economy, but it should not be drawn entirely on the backs of citizen taxpayers. We can't have a recovery of the economy until the majority of us, masters and slaves, Congresspeople and lobbyists, aging, hippie liberal douches and pissed off, redneck conservatives, rediscover the enlightenment that is personal responsibility and morally upright behavior.

Until that time, it's simply pissing in the wind.

For reaction, see http://www.motherjones.com/politics/2009/08/foreclosure-rescue-mirage#comment-194653

American Mission Creep Increasing in Kurd-Arab Dispute

rwtwain@yahoo.com (R.W. Twain) — Mon, 17 Aug 2009 18:03:00 +0000

US commander in Iraq wants troops in disputed land
By KIM GAMEL, Associated Press Writer
Mon Aug 17, 10:19 am ET

BAGHDAD – The top U.S. commander in Iraq said Monday that he wants to deploy American soldiers to disputed territories in northern Iraq following a recent spike in bombings there.

The move would be a departure from the security pact that called for Americans to pull back from populated areas on June 30.

The U.S. soldiers would partner with Iraqi government and Kurdish troops to secure the largely unguarded villages along the faultline of land disputed between Arabs and Kurds, Gen. Ray Odierno said.

He stressed that no final decision has been made but said Iraqi and Kurdish leaders were receptive to the idea.

"I think they just all feel more comfortable if we're there," he told reporters Monday at a briefing at Camp Victory, the U.S. military headquarters on Baghdad's western outskirts.

The U.S. deployment would be a temporary "confidence-building" measure, he said, adding he had discussed the idea with Iraqi Prime Minister Nouri al-Maliki earlier Monday in a meeting.

Odierno said it would not affect the overall withdrawal timeline that calls for U.S. combat forces to leave the country by the end of August 2010, with a full withdrawal by the end of 2011.

Iraq's government, meanwhile, approved a draft law paving the way for a referendum on the security pact that lays out the U.S. withdrawal timeline to be held simultaneously with national parliamentary elections on Jan. 16, spokesman Ali al-Dabbagh said in a statement. The measure still needs to be approved by Iraq's parliament, which is in recess until next month.

Iraqi lawmakers agreed to the security pact last November, after months of bitter negotiations. But it included the caveat that the deal should go before voters in a referendum to be held by July 30. The government said earlier this year that it wanted the referendum to be held on the same day as the national elections to save time and money.

Opponents had argued the Americans should leave immediately after the Dec. 31 expiration of a U.N. mandate for foreign forces.

The inclusion of the referendum met a demand by the main Sunni bloc in parliament and raised the possibility that the deal could be rejected if anti-U.S. anger and demands for an immediate withdrawal grow.

Odierno's announcement reflects heightened U.S. concern over an increase in violence since American troops pulled back from urban areas, particularly in northern Iraq. Some 160 people have been killed in bombings near the northern city of Mosul and in Baghdad since Aug. 7, when the recent spike began.

"I'm still very confident in the overall security here," Odierno said. "Unfortunately they're killing a lot of innocent civilians."

Several top defense officials have identified the split between Iraq's majority Arabs and the Kurdish minority as probably a greater long-term threat to Iraq's stability than the more familiar Sunni-Shiite conflict. Defense Secretary Robert Gates went to the Kurdish self-rule area in the North to make the case that both sides have limited time to resolve their differences before U.S. troops leave in 2011.

At the heart of the dispute is the oil-rich city of Kirkuk and a batch of villages in Ninevah province that the Kurds want to incorporate into their semiautonomous area despite opposition from Arabs and minority Turkomen ethnic group.

Odierno said al-Qaida in Iraq was exploiting the ethnic divisions to stage high-profile bombings in small towns that don't have a police force and other so-called soft targets in order to avoid heavy security concentrated in more central areas and maximize the number of casualties.

"Al-Qaida is trying to take advantage of the seam," he said.

He said the deployment of the U.S.-Iraqi-Kurdish protection forces would start in Ninevah province, which includes the volatile city of Mosul, then extend to Kirkuk.

Odierno discussed the idea with senior Iraqi and Kurdish officials on Sunday and planned another meeting in early September.

"Having met with all these leaders, I think there is room to work this out," he said.

Truth in Reporting?

rwtwain@yahoo.com (R.W. Twain) — Sat, 25 Jul 2009 09:49:00 +0000

\
Let's hope somone on staff in DC reads this re-printed article from Xinhua. Summary to your boss: "The new Iraq, created in our name, is coming apart at a seam. If half of the following article is true, a larger war rapily over the horizon comes."

Chinese Newws
News Analysis: Arabs-Kurds escalating tension endangers security in Iraq

www.chinaview.cn 2009-07-25 16:35:32 Print

by Xinhua writers Fu Yiming and Gao Shan

ARBIL, Iraq, July 25 (Xinhua) -- Iraq's semi-autonomous Kurdish region started its general elections on Saturday amid a simmering land and oil controversy that may endanger security in Iraq.

While Kurdish people are longing for their independence, recent escalating tension between Kurdish Regional Government (KRG) and the Baghdad central government overshadowed its outlook.

Last month, the KRG parliament in Arbil approved a new draft constitution for their autonomous region, legalizing its claims to the oil-rich Kirkuk as well as other disputed areas in Nineveh and Diyala Provinces.

Despite a delayed referendum -- generally regarded would pass by a majority -- the move, though condemned by Arabs as annexing disputed territories and a final secession.

"Kirkuk is Kurdish, like Arbil, Sulaimaniyah or Dohuk, and is part of Kurdistan," KRG President Massud Barzani said, "all of the historical and geographical documents prove this."

Back in Baghdad, Prime Minister Nuri al-Maliki is already not on speaking terms with Massud Barzani. Iraqi political leaders have denounced the constitution as a step toward splintering Iraq.

"This lays the foundation for a separate state. It is not a constitution for a region," said Osama al-Nujaifi, a Sunni Arab member of the national Parliament, "it is a declaration of hostile intent and confrontation. Of course it will lead to escalation."

Multiple clashes between the Iraqi army and the Kurdish Peshmerga militia in disputed region of Nineveh and Diyala Provinces, highlighted since the summer of last year, almost resulted in military confrontations.

On August 10 last year, the central government deployed army forces to northern Diyala and ordered the Kurdish Peshmerga militia to withdraw within 24 hours. They even forced KRG staff out of their government buildings a week later, and triggered a final crossfire between the two sides in late September.

After the general elections of Iraq in January, some Kurd-dominant regions in Nineveh and Diyala Provinces rejected new officials close to Maliki government to take office, and the Peshmerga militia even blocked those officials out of towns.

The incident resulted into a massive troop deployment from the central government to disputed areas. If officials from both sides joined by U.S. counterparts had not sat together for negotiation, bloodshed might have well happened.

KRG President Barzani has said in public that military clashes may happen in some regions. Unsatisfied with the hard stance of Maliki's central government, some Kurdish officials even called Maliki "another Saddam."

As both sides get more impatient, little room seems to be left for compromise, and chances for violence are mounting.

U.S. diplomats and military officials have repeatedly warned the potential for a confrontation between Iraqi central government and the KRG, which is emerging as "a threat as worrisome to Iraq's fate as the remnants of the insurgency."

The complication between Iraqi central government and the KRG involves many ethnic, territorial and international factors that may jeopardize the hard-gained security improvement in Iraq -- a sign that worries all -- if the confrontation upgrades further.

An expanded Kurdistan secession may trigger the string effects in neighboring countries like Turkey and Iran, which are all against Kurdish independence on their territories. Even Iraqi President Jalal Talabani, as a Kurd, said earlier this year that an independent Kurdish state is just a dream and won't happen.

With the back of the United States, the United Nations has proposed a compromise solution in which Kirkuk would be given a special status with links to both the central government and the KRG. But so far the proposal has failed to win much favor from either side.

During a visit to Washington on Thursday, Maliki acknowledged that these tensions were among "the most dangerous challenges that have been a concern for all the Iraqi government." But he said such controversies in politics could only be solved through constitutional means, instead of force.

Residential Loan Losses Mounting

rwtwain@yahoo.com (R.W. Twain) — Tue, 07 Jul 2009 05:14:00 +0000

July 5, 2009
Fair Game
So Many Foreclosures, So Little Logic
By GRETCHEN MORGENSON
www.nytimes.com

LAST week, the stock market tumbled on news that housing foreclosures and delinquencies rose again in the first quarter. The Office of the Comptroller of the Currency said that among the 34 million loans it tracks, foreclosures in progress rose 22 percent, to 844,389. That figure was 73 percent higher than in the same period last year.

But the comptroller’s office also said that amid the gloom, there was promising data about loan modifications: they rose 55 percent in the quarter. That growth came on a very low base, of course, but the move encouraged John C. Dugan, head of the comptroller’s office.

“As the administration’s ‘Making Home Affordable’ program gains traction and helps offset the impact of this very difficult economic cycle,” he said in a statement, “we should continue to see progress in future reports.”

A glimpse of second-quarter mortgage data, however, indicates that the progress Mr. Dugan and his colleagues in Washington are hoping for may take longer to emerge — raising questions about whether policymakers and banks are moving quickly or intelligently enough on the foreclosure problem.

Foreclosures remain one of the great financial ills for the economy. The Bush administration largely overlooked foreclosures affecting average homeowners, focusing instead on propping up elite, troubled financial institutions with taxpayer funds. The Obama administration has said it wants to wrestle the foreclosure issue to the ground by encouraging mortgage loan modifications, but its efforts have gotten little traction.

Loan modifications occur when a lender agrees to change terms of a troubled borrower’s mortgage; the most common approach is to reduce the loan’s interest rate. Cutting the amount of principal owed — an option that could be of more help to a borrower — is rare because it means homeowners pay less money back to the bank over time.

Lenders and their representatives, however, don’t like to modify loans through interest rate cuts or principal reductions because, of course, it reduces the income they receive from borrowers. No surprise, then, that loan modifications have been a trickle amid the recent foreclosure flood.

Enter the government, with the program it announced in March to encourage modifications. It offers incentives to loan servicers to change mortgage terms, providing $1,000 for each loan they modify. The program focuses on making payments more affordable through lower interest rates, but delinquent amounts and late fees are typically tacked onto the mortgage balance. “Making Home Affordable” does not compel lenders to reduce mortgage balances.

Servicers signed on to the program in April. The program’s early months were not covered by the O.C.C.’s first-quarter report. But other figures on modifications conducted in April, May and June are available. And they show a decline in modifications, not an increase as the government hoped.

Alan M. White, an assistant professor at the Valparaiso University law school in Indiana, analyzed data on 3.5 million subprime and alt-A mortgages in securitization pools overseen by Wells Fargo. The loans were written in 2005 through 2007; data on their performance is provided to the trusts’ investors. Mortgages handled by five of the nation’s largest loan servicing companies — Bank of America, Chase Home Finance and Litton Loan Servicing among them — are contained in the Wells Fargo data.

Mr. White found that mortgage modifications peaked in February and have declined in all but one month since. While servicers modified 23,749 loans in these trusts in February, they changed only 19,041 in May and 18,179 in June. This is exactly when servicers were supposed to be responding to the government’s loan modification urgings.

Foreclosures, meanwhile, keep rising. In June, 281,560 were in process, slightly above the 277,847 in May. Last January, there were about 242,000 foreclosures in the pipeline among the Wells Fargo trusts.

“I was hoping we would see some impact in June of the government’s program,” Mr. White said. “Is ‘Home Affordable’ working? My short answer is no.”

To be sure, the government’s data differs from that which Mr. White analyzed, and its loan modification figures for the second quarter may look better as a result. The O.C.C. includes prime loans as well as subprime, for example, while the Wells Fargo data contains no prime loans.

Nevertheless, Mr. White has collected the figures since November 2008, and he said that in the months since, the performance of the 3.5 million mortgages that he analyzes tracked the O.C.C. data pretty closely.

THE Wells Fargo data is illuminating. It shows that in June, 58 percent of modifications cut the payments that the borrower has to pay, a slightly smaller percentage than in April or May. The average reduction in June was $173 a month.

But the most fascinating, and frightening, figures in the data detail how much money is lost when foreclosed homes are sold. In June, the data show almost 32,000 liquidation sales; the average loss on those was 64.7 percent of the original loan balance.

Here are the numbers: the average loan balance began at almost $223,000. But in the liquidation sale, the property sold for $144,000 less, on average. Perhaps no other single figure shows how wildly the mortgage mania pumped up home prices. It also bodes poorly for the quality of the mortgage-related assets lurking in banks’ books.

Loss severities, like foreclosures, are rising. In November, losses averaged 56.1 percent of the original loan balance; in February, 63.3 percent.

Given losses like these, Mr. White said he was perplexed that lenders and their representatives were resisting reducing principal when they modify loans. His data shows how rare it is for lenders to reduce principal. In June, for example, 3,135 loans — just 17.2 percent of the total modified — involved write-downs of principal, interest or fees. The total loss from these write-downs was just $45 million in June.

And yet, the losses incurred in foreclosure sales involving loans in the securitization trusts were a staggering $4.59 billion in June. “There is 100 times as much money lost in foreclosure sales as there was in writing down balances in modifications,” Mr. White said. “That is not rational economic behavior.”

If banks have written down the value of these loans to the 40 cents on the dollar that they are fetching on foreclosures — the only true value for these homes right now — then why don’t they bite the bullet and reduce the loan amount outstanding for the troubled borrowers? That type of modification would be far more likely to succeed than larding a borrower who is hopelessly underwater with yet more arrears.

“You can reduce payments with a lot of gimmicks similar to those built into subprime loans — temporary rate reductions that defer a lot of principal, balloon payments,” Mr. White said. “To me that leads to a situation where American homeowners are paying 50 to 60 percent of their incomes for mortgages which reset in 2011 and 2012. That is not solving the problem.”

Certainly not for borrowers, that is. And because many of these losses will ultimately be passed on to taxpayers, it’s not solving our problem, either.

REPRINTED FOR COMMENT @ http://portlandhousing.blogspot.com/2009/07/gresham-mayor-averts-foreclosure.html

Yes, We Can... Spend Recklessly

rwtwain@yahoo.com (R.W. Twain) — Mon, 06 Jul 2009 16:17:00 +0000

Fattening the Beast
Obama's Twist on a GOP Budget Strategy

By Fred Hiatt
Monday, July 6, 2009

Since the Reagan era, some conservatives have hoped to shrink government by "starving the beast." Refuse to raise taxes, they figured, and eventually spending would have to fall.

It's beginning to look as though the new team may have a similar strategy, in reverse: Increase spending, and eventually taxes will have to be raised.

No official has articulated that to me as a strategy. But look at the evidence.

George Bush bequeathed to President Obama a nation heading slowly but surely toward fiscal disaster. Because of an aging population and rising health-care costs, spending -- primarily on Medicare, Medicaid and Social Security -- will steadily rise in coming years, as the nonpartisan and authoritative Congressional Budget Office explained in a report last month. Revenue is not projected to rise nearly as quickly. The result, if the government does not alter course: crushing debt that could lead to hyperinflation, prolonged depression, or both. Poor people would suffer most, and there would be many more of them.

"The systematic widening of budget shortfalls projected under CBO's long-term scenarios has never been observed in U.S. history," the CBO pointed out in its usual dry style. And: "All in all, the U.S. economy could contract sharply for a long period."

Obama's response has been to acknowledge the seriousness of the problem -- and make it worse. I'm not talking about his record-breaking stimulus plan, which was essential (if not ideally shaped) given the recession he also inherited. Rather, it is Obama's long-term budget that would more than double the projected deficit over the next 10 years, to $9 trillion, by extending most of the Bush tax cuts and limiting the alternative minimum tax while creating new programs and entitlements (to college tuition scholarships, for example) and refusing to cut back on existing ones.

And that's not to mention his top priority, universal access to health care. Obama has said that reform must be paid for, and he hopes it will lead to a slowing in the growth of health-care costs. That would hugely improve the long-term budget outlook.

But the prospects of cost control are tenuous, experimental, distant and politically fraught; by comparison, creating an expensive new entitlement is easy. Obama has proposed to pay for part of universal access by collecting more income tax from the wealthy, which would make the existing deficit that much harder to close. The cost of the entitlement could rise more quickly than the revenue paying for it. There is a good chance, in other words, that whatever emerges from Congress this summer will worsen the budget prognosis.

The bottom line is this: You cannot run a progressive government of the kind Obama favors by collecting only 18 percent of the gross domestic product in taxes, which has been the norm over the past 40 years. Nor can you increase the tax take to 24.5 percent of GDP -- which is what Obama proposes to be spending in 2019 -- simply by making the rich pay more.

But rather than level with the American people about this, or lay out a plan to raise the needed taxes, the Obama administration and the Democratic Congress are putting the spending pieces of progressive government in place and apparently counting on the tax piece to fall into place later.

Just to be clear: I support universal access to health care, and I don't think there's any natural law that says the U.S. economy couldn't function with higher taxes -- say, 22 percent of GDP. But you can't get there without wrenching changes -- abolishing the mortgage and charitable deductions, for example, or instituting a nationwide consumption tax. And unless you raise taxes so high that you risk choking economic growth, you also will have to trim Medicare and Social Security benefits.

It would be foolishly counterproductive to begin closing the gap in the midst of recession. But you could be setting long-term changes in motion -- adjusting rules for people who will retire five or 10 years from now, for example.

Obama and his economic team understand all this, and maybe they have a plan to get from here to there. Maybe they'll do the popular stuff first, and then next year, or next term -- as global investors become alarmed at the U.S. fiscal outlook and begin driving our interest rates higher -- persuade Congress to take its medicine and get the fiscal house in order.

But let's not forget how that starving-the-beast thing worked out. Conservatives were happy to cut taxes, but cutting spending didn't appeal all that much, and deficits soared. By postponing all the "hard choices" he warns of, Obama may be scripting a sequel.

But You Can't Fire Me!!

rwtwain@yahoo.com (R.W. Twain) — Wed, 01 Jul 2009 05:40:00 +0000

MADRID (Reuters) - Spanish police have arrested a man whom they suspect hired a contract killer to murder his boss in a desperate bid to avoid being laid off, newspaper El Pais reported on Tuesday.

The head of audiovisual services at the Barcelona International Convention Center contracted a Colombian man who shot and killed the director of the convention center on Feb 9, according to police.

The director had planned to lay off the arrested man as part of a restructuring project, police said.

In fear of losing his job, the head of services, through his sister, contracted a team of six Colombians who planned and carried out the killing, El Pais reported.

Police have also detained the sister and six Colombians.

The shooting marks one of the most extreme actions by Spaniards who fear losing jobs, homes and businesses during a recession in which unemployment is rising faster than in any other developed country.

Other cases include an indebted Spanish builder who kidnapped his bank manager at gunpoint and the head of a construction firm who threatened to set himself on fire unless debts he was owed were paid.

(Reporting by Andrew Hay; Editing by Matthew Jones)

Cheating the Tax Man: The Shadowy World of the Repatriation of Foreign Profits

rwtwain@yahoo.com (R.W. Twain) — Sat, 06 Jun 2009 05:59:00 +0000

Tax Break for Profits Went Awry
By FLOYD NORRIS

It was called the “Homeland Investment Act,” and was sold to Congress as a way to spur investment in America, building plants, increasing research and development and creating jobs. It gave international companies a large one-time tax break on overseas profits, but only if the money was used for specified investments in the United States.

The law specifically said the money could not be used to raise dividends or to repurchase shares.

Now the most detailed analysis of what actually happened — using confidential government data as well as corporate reports — has estimated what happened to the $299 billion companies brought back from foreign subsidiaries. About 92 percent of it went to shareholders, mostly in the form of increased share buybacks and the rest through increased dividends.

There is no evidence that companies that took advantage of the tax break — which enabled them to bring home, or repatriate, overseas profits while paying a tax rate far below the normal rate — used the money as Congress expected.

“Repatriations did not lead to an increase in domestic investment, employment or R.& D., even for the firms that lobbied for the tax holiday stating these intentions,” concluded the study by three economists, including a former official of the Bush administration who took part in the discussions leading to enactment of the plan in 2004.

The study, titled “Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act,” was released this week by the National Bureau of Economic Research. It was written by Dhammika Dharmapala, a law professor at the University of Illinois; C. Fritz Foley, an associate professor of finance at Harvard Business School; and Kristin J. Forbes, a professor of economics at the Massachusetts Institute of Technology who was a member of the president’s council of economic advisers from 2003 to 2005.

“The restrictions on how the money will be spent seem to have been completely ineffective,” Ms. Forbes said in an interview this week.

“Dell was a great example,” she added, referring to Dell Computer. “They lobbied very hard for the tax holiday. They said part of the money would be brought back to build a new plant in Winston-Salem, N.C. They did bring back $4 billion, and spent $100 million on the plant, which they admitted would have been built anyway. About two months after that, they used $2 billion for a share buyback.”

The research is the first on the act that was able to use confidential information gathered from companies by the Bureau of Economic Analysis, a part of the Commerce Department. The researchers learned from that exactly how much in overseas profits each company repatriated, and also learned how much it had invested and repatriated in earlier years. They had to promise not to disclose company-specific data and Ms. Forbes emphasized that the numbers she cited on Dell came from the company’s public filings with the Securities and Exchange Commission.

From the B.E.A. data, the researchers were able to calculate that $300 billion in overseas profit was repatriated by American companies in 2005, when they had to pay a tax rate of just 5.25 percent, rather than the normal corporate tax rate of 35 percent. The amount was five times the normal amount of repatriations.

United States tax law allows American companies to defer paying taxes on foreign profits so long as the profits are invested outside the United States. That is a big reason most major companies pay taxes that amount to far less than the 35 percent corporate tax rate would indicate.

Last month President Obama complained that “our tax code actually provides a competitive advantage to companies that invest and create jobs overseas compared to those that invest and create those same jobs in the U.S.,” and called for changes in the law. He stopped short of calling for repeal of the deferral provision, but business still reacted angrily.

“This plan will reduce the ability of U.S. companies to compete in foreign markets, which will not only reduce jobs, but will also cripple economic growth here in the United States. It couldn’t come at a worse time,” said John J. Castellani, president of the Business Roundtable, a trade group of large companies. This week Steven A. Ballmer, the chief executive of Microsoft, said his company would move jobs overseas if the Obama proposals were enacted.

In lobbying for the new act in 2003, a group of companies and trade associations formed the Homeland Investment Coalition and forecast that passage would help the American economy by “increasing domestic investment in plant, equipment, R.& D. and job creation.” The title of the new study reflects its findings that none of that happened.

One fact found by the study indicates that some of the repatriated money was not even really returned to the United States, contrary to the intent of the law. Companies knew of the tax holiday in 2004, and many of them chose to “invest” money that year in foreign subsidiaries that had profits subject to American taxes if they were brought back to the United States. They then brought the profits back in 2005, getting the tax break while not reducing the continuing foreign investment.

Ms. Forbes said about $100 billion left the United States and came right back, in a process the paper calls “round-tripping.”

Other studies, using only publicly available information from S.E.C. filings, have previously estimated that the amount of money going to shareholders was much lower. In a paper to be published in The Journal of Accounting Research, two accounting professors, Jennifer Blouin of the University of Pennsylvania and Linda Krull of the University of Oregon, estimated that about 20 percent of the money went to share repurchases. They did that by comparing the spending of companies that repatriated money to similar companies that did not.

Ms. Forbes and her colleagues were careful to say their findings did not indicate that any companies violated the law barring use of the money for share repurchases and dividends. “Rather,” they said, the results “reflect the fact that cash is fungible and that a tax policy which reduces the cost of accessing a particular type of capital will have difficulty affecting how that capital is used.”

Indeed, the study praises the companies for not spending the money in other ways, such as raising executive pay or investing in noneconomic projects. And it concludes that the American economy may have been helped by the act.

“Although the H.I.A. does not appear to have spurred the domestic investment and employment of firms that used the tax holiday to repatriate earnings from abroad, it may still have benefited the U.S. economy in other ways. The tax holiday encouraged U.S. multinationals to repatriate roughly $300 billion of foreign earnings and pay most of these earnings to shareholders. Presumably these shareholders either reinvested these funds or used them for consumption. Either of these activities could have an effect on U.S. growth, investment and employment.”

In the current credit squeeze, however, some companies may wish they had not spent so much money on share repurchases. In total, Dell spent $7.2 billion buying back 204 million shares in 2005, spending around $35 a share. But it stopped making sizable purchases of stock a year ago.

Today, Dell’s shares trade for about $12, and $7.2 billion would be enough to buy back almost a third of the nearly two billion shares outstanding. Dell officials declined to comment.

Detailing the Banking Pig's Lipstick

rwtwain@yahoo.com (R.W. Twain) — Sat, 06 Jun 2009 05:41:00 +0000

By Yalman Onaran

June 5 (Bloomberg) -- Big banks in the U.S. say they’re on the mend. The five largest were profitable in the first quarter, rebounding from record losses for the industry in the fourth quarter. Share prices have jumped, with the KBW Bank Index doubling since March 6.

Treasury Secretary Timothy Geithner, after “stress testing” 19 banks on their ability to withstand a worsening economy, declared in early May that Americans can be confident in the banks’ stability and resilience. Wells Fargo & Co. and Morgan Stanley were among banks raising $43 billion in new capital since then through share sales.

“With our capital and assets, stressed as they have been, we can go back to focusing all our attention on managing our business and restoring value,” Citigroup Inc. Chief Executive Officer Vikram Pandit said after Geithner’s examinations were completed.

The revival may be short-lived. Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are.

The government probably wants to win time for the banks, keeping them alive as they struggle to earn their way out of the mess, says economist Joseph Stiglitz of Columbia University in New York. The danger is that weak banks will remain reluctant to lend, hobbling President Barack Obama’s efforts to pull the economy out of recession.

‘Bogus’ Profit

Citigroup’s $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. “The big banks’ profits were totally bogus,” says Weiss, whose 38-year-old firm rates financial companies. “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”

Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get.

The accounting rule changes that matter most for the banks came on April 2, when the Financial Accounting Standards Board gave companies greater latitude in how they establish the fair value of assets. Lawmakers, including Representative Paul Kanjorski, a member of the House Financial Services Committee, had complained that existing mark-to-market standards worsened the financial crisis.

Debt Valuation

Along with that change, FASB also let companies recognize losses on the value of some debt securities on their balance sheets without counting the writedowns against earnings. If banks plan to hold the debt until maturity, they can avoid hurting the bottom line.

At Citigroup, the recipient of $346 billion in fresh capital and asset guarantees from the government, about 25 percent of the quarterly net income came thanks to the debt securities rule change, the bank said.

Another $2.7 billion before taxes came from an accounting rule that lets a company record income when the value of its own debt falls. That reflects the possibility a company could buy back bonds at a discount, generating a profit. In reality, when a bank can’t fund such a transaction, the gain is an accounting quirk, Weiss says.

Citigroup also increased its loan loss reserves more slowly in the first quarter, adding $10 billion compared with $12 billion in the fourth quarter, even as more loans were going bad. Provisions for loan losses cut profits, so adding more to this reserve could have wiped out the quarterly earnings.

Wells Fargo

Without those accounting benefits, Citigroup would probably have posted a net loss of $2.5 billion in the quarter, Weiss estimates. In the five previous quarters, Citigroup lost more than $37 billion.

Wells Fargo also took advantage of the change in the mark- to-market rules. The new standards let Wells Fargo boost its capital $2.8 billion by reassessing the value of some $40 billion of bonds, the bank said in May. And the bank augmented net income by $334 million because of the effect of the rule on the value of debts held to maturity.

Wells Fargo spokeswoman Julia Tunis Bernard declined to comment, as did Citigroup’s Jon Diat.

The higher valuations Wells Fargo put on its securities probably won’t last, as defaults increase on home mortgages, credit cards and other consumer and corporate lending, Northeastern’s Sherman says.

Fed’s Optimism

“These changes will help the banks hide their losses or push them off to the future,” says Sherman, a former Securities and Exchange Commission researcher.

The Federal Reserve, which designed the stress tests, used a 21 percent to 28 percent loss rate for subprime mortgages as a worst-case assumption. Already, almost 40 percent of such loans are 30 days or more overdue, according to Tavakoli, who is the author of three primers on structured debt. Defaults might reach 55 percent, she predicts.

At the same time, the assumptions on how much banks can earn to offset their losses are inflated, partly because of the same accounting gimmicks employed in first-quarter profit reports, Weiss says.

“There’s a chance that it might work,” Columbia’s Stiglitz says of the government’s attempt to boost confidence. “If it does, then they’ll look like the brilliant general. But all these efforts also bank on the economy recovering and housing prices not falling too much further. Those are not safe assumptions.”

Indeed, while the government and accounting rule makers try to help the banks look their best, they may make the U.S. economy worse. As long as lenders are stuck with bad loans, they can’t provide new money to consumers or corporations to fuel a potential recovery. The banks may look pretty, but they’ll be zombies until they clean up their books.

Fluctuating Currenices and the Problem of China's Massive Dollar Reserves

rwtwain@yahoo.com (R.W. Twain) — Tue, 26 May 2009 21:23:00 +0000

Beijing's Would-Be Houdinis

By Sebastian Mallaby
Tuesday, May 26, 2009

With extraordinary speed, China has morphed from a diffident player in international finance into an impatient table-banger. Six months ago, one could muse about whether the Chinese were interested in a larger role within the International Monetary Fund or in helping to rebuild the crisis-battered global system. Now, the Chinese are pumping almost $40 billion into a new East Asian version of the IMF, browbeating trading partners into using the yuan, and floating fantastical ideas about a new international reserve currency. Visiting Beijing last week, Brazilian President Luiz Inácio Lula da Silva picked up on his hosts' changed mood. Calling for a "new economic order," he suggested that it was time to stop denominating trade in dollars.

It's great that China is speaking up. The country accounts for a large share of the world's savings and much of its growth; if a stable economic order is to emerge from this crisis, it will need Chinese buy-in. But there's a not-so-great side to China's transformation, too: Its contribution to the global debate is mostly muddled.

Why have the Chinese found their voice? Put simply, they have bought so much of the international system that they can no longer be indifferent to it. By running colossal trade surpluses, they have accumulated vast holdings of bonds and shares denominated in dollars, the currency at the core of global finance. If the greenback declines, China's government stands to lose a fortune.

The political backlash from such a loss could be brutal. Already, Chinese bloggers have ripped into the officials who invested $3 billion in the U.S. private equity group Blackstone, only to see the stock plummet. "They are worse than wartime traitors," one online chatter fumed, according to the Financial Times. A large fall in the dollar would make the Blackstone loss look like a picnic.

So Chinese authorities are searching for a way to reduce their exposure to the greenback. The surest method would be to stop buying so many U.S. Treasury bonds, but that would mean allowing the Chinese currency to rise against the dollar, which would hurt Chinese exporters when they are already suffering. So the government is scrabbling around for something -- anything -- that can spring it from the dollar trap without driving up its currency.

China's ideas come in two categories. The wackiest popped up unexpectedly on the Web site of the Chinese central bank -- itself a stunning sign of the nation's ambitions to shape the new order. It proposed that the IMF greatly expand its issuance of "special drawing rights," the multilateral quasi-currency it dreamed up in the late 1960s. The notion is that the IMF would trade these SDRs for some of China's dollars, and -- presto! -- China's dollar exposure would go down. But the hitch is that either the IMF or one of its member governments would be left holding the bag. The idea is a non-starter.

China's other approach is to promote the global use of its own currency. Its central bank has offered yuan to Indonesia and Argentina in return for rupiah and pesos. It hopes more trade will be denominated in yuan. Its contribution to the new IMF-like East Asian reserve fund may one day mean that a crisis-prone country in the region borrows partly in yuan.

All this is intended to buy China's currency some respectability. But as an escape from China's dollar trap, it is laughable. The idea is that once the yuan goes international, foreigners may be willing to borrow in it. That way, China can keep running a trade surplus and exporting capital, but instead of accumulating bonds denominated in dollars it would be able to accumulate bonds denominated in yuan. Again -- presto! -- China's exposure to the greenback would be reduced. But the hitch is the same as with the IMF idea: The currency risk would be transferred, in this case to China's borrowers. Given that the yuan is artificially held down by Chinese policy and will almost certainly rise over the medium term, a foreigner would have to be desperate (or intimidated) to help China out of its impasse by borrowing in its currency.

So neither the IMF idea nor the scattershot attempts to internationalize the yuan will rescue the Chinese from their dilemma. China has accumulated at least $1.5 trillion in dollar assets, according to my Council on Foreign Relations colleague Brad Setser, so a (highly plausible) 30 percent move in the yuan-dollar rate would cost the country around $450 billion -- about a tenth of its economy. And, to make the dilemma even more painful, China's determination to control the appreciation of its currency forces it to buy billions more in dollar assets every month. Like an addict at a slot machine, China is adding to its hopeless bet, ensuring that its eventual losses will be even heavier.

It is easy to appreciate China's sudden appetite for bold new ideas about international finance. But Beijing's leaders look less like the architects of a new Bretton Woods than like aspiring Houdinis.

The Muffled War on Accountability

rwtwain@yahoo.com (R.W. Twain) — Fri, 22 May 2009 22:46:00 +0000

KBR Got Bonuses for Work that Killed Soldiers
By Jeremy Scahill

May 20, 2009

The Department of Defense paid former Halliburton subsidiary KBR more than $80 million in bonuses for contracts to install electrical wiring in Iraq. The award payments were for the very work that resulted in the electrocution deaths of US soldiers, according to Department of Defense documents revealed today in a Senate hearing. More than $30 million in bonuses were paid months after the death of Sgt. Ryan Maseth, a highly decorated, 24-year-old Green Beret, who was electrocuted while taking a show at a US base in January 2008. His death, the result of improper grounding for a water pump, has been classified by the US Army Criminal Investigations Division (CID) as a "negligent homicide." Maseth's death had originally been labeled an accident. Bonuses were paid to KBR in 2007 and 2008, after CID investigators had officially expressed concerns about the quality of KBR's electrical work. For its part, KBR denies any culpability for the electrocution deaths.

This information was revealed at a hearing of the Senate Democratic Policy Committee. According to the committee's chair, Sen. Byron Dorgan, the rewards KBR received under its LOGCAP contracts were supposed to be for work of the "highest quality" with "no deficiencies" or problems. Dorgan said KBR's work was "shoddy" and "unprofessional." Some eighteen US soldiers have died since 2003 as a result of KBR's "shoddy work," according to Sen. Frank Lautenberg. KBR/Halliburton, of which Dick Cheney was chairman and CEO from 1995 to 2000, has been the single largest corporate beneficiary of the US wars in Iraq and Afghanistan. It continues to operate globally on US government contracts.

Charles Smith, the former Army official who managed the contracts under which KBR performed electrical work in Iraq, testified that it was "highly inappropriate" that KBR received these bonuses for what he called "dangerously substandard" work. He said that the Army was well aware of KBR's "poor performance" since the beginning of the Iraq invasion, and yet continued to reward KBR because the military was "afraid" KBR would cease work. He said there was "a culture that decided KBR was too big to fail and too important to be held to account." The "perverse incentive is that there was no incentive" for KBR to do quality work because they received bonuses for poor work.

Senator Dorgan said there are "tens of thousands of examples" of unnecessary risks to US soldiers, including deaths that have arisen as a result of KBR's work. "Why should [KBR] be getting more contracts now that we know all this information?" asked Sen. Bob Casey. "The Defense Department has not answered these questions."

James Childs, a master electrician hired by the Army to review electrical work in Iraq during 2008, testified that KBR's work in Iraq was the "most hazardous, worst quality work" he'd ever seen. He said his investigation found improper wiring in "every" building KBR wired in Iraq (of which there are thousands) and that KBR's rewiring work in buildings that were previously safely wired resulted in the electrical system becoming unsafe. Childs said that KBR did not do any work "according to code." He also testified that the same risks exist in Afghanistan, which he recently visited. "While doing inspections in Afghanistan, I found the exact same code violations," Childs said.

Eric Peters, a master electrician who worked for KBR in Iraq as recently as 2009, said that 50 percent of the KBR-managed buildings he saw were not properly wired. "I worried every day people would be injured or killed as a result of this work," Peters testified. He estimated that at least half the electricians hired by KBR--many of them cheaper-costing Third Country Nationals (TCNs)--to service the US military in Iraq would not have been hired to work in the United States, saying they were not trained in US or UK electrical standards. TCNs--from places like India, Bangladesh and Bosnia--are estimated to have done some 60 percent of the electrical work for KBR in Iraq. Peters charged that KBR allowed trainees to take notes in to certification tests, making it very easy to be cleared for work.

Peters also charged that KBR "frowned upon" any refusal to sign off on work that Peters deemed incomplete or unsafe. Peters and others who testified said that "all over theater," meaning everywhere in Iraq, KBR would effectively double-bill US taxpayers by leaving electrical work half-done or incorrectly done and then billing taxpayers again to repair its own shoddy work.

Peters characterized KBR managers as "completely unqualified" and said he is not a "disgruntled former employee" but rather a "disgusted former employee."

How the Law Really Works

rwtwain@yahoo.com (R.W. Twain) — Wed, 20 May 2009 17:07:00 +0000

Documents About Lost E-Mail Can Stay Secret
Court Sides With White House Office

By Del Quentin Wilber
Washington Post Staff Writer
Wednesday, May 20, 2009

A federal appeals court ruled yesterday that the White House does not have to make public internal documents examining the potential disappearance of e-mails during the administration of President George W. Bush. In upholding a 2008 decision by a federal judge in a lawsuit brought by a watchdog group, the appeals court found that the White House's Office of Administration is not subject to the Freedom of Information Act.

Citizens for Responsibility and Ethics in Washington (CREW) filed the suit seeking to force the White House office to comply with a 2007 request for documents related to the alleged sloppy retention of e-mails between 2001 and 2005, a period that included the lead-up to and start of the Iraq war. The group was seeking the records to get a better sense of what happened to the e-mails, said Anne Weismann, the organization's chief counsel.

The Office of Administration, which performs a variety of administrative services for the Executive Office of the President, had complied with similar requests for years. But officials changed the policy after CREW's request, arguing that the office does not exercise enough independent authority to be subject to open-records laws.

Government agencies and offices generally must do more than advise and assist the president or his immediate staff to be subject to the laws. Because the Office of Administration does not perform "tasks other than operational and administrative support for the President and his staff, we conclude that [it] lacks substantial independent authority and is therefore not an agency under FOIA," wrote Judge Thomas B. Griffith of the U.S. Court of Appeals for the D.C. Circuit, who was joined in the 13-page opinion by Chief Judge David B. Sentelle and Judge A. Raymond Randolph.

CREW's executive director, Melanie Sloan, said her organization is unlikely to appeal the ruling. But she said her group and others like it recently sent a letter to the Obama administration urging it to apply freedom-of-information laws to the Office of Administration.

"Transparency and accountability start at home," Sloan said.

"This is load of bullshit, a blueprint for government abuse!" exclaimed blogger R.W. Twain. "This ruling sets a precedent for allowing government actors to conduct illegal acts outside the reach of FOIA, as long as the government agency claims its activities were 'operational and administrative support for the President and his staff."

Yet One More Gift From the Taxpayers to Wall Street

rwtwain@yahoo.com (R.W. Twain) — Wed, 20 May 2009 16:58:00 +0000

Efforts to Repay Bailouts May Undercut Benefit for Taxpayers
By ERIC DASH, www.newyorktimes.com
May 18, 2009

Americans were promised a reward for rescuing the nation’s banks. In return for all those bailouts, the banks essentially granted stock options to the government — a potential jackpot for taxpayers once the crisis blew over.

But now banks, eager to get Washington out of their hair, are pushing to undo those investments as quickly — and cheaply — as possible. If the Obama administration acquiesces, billions of taxpayer dollars could be left on the table.

At issue are so-called warrants that the government received from the banks last autumn, when the financial world was teetering. Like options, warrants give their owners the right to buy stock at a set price over a certain period of time, in this case, 10 years.

Now, with many banks itching to return their bailout money, the warrants are raising some thorny questions. What are these investments worth? Should the government drive a hard bargain, or let the banks off easy? Should it maximize profit for taxpayers, or minimize pain for banks?

Many banks want to buy back the warrants and wriggle free of the government. Big banks like JPMorgan Chase, Goldman Sachs and Morgan Stanley have formally notified regulators that they want to return their bailout money, according to people briefed on the situation. But as long as the government holds the warrants, it still has some leverage over the industry.

For taxpayers, a lot of money is at stake. The government has an option to buy stock in 579 banks. By some estimates, the warrants on JPMorgan alone are currently worth more than $1.1 billion. They could be worth much more if JPMorgan’s share price rose.

So far, one publicly traded bank, Old National Bancorp in Indiana, has repaid the government in full by returning its bailout money and repurchasing its warrants. (Two small privately held banks have done the same.)

How Old National pulled this off, and the seemingly favorable terms it secured, shows how aggressively banks big and small are pushing, even after they repay money from the Troubled Asset Relief Program, or TARP. Old National paid $1.2 million for its warrants. Analysts estimate the investments might have been worth as much as $6.9 million.

“It’s a great deal for Old National,” said Linus Wilson, a finance professor at the University of Louisiana, Lafayette. “Treasury accepted a lowball offer.”

Andrew Williams, a Treasury spokesman, declined to comment about the negotiations, but said the government “has a robust process in place for valuing warrants.” He added that the Treasury was required by law to sell the warrants once a bank repaid its bailout money.

Analysts say that has made it difficult for the government to pursue a goal of maximizing profits for taxpayers, though a recent change to the law might give the Treasury more flexibility. Even if it had the option, it is unclear how successful the government would be at actively managing such a complicated investment portfolio.

Mr. Williams said the Treasury’s total warrant holdings were worth more than $5 billion, but the value changes along with the underlying stock prices and other factors.

But Prof. Wilson estimated that the warrants on nearly 300 publicly traded banks, which account for more than 95 percent of the government’s investments, were conservatively worth $2.4 billion to $10.9 billion. Some lawmakers worry that taxpayers will lose out. “Taxpayers were there at a critical moment,” said Senator Jack Reed, Democrat of Rhode Island and a member of the banking committee. “They should enjoy the upside when these institutions recover.”

To extinguish the warrants, the banks can let the Treasury auction them off to private investors or can choose to buy them back themselves. As with other bank rescue efforts, like moves to buy banks’ problem assets, the central issue with the repurchases is determining a fair price.

“That is the problem in TARP asset purchases, and it is the problem here,” said Vincent R. Reinhart, a former Federal Reserve official who is now a resident scholar at the American Enterprise Institute. “Do you value it at roughly comparable asset prices or do you acknowledge that the current market prices reflect an unusual uncertainty in markets and aversion to risk?”

For the government, the decision is about more than dollars and cents. It may be willing to sell the warrants simply to send a positive message about the stability of the banks.

“The U.S. Treasury would be better off rejecting a lot of these bids and selling these warrants to third-party investors,” Prof. Wilson, at the University of Louisiana, said. “Instead of having one buyer, they would have many buyers from all over the world trying to decide what the proper price should be.”

Old National’s move to buy back its warrants illustrates how tricky it is to strike the right balance. Executives at the bank, based in Evansville, Ind., and a large community lender with 100 branches and $8 billion in assets, began seeking to exit TARP almost as soon as the Treasury wired it the money in December.

By the end of March, Old National had won approval from its regulators to repay its $100 million of bailout funds. But the bank also wanted to repurchase its warrants, fearing it could remain subject to pressure from the government or another outside investor.

“We felt more comfortable that we controlled our own destiny rather than have the hands of the Treasury or a third party,” Bob Jones, Old National’s chief executive, said. “We think our stock has plenty of upside and would rather have that in our hands.” On April 20, Old National submitted an initial offer of around $600,000. Ten days later, Treasury officials, after gathering their own estimates from two asset managers and two market participants, rejected the bid as too low. Over the next week, both sides haggled over the price.

“We both walked through where we were,” Mr. Jones said. “They held their ground on a number of cases, and clearly we had to compromise.” On May 7, Old National was given approval to buy back its warrants for $1.2 million. The bank wired the money four days later.

At Old National’s annual meeting, shareholders were elated by the news. “It was the only applause I drew the whole meeting,” Mr. Jones said.

Another Gift From Taxpayers to Wall Street

rwtwain@yahoo.com (R.W. Twain) — Wed, 20 May 2009 16:50:00 +0000

By William D. Cohan, contributor www.cnnmoney.com
Last Updated: May 18, 2009: 10:39 AM ET

NEW YORK (Fortune) -- Imagine if you were not really in the market for a house but the government came along and said that it would finance 94% of a home's purchase price with a mortgage rate of less than 3%. Still not interested? Wait, Uncle Sam has some additional sweeteners: if you do the deal and buy the house for only 6% down, you also get the equivalent of rental income every month to the tune of at least an annualized yield of 10% of the purchase price.

But wait there's still more: if, say, after two years, you decide you don't want the house any longer, you can just walk away from it. No need to pay the balance of the mortgage (it won't affect your credit rating), and you can keep the rental income received to date.

That's essentially the deal that Treasury Secretary Timothy Geithner has offered qualified professional investors who participate in the so-called TALF (Term Asset-Backed Securities Loan Facility). Two months into the program as the first TALF- backed deals hit the market, you can see why the likes of hedge fund Fortress Investment Group are drooling over it. "I'm a big believer in the impact that TALF can and should have," Fortress CEO Wes Edens said on a May 6 investor call, adding that he expects that Fortress will be "a big participant" in the TALF program "three to six months from now."

The first few TALF deals -- one for Ford Credit (the financing arm of the automaker), another for American Honda Receivables Corp., a third for the student loan company Sallie Mae and a fourth for motorcycle icon Harley Davidson -- shed some light on our tax dollars at work.

"I've had accounts that dropped everything they were doing to take a look at this TALF financing," one Wall Street trader explained. "It was like nothing they had ever seen. It beats any financing that the private sector could ever come up with. I almost want to say it is irresponsible." For instance, Prudential Financial, Inc. (PRU, Fortune 500), the large insurer and investment manager, borrowed $786 million from the TALF as of March 31 and put up only $50 million to do so, some 6.4% of the deals.

In case you're not totally conversant with the alphabet soup of financial remedies emanating from the Obama Administration, here's a brief refresher: Geithner and the Federal Reserve announced the launch of the TALF in March. The TALF is a $200 billion (on its way to $1 trillion) non-recourse lending program to private investors as a way to encourage them to buy newly underwritten securities backed by auto loans, credit-card receivables and student loans, among other asset classes. (The TALF program is set to extend, in June, to the issue of new commercial real-estate mortgage-backed securities.)

These securitizations were once upon a time a key component of the so-called "shadow" financing system that helped raise trillions of dollars of capital worldwide. Of course, the securitization and sale of mortgage-backed securities was one of the leading causes of the current financial crisis as the people who took out the underlying mortgages started to default upon them in unexpected numbers. Still, Geithner has determined, correctly, that getting these securities circulating again is crucial to restoring the health of the credit markets. The Treasury designed the program, but it is the Federal Reserve that provides the government's share of the capital. "The increase in the TALF is expected to help stimulate both new issuances and the removal of assets from bank balance sheets," Credit Suisse wrote to its shareholders on May 8.

Investors interested in borrowing from the TALF program have to be approved by the Treasury and then, once approved, have to set up an account with a broker-dealer that is subject to a variety of the usual terms and conditions. The investor then must indicate a desire to buy, say, at least $10 million of one of the dozen or so deals, worth an aggregate of around $25 billion, which have come to market since the TALF program was set up in March. An early test for TALF was a May 5, $1.5 billion car-receivables securitization for American Honda Receivables Corp. and underwritten by JPMorgan Securities (JPM, Fortune 500) and BNP Paribas Securities. Investor demand for the deals so far is said by one trader to be "strong" and the deals are selling well. The real market test, though, of TALF will come when the first deals involving CMBS (Commercial Mortgage Backed Securities) start coming to market in the next few months.

The way the TALF works in practice is this: The amount of equity an investor has to put up, or the "haircut" as the TALF documents call it, depends upon the assets involved, the term of the loan or lease of the underlying asset (say, a car) and the credit quality of the underlying borrower. A loan to buy a three-year security backed by a group of credit-card receivables from high-quality borrowers would require an investor to put up 6% of the capital -- a 6% "haircut" -- and then can borrow the rest from the TALF through his brokerage account. To buy a two-year high-quality credit-card receivable security, a borrower would put up 5% of the face amount of the securities purchased. Auto receivables require as 12% equity investment for a three-year security. Small business loans require 5% down. Student loans require 10% down for a three-year deal.

An investor interested in a $10 million slice of three-year credit card receivable would put up 6% of the money -- $600,000 -- and borrow the balance of $9.4 million from the TALF at a rate of three-year LIBOR plus 100 basis points (Attention K-Mart shoppers, that's 2.85% at this moment.) Depending on all sorts of assumptions, the yields on these investments are said to be in the 11% to 15% range, especially attractive since the TALF loans are non-recourse to the borrowers -- you can just walk away and lose only your underlying equity investment and the collateral but you are not held responsible for the unpaid portion of the TALF loan itself.

In addition, the TALF loan is not marked-to-market so if the underlying collateral deteriorates in value, the investor is not required to put up more equity. What's more as the car payments or credit-card payments on the underlying security are made, the payments are distributed to the government and the investor on equal footing -- that means the investor starts getting paid back at the same time as the government even though the government is the senior secured creditor and even though an investor has put up only a small fraction of the original money. One private equity investor, who would not normally have looked at investing in such a deal but did, called this particular aspect of the TALF "shockingly good."

But who will the TALF deals be shockingly good for -- the players on the field or those of us in the bleachers? If what Geithner calls "our lending facility with the Fed" does its job and jumpstarts the credit markets then the extraordinary concessions the government has made to attract private capital may have been worth it.

William Cohan is the author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, published this month by Doubleday Books, a division of Random House, Inc.

Let's Have Cap and No Trade

rwtwain@yahoo.com (R.W. Twain) — Tue, 19 May 2009 19:33:00 +0000

By David Sokol
www.washingtonpost.com
Tuesday, May 19, 2009

The adage that everyone wants to go to heaven but no one wants to die is on display again as the House considers a massive 932-page climate-change bill, introduced by Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.), that would establish a "cap and trade" system for carbon dioxide and other greenhouse gas emissions. Its sponsors say it will keep low- and middle-income consumers whole while the United States cuts emissions 83 percent below 2005 levels by 2050 and transitions to a clean-energy economy.

Nothing could be further from the truth.

On paper, the Waxman-Markey bill puts a cost on carbon dioxide by imposing a ceiling, or cap, on greenhouse gas emissions and then setting up a market for regulated industries -- such as the electric power sector -- to buy and sell allowances to pollute under that cap. As the cap is reduced each year, market participants will exchange allowances in a complex auction market.

If you liked what credit default swaps did to our economy, you're going to love cap-and-trade. Just read Title VIII of the bill, which lets investment banks, hedge funds and other speculators participate in the cap-and-trade market. They don't have emissions to cut; they have commissions to make.

The real hidden catch of the cap-and-trade system, though, is that it will require consumers to pay twice: first for emission allowances and then for the construction of new low- and zero-carbon power plants.

Congressional estimates of government revenue from the sale of cap-and-trade allowances range from hundreds of billions to trillions of dollars. Contrary to assurances from the bill's sponsors that utility customers wouldn't have to pay these costs for the first decade, some coal-dependent utilities would be forced to purchase more than half of their allowances when the program is scheduled to begin in 2012. Would these allowances reduce our greenhouse gas emissions? No; that would come when consumers footed a second bill -- for the cost of their utilities either to retrofit coal and gas plants to capture carbon -- something that cannot be done today on a commercial scale -- or to shut them down and build non-carbon-producing nuclear plants and wind farms instead.

In fact, to the extent that cap-and-trade auctions increase ratepayers' bills, they will impede utilities' ability to develop a less carbon-intensive infrastructure.

Markets thrive on volatility. Electricity utilities, on the other hand, are highly regulated to ensure price stability -- not volatility -- for their customers. The Waxman-Markey bill imposes a market-based (read: unregulated) trading program on a highly regulated industry that must make enormous long-term and least-cost capital decisions to reduce carbon dioxide emissions. In an unprecedented and unwise fashion, it turns American industry over to the federal Environmental Protection Agency by giving the agency the authority to change the rules on allowances every five years. Is this sound public and economic policy? I think not.

If Congress wants to achieve 83 percent reductions in greenhouse gas emissions by 2050, the electricity sector can get there, but there is no need for that first cost. Get rid of auctions, speculation, trading, new Wall Street "products" (yes, the bill allows for credit default swaps and carbon derivatives) and the trillions of dollars in government revenue that may end up being spent on other programs. Get rid of the 12 new advisory boards, committees and other institutions established under the Waxman-Markey bill. Focus instead on the most efficient and inexpensive way to cut carbon dioxide emissions.

The solution? Keep the cap and remove trading from the equation: Mandate that the industry, over the same 40-year period, simply limit its emissions to the same levels proposed in the Waxman-Markey bill. This can be accomplished with a clear plan that gives states an option: Either they participate in a cap-and-trade program or they elect an alternative compliance mechanism to reach the same greenhouse gas emission goals by working with their utilities to develop a 40-year program of shutting down aging coal plants, retrofitting plants to capture carbon dioxide if the technology becomes available, and/or building zero-carbon energy plants. More important, the carbon dioxide reductions in this proposal can be achieved while providing adequate time to plan to minimize price shock and economic dislocation. It is the states, through their public utilities commissions -- not the federal government -- that have both the interest and obligation to manage citizens' costs while transitioning to a carbon-free future.

This transformation of our entire electricity sector won't be cheap, but it would be less expensive than the double cost of a complex cap-and-trade program followed by that same transformation.

The writer is chairman of the board of Iowa-based MidAmerican Energy Holdings Co., a subsidiary of Berkshire Hathaway, which also owns an 18 percent stake in The Washington Post Co.