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Sunday, August 31, 2008

Gustav, GWB and the GOP

The arrival of Gustav on the radar couldn't have been timed more ominously than if the Bard himself came back to write political thrillers. The aftermath of Katrina in 2005 was thought to have served as a major wake-up call to American voters about the basic priorities and functioning of our very expensive government. The pictures the disaster painted weren't pretty. A President too occupied with two real wars and a nebulous "global war" on terror to recognize and react to the disaster for TWO DAYS. A newly centralized "Department of Homeland Security" (typing those words without quotes just seems silly) which failed nearly every objective measure of performance in coordinating relief and communications. Energy markets for oil and gas disrupted by a meteorological event that should not have come as much of a surprise but did. A federal budget so bloated with military spending and constrained by deficits that America seemed flat-footed in its ability to even start any attempt to rebuild a major city after a natural disaster.

Despite that wakeup call to Americans and their government, very little learning seems to have taken place since 2005. Is it fate that another storm likely equal in overall damage is headed to the EXACT same region BEFORE a major American election? Watching the reactions to Gustav's threat should be very enlightening for voters.

After Gustav strengthened from a Category III to Category IV storm, the White House announced President Bush would forego his previously scheduled in-person appearance at the GOP convention Monday night to better focus on managing the government's relief efforts. (#1) Okay, I guess that's good. That might demonstrate some a rare case of learning on the part of Bush and his administration. Buses are helping with evacuations. Depots are stocked up on bottled water. Great. However, the full extent of aid the Federal government will provide will be unclear for quite a while. How long will Gulf Coast residents have to wait for a complete picture for round II?

They might want to talk to residents of Illinois affected by flooding earlier in 2008. After floods affected portions of southern Illinois in March of 2003, Illinois Governor Rob Blagojevich sent a request on May 23 for funds to assist residents in 15 counties. A separate request was sent on May 27 for funds to help local governments repair damage to public buildings and facilities. The state heard nothing from FEMA and Blagojevich sent a follow-up request on June 24 directly to President Bush. (#2)

The governor just got his final answer --- no aid --- on August 25, five months after the damage, three months after the first request and two months after the direct communication to the President. (#3) People may argue one way or the other about the final answer and whether the damage to those southern counties really warranted federal aid but why would it ever take THREE MONTHS for FEMA to respond to a state governor?

Could it be FEMA still factors in the electoral benefits of granting aid in its cost / benefit analysis? There's not much chance of helping the GOP party faithful and its candidates by throwing aid dollars at a blue state. Could it be the anticipated public reaction to a denial of aid while memories of flooded homes were still in the media was deemed too politically risky? Better to delay the "no" answer and hope it gets ignored during coverage of some other fiasco.

To avoid repetition of disastrous public imagery after Katrina, John McCain has supposedly taken control of GOP convention planning and cancelled most of Day One's planned festivities and speeches. While canceling Day One might avoid an image problem, there is frankly little either McCain or Obama can do by showing up in the area and distracting the press and local officials from focusing on recovery. Maybe McCain should have instead refocused Day One on insurance industry regulation, fraud and a better plan for rebuilding New Orleans that doesn't stagger billions in levee rehabilitation over seven years, jeopardizing the entire investment in the levees and the homes behind them until the last dollar is spent. This is akin to building a million dollar home and taking over two years to put the roof on and close the house from the elements while still proceeding to install the drywall and the hardwood flooring.

It may not be over until the fat lady sings but it DEFINITELY isn't over in the realm of disaster recovery until the insurance company checks clear and FEMA takes its own sweet time to answer basic fundamental questions about its sole mission.


#1) http://news.yahoo.com/s/ap/20080831/ap_on_go_pr_wh/bush_gustav


#2) http://www.chicagotribune.com/news/chi-ap-il-illinoisflood-fem,0,6477950.story

Sunday, August 24, 2008

Conventional Politics

It is about twenty four hours from the beginning of the prime-time coverage of the Democratic national convention in Denver, Colorado. If one had any doubt about the content or outcome of the convention, one only has to look at Barack Obama's choice for his running mate, Senator Joe Biden, to attach a label -- CONVENTIONAL. Conventional politics are the last thing America needs in 2008 and beyond.

The selection of Joe Biden for the Vice President slot may "balance the ticket" or highlight perceived weaknesses in Obama's experience. However, it's pretty clear Biden's selection will cause some head scratching:

* he voted to provide Bush "authority" for the Iraq war
* he has already appeared in McCain ads stating Obama wasn't "ready" for the Presidency
* he's not a disciplined, consistent public speaker
* well respected on foreign policy but less influential on economics where most of our problems now lie

So what's wrong with the Democratic convention, when it hasn't even started? Look at the prime time schedule:

Monday -- Michelle Obama as keynote, aiming to let voters "get to know her" and paint the family side of Barack, which is only likely to cement impressions of a "power couple" where voters have to worry about the politics of the spouse as well as the candidate

Tuesday -- Hillary Clinton as keynote, supposedly aiming to firmly swing her supporters behind Obama but just as likely to return focus on her own campaign's bitterness over squandering her own front-runner position because of her own poor management of her campaign (#1)

Wednesday -- Bill Clinton as one speaker, presumably to convey he truly is behind the party's nominee despite five months of public pouting over "mis-treatment" of his wife and her campaign, which, again, was mis-managed into the ground internally by Hillary and her staff, not by anything any other candidate said or did, followed by Joe Biden as keynote

Thursday -- the coup de grace acceptance speech of Barack Obama in front of 76,000 people at Invesco Field, which will, at a minimum, reinforce the undesired "rock star" labeling of the opposition or worse, raise disturbing comparisons to prior mass spectacles of the ages, ranging from mindless opening ceremonies at $40 billion Olympic boondoggles to more sinister Leni Riefenstahl productions.

With all due respect, no one needs to hear from Michelle Obama or about Michelle Obama. Hillary Clinton lost her front-running bid by her own doing and needs to act like a strong, independent, new-age woman and cede the spotlight by shutting up about imagined "slights". Bringing Bill Clinton back to wax nostalgic over the good old days of the 1990s and what coulda been does nothing to address the problems facing the country now and just reinforces the family dynasty problem that has stunted the gene pool of both the Democratic and Republican parties. Clinton already hogged enough oxygen in the 2000 convention -- he needs to get out of the pond.

What the country needs right now is a TOTALLY different communication approach to explain

* WHAT has happened to the country over the past 8 years,
* HOW it happened,
* WHAT will happen if we don't change
* and HOW we can simplify government and restore Constitutional balance

Simplifying government doesn't mean gutting it so it cannot function (housing meltdown, banking fraud, Katrina) nor does it mean outsourcing an even larger government for private gain (Halliburton, FEMA, Homeland Security, etc.). It means eliminating the protections government provides big business that encourages big business to swing for the fences when things go well then beg for taxpayer bailouts when the "free market" hands them their head on a plate. It means being honest with voters about so-called "entitlements" and restructuring those programs to actuarial and financial soundness.

Perhaps the most frustrating aspect of the current 2008 campaign is the lack of attention to the basic Constitutional health of our country. ANY cursory review of the policies enacted over the past seven years and their outcomes clearly shows the current disasters could not have happened if key elected officials and appointees had not taken EVERY opportunity to ignore or outright circumvent the Constitution. The problems range from:

* Dick Cheney's secret summer of 2001 energy task force
* approval of torture practices outside the review of career legal experts in the military and Justice
* instigation of a war based upon cherry-picked intelligence not shared with Congress or career military / intelligence officials
* approval of the 2003 prescription drug program based upon forged cost data withheld from Congress
* illegal domestic spying in violation of clear-cut, thirty year old surveillance laws

From DAY ONE, players in the Bush Administration were bent on "restoring" full power to the Presidency. If the terrorist attacks of September 11, 2001 had not occurred, other justifications would have been used. The lesson Americans SHOULD be learning from all of this is that debates over very specific policies (windfall profits tax on oil? gas rebates for consumers? mortgage bailouts for banks or consumers? continued ethanol subsidies? etc.) are virtually POINTLESS because the KEY issue facing the country is an absolute failure of the basic mechanics of government brought about by old-school politicians and bureaucrats re-fighting thirty year old battles.

This election provides a choice between

a) a magna cum laude graduate of Harvard Law who taught constitutional law at another top law school (#2)

b) a Vietnam war hero who began taking political contributions from Charles Keating during his first two terms as US Representative, later became ensnared as part of the Keating Five for getting involved in conversations with S&L regulators on Keating's behalf (albeit playing one of the lesser roles), and did nothing to curb the excesses of a criminal Administration for 7 years in exchange for having a chance to run as his party's Presidential nominee

In a very real sense, there has never BEEN a candidate more suited to entering office and addressing the key problem facing the country than Obama yet Obama has failed to frame the debate from this perspective.

What would a better Democratic Convention agenda look like? Maybe the following:

Monday -- a focus on reforming ALL entitlements -- addressing welfare for the middle class
Tuesday -- a focus on business regulation -- addressing welfare for Corporate America
Wednesday -- a focus on the world and America's leadership role in energy, globalization and true freedom
Thursday -- accepting the nomination and outlining an action plan to put the country back on its Constitutional moorings

There is probably nothing else either party could do to more effectively communicate a message of "change" than conducting their convention as a true heart-to-heart with the American people about the challenges we face instead of producing an infomercial / opening ceremony spectacle like we're about to witness.



#1) http://www.theatlantic.com/doc/200809/hillary-clinton-campaign

#2) http://www.law.uchicago.edu/media/index.html

Friday, August 15, 2008

Securing the Border for Fun and Profit

The PBS show NOW aired a report on August 15, 2008 on the status of the "Secure Border Initiative" -- the project intended to block illegal immigration and infiltration of terrorists across the US / Mexican border. The story reflects all the elements of government at its worst:

* outsourcing of key decision making to private contractors (Boeing)
* sham public meetings ostensibly conducted to gather community input
* failed project management and flawed deliverables rewarded by more dollars
* arbitrary and capricious use of the government's power of eminent domain

The SBI project aims at improving border security through the construction of a physical fence in "high traffic" areas of illegal immigration and a virtual fence of high-tech surveillance tools for wider ranges of space to spot crossings and dispatch border officials to attempt to intercept illegals. The NOW story recaps several findings originally reported by Melissa Bosque on February 22, 2008 in The Texas Observer. (#1)

On the virtual fence front, much of the development work has been outsourced to Boeing. Millions have already been paid for the work but unfortunately, the actual leadership of the Border Patrol was not adequately consulted by the developers to identify what the system needs to do so initial efforts have proven to be worthless. No problem, if the first $21.6 million didn't solve the problem, here's more money. Sounds familiar.

Melissa Bosque of The Texas Observer found public meetings held to supposedly explain construction plans on the physical fence to affected communities and gather input from local citizens were shams arranged by outsourced consultants who brought no actual decision makers with the project planning to the meetings, allowed no legitimate question/answer sessions in the meetings, and brought none of the public comments back to SBI project management. Sounds familiar.

Most Americans hearing of the plan for a giant barrier fence picture the fence being constructed right on the actual US / Mexican border with no "lost" land. No way, Jose. Plans for the physical fence actually involve constructing it well within US territory. Of course, this is not just US government territory, this is private land owned by American citizens. In many cases, the Federal Government has offered to pay affected landowners for the land occupied by the fence. However, think about that for a second.

* you own 600 acres on the US / Mexican border
* the government wants to build a fence requiring a 50 foot strip through your property
* that fence might actually lie HUNDREDS of feet inside your property
* the fence strands potentially HUNDREDS of acres on the "unsecure" side of the fence, rendering the practical value of that property worthless
* you are only being compensated for the sliver of land occupied by the actual fence

The Texas Observer also found rather capricious decisions being made about where the fence is being constructed. A family farm? Yea, let's put it there. The upper crust River Bend Resort? Let's snake around that. What illegal worker or terrorist is likely to bring a sand wedge with them for the crossing?

Let's recap. An ill-conceived government project justified by national security, outsourced to a poorly performing but lavishly compensated contractor, presented to the public with sham public comment sessions leveraging abusive use of eminent domain while protecting property of well-connected parties from the damage. This might be the poster-child project for out-of-control, outsourced government for private gain.


#1) http://www.texasobserver.org/article.php?aid=2688

Sunday, August 10, 2008

Georgia and the World Economy

It has taken a mere four days for outside Russian forces to chase Georgian forces from breakaway regions of their own country and put those territories firmly under the thumb of Moscow. The motivations of Russia in pulling off this power play don't seem to be much of a mystery (strengthening influence and control over territories hosting pipelines crucial to Russia's energy sector). The failure of American media to explain the danger of Russia's intervention and the reasons for America's inability to adequately respond to it aren't much of a mystery either. Our economy's health is so precarious that no government or market players want to risk spooking the public any further by connecting the dots.

* a lame-duck US President is spending his last August vacation attending the Olympics and visiting our bankers (I mean friends) the Chinese
* an incompetent US Congress has adjourned for their August vacation to campaign and blame their inaction on the "other guys"
* public and private debt in America continues to skyrocket due to an unfunded $120 billion per year war, high energy prices and a slowing economy
* as banks attempt to stop additional mortgage lending losses by cutting HELOC funds, consumers simply shifted their borrowing to high-interest credit cards, to the tune of $14.3 billion in June 2008, nearly DOUBLE the $8.1 billion added in May (#2)
* much of America's "boots on the ground" capability has been ground to dust and rust by the five year deployment in Iraq
* The US banking system has nearly collapsed several times WITHOUT any true external shock
* Europe's economy is as precariously positioned as the US economy due to bad US mortgages that were securitized and resold worldwide
* Europe's energy markets are highly dependent on Russian oil and eastern European pipelines like those in Georgia
* Russia has already demonstrated its willingness to play hardball with energy and pipelines to support its interests by disabling a pipeline in Belarus in 2007

The situation facing the markets as of August 10, 2008 is vastly different than the one exactly one year earlier. On Friday August 10, 2007 the US credit markets literally froze up with no discernable external input and required a MASSIVE intervention from the Federal Reserve to temporarily right the ship -- an intervention LARGER in size than that required after the attacks of September 11, 2001. (#1) Today, exactly one year later, world markets have had some very concrete problems to consider for an entire weekend before international markets open for Monday:

* a likely direct spike in crude prices due to supply concerns from the situation in Georgia
* secondary spikes in crude prices as speculators react to the direct spike
* confirmation that an overextended US military cannot act to protect energy interests so crucial to our short-term health in an already teetering economy
* possible confirmation that America's crippling dependency on Russian / Chinese purchases of Treasuries to keep our economy floating is weakening our already damaged moral authority in the world

The recent drop in oil prices from $145 to $115 has produced elation for consumers and some economists who hope falling energy prices will help revive a stalling economy. For investors in commodities, it's probably produced a few gray hairs and heart attacks while tempting them into larger positions in energy hoping for the next updraft. I suspect the truth is that wildly fluctuating energy prices won't be good for anyone and that they are really a canary in the coal mine signaling the presence of much larger problems.

* a one or two-year reduction in energy prices will discourage long-term investments in alternative energy / conservation technologies, worsening eventual problems 10-20-30 years out
* any sudden spike in energy will encourage speculators who have already lost billions in mortgages to "catch up" by betting big on oil, which will cripple world economies in the short term if prices stay up or further bankrupt many institutions if the speculators can't drive the market
* billions in speculative bets sloshing around Wall Street will further destabilize the core of our financial system, already at its most vulnerable since 1929

With all these problems converging, it seems rather puzzling to see Bush on vacation (as much as any President is "on vacation"), sitting in a basketball arena (paid for in no small part by American interest payments on Treasuries held by China) taking in some hoop action. After all, Vladmir Putin saw fit to head home early to take care of the Russian end of the crisis in Georgia.

Then again, there seems to be a precedent. I wonder if "Putin determined to recapture Georgian pipelines and spook world economy" appears anywhere in the August 6, 2008 Presidential Daily Briefing?


#1) http://watchingtheherd.blogspot.com/2007/08/financial-markets-running-on-empty.html

#2) http://www.bloomberg.com/apps/news?pid=20601087&sid=ap7UVL.N6UAM

Tuesday, August 05, 2008

The Next Worry: Executive Pensions

As if the economy didn’t have enough to worry about already, the Wall Street Journal published a story on August 4, 2008 (#1) concerning another compensation and cash management practice we are sure to be reading more about in the next few years. The article, entitled Companies Tap Pension Plans to Fund Executive Benefits, identified eleven firms including Intel who have re-structured the books for executive pension plans to shift obligations for those outsized executive plans back into the firm’s rank-and-file pension plan. Understanding the true impact first requires a bit of background, which the article outlines nicely.

* tax law encourages firms to operate pension plans for employees by allowing employer contributions to be deducted from corporate income

* the tax code attempts to avoid aiding the creation of outsized pensions for execs by requiring them to be administered separately and providing no tax deduction for contributions

* the tax code doesn’t make careful distinctions between traditional “pension” compensation and other forms of deferred compensation

That last bullet appears to be the daylight between “legal” and “ethical” required to devise techniques that allow firms to obtain the tax advantages for compensation that would normally run afoul of the “disproportionate” limitations applied for executive benefits. By shifting existing obligations for high paid executives into the rank-and-file pension plan, this approach makes any contributions towards those future deferred compensation payments tax deductible in the present, improving profits (and likely boosting short-term incentive compensation) and disguising the true cost to shareholders of the executive contributions.

The WSJ story only mentioned eleven firms confirmed to have adopted this practice in blending its executive and rank-and-file obligations. However, the story mentioned that because of the accounting for these contributions, it is not easy to identify when the practice is used by reviewing a firm’s books, the IRS doesn’t yet track the practice, and compensation consultants aren’t talking.

Of course, all of the above makes an interesting accounting and management story in and of itself. However, when one considers the health of many pension plans, the current financial health of many large companies and the continuation of lavish compensation for executives producing the current financial morass, alarm bells should be ringing. This risk-shifting practice seems to be one more slight of hand being attempted by possibly dozens of large companies who might be one or two bad news stories away from bankruptcy and a transfer of their pension obligations to an already insolvent Pension Benefit Guarantee Corporation (that’s pronounced “US taxpayer”).

The title chosen for this comment is purely sarcastic. Given the gross overcompensation of the average executive who makes more in one year of work than most Americans can save over a lifetime, no one is really “worried” about their pension plans. The only problem is executives are once again rigging the system to mix their IOUs back in a larger pool of obligations, essentially putting themselves at the head of the line when the company goes bust after having been at the head of the line the whole time while producing the bust.

I’ve suggested before (#2) that one of the most important reforms required in bankruptcy law involves zeroing out all executive pension obligations at bankruptcy. With the outlandish pay received during the good times and often even MORE outlandish “combat pay” offered during tough times to “retain” the “needed leadership”, if executives can’t live on 346x the average worker’s salary (#3), they’re probably part of the problem anyway. This WSJ story provides more evidence of the disconnect between executive incentives and shareholder interests.


#1) http://online.wsj.com/article_email/SB121761989739205497-lMyQjAxMDI4MTA3NDYwMTQ5Wj.html

#2) http://watchingtheherd.blogspot.com/2006/05/sotu-alternatives-military-retirement.html

#3) http://money.cnn.com/2007/08/28/news/economy/ceo_pay_workers/index.htm