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Archive for April 5th, 2010

Pfizer Caught Illegally Marketing Bextra, Feds Won’t Prosecute Because “Pfizer Too Big To Nail”

CNN Health has an interesting article detailing illegal marketing practices at Pfizer. However, government officials looked the other way because Pfizer too big to nail.

Imagine being charged with a crime, but an imaginary friend takes the rap for you.

That is essentially what happened when Pfizer, the world’s largest pharmaceutical company, was caught illegally marketing Bextra, a painkiller that was taken off the market in 2005 because of safety concerns.

Internal company documents show that Pfizer and Pharmacia (which Pfizer later bought) used a multimillion-dollar medical education budget to pay hundreds of doctors as speakers and consultants to tout Bextra.

Pfizer said in court that “the company’s intent was pure”: to foster a legal exchange of scientific information among doctors.

But an internal marketing plan called for training physicians “to serve as public relations spokespeople.”

According to Lewis Morris, chief counsel to the inspector general at the U.S. Department of Health and Human Services, “They pushed the envelope so far past any reasonable interpretation of the law that it’s simply outrageous.”

By April 2005, when Bextra was taken off the market, more than half of its $1.7 billion in profits had come from prescriptions written for uses the FDA had rejected.

But when it came to prosecuting Pfizer for its fraudulent marketing, the pharmaceutical giant had a trump card: Just as the giant banks on Wall Street were deemed too big to fail, Pfizer was considered too big to nail.

Why? Because any company convicted of a major health care fraud is automatically excluded from Medicare and Medicaid. Convicting Pfizer on Bextra would prevent the company from billing federal health programs for any of its products. It would be a corporate death sentence.

Prosecutors said that excluding Pfizer would most likely lead to Pfizer’s collapse, with collateral consequences: disrupting the flow of Pfizer products to Medicare and Medicaid recipients, causing the loss of jobs including those of Pfizer employees who were not involved in the fraud, and causing significant losses for Pfizer shareholders.

“If we prosecute Pfizer, they get excluded,” said Mike Loucks, the federal prosecutor who oversaw the investigation. “A lot of the people who work for the company who haven’t engaged in criminal activity would get hurt.”

Pfizer says the company has learned its lesson.

But after years of overseeing similar cases against other major drug companies, even Loucks, isn’t sure $2 billion in penalties is a deterrent when the profits from illegal promotion can be so large.

“I worry that the money is so great,” he said, that dealing with the Department of Justice may be “just of a cost of doing business.”

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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What does it mean to be Middle Class in 2010? – No College Degree, Massive Amounts of Debt, One Health Crisis from Bankruptcy, and Beholden to the Banking Elite.

Posted by mybudget360

Being middle class today does not carry the financial security that it once carried in the 1950s and 1960s.  Interestingly enough, many Americans at that time did not own stocks yet somehow they managed well because they had access to affordable housing without toxic mortgages and many had the ability to work with one company and have some kind of security from their company.  It was a mutual relationship as even Henry Ford shook the auto manufacturing world by upping wages for his workers.  Yet today, we are being fed distorted information from Wall Street that we need to have this system where workers are disposable entities only to increase the profits of the corporate class.  If people are hurting so much why are we paying billions in bonuses to a small group of people that really haven’t helped the country?  In fact, many of these are directly responsible for our current economic problems.  At the root, this has been the cancer that has eaten away at what it means to be middle class.  Social government welfare for Wall Street and Darwinian capitalism for the rest of us.

The middle class has it extremely tough today not because of random events but purposeful and directed robbery from Wall Street.  This was a methodical and planned dismantling of the system.  First, let us walk through some details of the middle class to create a profile:

Source:  Census

The most common household formation in the U.S. is a married couple.  Certainly this has changed over time but this is the most common arrangement in the U.S.  But this has also led to the two-income trap that we have heard about so often:

Even though nominal wages are much higher today, inflation has eroded the buying power of Americans so much that even two incomes today cannot compete with one income forty years ago.  After all, if you could buy a car with $200 then $1,000 would seem like a lot.  But what is a $50,000 household income when home prices cost $250,000?  This is really the essence of what has broken the middle class apart.  Prices rose to astronomical levels because Wall Street created speculative casino products and injected the virus into the system.  The middle class today is fearful of even having enough to retire.  But beyond even retiring, many people have very little saved:

Now Wall Street would lead you to believe that people should just pucker up and save more.  Bailouts are only for Wall Street folks yet average Americans need to resurrect the ghost of Horatio Alger and pull themselves up from their bootstraps or hope that a rich uncle leaves them a nice inheritance package.  Yet what they forget is that we have a large part of our population that don’t even qualify as middle class:

38,000,000 Americans are receiving some form of food assistance.  These people are living day to day so saving isn’t even in their equation.  They are just trying to get by.  These are the folks waiting at midnight at Wal-Mart waiting for their debit cards to reload just so they can buy food for their family.  Do you think they are interested in investing in the next hot stock?  Even as hard as it is to be middle class, poverty has been amplified in this recession:

10% of all U.S. families are in poverty.  Yet the rate is a bit higher if we actually go by food stamp data.  The average household size is 2.61 in the U.S. so many families are struggling with children as the above data reflects.  Yet you would expect the middle class to have a better chance at going forward but more and more middle class families are entering what is now being called the working poor.

Wall Street and the banking system is at the core of this mess.  They didn’t create poverty but they have amplified it by setting up a system that has now pushed millions of Americans into foreclosure.  Why all of a sudden did Americans start gambling with their homes only when Wall Street got involved?  They have created a new financial fiefdom where they can siphon off resources from the productive sector of the economy all from the comforts of their NY,NY offices.  Even the idea that all Americans own stocks is not exactly accurate:

The top 1 percent control 42 percent of all financial wealth in this country.  And wealth is the key here.  So what if you have a $500,000 home if you have a $600,000 mortgage.  You are not wealthy.  So what if you have a leased BMW but have $30,000 in credit card debt.  You are not wealthy.  This is what Wall Street sold to America in the disguise of wealth.  And people bought it up at the expense of the prudent.  But that veil is now gone.  And who has the wealth?  This is what happens when you make a pact with the financial devil.

We must educate ourselves in order to have any fighting chance to have a solid middle class:

The sad fact above is these stats come at a time when public education is falling by the wayside.  We’ve had some of the cheapest and best public universities the world has seen.  That era is coming to an end as banks run the student loan market and for profit education is charging ridiculous amounts of tuition that are crushing the middle class.  As of 2008 only 27 percent of Americans have a four year degree or higher.  Now how will this number increase in a time when educational costs are going up and wages are stagnant?  As long as you have a population that is unaware of what Wall Street is doing, they can keep doing their robbery in the open.

We also have an aging population:

That 65 and over category is going to explode in the next decade as baby boomers enter retirement.  Many were betting on housing appreciation and unrealistic stock market returns for a long and prosperous retirement.  Instead, Wall Street has taken the money and many will have to work well into their retirement years.  One illness can wreck their entire financial nest egg (if they have one).  The notion that middle class meant a secure retirement is now gone.  And with health care costs rising more and more money will go to this category.  Education and health care are cornerstones of what we consider middle class living and this sector is enormous in terms of employment:

21% work in education services, and health care and social assistance.  This number is likely to increase given demographic trends.  Yet who are we really serving if students go into $40,000, $60,000, and even $100,000 in debt for degrees that don’t provide them adequate training to survive in a corporatist economy?  The banks don’t mind because they can saddle a young person with a stream of income for multiple years and have the government pay the bill.  How about we take banks out of the equation and require people to pay a sizeable portion of their education?  Ironically, this would lower costs.  It doesn’t have to all be upfront but allowing the current system to go on is criminal.  If you want proof look at the housing market.  Now that people have to document some income housing prices have collapsed.  The for profit schools only require 10% of funds to come from the students and then the government matches 90%.  In reality, these schools take that 10% on a credit card so this is really a zero down education.

The story of Wall Street is the story of putting Americans into debt.  If you really want to know where the middle class went you can look at the absurd amounts of debt.  And this idea that everyone is rich is pure propaganda:

Only 34% of U.S. households make more than $65,000 per year.  And that number is now much lower since this is based on 2008 data.  When we look at luxury auto sales they do not reflect the actual wealth in our country.  Much of it is pure debt financing.  All hat and no cattle as they say in Texas.

And we can see inflation eating away at purchasing power:

Just look at 1950.  The median household income could purchase the median home with twice their annual income.  In 2006 it required 4 times that income.  Even in 1980, the median household income could buy 3 cars with that salary.  Today, it is more like two.  And this is even more distorted because we have more two income households.

So the middle class is really facing a struggle in 2010.  But this just didn’t happen.  This was a forty year systematic robbery of the compact Americans had with government and the business community.  Where we go from here really depends on how much people value the middle class and coalesce to bring Wall Street in check.  So far things aren’t looking good.

Personal Bankruptcies Hit a High and May Keep Rising

By Kevin O’Leary / San Diego

In the fourth-floor courtroom of the U.S. Bankruptcy Court of the Southern District of California, which serves San Diego and Imperial counties (pop. 3.4 million), Chief Judge Peter W. Bowie’s docket is overflowing. Bowie has 77 Chapter 13 bankruptcies on his Tuesday calendar, one of which is the case of Juan Flores.

Flores, 55, is the owner and sole proprietor of a local business, Carpet Care 4 Less. Throughout 2007, he saw his income plummet along with the national economy. “My business dropped off by 50%,” he says. As his client roster evaporated, Flores started drawing on credit cards and took out a second mortgage to the tune of $57,000 in order to stay afloat. In 2009, out of options and under threat of losing his home of 10 years, Flores filed for Chapter 13 bankruptcy — a reorganization filing under which consumers agree to a plan to make payments of past-due debts to creditors for a three- to five-year period. But now he is behind on his payments again, and Wells Fargo Bank wants to restart foreclosure proceedings. (See the best business deals of 2009.)

Cases like Flores’ are being brought before judges all across the country, and the number of such legal actions promises to increase. In March, more individuals and businesses filed for bankruptcy than in any month since October 2005, when federal bankruptcy laws were made more restrictive. There were 158,141 U.S. bankruptcy petitions filed last month — a 35% increase over February’s figure, according to data compiled by Automated Access to Court Records (AACER). This was a 19% increase over the number in October 2009, the last record-high month.

In the first quarter of 2010, the rate of personal bankruptcy filings in a dozen states increased by double-digit percentages over 2009′s monthly averages. “What is surprising is that there are still hefty increases in states like Arizona, California and Florida,” says AACER president Mike Bickford, referring to the fact that it might seem that the worst would be over in states hard-hit by the housing bubble. “Intuitively, you would think there might be some leveling off in these states, but that is not the case. In addition, there were large increases in bankruptcy filings in the Midwest, especially Michigan and Illinois.”

But many law scholars are not surprised by Americans’ mad rush to bankruptcy court. Adjusted for inflation, personal borrowing in the U.S. is 10 times greater than in 1960, according to the Federal Reserve. “Now, consumer credit has dried up,” says law professor Robert Lawless, an expert on bankruptcy among sole proprietors and small entrepreneurs at the University of Illinois. “That is why people are ending up in bankruptcy court.”

Katherine M. Porter, a bankruptcy expert at the University of Iowa and the University of California, Berkeley’s Boalt Hall Law School, says people typically “seriously struggle” with their debt for two years before turning to bankruptcy.

The statistics show that Chapter 7 bankruptcy filings are rising faster than the more complex Chapter 13 filings. While the latter requires individuals to repay a substantial portion of their debt and prevents banks from foreclosing on their homes, Chapter 7 bankruptcy allows a debtor to wipe out his or her debts entirely and get a fresh start. “It is very fast and very deep debt restructuring,” says Porter. Since 2005, Chapter 13 filings have dropped from about 35% of all personal bankruptcy filings to 25%, she says. “Systemically, that’s a big change.”

That change suggests that more home owners are simply walking away from their mortgages, rather than attempting to make payments, especially during a recession with record-high long-term unemployment. “Chapter 13 was designed for regular economic times when people might lose their jobs and fall behind on their mortgage for three to four months, but having found a new job they would be able to use the Chapter 13 process to keep their homes,” says Porter, noting that even during normal economic times only 1 in 3 Chapter 13 bankruptcy filings results in the individual’s successful meeting of payment obligations. (See pictures of Americans in their homes.)

Under current bankruptcy law, Porter says, bankruptcy courts have “no tools to reduce the principal, stretch out the payments or adjust the interest rate” — that is, since judges can’t adjust mortgages to make them easier to pay, people end up ditching them instead.

San Diego resident Flores is still unwilling to give up, though a skeptical Judge Bowie says he is inclined to dismiss the case. “Have you run the numbers to see if he can meet the payments on just unemployment?” Bowie asks Flores’ attorney, Larissa Lazarus. The attorney informs the court that her client needs 12 months to catch up with his payments, saying the problem is a back-property-tax issue of $908 a month that will be resolved in nine months. From the bench Bowie says, “I can do nine months, not 12.”

Flores, who has run his carpet-cleaning business for 30 years, is relieved. “I just have to work like hell,” he says.

A substantial number of cases before Bowie involve a financial institution asking the court for relief from stay, so they can pursue foreclosure against borrowers like Flores. Lenders represented in the courtroom include JPMorgan Chase Bank, Bank of America, Deutsche Bank Trust, Wells Fargo Bank, US Bank and GMAC Mortgage. When a Chapter 13 bankruptcy is ordered and confirmed, lenders must cease any foreclosure proceedings and the delinquent homeowner must begin making regular mortgage payments. But if the debtor cannot keep up the payments, “sooner or later the court drops the bomb,” says attorney James Beshears.

To help individuals make their payments, Bank of America announced in March that it would start reducing the principal on some home loans. This, after the banking industry successfully fought off attempts by Democratic Illinois Senator Dick Durbin and others in Congress to pass legislation last spring that would have allowed for mortgage modifications. But since then, it has become clear that without loan modification, many borrowers have no recourse but to accept foreclosure and walk away, says Porter. “I think one reason the economic recovery is slow is that it is taking so long to work through these delinquencies,” she says.

According to Jay Brinkmann, chief economist of the Mortgage Bankers Association (MBA), “Loans 90 days or more past due now account for half of all delinquencies, the highest share in the history of the MBA survey.”

In San Diego and Imperial counties alone, bankruptcy filings have increased 379%, spiking from 4,210 in 2006, the peak of the housing boom, to 20,193 in 2009. Nationally, more than 1.4 million business and consumer bankruptcy petitions were filed in 2009, up 32% from the 2008 figure, and Samuel J. Gerdano, executive director of the American Bankruptcy Institute, says the number of consumer filings (Chapter 7 and 13) in 2010 will likely surpass those in 2009. If the just-released March numbers are any indication, Gerdano is probably right.

Is The Metals Market A Ponzi Scheme?

Posted by Karl Denninger

The stories are certainly gaining credibility – and volume.

There have long been claims that the “paper gold” market is wildly manipulated.  Certainly it does trade 100x or more the physical market, but this, standing alone does not prove manipulation.  Have a look at the number of contracts that trade against physical oil, wheat, soybeans or corn.  You’ll find that in each of these cases there are a lot more contracts than bushels or barrels.

But the recent allegations go further.  Now there is a document out on Zerohedge that makes the claim that the US Government has been involved in a massive and outrageous fraud – that is, the “creation” of fake gold bars that are in fact tungsten with a gold veneer on top.  We’re not talking about a “few” bars either.  The allegation is that ten thousand metric tons of fake bars are in fact in circulation – right now – and that our government was the one that caused it to happen.

Huffington Post has picked this up too, but unfortunately the author is a hard-core “gold is money and you need to buy a lot of it right now” guy.  Not exactly the most unbiased source…. and, if he (or his fund) is long a massive amount of the yellow stuff and smells deflation, well, “price support” suddenly becomes rather important.

A big part of the problem here is the insane amount of secrecy that surrounds what should be a completely-transparent market and reserves.  The US, for example, allegedly has a lot of gold at Fort Knox.  Is it really there – and is what’s actually there really of the quality claimed?  How do you know?

I’m a contrarian on the impact that would flow from proof being delivered that the US Gold stock was all tungsten bars with gold plating on top.  Many claim this would cause an instant explosion in price and collapse of the dollar. 

I disagree.

Discovery that the metals market has been “polluted” to the point of irrelevance would mean that those around the world who had bought and were holding alleged gold bars that in fact aren’t gold had tendered good money for nothing.  This would be a monstrous deflationary event – after all, the definition of deflation is the destruction of money, and that’s exactly what would have happened, just as if you took a stack of $100 bills and burned them in your back yard.  To the extent that sovereigns were unknowingly duped this could have enormous consequences, especially if, as is alleged, the fraud is traceable to direct and intentional action taken by the US Federal Government.

I’m in the camp that extraordinary claims require extraordinary proof, and a fuzzy video on Youtube claiming to be a sectioned gold bar – with no visible mint marks or serial numbers – doesn’t cut it for me.

If there is such a fraud on the scale claimed and it has in fact been discovered there are literally thousands of people who know about it.  While many of them have every reason to keep their mouth shut (it’s their money that was vaporized by the fraud!) there are a lot of others who have every reason to stand up and shout.  So far, other than a handful of very self-interested parties, nobody is.

As they say, “show me the money” – or as is more appropriate in this case, “show me the tungsten.”

Ten Year Bond Breakout!

Posted by Karl Denninger

Borrowing costs are going up, and this chart says they’re going up a lot – like 200 basis points within the next year or so on mortgages and 10yr Treasuries.

Key to the thesis of Bernanke (and essentially everyone else) that this “V-shaped” recovery could take hold and be sustainable – instead of being a false dawn – is the premise that mortgage rates would behave.

Bernanke’s thesis, in fact was that he could cap 30 year money at 4% or less to prevent home price devaluation.

Well, now the 10 year bond is back where it was before the collapse.  That’s good, right?  Well, not really – because it means that 30 year money (mortgages) will start backing up shortly and prices on existing Fannie and Freddie (along with other long-duration) paper will start falling.

The target on this breakout of the inverted head-and-shoulders is 6% on the ten year treasury, and approximately 7% on 30 year mortgages.  As of today’s pricing (about 5% on that same money) we can back into the home price impact quite simply; the hypothetical $200,000 house will be devalued to $161,644.55.

That is, the same payment that today pays down a $200,000 mortgage will only pay down a $161,644.55 one.

The time on the full expression of this target is one to two years hence, although it can occur sooner.  The reliability of this sort of pattern is extremely high, and remains valid conditionally even with a drop back to 3%, and is not invalidated unless the ten year were to get down to 2.03%.  Neither is likely.

The entire premise of the so-called “recovery” not only requires stabilization of the housing market but a resumption in home price appreciation.  With the cost of mortgage money nearly-certain to rise toward the 7% range over the next year this is simply impossible.

The market will not ignore this for long, once it begins to express itself in actual rates and prices – and it will. 

If you’re one of the trapped underwater homeowners who as of today has an opportunity to short-sale your house, take it – while it still is available. 

Consider that The Fed is holding a literal trillion of this paper which is likely to come under extreme valuation pressures as rates back up.

Additionally, the sentiment in the market today is positively giddy – those who claim that retail is “not in” need to look at the ISE index, which hit an all time high today.  That’s all retail call buyers – they sure are “in”, and now the shears can come out of the drawer.

Parabolic moves like this always go further than you’d expect or believe possible.  But the math always wins, and the sort of rate environment we’re seeing now is quite similar to what happened in 1987.

No, this is not predicting a 1987-style crash – at least not today or tomorrow.  But with both rates and oil headed up hard the effective tax this presents to the economy is going to hit home immediately and hard, with no evidence that this very same backup in oil is in commodities generally (look at wheat lately?)

That’s not inflation, it’s financial speculation in a blow-off top.

Real job creation and a healthier economy?  We’ll see.

On Sheila Bair’s Lies

Posted by Karl Denninger