A Tale of two fortunes...The S.E.C. vs. Goldman Sachs (and Merrill-Lynch?)

Yesterday I had Chinese food for lunch and at the end of my meal, I broke open my “fortune cookie” to see what the factory who made it had dreamed up for my future. There were two fortunes in there! The first one predicted, “You have an important new business development shaping up.” The second warned, “A liar is not believed even though he tells the truth.” That started me thinking about what these two things had in common with the state of our current world and that, in turn, led to the following conclusions.

Just a few days ago, the Securities and Exchange Commission accused Goldman-Sachs executives of engaging in outright fraud during the recent “financial crisis.” Besides predatory lending (which should be a crime, but isn’t) there was massive misrepresentation of risks (actually it was great big lies clothed as neutral third party evaluations of “Collateralized Debt Obligations” – but more about that later on). In short, we the consumers were lured into taking out complex, expensive loans* that most of us just didn't understand. (*the infamous “sub-prime mortgages,” that, after they failed, became known by the even more insidious euphemism “toxic assets”).

The Bush administration’s regulators both failed to call attention to, much less stop, this abusive lending and prevented states from doing it as well. To compound the issue (no pun intended), subprime lenders didn’t retain the loans they made, but sold them to investors, whose insatiable demand was responsible, at least in part, for the expansion of the “creative lending practices” at the root of this whole mess. What is more, while knowing that future losses were virtually certain and neglecting to inform the people buying those loans of this fact, the lenders sold them anyway. This wasn’t strictly illegal either, even if it was unethical and immoral behavior. Then, brokerage firms packaged and marketed securities backed by these bad loans while betting that such securities would tank, thus netting themselves even more profits. Shades of Gordon Gekko indeed though, unlike the movie, people really got hurt.

Now, the S.E.C. is charging that Goldman Sachs created, marketed, and sold securities that were deliberately designed to fail, so that forwarned “important clients” could profit from that failure. And Goldman isn’t the only financial firm accused of doing this. It appears that several banks helped market similar securities for a major hedge fund that profited immensely from that failure according to ProPublica, a website devoted to “journalism in the public interest.” In addition, ProPublica reports that Merrill Lynch is now suspected of similar transgressions.

So what role did fraud play in the financial crisis?

Predatory lending and selling of mortgages based on lies did not, in themselves, cause the recent crisis. However, by inflating the housing bubble and creating a miasma of “toxic assets,” these practices definitely made it much worse than it should ever have been. Further, the creation of investments designed to fail significantly increased bank losses and that led to an economy-wide catastrophe once the housing bubble burst.

Remember “neutral third party evaluation of these Collateralized Debt Obligations (CDOs)?” When investors asked for what they believed to be impartial, objective assessments of risk, Goldman Sachs is charged with passing off their “designed to fail” structure as a neutral evaluation! That’s outright fraud, and it means that Goldman considered their customers as little more than “marks” or targets for fraudulent gain.

In addition, many of the synthetic CDOs designed by Goldman Sachs carried “risk-free” or “nearly risk-free” ratings from both private and government agencies. Former Goldman CDO traders have been quoted as saying that, “the ratings agencies didn’t understand these instruments,” and that, “the investment banks would offer their (Goldman's) models for the agencies to use in assigning ratings.” Without these high agency ratings, investors might have looked more closely at these packages and realized what they really were. Representations made to the ratings agencies by banks allied with Goldman Sachs are also fraud and should, in my opinion, become the focus of a continuing SEC investigation.

Would financial reform of the kind now before the congress have prevented the fraud that flourished over the past decade?

What the current senate bill could do:
* An independent consumer protection bureau could limit predatory lending.
* Requiring that lenders retain five percent of the value of loans they make, could limit the practice of making bad loans and quickly packaging and selling them to unwary investors.
* While it might not prevent abuses of the type alleged to have been committed by Goldman Sachs, requiring that financial instruments like “credit default swaps” be traded openly and transparently could prevent insurers like A.I.G. from backing theses abuses and needing a federal bailout to prevent its total collapse.
In addition to these provisions, the financial reform bill must stop the creation of instruments like “synthetic C.D.O.’s,” that let investors gamble on assets without actually owning them.

In the final analysis, reform can only go so far. In my mind, what is urgently needed is a fundamental change to the way Wall Street does business. Financial-industry lobbyists, through the Republican politicians they have bought and paid for, would have us believe that all will be well if the federal government simply pledges to stop all bailouts. That is patently absurd; the truth is that the financial industry has become a sham in which an elite cadre receive huge bonuses based on their ability to mislead and exploit consumers, investors, and their own customers. This sytem must change, so bailouts are not needed, much less contemplated.

No wonder the Tea-Party folks are angry – they lost more individual freedoms during the Bush-Cheney years than when King George instituted the stamp act, and now the private sector, of which they mistakenly believed they were part, has destroyed their dreams of retirement and taken away their homes. Like the fortunes in my cookie, another dichotomy fraught with sinister implications.

Why do we need health care reform in the U.S.A.?

Health care costs too much. According to the Organization for Economic Cooperation and Development, every person in the United States spends an average of $6,714 for health care. That's significantly higher than in the United Kingdom, where spending amounts to $2,760 per person; France, where the cost is $3,449 per person; or Canada, where per person medical costs are $3,678. While some will argue that medical care is better in the United States than in these other countries, others will say the opposite is true. For example, out of 222 countries, the United States ranks 50th in life expectancy, and 180th in infant mortality; meaning 43 countries have lower infant mortality rates and in 49 countries, people on average live longer than Americans. Both of these numbers, by the way, include Canada, France, and Japan.

Americans are losing their health insurance at record rates, and so cannot afford good medical care. Nearly 32 million Americans have no insurance, and 26 million more are under-insured. A major reason for this is that many employers have stopped offering employee insurance because they cannot afford it. According to the journal Health Affairs, the United States spent $2.4 trillion on health care in 2007! That's roughly $7,900 per person. In fact, the United States spends 52 percent more per person than Norway, the next most costly nation according to the Kaiser Family Foundation. President Obama, Republican and Democratic members of Congress, the American Medical Association, and America's Health Insurance Plans, a lobbying group that represents the insurance industry, all have agreed the system is broken and needs to be fixed. With the passage and signing of the current health care insurance refom bill, that process has begun. It remains to be seen what will happen next.

So, what does this new health care insurance reform bill do?

32 million uninsured Americans will be (insured) by 2014. When fully phased in, 94 percent of eligible non-elderly Americans will have coverage, compared with 83 percent now at an estimated cost of $938 billion over 10 years for the coverage expansion. According to the Congressional Budget Office, the health care reform measure will reduce deficits by $143 billion over the same decade. Almost everyone will be required to be insured or else pay a fine, which takes effect in 2014. There is an exemption for low-income people.

Starting this year, insurers will be forbidden from placing lifetime dollar limits on policies, from denying coverage to children because of pre-existing conditions, and from canceling policies because someone gets sick. Parents will be able to keep children on their coverage up to age 26. A new high-risk pool will offer coverage to uninsured people with medical problems until 2014, when the coverage expansion reaches full market penetration. Major consumer safeguards will also take effect in 2014. Insurers will be prohibited from denying coverage to people with medical problems or charging them more. Insurers will not be able to charge women more.

The federal/state Medicaid insurance program will be expanded to cover people with incomes up to 133 percent of the federal poverty level or $29,327 a year for a family of four. Childless adults will be covered for the first time, starting in 2014. The federal government will pay 100 percent of costs for covering newly eligible individuals through 2016. The bill applies an increased Medicare payroll tax of 3.8 percent to investment income and wages of individuals making more than $200,000 a year, or married couples above $250,000. The legislation also will impose a 40 percent tax on high-cost insurance plans worth more than $10,200 for individuals and $27,500 for families. The tax will go into effect in 2018.

An existing coverage gap in the Medicare prescription drug benefit that seniors fall into once they have spent $2,830 will be gradually closed. Seniors who hit the gap in 2010 will receive a $250 rebate. Beginning in 2011, seniors in the gap will receive a discount on brand name drugs, initially 50 percent. When the gap is completely eliminated in 2020, seniors will still be responsible for 25 percent of the cost of their medications until Medicare's catastrophic coverage kicks in.

Employers will pay a fee if the government subsidizes their workers' coverage. The $2,000-per-employee fee will be assessed on the company's entire work force, minus an allowance. Companies with 50 or fewer workers are exempt from the requirement. Businesses with 25 or fewer employees that offer health coverage to their work force will get tax credits. The credits will start in 2010 and rise in 2014 to a maximum of 50 percent of the cost of premiums offered by the smallest businesses (those with 10 or fewer workers). Individual subsidy aid is available on a sliding scale for households making up to four times the federal poverty level, $88,200 for a family of four. Premiums for a family of four making $44,000 will be capped at around 6 percent of income.

Small businesses, the self-employed, and the uninsured could pick a plan offered through new state-based purchasing pools called exchanges, opening for business in 2014. The exchanges will offer the same kind of purchasing power enjoyed by employees of big companies. People working for medium-to-large firms will not see major changes. But if they lose their jobs or strike out on their own, they may be eligible for subsidized coverage through the exchange, and insurers could not deny them coverage.

The legislation cuts about $455 billion over 10 years from projected payment increases to hospitals, insurance companies, and others under Medicare and other government health programs. Revenue increases over 10 years include: $210 billion from increasing the Medicare payroll tax; $107 billion from fees on insurance companies, drug makers, and medical device manufacturers; $32 billion from the excise tax on high-value insurance plans; and $2.7 billion from a tax on indoor tanning services.

People purchasing coverage through the new insurance exchanges will have the option of signing up for national plans overseen by the federal office that manages the health plans available to members of Congress. Those plans will be private, but one will have to be nonprofit.

The bill tries to maintain a strict separation between taxpayer dollars and private premiums that will pay for abortion coverage. No health plan will be required to offer coverage for abortion. In plans that do cover abortion, policyholders will have to pay for it separately, and that money will have to be kept in a separate account from taxpayer money. States could ban abortion coverage in plans offered through the exchange. Exceptions will be made for cases of rape, incest and danger to the life of the mother.

And this means what for our wallets and pocketbooks?

Universal health care is not just intelligent and just social policy; it is also smart economic policy. Workers in Canada, Europe, or Japan who lose their jobs, lose income but retain their health care coverage. Conversely, until now, unemployed American workers who lacked health care coverage faced financial ruin if sickness struck them or their families. COBRA made bridge coverage available but in most cases it was unaffordable for anyone but the wealthy. After all, lack of employment means lack of income to pay unsubsidized insurance premiums. Worst of all, if a major illness was diagnosed during unemployment, a worker became unemployable, and essentially doomed to a life of poverty, costing the taxpayer more money in state supported health care, if even available, and depriving the economy of a productive member.

In the short term, this law is good for the economy, because consumer spending, which ground to a halt in the United States (following the Gordon Gecko inspired betrayal of the American financial system by banks and Wall Street investment firms) can increase as people realize they don't have to declare bankruptcy, or do without necessities to pay medical bills. It's good news for America's economy in the long run, as well, because Washington now has oversight over doctors and insurance companies for the first time ever. This means that the most critical health-care issue -- cost -- can finally be addressed.

Cost-cutting, down to Canadian and European levels, must be the next legislative effort. Americans spend 16% of their GDP on their health care, covering only half the population adequately, compared with, for example, Canada, which covers everyone for 10% of GDP. The health insurance industry makes more profits in the U.S. than Canada pays out in health care benefits for 34 million people. The pharmaceutical industry lobbied for and got laws that made volume discounts illegal so Americans pay up to twice as much for U.S. drugs than do the Canadians or the Europeans or the Japanese. Americans also pay far too much for doctors, tests and hospital beds.

President Obama, I congratulate you on passing this compromise health insurance reform bill. We are halfway there. Now get to work on cutting health care costs. That's the stuff real legacies are made of.

President Obama awarded the Nobel Prize for Peace

It is obvious to me that, no matter what President Obama does or says about this award, he will be the subject of both crass speculation by the left and harsh criticism, verging on lunatic obsession, from the right. The Nobel committee awarded the prize. It's over, let's move on. (Rush, take a pill...)

As to my personal take on this, I have to remember the place we Americans occupied in the court of international public opinion when President Obama was elected. Since that was just nine months ago, it is less difficult than recalling my last tire purchase, say, but only slightly less. The world, for the most part, LOATHED us. Not only were we the great satan, but we were the non-communicators, the uni-laterists to end all uni-lateralists, and the root cause of an impending world economic collapse. In short, most people didn't like us, didn't respect us, and didn't trust us. But, they were afraid of us. It was so bad in fact, that many U.S. citizens who, mostly out of necessity, were travelling abroad, identified themselves as Canadians...

President Obama (and notable members of his administration) have begun to change all of that. He has reached out to Muslims and the middle east, indeed to the entire world; he has, with help, arrested the economic downfall, and he has begun to deliver on his campaign promises to end discrimination in its seemingly innumerable forms. The fact that he has not done so with the speed that most liberals would like, is due more I think, to the unrealistic expectations of the "I want it now generations," rather than to lack of effort on the part of the administration.

So, the Nobel committee, responding to the feeling of hope and optimism that the global community outside of Washington and the U.S. is now feeling, awarded the prize to Obama, because he affords great promise. I, for one, am completely OK with this. If the president fails to achieve anything and leaves office in three years with a lackluster legacy, then everyone can (and most certainly will) criticize this award and everything else about the man and his presidency.

However, notwithstanding the historic nature of his election in terms of it's effect on the equality of races in this country and in the world today, I think it highly unlikely that he will fail. Rather, I believe that he will not only justify the confidence of the Nobel committee, but will strive and succeed in making this a better world in which to live. A place where we (the Americans again) are respected, trusted and even admired. A place where, even with all of our "foibles," humans can really get to work on living together in peace.

As legacies go, that ain't bad.

Fed to ban texting while driving, or "honk if you love jesus, text if you want to meet him..."

 (well...DUH!)   Ray H. LaHood, the U.S. Secretary of Transportation, announced the ban Thursday, October 1,  at a conference in Washington (DC) that included 300 academics, law enforcement officials, legislators, telecommunications and automobile industry representatives, as well as families of people killed by motorists who were talking on cellphones or text messaging.

    "This meeting is probably the most important meeting in the history of the Department of Transportation," Mr. LaHood said at the end of the two-day conference. He added, "this...sends a very clear signal to the American public that distracted driving is dangerous and unacceptable."

    The order took effect immediately and involves 4.5 million federal employees, including military personnel.

    OK and, just like the current health care proposal, this order both misses the point and at the same time highlights the pervasive power of special interests in government. The real issue is distracted driving in all of its forms, from talking on cellphones to eating cheesburgers and applying makeup.

    Perhaps we need a return to those defensive driving courses I took in high school, where the grisley photos of wrecks and the admonitions of celebrities to "think before you act," certainly had a chilling albeit brief effect on my driving. We certainly need more than a ban on texting, although, it is a good start (if it is actually enforced and especially if it proliferates to the rest of us).

    But, it probably won't. It won't be enforced because states haven't adopted it and state and local police don't enforce federal policy. It won't proliferate for the same reason the CDC predicts that 40-60% of people who should take the swine flu vaccine won't do it. It's inconvenient. Finally, it won't because the only people who are really distracted by all of the things we do when we should be concentrating on traffic and road conditions, are other people, not us.