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Archive for April 1st, 2010
Looting Main Street
April 1st, 2010 | 
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How the nation’s biggest banks are ripping off American cities with the same predatory deals that brought down Greece
MATT TAIBBI
If you want to know what life in the Third World is like, just ask Lisa Pack, an administrative assistant who works in the roads and transportation department in Jefferson County, Alabama. Pack got rudely introduced to life in post-crisis America last August, when word came down that she and 1,000 of her fellow public employees would have to take a little unpaid vacation for a while. The county, it turned out, was more than $5 billion in debt — meaning that courthouses, jails and sheriff’s precincts had to be closed so that Wall Street banks could be paid.
As public services in and around Birmingham were stripped to the bone, Pack struggled to support her family on a weekly unemployment check of $260. Nearly a fourth of that went to pay for her health insurance, which the county no longer covered. She also fielded calls from laid-off co-workers who had it even tougher. “I’d be on the phone sometimes until two in the morning,” she says. “I had to talk more than one person out of suicide. For some of the men supporting families, it was so hard — foreclosure, bankruptcy. I’d go to bed at night, and I’d be in tears.”
Homes stood empty, businesses were boarded up, and parts of already-blighted Birmingham began to take on the feel of a ghost town. There were also a few bills that were unique to the area — like the $64 sewer bill that Pack and her family paid each month. “Yeah, it went up about 400 percent just over the past few years,” she says.
The sewer bill, in fact, is what cost Pack and her co-workers their jobs. In 1996, the average monthly sewer bill for a family of four in Birmingham was only $14.71 — but that was before the county decided to build an elaborate new sewer system with the help of out-of-state financial wizards with names like Bear Stearns, Lehman Brothers, Goldman Sachs and JP Morgan Chase. The result was a monstrous pile of borrowed money that the county used to build, in essence, the world’s grandest toilet — “the Taj Mahal of sewer-treatment plants” is how one county worker put it. What happened here in Jefferson County would turn out to be the perfect metaphor for the peculiar alchemy of modern oligarchical capitalism: A mob of corrupt local officials and morally absent financiers got together to build a giant device that converted human shit into billions of dollars of profit for Wall Street — and misery for people like Lisa Pack.
And once the giant shit machine was built and the note on all that fancy construction started to come due, Wall Street came back to the local politicians and doubled down on the scam. They showed up in droves to help the poor, broke citizens of Jefferson County cut their toilet finance charges using a blizzard of incomprehensible swaps and refinance schemes — schemes that only served to postpone the repayment date a year or two while sinking the county deeper into debt. In the end, every time Jefferson County so much as breathed near one of the banks, it got charged millions in fees. There was so much money to be made bilking these dizzy Southerners that banks like JP Morgan spent millions paying middlemen who bribed — yes, that’s right, bribed, criminally bribed — the county commissioners and their buddies just to keep their business. Hell, the money was so good, JP Morgan at one point even paid Goldman Sachs $3 million just to back the fuck off, so they could have the rubes of Jefferson County to fleece all for themselves.
Birmingham became the poster child for a new kind of giant-scale financial fraud, one that would threaten the financial stability not only of cities and counties all across America, but even those of entire countries like Greece. While for many Americans the financial crisis remains an abstraction, a confusing mess of complex transactions that took place on a cloud high above Manhattan sometime in the mid-2000s, in Jefferson County you can actually see the rank criminality of the crisis economy with your own eyes; the monster sticks his head all the way out of the water. Here you can see a trail that leads directly from a billion-dollar predatory swap deal cooked up at the highest levels of America’s biggest banks, across a vast fruited plain of bribes and felonies — “the price of doing business,” as one JP Morgan banker says on tape — all the way down to Lisa Pack’s sewer bill and the mass layoffs in Birmingham.
Once you follow that trail and understand what took place in Jefferson County, there’s really no room left for illusions. We live in a gangster state, and our days of laughing at other countries are over. It’s our turn to get laughed at. In Birmingham, lots of people have gone to jail for the crime: More than 20 local officials and businessmen have been convicted of corruption in federal court. Last October, right around the time that Lisa Pack went back to work at reduced hours, Birmingham’s mayor was convicted of fraud and money-laundering for taking bribes funneled to him by Wall Street bankers — everything from Rolex watches to Ferragamo suits to cash. But those who greenlighted the bribes and profited most from the scam remain largely untouched. “It never gets back to JP Morgan,” says Pack.
If you want to get all Glenn Beck about it, you could lay the blame for this entire mess at the feet of weepy, tree-hugging environmentalists. It all started with the Cahaba River, the longest free-flowing river in the state of Alabama. The tributary, which winds its way through Birmingham before turning diagonally to empty out near Selma, is home to more types of fish per mile than any other river in America and shelters 64 rare and imperiled species of plants and animals. It’s also the source of one of the worst municipal financial disasters in American history.
Back in the early 1990s, the county’s sewer system was so antiquated that it was leaking raw sewage directly into the Cahaba, which also supplies the area with its drinking water. Joined by well — intentioned citizens from the Cahaba River Society, the EPA sued the county to force it to comply with the Clean Water Act. In 1996, county commissioners signed a now-infamous consent decree agreeing not just to fix the leaky pipes but to eliminate all sewer overflows — a near-impossible standard that required the county to build the most elaborate, ecofriendly, expensive sewer system in the history of the universe. It was like ordering a small town in Florida that gets a snowstorm once every five years to build a billion-dollar fleet of snowplows.
The original cost estimates for the new sewer system were as low as $250 million. But in a wondrous demonstration of the possibilities of small-town graft and contract-padding, the price tag quickly swelled to more than $3 billion. County commissioners were literally pocketing wads of cash from builders and engineers and other contractors eager to get in on the project, while the county was forced to borrow obscene sums to pay for the rapidly spiraling costs. Jefferson County, in effect, became one giant, TV-stealing, unemployed drug addict who borrowed a million dollars to buy the mother of all McMansions — and just as it did during the housing bubble, Wall Street made a business of keeping the crook in his house. As one county commissioner put it, “We’re like a guy making $50,000 a year with a million-dollar mortgage.”
To reassure lenders that the county would pay its mortgage, commissioners gave the finance director — an unelected official appointed by the president of the commission — the power to automatically raise sewer rates to meet payments on the debt. The move brought in billions in financing, but it also painted commissioners into a corner. If costs continued to rise — and with practically every contractor in Alabama sticking his fingers on the scale, they were rising fast — officials would be faced with automatic rate increases that would piss off their voters. (By 2003, annual interest on the sewer deal had reached $90 million.) So the commission reached out to Wall Street, looking for creative financing tools that would allow it to reduce the county’s staggering debt payments.
Wall Street was happy to help. First, it employed the same trick it used to fuel the housing crisis: It switched the county from a fixed rate on the bonds it had issued to finance the sewer deal to an adjustable rate. The refinancing meant lower interest payments for a couple of years — followed by the risk of even larger payments down the road. The move enabled county commissioners to postpone the problem for an election season or two, kicking it to a group of future commissioners who would inevitably have to pay the real freight.
But then Wall Street got really creative. Having switched the county to a variable interest rate, it offered commissioners a crazy deal: For an extra fee, the banks said, we’ll allow you to keep paying a fixed rate on your debt to us. In return, we’ll give you a variable amount each month that you can use to pay off all that variable-rate interest you owe to bondholders.
In financial terms, this is known as a synthetic rate swap — the spidery creature you might have read about playing a role in bringing down places like Greece and Milan. On paper, it made sense: The county got the stability of a fixed rate, while paying Wall Street to assume the risk of the variable rates on its bonds. That’s the synthetic part. The trouble lies in the rate swap. The deal only works if the two variable rates — the one you get from the bank, and the one you owe to bondholders — actually match. It’s like gambling on the weather. If your bondholders are expecting you to pay an interest rate based on the average temperature in Alabama, you don’t do a rate swap with a bank that gives you back a rate pegged to the temperature in Nome, Alaska.
Not unless you’re a fucking moron. Or your banker is JP Morgan.
In a small office in a federal building in downtown Birmingham, just blocks from where civil rights demonstrators shut down the city in 1963, Assistant U.S. Attorney George Martin points out the window. He’s pointing in the direction of the Tutwiler Hotel, once home to one of the grandest ballrooms in the South but now part of the Hampton Inn chain.
“It was right around the corner here, at the hotel,” Martin says. “That’s where they met — that’s where this all started.”
They means Charles LeCroy and Bill Blount, the two principals in what would become the most important of all the corruption cases in Jefferson County. LeCroy was a banker for JP Morgan, serving as managing director of the bank’s southeast regional office. Blount was an Alabama wheeler-dealer with close friends on the county commission. For years, when Wall Street banks wanted to do business with municipalities, whether for bond issues or rate swaps, it was standard practice to reach out to a local sleazeball like Blount and pay him a shitload of money to help seal the deal. “Banks would pay some local consultant, and the consultant would then funnel money to the politician making the decision,” says Christopher Taylor, the former head of the board that regulates municipal borrowing. Back in the 1990s, Taylor pushed through a ban on such backdoor bribery. He also passed a ban on bankers contributing directly to politicians they do business with — a move that sparked a lawsuit by one aggrieved sleazeball, who argued that halting such legalized graft violated his First Amendment rights. The name of that pissed-off banker? “It was the one and only Bill Blount,” Taylor says with a laugh.
Blount is a stocky, stubby-fingered Southerner with glasses and a pale, pinched face — if Norman Rockwell had ever done a painting titled “Small-Town Accountant Taking Enormous Dump,” it would look just like Blount. LeCroy, his sugar daddy at JP Morgan, is a tall, bloodless, crisply dressed corporate operator with a shiny bald head and silver side patches — a cross between Skeletor and Michael Stipe.
The scheme they operated went something like this: LeCroy paid Blount millions of dollars, and Blount turned around and used the money to buy lavish gifts for his close friend Larry Langford, the now-convicted Birmingham mayor who at the time had just been elected president of the county commission. (At one point Blount took Langford on a shopping spree in New York, putting $3,290 worth of clothes from Zegna on his credit card.) Langford then signed off on one after another of the deadly swap deals being pushed by LeCroy. Every time the county refinanced its sewer debt, JP Morgan made millions of dollars in fees. Even more lucrative, each of the swap contracts contained clauses that mandated all sorts of penalties and payments in the event that something went wrong with the deal. In the mortgage business, this process is known as churning: You keep coming back over and over to refinance, and they keep “churning” you for more and more fees. “The transactions were complex, but the scheme was simple,” said Robert Khuzami, director of enforcement for the SEC. “Senior JP Morgan bankers made unlawful payments to win business and earn fees.”
Given the shitload of money to be made on the refinancing deals, JP Morgan was prepared to pay whatever it took to buy off officials in Jefferson County. In 2002, during a conversation recorded in Nixonian fashion by JP Morgan itself, LeCroy bragged that he had agreed to funnel payoff money to a pair of local companies to secure the votes of two county commissioners. “Look,” the commissioners told him, “if we support the synthetic refunding, you guys have to take care of our two firms.” LeCroy didn’t blink. “Whatever you want,” he told them. “If that’s what you need, that’s what you get. Just tell us how much.”
Just tell us how much. That sums up the approach that JP Morgan took a few months later, when Langford announced that his good buddy Bill Blount would henceforth be involved with every financing transaction for Jefferson County. From JP Morgan’s point of view, the decision to pay off Blount was a no-brainer. But the bank had one small problem: Goldman Sachs had already crawled up Blount’s trouser leg, and the broker was advising Langford to pick them as Jefferson County’s investment bank.
The solution they came up with was an extraordinary one: JP Morgan cut a separate deal with Goldman, paying the bank $3 million to fuck off, with Blount taking a $300,000 cut of the side deal. Suddenly Goldman was out and JP Morgan was sitting in Langford’s lap. In another conversation caught on tape, LeCroy joked that the deal was his “philanthropic work,” since the payoff amounted to a “charitable donation to Goldman Sachs” in return for “taking no risk.”
That such a blatant violation of anti-trust laws took place and neither JP Morgan nor Goldman have been prosecuted for it is yet another mystery of the current financial crisis. “This is an open-and-shut case of anti-competitive behavior,” says Taylor, the former regulator.
With Goldman out of the way, JP Morgan won the right to do a $1.1 billion bond offering — switching Jefferson County out of fixed-rate debt into variable-rate debt — and also did a corresponding $1.1 billion deal for a synthetic rate swap. The very same day the transaction was concluded, in May 2003, LeCroy had dinner with Langford and struck a deal to do yet another bond-and-swap transaction of roughly the same size. This time, the terms of the payoff were spelled out more explicitly. In a hilarious phone call between LeCroy and Douglas MacFaddin, another JP Morgan official, the two bankers groaned aloud about how much it was going to cost to satisfy Blount:
LeCroy: I said, “Commissioner Langford, I’ll do that because that’s your suggestion, but you gotta help us keep him under control. Because when you give that guy a hand, he takes your arm.” You know?
MacFaddin: [Laughing] Yeah, you end up in the wood-chipper.
All told, JP Morgan ended up paying Blount nearly $3 million for “performing no known services,” in the words of the SEC. In at least one of the deals, Blount made upward of 15 percent of JP Morgan’s entire fee. When I ask Taylor what a legitimate consultant might earn in such a circumstance, he laughs. “What’s a ‘legitimate consultant’ in a case like this? He made this money for doing jack shit.”
As the tapes of LeCroy’s calls show, even officials at JP Morgan were incredulous at the money being funneled to Blount. “How does he get 15 percent?” one associate at the bank asks LeCroy. “For doing what? For not messing with us?”
“Not messing with us,” LeCroy agrees. “It’s a lot of money, but in the end, it’s worth it on a billion-dollar deal.”
That’s putting it mildly: The deals wound up being the largest swap agreements in JP Morgan’s history. Making matters worse, the payoffs didn’t even wind up costing the bank a dime. As the SEC explained in a statement on the scam, JP Morgan “passed on the cost of the unlawful payments by charging the county higher interest rates on the swap transactions.” In other words, not only did the bank bribe local politicians to take the sucky deal, they got local taxpayers to pay for the bribes. And because Jefferson County had no idea what kind of deal it was getting on the swaps, JP Morgan could basically charge whatever it wanted. According to an analysis of the swap deals commissioned by the county in 2007, taxpayers had been overcharged at least $93 million on the transactions.
JP Morgan was far from alone in the scam: Virtually everyone doing business in Jefferson County was on the take. Four of the nation’s top investment banks, the very cream of American finance, were involved in one way or another with payoffs to Blount in their scramble to do business with the county. In addition to JP Morgan and Goldman Sachs, Bear Stearns paid Langford’s bagman $2.4 million, while Lehman Brothers got off cheap with a $35,000 “arranger’s fee.” At least a dozen of the county’s contractors were also cashing in, along with many of the county commissioners. “If you go into the county courthouse,” says Michael Morrison, a planner who works for the county, “there’s a gallery of past commissioners on the wall. On the top row, every single one of ‘em but two has been investigated, indicted or convicted. It’s a joke.”
The crazy thing is that such arrangements — where some local scoundrel gets a massive fee for doing nothing but greasing the wheels with elected officials — have been taking place all over the country. In Illinois, during the Upper Volta-esque era of Rod Blagojevich, a Republican political consultant named Robert Kjellander got 10 percent of the entire fee Bear Stearns earned doing a bond sale for the state pension fund. At the start of Obama’s term, Bill Richardson’s Cabinet appointment was derailed for a similar scheme when he was governor of New Mexico. Indeed, one reason that officials in Jefferson County didn’t know that the swaps they were signing off on were shitty was because their adviser on the deals was a firm called CDR Financial Products, which is now accused of conspiring to overcharge dozens of cities in swap transactions. According to a federal antitrust lawsuit, CDR is basically a big-league version of Bill Blount — banks tossed money at the firm, which in turn advised local politicians that they were getting a good deal. “It was basically, you pay CDR, and CDR helps push the deal through,” says Taylor.
In the end, though, all this bribery and graft was just the table-setter for the real disaster. In taking all those bribes and signing on to all those swaps, the commissioners in Jefferson County had basically started the clock on a financial time bomb that, sooner or later, had to explode. By continually refinancing to keep the county in its giant McMansion, the commission had managed to push into the future that inevitable day when the real bill would arrive in the mail. But that’s where the mortgage analogy ends — because in one key area, a swap deal differs from a home mortgage. Imagine a mortgage that you have to keep on paying even after you sell your house. That’s basically how a swap deal works. And Jefferson County had done 23 of them. At one point, they had more outstanding swaps than New York City.
Judgment Day was coming — just like it was for the Delaware River Port Authority, the Pennsylvania school system, the cities of Detroit, Chicago, Oakland and Los Angeles, the states of Connecticut and Mississippi, the city of Milan and nearly 500 other municipalities in Italy, the country of Greece, and God knows who else. All of these places are now reeling under the weight of similarly elaborate and ill-advised swaps — and if what happened in Jefferson County is any guide, hoo boy. Because when the shit hit the fan in Birmingham, it really hit the fan.
For Jefferson County, the deal blew up in early 2008, when a dizzying array of penalties and other fine-print poison worked into the swap contracts started to kick in. The trouble began with the housing crash, which took down the insurance companies that had underwritten the county’s bonds. That rendered the county’s insurance worthless, triggering clauses in its swap contracts that required it to pay off more than $800 million of its debt in only four years, rather than 40. That, in turn, scared off private lenders, who were no longer interested in bidding on the county’s bonds. The banks were forced to make up the difference — a service for which they charged enormous penalties. It was as if the county had missed a payment on its credit card and woke up the next morning to find its annual percentage rate jacked up to a million percent. Between 2008 and 2009, the annual payment on Jefferson County’s debt jumped from $53 million to a whopping $636 million.
It gets worse. Remember the swap deal that Jefferson County did with JP Morgan, how the variable rates it got from the bank were supposed to match those it owed its bondholders? Well, they didn’t. Most of the payments the county was receiving from JP Morgan were based on one set of interest rates (the London Interbank Exchange Rate), while the payments it owed to its bondholders followed a different set of rates (a municipal-bond index). Jefferson County was suddenly getting far less from JP Morgan, and owing tons more to bondholders. In other words, the bank and Bill Blount made tens of millions of dollars selling deals to local politicians that were not only completely defective, but blew the entire county to smithereens.
And here’s the kicker. Last year, when Jefferson County, staggered by the weight of its penalties, was unable to make its swap payments to JP Morgan, the bank canceled the deal. That triggered one-time “termination fees” of — yes, you read this right — $647 million. That was money the county would owe no matter what happened with the rest of its debt, even if bondholders decided to forgive and forget every dime the county had borrowed. It was like the herpes simplex of loans — debt that does not go away, ever, for as long as you live. On a sewer project that was originally supposed to cost $250 million, the county now owed a total of $1.28 billion just in interest and fees on the debt. Imagine paying $250,000 a year on a car you purchased for $50,000, and that’s roughly where Jefferson County stood at the end of last year.
Last November, the SEC charged JP Morgan with fraud and canceled the $647 million in termination fees. The bank agreed to pay a $25 million fine and fork over $50 million to assist displaced workers in Jefferson County. So far, the county has managed to avoid bankruptcy, but the sewer fiasco had downgraded its credit rating, triggering payments on other outstanding loans and pushing Birmingham toward the status of an African debtor state. For the next generation, the county will be in a constant fight to collect enough taxes just to pay off its debt, which now totals $4,800 per resident.
The city of Birmingham was founded in 1871, at the dawn of the Southern industrial boom, for the express purpose of attracting Northern capital — it was even named after a famous British steel town to burnish its entrepreneurial cred. There’s a gruesome irony in it now lying sacked and looted by financial vandals from the North. The destruction of Jefferson County reveals the basic battle plan of these modern barbarians, the way that banks like JP Morgan and Goldman Sachs have systematically set out to pillage towns and cities from Pittsburgh to Athens. These guys aren’t number-crunching whizzes making smart investments; what they do is find suckers in some municipal-finance department, corner them in complex lose-lose deals and flay them alive. In a complete subversion of free-market principles, they take no risk, score deals based on political influence rather than competition, keep consumers in the dark — and walk away with big money. “It’s not high finance,” says Taylor, the former bond regulator. “It’s low finance.” And even if the regulators manage to catch up with them billions of dollars later, the banks just pay a small fine and move on to the next scam. This isn’t capitalism. It’s nomadic thievery.
[From Issue 1102 — April 15, 2010]
Posted in Banks, Corruption, Economic Crisis, Economy, Financial System, Fraud, Goldman Sachs, JPMorgan, Matt Taibbi | 
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The Fed Admits To Breaking The Law
The Fed Admits To Breaking The Law
Posted by Karl Denninger
Now how long will it be before something is done about it?
April 1 (Bloomberg) — After months of litigation and political scrutiny, the Federal Reserve yesterday ended a policy of secrecy over its Bear Stearns Cos. bailout.
In a 4:30 p.m. announcement in a week of congressional recess and religious holidays, the central bank released details of securities bought to aid Bear Stearns’s takeover by JPMorgan Chase & Co. Bloomberg News sued the Fed for that information.
The problem is this: The Fed is not authorized to BUY anything other than those securities that have the full faith and credit of The United States.
In addition Ben Bernanke has repeatedly claimed that these deals would not cost anyone money. But the current value looks differently:
Assets in Maiden Lane II totaled $34.8 billion, according to the Fed, which set their current market value in its weekly balance sheet at $15.3 billion. That means Maiden Lane II assets are worth 44 cents on the dollar, or 44 percent of their face value, according to the Fed.
Maiden Lane III, which has $56 billion of assets at face value, is worth $22.1 billion, or 39 cents on the dollar, according to the Fed’s weekly balance sheet. A similar calculation for the Bear Stearns portfolio couldn’t be made because of outstanding derivatives trades.
In other words, they have lost more than half of their value.
This was and remains a blatantly unlawful activity.
The Fed has effectively usurped Article 1 Section 7 of The Constituion which reads in part:
All bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.
The Fed effectively appropriated taxpayer funds without authorization of Congress. At the time these facilities were put in place neither TARP or any other Congressional authorization existed for them to do so, and to date no bill has been put through Congress authorizing the expenditure of taxpayer funds, either through putting them at risk or via outright expense, for this purpose.
Nor does it stop with a “mere” Constitutional violation – The Federal Reserve Act’s Sections 13 and 14 do not permit Fed asset purchases except, once again, for items carrying “full faith and credit” guarantees. Credit-default swaps and trash mortgages most certainly do not meet these qualifications.
I know I’ve harped on this for more than two years, but here we have a raw admission of exactly what was done – and there is simply no way to construe any of it in a light that conforms with either The Constitution or black-letter statutory law.
What’s worse is that Tim Geithner, head of the NY Fed at the time, was very much involved in this – that is, he in effect personally, along with Ben Bernanke, usurped the power of the United States House.
The Fed has spent two years trying to hide this from the public and Congress. It has fought off both Congressional demands for disclosure and multiple FOIA lawsuits, the latter of which has resulted in a series of adverse rulings (and, it appears, was ultimately going to force disclosure anyway.)
These actions are unacceptable but promising “never to do that again” is insufficient. In a Representative Republic where the rule of law is supposed to be paramount – that is, where we do not crown Kings and relegate everyone else to the status of knaves, unlawful actions such as this demand that strong and unmistakable sanction also be applied to all wrongdoers in addition to protection against future abuse.
In this case this means that both Geithner and Bernanke must go – for starters.
Amending The Federal Reserve Act of 1913 (as Chris Dodd has proposed to prevent future lending bailouts) is not sufficient in that The Fed did not lend in this case, it purchased, and by buying what we now know were trash loans it violated the black letter of existing law.
There is only one effective remedy for an institution that has proved that it will not abide the law: it must be stripped of all authority that has been in the past and can be in the future abused.
This means that The Fed, if we are to keep it at all, must be relegated to a body that only practices and provides monetary policy – nothing more or less – and that all monetary operations must be performed openly, transparently, and within those constraints.
We cannot have a republic where an unelected body is left free to violate The Constitution with wild abandon and those acts are then allowed to stand.
One final thought: If the individuals responsible for this blatant black-letter violation of the law do not face meaningful sanction for these acts, and neither does The Fed as an institution, can you fine folks over at The Executive, Judiciary and Legislative branches of our government please explain to us ordinary Americans why we should obey any of the laws of this land when you will not enforce the laws that already exist?
Posted in Banks, Corruption, Economic Crisis, Economy, Federal Reserve, Financial System, Maiden Lane I, Maiden Lane III |
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Challenger Layoffs – Government Cuts
Challenger Layoffs – Government Cuts
Posted by Karl Denninger
If jobs are being created, how come state and local governments are firing, as reported by Challenger:
Employers announced plans to cut 67,611 jobs in March, according to outplacement firm Challenger, Gray & Christmas Inc. That’s up 61% from February, when 42,090 jobs were lost, the lowest level in nearly four years.
Anecdotally I’ve been hearing of major reductions in state and local employment for the last couple of months, as “stimulus” transfer payments run out and budgets must be balanced on a state level. A recent surge in Facebook groups coalescing around the government leeches howling about pay, benefit and job reductions are quite impressive, with literal thousands squealing about New Jersey’s moves to bring teacher, firefighter and cop leech, er, “employee” pay and benefit levels in line with private sector costs.
Government, of course, has long been populated with leeches. Indeed, by definition every government employee is a leech, since the money to operate a government program can come only by taxing it away from those who produce in the economy to be redistributed to these “essential” programs.
Some of these services are indeed important – or even essential. But over the last 20 years or so we have changed a government job from something you do because you want to be of service to something you do to extract as much money as possible from your neighbor across the street – or next door.
Witness the pension abuse loopholes that are being closed – and are generating the loudest screams. The usual practice for years has been to use take the last handful (frequently three or five) years of service as the salary base, then pay that. But “salary base” has nearly always included overtime, “hazard pay” and any other “add-ins”, including in some cases pay taken in lieu of accrued vacation time off! The result is that many people “retire” from these positions with six-figure pensions that frequently exceed the base pay that they would have earned while on the job. Further, many of these systems allow people to retire at 50 or 55, instead of the private-sector standard of 65 or even 67 (as is now the case for full Social Security benefits.) Many of these pensions also provide full medical coverage – all paid in full. And then you have the abusive changes made to state law and constitutions which effectively protect these payments as “super-senior” obligations that cannot be renegotiated or defaulted upon.
Contrast this with a private pension plan which can and sometimes does default. When private sector employees push too hard and abuse their pension systems, forcing them underwater, the PBGC comes in and takes over the plan. This results in the plan forcibly resetting back to whatever it can actually fund, which frequently results in a 50% or more reduction in benefits for pensioners.
Those who think that the “pain is over” need to look at state finances. There’s nothing good going on in this regard and layoff notices are increasing rapidly at the state and local government level. There isn’t a thing that can be done to fix this, as the distortions that drove the so-called “economy” over the last three decades are so outrageous as to expect them to be able to be maintained is laughable.
Yet that’s a huge part of the ”juice” behind the calls of “economic recovery” – the premise that we can pay retired firefighters and cops $150,000 pensions plus full medical insurance for 30 or more years as we can let them retire at 50 with full benefits. At the same time we can have public employees that are dramatically overpaid relative to the private sector in their current jobs.
All of this can be done while the entirety of the underpinning of the consumer and business sector – living beyond our means via home equity withdrawal – has literally disappeared and there is no possibility for that cycle to be restarted as more than a third of all mortgages are underwater on valuation. And don’t look at commercial real estate loans – yesterday we were treated to a report showing that CMBS deterioration hit another record for the current month.
At the same time these homedebtors are being cajoled into taking “modifications” on their notes that leave them with debt-to-income levels (on gross income!) of up to 60%, virtually guaranteeing they will not be able to make the payments on a continuing basis and, what’s worse, locking them into their underwater home and preventing them from moving to where job prospects are better. Those who do not currently own homes remain unable to buy them as a consequence of artificially-propped valuations, and the reservoir of suckers who took the $8,000 tax credit for “home buyers” appears to have been exhausted.
These factors are not mentioned on ToutTV and ToutPress, with the screamers on CNBS, Bloomberg and the Wall Street Journal all waving pom-poms and proclaiming “economic recovery is here!”
Yet here in the real world of Spring Break of Destin, Florida the streets are nearly empty. Oh sure, there are people here getting drunk and sunning themselves, but with good weather I would expect that the roads would be packed and the restaurants brimming with hour+ wait times.
Neither is or has been the case; last night I dined out right in the middle of the “rush” and while we had to wait a few minutes that was almost entirely due to the size of our party – half the local Olive Garden was empty despite it being 5:30 in the evening. This time three years ago there would have been an hour wait with the line out the door.
Yes, it’s anecdotal, and I’m sure there are places in this country where the economy is doing just fine. But there were during The Depression too – remember, 75% of the people had jobs during the worst of it in the 1930s.
That there are places where “all is doing ok” is not the test. The question is whether we can generate actual spending growth organically – not with government subsidy or games, but through actual private economic activity. To do so consumers and businesses must have de-levered and returned to sound balance sheets. While many firms are in decent shape the banks are in fact sitting on hundreds of billions of concealed losses enabled through balance-sheet bogosity made legal, while the consumer has gotten no break at all and are in fact hopping from rock to rock attempting to avoid the black hole of insolvency.
Rationalization of state and local government employment costs along with de-leveraging consumer balance sheets is not going to be over any time soon. Yet without it the sort of growth being priced into the market today – 5% or better annualized returns for the next five years forward – is flatly impossible on a sustained basis. The longer we play “extend and pretend” the more compounding of interest expense continues and the worse the ultimate damage will be.
Oh sure, in the short term the government can (and has) replaced nearly 10% of GDP with deficit spending. But even there the impact is waning, as the home sales numbers prove. Even enticement with an $8,000 tax credit is no longer sufficient to continue to stimulate final demand for homes, and despite this enormous subsidy activity is once again falling.
The monetary flat spin that I brought up at the end of 2008 continues to tighten, and objects out the window (that would be the ground!) are closer than they appear.
Three Reasons Public Sector Workers Are Killing The Economy; Pittsburgh's Pension Liability Hits $1 Billion; Pittsburgh Is Bankrupt
With thanks to the Business Insider who says “pass it on” here are Three Reasons Public Sector Workers Are Killing The Economy.
Three Reasons
1. Public sector employees cost too much.
2. We can’t fire them no matter how bad they are
3. They are a permanent lobby
Because public workers get money from taxpayers, everything it gains means less money for the rest of us!
Please play the video, it is short, entertaining, and educational.
Pittsburgh’s Pension Liability Hits $1 Billion
Please consider Pittsburgh’s pension liability hits $1 billion
Pittsburgh’s multimillion-dollar pension liability is set to balloon to $1.04 billion today, when city officials must comply with a state requirement to report retirement obligations to police, firefighters and other city workers.
With $296 million on hand in February, the city has about 30 cents for every dollar required to cover pension promises to about 3,200 employees and thousands of pensioners.
Mayor Luke Ravenstahl wants to avoid a state takeover of the pension funds looming at year’s end by depositing at least $200 million from a controversial plan to lease city parking garages and meters for 50 years to a private firm.
“They’re going to have to be very liberal in their assumptions, if they think that $200 million is going to bring them to 50 percent,” said James McAneny, director of the Pennsylvania Employee Retirement Commission. “They’re going to have to assume really good earnings and that nobody is going to be able to get a pay raise.”
“It’s one of the worst pension funds I’ve heard of,” said Edward Siedle, president of Florida-based Benchmark Financial Services, Inc.
“Eight percent is an extraordinarily high expected return. Most funds are in the sevens,” he said. “If you fail to meet your investment return, your liabilities grow each year. It’s like setting an unrealistic bar.”
Pittsburgh is bankrupt in my estimation. There is no way it can meet those pension obligations thanks to corrupt politicians getting in bed with greedy unions. The only way out is bankruptcy, hoping to overturn ridiculous promises in court.
Sadly, Mayor Luke Ravenstahl has his head in the sand, hoping to postpone reality with sleight of hand magic. It won’t work.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Don't Believe The Obamabot Liars
Don’t Believe The Obamabot Liars
Posted by Karl Denninger
They’re out in force trying to defend the indefensible:
These cost savings are real. They will grow over time. And they will make U.S. businesses more competitive.
….
The bill President Obama signed into law last week helps avoid each of these equally unappealing options.
I understand that in these difficult economic times, the potential for any additional expense is not welcomed by American businesses. But in the long run, the health insurance reform law promises to cut health-care costs for U.S. businesses, not expand them.
In a word: 
Let’s take a look at why we have a problem – we’ll look at the largest contributors to the mess, not the “little things.”
We will start with cost shifting.
This is one of the primary causes of health care “inflation” – in short, those who pay cover those who don’t have any money. The new law attempts to address this by forcing everyone to have insurance in some form or another. Or does it? In fact no, it does not.
Assuming that the mandate passes constitutional muster (and I don’t think it will) the problems remain. Specifically, illegal invaders still get emergency (including “planned emergencies” like childbirth) care at no cost to them – ever – and you get the bill.
But the cost-shifting doesn’t stop there. The worst part of the cost-shifting is in the medical device and pharmaceutical business. Other nations slap cost controls on pharmaceuticals, saying to the companies that they will pay “$X” for some device or medication – and if the drug company does not agree to sell for “$X” then the nation threatens to either not buy at all or break their patents and reproduce the drug or device within their borders, giving the company nothing.
The problem of course is that most pharmaceuticals and many devices have a cost structure that is more than a bit skewed. That is, the first pill may cost $1 billion – in development and testing expenses. Many drugs are “dry holes”; the company spends but the drug proves ineffective or even dangerous, and thus the money is lost.
Subsequent pills may cost $2 each to manufacture – once that first billion is spent.
Obviously, the drug companies must amortize that billion dollar development expense over the projected life and sales cycle for the drug. If they fail to do so they go out of business.
Everyone in the world who has access to that drug gets the benefit of the development. We in The United States get to pay the entire cost, because it is only here that we do not price-control drugs and threaten manufacturers with patent breaks if they don’t price “as we like it.”
This is responsible for most of the drug and device price inflation we have experienced – we are literally paying for the development of new treatments for more than 6.8 billion people yet there are only 330 million of us in the United States. That is, we bear twenty times our “fair share” of those development costs.
Medicare Part “D” is projected to be the fastest-growing deficit-generator; this should not surprise, given the gross and outrageously unfair means by which we literally absorb the entirety of worldwide drug development expense.
All of this, by the way, occurs due to government. Were government to refuse to protect those companies with laws that preempt the ordinary (and reasonable) presumption that a person who owns a thing may dispose of it as they see fit, cross-border trade flows would put tremendous pressure on these price disparities. Prices would fall here (a lot) and rise everywhere else (a good bit.) While the price-leveling would not be perfect by any means this much is certain – it is impossible for us to control the parabolic rise in drug expense when we’re bearing the burden of development for nearly 7 billion people on the backs of 330 million Americans.
We also cost-shift when it comes to illegal invaders. There is no agreement on exactly how many billions these illegals cost-shift to legal American citizens and residents – but that it amounts to tens of billions of dollars annually is not in dispute. There is no particular reason to allow that to occur – we could just as easily pass a law providing that hospitals and other emergency care providers send their bills for anyone with no insurance or money to the Federal Government, who then pays the bills immediately. The government then either turns the matter over to the IRS for collection (if a US Citizen or Resident) or bills it back to the foreign nation in the case of an illegal invader. This instantly stops all the cost-shifting for both the uninsured and the illegal invaders, and costs the government nothing!
There are many other factors in the health care cost explosion (with the disconnect in visibility between cost and your actual visibility of that expense being a big one) but until we get the cost shifting under control all other debates about how we’re going to “control costs” are a waste of time.
I wrote a four-point plan in September of last year that would have actually addressed costs by going after all of the major components that drive medical price ramps. It was faxed to all 535 fools in DC. It is particularly telling that not one of those points was addressed in the bill proffered and passed, proving that cost containment was never a goal of this legislation – instead, it was designed and executed to suit the lobbying interests who are simply trying to claw even more of your money into their pockets.
Wake up America – you’re being robbed – again – by both the Demoncrats and Rethuglicans.
Posted in Corruption, Economic Crisis, Economy, Government, health care reform, Tax, Tax Credit |
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Geithner Writes Own Resignation Speech
Geithner Writes Own Resignation Speech
Posted by Karl Denninger
Well, it should have been anyway.
WASHINGTON – Treasury Secretary Timothy Geithner said Thursday it’s “deeply unfair” that some financial institutions that got taxpayer-paid bailouts are emerging in better shape from the recession than millions of ordinary Americans.
…
But in a “TODAY” show interview, Geithner also argued that President Barack Obama had no choice when confronted with a financial crisis.
Let’s say that I accept that. I don’t, by the way, but let’s assume that I do.
The real problem with his speechifying is here:
“What happened in our country should never happen again,” he said. “People were paid for taking enormous risks. It was a crazy way to run a financial system.” Geithner said, “It’s the government’s job … to do a better job of restraining that kind of risk-taking.”
Who was the one that was responsible for watching over that enormous risk-taking and crazy operation of the financial system?
Oh that would be Timmy Geithner, who was running the NY Federal Reserve Bank, the organization that both executes monetary policy and monitors every one of those “too big to fail” institutions that we had to bail out.
So for Timmy’s malfeasance, misfeasance or both – which he just admitted to on national television - he is promoted to Treasury Secretary?
If you’re an Obama supporter, how do you defend not only the choice of Timmy for the job in the first place, but President Obama’s continued “confidence and support” in the very man who has admitted that the financial system that he oversaw and was charged with monitoring was being run “in a crazy way”?
Posted in Banks, Corruption, Economic Crisis, Federal Reserve, Financial System, Timothy Geithner |
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