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Thursday, May 27, 2010


Prosecutorial Overreach

Item: U.S. drops criminal cases against AIG executives. Not exactly a shock to this blogger. Most business disasters are not the result of fraud and criminal malfeasance, though some are. Most are the result of misjudgements, incompetence, or the inability to adjust to a rapidly changing business environment. However, when politicians see the opportunity to leverage business failure for their own benefit, many take actions that criminalize ordinary behavior, or stupidity. Stupidity in business is a problem but it's not illegal. The current generation of prosecutors, whether state attorneys general in the mold of Spitzer, Blumenthal and Cuomo, or the young guns who inhabit the local offices of federal prosecutors, have become a particularly offensive group. Interestingly if you review the records of the above named, and review Giuliani's record as a federal prosecutor, you will see a poor conviction rate and that many of those convictions they did obtain were overturned on appeal. The more "successful" tactic for the Spitzers and Cuomos of the world has been to obtain plea bargains. We wonder how many of those copping to pleas were actually innocent victims who had simply reached the bottom of their legal war chests.

The result of the AIG mess is that there have been no convictions, and that nothing has been proven against Mr. Greenberg or any of his officers. What a shame that Spitzer's vendetta against Greenberg led directly to the company's implosion.

Given these facts, we wonder why Mr. Blumenthal still leads in polls to succeed the also ethically challenged Senator Dodd. You would think that the revelations about Blumenthal's non-service in Vietnam would have confirmed what Nutmeg State voters should already know about his character flaws. Well there's still time. Maybe the opportunity to dispatch him to D.C. is too tempting to pass up. But frankly, I hope he gets what's coming to him - a stern rebuke by voters this November.

As for Mr. Cuomo, if it wasn't so stomach turning, you'd have to laugh at his positioning himself as an outside reformer in the NY Governor's race. Of course, NY'ers are probably still grateful to him for his investigations that completely undermined first Spitzer and then Paterson, paving the way for his own run. The Cuomo name and organization is very powerful in NY, and no wonder - they have made thuggery respectable somehow. Still, things really begin after the convention - hopefully the GOP will find a viable candidate to rally around.

If our politics is down, dirty, and bare knuckled, British politics at least presents the veneer of sophistication. So now we have the spectacle, following a close election, of the laughable Liberal Democrats holding the balance of power, even though they actually lost a few seats in Parliament. Instead of making a deal with their natural allies in Labour, the Libs joined a coalition with the party on the opposite end of the spectrum, the Conservatives.

What is really interesting here is not that this coalition came together, but what it means for Mr. Cameron's attempt to keep a government in place. In the UK, there has to be an election at least once every five years, but the Prime Minister can dissolve Parliament at any time triggering a new election. This happens most frequently following loss of a key vote in Parliament, but it could also occur if the PM simply determines that now would be a good opportunity to gain some seats. Under the current setup, withdrawal by the Libs at any time could also cause the government to fall and a new election.

In short, I predict that one way or the other, we will see an early election in the UK, perhaps within the next two years or so. I don't think the Libs and Tories can co-exist in this coalition for very long. At some point a new election will be an irresistible opportunity for one party or the other.

The health care battle is over, at least for now, but hardly forgotten. Did you notice that the mid eleven digit figure Medicare rate fix went through already, of course under a separate bill to keep it out of Obamacare scoring by the CBO. This is exactly what Republicans said would happen, and Dems never denied. But cynically, Dems claimed throughout that Obamacare would be revenue neutral or even save money, which was always impossible.

Here's a guest Business Wire dispatch on the Massachusetts version, which is a preview of the fiscal mess and health care rationing we face if Obamacare ever gets implemented.

Lessons Learned From Massachusetts’s $4 Billion Health Reform Disaster

CAMP HILL, Pa.--(BUSINESS WIRE)--The Massachusetts health insurance system under reform is already a financial disaster and sure to force higher taxes and insurance premiums in a preview of what is to come for all Americans under the recently passed reform laws, according to the cover story in InsuranceNewsNet Magazine’s May edition.
“Be Careful What You Wish For, America”

.“When we heard what was really happening in Massachusetts, we decided to devote our cover story to it,” says Rob Billingham, executive editor for InsuranceNewsNet Magazine. “It is alarming how the commonwealth is dismantling its health insurance industry and hurting the citizens’ access to affordable coverage. It’s also frightening that this is the model that national reform was based on.”

The article, “Be Careful What You Wish For, America,” was written by the leader of Massachusetts’s health insurance broker association, one of the people on the front lines who would have inside knowledge of the unnatural disaster hitting the state.

Mark S. Gaunya, president of the Massachusetts Association of Health Underwriters, explains how Massachusetts’s system is in danger of collapsing because it did little to control costs.

“Initially, MassCare was expected to cost $88 million a year — but today the Massachusetts health care budget exceeds $4 billion, and our fiscal budget for 2011 is underfunded by $294 million because of this law,” Gaunya says. “Simply put, Massachusetts can’t afford it.”

The system’s weak individual mandate is also forcing insurance companies to take the sickest and most expensive residents while healthy people go without insurance until they absolutely need it, driving up costs for all the other residents who buy health insurance.

“It is a calamity in the making and it is just a preview of what’s coming for the rest of the nation,” Billingham says.


And in case you are not aggravated enough, here are some quotes to make you feel even worse about the higher taxes you will be paying next year (and probably long after):

"Albert Einstein - "The hardest thing in the world to understand is the income tax." Will Rogers - "It is a good thing that we do not get as much government as we pay for." James Madison - "I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents..." Will Rogers - "Alexander Hamilton started the U.S. Treasury with nothing and that was the closest our country has ever been to being even." Robert A. Heinlein - "There is no worse tyranny than to force a man to pay for what he does not want merely because you think it would be good for him." John S. Coleman - "The point to remember is that what the government gives it must first take away." Dr. Laurence J. Peter - "America is a land of taxation that was founded to avoid taxation." Milton Friedman - "Congress can raise taxes because it can persuade a sizable fraction of the populace that somebody else will pay." Plato - "When there is an income tax, the just man will pay more and the unjust less on the same amount of income." Benjamin Tucker - "To force a man to pay for the violation of his own liberty is indeed an addition of insult to injury." Winston Churchill - "We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle." G. Gordon Liddy - "A liberal is someone who feels a great debt to his fellow man, which debt he proposes to pay off with your money." Dan Bennett - "There's nothing wrong with the younger generation that becoming taxpayers won't cure." Jean-Baptiste Colbert - "The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing." Benjamin Franklin - "It would be a hard government that should tax its people one-tenth part of their income."

With the resurgence of jazz, there is now also a large cadre of excellent writers and reviewers on the subject, which is very helpful when it comes to sorting out the artists you want to go see and the CD's you might wish to buy. Still, there is no one better than Nat Hentoff, who has been writing about jazz (and many other topics) since it was the idiom of popular music in this country many decades ago. For the latest example of why his writing has been so important to the survival and renaissance of jazz music, see his column in today's WSJ (page D6) on young saxophonist Myron Walden.

Clearly, the Mets have adapted to their new ball park in its second season, and can even beat good teams there. Still want to see a good road trip or two before I get too excited. At least it looks like we will still be playing meaningful games in June.


Wall Street, and indeed all of the world, is buffeting investors, who would do very well to keep their cool while maintaining a wary eye on the Euro, banks everywhere but particularly in Europe, and the threatening explosion of the bubble that is sovereign debt. Though the recent slump continues to bear the earmark of a correction rather than a new bear market, we are not discounting the possibility of a second dip to the recession either.

On Monday, we bought 400 shares of Great Lakes Dredging (GLDD) for the IRA at 5.24. This became a value buy when its debt/equity ratio dropped below 70%. For our "zero buy" on Wednesday, we bought 100 shares of Flir Systems (FLIR) at 27.87.

Most of our holdings' earnings reports have been OK - some reducing debt, some increasing equity, a few high performers doing both. We have also been rewarded with a number of dividend hikes of late. One action we did take was to formally remove Transocean (RIG) from the buy/hold list. We had previously sold all of our shares soon after the accident in the Gulf, and though we think both BP and Haliburton are more to blame than Transocean, my call is that deep water drilling is a business I prefer to have no exposure to. We've got plenty of oil service exposure (BRS, CNRD, GIFI and SLB of course) so RIG is not something we want to go back into, even if the lower price properly discounts the risks and costs of the accidents.

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