bidness

How Can a Boycott Actually Work? The Failure of Consumer Activism

mikethemadbiologist — Sun, 28 Aug 2011 08:01:23 +0000

How Can a Boycott Actually Work? The Failure of Consumer Activism

Admittedly, some boycotts have worked: Glenn Beck seems to have been seriously harmed by the boycotts against his advertisers. But what happens when the corporations you want to boycott have massive market share? The American Legislative Exchange Council (ALEC) is a corporate-backed lobbying group that has essentially written many laws at the state level, including Wisconsin, Florida, and Michigan. One-third of all state legislators (overwhelmingly Republican) are members of ALEC, and ALEC has pushed some really awful legislation, including limiting consumer rights, environmental protection, and trying to privatize education.

So let's say one wanted to boycott ALEC's supporters. Well, here's the list:

Allergan
Altria
American Coalition for Clean Coal Electricity
American Electric Power
AT&T
Amazon.com
Atmos Energy
American Federation for Children

Oh, I'm sorry, that's only the list of companies and lobbying groups that begin with the letter "A". Here's the rest of the list to give you the full flavor:

BP
Reynolds American
Takeda Pharmaceutical
Allergan
Altria
American Coalition for Clean Coal Electricity
American Electric Power
AT&T
Bayer
Chevron
ExxonMobil
EZCorp
Lumina Foundation
Peabody
PhRMA
Shell
State Farm
State Policy Network
UnitedHealthcare
Visa
Walmart
Walton Family Foundation
CashAmerica
Entergy
FedEx
Franklin Center for Government and Public Integrity
Freepont-McMoran Copper & Gold
Intuit
Johnson & Johnson
Koch Industries
LouisDreyfus Commodities
Louisiana Seafood
McMoran Exploration
National Rifle Association
Pfizer
Sanofi
TogetherRX Access
UPS
Amazon.com
Atmos Energy
BlueCross BlueShield Association
CenturyLink
Chesapeake Energy
ConocoPhillips
Dow
Encana
Energy Transfer
Gulf States Toyota
International Paper
Jacobs Entertainment
LouisianaTravel.com
NetChoice
QEP Resources
StateNet
TimeWarner
WellPoint
American Federation for Children
BlueCross Blue Shield of Lousiana
BNSF
Cleco
CN
Cox
CSX
Genesee & Wyoming Inc.
Harris Deville & Associates
HP
Kansas City Southern
Kraft Foods
Lilly
Louisiana Chemical Association
Louisiana Railroads Association
Louisiana Realtors
Merck
Norfolk Southern
RestoringFreedom.org
Society of Louisiana CPAs
Southern Strategy Group
Spectra Energy
The Capitol Group
Union Pacific
USAA
Walgreens

How can one boycott pharmaceutical companies with exclusive patents? How does one not buy goods shipped on CSX? In many places, there are de facto cable monopolies, so it's COX or no TV. Ditto Walgreens. Stop buying natural gas (Chesapeake Energy)? In many cases, a consumer-driven approach is impossible (and a stellar example of why anti-trust law should be enforced).

This is a case where the marketplace dominates the political sphere. And that is not good for most Americans.

An aside: It's worth reminding people that economics used to be called political economics. The political ramifications of economic activity were not ignored, or seen as natural outcomes.

mikethemadbiologist Sun, 08/28/2011 - 04:01

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environment

This, Too, Should Be Called Default

mikethemadbiologist — Sun, 14 Aug 2011 08:13:07 +0000

This, Too, Should Be Called Default

With all of the S&P hoopla, we've heard a lot about 'default'--that the U.S. government can't (false) or won't (with the teahadists, who knows?) pay the money owed on its debt. Well, there's another kind of default that's slipping under the radar (italics mine):

When the small, beleaguered city of Central Falls, R.I., filed for bankruptcy this month, it sought to cut the pension checks it has been sending its retired police officers, firefighters and other workers by as much as half. All the city promises now is that its retirees, many of whom do not get Social Security, will not have their benefits cut to less than $10,000 a year.

But investors who bought the city's bonds could do much better: Rhode Island recently passed a law intended to make sure that they would be paid in full, even in bankruptcy.

Retirees are wondering how the city can cut what they believed was a guaranteed benefit. "We put our time in, we put our money in," said Walter Trembley, 74, a retired Central Falls police officer. "And the city, through their callousness and everything else, just blew it. They were supposed to put money in and they didn't."

Cities and local governments make lots of promises: to their citizens, workers, vendors and investors. But when the money starts to run out, as it has in Central Falls, some promises prove more binding than others.

While Central Falls, RI is a basket case on many different levels, lots of state and local governments aren't meeting their obligations:

Teachers in New Jersey likewise got a cold shoulder when they tried to make the state comply with a law that it contribute a required amount to their pension fund each year. A judge ruled that their plan was not yet unsound, despite the state's failures to make the payments. The teachers, who argued that by the time the plan qualified as "unsound" it would have collapsed, lost on appeal last year. But the state always sets aside enough money to pay bondholders.

Keep in mind that many state and local employees are not eligible for Social Security benefits as a cost-cutting measure for those governments, so the pension is often all these retireed employees have. And this is the reality:

After going 20 months without their pension checks, the 141 retirees of Prichard decided a third of a loaf was better than nothing and settled with the city. Their average benefit, which had been $1,000 a month, is now about $350. But they also get Social Security. Ms. Berg, the retired clerk, said she worried about the retirees of Central Falls, many of whom do not.

"I can't imagine telling them that they have to take this 50 percent cut," she said. "These are retirees, elderly people. They can't go out and get new jobs."

So wealthy bondholders taking a haircut equals default, while making Grandma eat catfood is fiscal responsibility. Good to know.

An aside: For those who want to argue the 'overpaid government employee' canard, read this.

mikethemadbiologist Sun, 08/14/2011 - 04:13

Tags

Basic Human Decency

bidness

It is a default. And there's absolutely nothing that keeps a company or city from defaulting. Even on guaranteed bonds. Workers should be very leery of any pension arrangement, other than with the federal government, that removes their social security benefit.

Yes, because those city workers are the ones who need to take responsibility and own this default.

@2 Nobody said that the city workers need to own the default or take responsibility. But it's wise for people to "trust, but verify".

There's a big gap between how systems and people *should* behave and how they do. There are a lot of scammers out there, as well as a lot of irresponsible city planning. If we want to protect retirees, we can work to fix bad planning by cities.. but in the meantime, we can also teach people how to watch out for dangerous situations.

So Is Standard & Poor's Still Rating Cows?

mikethemadbiologist — Sat, 13 Aug 2011 08:10:16 +0000

So Is Standard & Poor's Still Rating Cows?

One of the most frustrating things about the Standard and Poor's (S&P) U.S. debt downgrade is that S&P is part of the problem, as I've described before. They really aren't studious evaluators of evidence, untouched by the profit motive or ideology. They are venal hacks, as Matt Stoller reminds us of what came to light about S&P in 2008 during the aftermath of Big Shitpile (aka the housing crisis and other fun stuff):

Indeed, of all the players in the financial crisis, the ratings agencies were the single most embarrassing and obvious points of failure and corruption. Why did all the toxic crap get AAA ratings? Because S&P, Moody's, etc. basically got paid for each AAA rating. Were these companies actually apologetic after blowing up the economy? Ha! Here's testimony to the House Financial Services Committee in 2009 by S&P President Deven Sharma.

Mr. Chairman and members of the Subcommittee let me assure you of two things. First, our ratings in the mortgage-backed securities area were not venal. These were honest views expressed based on the best information available, dealing with complex instruments.

Erm, about the venality thing:

This conversation by two S&P analysts was released by the House Oversight and Government Reform Committee in 2008.
Rahul Dilip Shah: btw: that deal is ridiculous
Shannon Mooney: I know right ... model def does not capture half of the risk
Rahul Dilip Shah: we should not be rating it
Shannon Mooney: we rate every deal... it could be structured by cows and we would rate it

This stuff came out in 2008. In 2009, S&P's President got up in front of a Congressional committee and said that her company's ratings were honest and not venal. And nothing happened! S&P still keeps going as if they are a credible institution!

MOOOO!!!!

Seriously, this is why all of that 'looking forward, not back' crapola is so toxic. These jokers shouldn't be taken seriously. Yet, by not finishing them off when we had the chance, they not only have survived, but are stronger for it. At this point, how could they possibly know any fear? They have been exposed as incompetent and dishonest...yet we still must take their pronouncements seriously.

mikethemadbiologist Sat, 08/13/2011 - 04:10

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bidness

You'd think the US Bond market sending yeilds through the floor after their downgrade would show everyone their ratings have no basis in reality.

Yields are going down because investors have little hope of getting better returns elsewhere.

I would rather look at the CDS spreads, where France (AAA) has 3x the spread of USA (AA+). Interesting.

There is also the history of S&P's credit ratings on various Eurozone countries. Nate Silver had a column last week reviewing that history. Short version: A reasonable observer might conclude that S&P learned of the high risk of default by Greece et al. by reading the newspaper. An investor in Eurozone bonds who relied on S&P credit ratings would have lost his shirt. Spain had a AAA rating as recently as 2009. There are many other examples in Nate's column.

Roman:

Yields are going down because investors have little hope of getting better returns elsewhere.

In that case, if S&P is doing a good job of rating sovereign debt, we should be seeing other AAA downgrades. In fact, we should already have seen them.

I would rather look at the CDS spreads, where France (AAA) has 3x the spread of USA (AA+). Interesting.

That's a very good way to look at it. I see no reason to come up with an explanation for the divergence between US bond yields and the S&P rating beyond the simple fact that the S&P rating adds no information.

Any story a pundit comes up with about what the sovereign debt markets are "thinking" these days is easily checked against a carefully selected set of spreads. Nothing that I can see squares with both the markets being right and S&P ratings making sense. Given the choice, I'm going to lean toward S&P not making sense.

Yields are going down because investors have little hope of getting better returns elsewhere.thankssss

"The Revenge of the Ratings Agencies": This Is Extortion

mikethemadbiologist — Thu, 11 Aug 2011 07:55:12 +0000

"The Revenge of the Ratings Agencies": This Is Extortion

Monday, I wrote about how Standard & Poor's (S&P) downgrade of U.S. debt had political motivations--avoiding fraud investigations as well as 'convincing' the Securities and Exchange Commission to remove new regulations that could undercut their business:

...I won't rule out that S&P is ~~stupid~~ incompetent and ideologically blinkered. But they routinely commit fraud (and I'm certain if other states investigated, they would find the same thing). They are attempting to bully the American people to prevent an investigation into the role in the housing crisis, as well as preserve their business model by forestalling the new SEC regulations.

This is what frauds do. And by issuing these ratings, they can now claim, as they have already done before, that any investigations are 'revenge.'

Apparently, I'm not the only one. In Wednesday's NY Times (and why read the Times? I told you this sooner! I kid. Sorta.), law professor Jeffrey Manns writes (italics mine):

Since the 1970s, federal statutes and regulations have mandated that debt issuers obtain ratings as evidence of creditworthiness. An oligopoly of rating agencies used this authority to effectively control access to the financial system. Even a threat of a downgrade from a rating agency could cause credit to dry up, and few inside or outside of Washington dared to challenge their dominance.
The financial crisis jeopardized the agencies' privileged position. Politicians and pundits accused them of being asleep at the wheel, if not complicit with issuers, in camouflaging risks and misleading investors during the run-up to the subprime mortgage crisis. The Dodd-Frank Wall Street reform law, enacted a year ago but not fully implemented yet, threatened to introduce unprecedented oversight and regulation.

The law called for exposing rating agencies to civil liability in securities lawsuits if their ratings were inaccurate. It also challenged the oligopoly's dominance by calling for the Securities and Exchange Commission to explore the feasibility of having an independent organization select rating agencies for asset-backed securities, instead of having the bond issuers select and pay the agencies, as they now do.

The last part is key, and something I didn't really get into in my previous post on this subject. The rating agency is hired directly by the bond issuer (if it's a public municipal bond, by the local government). This results in two conflicts-of-interest. The first, described by Manns, is that if a corporation routinely issues bonds, a bad rating (even if legitimate) will convince the corporation to shop around for a more lenient rating agency. So the ratings are not very useful for bond purchasers.

The second conflict, which manifests itself in the municipal bond ratings scam, is that rating agencies have long-term financial-customer relationships with the bond insurance companies. It is in S&P's interest to push business towards the bond insurers by issuing lower ratings (as the bond insurers have admitted--only after subpoena), since the bond insurers hire these same rating agencies to rate the bond insurers themselves.

So the rating agencies aren't happy if they can't use their clout to help favored clients--and drive business to themselves. Thus, much anger at the SEC, and, by extension, the Obama administration (an aside: is the Obama administration really so naive as to not have seen this coming? Disturbingly, the answer might actually be yes). OK, back to Manns:

But the rating agencies struck back, first through civil disobedience. To evade potential liability, they threatened to freeze the markets for asset-backed securities by refusing to allow their ratings to be quoted in S.E.C. filings. The S.E.C. quickly caved and suspended the rule. Meanwhile, the rating agencies have begun a guerrilla campaign of behind-the-scenes lobbying to weaken the commission's efforts to carry out other parts of Dodd-Frank.

The S.& P. downgrade has elevated this simmering standoff to an overt clash. Politicians will be tempted to wave a white flag by granting the agencies a pass from tough regulation in exchange for the agencies' not downgrading federal debt further. While that approach may give the United States breathing room in the short run, the government should not give in to such extortion.

No, the government should not give into extortion. But this is the Obama Administration and they rollover for everybody (except liberal bloggers. Gotta punch a Dirty Hippie in the Face!). So they probably will give in.

Related: Yves Smith has more.

mikethemadbiologist Thu, 08/11/2011 - 03:55

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The Rule of Law

An AA+ rating isn't so bad. If it were corporate paper it wouldn't be a bad investment.

But having the government "do something" about rating agencies would send a message that government debt really is totally worthless.

"Apparently, I'm not the only one. In Wednesday's NY Times (and why read the Times? I told you this sooner! I kid. Sorta.), law professor Jeffrey Manns writes (italics mine)"

I just was amused by the rather amusing timing of the above quote with this:

http://scienceblogs.com/mikethemadbiologist/2009/04/more_on_fake_huffpo…

Someone over there thought they'd found someone else who believed the same as they did.

Nice Bond Rating You Have There, It Would Be a Shame If Something Happened to It: S&P Innoculates Itself Against Fraud Charges

mikethemadbiologist — Mon, 08 Aug 2011 07:56:57 +0000

Nice Bond Rating You Have There, It Would Be a Shame If Something Happened to It: S&P Innoculates Itself Against Fraud Charges

There's been a lot of excellent posts debunking Standard & Poor's recent downgrade of U.S. debt on the merits--it is poor assessment of risk. Yes, there are substantive economic arguments against S&P's evaluation. But S&P is also fundamentally corrupt. The Coalition of the Sane must point this out too--there is an ethical dimension here, not just an economic one.

The critical point is this: during the last year, every negative statement by S&P has followed action by the federal government to investigate possible fraud by S&P (and other ratings agencies) during the mortgage crisis (bringing new meaning to the phrase "motivated reasoning"). This is not an intellectual error, but a political move:

But perhaps the biggest thing that happened on April 13: A bipartisan study on the financial crisis from the Coburn-Levin Senate Permanent Subcommittee on Investigations released a report saying the credit ratings agencies were a "key cause" of the financial crisis. They issued a 650 page report, which included the following recommendation (p. 16):

The SEC should use its regulatory authority to facilitate the ability of investors to hold credit ratings agencies accountable in civil lawsuits for inflated credit ratings, when a credit rating agency knowingly or recklessly fails to conduct a reasonable investigation of the rated security.

Two days later, David Beers reached out to Undersecretary Goldstein to let Treasury know that the Standard and Poors committee has changed its outlook to "negative." OnApril 18: Standard and Poors issued press release downgrading the outlook for US sovereign debt from stable to negative and giving a 30% chance of a ratings downgrade from AAA to AA.

"U.S.'s fiscal profile has deteriorated steadily during the past decade and two years after the financial crisis" they say -- with no mention of their own role in that crisis. And whereas the October threat had been based on concerns over Social Security and Medicare, the latest press release contained no mention of either.

And it's pretty clear, they're trying to deliberately influence the Security and Exchange Commission (SEC):

In the midst of all of this, the SEC was moving to implement Dodd-Frank in ways that would negatively impact all the ratings agencies, and looking into S&P's role in the 2008 mortgage crisis:

May 18:theSEC commissioners "voted unanimously to propose new, tougher regulations for credit rating agencies," which would "implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and enhance the SEC's existing rules governing credit ratings."

June 9: Bloomberg reports the SEC may recommend recommend that ratings agencies be prohibited from advising investment banks on how to earn top rankings for asset- backed securities

June 14: Reports emerge that the SEC is considering civil fraud charges against S&P and Moody's in the run up to the financial crisis.

But Standard and Poors was not cowed by the SEC's sudden rash of action. On July 14 they raised the threat of a downgrade to 50% within the next 90 days.

And now they were very explicit about what they were looking for in exchange for a AAA rating. They wanted a number....which just happened to be the magic $4 trillion number:

If Congress and the Administration reach an agreement of about $4 trillion, and if we to conclude that such an agreement would be enacted and maintained throughout the decade, we could, other things unchanged, affirm the 'AAA' long-term rating and A-1+ short-term ratings on the U.S.

Incredibly, S&P's Devan Sharma told Congress this week that that S&P had been "misquoted" regarding the $4 trillion figure and that it had been "inaccurately stated that the company was calling for that specific threshold." I really don't know any other way you could read it. He also accused the administration of "meddling in the ratings process," a charge quickly trumpeted by Republicans on the committee.

Politico reported that administration officials were "shocked by the move," suggesting that it did not seem to square with prior S&P reports (duh).

But S&P wasn't done. On July 21: David Beers met with Congressional Republicans in a closed door meeting to brief them on a potential downgrade of US debt.

And on that same day, the House Financial Services Committee approved the bill to remove the Dodd-Frank provisions that subject credit ratings agencies to expert liability. It passed 31-19 "over the opposition of the senior Democrat on the panel," devolving into a clear partisan effort.

Then on Tuesday of this week [July 26], the SEC unanimously approved a plan to erase references to credit ratings from certain rulebooks. They also adopted alternatives to the credit ratings -- a blow to the CRA's [credit rating agencies; e.g., S&P] entire business model.

That last body blow by the SEC happened on July 26. As Yves Smith would say, "Quelle Surprise!" This sort of sleaziness (not to mention outright fraud) is nothing new for the rating agencies. Currently, Connecticut is suing the agencies for rating its municipal bonds as less credit worthy than they actually are, increasing the cost to taxpayers--even though these bonds are a much lower risk than the highest rated corporate bonds (italics mine):

"We are holding the credit rating agencies accountable for a secret Wall Street tax on Main Street -- millions of dollars illegally exacted from Connecticut taxpayers," Blumenthal said. "Connecticut's cities and school districts have been forced to spend millions of dollars, unconscionably and unnecessarily, on bond insurance premiums and higher interest rates as a result of deceptive and deflated credit ratings. Their debt was rated much lower than corporate debt despite their much lower risk of default and higher credit worthiness.

"Studies done by all three agencies themselves since 1999 show that public bonds default far less often than corporate bonds with similar, higher credit ratings. In fact, public bonds with low ratings have lower default rates than the highest rated corporate bonds. They have maintained the dual standard to financially benefit bond insurers, investors and ultimately themselves.

"This rating charade created a Wall Street shell game constructed by the ratings agencies for the benefit of the bond insurers -- which enabled the bond insurers to profit from unnecessary premiums and interest paid by taxpayers. All three rating agencies admit and acknowledge -- in their own studies conducted as long as nine years ago -- that states and cities have virtually zero risk of defaulting on loans. Despite their own conclusions, the credit rating agencies purposely concocted a dual rating system, enabling them to impose lower ratings on municipalities than corporations that are far more likely to default....

Expenses paid by taxpayers for bond insurance and higher interest rates would have been unnecessary if the rating agencies fairly and honesty rated public bonds -- based on the likelihood public bond issuers would pay back their bonds on time.

One central reason for the continued underrating was the coordinated efforts of the bond insurers to convince Moody's to maintain the dual rating system. In 2006, as Moody's considered changing its practices and rate public debt on the same scale as corporate debt, an Ambac executive wrote "did we know this was coming -- at first blush this looks pretty serious to me...This is cutting at the heart of our industry...While we in the industry might agree with the default/loss conclusion (this is in part the basis of our success and ability to leverage as high as we are), to lay it out there like this could be very detrimental."

One of the costs that taxpayers had to buy was buying bond insurance. Suppose you're trying to sell debt but you're given a low rating. You can go to a private insurer and buy insurance, and your debt is now assigned the rating of the insurer, usually AAA. One problem though--not only was most debt rock solid, but the insurers themselves didn't have AAA ratings according to S&P (pdf; p. 11, #38).

And the government is irresponsible?

Look, I won't rule out that S&P is ~~stupid~~ incompetent and ideologically blinkered . But they routinely commit fraud (and I'm certain if other states investigated, they would find the same thing). They are attempting to bully the American people to prevent an investigation into the role in the housing crisis, as well as preserve their business model by forestalling the new SEC regulations.

This is what frauds do. And by issuing these ratings, they can now claim, as they have already done before, that any investigations are 'revenge.' Conservatives, who receive lots of contributions from them and who perceive another political opportunity, will fire up the Mighty Wurlitzer, once again demonstrating that they are more enamored of their own power and prerogative than the rule of law and the welfare of the Republic. Fox News and other rightwing outlets will shriek about government interference, casting doubt, creating a 'controversy' where there should be none. It will be one more example why no nation can endure half-Fox news and half free.

This is why, despite the urgings of the Great Conciliator, you have to look back, not just forward. Because if you don't, they just do yet another awful thing.

Standing up to the rating agencies is one of the few good things the Obama Administration has executed competently. But will he fight for it? And will we make him?

Related: Matt Stoller has several other examples of the rating agencies' awful behavior.

mikethemadbiologist Mon, 08/08/2011 - 03:56

Tags

Oh, dear. Shoot the messenger.

S&P its just an opinion. You haven't paid them any money so you're not a customer. Neither is the US government because it hasn't asked for a rating.

Purchasers of bonds who pay S&P are the customers.

The problem is you don't like S&P's answer.

It's very simple, you are going to be down graded if you spend 40% more than you tax.

You can either cut spending and pay back debt. If the US does, it rating will go back up.

You can increase taxation. By a huge amount. However, that's unlikely to get your rating back, because that results in lower tax revenues. It's tax revenues that pay the debt off.

All S&P care about, because it's the question they are asked, is are bond investors going to get their cash back. They aren't asked other questions.

I would say their answer is pretty accurate.

There is a simple way solve the rating problem: government regulators should stop using them as a benchmark. If the use of ratings is purely voluntary, they will be only used if considered reliable.

As for now, the US T-bill yield hasn't shot up. So WHAT IS THE WHOLE ROW ABOUT? I have the impression that it's mostly about politics, not finance.

roman, if the USA is given a AAA rating despite the USA being so partisan one half is willing to scupper the US economy to get their way, then the S&P rating is not reliable.

How reliable is the US economy?

As reliable as Teabaggers will let it be.

I'm surprised that it wasn't given an F, TBH.

Nick @1

Really? You think there's any risk at all that bond holders won't get their money back? Point to a time where it hasn't happened. Point to when there's been a delay.

It's very simple, you are going to be down graded if you spend 40% more than you tax.

All S&P care about, because it's the question they are asked, is are bond investors going to get their cash back. They aren't asked other questions

You can't even be consistant in a single post.

As for the other nonsense in your post, you'd do well to read the other posts on this blog, follow the links provided and educate yourself about economics.

"I'm surprised that it wasn't given an F, TBH."

There is no F rating. Given the current yields of US treasuries, anything lower than AA would be out of the blue. Let's not get carried away.

S&P is accurate? That explains why they performed so poorly in identifying monetary problems in the past. It would also explain the $2 trillion dollar error in their first analysis here.
"You can increase taxation. By a huge amount. However, that's unlikely to get your rating back, because that results in lower tax revenues. It's tax revenues that pay the debt off."

Letting all of the tax cuts President Bush moved in, and (for some reason) President Obama let continue, would be an excellent start.

"S&P is accurate?"

I think this indicates a problem people here are having.

Your credit rating is about how confident people are that your money is worth what it is printed at.

If the money markets are not confident, then your rating drops.

It's the same when you don't have a credit history: they don't know whether you can or not and will give you a bad rating. NOT because they know what your defaulting rate is and that you are a bad risk, but that they don't know and therefore cannot be confident you're a good risk.

PS roman, look up "humour" in the dictionary.

Wow, look up the post-downgrade T-bill yields...

And this has WHAT do to with the risk of US currencies downgrading from "Absolutely rock solid" to "Really Solid" how?

You can increase taxation. By a huge amount. However, that's unlikely to get your rating back, because that results in lower tax revenues.

Until people stop believing this sort of nonsense, we're never going to be able to solve our problems. Except in pathological cases, raising taxes raises revenue. We're about as far from being one of those pathological cases as we could possibly be.

The US debt rating should drop. We've now got one party in office who would be quite happy to see the US default. There is a non-negligible risk we'll see more of the same debt ceiling stupidity in the future, and possibly with worse consequences.

The issue with the S&P downgrade is not that there was a downgrade, it is that the rater in question is incompetent or malicious (these two choices are not mutually exclusive). There are no material facts regarding the state of the US balance sheet that were not evident six months ago, just some political posturing in which the Republicans reiterated their long-standing opposition to any form of tax increase. A competent, apolitical ratings agency would have done the downgrade at least a few months ago. S&P, however, is one of the agencies that was handing out AAA ratings to securities based on mortgages that any reasonable observer should have known would not be repaid other than by refinancing or selling the property (i.e., the Greater Fool Theory). That S&P waited until Friday to announce a downgrade--after the debt ceiling political crisis--gives the appearance that they are playing political games. A ratings organization, like Caesar's wife, must be beyond repute.

@Wow

"And this has WHAT do to with the risk of US currencies downgrading from "Absolutely rock solid" to "Really Solid" how?"

I'm jsut saying that S&P haven't really moved the markets with their rating. I think they kind of reflect the prevailing market sentiment.

@Eric Lund

6 months ago we didn't expect the debt ceiling to become a hot political issue. The perception is that the political risk of US debt has increased from "nil" to "non-negligible". This became apparent over the last few weeks, hence the downgrade.

S&P was in a "damned if they do, damned if they don't" situation with this rating, really.

The debt ceiling only became a hot political issue because extremists lied and made it one in order to take attention off their purposeful lack of intelligent action. The perception of the that the political risk increased is entirely due to those same extremists - witness the times they put forward requests. the president accepted, and they backed away.

S&P fell into line with the downgrade just as it was hoped they would. If they make their decisions based on the lies and false elevation of importance of the debt ceiling we've seen the past months, they no longer deserve to be taken seriously or be seen as an impartial set of judges. In no way were they "damned if they do, damned if they don't" as you put it.

@dean

"The debt ceiling only became a hot political issue because extremists lied and made it one in order to take attention off their purposeful lack of intelligent action."

On this side of the Atlantic, we see it as, guess what, POLITICAL RISK.

"The perception of the that the political risk increased is entirely due to those same extremists - witness the times they put forward requests. the president accepted, and they backed away."

So your claim is that they created political risk in order to create the perception of the increase of political risk? That's damn clever of them.

"If they make their decisions based on the lies and false elevation of importance of the debt ceiling "

Is political risk a meaningless formality, or is it a real brake applied to government spending?

"I'm jsut saying that S&P haven't really moved the markets with their rating."

So why all the posting?

If it's not changing the market and this means something significant, then why do you want to ignore the S&P?

You seem to want to have your cake and eat it too.

@Wow

Sorry, can you clearly state your point about S&P? Like: what have they done right, what have they done wrong, what they should have done and why.

I'm asking you why, if the downrating is having no effect, why did you say:

There is a simple way solve the rating problem: government regulators should stop using them as a benchmark. If the use of ratings is purely voluntary, they will be only used if considered reliable.

Posted by: Roman | August 8, 2011 10:18 AM

If the downgrade isn't affecting the economy, why did you want that?

Just a knee-jerk hate-on?

@Wow

"If the downgrade isn't affecting the economy, why did you want that?"

Because the US credit rating should reflect the US credit quality. Keeping it at AAA when it should be AA+ would not be fair to countries which have AA+.

And the fact that the downgrade didn't move the markets is that the markets have already decided that the US is not AAA. The US really tarnished its image in the markets with this whole political row over the debt ceiling and cutting the deficit.

"Just a knee-jerk hate-on?"

This is something I can't understand -- why do you take this whole issue so emotionally? It's not about hate or love. It's just about money.

What's next, calling S&P "anti-American"?

Roman:

And the fact that the downgrade didn't move the markets is that the markets have already decided that the US is not AAA. The US really tarnished its image in the markets with this whole political row over the debt ceiling and cutting the deficit.

I wouldn't go that far. In order for the market to have priced in a drop from AAA to AA+, you'd have to have seen a decline in bond prices at some point. That hasn't happened. The more likely explanation is that the markets simply don't care what S&P has to say on this issue.

That makes good sense for a few reasons:

1) As discussed above, the bond ratings agencies don't have the best reputation right now.
2) Unlike the debt of obscure private companies, people generally know what they're getting with US debt. There's no reason to think that S&P has any insight that the rest of us don't.
3) Ratings agencies in general don't do a very good job of rating sovereign debt. It has been shown repeatedly that they consistently grade governments much harder than private companies. Looking at downgrades versus actual yields shows a consistent pattern of grading on a public vs private curve.

Basically, this type of thing seems to be (and probably should be) met with a collective eye roll. S&P wants attention. They have it. Yay. Let's get back to what we were doing so they don't get the impression that they matter the way they used to.

That's not to say that our government hasn't behaved shamefully. The fact that we can even have this conversation with a straight face is evidence that the Republican party has harmed our credibility. But that doesn't make S&P any more credible.

"excellent posts debunking Standard & Poor's recent downgrade of U.S. debt"

"Debunk" seems to be the latest PV term. It claims the disproving of a fact without actually having to produce any actual evidence. In this case it is particularly obviously egregious since the downgrade actually happened.

Imagine, according to the argument given here, what grading they would have given if S&P wasn't under USD jurisdiction.

@Troublesome Frog

"I wouldn't go that far. In order for the market to have priced in a drop from AAA to AA+, you'd have to have seen a decline in bond prices at some point."

Not necessarily. The decline of the US debt quality happened simultaneously with the decline of the quality of other debt. We live in a world in which NOTHING is AAA anymore. Get used to it. That's the major change after the credit crunch (or, maybe, it's a return to sanity -- why should anything be "risk free"?).

The US is saved, paradoxically, by the sheer size of their debt. There is a pool of capital out there in the wild, which has to go somewhere. If you sell trillions of US bonds, what are you going to do with the dollars you'll receive for them? stuff them up the chimney? When US goes down, it increases the risk elswhere, and T-bills end up being the safest of the unsafe assets after all.

Roman:

Not necessarily. The decline of the US debt quality happened simultaneously with the decline of the quality of other debt.

All other debt? All of these narratives can be tested by looking at the relevant spreads over time. How do we compare over time with other AAA countries? As I see it, there are only two logically consistent possibilities:

1) The quality of all other debt declined equally, making it tough to tell what the market really thinks because we lack a frame of reference. In that case, a "good" bond rating agency would be downgrading AAA countries left and right, assuming that AAA is an "absolute" rating.
2) The quality of US debt has declined over time relative to the quality of other AAA debt. This justifies downgrading the US but nobody else. If true, this should be reflected in the spreads between US debt and other AAA debt. I haven't done a deep analysis, but this trend is not apparent to me.

The only way I see the S&P rating making sense is if they know something that the markets don't. That's certainly not unheard of, but I don't think it likely in this case. There really isn't much more to US treasuries than meets the eye, and S&P just doesn't have much credibility on the subject.

thanks useful entry

"The only way I see the S&P rating making sense is if they know something that the markets don't."

Or if they're making decisions that the market you're looking at doesn't take into account.

The sale of Yahoo to Microsoft was mandated by a market that doesn't look at the long term profit but instead cares only about the next quarter.

The CEO knew that more money would be made by Yahoo continuing to exist as a separate company but over years, whilst many big investors wanted the immediate payout from Microsoft, even if that means that there would be no Yahoo or value in the shares a year down the line: they were intending to sell them to a sucker well before then.

Sovereign Nations Should Not Outsource Currency: The Social Security Edition

mikethemadbiologist — Sun, 24 Jul 2011 07:59:53 +0000

Sovereign Nations Should Not Outsource Currency: The Social Security Edition

A while ago, I discussed how the battle over credit and debit fees is really a battle over how much money should cost and whom you're paying that cost to: corporations or government. Well, the corporate takeover of the monetary base continues unabated, this time affecting Social Security. You see, in the name of efficiency, the Social Security Administration is moving to direct deposit, whether you like or it not. So what's the problem with that? Well, there are some interesting...features (italics mine):

If you click on the "About the Direct Express Card" link, the second paragraph says:

There are no sign-up fees, monthly fees or overdraft charges. No bank account or credit check is required to enroll. Cardholders can make purchases, pay bills and get cash at thousands of ATMs and retail locations.

So far, so good. But here's the last sentence in that paragraph:

Some fees for optional services may apply.

Oh, some fees -- okay! Now scroll down a bit and check out the fine print (which is probably too fine for a lot of older people to read). You're allowed one (as in ONE!) free ATM cash withdrawal for every payment you receive each month. After that, you will pay 90 cents per withdrawal.

But wait ... there's more. Even the first "free" withdrawal is only free if you use "one of the more than 50,000 surcharge-free network ATMs." And that's just the tip of the iceberg. There are other fees for everything from requesting a paper statement (75 cents) to transferring your own money to your own bank account ($1.50).

That's right, we're charging old people dependent on Social Security and who are often living close to the bone user fees to access their Social Security payments. Actually, we is not the correct pronoun--MasterCard is.

I'm sure the efficiency goobers can make the case that this will save money, but sovereign governments should not give private corporations the power and prerogative to charge people for access to their government pensions.

I'm starting to think Louk had the right idea.

Related: The details are unclear, but California has shifted its aid distribution over to a system run by Bank of America. It does appear that claimants will have to use Bank of America to avoid fees.

mikethemadbiologist Sun, 07/24/2011 - 03:59

Tags

bidness

Social Security

I'm confused. I get SS by direct deposit and it goes immediately into my bank account. It seems that what you're discussing is some kind of loadable debit/credit card -- is that right? Are you saying that the SS is going to do away with direct deposit into bank accounts and only have the loadable cards?

This is an attempt by SS to completly do away with the checks, for folks that do not have bank accounts. Similar to what is done for welfare. (A lot of lower income folks don't for one reason or another have a bank account). The idea is that with paper checks, one had to pay a check cashing place to cash the check, for Example Wal-Mart charges $3 to cash a check. So the comparison is to the fees charged for using paper checks, as most banks will not cash a check for a non-customer, due to forgery issues.

What odd framing in the OP. The question is should people pay private companies for services rendered or should people receive those services for free. To my knowledge, most government payments to people require conversion into currency. This conversion can be done at a bank with which a person has a business relationship or at businesses which charge a fee for check cashing.

From a government expense standpoint, writing and sending physical checks is very expensive compared to digitally transferring payments through direct deposit to bank accounts or debit card accounts.

The OP is seemingly just looking to find something to rant about.

The state of RI moved it's unemployment benefits to Chase a few years back and it has similar fees.

This has also been done with unemployment in many states for some years now. Google "unemployment direct deposit", and see what alternatives are offered. Wisconsin, for example, still uses checks. Pennsylvania and New York issue debit cards.

I agree with the other posters. I really can't see what the possible downside is whatsoever.

*read blog post*
*reads comment 3 by Mike*
lol wut

Mike the Mad Biologist is absolutely right. And there are even more downsides to this than the fees he mentions. Yes, direct deposit will still exist, along with the debit card option, as a means by which Social Security benefits will be conveyed to recipients. However, despite any claimed savings by the government for only providing benefits by electronic means, the biggest cost is elimination of the paper check for those who desire it.

It's not just the unbanked or those who rely on check cashing services who have received paper check payments from the government. There are plenty of people who trust a paper check more than some electronic transfer, and that trust, and choice of receiving a paper check, should be respected and honored.

What Treasury has done is tell some 15% of benefit recipients, about 6 million people, that their preference means nothing and their choice is inconsequential, and they no longer deserve to have that choice.

More than 1/3 of all households in the U.S. do not have internet access and thus have to find an alternate means of determining if the direct deposit of benefits took place. In addition to the fees associated with the debit cards, not everyone wants or needs one.

The move by states to pay all benefits electronically, coupled with similar action at the federal level, and
Treasury's recent decision make sales of savings bonds electronic-only as of January 1, all increase the likelihood of a crippling cyberattack on our nation's currency, with catastrophic consequences resulting.

My comfort level involves cash and checks. If you like electronic money, more power to you. That's your choice. But I resent any government agency taking my choice away from me.

Bob, it ceases to be your choice when it involves everyone's money (taxes). Don't get me wrong, I'm a complete supporter of SS, but it should keep up with the times. You would have to make some pretty good arguments to convince me that a paper check is in any way nearly as secure as an electronic card, and reducing the chance of someone's SS money being stolen is a good thing IMO. As far as your fear of cyberattacks, well they would affect the very same accounts that your paper check is coming from, so it's not like you have any additional security by having a piece of paper instead of an electronic account. Regarding the internet access thing, it's a good point until you realize that every single bank I've ever heard of has both automated and staffed phone centers that you can do all of your transactions through, and you can check your balance in about 60 seconds.

As far as fees go, it's a standard fee that applies to nearly every transaction in this country. I pay more than that if I want to take money out of an ATM using my credit card, but here's the big thing: I don't have to use cash if I don't want to. These cards aren't going to charge you money to use them at a store, only if you want to take cash out of an ATM. Sorry, but that's a pretty minor inconvenience (or really it's more convenient than using cash).

Sorry Bob, but I can't see a single argument you make holding any water. You remind me of my dad, who didn't get a cell phone for years because he didn't want the fancy new technology. Then he realized that I hadn't paid a long-distance charge in years, and I could call my brother in CA for the same price as calling him down the street. I've been trying to get him around to credit cards, but it's the same story. Maybe when I show him the several hundred dollars in Amazon giftcards I get through rewards programs he'll come around . . .

I have so many responses, Rob Monkey.

Social Security *has* kept up with the times. It provided paper check, direct deposit, and debit card payment options. People selected the option that made the most sense to them. As I pointed out, some 6 million people have continued to select the paper check option. Since it appears you do not see the need to validate their choice, I hope you will never be placed in a position of having a choice you oppose being forced upon you---whether it involve Social Security or anything else. And should such an unwanted choice be imposed upon you, will you be so willing to accept it?

As to security, I am unaware of any system which is totally safe and unable to be compromised. Therefore, each person should be allowed to choose the system with which he/she is most comfortable and finds the most secure. Your mileage may differ, but I find cash and checks to be the most secure. If you like electronic cards, think they are secure, and don't care if every purchase you make on them is able to be tracked by the vendor and possibly sold to a third party as well as be susceptible to hacking, it's fine with me. I like the anonymity of cash and the fact that any spending of it provides a tangible exchange of money. Either I have it in my pocket or I don't. Checks are a fallback for moving larger amounts of money, such as for recurring monthly bills or larger purchases in stores. I feel safe with them; I don't with cards. That's why I don't have (or want) credit cards, debit cards, or ATM cards.

As for checking bank balances, yes, you can call a bank call center. Personally, I don't have time to mess around with that. Nor do I think people should have to make calls or go on-line to find out if a direct deposit has been made to their account. If the paper check has arrived in the mail, I have been paid. If it doesn't, I haven't. Simple and easy to figure out. And once I have the check, I can decide when, where, and how to deposit or cash it as I see fit, depending on the circumstances of the moment. Even though direct deposit can be split between accounts if the person desires, it must be set up that way ahead of time, then adhered to until the recipient decides to alter the formula. With a check in hand, the recipient can decide at that moment how to handle it.

As for the fees, by paying with cash or checks, I avoid all transaction fees. I don't use an ATM. If I need cash, I get it from a teller at my financial institution. If the fee is a negligible inconvenience for you, and something you don't mind paying, great. Personally, I love never having to concern myself with the possibility of incurring one.

Your dad and I would probably have a lot in common. I don't have or want a credit card. And I don't have a cellphone either. I don't know your dad's age, but I'm betting that I'm younger than he is. I also never make long distance calls. So unless you've got the greatest cell plan around, my guess is that my monthly landline bill is probably cheaper than what you pay. I don't have to worry about how many minutes I use, and I never have to worry about whether I'm in a dead spot.

All of these reflect my personal choices. I've got nothing against direct deposit, debit cards, credit cards, or cellphones for that matter.............for those who want them.

All I ask is that I be allowed to live my life with the choices and options that have previously been made available to me, without being forced to change to something else that I don't want or need.

More on the Congressional--and Congressional Staffer--Retirement Program

mikethemadbiologist — Sun, 03 Jul 2011 08:01:13 +0000

More on the Congressional--and Congressional Staffer--Retirement Program

It appears the de facto Congressional retirement plan is spreading to the lower orders. For those who aren't familiar with the Congressional retirement plan, here's what I mean:

One of the dirty secrets about many, if not most, congressmen and senators is that they like Washington, D.C., rhetoric notwithstanding. They want to stay in town after they leave (or lose) office. Once you've tasted the Capital of the Free World, do you really want to go back to Pierre, South Dakota? (Tom Daschle comes to mind...). It's funny how many politicians, having made a career out of bashing War-Shing-Tun, don't...seem...to...ever...leave.

I can't blame them: I moved to Boston, and would be very happy to stay here. Places do grow on you. The problem comes, for politicians, when they have to find a job. For an ex-politician, there aren't that many 'straight paths' to getting your next job: lobbyist and corporate board member are the easiest and the most lucrative.

But if you get a reputation as someone who opposes large business interests, what chance do you have of getting either of these types of jobs? Sometimes, the quid pro quo is very crude and direct (e.g., Billy Tauzin), but the Village's political culture makes it clear what is acceptable. One should not be 'populist', or, heaven forbid, liberal.

According to Matt Stoller, the contagion is spreading (italics mine):

Let's take a look at someone that I liked a great deal while I worked in the House, a staffer named Doug Thornell, who worked for Rep. Chris Van Hollen. Van Hollen was the architect of the Democratic response to Citizens United, as well as the Chair of the electoral arm of the House Democrats, the DCCC. Thornell was his communications staffer, and you could always count on him for a quote to go after the GOP's reliance on special interests. Thornell was also one of the Hill's 50 most beautiful people in 2010.
In 2010, Doug Thornell would let the GOP have it.

"For 20 years, John Boehner has been in Washington caddying for powerful corporate special interests and working against middle class families," Doug Thornell said. "He rushed to support President Bush's Wall Street bailout, but when President Obama asked for his support for middle class tax cuts, help for small businesses and aid for those most in need, he turned his back."

Fast-forward to 2011. Doug Thornell is now working for a group seeking to allow corporations to repatriate profits without paying taxes. His tune on special interests has changed.

"Our broken tax system currently penalizes U.S. businesses that want to bring their global earnings home," said Doug Thornell, a former House Democratic staffer who is now a spokesman for the Win America Campaign. "The simple truth is there are few policy options left that will inject this amount of money into our economy and cost taxpayers next to nothing."

You can say "how dare he do this!" But that's actually beside the point. Doug is a highly trained and highly competent communications staffer, and he genuinely did want to help people when he worked for Van Hollen. Where else could he go after the Democrats lost the majority? It's obvious that the career path options in the political class are so limited that they constrain behavior within the institutions themselves.

While Stoller proposes that liberals should have well-heeled ~~retirement homes~~ think tanks in which former Democratic operatives can be esconced, what this really tells us is that our political betters--the ones who supposedly know so much more than we hoi polloi--are fatally compromised. And I don't know how to fix that.

It would appear that once upon a time, Democratic operatives were able to serve their country without an off ramp. Not sure what happened since then.

mikethemadbiologist Sun, 07/03/2011 - 04:01

Tags

bidness

Democrats

The Complete Breakdown of Law Regarding Home Ownership: The Essex County, MA Edition

mikethemadbiologist — Sat, 02 Jul 2011 08:01:54 +0000

The Complete Breakdown of Law Regarding Home Ownership: The Essex County, MA Edition

I haven't talked about Big Shitpile (the housing-initiated economic collapse in a while), but this report from the Essex County Register of Deeds (Massachusetts) describes nothing less than the breakdown of the property title system in the U.S.:

Yesterday at the Annual Conference of The International Association of Clerks, Recorders, Election Officials and Treasurers (IACREOT), Register John O'Brien revealed the results of an independent audit of his registry. The audit, which is released as a legal affidavit was performed by McDonnell Property Analytics, examined assignments of mortgage recorded in the Essex Southern District Registry of Deeds issued to and from JPMorgan Chase Bank, Wells Fargo Bank, and Bank of America during 2010. In total, 565 assignments related to 473 unique mortgages were analyzed.

McDonnell's Report includes the following key findings:

- Only 16% of assignments of mortgage are valid

- 75% of assignments of mortgage are invalid.

- 9% of assignments of mortgage are questionable

- 27% of the invalid assignments are fraudulent, 35% are "robo-signed" and 10% violate the Massachusetts Mortgage Fraud Statute.

- The identity of financial institutions that are current owners of the mortgages could only be determined for 287 out of 473 (60%)

- There are 683 missing assignments for the 287 traced mortgages, representing approximately $180,000 in lost recording fees per 1,000 mortgages whose current ownership can be traced.

The practical implications of this, at least in Massachusetts, are pretty straightforward: most foreclosures are invalid since the foreclosing party can't claim title to the mortgage. It also calls into question bundled mortgages--those who sold these mortgages never owned the mortgages and consequently committed fraud (it's as illegal as if I sold you PZ's house without his knowledge).

But there's a larger problem. Quite simply, lenders have ~~repeatedly~~ in most cases violated the law. This isn't some 'ticky-tack' paperwork either. Titles are, and have been for over two centuries in America, the primary mean by which ownership of residential property* is established. This is open season on the fundamental nature of property, yet, mysteriously, conservatives have been very, very quiet about all of this.

Registrar John O'Brien sums it up:

"My registry is a crime scene as evidenced by this forensic examination," stated John O'Brien. "This crime that has affected thousands of homeowners in Essex County who, through no fault of their own, have had their property rights trampled on and their chain of title compromised. This evidence has made it clear to me that the only way we can ever determine the total economic loss and the amount damage done to the taxpayers is by conducting a full forensic audit of all registry of deeds in Massachusetts. I suspect that at the end of the day we are going to find that the taxpayers have been bilked in this state alone of over 400 million dollars not including the accrued interest plus costs and penalties. The Audit makes the finding that this was not only a MERS problem, but a scheme also perpetuated by MERS shareholder banks such Bank of America, Wells Fargo, JP Morgan and others. I am stunned and appalled by the fact that America's biggest banks have played fast and loose with people's biggest asset - their homes. This is disgusting, and this is criminal," said O'Brien.

Meanwhile, in Michigan, a recent court decision finding that MERS compromised the chain of title has led to a 97% reduction in foreclosure filings.

The large banks broke the law so they could avoid paying filing taxes and so no one could determine just how shitty the bundles of mortgages actually were. Now, hopefully, they'll pay for it.

I realize Big Shitpile is, like, so 2009, but the rule of law and the legitimacy of home ownership are kind of important. Yet this almost never penetrates the national media, especially television. Odd that...

*And commercial property too.

mikethemadbiologist Sat, 07/02/2011 - 04:01

Tags

It's kind of astonishing that county registrars let MERS & co. get away with this for so long, and even now, when so much evidence of chicanery is coming to light, only a few are taking any real action. Just from a financial point of view, it makes no sense: as O'Brien says, avoiding recording fees was part of the plan, and the states could really use that money. It's good that O'Brien is trying to get his colleagues to sit up and notice, though.

From the IOKIYAR Files: GOP Debt Negotiator Rep. Eric Cantor Shorts the Republic

mikethemadbiologist — Wed, 29 Jun 2011 09:53:26 +0000

From the IOKIYAR Files: GOP Debt Negotiator Rep. Eric Cantor Shorts the Republic

It's OK If You're a Republican, I suppose:

Last year the Wall Street Journal reported that Cantor, the No. 2 Republican in the House, had between $1,000 and $15,000 invested in ProShares Trust Ultrashort 20+ Year Treasury EFT. The fund aggressively "shorts" long-term U.S. Treasury bonds, meaning that it performs well when U.S. debt is undesirable. (A short is when the trader hopes to profit from the decline in the value of an asset.)

According to his latest financial disclosure statement, which covers the year 2010 and has been publicly available since this spring, Cantor still has up to $15,000 in the same fund. Contacted by Salon this week, Cantor's office gave no indication that the Virginia Republican, who has played a leading role in the debt ceiling negotiations, has divested himself of these holdings since his last filing. Unless an agreement can be reached, the U.S. could begin defaulting on its debt payments on Aug. 2. If that happens and Cantor is still invested in the fund, the value of his holdings would skyrocket.

"If the debt ceiling isn't raised, investors would start fleeing U.S. Treasuries," said Matt Koppenheffer, who writes for the investment website the Motley Fool. "Yields would rise, prices would fall, and the Proshares ETF should do very well. It would spike."
The fund hasn't significantly spiked yet because many investors believe Congress will eventually raise the debt ceiling. However, since Cantor abruptly called off debt ceiling negotiations last Thursday, the fund is up 3.3 percent.

In case, you're not getting what this means, Rep. Cantor, who is playing hardball on the debt negotiations, stands to profit heavily if the negotiations collapse and the debt ceiling crisis blows up. U.S. Treasuries would drop in value, and since Cantor 'shorted' them--bet that they would decrease in value--he would make a killing. As far as I'm concerned, it borders on treason to speculate against the full faith and credit of the Republic when you are an elected official of the Republic. And if you're an elected official, you don't get to claim the 'hedging' argument--your job is to keep U.S. Treasuries relatively stable in value and preserve their basic integrity.

Several thoughts:

1) Why isn't the press covering this? Seems kinda important.

2) Could you imagine the shitstorm that would ensue if a Democrat had a conflict?

3) Why aren't Democratic operatives all the way up Cantor's ass on this? Might answer question #1.

The inability of Democrats to appeal to the lizard

mikethemadbiologist Wed, 06/29/2011 - 05:53

Tags

bidness

Conservatives

So the leading Republican is trying to destroy the economy so he can personally profit. Par for the course really. What policies do they have that aren't doing this? This is just a little more direct and a little bigger scale. They're the party of fiscal irresponsibility.

CEO Pay and the Moral Decline of Economic Elites

mikethemadbiologist — Tue, 21 Jun 2011 07:55:01 +0000

CEO Pay and the Moral Decline of Economic Elites

Over the weekend, The Washington Post actually committed journalism with a report about the growing income and wealth gap in the U.S. To place it in historical context, they compared two CEOs, one from the 1970s and the current CEO. Here's the blast from the past (italics mine):

It was the 1970s, and the chief executive of a leading U.S. dairy company, Kenneth J. Douglas, lived the good life. He earned the equivalent of about $1 million today. He and his family moved from a three-bedroom home to a four-bedroom home, about a half-mile away, in River Forest, Ill., an upscale Chicago suburb. He joined a country club. The company gave him a Cadillac. The money was good enough, in fact, that he sometimes turned down raises. He said making too much was bad for morale...

But critics question why so much of the growth in income should go to the wealthiest. Douglas, the Dean Foods chief from the '70s, died in 2007. But his son, Andrew Douglas, said his father viewed wages in part as a moral issue.

If his father had seen how much executives were making today, Andrew Douglas said, he'd be "spinning in his grave. My dad just believed that after a while, what else would you need the money for?"

Now, let's compare to the new breed (italics mine):

From 1970 to 1979, while Douglas was the chief executive, sales at Dean Foods tripled and profits increased tenfold, to $9.8 million, according to company records. Similarly, from 2000 to 2009, sales at what would be Dean Foods had roughly doubled, and so had profits, to $228 million. (Engles became chief executive after the company he led bought Dean Foods in 2001 and adopted its name.)
Yet there are vast differences in the way the two men were paid, even when you adjust for the effects of inflation.

In the late 70s -- 1977, 1978 and 1979 -- Douglas made about $1 million annually in today's dollars. The largest part of that was a salary; some came from a long-term incentive based on the stock price that would not mature until he retired.

By contrast, in the late 2000s -- 2007, 2008 and 2009 -- Engles averaged $10.5 million annually, most of it in stock and options awards and other incentive pay, according to proxy statements. After '09, which was a particularly bad year, Engles's compensation dropped to $4 million in 2010. If profits return, so will his higher earnings.

That's right--after a bad year Engles' receives four times the pay his predecessor did. Does this have an effect? You betcha:

Over at Dean Foods, Kenneth Douglas was likewise resistant to making more. Most years, board members at Dean Foods wanted to give Douglas a raise. But more than once, Douglas, a former FBI agent who literally married the girl next door, refused.

"He would object to the pay we gave him sometimes -- not because he thought it was too little; he thought it was too much," said Alexander J. Vogl, a members of the Dean Foods board at the time and the chair of its compensation committee. "He was afraid it would be bad for morale, him getting a big bump like that."

"He believed the reward went to the shareholders, not to any one man," said John P. Frazee, another former board member. "Today we get cults of personality around the CEO, but then there was not a cult of personality."

Outside one of the Dean Foods dairies recently, the workers at the plant for the most part only rolled their eyes when asked about Engles's salary. But they spoke admiringly of Douglas.

"People back then thought enough was enough," said Ron Smith, 63, who maintains the machines at the plant.

Meanwhile, these brilliant executives aren't helping at all (italics mine):

Let's begin with the view from 30,000 feet. Total executive pay increased by 13.9 percent in 2010 among the 483 companies where data was available for the analysis. The total pay for those companies' 2,591 named executives, before taxes, was $14.3 billion.

That's some pile of pay, right? But Mr. Ciesielski puts it into perspective by noting that the total is almost equal to the gross domestic product of Tajikistan, which has a population of more than 7 million.

Warming to his subject, Mr. Ciesielski also determined that 158 companies paid more in cash compensation to their top guys and gals last year than they paid in audit fees to their accounting firms. Thirty-two companies paid their top executives more in 2010 than they paid in cash income taxes.

The report also blows a hole in the argument that stock grants to executives align the interests of managers with those of shareholders. The report calculated that at 179 companies in the study, the average value of stockholders' stakes fell between 2008 and 2010 while the top executives at those companies received raises...

Moving on to R.& D. costs, the report examined the 62 technology companies in its sampling that reported such an expense, excluding certain costs associated with acquisitions.

Mr. Ciesielski found that the median level of executive pay was equal to 5.3 percent of these companies' R.& D. expenditures.

Topping the pack was Jabil Circuit, a manufacturer of electronic circuits and boards for computer, communications and automotive markets. In 2010, its $27.7 million in total executive pay almost matched the $28.1 million it spent on R.& D. While last year may have been an outlier, over the past four years, Jabil's pay equaled 57.2 percent of the amount it spent on research and development....

Eleven companies analyzed in the report gave top executives a combined pay package amounting to 1 percent or more of the companies' average market value over the course of the year. The Janus Capital Group, the mutual fund concern, topped the list, with pay totaling almost $41 million for five executives. This accounted for 1.95 percent of the company's average market value over 2010.

"To earn their keep," the report said, "managers would have to create stock market value in the full amount of their pay."

So, to summarize: harming the public treasury (executive salaries can be deducted), decreasing money spend on research (and long-term company health), and harming investors. What's not to like? Here's another case study:

We'll concede that it has been a rough several years for the financial services industry and for the market as a whole. Here's a five-year chart comparing Goldman to the S&P 500 and to the KBW Bank Index. Over the past five years, Goldman has outperformed the sad sack bank index by a significant margin but has underperformed the S&P 500. Goldman survived the 2008 panic in better shape than most of its rivals, in part because the Federal Reserve let it and other highly leveraged investment banks access funds. But Goldman didn't exactly light it up as the credit and stock markets bounced back. (Here's a two-year chart of Goldman against the S&P 500 and the KBW Bank Index.)

Besides, Goldman would be insulted if it were to be compared to the typical member of the KBW Bank Index. This isn't some small-time, sleepy institution that takes deposits and lends money here and there. Goldman is an elite global institution, with the best minds and systems money can buy. It bestrides the globe like a colossus. It works harder and smarter than all the other firms. It has a culture in which failure and mediocrity aren't tolerated, much less rewarded. Up or out.

So imagine a bunch of senior Goldman executives hired an expensive portfolio manager and tasked him with creating positive returns. Next, imagine that the manager came back year after year and informed the executives that the best he could do was flat returns -- but that he nonetheless deserved a multimillion-dollar payday. They'd laugh.

And yet while Goldman's returns have been subpar, CEO Lloyd Blankfein is getting paid like he's crushing the market.

A couple of decades ago, Christopher Lasch wrote a book, The Betrayal of the Elites, which focused mostly on how the upper class of U.S. society was setting a bad example on social issues (i.e., a more comprehensive 'Murphy Brown' argument). I always thought that argument was overblown: the true hallmark of the upper class' moral and ethical degeneracy was demonstrated by how they treated their employees (increasingly shabbily).

We are ruled by greedy sociopaths.

mikethemadbiologist Tue, 06/21/2011 - 03:55

Tags

bidness

ethics

Thank you for this post, I'll try to link it around. You know what the enablers of this do: complain about "politics of envy", as if how much is distributed to us isn't a worthy issue. Readers might be interested in the Steady State Economy site: http://steadystate.org/.
PS: hope it's OK to also pitch my physics essay, see name link.

I think the last sentence says it all.

Governments are complicit in this by making income tax scales flatter and flatter as time goes by. One of the worst examples is the US Federal Government, which doesn't even have a tax-free threshold for everyone, and taxes low income earners more than low income earners in other well-off countries, while at the same time taxing high-income earners less than in those other countries. You may complain about people looking after themselves but what excuse do governments (the US especially) have?

Chris, could you tell me more about that? The righties keep complaining, "the lower half doesn't pay any Federal income taxes." I know, there's the other kinds, but give us more scoop on how all that hashes out, alternatives, etc.

Also, it's worse than just "flat" taxation (which I might respect if done very fairly and with other reforms), because of capital gains etc. being taxed at lower rates than earned income! This is a major scandal, and even establishment enablers like Samuelson called to end the discrepancy.

100% inheritance tax would kill most of this. If you die and it's all going to go to "the gubmint", you'll spend the damn thing.

And there's no way you can spend 7million a year, every year.

The righties keep complaining, "the lower half doesn't pay any Federal income taxes."

They would, wouldn't they? A lot of very low income earners in the US manage to avoid Federal income tax by qualifying for tax credits by not all of them whereas ALL very low (adult) income earners (below $16,000 pa) in Australia pay no tax. A single income earner in the US earning $16,000 (which is worth less than AUS$16,000 these days) pays $1982.50 Federal tax if they don't qualify for any tax credits. This is more like the land of inequality than the land of the free.

Also, it's worse than just "flat" taxation (which I might respect if done very fairly and with other reforms), because of capital gains etc. being taxed at lower rates than earned income! This is a major scandal

Indeed, they got away with this in Australia too, to the extent that it favors rates of capital gain more than double the inflation rate. This will come back and bite one day when the property boom comes to an end. Then they'll have to pay capital gains tax, even if they only make one dollar in twenty years and the consumer price index has doubled.

Unless I got lost in your figures, today's CEO is earning between four and ten times as much for running a company that's at least 23 times as big. And if US is anything like the rest of the world, the supermarkets will have put downward pressure on Dean Foods' margins, meaning that 23 times the profit probably translates into significantly more than 23 times the sales.

Since the current company appears to have grown through acquisitions, it might be more instructive to compare the current CEO's remuneration with the consolidated remuneration of all the CEOs of all the former companies which now comprise Dean Foods. We are meant to be scientists, after all....