congressional follies redux 3/24/09

Here's a quick post on a lighter note. Today Treasury Secretary Timothy Geithner and Federal Reserve Board Chairman Bernard Bernanke testify before congress today. They will ask for increased regulatory oversight and power over financial institutions that are in dire straits. The press (AKA the media) report that the congressmen/women plan to "grill" Mssr. Geithner and Bernanke about the government's handling of the AIG Bonus payments. Yes, folks, you got that right. Our beloved legislators that amended the stimulus/bailout bill to allow the bonus payments in the first place will "grill" these men about how these payments were handled!! Sounds to me like Congress wants to pass the buck on their own legislation to the executive branch. The notion of Congress protecting the taxpayers from the executive branch is similar to using wild weasels to guard a chicken coop from a fox. DC is a town where blame is ladled out like gravy over a thanksgiving dinner at a homeless shelter while responsibility and accountability for acts committed or omitted is avoided at any cost. No wonder we are in an extreme recession. Will senator Michael Dodd (dem. Connecticut) have to sit between the congresspeople and 2 of Obama's biggest dogs of financial regulation?

A Few Thoughts on the 90% Bonus Tax.

Quote of the Day:

“We figure the local and state governments will take care of the other 10 percent.”

Rep. Charley Rangel's explanation for the 90% tax on tarp recipients bonus payments.


Counterquote of the Day:

"No man's life, liberty, or property are safe while the legislature is in session."
-- Mark Twain (1866)

Holy Smoke, America!! Did this really just happen to us? The American colonies rebel yell against England was "taxation without representation is tyranny!" Now we have a 90% tax rate with representation!! Perhaps it is time for another tax rebellion. The Senate is proposing a 70% tax on bonus payments, 35% paid by the company and the other 35% paid by the recipients. Even that is way too high. I think our representatives need to take a real deep breath, exhale slowly, then read the Constitution. Is this what they want for our future generations? I think not. This bill was composed mainly to make the most political hay over the public's distress over the bonus payments. It scares me how quickly this bill was passed. Congress, especially the house financial services committee, used delaying tactics and dogged resistance to prevent reform or overhaul of Fannie Mae/Freddie Mac for years. If they had acted half as fast on reform of these GSEs, (government sponsored enterprises, more on this later) the USA could have avoided the super recession we are experiencing and just had a nice regular recession that goes away in a year or two. If Congress can pass such outrageous tax bills for one reason, I am certain they will be able to think of more. Who knows, maybe all the opponents of war will tax the extra pay for overseas and dangerous duty military people receive.

Since the unions and activists have arranged busloads of people to hike to the AIG executives homes, would it not be fair to let the overtime pay of union workers be taxed the same as bonuses for people who do not get paid by the hour but by results? When it comes down to brass tacks, overtime is just another bonus. Since the UAW get paid when they are out of work, congress could really clean up here.

If the unions and activists cared more about all the taxpayers and not just the unionized ones, they would also organize a march in DC to all the congresspeople's DC homes to lodge complaints about their micromismanagement of this financial fiasco. Remember, all this started with Fannie Mae and Freddie Mac, not AIG.

Congressional follies about AIG

Quote of the Day:

"Some People say I make jokes. I just watch the government and report the facts."

Will Rogers

First of all, a standing ovation is due to Edward Liddy, CEO of AIG for standing up to the arrogance of Steven Lynch. (A Massachusetts democrat, definitely not the comedian!) Mr. Liddy took the job for $1.00 and no stock options to try and help out his country. Mr. Lynch was way out of line in his questioning of Mr. Liddy and should apologize. What do you have to say for yourself, Mr. Lynch?

Second, this is $165 million, that's 6 zeros and 2 commas, not the trillions (12 zeros and 4 commas) that the bailout efforts and economic stimulus packages will cost the American taxpayers. This is just political grandstanding to deflect the interest of the press and public away from the massive spending the Obama Administration and Congress want to enact in the name of economic recovery. Politicos are very good at straining minnows and swallowing whales. It's called micromismanagement.

Third, were President Obama and Rep. Lynch both absent from law school the days contract law was taught? This was a pre-existing contract and failure to pay could have exposed AIG to lawsuits.


Fourth, will Timothy Geithner get his old job as Governor of the New York Federal Reserve Board back if he takes the fall for all this congressional hubris over $.0000165 trillion retention bonus that the original bailout bill allowed to go through in the first place?

I think Mr. Liddy should be given the chance to do what he said he will do in his recent letters to Treasury Secretary Geithner. Repay the bailout money and keep the good businesses of AIG intact and contributing to the USA economy. He was the CEO of Allstate, another large insurance company. He is offering all his experience for $1.00. He has a better chance of succeeding than any and all members of the house financial services committee could do. Remember, this committee repeatedly defended Freddie Mac and Fannie Mae right up until they went into conservatorship. How many of them work for $1.00. My educated guess is none,zip, goose egg, zero.

Barney Frank: Plenty of rich people that we can tax

Here is a really interesting interview of Barney Frank by CNBC's Maria Bartiromo. Thanks to her control of the interview by stopping Mr. Frank from chatting on about his influence on John McCain, it is only 52 seconds long. It is very revealing of Mr. Frank's attitudes on taxes, the rich and the role of government.

I was so impressed I had an epiphany moment. I realized there was a whole class of people who could be made super rich by legislative fiat, one of Mr. Frank's favorite pastimes. Let's declare all political campaign contributions as taxable income to the end user, politicians such as Mr. Frank. The politicians usually do whatever whim and fancy hits them regardless of how it affects major contributors. Remember the tobacco settlement back in Bill Clinton's presidency. The tobacco companies contributed $millions if not $billions and they still got screwed - whoops, make that sued by the US Government. Part of the settlement required smoking cessation programs support and severe curtailment of advertising. To make matters worse if these draconian measures did not produce a certain level of smoking cessation after a few years, more penalties would be applied!!!

Just think, several hundred new millionaires all conveniently working within the DC beltway. That is my idea of change for the better. Since our politicians seem so obsessed with controlling executive compensation in the private sector, what better way to lead than by such a courageous example. However, I believe this bill is ever proposed would generate an unprecedented amount of bipartisan opposition.

Still, It is a great idea, maybe it will inspire other great ideas that stand a snowball's chance in Heck of becoming the law of the land.

Why the Economic Corpulence Package will not work

President Obama (and his supporters) said one of the ways his economic stimulus package will (eventually) succeed is by encouraging banks and other creditors to start lending again so people can go out and buy lots of stuff. All of this spending will "save or create" lots of jobs, all good ones and all here in the USA. Wait one minute here, what happened to more manna from heaven than we can shake a stick at?? Cures for cancer, heart disease, diabetes, obesity, hangnails, etc, etc?? Throw in the moon and stars while you're making pie in the sky promises.

Increasing credit liquidity (aka encouraging banks and other creditors to start lending at lower standards just to boost Gross Domestic Product) will not turn around the worldwide economic recession. The reason for this blog and the current economic crisis is the gross overextension of credit caused by subprime mortgage lending. In other words, lending money for extremely high ticket purchases, homes that the buyers were not expected to be able to repay in the long run, turned a nice normal all-American business cycle recession into a severe worldwide recession.

In 2005, the USA had a negative personal savings rate, the first time since the great depression. In 25 words or less, the USA spending exceeded its disposal income. (disposal income is money after taxes. Jiminy Cricket, talk about your endangered species!!) A return to the credit abuse habits that got the USA into this extreme recession will not get us out of it. We may see an increase in sales and gross domestic product on a short term basis, but another extreme recession will be just around the corner. IMHO, Americans don't need more cell phones with cameras, music, video and web surfing ability; we need to hunker down, tighten our belts and get our feet back under us. Put another way, start living within our means and saving money for long term wants and needs. College tuition, home purchase, retirement come to mind.

President Obama recently said he wanted the US government to do the same thing American families do with their money. Sit down, work out a budget so the family income will cover all necessary expenses and some savings for future items. This would be real, unprecedented change for the better. Now the decision must be made, do we continue to encourage a consumption based economy or start to encourage a savings based economy?

Armageddon California style updates for 02/09

Time to review the latest events in the California State Budget crisis. Notice I did not label this a progress report since there has not been enough of that to report. However, here are the highlights for this month.

First, John Chiang, the state controller announced suspension of all travel and per diem expense checks for all state employees including the legislators. They receive per diem checks of $173.00 to offset the expense of living in Sacramento. Let's do the math. 120 lawmakers times $173.00 a day is $20,760.00 daily savings. For a 5 day work week, that's $103,800.00 a week. This does not include the travel and per diem expenses for the rest of the state work force. Remember, this is just a suspension of payments due. When the legislators finally get around to passing a budget it will be paid.

Next, Governor Schwarzenegger tried to enact a 2 day a month furlough (days off without pay) for all state employees. John Chiang resisted the effort with the support of state employee unions, so Arnold had to take John to court to enforce it. The courts have already ruled that Arnold can do this since it is an emergency.

On February 10, Governor Schwarzenegger announced that the State of California will lay off 20% of its work force, letting go of those with the least amount of seniority. Wow, that's one out of 5 workers. California has about (for now anyway) 200,000 employees. I can't imagine that in a pool of 200,000 employees some wouldn't be willing to accept an early retirement if some of the payment reductions that usually apply to early retirements were waived. But then again, public employee pensions are very expensive. Maybe Arnold and the lawmakers made a good choice to let go of the least senior employees. If anyone has any thoughts on the subject, share them here.

Time for the USA to change its national bird.

US Treasury Secretary Timothy (doggone, I forgot to file my taxes!!!) Geithner announced a plan to set up a government and private investor partnership to buy up to $1 trillion+ (that's 12 zeroes and 4 commas) worth of troubled assets from the nation's financial firms. In Wall Street jargon this is known as a vulture fund. Since the distressed securities involved are close to dead, this moniker is very fitting, even explicit. Vulture fund investors take the risks involved with deeply discounted securities in hopes that the investments will eventually recover and then be sold at a profit. The biggest risk for VF investors is the market is right about the securities and they are wrong. Most VF investors minimize this risk by researching the companies in the VF to find out what the odds are of a recovery. They also make certain the fund is well diversified so that one failed security will not wipe out any hopes for future profits.
I just do not see how this $trillion+ vulture fund will work. The hope being that trading out these bad debt instruments with money or better debt instruments will encourage the firms to start lending to consumers and businesses again. First, where are the private investors going to come from? How many people will buy into the notion that a portfolio of mortgages issued to people who were not expected to afford them when they were issued has the potential for profit? Not many, that's for sure. Most investors would not touch these portfolios unless they were buying them at pennies on the dollar or if the government were to guarantee the investments in some way. (remember Bear Sterns, AIG, Citigroup, GM, Chrysler, Fannie Mae,Freddie Mac?)
Secretary Geithner's announcement was given a thumbs down response on Wall Street as investors voted with their wallets and sold off a lot of stocks. This in turn led to declines in world stock markets as well.