Mar 29

Privacy Damages: Pshaw!

While many of you were going about your routine business on Wednesday, the Supreme Court in a 5-4 decision authored by Justice Alito, handed down an important ruling concerning what you will be able to recover in the case that the United States government decides to make any of that business public.

Essentially, if the government improperly leaks your private information, whether by mistake, or in some misguided effort to embarrass or intimidate you, the measure of damages recoverable in court will be limited to your out-of-pocket expenses. In the past–since the post-Watergate era–plaintiffs were able to recover damages for emotional distress. So, if you spend $10 to take a cab to your psychiatrists office, the $10 is recoverable, but your actual damages are not. This will not only make it less likely that plaintiffs will bring privacy cases, but more importantly it removes any impediment the government may have had not to act in nefarious ways with regard to your private information.

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Lois Beckett over at ProPublica has an interesting piece on Obama’s massive campaign database, which is being used to reportedly tailor messages to supporters. She reports that the campaign is being tight-lipped about what type of information it is gathering about supporters, what will happen to the information it gathers once the campaign is over, and whether or not an individual can erase any of the information collected.

I don’t find anything about this story all the surprising. Dangerous and pernicious perhaps, but nothing that most retailers and businesses are not already doing. What is different however is the information, or access to information, that the government has at its disposal when compared to private business. Which is precisely why it is important that someone keep an eye on this type of data mining. I have personally sent several correspondences directly to the White House via email, so I am anxiously awaiting communications so that I can confirm that the campaign is tailoring its message.

Mar 29

You’re Hot: You’re Hired

You may be one the of millions of Americans who periodically sit down to clear your mind and blow an hour or two watching some ridiculous reality show wherein contestants are eliminated one by one until only one narcissistic candidate remains. The next time you do so, pay attention to the “professions” of the competitors. Undoubtedly there will be more than one ridiculously attractive young man or young woman who lists their career as medical or pharmaceutical sales. Why do the drug and medical equipment manufactures recruit these young hotties? It is simple, because doctors are a cash cow, cash cows that are more easily milked by gorgeous farmhands.

The unsavory ties between manufacturers and doctors have existed for decades, but have been exacerbated by the proliferation of HMOs. If a company is able to secure a contrat with say, Kaiser Permanente, to carry it’s statin rather than a competitor’s statin, the rewards are enormous. If an equipment manufacturer can convince doctors to employ its devices, the revenues can run into the several billions of dollars. Moreover, nearly each of the medical specialties has formed a “society” wherein its members routinely gather in large conference rooms and convention facilities to hear lectures and panels on the most cutting edge treatments and procedures. Never absent from these gatherings are the medical and pharmaceutical sales teams. Sales teams set up elaborate booths and displays, sometimes running into the tens of thousands of square feet each. They will even leave you a gift on your nightstand, approved by a payment to the society’s coffers. While still other sales staff are sent to meet with doctors individually at their offices. No stone is left un-turned. There is great reward for the sales staff, many making six figure salaries and commissions.

While some universities and hospitals have banned their physicians from accepting promotional materials or speaking on behalf of specific drugs or equipment, the medical societies of the specialties have not. Surprisingly, the societies themselves sell the manufacturers direct access to their members, at a stiff cost. In some cases, more than half of a society’s revenues come directly from drug manufactures and equipment makers.

The effects of this financial influence on doctors comes at the expense of the patient. Patients may not have discounted access to a particular drug–even if the drug is more effective–under their medical plan if the plan has contracted with another manufacturer of a similar drug. Patients are prescribed drugs that they don’t need and asked to buy or are provided with equipment that they don’t require. One study from the Journal of the American Medical Association found that more than one in five patients who received cardiac defibrillators did not meet the medical criteria for receiving them. Large drug makers and equipment makers have paid millions in settlements in civil cases involving allegations of improper kickbacks to doctors and medical societies.

At this time little attention is being shown to the drug manufacturers’ and equipment makers’ magnificent minions trolling your doctor’s offices and grifting the groups he or she is a member of. It is time that more effort is spent on lobbying representatives to pass legislation ending this obvious conflict of interest for the sake of patients. No relationship is more critical than that of the doctor and patient, and there can be no space permitted for cash over competent care.

Mar 29

Even the Experts don’t get it

Demand Curve

Fraud Outweighs Government Action

In a recent column over at Project Syndicate, J. Bradford DeLong discusses government’s failure to match aggregate demand to aggregate supply and it’s dangerous consequences for the economy. While I agree with his premise entirely, I disagree that investing in private business is no less risky than it has been in the past. The governments of industrialized nations have indeed significantly hindered economic growth by not investing the necessary amount of money into the economy in ways that produce actual demand, but they have also done nothing to increase confidence.  He writes:

But the risk that the world’s investors currently are trying to avoid by rushing into US, Japanese, and German sovereign debt is not a “fundamental” risk. There are no psychological preferences, natural-resource constraints, or technological factors that make investing in private enterprises riskier than it was five years ago. Rather, the risk stems from governments’ refusal, when push comes to shove, to match aggregate demand to aggregate supply in order to prevent mass unemployment.

I believe that his reasoning is inherently flawed. It may or may not be any more risky today to invest in private enterprise than it was five or ten years ago, but the existing risks have been brought to light. The unavoidable consequences of the dismantling of financial regulatory schemes in the United States primarily, but also in several of the Eurozone countries have led investors to more carefully consider investments in private enterprise than they had done in the past. The reason that investment in private enterprise in industrialized nations was an attractive venture from time immemorial was because confidence in market regulation and rules enforcement engendered a notion of safety. With the notion of safety all but gone, investors now see that the emperor has no clothes. Without confidence that private equity investments will be protected from fraud and other nefarious schemes, whether the government matches aggregate demand to aggregate supply will ultimately be economically meaningless in the long term

Mar 28

A Not So Modest Proposal

Whatever

In listening to the questions directed at Solicitor General Verrilli yesterday with regard to the Affordable Care Act and its individual mandate I was shocked by a comment made by Justice Scalia. He essentially intimated that the governmental mandate upon emergency rooms to provide basic care to individuals regardless of their ability to pay has itself created the very problem of those with insurance subsidizing those who do not. I could not help but take his view as entirely fundamental. Of course, I exclaimed loudly! If we do not require any medical facility to offer free care, nor force insurance companies to offer policies to those with pre-existing conditions, unhealthy lifestyles, or genetic propensity for disease, the insurance market would be clear and fair. Obviously one must set aside the long-standing principle of the medical professions to treat those suffering pain, regardless of socioeconomic status in order to reach this conclusion, but who really believes that physicians take this principle all that seriously anymore? I mean really, the new BMW 7-Series just hit showrooms after all.

Each one of us should sit down today and write Justice Scalia a sincere thank you note for his clarity on this matter. If you do not have any money, you do not get any care. It really is that simple after all. Health care, like Coca-Cola, automobiles, boysenberries, or playing cards is no different from any other commercial product, and we do not as a society go around expecting free Coke and cars. My only hope is that somehow Justice Scalia can somehow bring about the disbanding of Medicare, Medicaid and the Veterans Administration facilities. Most notably the free health care for veterans. I mean really, we as a society actually pay them! They pay nothing at all. Why are they getting free health care? No one should ever be forced to pay for anyone else’s products or services. If you are shot, mosey on down to the Walgreen’s and pick up a sewing kit. If you get old, find a nice warm place to rest while you slowly die of some degenerative disease otherwise easily arrested by modern treatments. We will all be better off.

JUSTICE SCALIA: It’s a self-created problem.

GENERAL VERRILLI: — to say that Congress cannot solve the problem through standard economic  regulation, and that — and I do not think that can be  the premise of our understanding of the Commerce Clause.

JUSTICE SCALIA: Whatever -­

Here here Justice Scalia, whatever indeed.

Mar 27

Individual Mandate to Go?

Jeffrey Toobin, one of CNN less hackneyed correspondents delivers his analysis following his departure from the Supreme Court today, where both proponents and opponents of the Affordable Care Act’s individual mandate presented their oral arguments. While few Supreme Court decisions are based in large part upon the performance of the parties at oral argument, if his impression of the justices is correct,  it’s going to be a shitstorm. Not only will the insurance corporations go apeshit if they lose the huge healthy rate-paying base they demanded in return for preexisting condition coverage concessions, it could spell doom for Obama’s reelection chances if a decision is released prior to November. If the court were to overturn the individual mandate it would be based upon an extraordinary legal stretch on the part of the five conservative justices, and perhaps one or more of the court’s more liberal members. It would in fact rise to the level of Gingrichian ”activist judges,” as nearly no objective legal scholars have found a sound basis to overturn the mandate.

Most importantly, in concluding that health care is nothing more than any other item in interstate commerce, the United States will shout loudly to the world, and to its citizens, that basic health care is not a right, but rather the equivalent of a pair of jeans, a fruit smoothie, or an automobile.

Mar 26

Stock Market: It’s So 1900′s

Wall Street

Not Safe for Small Fish

Over the past few decades, the United States has embarked upon a course of massive financial market deregulation. This deregulation has affected every area of finance. The result has been a volatile and generally disadvantageous stock market for average investors. Conventional investment strategy dictates investing a large proportion of your retirement investments in the U.S. stock market, the remainder in foreign securities, bonds and fixed income investments. Generally, this amount is as high as 80% for someone in their twenties, to much less than 50% for someone nearing or already enjoying retirement. Conventional thinking has reached an end.

Recent deregulation, lax oversight by federal governmental regulators and law enforcement, increased barriers to individuals accessing the courts when disputes between investors and large investment houses, brokerages and banks arise has in my opinion made this strategy obsolete and dangerous. There can be no greater evidence of the breadth of the disingenuous concern for the individual investor than the dearth of prosecutions and meaningful statutory or regulatory fines imposed upon those who committed the fraud that caused the housing bubble and its ensuing tsunami of consequences. When fines are imposed or settlements reached with the perpetrators, it is often for a tiny fraction of the damage caused. For example, the most recent mortgage fraud settlement offers those whose homes were wrongfully foreclosed upon—repeat, wrongfully foreclosed–not simply foreclosed upon by mistake, but in cases of fraud, a lousy $2,000. The great fear is that upsetting Wall Street will prod it to unleash even greater harms upon us in return.

The bottom line is that no one is protecting you. You must protect yourself. The stock market—or should I say those who now control the stock market–have offered you nothing in the recent past for your adherence to the old adage of “invest for the long haul.” The market makers have done nothing but continue to gleefully accept your money through ridiculous fees in return for awful advice and poor returns. You have been nothing more than the basis for exorbitant leverage and a steady dependable stream of income. Your employers have not served you well either. Most 401K plans are riddled with fees and are far too light on low cost index fund options, further eating away at your already paltry returns. Your employers generally ignore their responsibility as fiduciaries. It is not a wonderful time to be an individual investor. For example, from 1996 through 2011, adjusted for inflation, the stock market overall returned nothing. Since the end of 1999, the return on United States equities has been 7.6 percentage points a year lower than that on government bonds. Dividend returns have consistently decreased for decades, and the long-term average annual return of the stock market has dwindled from historical averages as well. To be fair, there have always been periods in the past when stocks lagged behind government bonds for some period, but those events have been rare. In the modern era, these events are occurring more and more frequently.

This problem is only going to continue to grow as statutes and regulatory “reform” in the name of removing restrictions on growth loosens regulations further. The recent JOBS Act is an example. The act lessens regulations and reporting requirements on “emerging” businesses in the name of efficiency and ease of raising capital. What it actually creates is a ponzi scheme structure of separating investors from their money and a boiler-room mentality for business. As I discussed here, the reason United States equities  traded at such a high premium historically was a direct result of the perceived safety of these equities  due to stringent regulations and reporting requirements imposed upon publicly traded corporations. With many of these regulations removed, we will likely see greater and greater fluctuations in market prices and frequent significant drops in overall share price. This has always been the case in much of the developed world, where strict and meaningful regulations face powerful opposition by those in power.

Once the root cause of the recent housing market collapse and tangential market collapse had been ascertained–lax oversight, deregulation, excessive leverage and derivatives trading–the rational response should have been to rewind the regulatory environment back to the posture it had occupied prior to the irresponsible behavior, or at minimum to set a path toward that end. However, the United States did not, and it did not precisely because both the Democratic and Republican parties are in the pockets of Wall Street. Whether the election financing rules have contributed to this situation is certainly an important discussion to undertake, but it has no relevance to your investment strategy at this time. President Reagan began the process of financial market deregulation and it reached its crescendo under President Clinton and President Bush. Money ruled over ideology, and we all paid for their incompetence.

As I write this the DOW Jones Industrial Average is above 13,000, riding high on recent jobs numbers and clues from the Federal Reserve that more easy cash is on the way. But mark my words, the economy has not been fixed, and the recent financial regulations passed by Congress and signed by President Obama do little to decrease the likelihood of another catastrophic event. Until meaningful regulation is enacted and the governmental agencies charged with investigation and prosecution of fraud and violations of even existing rules do their jobs effectively, the stock market offers you no better security or growth than a craps table.

The time is now to rethink your overall investment strategy and shift toward a portfolio weighted more heavily toward government securities, high quality corporate bonds, savings bonds, foreign government bonds of stable nations, domestic municipal securities, and even certificates of deposit. The money you do have invested in the stock market should be in low fee index funds, not in any fund managed by some pimple faced Harvard MBA. Less than 1% of these funds’ managers have outperformed the market even when times were great and stable! If they did outperform, it was due to nothing more than dumb luck.

Investing in the stock market for the long haul may have been sound advice in the past, but it no longer holds true. I would go even further than many who subscribe to low fee index fund investing in that I believe that investing a traditionally acceptable percentage of a portfolio in low fee stock index funds, as the stock market portion, is far too volatile and risky. I believe a portfolio that your grandmother may have held is more appropriate now. You may have heard her say “at least I didn’t lose money” many times, and she may nave been right, absent inflation. She would have made more money by investing in the stock market, you likely will not. A portfolio heavily weighted toward safe fixed income securities is just what she would recommend, and in 2012, she’s right. I do not anticipate a reversion to a financial regulatory environment safe for individual investors anytime soon. If the recent crash could not nudge policymakers in that direction, I do not know what will. The only path back to sanity lies with the electorate in voicing its demands in the voting booth.

 

Mar 23

He Started it!

With the Supreme Court set to hear oral argument over the constitutionality of specific provisions of the Affordable Care Act, Republicans are weighting their options once the opinion is handed down. While it is unlikely the high court will issue its decision until after the 2012 Presidential election, it is important to remember that the individual mandate was a Republican idea to begin with, going as far as to introduce the legislation in Congress. Wouldn’t it be wonderful to have a political party with consistent principles?

Mar 23

Bologna: Michael Eisner

The absolute wrong way to forward a third party movement. A clue should have been the author of this piece, a beyond wealthy white man who was schooled privately from kindergarten. So, if the American people decide using the methodology devised by this group that it wishes to move in a certain direction, and that direction is hit by a bus, we get to immediately move in the opposite direction?

To help ensure that this candidate will be a problem-solver who represents the great majority of American society rather than fringes or the special interests, he or she will be required to pick a running mate from a different party. For example, if the candidate is a Republican, the running mate might be a Democrat or an independent.

This is idiocy and theatrics, not a foundation for true separation–or even a first step–from the two-party system. It’s no surprise that a man charged for many years with producing drivel is it’s loudest mouthpiece. Please take your project home and come in tomorrow with a new idea, or I’ll have to give you an F.

Mar 23

JOBS ACT: The Next Bubble

Charles Ponzi

In yet another example of the Democratic and Republican parties working together to screw the American people, the United States House of Representatives last week passed a set of bills formally referred to as the JOBS Act, but colloquially known to insiders as an enormous early holiday gift to entrepreneurs and Wall Street. The Senate passed the bill with minor modifications yesterday. Therefore, it heads back to the House and certainly shortly thereafter will find its way to the President, who has voiced his support for the measure.

Essentially, Democrats and Republicans alike tout the JOBS Act as addressing many of the problems that investors and start-ups have for years said plague the venture market–that they cannot easily raise capital from hundreds and thousands of small investors, and that financial disclosure requirements make it difficult for them to take the companies public. The Chamber of Commerce and several other business groups strongly support the measure, which should be an initial clue that the measure will intimately result in crap for the public, and more wealth for the powerful. In essence, small companies wish to be able to raise capital through a method called “crowdfunding.” It allows hundreds or thousands of investors to invest small amounts in a “promising startup” rather than pigeon holing the startup to only pitch their ideas to “angels” and large investors. Of course, this method is preached everywhere as opening the equity markets to the small investor, when essentially it only serves to separate them from their money when the startup goes belly-up.

The JOBS Act would also loosen regulatory requirements for smaller companies seeking to go public by creating a new classification called “emerging growth companies.” If a company has annual revenues of less than $1 billion—the lion’s share of all businesses—the financial statements required for an application to go public would be reduced and the companies would be exempt from having to hire an external auditor. It also provides for so-called “mini” public offerings for which companies raising $50 million or less. These companies would be permitted to avoid some of the financial disclosure requirements.

In other words, the investor and the SEC would have to rely upon the company’s word and its own accountants and statements as to the financial solvency of the company. No regulation would exist that would serve to verify any of the claims set forth in the reports. A company could essentially cook its books without any oversight. Ultimately, when the company folds or its fraud is exposed when its IPO draws near, the small investors would have little or no recourse as all of the company’s assets would likely have been exhausted, if it ever had any assets.

Only a tiny fraction of startup businesses in the United States are still in business 10 years after launch. Allowing these companies access to grandma’s equity is not going to change that. What it will do however, is make grandma poorer as part of this proposed ponzi scheme. In an effort to woo you away from your savings, emerging growth companies would also be able to solicit investments with incomplete information permitted by provisions exempting emerging companies from many of the regulations enacted to limit boiler-room activities. These provisions allow the company to use fancy heretofore-banned presentations and sales techniques in order to convince small investors to support their endeavor. A company could hire teams of pitchmen stationed in an office or at home whose only job is to contact potential investors and extract their capital.

Jeffrey Stibel, CEO of Dun and Bradstreet Credibility Corp recently said: “Under this bill, you can now go to my grandmother and say, ‘I want you to invest in a company,’ but the whole thing can be effectively a scam and you’ve just created the air of legitimacy to skirt the law.” Previously, you had to go to a qualified investor, who has enough sophistication to sniff out fraud.”

To be clear, the reason U.S. stocks today, and historically, trade higher in terms of profit to equity ratios than foreign securities is quite simple: our regulations provided confidence to worldwide investors that unsavory or illegal practices would be minimized. Our stringent reporting requirements also provided a level of clarity to would be investors of the financial solvency of any publically traded corporation.

This legislation, which has bi-partisan support, seeks to undo a century of securities reporting requirements in an effort to compete with foreign corporations. The legislation does so under the guise of job creation and small business “incentives.” The legislation is nothing more than a regulatory race to the bottom that will result in thousands of bankrupted investors and a more volatile and less trustworthy stock market.

Update March 27, 2012: Well, it passed through the House, without changes, so it is on to the President. Let the games begin.

Update March29, 2012: Ian Masters conducted an interview with Jeff Mahoney, the General Council of the investor watch dog group the Council of Institutional Investors. He assesses the damage that this de-regulation of Wall Street in the name of job creation will do to unsophisticated investors.  

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Mar 23

Allowing Fraud is in the Public Interest

A new study by mortgage behemoths Freddie Mac and Fannie Mae has ruffled powerful feather, from banking executives to the man in charge of administering the agencies after a takeover by the government during the mortgage crisis. Fannie and Freddie now control nearly 80% of all outstanding mortgages in the United States. The question: whether to reduce the amount of money beleaguered homeowners owe on their mortgages. I discussed this issue in a prior column some weeks ago.

Fannie and Freddie concluded that principal loan forgiveness would not only help people keep their homes, it would also save Freddie and Fannie money. Additionally, because the taxpayers have already provided Fannie and Freddie with over $150 billion in financing, it would also save the taxpayers money.

Unfortunately, several important figures remain hamstrung by the misguided notion that allowing principal reduction of underwater mortgages encourages wrongful and irresponsible behavior. Several economics professors as well as independent economists continue to cling to the idea that home buyers will allow their homes to go into default simply to take advantage of a principal reduction program, notwithstanding o evidence to support their position. More importantly, the now confirmed jackass, Edward DeMarco, who heads up the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie continues to refuse to allow principal reductions as a means to even in the face of this new data that proves he is unquestionably wrong.

While new subsidies provided to Fannie and Freddie by the Obama administration allow for the federal government to pick up nearly 50% of any losses sustained through principal write downs, FHFA continues to cite ridiculous concerns such as changes to the computer system at Fannie and Freddie as reasons for its stubbornness.

The position of the FHFA as well as those charged with providing impartial economic advice to it is terribly disappointing. It is also repugnant to the ideas of fair play, and even sound business practices. This episode is simply more evidence that the Bush and Obama administrations’ purposeful cuddly relationship with the banks and insurance companies whose fraud caused the housing crisis and subsequent recession continues to prevent any real progress on this matter. The refusal to break up Citi will prove to be Obama’s Tora Bora with regard to the great recession. Its refusal to make any showing of force against the banking sector has made it nearly impossible since to extract what is due the American people in return for the illegal and irresponsible behavior which has cause so much pain, suffering, and death.

Mar 21

Energy: Better Late than Never

Michael Spence over at Project Syndicate has written an interesting piece on the current and past energy policies in the United States. While I often take issue with the Democratic Party and President Obama, the difference between the energy policy pursued by his administration and the policies put forward by the Republicans are quite stark. It’s a shame this couldn’t also be true for Wall Street, Social Security, Medicare, and defense spending, for example.

The Obama administration is now working to initiate a sensible long-term approach to energy, with new fuel-efficiency standards for motor vehicles, investments in technology, energy-efficiency programs for dwellings, and environmentally sound exploration for additional resources. Doing this in the midst of an arduous post-crisis deleveraging process, a stubbornly slow recovery, the process of building a new, more sustainable growth pattern, is harder – politically and economically – than it might otherwise have been, had the US started earlier.

I have written tangentially on this subject in past articles here, here, and here.

Mar 21

FINRA and Wall Street Get Hand Slapped

UnfairDan Solin, who has written several outstanding books on investing, as well as a regular column for the Huffington Post, has authored a piece summarizing a recent court battle surrounding the inherently unfair process by which account holders and employees of retail brokerage houses are forced to arbitrate their disputes rather than seek redress in a court of law.  It doesn’t take a rocket scientist to come to the conclusion that impartial arbitrators, who are almost exclusively remunerated by the same Wall Street entities that are also parties to the disputes before them, are anything but impartial.

Following a former Wells Fargo employee’s pummeling in forced arbitration, the employee appealed in an effort to have the award set aside. A District Court judge found the brokerage attorney’s track record of nefarious success unconvincing, but nonetheless reluctantly affirmed the arbitrators decision. The reason that the judge’s hands were tied, is because the basis for overturning an arbitrator’s decision requires a finding of fraud, corruption, procedural misconduct, or an obvious case of exceeding its authority. In other words, if you lose before an impartial arbitrator in a conflict with a brokerage house or investment bank–which occurs in nearly every case–you are left with little or no recourse in the U.S. courts no matter how unfair the decision. It’s good to be a banker.

The Court noted that the securities industry’s “constant and prolific participation” in these arbitrations gave it “a clear advantage over the individual employee or customer” because the industry knows which arbitrators will favor its position. That fact, coupled with the limited review permitted by the Courts, results in a “… process in which, as in this case, counsel for the bank can remain undefeated 30 or 40 times a year.”

Judge Cogburn was not impressed with this track record, noting: “Now there’s a level playing field.”

You can view the court opinion here.