May 24

The Fiscal Cliff: You Must be this Intransigent to Board this Ride, Let’s Go!

DivingIf you’re like me, you love roller coasters, most notably the incarnations that retain the preliminary long steep climb accompanied by the ominous clickity clack of the chain and track below the car until the pinnacle is reached. At the apex, all is silent, and just as you can see nothing but sky before you and the tiny heads of fellow park visitors hundreds of feet below you, the car proceeds downward at a ridiculous speed sucking the breath from your lungs. It’s exhilarating fun, and generally lasts no more than a minute or two. At this very moment, the United States is scaling hill number one while frantically ensuring that the lap bar has engaged properly. On December 31, 2012, a series of economic events are scheduled to take place that many are referring to as the “fiscal cliff.”

The Bush tax cuts enacted in 2001 and 2003, and extended through 2012 by President Obama in a December 2010 agreement, are set to expire. The expiration would adjust marginal tax rates upward across all income brackets and modestly raise the tax on capital gains–income earned from investments–from 15% to 20%. The expiration will also remove qualified dividends from special tax treatment, and undo a temporary patch to the Alternative Minimum Tax, among other smaller changes. Additionally, as part of the deal to raise the debt ceiling in 2011, Democrats and Republicans agreed to automatic across the board spending cuts of $1.2 trillion over the next ten years. The cuts are part of a sequester agreed to by both parties which will go into effect because the two sides could not agree on an alternative as required by the original pact. While certain mandatory outlays are exempted from the spending reductions, the total amount will be split roughly 50/50 between discretionary and defense spending unless consensus is reached before or sometime shortly after January 1, 2013. The federal unemployment extension and temporary 2% payroll tax reduction would also expire at years end. If Republicans are not willing to move into a position of rationality and responsibility, my position is that we should all buckle up and see where the ride takes us, rather than concede to incoherent demands in order to to avert a greater short term disaster. Continue reading

May 16

What Barack Obama and Mitt Romney’s Investments Say About Them

Obama RomneyBarack Obama and Mitt Romney both filed their Executive Branch Personnel Public Financial Disclosure Reports as required in order to seek the office of the Presidency in 2011. I have previously described the two men as Pragmatist and Opportunist, respectively, and the financial disclosures further buttress my position. Barack Obama’s investment disclosure (Schedule A) is a mere three pages in length, while Mitt Romney’s disclosure runs a staggering eight pages, with an additional four pages of detailed investments managed in tax-sheltered private accounts. Barack Obama’s investments read like the embodiment of the conservative investment strategies championed by Vanguard’s founder John C. Bogle and investment adviser and author Dan Solin, while Mitt Romney’s portfolio appears to be right at home with noted investment televangelist fraud Jim Cramer’s Lightning Round, during which the shyster offers up investment buy or sell recommendations at breakneck pace out of thin air.

Barack Obama’s largest asset is a diversified group of long term and short term treasury obligations. The bonds and notes are generally regarded as risk-free investments delivering modest returns, even more modest in the current low interest rate environment. Mr. Obama’s personal stock holdings are limited to three retirement accounts, all invested in the Vanguard 500 Index Fund. The fund is not actively managed nor speculative. It simply tracks the performance of the S&P 500 Index, nothing tricky or fancy, or creative. Mitt Romney on the other hand holds pages and pages of individual equities, individual corporate bonds, foreign securities and actively managed mutual funds, many of which are managed in so-called blind trusts. Romney does have significant assets in market tracking index funds as well, but he also has upwards of $500,000 in gold, perhaps the most speculative of all possible investments. While the two men offer very similar policies for Wall Street, the two banal baby-kissers could not be more contrasting in their handling of their own personal fortunes.

So, what does this say about the two men? It has been widely reported that President Obama harbors no adulation for Wall Street, but rather coddles and serves it out of a fear of the political consequences of not doing so. Whether Obama has made a poor political calculation in this regard is a subject for another day. However, Obama apparently views the endeavor of those who have chosen “finance” as their career as facile and uncreative, adding little of real value to society. In fact, during a meeting between Obama’s campaign director and Wall Street heavies, the executives pulled no punches, even demanding that the President apologize to Wall Street publicly.

One of the guests raised his hand; he knew how to solve the problem. The president had won plaudits for his speech on race during the last campaign, the guest noted. It was a soaring address that acknowledged white resentment and urged national unity. What if Obama gave a similarly healing speech about class and inequality? What if he urged an end to attacks on the rich? Around the table, some people shook their heads in disbelief.

“Most people in the financial world,” a top Obama donor later told me, “do not understand how most of America feels about them.” But they think they understand how the president’s inner circle feels about them. “This administration has a more contemptuous view of big money and of Wall Street than any administration in 40 years,” the donor said. “And it shows.”

Mitt Romney on the other hand embraces the myth of creative finance and wealth creation wholeheartedly. Even given his advanced age of sixty-five–by age-based investment strategies at least–he is far too heavily invested in individual equities, individual corporate bonds, and active managed mutual funds. Most responsible fee only investment advisers would counsel the GOP candidate to sell off much of his equity stake in lieu of safer fixed income investments. Mitt Romney however will apparently hear none of that. His investments evidence a heartfelt belief  in the soundness of the American financial system directly in line with his political rhetoric and hyperbole.

Most of us spend decades believing the hype surrounding individual stocks and pimply-faced mutual fund managers fresh from Harvard Business School notwithstanding the mountain of empirical data to the contrary. We call our brokers and financial advisers seeking the next hot tip. After all, they know what they’re doing, right? Study after study reports the ineffectiveness of actively managed mutual funds and investing upon the advice of brokers and commissioned advisers. It is not until we actually sit down and research the subject, or remove our head from Wall Street’s all-encompassing allegory surrounding its brilliance for long enough to pay close attention to someone who actually knows what he or she is talking about, that we adjust our strategy. President Obama, a self described pragmatist, must have undertaken this analysis years ago. He understands that no matter how rosy the claims or how flashy the public relations campaign, that those peddling financial stock-picking advice have a downright pitiful track record. He also understands that to truly reap extraordinary gains from the stock market over time, you must either risk losing your entire fortune on risky bets, or you must be privy to inside and often illegal information. Neither of the preceding two courses of action is particularly appealing to an individual aspiring to the highest office in the land, so hum drum practicality it has been for the Commander in Chief.

President Obama’s changeable challenger is the consummate opportunist. He believes that actively managed funds offer superior returns to stock index funds and bond index funds. He believes that those Wall Street boys clad in $5,000 suits while extracting 2% or more of the wealth of their clients in return for poor advice actually enjoy some level of expertise. It is not all that surprising in that Romney himself spent much of his career surrounded by folks who made their livings bilking people of onerous fees by touting “exclusive” yet utterly perfunctory “proprietary analysis” while poorly managing their investments. The crowd in which Romney moves honestly believes its own claims of brilliance. In contrast to the con-man who knows precisely how valueless his products are, the Romney’s of the world believe their advice and knowledge has some real value. They are, in a essence, delusional borderline sociopaths. Some have opined that Romney’s portfolio is overly conservative and carefully crafted to avoid any political pitfalls. This analysis only makes sense if the author continues to himself or herself subscribe to the long-since-discredited strategy of actively managing investments. Even in 2012, those who advocate for a strategy based upon empirical data and sound experiential reports continue to swim upstream. A testament to the depth and reach of the myth of the stock-picker.

I believe that the duo’s investments speak volumes concerning each man’s approach to governance. Obama almost certainly charges his staff and advisers with the responsibility of researching each and every social issue or economic policy question inside, up, out, and down, leaving no stone unturned. It is in his nature to do so. He is then presented with each and every data set and potential effect prior to his coming to a practical and pragmatic conclusion. That very conclusion is then simmered on low heat through a Bearnaise sauce of political consequences and an ultimate decision is reached. This is precisely how Obama handled the gay marriage debate. He understands that practically speaking gay marriage is of no consequence to him, his marriage, or the orderly functioning of society or government. He has no moral objections to the idea. He has said as much in the past. However, once placed upon the hot stove of electoral politics, he made a poor decision, and his statements on the issue during the 2008 campaign were overly-complicated, forced, and disingenuous. This is almost certainly how he has approached the closing of Guantanamo Bay Prison since being elected, among a whole host of other issues and questions that have but one clear and obvious practical solution.

Mr. Romney in part still believes in  making “gut” decisions. It would be unfair to cast him among the same ilk as George W. Bush and his nearly unexpurgated lack of reliance on data and practical effect, as Romney can indeed be a thoughtful and realistic man. However, having no occasion in his life to doubt the efficacy of efficient markets, Mr. Romney is almost certain to believe much of what he spews on the campaign trail. I am unquestionably confident that he believes that tax cuts spur economic growth and lead to job creation in the face of reams of data to the contrary. He almost assuredly believes that  military power can be used to solve centuries old civil and religious conflicts and restore peace. He without question holds the position that income inequality will not eventually erode society as a whole. If he is elected it is likely that Mr. Romney will make many poor decisions based upon an honest belief that he is correct notwithstanding opposing information. However, he will also make his share of practical decisions. The question is which of the two categories will be out of balance.

In 2012 we do not have to chose between an ideologue and a pragmatist, or a true believer and a statistician–assuming a vote for either of the two mega-parties. Neither of the major candidates ultimately believes in anything strongly enough to be swayed by ideology or morality alone. Each man can be swayed from a practical common sense solution by politics, so both men are inherently dangerous. One need only look to Obama’s treatment of Wall Street and Romney’s continual conversion on policy for evidence. It is ultimately irrelevant how thoughtful and pragmatic a leader may be at his or her core if practical considerations have no place at the policy table. In analyzing the two men’s investments, it is clear that one man is a practical sound decision-maker at his essence, and one man is practical yet inclined to surrender to his belief in the advantage of risk and reward. Whether it is more desirable for a leader to make poor decisions based upon an honest yet misguided belief in the anticipated results, or to make poor decisions based upon a political calculation in the face of a deep understanding of information to the contrary is a choice that each of you will have to make on your own. I however would like a third choice.

May 14

Not Your Grandfather’s Government – The Public Sector Needs You

Unless you live in California, you may not have heard the announcement today that the state is currently facing a $16 billion shortfall in revenues for the next fiscal year. Tax revenues fell short of rosy politically motivated estimates, and spending has increased above expectations. The budget deadline is in June, and several of the Governor’s proposals to cut spending have been thwarted by fellow Democrats in the state legislature, while proposals to increase taxes have been lampooned by Republicans and money flowing in from right wing groups. A similar story is playing out across this great land of ours. The failure of the people to accept tax increases, corporate defiance to invest capital, government’s rejection of job training efforts, and the petulant reluctance of the Congress to step in and buoy state coffers is causing massive layoffs and reductions in public services.

Unlike the New Deal programs that followed the Great Depression, during this period of extreme economic trauma, both the federal government and the states have instead reacted to shrinking tax revenues and mass unemployment by shrinking government programs and firing workers. At the federal level, the appetite for renewed borrowing to fund programs, assist states, and help the middle class and the poor is minuscule. At the state level, due to requirements of budgetary balance, massive layoffs have accompanied drastic cuts in public services. Parks have closed. Hospitals have closed. Transportation, improvement, and infrastructure projects have been canceled altogether or have been substituted with patchwork fixes and band-aid repairs. Public sentiment is perceived by Washington to favor deep cuts and curtailments in borrowing and spending. Not only is Washington wrong on the policy, it is wrong on its taking of the pulse of Americans.

It was recently revealed that another 15,000 public sector jobs were lost in April 2012. Since the depression began in 2008, the public sector has lost–conservatively–more than 600,000 jobs. 600,000 folks who once provided you with the services that you took for granted as a birthright. People who educated your children, removed your trash, maintained your public spaces, filed your deed transfers, inspected your homes, monitored clean air and clean water standards, and on and on. Democrats and Republicans each favor varying degrees of continued austerity, with Democrats favoring small tax increases on the wealthy and corporations, and fewer cuts to government programs, and Republicans favoring huge tax cuts for the wealthy and corporations, with massive cuts to spending, defense outlays left untouched.

To listen to stump speeches and congressional soliloquies, one might come away with the impression that the public favors some mixture of the two approaches, with wide agreement that taxes should be kept in check and government spending cuts imperative. The data suggests that neither side is properly reflecting the position of the vast majority of Americans. For example, 56% of Americans believe that higher taxes and increased spending is needed to remedy our faltering economy. 68% of Americans believe that the current tax system benefits the wealthy at the expense of the rest of us, and a majority of Americans would be willing to pay more taxes to maintain Social Security and Medicare, as well as government programs that assist the poor.

As stimulus monies run dry, it is nearly impossible to open a local paper anywhere in the nation and not find a story or two concerning budget shortfalls and potential layoffs. School Board meetings far and wide have become contentious events. Property owners have been asked to pay more to support local schools, yet staff reductions and benefit give-backs remain unavoidable. Teachers are slated to be laid off, municipal services are being scaled back, and programs that offer help to young children and the poor are being eliminated altogether. State programs to offer incentives to people to install energy reducing technologies are being dispensed with, and along with the incentives, the jobs of those who install solar panels, geothermal systems, and energy efficient building materials and upgrades are lost. With each unnecessary cut, the ripple effects are felt beyond the public sector.

With budget cuts to education, we are destroying our own future. Enrollment is down at some of our most prestigious public university systems in response to higher out-of-pocket costs and staffing restrictions. At a time when technical education is becoming the very key to obtaining a good paying job, we are making it increasingly difficult to obtain, even for those who have excelled academically. This is a recipe for disaster. Last year alone, the federal government cut more than $5 billion in funding from education programs, the bulk of which was slated to pay for state programs and direct state grants. As the states struggle to balance budgets, education becomes a large juicy target. New York State alone will be eliminating more than 5,000 teaching positions, even after increasing tax levies.

As federal money fails to reach states, so too does state money fail to reach localities. These localities are forced to cut back on services such as fire and rescue, as well as police. Local government offices cut back on building inspections, shrink hours of operation, close public libraries, and even darken street lights. The Federal Reserve Bank of San Francisco, hardly an arm of the socialist movement, has predicted lasting consequences should the economy remain stagnant and federal aid to states remain damned. Because state governments are constrained by a requirement to balance their budgets, revenue shortfalls require offsetting cuts and debt offerings. Many states are already burdened by high debt loads and are loathed to increase bond offerings for fears of credit downgrades that increase borrowing costs. The states are left with the option of cutting spending and increasing taxes. Increasing taxes–while necessary–is politically unappealing during an economic recession, therefore most states opt for spending and services cuts.

The only entity available to step in and curtail the bloodletting of state and municipal jobs and cuts to public services is the federal government. Unfortunately, President Obama has not been willing to expend any political capital on efforts to assist the states, and Republicans are hell bent on ensuring that the economic emergency continue through election day. This situation creates immeasurable suffering in local communities. Taxpayers are asked to bear the burden of funding depleted schools and local services at increasingly unsustainable levels. Many people have lost their homes over an inability to meet property tax and other municipal burdens. Allowing this to continue during a period of high unemployment is particularly devastating, and sets in motion a cavalcade of events that only drags the local economy down further.

It is time for the federal government to step up and offer assistance to states and localities in order to maintain a basic level of public services and avert further layoffs of public employees. While the private sector continues to report modest job creation in 2012, the public sector continues to lose jobs. Lost in the debate over funding of government and government services is the fact that it is the public sector that allows the private sector to flourish, and it has done so since WWII. The public sector helps educate its employees, it maintains the bridges and roads on which the private sector transports its goods and personnel, it maintains the safety of air travel so that the private sector may travel to meetings and business events, it oversees the ports through which the private sector exports its goods and imports its supplies, it manages the tax boards and the IRS, it provides fire, police, and ambulance services to private sector business and its employees, it pumps clean water in and carries sewage and waste water out of private sector facilities, it has ensured efficient markets and regulation that has allowed private sector American business to attract capital from around the globe and enjoy some of the largest stock trading premiums in the modern world, it administers the courts through which the private sector settles its disputes, it handles patents, copyrights, and trademarks in order to allow private business to profit from its own creative product free of exploitation and theft. Essentially, without a robust and functional public sector, the United States of America and its business and financial dominance would not exist.

It is time to provide the public sector with the short term assistance it needs in order to ensure our collective long term survival. Teachers and public employees are not the reason that the government is broke–wage inequality, poor and dis-courageous governance, and corporate greed is. Please join us in focusing the anger, vitriol, and more importantly the constructive solutions, on those actually to blame for the current circumstances of state and municipal budgets. Those who provide us with the invaluable services that distinguish a modern functional society from one of chaos and dysfunction in return for substandard wages and a secure retirement are not the enemy. Don’t allow yourself to be convinced otherwise.

May 04

Occupy Debate: Let’s Meet in the Middle

OccupyIt is certainly a rare situation where I find myself in the middle on an issue, nearly inconceivable in questions of politics. However, in a recent debate I found myself square on the fence. In competing articles this past week, Josh Harkinson of Mother Jones and Max Berger of Occupy Wall Street penned pieces debating the various positives and negatives of the Occupy movement transitioning itself into a movement focused on electoral politics, much like the right wing Tea Party. Harkinson, who has reported on the Occupy movement for the better part of a year, opined that Occupy’s stated goal: “the toppling of a corrupt political system under the sheer weight of its own repression,” could not be accomplished unless the movement makes a concerted effort shift its efforts and attempt to influence individual political races across the country. Berger on the other hand took a more balanced approach, advocating for continued mass pressure upon the political structures in the United States as it challenges efforts to transform it into another MoveOn.org, while also paying close attention to electoral politics. Harkinson cites previous left-leaning electoral successes such as Lyndon Johnson and his signing of civil rights legislation as examples of electoral victories.

Harkinson takes some umbrage with the Occupy movement and its posture toward an electoral-centric approach.

Occupy activists, many of whom don’t have a lot of experience with politics, seem to think that MoveOn is taking its orders from the White House. In reality, MoveOn polls its 7 million members on which candidates to support, and it often runs campaigns to unseat Blue Dog Democrats when it thinks a more progressive candidate has a shot at winning. But whatever. What Occupy really ought to do if it intends to live on is plunge directly into electoral politics on the local, state, and congressional level. It ought to co-opt the Democratic Party.

Though Occupy could support many sympathetic candidates in Democratic primaries, some pundits haven’t pushed the idea because they worry about a tea party effect on the left, with liberal Democrats losing to Republicans in the general election. Yet other than a third-party bid, with its potential for another Nader debacle, this may be the only way to command Washington’s attention. Many occupiers believe it’s futile, however, because they’d never win against an avalanche of unregulated corporate political spending.

Berger articulates Occupy’s reticence to simply sign on as another left-leaning non-profit.

If Occupy tried to start a left Tea Party, we would be following in the footsteps of several progressive movement efforts that came up short. Howard Dean’s presidential campaign turned into Democracy for America to reclaim the “Democratic wing of the Democratic Party,” the Progressive Change Campaign Committee explicitly references the DCCC, and Rebuild the Dream originally billed itself as the progressive Tea Party. I have worked for each of these organizations and have lots of respect for their work. But unfortunately, none of these projects, despite their many successes, have managed to mount a serious national effort to take out bad Democrats and replace them with good ones. They are constrained by the lack of a grassroots base in many congressional districts and big donors reluctance to fund challenges to Democrats. Even big, collaborative efforts to take out bad Democrats have a relatively poor record (See Sheyman, Ilya; Halter, Bill; or Lamont, Ned).

While I am sympathetic to both positions, and I do believe both men share the same ultimate goal, I believe the answer lies somewhere in between. Harkinson, who too his credit has been one of the few reporters covering the Occupy movement in-depth, misses the ultimate binding strength of the Occupy movement: its members don’t desire to be part of the establishment as is, and fail to see a means of change from within. Rather they view extraordinary pressure from without as a more formidable force for change. Even as he cites Lyndon Johnson as an electoral success, he must also admit that outside pressures exerted upon the Congress and the presidency moved civil rights legislation forward. Johnson himself had made no grand promises as vice president or as a candidate for president in 1964. Much like Franklin Roosevelt so famously called upon those in the progressive movement to take to the streets and rally the masses if the movement sought to see its agenda signed into law. While many of the immediate economic and relief measures passed during the first tranche of the New Deal passed easily, none of the second tranche of New Deal programs–many of which faced opposition from the business community and conservative Democrats–would have been possible without the robust pressure thrust upon Congress by the public. Much of which was drummed up through grass-roots organizing rather than organized efforts to elect individual candidates. Continue reading

May 02

Apologize or Else

MarketApparently Wall Street and the wealthy generally are so incensed with President Obama that they have demanded a national apology in the form of a televised speech for what they regard as the unfair demonization of the rich by the administration. The demand  reportedly took place during a New York  meeting between Obama campaign manager Jim Messina and Wall Street political contributors.

For the next hour, the donors relayed to Messina what their friends had been saying. They felt unfairly demonized for being wealthy. They felt scapegoated for the recession…

One of the guests raised his hand; he knew how to solve the problem. The president had won plaudits for his speech on race during the last campaign, the guest noted. It was a soaring address that acknowledged white resentment and urged national unity. What if Obama gave a similarly healing speech about class and inequality? What if he urged an end to attacks on the rich? Around the table, some people shook their heads in disbelief….

“This administration has a more contemptuous view of big money and of Wall Street than any administration in 40 years,” [one] donor said. “And it shows.”

Much has been written about the vitriol felt by the wealthy and Wall Street toward Obama. It has been opined that the explanation for the hatred is rooted in his rhetoric concerning the wealthy and their need to pay their fair share of taxes. Obama has indeed been fond of touting the virtues of bottom-up economic growth rather than trickle-down. Another theory is that Wall Street is incensed by Obama’s attempts to promulgate new regulation following the financial collapse brought about by the very same folks now demanding an apology. The most simple explanation recently offered for the consternation of Obama claims simply that Wall Street insiders are nothing more than spoiled brats who whine when any barrier is placed between them and stealing the hard-earned money of every day Americans.

This episode if particularly sad because the current administration has done nothing but accommodate Wall Street at every turn. It refused to break up any of the large banks once it became clear that many in the group were no longer financially solvent. It refused to offer homeowners any real relief if any share of that relief would come from the hide of Wall Street. It capitulated to Wall Street in maintaining extraordinary capital inflows of taxpayer funds into the large banks for what has now been nearly four years. It has negotiated widespread immunity from civil action on behalf of Wall Street with all but one of the states’ Attorneys General in exchange for chump change. It has paid only lip service to any real attempt to reduce the principal owed on tens of millions of underwater homes. The list of charity provided to Wall Street is indeed lengthy and diffuse.

Back in April of 2009, Obama famously said that “My administration is the only thing between you and the pitchforks.”  He could not have been more accurate in his description. Yet, at this watershed moment, when it should have been abundantly clear to Obama that no amount of largess would satisfy them, he chose to play the role of referee rather than to pick up the ball and dunk it on behalf of the American people. The period since has been littered with obfuscation and outright malice toward Obama from Wall Street. Once it became obvious to Wall Street that Obama was going to pursue a course of mild regulation, wealthy power brokers all but cast aside any plans they had to support the President’s reelection efforts. This has borne itself out, as Wall Street has donated exponentially more money to Romney than to Obama. Wall Street hasn’t maintained its status-quo methodology of hedging its bets, rather it has gone all-in on the Republican candidate. As recently as 2008, Wall Street was goo goo for Obama, donating nearly 50% more to him than rival John McCain. This time around anger has translated to a windfall for Romney.

And in this election cycle, Wall Streeters didn’t have to look far for a more natural fit. Mitt Romney founded a leading private-equity firm, Bain Capital, and he promised to repeal Dodd-Frank altogether. By late fall, invitations to some of Romney’s New York fund-raisers were carrying the names of dozens of financial executives, many of whom knew Romney personally or had closed deals with him during his years at Bain. Some Romney donors started asking their Obama-supporting colleagues to Romney events just to tweak them.

Wall Street donors were also emerging as the financial engine behind Restore Our Future, a super PAC founded by former Romney aides. Even as Obama outpaced Romney in traditional fund-raising, Restore Our Future, exploiting the Supreme Court’s Citizens United decision and subsequent rulings and regulations, was bringing in millions of dollars in unlimited checks from hedge-fund and private-equity magnates.

By the end of February, the group had raised more than $43 million, almost half of it from Wall Street — more money than Obama raised from the industry during the entire 2008 campaign. Paul Tudor Jones was among the group’s donors, cutting Restore Our Future a $200,000 check in December. At the same time, a super PAC founded by former Obama aides, Priorities USA Action, was struggling, raising less than $5 million, much of it from Hollywood and unions. The Democratic group faced a particularly cold reception among Wall Street Democrats, some of whom feared any money they gave would be used to finance attacks on their own industry.

With the passage of the 850 page Dodd-Frank Act and the thousands of pages of analysis required by the act, Wall Street abandoned Obama entirely.

“I think it’s an unfixable relationship,” one Democrat involved in planning the March 1 fund-raisers told me this spring. “They hate him. They really, really do. They hate all the Democrats.”

Notwithstanding the meager reforms included in the legislation, Wall Street viewed it as a direct assault to their bow, and has fought back by bankrolling conservative candidates. Ultimately, the reform serves in some measure to prevent Wall Street from imploding itself or the larger economy. However, when a sector of the economy has an overt guarantee from the government to be rescued should it become unstable, no regulation is seen as responsible or necessary.

Obama does have the right instincts. It has been widely reported that he and his inner circle have not been willing to coddle and cavort with business power brokers as the Clinton’s had. He apparently is uncomfortable in small fundraising groups of Wall Street executives. He’s right to feel as he does. Wall Street and business executives don’t need his help. They don’t need him at all, they want nothing more than guarantees that he won’t overly restrict their efforts to continue to extract wealth from the economy for themselves. However, beginning in 2009 and continuing to this day, he has made poor decisions regarding which side to support in the war between banks and Wall Street and the American people. His rhetoric falls flat on many as it has become obvious that it will not be backed-up by policy initiatives. The administration has continued to funnel trillions of dollars though Wall Street in hopes that some measure of the riches would find its way to Main Street. It hasn’t happened.

Yet Wall Street despises him nonetheless. Had the President made the decision to allow several of the large banks to be broken apart, forced lenders to cram-down mortgage debt, and prosecuted those responsible for much of the fraud that caused the collapse, Wall Street would rightfully abhor him, but he would have the support of the people. In choosing  to capitulate to Wall Street from the very beginning, he has the excited support of neither.While it is unlikely that Obama will deliver a national save-the-rich speech anytime soon, he is almost certain to strike some deal with Wall Street that calls off the dogs.

May 01

Pragmatist or Opportunist?

Obama-RomneyEssentially the voters in 2012 will have a very simple choice to make, whether to elect a political pragmatist or a political opportunist. On the one side is President Barack Obama, who by all accounts holds very few, if any, ideological convictions. In fairness, he does lean just left of center, but rather than having a belief system rooted in progressive ideals, it appears that his belief system has been fashioned by his personal experiences and educational training alone. He is a no nonsense analytical thinker. He looks plainly at a situation and determines what can be accomplished. He then moves further away from his original position expecting that his opponents will do likewise, and embraces a series of compromises until some agreement is reached, however distant from his original position. While this jumping-off point normally lends itself to practical common sense solutions, it has failed to hold true in his case. However polarized the other side, he is determined to come away with something. Mitt Romney on the other hand also appears to lack any foundational ideology, while leaning marginally right. His early political career appears to have been fashioned by his experience at the feet of his father, the one time chief of American Motors and Governor of Michigan. His father is widely regarded as a right-leaning moderate. He has spent much of his adult life surrounded by business elites, and will advocate on their behalf so long as in doing so he treads upon the path of least resistance. He too seeks out practical solutions to the problem at hand, but he allows the political winds rather than any firmly held position to determine what is in fact practical. So, the question is whether it is better to elect an individual who refuses to bend when the longer term practical political consequences may be deleterious, or someone who will bend facilely.

Looking at some examples from Obama’s first term we can see the limits of political pragmatism and general rigidity. The most glaring example is his reaction to the financial crisis. His policy decisions following inauguration through today are generally accepted by his progressive base, as well as most rank and file Democrats, as being far too friendly to Wall Street and the financial sector generally. Much time and effort has been spent ensuring the solvency of the banking sector, while little or no help has been offered to those most affected by the crisis. Experts have opined that it is precisely the President’s pragmatic rigidity that has contributed to his failure to move toward a more progressive fair approach in addressing the depression. Interestingly, while disappointed, neither the Democratic base or independents have been willing to take Obama to task over his  continued willingness to assist Wall Street. Even while Obama has been reported to have a great degree of contempt for Wall Street and apparently views the fruits of its labor generally valueless, he has bent over backwards to help it. Even when pushed by the public and Congress to pass some sort of financial reform package, the result was an impotent regulatory regime in the name of Dodd-Frank, and facially attractive but only marginally  protective credit card and other consumer protection reforms. Yet Wall Street still views him with extreme and venomous derision. Continue reading

Apr 30

IMF Chief Calls for Mortgage Principle Forgiveness in U.S.

International Monetary Fund Chief Christine Legarde has added her voice to the growing chorus of economists not bought and and paid for by the banking sector in calling for the United States to begin to reduce the principal on underwater mortgages purchased during the fraudulent run-up in housing prices between 2002 and 2008. She recommends doing so in order to stimulate growth across the globe, but doing so would also significantly impact the economy at home.

She called upon Fannie Mae and Freddie Mac, both of which are overseen by the Federal Housing Finance Agency, to reduce the principal owed on homes, whether the homeowner is in arrears on payments or simply underwater and current in their obligations. Unfortunately, FHFA boss Edward DeMarco has steadfastly maintained that he will not support policies that allow for widespread mortgage write-downs. Mr. DeMarco was to make a decision by April 30, 2012 whether or not he would move forward on a plan under Obama’s HAMP program to allow principal reductions on properties backed by Fannie Mae and Freddie Mac where the mortgage holder is seriously delinquent. Unfortunately Mr. DeMarco recently announced that he would ignore the deadline, imposed by Congress, and continue to study the problem.

The HAMP program reductions that are under consideration by Mr. DeMarco would only affect about 10% of all underwater mortgages backed by Fannie Mae and Freddie Mac because homeowners who are underwater but continuing to make timely payments are not eligible for reductions. Mr. DeMarco has said in the past that he fears mass purposeful mortgage delinquencies if the program is permitted to move forward, a prospect that has not been supported by evidence. The likelihood of damaging ones credit rating and potentially losing a home in exchange for a principal reduction that may or may not come at all has not convinced any significant number of borrowers to stop making their mortgage payments.

The Obama administration has been reported as putting pressure on Mr. DeMarco to make a decision allowing the contemplated principal reductions to move forward, but I am dubious as to how extraordinary the insistence has truly been from the White House. The administration has offered a deluge of failed and ill-conceived fixes to the mortgage mess since 2008, none of which truly aimed at forcing the banks and Fannie Mae and Freddie Mac to allow principal write-downs of underwater properties. A wisely constructed plan by the FHFA and the administration could easily limit any reductions to those homes actually purchased during the fraudulent run-up in home prices, and those homes who value exceeds that of the original mortgage, excluding refinancing undertaken to make additional unnecessary purchases. Configuring a program to address this problem and stimulate the economy would not be a herculean task.

It is wholly objectionable that the already incommensurate principal reductions proposed by Congress and the President are being insubordinately rejected. However, it should come as no surprise to anyone given the administration’s posture concerning this problem from the very beginning. Setting aside the earlier mentioned waterfall of half-assed programs previously concocted, the furthest the President has been willing to travel down the write-down road has been to propose federally assisted and voluntary refinancing of a small number of homes under lower interest rates. Not a single legitimate attempt has been made to reduce the principal of homes currently in repayment and dramatically underwater. Offering a homeowner the ability to pay twice the value of a home under a lower interest rate is no program at all. It is an insult to each American who had their tax dollars spent drowning large banks and mortgage institutions in liquidity in order to ensure their solvency.

So, Mr. DeMarco, no one is surprised by your decision. Further, only a fool should be surprised by the administration’s lack of movement on this issue. You’re a homeowner, not a bank, and as such, you don’t matter. The most logical course of action is to walk away from any home that is seriously underwater, because help is not coming.

Christine Legarde was right to call upon the American government to offer significant principal reductions to underwater homeowners. She is right because it will boost the American economy, setting free cash to be spent consuming goods and services and alleviating business and personal uncertainty. She is right because it will boost the world economy. She is right because it represents remuneration for the fraud perpetrated upon the people. She is right, quite simply, because it is the moral thing to do.

Apr 28

Neither Side is being Reasonable on Taxes

Ryan - ObamaAs the election draws near and the competing interpretations of deficit bean counting becomes louder and louder, taxes, specifically income taxes, will be occupying a more pronounced amount of the political space. On the one side, Republicans, who oppose raising taxes on anyone for any reason, and who have been so dreadfully frightened by Grover Norquist and his ridiculous tax pledge that its reasonable members don’t dare speak honestly. On the other side–because we only have two sides after all–are the Democrats, who oppose raising taxes on anyone making less than $250,000. How the Democrats arrived at that number has been the subject of debate, but the party has sufficiently pigeon-holed itself on that number, so it is just as if Moses himself carried it down the Capitol steps and announced it as God’s will. Neither side is correct, and neither side is moving.

The Republican position is uniquely barbaric. Assuming no legislative change from status-quo, the top wage earners in the United States in 2012 will pay a top rate of 35% on incomes over $388,350 and 33% on incomes roughly over $218,000. Comparatively, most European nations carry a top tax rate of over 40%, and significant sales taxes and luxury taxes. Germany has a top income tax rate of 42%, and is currently the only thing standing between Europe and total economic destruction, rightly or wrongly. The Republicans are demanding not only that the top tax rate not be raised, but rather that it and other taxes affecting top earners be lowered dramatically, to 25%. Each of the lower marginal tax brackets would be lowered to 10%. They offer no compromise on this position.

Democrats on the other hand are standing pat on the position that taxes should be raised to pre-Bush levels for top earners of as high as 39.6%, and proposing that marginal tax rates for lower income earners not be changed from current levels for families earning less than $250,000 and individuals earning less that $200,000. There is also a surtax on unearned income at the higher income levels of 3.8%. Further, any individual earning more than $1 million would pay a minimum income tax rate of 30%.

Setting aside any debate concerning the United States’ arcane corporate tax code, neither party is being reasonable. First, the Republican plan leaves the government $6.2 trillion short on revenues and would necessarily lead to drastic cuts in discretionary spending, be it from programs boosted by Democrats, or from Defense. Second, the Democratic proposal, although much more equitable, also leaves in place the irresponsible Bush tax cuts for lower wage earners. It isn’t smart economics or smart politics to propose tax changes that affect only a small group of taxpayers. Moreover, Obama and the Democrats had their chance to avoid this fight altogether in late 2010. With the Bush tax cuts set to expire, they instead chose to negotiate with the Congress for a two-year extension. That decision was neither politically smart or economically responsible. With deficts almost certainly to be a more resounding issue during the 2012 campaign than tax rates, the Democrats, primarily out of fear, intentionally exacerbated the deficit by signing the 2010 agreement, playing directly into the Republicans’ wheelhouse. Allowing the Bush tax cuts to expire for everyone would have been a much easier political sell for the President and Democrats if they had painted the Republicans as unreasonable and focused on the shared sacrifice inherent in allowing a return to Clinton era rates. Instead, Democrats must fight the battle battle again during an election year. Continue reading

Apr 25

Obama and Department of Education Outsourcing Student Loan Servicing

On April 15, 2012 I received a letter in the mail from EdFinancial, a so called “nonprofit” financial services company, informing me that it would be taking over the serving of my William D. Ford direct consolidation loan, effective April 5, 2012. First and most obviously, the letter was postmarked seven days after the effective date. Most upsetting, the notice arrived just three days prior to my payment being due. I received no contact from the Department of Education, who had been servicing my loans since I graduated from Law School. So, I was left with only a small window of time in order to determine on my own if the letter was legitimate, and then register on the new website and adjust my automatic payments accordingly.

The federal government through the Department of Education has been has been transferring large tranches of federal student loans to new loan-servicing companies for some time now. It has plans to continue to do so through the end of 2012 and beyond.

As our federally-owned loan portfolio continues to grow, we are ready to move to the next step in ensuring an efficient and effective multi-servicer, borrower-centric approach to servicing.  We will further expand our federal loan servicer team through contracts awarded under the HCERA/SAFRA Not-For-Profit (NFP) Servicer Program solicitation.  This solicitation offered NFP entities the opportunity to submit proposals individually or in teams for servicing borrower accounts on our behalf.  Whether individual or team award, our customers will know and face one servicer.  The Department will annually measure each servicer’s performance in the areas of borrower satisfaction and default management and use the results to assign additional volume when applicable.

I am left only to assume that not directly informing borrowers in advance that hundreds of billions of dollars in student debt will be transferred to private entities is an indispensable element of this new “borrower-centric” approach. I also assume that not informing me in a timely fashion of the transfer carries no penalty. I should say loudly that I was very happy with the past service provided by the Department of Education and found its staff to be knowledgeable, helpful, and responsive. Over the years I have had several questions and need for assistance, and each request was handled professionally. I have no doubt that the level of service provided previously will not be duplicated by the private entities paying lower wages and benefits, and providing no job security to its collection agents and staff.

The change was pushed by several nonprofit student loan corporations and their trade groups, including the Education Finance Council, during the health care debate in 2009 and 2010. The rule change was hidden away nicely as part of legislation passed concurrently with the Affordable Care Act. As has been true often during Obama’s tenure, an idea first floated to enable common sense reform, has been bastardized by moneyed interests. The motivation for the law was primarily to allow the government to break from guaranteeing loans offered through banks and credit unions and to begin lending directly to the public. The change made sense, and it has saved the federal government from having to pay fees to the large banks to originate and service the loans. It has also meant that the federal government would be forced into servicing a larger number of loans. However, the apparently influential nonprofit collection servicing business groups won a provision which guaranteed that its members would be granted the rights to service the loans.

As a consequence of the right hand helping while the left hand pummels, many borrowers have suffered problems during the transition. Many borrowers’ payments have been adjusted upwards or downwards without explanation. The vast majority of these same borrowers have since provided the new servicer with the requested information needed to correct the issue, but have not found a resolution. In my case I was simply notified in an unprofessional and untimely manner, although I am certain that additional problems will arise in the future.

I have some initial questions for the Department of Education. For example, how will loan forgiveness procedures be handled? Who will make decisions regarding public service loan forgiveness? How will borrowers’ payments be tracked for purposes of forgiving loan balances once the loans become eligible under the 25 or 20 year provisions? Are we to trust these private companies to keep accurate records and base decisions on government policies and interpret those policies accurately? What new collection rights, if any, will the servicers enjoy that the federal government did not? Will there be an oversight board set up to handle complaints from borrowers when these servicers ultimately engage in fraudulent behavior? Who will punish these entities if they begin to intimidate borrowers? At least six of the servicers that Uncle Sam has negoitiated these no-bid contracts with with have been involved in scandals in the past. How are we borrowers to have any confidence in this process?

The fact of the matter is that this type of government outsourcing never functions as planned. Just ask anyone who has run afoul of parking regulations in Chicago, or the folks who were recently renumerated for fraudulent fines and penalties paid to private operators of toll roads in California. This loan servicing outsourcing was a terrible idea and it will have terrible consequences. Unfortunately, it will be nearly impossible to unwind it.

It is a despairing situation because the President, I believe, had no intention of placing student borrowers into a precarious situation. In attempts to streamline the process he simply traveled down the path of least resistance, likely believing that the servicers’ nonprofit status would in some way shield borrowers from the type or predatory behavior that they had been subjected to by the large banks and private collection companies. In return, he was able to carve out a change that removed billions in fees from the large banks as the government became a direct lender to students. As I write this, the President is traveling around the country attempting to rally support for an extension of lower interest rates for student loan borrowers, and I believe he intimately understands the harm that will be caused by failure. However, outsourcing nearly a trillion dollars in student loan debt to ill-trained, ill-informed, ill-motivated private entities was a poor decision, and one that will likely adversely affect borrowers for decades.

Apr 18

Obama attempts to Overcome Institutional Insolence on Oil Prices?

Yesterday President Obama stood at the White House with Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler, Treasury Secretary Timothy Geithner, Attorney General Eric Holder, Federal Trade Commission (FTC) Chairman Jon Leibowitz, and proclaimed that he will be putting “more cops on the beat” to investigate Wall Street oil price speculation and potential wrongdoing. I have written on this subject before here, here, and here. While I have little confidence that anything will come of this third call by the President for the Department of Justice, the FBI, and the CFTC to investigate oil futures speculation and other speculation in the commodity derivatives markets, he is at least taking his act public this time.

“We can’t afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage, and driving prices higher, only to flip the oil for a quick profit,”

Many argue that the President can not do much at all to influence oil prices. Many simply buy the Wall Street rhetoric hook, line and sinker, and even go so far as to turn sheer conjecture into fancy charts in order to confuse the public. I disagree. First, there is no greater motivator than personal freedom, and under current law Eric Holder can punish those found to have run afoul of the law by sending them to federal prison. Moreover, while the fines currently permitted are small change, the embarrassment that would accompany fines has consequences. I do not have any explanation for the extraordinary impotence and insolence at the Department of Justice under Eric Holder. The entire soap opera could just as easily be an elaborate act wherein the President calls for investigations of this thing or the other thing, and subsequently sends Eric Holder privately on his way with instructions to do nothing.

I find it extraordinarily difficult to believe that if Eric Holder made the decision to call in the FBI and begin interviewing the big Wall Street players in the commodity futures derivatives markets and put a few of them in prison, that the oil prices wouldn’t drop in an instant. I envision FBI agents and federal regulators walking through hallways at Goldman Sachs, owner of the Goldman Sachs Gold Index, and other large firms carrying lawfully issued subpoenas and search warrants. I have a hunch that some of the more egregious activities would stop immediately if people realized they might actually be sent to prison. Exxon Mobil, the Saudi Oil Minister, among others, are on record as believing that the current price of oil has no basis in the realities of supply and demand nor the potential disruption in delivery that could ensue following a conflict with Iran. Holder’s behavior with regard to oil futures speculation is not dissimilar from his approach to both the larger mortgage and financial instrument fraud which caused the recession, and his utter infecundity with regard to prosecuting those responsible for the BP oil spill. It is as if the entire Department of Justice loathes prosecuting anyone, for anything, at any time.

What is particularly troublesome about Obama’s footing on oil prices is that it is not Republicans who are obfuscating efforts to initiate investigations, make arrests, and prosecute those responsible. It is his own administration and administration officials who stand in his way. It is cerytainly true that Republicans, Mitch McConnell in particular that are placing the blame at Obama’s feet, but the President has the tools to demonstrate through concrete actions that he takes Wall Street fraud and price manipulation seriously. One man, let alone the President of the United States, can alone control the world price of oil, but one man can use the tools available to him to take action. Some time ago CBS’s 60 Minutes ran a piece in which it interviewed the chief prosecutor at the Department of Justice concerning the lack of criminal prosecutions stemming from the financial collapse. His response was a contemptuous “just wait.” Well, the American people have been patiently waiting for nearly four years for the administration to show that it will prosecute wrongdoing perpetrated by the golden boys of Wall Street. My guess is that the wait will continue.

Ian Masters interviewed Michael Greenberger, the former Director of Trading and Markets at the Commodity Futures Trading Commission, on this subject yesterday. It’s worth a listen.

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Apr 16

You Love the Bailouts, Didn’t You Hear it on the News?

In an unsurprising yet detestable act of hubris, the Obama administration and its Treasury Department recently held yet another invitation only press briefing for select journalists. Apparently, the marching orders for the press this time around are to communicate to the public that the Bush and Obama reactions to the 2008 financial crisis, when compared to other industrialized nations, averted the cataclysmic disaster suffered by those with far less bold leadership. Assuming the standard is whether or not the United States did a better job of dealing with the financial crisis than say, Spain, then yes, we did a bang up job. If the standard is how we responded to the disaster when compared to say Canada, or Australia, two of the nations most economically and socially similar to the United States, then we butchered the response miserably.

Several journalists in attendance at the briefing were less than convinced that the Obama administration was offering anything new:

On Friday, the Treasury Department convened one of its semi-regular, invitation-only background press briefings for journalists. Senior Treasury officials spoke to us, answered our questions, and showed us a “deck,” which is annoying industry jargon for a Powerpoint presentation. “I just know this is going to be a fucking waste of time—another dog-and-pony show,” another journalist told me on our way into the meeting. The central message of the dog-and-pony show was that the US response to the 2008 financial collapse was pretty effective, especially when compared to how other countries reacted to different crises. The Powerpoint presentation used terms like “bank investment programs,” but what the Treasury gang was talking about was the highly unpopular financial bailouts (as opposed to the auto bailouts, which the Obama team views as a political winner).

This is more of the same old song and dance that the American People have been forced to choke down since 2008. The fable goes something like this: If Citibank or Bank of America were allowed to fail, and trillions of dollars were not directly given and loaned to large financial institutions and foreign investors, the United States economy would have been thrown into an apocalyptic tailspin that would have destroyed the world. The narrative included scare tactics that conflated a failure to funnel funds to the financial sector with the the problems facing Greece and Europe. Moreover, if interest rates were not kept at historically low levels–punishing savers, the elderly, and the middle class–banks would not lend and small businesses would fold in the hundreds of thousands. First, there is not one bit of evidence to back up these claims. Second, even if the claims have some merit, it does not excuse the wholesale disregarding of those most directly affected by the crisis: the people. Certainly something had to be done to stabilize the banking sector and the markets to avert further job losses. However, the contention that Europe suffered more significantly than the United States because it lacked bold leaders taking decisive action is specious at best. The reason Europe suffered to a greater degree was due to its centralized monetary policymaking which lacks a mechanism to tailor monetary policy for each individual member state. It had nothing to do with Timothy Geithner’s brilliance.

Politics is politics, so it would be naive to believe that the Obama administration is not playing to win the game. As such, these press spectacles are business as usual. It is also likely to bear fruit, as major media news outlets long for the “administration official” to agree to appear on its faux news programs, and bucking the administration’s talking points does not serve that end. However, unlike television news, we learned as schoolchildren that a hypothesis must be tested rather than assumed based upon conjecture. There is no evidence to support the notion that the the Bush and Obama administrations acted in such a way that averted the Four Horsemen’s arrival. Nor is there evidence to support the claim that the chosen course was the only means of stabilizing the economy.

Even assuming that the policy choices pursued by the current and past administrations averted a greater recession, it does not excuse the paralysis on jobs and housing. Germany for example has bolstered its recovery by pursuing practical jobs policies. Iceland has implemented a program under which it has forgiven household debt and mortgage debt acquired as part of the fraudulent run-up in housing prices. In the United States, the debts owed and employment problem are no different. Homeowners took on mortgages based upon what they believed to be the fair market value of the home. The value was fraudulent inflated, and therefore much different than a loan in which both parties act fairly and ethically. Politically, debt forgiveness is a win win. In the United States it would stimulate growth and job creation, as greater resources would be thrust into the economy as consumers are freed from the devastation of servicing mortgages, credit cards, and student loans currently absorbing the bulk of earned and Social Security income.

Sadly, debt forgiveness in nowhere on the radar in the United States. The ridiculously unique American belief that that contracts must be honored, even if based on fraud, places some blame for inaction at our own feet. However, the notion has not even be raised seriously by the President. Instead we continue to trudge along on a perfunctory path of half-measures and hope that the large banks will right their wrongs willingly. It is time for sound economic policy that forgives fraudulent debt and incentivises hiring. It is time for creative job training efforts between federal, state, and local colleges, vocational training centers, and employers. It is time for the banks to write-down mortgage debt and deal with customers fairly in return the gargantuan assistance provided by taxpayers. In short, it is time for as change.

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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 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.