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Tuesday, December 15, 2009

 

The Daily Double - Healthcare and Financial Reregulation

The Obamacare campaign in the U.S. Senate is like watching a daily soap opera, with its endless plot twists and turns, one day's enemies are the next day's allies and so on. C-Span junkies must be in their glory. As predicted here, Landrieu and most of the other Blue Dog Dems have long since folded up their tents, leaving Ben Nelson, railing about abortion funding and only Independent Senator Lieberman seriously objecting to the concept of the federal grab and overspend. Even Senator Lieberman says that if Reid can fix the Medicare expansion (that he once favored!), he could be on board. This is why Dems say 60 votes are still within reach.

However, they are not quite there yet. First, Nelson will put forth an abortion amendment, and when it fails, we'll see if the bill's safeguards allow him to be in favor. The bigger battle will be over the medicare expansion to age 55.

Apparently, Reid is ready to give that up quickly (it is SUCH a lousy idea), but simply jettisoning it will leave no public option other than the "insurance exchanges" and no one really understands how they will work. That will be OK with Lieberman who won't support a public option, but then, what will liberal senators from deep blue states be bringing home? Just some insurance reforms, but we really don't need a thousand page bill replete with taxes, mandates, penalties, etc. to do that. So we will have to see if the Dems really can drum up 60 votes. Right now, it looks like Dems will do whatever it takes to get this bill through the Senate and into a Conference Committee where the real mischief will be done.

But first, the bill needs to be scored by the CBO, and that's a challenge when you're dealing with a moving target. My guess is that Dems will learn that there is no deficit saving here, quite the opposite, and I'm not sure what they do with that information. One of the reasons the bill scored so well last time around was the inclusion of the CLASS Act, a phantom long term care benefit that front loads premiums and back loads claims. Senator Thune put forth an amendment to delete it and got 51 votes, a clear majority but not enough to take it out (you need 60 votes to do anything these days). The Dems couldn't take it out and still score the bill well, but in fact, CBO has updated actuarial information and is likely to reduce the net savings from CLASS. This could be an unpleasant surprise for Reid and the Administration.

Meanwhile, Obama keeps playing the Dems propaganda game, that is to say lying. He keeps saying the bill bends the cost curve (which way?), addresses the uninsured (by giving away the insurance - we could do that through Medicaid), and that the people have been waiting for us to pass national health care (but all the polls show the bill is intensely unpopular and getting worse). The last thing this hapless Administration needs is a credibility gap to exacerbate its woeful performance.

Apparently, it doesn't matter to Obama either what's in the bill, as long as he can say he passed something. What a stiff we elected!
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The second half of the daily double relates to financial re-regulation. The Barney Frank version passed the House the other day, somewhat narrowly, and now we move on to the Senate. The Chris Dodd bill in the Senate is almost the polar opposite of the Frank bill in terms of its mechanics, though it springs from a similar philosophy. What both bills attempt to do is to cover up the culpability of Congress generally, and Frank and Dodd specifically, for their role in causing the recent crisis, while making the big banks and the i-banks the whipping boys and taking the opportunity to grow the federal bureaucracy.. The "solutions" in the bill are akin to treating symptoms without addressing the causal agent. No matter, this is all about politics and trying to stay in the majority. Good luck with that boys.

Building on this agenda, Obama took the financial CEO's to the woodshed yesterday, telling them they cannot oppose the re-regulation effort. Whenever I hear political strong arm tactics like that, I cringe, knowing that the speaker is utilizing power rather than logic. In the long run, those tactics never work. This was reminiscent of JFK's temper tantrum early in his term when he blasted the steel companies for raising prices and "causing inflation." Needless to say, the rollback in prices that resulted was temporary - supply and demand determine prices, not politics.

Not that the banks and i-banks weren't part of the mess, but the solutions (break 'em up when they get too big, rein in pay, force banks to lend, etc.) have nothing to do with either the economic failure we have witnessed nor enhancing any recovery that might be taking place.

It is useful to review the steps that nearly brought our economy to ruin:

1. Frank, Dodd, Fannie Mae and Freddie Mack demanded that the market provide low cost mortgages, even to those who could not afford them.
2. To fend off the phantom year 2000 recession, Federal Reserve Chairman Greenspan lowered interest rates to absurd levels and kept them there much too long.
3. Powered by low interest rates, banks of all stripes conspired with mortgage brokers to expand loans, often with little or no documentation, to unworthy borrowers. They immediately offloaded this risk by selling the loans off to securitizers.
4. The mortgage industry went off on a fee bubble, generating as large a volume of mortgage loans as possible to feed the securitization frenzy.
5. Issuers of securitizations convinced the major rating agencies (for more fees) to rate these products AAA, easing their sale in the secondary and tertiary markets. The rationale was that home values would continue to climb, thus securing the loans even in the event of borrower default.
6. Investors of all stripes reached for yield buying the securitizations. Mark-to-market accounting allowed them to book paper profits on these instruments as the market bid them up.
7. AIG and others sold "insurance" on these loans in the form of Credit Default Swaps, convinced they would never have to make good.
8. When home values actually began to fall, the whole thing unwound. AIG quickly unraveled, and mark-to-market accounting's procyclicality exacerbated the collapse.

So please tell me how either the Dodd or Frank bills address this sequence of events. On the other hand, the following reforms might actually accomplish something.

1. Regulate derivatives - trade them through an exchange, to modify counterparty risk.
2. Repeal Graham Leach Bliley and restore the separation of investment banking, commercial banking, and insurance.
3. Require Boards of Directors to be truly independent of management and to represent shareholders. Separate the role of CEO from Chairman of the Board, as in the UK (that's how to get executive pay right, as opposed to the heavy handed approach we are seeing now).
4. Limit the application of Sarbanes Oxley to large companies.
5. For securitizations, consider what needs to be in place if the loan needs to be unwound. Certain duties and obligations should not be transferable so that default situations can be better addressed.

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On Prime Minister's Questions last week (broadcast live on PBS Wednesday mornings and rerun on Sunday night at midnight), a Conservative back bencher opened the session by chiding Prime Minister Brown about his alternately characterizing Spain as a member of the G20 group, and then not (several times recently). He concluded his question thusly: "The strain in Spain seems mainly in his brain." The humorless Brown attempted a straight answer, but even he could barely contain laugh - out - loud amusement.

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We made up for lost time in Frisco on Friday with three transactions. First we sold all 996 shares of I 2 Technologies (ITWO) at 18.50, near the coming takeover price, but this way, we get all cash instead of some stock we don't want. We took a comparatively small loss of $2,760 - I say small since we made quite a bit on our December 2008 average down. This could have been a much worse fiasco. We bought 400shares of Home Diagnostics (HDIX) for the IRA at 5.67. Then finally, our 600 Avocent (AVCT) shares were tendered for 25, a gain of $1,488. I think this price was too low, but life's too short for silly class actions. Take the money and move on. So we've got a fair amount of cash to deploy for the balance of the year. in the taxable accounts, we will be very near even from a capital gains standpoint for the year - bad news for Governor Paterson and Treasury Secretary Geithner.

Comments:
Great post from the redwaver re: financial re-regulation. The President has done nothing to attempt to fix the glaring problems in this area as he has been WAY too involved in health care which is going nowhere. Though I disagree with redwaver's comment regarding unwind provisions of securitizations (leave caveat emptor in place and it would not have mattered in this last financial extravganza as EVERYONE bet on increasing home prices) the redwaver addresses what went wrong and how to fix it. Why why must we put up with the nonsense from Dodd and Frank? Because we tolerate it - that is why. I know I will do what I can to see that both of them do not get re-elected.

As always,
Hail Freedonia !
Rufus T. Firefly
 
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