FedUpUSA

Archive for May 24th, 2010

Insider Trading Is Perfectly Legal – But Only For Members Of The U.S. Congress

Did you know that insider trading is perfectly legal in the United States?  Well, not for 99.9% of the population.  It is actually only a very small percentage of the population that can legally indulge in insider trading – the members of the United States Congress.  In fact, a law that would ban insider trading by members of Congress has been stalled for years on Capitol Hill.  So why wouldn’t lawmakers in Washington D.C. want to apply the same rules to themselves that apply to the rest of us?  After all, how are we supposed to respect the integrity of those “serving” in Congress when they are playing by an entirely different set of rules?  The American people aren’t stupid.  They can see what is going on.  The truth is that there is a reason why approval ratings for Congress are at an all-time low.

The sad thing is that this issue has gotten very little attention in the mainstream media.  Nobody seems really that upset about it.  But it is a travesty that our lawmakers can legally make trades in the open market based on inside information that they have gained by being in positions of authority.  As the Wall Street Journal recently explained, they can generally make all the money they want off of insider information without any fear of prosecution because “insider-trading laws generally do not apply to lawmakers, leaving them free to trade on nonpublic information.”

But members of the U.S. Congress are generally in a greater position to influence the fortunes of individual companies than almost anyone else.  For example, certain members of the U.S. Congress may know that certain legislation is going to be introduced that would have a dramatic impact on the economic fortunes of a particular industry or corporation.  What would stop those members of Congress from making very profitable trades in the marketplace based on that information?

Nothing.  Nothing at all.

So, is there any evidence that members of Congress have been involved in this sort of activity?

Well, there is at least one study that seems to indicate that members of the U.S. Congress have been much more successful in the stock market than members of the general public….

A 2004 study of the results of stock trading by United States Senators during the 1990s found that that senators on average beat the market by 12% a year. In sharp contrast, U.S. households on average underperformed the market by 1.4% a year and even corporate insiders on average beat the market by only about 6% a year during that period. A reasonable inference is that some Senators had access to – and were using – material nonpublic information about the companies in whose stock they trade.

Of course Congress could stop all of this by simply passing a law that bans insider trading by our lawmakers.

But they refuse to do it.

Instead, it is likely that our “leaders” will continue to make millions of dollars by betting against the U.S. economy and very few people will even raise an objection.

In the upcoming Wall Street sequel, Gordon Gekko makes a statement that seems very appropriate for the world in which we now live….

“Someone reminded me I once said ‘Greed is good’ – now it seems it’s legal”

Stealth IRS Changes Mean Millions of New Tax Forms

By Neil deMause

NEW YORK (CNNMoney.com) — The massive expansion of requirements for businesses to file 1099 tax forms that was hidden in the 2,409-page health reform bill took many by surprise when it came to light last month. But it’s just one piece of a years-long legislative stealth campaign to create ways for the federal government to track down unreported income.

The result: A blizzard of new tax forms that the Internal Revenue Service will begin rolling out next year.

“It was actually something that we were following back under the Bush administration under the 2008 budget — we started to see these kinds of rumblings about the ‘tax gap’ and whether or not businesses were paying their fair share,” says Tom Henschke, president of the Pennsylvania-based SMC Business Councils, which was one of the first organizations to call attention to the health care amendment when it was introduced last fall. “So two administrations can claim credit for this.”

The first tax-reporting expansion was buried in a different bill, the Housing Assistance Tax Act introduced by House Speaker Nancy Pelosi and signed into law by President George W. Bush in July 2008. Best known for its first-time homebuyers’ credit, the bill also created a new addition to the family of 1099 tax forms: the 1099-K.

The 1099 is a catch-all series of IRS documents used to report non-wage income from a variety of sources like contract work, dividends, earned interest and pension distributions. The new 1099-K aims to shine a light on a currently hard-to-track payment stream: credit cards. Starting in 2011, financial firms that process credit or debit card payments will be required to send their clients, and the IRS, an annual form documenting the year’s transactions.

The rule comes with a floor to weed out the most casual retailers: The 1099-K is only required when a merchant has at least 200 payment transactions a year totaling more than $20,000. But it applies to all payment processors, including Paypal, Amazon.com, and others that service very small businesses.

The goal of the new regulations is to catch income that is going unreported to the IRS. The federal government loses an estimated $300 billion each year from the “tax gap” between what individuals and businesses owe and what they actually pay.

“Better information reporting helps the tax system work better by ensuring that everyone pays what they owe,” IRS Commissioner Doug Shulman explained last year as his agency unveiled the 1099-K. “The new law gives us an important new tool for closing the tax gap and also provides business taxpayers better documentation to compute and report their income and expenses.”

For companies that currently report all their credit card and Paypal sales to the IRS, the 1099-K requirement will have little impact. All the paperwork will be done by the bank or payment processing service, and business owners will simply receive a form at the end of the year listing their total receipts.

The 1099 changes attached to the health care reform bill are another kettle of fish. These massively expand the requirements for filing the “1099-Misc” form, which companies use for recording payments to freelance workers and other individual service providers. Until now, payments to corporations have been exempt from 1099 rules, as have payments for the purchase of goods.

Starting in 2012, that changes. All business payments or purchases that exceed $600 in a calendar year will need to be accompanied by a 1099 filing. That means obtaining the taxpayer ID number of the individual or corporation you’re making the payment to — even if it’s a giant retailer like Staples or Best Buy — at the time of the transaction, or else facing IRS penalties.

In essence, the 1099-Misc is having its role changed from a form for tracking off-payroll employment to one that must accompany virtually any sizeable business transaction.

“Just with business travel it would include hotels, rental cars,” Henschke says. “Phone service: 1099. Computer service: 1099. Whoever does your postage meter: 1099. You do a little advertising, Yellow Pages: 1099. Your landlord: 1099. You might as well just keep them in your pocket and hand them out as you go around every day.”

How did this sweeping provision end up hidden in the health reform bill? No one is willing to take credit for introducing the new legislation, which appeared in the Senate Finance Committee’s version of the health bill last fall. Committee chairs Don Baucus, D-Mont., and Chuck Grassley, R-Iowa, both referred calls to committee staffers, who wouldn’t comment on the record.

But the provision appears to be a long-in-the-works change that was just waiting for the right moment to be attached to legislation.

Back in 2007, the Senate Finance Committee asked the government’s General Accountability Office to conduct a tax-gap study. The resulting report estimated that establishing additional 1099 paper trails for income could provide up to $345 billion annually in new federal tax revenues.

Enter the health reform bill. Last fall, as the debate raged over its projected cost, Congressional supporters of the bill began a desperate search for “revenue enhancers” to bring the net cost down — and eliminating the 1099 exceptions for corporations and goods was seen as an easy way to bring in more cash without raising tax rates.

House and Senate staffers “essentially have a cupboard full of convenient revenue raisers that they can put into bills when they need it,” notes Chris Edwards, director of tax policy studies for the libertarian Cato Institute. In the case of the 1099 changes, he says, “this was sitting around, the IRS wanted it and had testified in favor of it, and they needed a revenue raiser. This was just a convenient thing.”

Still, the form the new law took was surprising — especially the requirement that businesses file 1099s when they purchase goods, which hardly anyone saw coming.

Henschke’s group had previously surveyed its members and learned that they average 10 filings a year of 1099 forms, each of which takes about half an hour to prepare. That’s in line with the GAO report, which found that a typical small business spent between three and five hours per year filing 1099s.

But SMC’s survey found that extending 1099s just to services purchased from corporations would push that number to at least 200 filings per year for a typical small business — adding an estimated $6,000 to the cost of preparing the average tax return. And that’s without even accounting for the requirement that 1099s be filed for purchases of goods, a provision that Henschke’s group didn’t see coming when it conducted its survey last year.

“These folks are doing their paperwork in the evenings and on the weekends already,” he says. “This certainly adds to the burden substantially.”

The IRS has a draft version of the 1099-K form available now for public feedback, and will begin requiring the form’s use next year. The additional 1099 requirements take effect in 2012. The agency is in the process of drafting its guidance on them. 

“Two Scoop Special”: Double-Dip Recession Guaranteed

By Charles Hugh Smith

Whether you believe the U.S. economy ever exited recession or not, a further decline is already baked in by numerous macro factors.

A “double-dip recession” makes no sense to the 76 percent of Americans who believe that the US economy remains in recession. And indeed, I argued in Suppressing the Cognitive Dissonance of a Bogus Recovery that the “growth” touted by the mainstream media and the Central State propaganda machine is a mirage.

To the 24% of the populace who believes the U.S. exited recession in fine fettle, I offer a “Two Scoop Special”: a Double-Dip recession is guaranteed for the following reasons:1. The Eurozone is heading into deep recession, taking U.S. corporate profits with it. Three things are certain in the Eurozone: Austerity, higher taxes and more of each nation’s budget will be carved off to pay interest on their ballooning debt. All three mean less money in consumers’ pockets, and in local government pockets.

Please see Why the Eurozone Is Doomed for more on the Eurozone’s structural problems.

2. China’s unprecedented bubble in credit and real estate will implode, taking down China’s economy. Warning signs already abound: please see If China Stocks Lead U.S. Market, Look Out Below and China’s Towers and U.S. McMansions: When Things Fall Apart (Literally) for more.China’s imploding debt/real estate bubble will cut its already meager imports from the U.S. and dismantle the illusion of “growth” (note to economists: building 100,000 empty highrises is not “growth”) that has enabled the commodity countries such as Canada and Australia to inflate new property bubbles at home.

3. Once China goes down, so do the housing bubbles in Canada and Australia, and the Asian economies which depend on sales to China for their own growth.

As those nations’ tumble into a bottomless pit of bubble-popping recession, their taste for American goods and services will plummet as well. Good-bye, inflated Corporate-America profits.China’s bubble deflating will be felt in Japan and the Southeast Asian “Tiger” economies, all of which will see their exports to China crater. Since they are all merchantilist to the core, this drop in exports will push them into recession as well.The highly popular fantasy that “emerging economies” will continue growing at insane rates forever will drop heavily into the dustbin of history.If you have any doubt about this scenario, call up a chart of copper, which is generally considered a bellwether for commodities and the global economy. Copper has crashed.

4. Local government in the U.S. will have to shed tens of thousands of jobs. As Mish has repeatedly pointed out, public unions could avoid massive layoffs by slashing the pay of all public employees and trimming their pension plans and other (in comparison to private-sector workers) gold-plated benefits. But the public unions seem bent on turning back the clock to 2006: they are rejecting any meaningful cuts in pay or bennies, and they also want limited/zero job cuts.

That isn’t possible. Any politico so beholden to the State fiefdoms that he/she votes in taxes high enough to fund the public union fiefdoms will lose power this November. States with 20% unemployment cannot survive massive tax increases, on top of all the junk fees and hidden taxes which have already been imposed on a burdened public.

This realization is slowly going mainstream, for instance: The Bankrupting of America: We have a ruinous collaboration of elected officials and unionized public workers.

The loss of hundreds of thousands of jobs (and don’t forget those 1.5 million Census jobs are temporary) will deplete the amount of income and borrowing power needed to sustain “consumer spending.”

5. Bank reform will force layoffs and consolidation in the financial sector. It’s been a tough year for the banks; after all, U.S. commercial banks generated a record $22.6 billion in derivatives trading revenues in 2009–that’s commercial banks, not investment banks.

Aw, poor babies.Reforms will eventually shutter many trading desks and curtail various high-labor gaming within the financial sector, triggering another round of layoffs. More “jump, you f**kers” signs will appear on Wall Street.

6. Housing’s bogus government-induced “rally” will implode. Just scan patrick.net for dozens of stories outlining the implosion: mortgage applications are plummeting, building permits are plummeting, sales are plummeting, etc. The Federal government essentially nationalized the entire U.S. mortgage market to save housing, and now that the Fed has announced an end (or so they claim) to their $1.2 trillion buying spree of toxic mortgages, then the Mortgage Emperor is revealed to have no clothing. There is no private mortgage market in the U.S. anymore; there are only the rotting carcasses of Fannie Mae and Freddie Mac, still soaking up tens of billions of dollars in tax money to sop up soon-to-default mortgages.For an on-the-ground report from once-hot San Diego, check out the San Diego Housing Forecast: the values of pricey homes is still falling, and buyers are now scarce.

7. The massive Federal bailouts accomplished nothing but propping up a rotten status quo for a year. No new jobs were created; what was “saved” by squandering trillions of dollars? The counterparties to AIG’s bad derivatives bets; Goldman Sach’s ability to skim profits day after day, month after month, a housing market doomed to slide much further, destroying the trillions dumped in to prop it up, and and a handful of pork-barrel projects at the state and local levels.

Now the “stimulus” and bailouts are drying up, and we have nothing to show for it. The bloated status quo cannot maintain its payrolls without the trillions in Federal largesse, and so payrolls and spending will fall throughout the status quo.

8. The vaunted “recession-proof” sickcare industry will start shedding jobs as Medicare and other funding sources implode. Texas doctors opting out of Medicare at alarming rate:

“This new data shows the Medicare system is beginning to implode,” said Dr. Susan Bailey, president of the Texas Medical Association. “If Congress doesn’t fix Medicare soon, there’ll be more and more doctors dropping out and Congress’ promise to provide medical care to seniors will be broken.”

More than 300 doctors have dropped the program in the last two years, including 50 in the first three months of 2010, according to data compiled by the Houston Chronicle. Texas Medical Association officials, who conducted the 2008 survey, said the numbers far exceeded their assumptions.The largest number of doctors opting out comes from primary care, a field already short of practitioners nationally and especially in Texas. Psychiatrists also make up a large share of the pie, causing one Texas leader to say, “God forbid that a senior has dementia. 

Once again, this shouldn’t be news to oftwominds.com readers, as we addressed this trend back on April 10, 2010: The Politically Inconvenient Medical Realities of Opting Out. Simply put, there isn’t enough money in the known Universe to fund U.S. sickcare, and now the reality is bursting through the walls of denial and complacency. The “recession-proof” sickcare (a.k.a. healthcare) system will start shedding jobs, not adding them, as the money dries up–not just Federal money, but private insurance funding as well, as employers cut headcount and laid-off employees find they cannot afford COBRA coverage or sky-high private insurance rates.

For more on the general trends at work beneath the fast-spreading oil-slick of propaganda, please see Why the “Nascent Recovery” Won’t Last (April 27, 2010) and How We Get Ahead Now: Gaming the System (April 20, 2010).

The Next Bailout: $165B for Unions

By Erik Berte - FOXBusiness

A Democratic senator is introducing legislation for a bailout of troubled union pension funds.  If passed, the bill could put another $165 billion in liabilities on the shoulders of American taxpayers.

The bill, which would put the Pension Benefit Guarantee Corporation behind struggling pensions for union workers, is being introduced by Senator Bob Casey, (D-Pa.), who says it will save jobs and help people.

As FOX Business Network’s Gerri Willis reported Monday, these pensions are in bad shape; as of 2006, well before the market dropped and recession began, only 6% of these funds were doing well.

Although right now taxpayers could possibly be on the hook for $165 billion, the liability could essentially be unlimited because these pensions have to be paid out until the workers die.

It’s hard to say at the moment what the chances are that the bill will pass. A hearing is scheduled Thursday, which will give the public a sense of where political leaders sit on the topic, said Willis.

Just last week President Obama said there would be no more bailouts.

President Obama Asked To Fund Wiis For Schools

Posted by Karl Denninger

Has Alan Grayson Lost His Mind?

Posted by Karl Denninger

I generally like Alan so I was stunned to see this bit of pandering - although perhaps I shouldn’t be, given that it’s election season and every one of the critters in Congress is trying desperately to justify their salaries.

5 minutes of worthwhile video, but….. (you knew there would be a “but”, right?)

Yes, we could cut the separate funding for Afghanistan and Iraq.  Of course we would then have the troops here, which still results in them being paid salaries, right?

The cost of a war isn’t just fuel for planes, bombs to drop and bullets to shoot.  It is also salaries for our soldiers, salaries for the development of weapons, salaries for places like Eglin and other bases.  If the total spent goes down that support to the economy goes down too.

You won’t see me argue for greater federal spending in the general sense.  But I will argue that until and unless you deal with the energy situation and our 40 years of stupidity in that regard walking away from the sources of our nation’s energy isn’t exactly smart.

Worse, however, Alan Grayson wants to give 90% of the money he would “save” through this move to “the people”, thereby not actually withdrawing the deficit spending (which we should do), but instead shifting it.

$16 billion of “deficit reduction”, so he claims.  But he’s not mentioning the $1.6 trillion in deficit that we have.

Cutting $160 billion wouldn’t be all that bad of an idea – that would be 10% of the deficit, and might actually matter.  Indeed, it would be what I’d call “a good start.”

But 1%? 

That’s pissing into a hurricane.

Nice try at populism draped in a false cloak of “fiscal responsibility” Alan.

It’s unfortunate that “on the numbers” your bill displays an IQ smaller than your shoe size.