Should Evangelical Voters Trust Trump? Cruz? Rubio? Not So Much

Should Evangelical Voters Trust Trump? Cruz? Rubio? Not So Much

On Monday evening, as many as 150,000 dedicated Republicans in Iowa are going to show up at schools, libraries, community centers, and firehouses to write the names of GOP Presidential candidates on slips of paper. Of those caucus participants, polling suggests that over 60 percent will describe themselves as evangelical Christians.

Current polling also suggests that the top three choices, and therefore delegate winners, will be Donald Trump, Ted Cruz, and Marco Rubio.

Would the interests of Iowa’s evangelical Christian voters be served by any of those candidates?  If history has any predictive power, not too well. Certainly,those three don’t live the religious life that evangelical voters seem to believe is the most important thing in choosing a leader. (Remember, what counts is acts, not words.)

So how do the candidates act, in evangelical terms?

Trump, as we know, only sees the inside of a church when he thinks showing up there might help him.  He says he never does anything wrong, so he’s never had to ask forgiveness from God.  And his attempts to refer to the Bible are laughable.  But maybe his charitable acts tell another story?  Nope.  He has donated less to charity than almost anyone in his income range.  His namesake charity, the Donald J.Trump Foundation, is remarkably stingy and smells like a scam.  Last year his foundation gave out just over $500,000, and of that, $100,000 went to the purely political “charity” called Citizens United. The year before, $100,000 of Trump’s charitable donations went to Jerry Falwell, Jr’s political operation.  And there was also a nice donation to the slush fund that Justice Clarence Thomas’ wife runs as an “advocacy group.” It was “charity” as political favor-buying, in other words.

The Trump Foundation itself seems to have no particular significance for Trump when it comes to giving money.  He’s put in virtually none of his own money for nearly ten years, and the money that has come in seems to come from business suppliers and other interested parties. just before they ink deals with his management company.  I guess Stark Carpets just feels especially charitable when a new contract for hotel carpets is about to be signed. That has happened five times over the years, so far.

But at least Trump doesn’t claim his religion drives every waking moment of his life and every decision he makes.

Senator Cruz (R-TX), on the other hand, is pushing his affinity for the evangelical community big time.  Too bad he had to release his tax returns. Despite earning a family income well over $1 million per year, the five-year period from 2006 through 2010 was a time when the Cruz family felt no need to donate even one thin dime to any church. What happened after 2010? Oh yes, he started running for public office.

Then we have Senator Rubio  (R-FL), a slick speaker who looks like a shoo-in for student body president. Rubio seems to adopt a new set of religious beliefs every time he moves to a new place.  It’s hard to keep up, but he’s on his third faith so far. Is it too cynical to imagine something other than spiritual awakening made him adopt Mormonism, converting from Catholicism, when he lived in Nevada?  Evidently another spiritual awakening struck him like a thunderbolt when he moved to Florida, and incidentally wanted to join the leadership of the Republican-led state legislature there. Mormonism got jettisoned, and on came his rebirth as an evangelical Protestant.

If any of these three gentlemen becomes the GOP candidate for President, it’s the evangelical community that play the role of unions on the Democratic side, by organizing and providing the foot soldiers who knock on doors and operate the telephone banks.  Will the evangelicals who do that essential work get their payoff in policy priorities from these guys?

The religious right has been burned so many times before by candidates who say they care, and then drop them like a hot potato after the election. Is there any reason to think this time will be different?

Will The GOP Turn The CBO Into A Fantasy League?

Will The GOP Turn The CBO Into A Fantasy League?

News that Doug Elmendorf will not be appointed to another term as head of the Congressional Budget Office bodes ill for future budget policy discussions.

The CBO is the official non-partisan scorekeeper for all things budgetary. The soon-to-be outgoing chief of that crucial office is held in high esteem by both parties for his fair-minded neutrality.

On occasion, Elmendorf has pleased the Democrats and frustrated the Republicans, but just as frequently the tables are turned.

The CBO’s analysis of the likely 10-year effects of the Affordable Care Act is a prime example. Democrats seized on the overall deficit savings from Obamacare that came from several cost-control measures in the Act and new taxes on “Cadillac” employer-provided insurance plans. For their part, Republicans got political talking points from the estimate that the workforce would shrink when middle-aged workers left jobs they held on to as the only way to maintain their health insurance.

No matter. The (D)s could trumpet the deficit cutting, and the (R)s could say it cost jobs.

Now, if the more aggressive members of the GOP get the kind of CBO head they want, one of the bedrock principles of CBO analyses these past several decades is likely to come to an end. The phrase we hear for the new policy is “dynamic scoring,” and it opens the door for the CBO to apply unproven — some say disproven — economic theories that favor Republican policy goals.

To be sure, even the current “rules” of CBO analyses are subject to partisan gaming. For example, when a bill increases deficits too much to be acceptable in the CBO’s standard 10-year analysis, the bills are often changed to make the expensive (but popular) aspects of the bill expire early. With a wink and a nudge, the bill’s sponsors figure that Congress will extend the popular but expensive features when they are up for expiration.

It can be so rote a change that we give names to them – like the “doc fix” for Medicare. Since 2003, the formula for Medicare spending increases has included a cut in reimbursement to doctors. And seventeen times over these past 11 years, Congress has reversed those cuts in short-term bills with the generic name “doc fix.” But the law that controls Medicare spending continues to be the law, so the CBO projects future deficits based on what is in place.

Another example was the automatic sunsetting of the tax cuts put into place in 2001 and 2003. When they were originally set to expire in 2010, the country was still suffering the after-effects of the 2008 recession, so most of the cuts stayed in place. In political speak, not extending all the cuts was labeled “raising taxes.”

The latter example is especially significant if the new head of the CBO uses the dynamic scoring that radicals like Rep. Paul Ryan (R-WI) want. According to the supply-side devotees that want the new method of scoring, tax cuts always spur additional economic growth, effectively growing our way out of the revenue shortfalls that are inevitable when tax rates are cut.

Remember the discussions before the 2001 and 2003 tax cuts became law? We were told that “deficits don’t matter,” and that the economy would grow so much that there would be huge revenue increases even at the drastically lower rates. It didn’t work out that way, and the final George W. Bush budget had a $1.3 trillion deficit even with the Afghanistan and Iraq wars “off budget,” rather than the zero deficit or surplus that supply-side economic theory had predicted.

In 2005, as the 2001 and 2003 tax cuts weren’t hitting the projected lowered deficits that their sponsors expected, some members of Congress thought they just hadn’t given the economy enough tax cut medicine. So they directed the CBO to study the effects of cutting federal income tax rates by 10 percent, and to explore what would happen if they also assumed that the tax cuts would spur additional growth, as dynamic scoring fans expect from the next director of the CBO. To be clear, they weren’t talking about lowering the 25 percent tax bracket to 15 percent; just lowering the rate by 10 percent (to 22.5 percent), lowering the 35 percent rate to 31.5 percent, and so on.

In that study, the CBO came up with estimates of additional deficits of $522 billion for the first five years, and $1,035 billion over the next five years using CBO’s conventional method of scoring. Those came from the lower tax revenues without adding in any effect of boosted growth.

To project dynamic effects they worked with external consultants at Global Insights and at Macroeconomic Advisors, who were able to give the CBO estimates of additional economic activity over a five-year horizon. Longer-term effects had to be estimated by CBO staff alone.

It’s a tough job, estimating the future, and changing the rules will make it that much tougher. The CBO decided to project multiple future paths for the economy based on how taxpayers react as their rates are lowered, how Congress deals with the revenue shortfalls created by the tax cuts, and whether capital is free to move across borders or not. Across all the scenarios, the CBO estimated that there would be incremental growth in GDP, in annual amounts varying from 0.1 percent up to nearly 1 percent.

If people simply spend and save based on how much money they have in their pockets right now (what the CBO called the “no foresight” model,) the results are not encouraging. The effect was an even higher deficit than the $1.56 trillion that conventional CBO scoring predicted.

So the CBO also imagined that taxpayers would actually change their habits based on believing that Congress would bring the budget back toward balance after 10 years through spending cuts or higher tax rates. In one set of cases, they imagined that the individual taxpayers would plan according to the effects over their entire lives. In other cases, they supposed that taxpayers would actually include the effects of their spending and saving on future generations.

Can I have a show of hands for those without professionally managed multi-generational trust funds who plan over those horizons?

Under these optimistic scenarios where people plan for at least their own lifetimes, some of the trillion and a half dollars added to the national debt by the tax cuts comes back to the Treasury by virtue of the extra growth in the economy and employment. The CBO estimated that our national debt from that relatively modest tax cut would grow by only $1.1 to $1.3 trillion with those positive feedback effects from the tax cuts.

But wait! Maybe there’s a better model, taken from reality. As Governor Sam Brownback said when he pushed Kansas to make drastic tax cuts, he was using the state as his “laboratory” — and he even hired supply-side guru Art Laffer to advise.

Kansas is bordered by four states with very similar economies. They didn’t duplicate his tax cuts. What better real-world experiment could we have?

Since the Brownback/Laffer policies were put into place, the Kansas economy grew slower and unemployment dropped less than in any of the bordering states. This year, Kansas will probably finish depleting its rainy day fund, let its roads fall apart even more, close schools all over the state, and raid specific purpose funds to give them to the general fund. That’s to plug the $279 million gap in this year’s budget that’s still left after last year’s budget cuts. And the problem being pushed into next year is already expected to be more than twice as big ($648 million). So maybe the incoming head of the CBO analysis should use this real data from the real world, where tax cuts seem to make an economy grow slower than no tax cuts.

Now that’s a plan! More unemployment, slower growth, and bigger deficits.

Watch the CBO carefully after the new boss arrives. If they don’t consider the possibility that the economy might actually shrink if taxes and spending are cut, then we know that the days of being a neutral scorekeeper are over, and fantasy sports have taken over for the real players on the field.

Howard Hill is a former investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio. His book Finance Monsters was recently published.

Photo: University of Michigan’s Ford School via Flickr

How To Tell If The Next Financial Crisis Is Upon Us

How To Tell If The Next Financial Crisis Is Upon Us

In my last article, it was suggested that the rapid collapse in oil prices might have set up a repeat of the 2008 financial crisis. Before we all run for the bunkers and the freeze-dried food, we should know the conditions needed for a crisis to happen, and the signposts we’ll see if the crisis gets going.

For a sector correction to become a meltdown, and for that to turn into a global crisis, there need to be several preconditions in place.

The first condition is a serious market sector correction. Such a correction is already underway and heading toward a meltdown (the second condition), according to some participants in the market for energy company bonds and loans. Others are more sanguine.

That smaller energy companies have issued more junk-rated debt than their relative size in the economy isn’t under debate. Of a total junk bond market estimated around $1.2 trillion, about 18 percent ($216 billion, according to a Bloomberg estimate) has been issued by energy-related companies. Yet those companies represent a far smaller share of the economy or stock market capitalization among the universe of junk-rated companies.

If the beaten-down prices for junk energy bonds don’t stabilize or recover a bit, we might see the second condition: a spiral of distressed sales of bonds and loans. This could happen if junk bond mutual funds or other large holders sell into an unfriendly market at low prices, and then other holders of those bonds succumb to the pressure of fund redemptions or margin calls and sell at even lower prices.

The third condition, which we can’t determine directly, would be pressure on Credit Default Swap dealers or hedge funds to make deposits as the prices of the CDS move against them. AIG was taken down when collateral demands were made to support existing CDS agreements, and nobody knew it until they were going under. There simply isn’t a way to know whether banks or dealers are struggling until the effect is already metastasizing.

The unknown is how much of the $2.77 trillion of junk CDS on bank balance sheets on June 30 this year was energy-related. If history is any indicator, the CDS in the distressed energy sector will far outweigh its 15 percent share of the junk bond market.

But if we watch for the following three signposts, we’ll know that the crisis play is happening again:

  • Non-energy junk bonds dropping in price. That would mean large holders are exiting from all junk bonds, not just those companies affected by low oil prices.
  • Sudden drops in share prices for banks or insurance companies that hold small amounts of energy-related bonds or bank loans — a clue that some market participants think they have derivative exposure.
  • Rumors or news that the big, investment-grade energy companies (the Exxon-Mobils and Shells of the world) are having trouble renewing their commercial paper, bank loans or maturing bonds.

If we see all these signs in a matter of days or weeks, then our global financial system is being tested once again by the small community of speculators that profit from betting against industries, countries, or markets. They made a fortune betting against mortgages. Most of them didn’t retire to enjoy that wealth. They moved on to the next trade, and every day they try to repeat their investing success.

The next time their presence was really visible was the European debt crisis of 2011-2012. That didn’t take down the global financial system, but it was close. If Spain, Portugal, Italy and Ireland had followed Greece into debt restructuring, we would have had another global crisis, most likely even larger than the 2008-2009 episode. Only a major commitment from Germany kept the rest of Europe’s weaker countries from failing on their debt, too.

In March of 2012, the Greek “credit event” that triggered payment on CDS was estimated to apply to CDS that equaled 30 percent of the 300 billion Euro Greek sovereign debt market, or roughly 90 billion, (about $118 billion in U.S. dollars at the time). The “settlement price” for that CDS event was 21.5 percent. So the winners in the CDS bet took home 78.5 percent of $118 billion, or approximately $93 billion. That was nearly twice the size of the CDS payoff when Fannie Mae and Freddie Mac went into receivership. Nice trade for those who made it.

Do we need to remind ourselves that Fannie and Freddie were the Exxon-Mobil and Shell of the mortgage business? Or that no target is too big if trillions of dollars can be used to make the bets?

So where will the “next trade” be? Anywhere there might be weakness.

This month, it’s in energy companies that borrowed more than $200 billion while planning on oil prices staying over $100 a barrel, and gasoline staying over $3 a gallon.

Only time will tell whether there have been enough bets against those optimistic energy companies to make it a problem for everyone, and not just them.

Howard Hill is a former investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio. His book Finance Monsters was recently published.

Photo: Mathew Knott via Flickr

Are We There Yet? The Next Big Crash Might Be Around the Corner

Are We There Yet? The Next Big Crash Might Be Around the Corner

We probably aren’t at the cusp of the next financial crisis, but we can’t be sure, given the pathetic nature of the financial-market “reforms” that are already being curtailed even before taking full effect.

As we enjoy a rare market gift to the masses, the first sub-$3 gasoline in several years, we might want to temper our holiday cheer just a bit. Not because cheaper gas doesn’t help “everyman,” but because the presence of rapid price swings in one market can quickly turn into disaster for all markets.

It’s not that market volatility is in itself contagious. It’s the fact that there’s a hidden part of our financial system that works behind the scenes and takes advantage of opportunities in the market. Even if those opportunities benefit only them, and hurt the rest of us.

Remember how the last crisis went global? And how some said we should blame the banks (liberals cheer) or the bad borrowers (conservatives applaud) or even decades of government policy (libertarians blow their horns)? And everybody blamed subprime mortgage lending?

What few realize is that in September of 2008, actual realized credit losses from subprime mortgage foreclosures was a small fraction of the derivative losses sustained at just one company, AIG, which became synonymous with the word “bailout.”  And AIG wasn’t even in the subprime mortgage business.

Before the crisis, AIG was the world’s largest AAA-rated insurance company, with around $200 billion in market capitalization. AIG lost all their shareholders’ capital, and still sucked up nearly $190 billion in cash, government asset purchases and spinoffs. What did an AAA-rated insurance company have to do with mortgages, mortgage bonds or investing in mortgage bonds? Actually, nothing. Instead, AIGs connection to the mortgage crisis was a special kind of bond insurance.  It wasn’t regulated as insurance. In fact, it wasn’t regulated at all.

That insurance, called Credit Default Swaps (CDS), rightly has been addressed in the new regulations that implement the Dodd-Frank financial reforms. Delay and “pushback” on those regulations has already defanged them, but the anti-regulation crowd isn’t done yet.

Last year, the House passed a bill (designated HR-4413) to take care of the regulation problem.  Ironically titled “Customer Protection and End User Relief Act,” it made sure that anyone wanting to take speculative positions large enough to bankrupt any bank on Earth could do so without the irritating presence of examiners or capital regulations. All that was required was the assurance that they were “hedging their portfolios.”

Or they could escape scrutiny by being “end users.” When the regulations were first drafted, end users were defined as companies with less than $100 million in derivatives on their books. Above the limit would define a dealer. That limit was temporarily raised to $8 billion to give smaller banks or investment firms a chance to put systems in place. HR-4413 would make that limit permanent. The workaround for derivatives dealers in end users’ clothing couldn’t be simpler: Just put $7.9 billion in CDS bets in a number of separate companies.

What does this all have to do with cheap gas in your tank? A lot. Because the same CDS bets that nearly brought down the global economy once aren’t limited to mortgage bonds. If you’re one of the group that gambles with everyone’s future, you can do it in any sector. Like energy company bonds.

There isn’t any way to tell how big the CDS bets are in energy right now. The “reforms” have ensured that. The best we can do is look at the Office of the Comptroller of the Currency (OCC) report on derivatives after each quarter end, and find out that, as of the end of Q2, 2014, there were approximately $2.77 trillion of below-investment grade (junk) CDS outstanding in the American part of the global banking system. Almost all of it was on the books of the five largest taxpayer-insured banks.

To be fair, those banks do the best they can to pair off their CDS exposure, finding bullish investors to offset the bearish bets. Unfortunately, even the best hedges are never a perfect match. The “matched books” the banks run depend on both the bulls and the bears having enough money to pay when the time comes.

Let’s hope that time doesn’t come anytime soon.  We’re still recovering from the last crisis.

Howard Hill is a former investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio. His bookFinance Monsters was recently published.

Photo: Mike Peel via Wikimedia Commons

Understanding Net Neutrality: We Need A Better Analogy

Understanding Net Neutrality: We Need A Better Analogy

Faced with the profound issue of net neutrality, America’s consumers still struggle to understand its complexities. Part of the problem may be the usual analogy of express lanes on a highway.

Most people understand the Internet through its impact on them. So they take the fast lane/slow lane description and translate it into their own choices, like paying to take a toll road when they’re in a hurry. They know they pay extra for high-speed Internet to avoid dial-up, and they don’t see anything wrong with that. In fact, some local cable companies currently provide several speed levels for several price levels, which also seems “fair.”

People fundamentally suspicious of government (comparisons to the Post Office and Amtrak keep coming up) only think about their Internet choices at home, and the fact that competing technologies have delivered faster service without regulation, and assume that it will only get worse with regulation.

So let’s try this version instead:

Think of the Internet as the entire interstate highway system, complete with on-ramps, high-speed freeways, higher-speed tollways, interchanges and off-ramps.

At your home, you’re paying for the off-ramp from the system, and you already pay more if you want a 60 MPH off-ramp instead of a 10 MPH off-ramp with a stop sign. The big issue, the one Comcast, AT&T, Netflix, Silicon Valley and serious geeks everywhere are fighting over, is the on-ramp and access to those high-speed off-ramps.

Once your data is on the highway, slower speed only means more delay from the time your packets of data were sent until they are delivered. Not the end of the world, unless you’re a High-Frequency Trader. I’m sure by now most of us know that when we watch “live” television that there is actually a delay. Even switching from low definition to high definition often adds a few seconds’ lag, but seeing the big play in high def can be worth the cost of not knowing as quickly.

That could all change if the “slow lane” turns into a massive traffic jam. At that point, it won’t matter how much you’re paying for your fast off-ramp. If your content vendor can’t or won’t pay for fast transmission at each stage – getting on, transmitting, and getting off, then you might as well have a dial-up line. Remember “buffering?” Without net neutrality, it’s about to make a comeback.

What is really being debated is a brand-new trend in Internet commerce – charging the vendors extra to get faster on-ramps, and charging the vendors again to get access to the faster off-ramp that you’re paying for already.

Silicon Valley hates it, because it’s the land of garage startups, and if you have a hot new application, the $10 million-a-month fee for the fast on-ramp and fast customer off-ramps might keep entrepreneurs from ever getting into business.

The big ISPs (Internet Service Providers) love creating another source of profit from their control of the Internet “backbone” and their exclusive relationship with the end customers. That’s why Comcast is spending so much on Washington lobbyists, and is currently outspent by only Lockheed.

There is an upside to letting the ISP oligopoly continue unfettered by regulation: they’ll have so much money that they may decide to spend some of it upgrading their systems. They may even decide that the extra revenue for high-speed transmission is good enough to extend high-speed service to areas where other providers enjoy monopoly pricing, lowering subscriber prices. Or they could extend their networks to lower density populations, a development that might let the government get out of the business of subsidizing rural Internet deployment.

Just don’t be surprised to hear the ISPs try to call cutting those rural subsidies a “tax” the way Florida sugar growers described the trial balloon of cutting sugar subsidies. For the sugar kings, that tactic killed the idea and they kept their “emergency” subsidy that’s been in place since the Spanish-American War. You can bet the ISPs like that kind of government interference.

For those who argue that regulatory action on this issue will change the Internet forever, just remember, the one-speed-for-all-content network you’re used to is about to change dramatically unless regulation keeps it that way.

So my question to the “free market” folks who are against net neutrality is this: Are you sure that — for the rest of your life — you only want Internet services that the big boys will come up with? If you think Google, Netflix, iTunes, Amazon and a couple of others will invent everything you’ll ever want, and that they won’t gouge you with their pricing, then by all means, oppose net neutrality.

Howard Hill is a former investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio. His book, Finance Monsterswas recently published.

Photo: Joseph Gruber via Flickr

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One More Step Toward The Next Meltdown

One More Step Toward The Next Meltdown

The delaying tactics we told you about nearly two years ago have worked beautifully. The bailout worked (if not for homeowners, at least for the banks). It worked so well that the underlying problems that led to the financial crisis have remained largely ignored.

The regulations that have been written (and continue to languish during their extended comment period) are on their way to being eliminated or weakened yet again by Congress. The House helped out this week by passing a bill (HR 4413) that ensures that if any regulations do get approved, they will be difficult to enforce.

As we reported back in 2012, JPMorgan Chase in London managed to avoid examination and enforcement by the Commodities Futures Trading Commission simply by labeling their massive speculation in credit default swaps as “portfolio hedging.” It was a loophole big enough for a whale to swim through.

Another loophole made enormous by HR 4413 is the cutoff separating “end users” from “swap dealers.” In the CFTC draft regulations written after Dodd-Frank initiated oversight on the swap business, any market player with more than $100 million in swaps per year was considered a dealer, and subject to stricter oversight and capital requirements.

After the industry complained, the CFTC agreed to delay that stronger oversight for two years and put in a temporary $8 billion cap that was due to drop to $100 million later this year. The bill that passed the House makes that $8 billion cap permanent. Now any firm that wants to do $100 billion in business without regulation has the option to create 13 separate companies.

From the point of view of the people who profit from the lack of regulation, streamlining the lack of oversight is financially sound. After all, real estate values in waterfront Greenwich estates, the Hamptons, and even Park Avenue will likely suffer if bankers and hedge fund managers make less money.

For those who trade in opaque markets, profits are maximized when some participants have information that their customers and competitors don’t have. An open market with published prices and capital reserves would limit profits and return on equity. Complying with regulations and keeping records available for supervisory review costs money. It all cuts into profits.

And if profits get squeezed by an overbearing, overregulating government, how can a valuable part of our capital markets survive? It’s not cheap, after all, to employ the people needed to execute this business that virtually no one understands and that the government doesn’t want to regulate.

Remember when AIG Financial Products blew up? Even though there were traders, accountants, clerks, lawyers and others from Lehman who found themselves jobless, the Treasury Department decided to pay more than a million dollars in bonus payments to each of the valuable AIG employees that had bet so big, and so badly.

Thankfully, the lobbyists hired by the industry have figured out how to keep the business profitable, and how to turn the task of complying with new regulations into a potential new profit center. They helped incorporate a brilliant strategy into HR 4413, and got 265 members of the House to vote for it.

The CFTC will be required to create and publish cost-benefit studies prior to adopting new compliance policies, and those studies will be subject to judicial review. That will take some time. After the CFTC rules go into effect, market participants will be free to argue that the cost estimates were inaccurate. Because the studies are subject to judicial review, the companies being regulated can theoretically get the government to pay them for any additional costs they incur when complying. With a little creative accounting, maybe the swap dealers will turn a profit on compliance departments.

While the delaying tactics written into the bill keep regulation at bay, trading in credit default swaps will continue as it has, with the risks it has, here and abroad. Over half of the hundreds of trillions of dollars in swaps on the books of our banks belong to foreign subsidiaries. A condition of the new bill requires the CFTC and the SEC to certify that derivatives regulations are not already in place in those foreign jurisdictions before they become subject to the new “regulations.” All a bank or hedge fund needs to do is dispute the nature of existing derivatives regulations in their legal places of business overseas, and any oversight can come to a grinding halt while they all work it out. In the meantime, they can enter into lots of credit default swap contracts.

Perhaps the most brilliant part of HR 4413 is hidden in the budget. The congressionally mandated increased workload has no accompanying increase in the commission’s budget. It won’t be easy to run thousands of legal and economic analyses without the people to do it or the money to hire them.

Speaking of people, the bill passed in the House also peculiarly reinvents the org chart. Key regulatory and enforcement personnel currently report directly to the commissioner of the CFTC, but under the new law, those people would instead report to five different members of the commission. Hiring, firing, and departmental budgeting will be decided by all five members together.

Have you ever reported to five bosses at the same time? I did, for about a year, and it’s nearly impossible to get anything done.

By the way, in case you thought our government didn’t have a sense of humor, Congress tells us we can call HR 4413 the “Customer Protection and End User Relief Act.”

Howard Hill is a former investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio. He writes and blogs at

Correction: The “hundreds of trillions of dollars” figure cited in the 12th paragraph refers to all swaps, not just credit default swaps as this post originally stated.

Photo: mlmdotcom via Flickr

Why The Congressional Majority Likes Sequester

Why The Congressional Majority Likes Sequester

We hear that 800,000 civilian employees of the Department of Defense will get an automatic 20-percent cut in hours and pay. That’s a hell of a lot more than the percentage cut to the Department. Why? Because nobody is cutting the pay to contractors that are non-human “persons.” In fact, some defense contractors are going to enjoy a windfall, as they charge higher unit prices if the number of planes, jet engines or whatever being delivered on existing contracts is cut below volume discount levels.

And nobody really imagines the government won’t be back later to buy them, just that they’ll be delayed, and the government will pay a higher price per unit in the meantime. So there you have it — increased profit margins for corporations, all the real cuts applied to wage earners. What’s not to like?

If the cuts were to profit margins or across-the-board three-percent cuts to the price paid, then you’d see the House compromise to fix this.

A true skeptic might say that when the pain of budget cuts hits supporters of the PACs and the Tea Party astroturf outfits, the cuts will be more sensible, and we might even see a few unwarranted tax loopholes get closed to help narrow the deficit.

AP Photo/Jacquelyn Martin

The Pundit Watchlist

The Pundit Watchlist

Over the next couple of months, the American public can expect an ever-louder din of opinions as we approach the next bogus political standoff — the debt ceiling hostage crisis.

Bogus? I’m not saying it isn’t a crisis when elected public servants threaten to sabotage our country and the world economy. It certainly is. That’s why it was such a shock when a routine (and silly) bookkeeping matter suddenly became a pressure point in 2011 after years and years of “clean” increases to the debt limit.

But what other country spends money and then pretends it’s optional whether to pay the bills for what they’ve already spent? That’s what makes planning to instigate a crisis over the debt ceiling so bogus.

Perhaps an even more bogus activity in coming weeks will be the unending flow of opinions from the chattering class about the likelihood of default. When is the last time you saw a pundit pay any penalty for offering entirely wrong predictions?

Rather than pay heed to uninformed people with nothing at stake, wouldn’t you rather hear what people who could win or lose billions of dollars might think? Their opinions matter to me. Moreover, you can watch their opinions change over time (and so can the pundits).

In the market, we set up watchlists so we can check them frequently when we care about the outcome. So here it is, pundits — a watchlist you can use to see what people who have real money riding on the outcome think of the possibility of default for the U.S. and a couple of dozen other countries. Just scroll to the bottom of the list to see how U.S. debt is viewed.

When the price of CDS (default insurance) goes up, the big money is betting the odds of default is going up.

Not to get too far down into the weeds, but you do have to know one other thing about this form of credit insurance. The insurance increases or decreases in value according to the expected loss after the default, as well. We call the price of bonds after a default the “salvage value.” The amount paid out is the face amount of the bond less the salvage value. In that way, CDS is a lot like car insurance. When your car is totaled, you have to give the insurance company the vehicle to get the check. During the early years of CDS, the buyers of credit insurance had to deliver the bonds to get the payoff. That worked until Dana Corp. (the auto parts maker) went bankrupt, and much to everyone’s surprise, there was more credit insurance outstanding than there were bonds.

That’s when the rules changed. Now you get cash, but not the full face amount of the bonds you insured.

For example, if Treasury bonds miss an interest payment, that will trigger the payoff on the CDS. At that point, members of Congress, many of whom are millionaires, might wake up after their individual fortunes are crushed by the market, and decide to pay the bills. Most players in the bond market would expect that, so even the defaulted Treasury bonds will probably still trade at 90 cents on the dollar or higher.

That gives us a way of understanding the risk/reward of owning Treasury bonds and insuring them. Alternatively, it gives us a way to calculate the speculative value of betting against America’s credit.

In the first case, for those who use CDS as genuine insurance, the current yield of a 5-year Treasury note is 0.83 percent. If the cost of insurance is 40 basis points (0.40 percent per year) for five years, then the net return on a credit-insured Treasury would be 0.43% per year.

It gets a lot more interesting if you look at the risk/reward for pure speculation. If the politicians fail to swerve when they play chicken with our national credit in a couple of months, a single three-month payment of 10 basis points ($10,000 for $10 million face amount of CDS) could result in a million-dollar payoff if the post-default price of those Treasury notes drops to 90 cents on the dollar.

Pundits, place your bets. Or at least start watching how people with serious money are placing theirs.

Howard Hill is a former investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio. He writes and blogs at

Photo by “mlmdotcom” via

Lobbyists: The Best Risk Arbitrage Your Money Can Buy

Lobbyists: The Best Risk Arbitrage Your Money Can Buy

When I began investing decades ago, one of the earliest versions of hedge fund strategies was to simultaneously buy the stock of a “target” company in a takeover and sell the stock in the company that was doing the purchase.

They call it “risk arbitrage,” where the risk is that the announced deal might not happen.  While not nearly as profitable on a percentage basis as guessing ahead of time which company will be taken over, it nearly always works.

There was a profit to be made as long as the deal got completed, something that usually happened and usually resulted in a 10 percent or higher return in a couple of months.

Today I saw evidence of the modern version — making political contributions to “freshmen” politicos to help them retire campaign debt.  How cool is that?  Lobbyists who seldom make political contributions to challengers can endear themselves to the winner after the election, yet before they get sworn in.  The lobbyists can put their money to work on newcomers without having to take the large risk that they’ll lose to the incumbents.

This brings to mind a book topic I’ve been trying to figure out how to research.

The premise of the book is that, for the largest companies, no matter what business they’re in, the single highest return on investment they can make is spending money on lobbyists.

The steady increase in pay for lobbyists right through the recession that crushed almost every other profession’s payscale should give us a clue.  So should the steadily increasing cost of elections.

And then there’s the massive difference between the supposedly high corporate tax rate (35 percent) in America and the actual amount paid by US corporations (roughly 15 percent).  When GE earns multiple billions but pays zero in corporate income tax, you can see that they are getting a massive return on the millions they spend with lobbyists and politicos.

Or look at Wall Street and the banks.  After engineering the collapse that crushed savers and borrowers alike, they made out like bandits.  They even got their pet politicians to turn to them to “help” write the regulations to fix the problem.  How much is that worth?  It sure beats the profit margins in taking in deposits and lending to people or small businesses, right?

Just to be clear, the return on political investments isn’t limited to the big national issues, either.  In fact, much smaller contributions to state legislators can be an even better percentage return.  Does anyone doubt that a thousand dollars contributed to a state legislator in a relatively small state gets that lawmaker’s attention?  Throw in a “force multiplier” like the legislative language clearinghouse called ALEC, and a five-figure investment can return tens of millions in profit.

Here’s how it might work:

If I ran a prison-for-profit company, the kind of prisoners I’d like to hold would be the non-violent kind.  For example, casual laborers from Mexico and Central America who walked across the border to look for work.  If I could get the contract for holding them while the INS works through its backlog of cases, and simultaneously get several states to pass laws that turn every traffic stop into a potential “customer” for my service, it would be a home run.

Maybe I would even write a law that might become Arizona’s SB 1070, a law that could be replicated around the country using the ALEC clearinghouse for legislative language.  The beauty of the plan is that the lawmakers I make my contributions to are already very likely to want to take action against the “illegals” they see waiting at bus stops early every morning hoping to get work from landscapers.

Chances are that the profit from a handful of detainees pays back every dime I would spend getting this result.  If I ended up with thousands of detainees in custody, my return on investment might be near infinite.


If you ever wondered why spending goes up so much when “small government conservatives” take over, this is why.  They fall into the trap of believing that giving contracts to private companies will save money.  But when they hire for-profit companies to perform what they think are important functions that government should provide (eg security, defense, immigration control, education, infrastructure maintenance, hospital management, insurance or guaranteed loan payment processing, etc.) they fail to connect the most important dots.

For-profit companies exist to maximize profits.  In fact, nearly every company has profit growth targets that quadruple inflation, that triple GDP growth, that exceed population growth by a factor of 10.

Is it any wonder that government spending goes up faster than our citizens’ income when the corporate income for government contractors keeps growing at double digits?

When I heard that the impending hostage crisis over funding the government and increasing the the debt limit was likely to result in 800,000 civilian employees of the defense department being furloughed, I had no trouble understanding why we spend more on defense than the next 10 or 15 largest military powers combined. Eisenhower warned us.  We should have listened.

Using the government as the marketing arm for a company’s services and as that company’s collection agency or customer is the easiest way to make sure profits flow and grow for years to come.

The key to ensuring that revenue and profit stream is to “help” write the laws that create those contracts, and the tax code that makes sure those profits don’t get taxed.

I recently read that the compensation for the many thousands of lobbyists in the DC metro area topped $700,000 per year, beating the average paycheck at Goldman Sachs.  Given the return on investment, you can see why.

With so many newly minted senators and congressmen still in debt from their elections, the lobbyists are lining up to help with $5,000 checks.  Anybody willing to make a guess as to the return on investment from those checks?  I’ll bet it beats the 10 percent or 15 percent from old-fashioned risk arbitrage in the stock market.

Howard Hill is a former investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio. He writes and blogs at

Photo credit: Matthew Knott via

The Foreclosure Cliff

The Foreclosure Cliff

We can thank Ben Bernanke for the phrase “fiscal cliff” – a phrase many observers have tried to soften by pointing out they think it’s more like falling down a slope, sliding down a curve, or even tripping over a curb. I can understand trying to find other metaphors to replace the nearly always fatal results of going off a cliff.

But maybe those observers missed one effect that Bernanke knows drives the economy more than any else: housing.

You’d think we’d know by now that America’s economy depends on housing more than any other industry. Certainly the fact that unemployment is still nearly 8% while corporate profits have roared to all-time highs is a clue. So is persistently low consumer confidence in spite of those stellar profits and a stock market that has nearly doubled over the past four years.

But housing is at least stabilizing nationwide, and even heading upwards in the regions hit hardest by the housing bust that started the “Great Recession” in the first place.

But we’re not out of the woods quite yet, and one aspect of the impending spending cuts that begin January 1st is almost certain to change that progress on the housing front into a full blown retreat. And that retreat will start immediately, not gradually over the year, as do the other effects of the law passed in 2011 following the debt ceiling hostage crisis.

Starting this week, two million unemployed people now collecting extended federal unemployment benefits will get nothing. What if a million or more of them have mortgages? Will they be able to pay? Not bloody likely. People who have been out of work longer than six months generally don’t have much in the way of savings left.

That’s the reason extended unemployment benefits is such a huge winner when used as a stimulant for the economy. Unlike infrastructure spending, which takes months or years to begin to have a “multiplier effect” in the economy, extended unemployment benefit money gets recycled into additional activity almost immediately. Most economic studies show that roughly $2 of increased GDP comes from each dollar of unemployment benefits.

Contrast that with deficit spending resulting from tax cuts. That kind of spending only gives pennies in GDP growth for each dollar borrowed to subsidize those cuts.

The reason Bernanke called the impending fiscal policies in the “sequestration” a cliff was probably not because those who do have jobs will have more taxes taken from their pay, though they certainly won’t be spending more money and growing the economy with those smaller paychecks. That’s a small and gradual effect. The reason he called it a cliff is that the most destructive single thing you could do to our economy is to hurt, yet again, the largest asset of all but a few of us – our homes.

So before we say that it doesn’t matter when they fix the gun-to-the-head spending cuts and tax hikes that begin this week as long as they fix it over the next few weeks or months, consider what will happen to the value of your house if your neighbor goes into foreclosure next month. Two million neighbors are already having a hard time making their payments for the basics like housing and food. Surely some of them will fail when their main source of income is suddenly shut off.

Howard Hill is a former investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio. He writes and blogs at Follow on Twitter: @hhill61

This Horse Is Dead

This Horse Is Dead

When asked for my reaction to the spectacular failure of Team Romney’s Get Out The Vote (GOTV) computer system touted as the secret weapon that would defeat Team Obama on Election Day, I thought it was like beating a dead horse.

The way Team Romney failed and tried to hide it explains why Karl Rove and Fox News refused to believe what was happening election night, and for that, there is something to learn. As part of the campaign post-mortem, the bust that was Romney’s ORCA system simply underscores the fact that Romney’s business success wasn’t based on productive business purposes.

Bain’s success consisted of taking advantage of a tax arbitrage from issuing junk bonds and paying massive fees to the arrangers via offshore tax-advantaged investment funds. That’s true for all LBO deals, and one of the fundamental failures of our tax policy for the past four decades. When a company’s profits are turned into interest payments on newly issued junk bonds, that company stops paying any income tax. Think of it as an easy way to increase profits by just over 50% by not paying a 35% tax rate on those profits.

We also reward monetizing and extracting prior earnings such as fully funded pension funds and company-owned factories with far lower tax rates than we reward creating new earnings, and that has made some huge fortunes for those like Mike Milken who recognized the arbitrage.

But Team Romney did blow it on Election Day with its GOTV system, and as a former large-scale system developer, I can see why.

First and foremost, they didn’t test the system before deploying it. A test, by the way, doesn’t consist of having the developers show off the screens and reports they expect the system to produce. A test of a real-world data aggregation and analysis system consists of end-to-end simulation of the operation, with the actual people who will use it at each node where a human being is involved.

Any competent business manager knows this.

The fact that Team Romney spent months and hundreds of thousands of dollars developing and pitching their voter tracking and contact system as far superior to the battle-tested Team Obama system was just marketing hype. I suppose you could say that it was a success in one way, if getting big-money contributions that exceeded the development cost is what makes “success.”

As argued here and here, Mitt Romney is a lousy business manager compared to Barack Obama. This is just another example.

So let’s bury this horse and stop beating it.

I would suggest that we take note of the names of the senior staffers who sold Romney on this particular failure, and watch whether they reappear in future campaigns. After all, the voter registration contracts for six important states in 2012 were outsourced to a man who had already been accused of voter fraud in prior election cycles, yet the Republican National Committee seemed genuinely surprised when his “new” company committed voter fraud in several states.

Sadly, partisan purity seems to trump competence and integrity these days, so we might see these same trainers get another horse entered in next cycle’s political Triple Crown.

Howard Hill is a former investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio. He writes and blogs at Follow on Twitter: @hhill61

Photo credit: AP/Evan Vucci

Even Fox News Admits It

Even Fox News Admits It

Obama is a better manager than Romney, and that’s why he won the election. At least, that’s how the Fox News commentators explained Tuesday’s defeat.

While some might say that the economic and social policies the GOP offered were just an inferior product, the reality that a president got re-elected while unemployment is nearly 8% and household income for the average working person continues to decline was a complete repudiation of the pundits’ core beliefs about economics and politics.

So the pundits were stuck admitting that the Obama campaign had a better “ground game” and that the strategic marketing and execution of the business goal (getting elected with our antiquated electoral college system) was light years ahead of the competition.

What isn’t in dispute is that Team Romney was better at executing a winning election strategy than any other candidate who came forward during the extended primary. Romney literally destroyed a half-dozen competitors who led him in the polls at various times through the primary season.

Romney sells himself as a business manager. By Tuesday night, he had been running for president for more than six years, a period longer than most Bain investments. He should have had the best campaign execution we’ve ever seen if his management skills were as good as advertised.

As noted in my earlier column, Obama had twice as many people working for his campaign, and more than three times as many field offices, while spending less money than Romney. And Obama had a day job. A job he was doing pretty well, especially if you look at how well he did that job compared to the last Harvard MBA who worked out of 1600 Pennsylvania Avenue. The George W. Bush administration’s response to a U.S. city devastated by a hurricane comes to mind, and so does the effort to capture or kill bin Laden. By contrast, Obama’s management has been stellar, even without an MBA.

Maybe the country wasn’t ready to have another Harvard MBA run things. I personally think Romney was trying to sell a lousy product, so even really good marketing wasn’t going to work.

No, that couldn’t be it. It must be, as Fox News tells us, that Obama is just a better manager.

Howard Hill is a former investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio. He writes and blogs at Follow on Twitter: @hhill61

AP Photo/Chris Carlson, File

Choosing The Right Manager For The Biggest Business On Earth

Choosing The Right Manager For The Biggest Business On Earth

On Tuesday we’re going to give a manager a new four-year contract to manage the U.S. Government. It’s a big job. The manager we choose will be running the biggest business on earth.

Mitt Romney thinks he’s qualified. In fact, he thinks he’s the only candidate who has actually managed a business and the only one with a track record of success.

As the Republicans are so fond of saying, Barack Obama “never even ran a lemonade stand.”

But what voters need to examine is an apples-to-apples comparison, showing how both candidates ran the same kind of business and how successful they were.

Luckily, we can. The business in question is a national pPresidential campaign. Romney and Obama both ran one in 2008, and each of them is running one now.

Let’s go back to 2008 and look at how Obama did running his first presidential campaign. Compared to his two main adversaries (and to Romney’s early failure), the results were spectacular.

Obama’s campaign was larger and more complex than most Fortune 100 companies by measures such as staff size and locations. His use of the Internet demonstrated an innovative approach to campaigning that paved the way for Romney’s current pop-ups.

The Obama campaign built up steam with a devoted base and never ran a deficit, while the Clinton and McCain campaigns ran into serious financial difficulty. This despite the fact that McCain was starting with a fortune behind him and the Clintons had done it before.

Obama’s 2008 presidential campaign was a business with a million and a half  “employees” (active volunteers) and a billion dollars in revenue. Even more impressive, the business grew to that size in about a year. More experienced competitors who began with 10 times as much startup capital didn’t do nearly as well.

This year, the Romney campaign spent more money than Obama through the August reporting period. Yet they managed to open only a fraction as many field offices, all while having fewer than half the number of “employees” (volunteers working for the campaign). Fewer offices plus fewer employees means lower expenses in most businesses, but not when Romney’s in charge.

Arguably, Romney took a different strategic approach in the business of managing his campaign. He focused more resources on advertising and on “outsourcing” his on-the-ground efforts.

Was the strategy successful? Not with Romney’s nearsighted vision for the future.

His ads that imply American workers at Ohio’s Jeep plants will lose their jobs to China have backfired so spectacularly that the CEOs of two car companies felt they had to publicly take the Romney campaign to the woodshed for lying.

Romney knows a lot about “outsourcing,” but outsourcing voter registration drives to an accused fraudster in multiple states was a serious failure in business judgment. That supplier had to be fired, and the Romney campaign had no second source for that essential function. In Romney’s business circles, that’s known as “single-point failure” and managers are supposed to have a risk-management plan in place to avoid it.


During Romney’s tenure as governor of Massachusetts, his state dropped to the rank of 47th out of 50 in job creation. While Obama has been president, the number of government employees has gone down, while private enterprise jobs have risen by millions. Obama came to office when the country was losing jobs at the rate of 5 million per year. So who’s the better turnaround specialist in job creation?

Romney is right that fiscal responsibility is important. So is proper accounting. Romney keeps telling us that the deficit is currently $1 trillion per year. But the deficit was higher than that — $1.3 trillion — the day Obama took over, meaning the trend is in the right direction. Romney may say the opposite, but his proposals will create a turnaround in this positive trend and increase deficits, just as every Republican president has done since Reagan. That’s a turnaround America doesn’t need.

Deficits under the Romney plan are projected by some to be the same or slightly larger than Obama’s for the next four years. I think that’s overly optimistic. In fact, I think it’s hype. Someone should tell the Romney advisors that running a campaign is different from launching an IPO.

A more realistic view is that a Romney administration will double deficits to $2 trillion a year. That projection is realistic, based on the deficit increases caused by his tax cuts and additional defense and Medicare spending, with paltry offsetting cuts in agriculture, Medicaid, veterans’ benefits, Social Security or education.

Some voters may believe the fairytale that tax cuts result in more tax revenue and higher paychecks if the richest people get even richer, but the last 10 years have proved that approach doesn’t work. Fewer voters are likely to believe that the middle class and the Congress they elected will be willing to eliminate the home mortgage deduction. Who among them will want to get rid of the deductions that save the average American money on taxes, like charitable contributions or employer-provided health insurance?

Romney can call these deductions “loopholes” but that’s like advertising a lower price on a container of ice cream when you simply reduce the ounces inside. Yes, that’s how some businesses run. Is a plan to “save” Medicare by cutting the spending — and leaving retirees to make up the difference — the way we want our government to be run?

We’re not choosing what container of ice cream to buy, but we still need to know what’s inside and how much it’s going to cost. We’re choosing a manager for the biggest business on earth and the laws of arithmetic still apply. The kind of “off balance sheet accounting” we saw from Enron doesn’t cut it in the race for the White House. Neither do the imaginary results that sell an IPO.

Romney will do for our country what he did so many times in his business career—pay himself, his managers, and his investors enormous profits while loading the country with crushing debt, selling our most precious assets, cutting labor costs (here or overseas), and bankrupting the retirement fund. If Romney becomes president, that’s what I’ll expect, since that’s how he managed the businesses he controlled.

With Obama, we’ll get a manager who turned the negative trends in deficit spending and unemployment in the right direction, and steered the economy to the highest corporate profits on record. He also showed us how he manages emergencies like Superstorm Sandy and uses intelligence to take out Osama bin Laden, even when we had to violate another country’s airspace.

Choose your manager.

Howard Hill is a former investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio. He writes and blogs at Follow on Twitter: @hhill61

Photo credit: AP/Charlie Niebergall

Leveraged Returns, Election Style

If you could make a 50/50 bet for a dollar, and the payoff was 10 dollars each year for the next four, would you take that bet? In option-speak, that’s like buying a call option for a dollar with an expected value of $20. Of course you would, and that’s exactly why the 2012 presidential campaign has been the most expensive in history.

Political ads and contributions are cheap call options on the taxpayers’ collective purse, and it won’t just be defense contractors, agribusinesses, oil and gas, utilities and pharmaceutical companies draining us through subsidies, tax breaks and taxpayer-provided services unless we fix this problem.

Wall Street is convinced it can get more out of us, and they know how to get it: by reforming Social Security. Security companies, software contractors, telecoms, hospital companies, real estate developers and law firms are all angling to get “their” pounds of our flesh, too.

It’s all a matter of maximizing shareholder value, after all.

Consider what Massey Coal did—spending $3 million to elect its very own state Supreme Court judge (in a race where total spending other than Massey was around $2 million). Once elected, that judge cast the deciding vote to reverse a $50 million judgment against Massey on a case that was already on its way to that very court.

That’s a nicely asymmetric return profile, risking $3 million and getting $50 million back.

Not all cases are that simple. For example, the majority of the state legislators who voted to support Arizona’s “show me your papers” law had gotten campaign contributions from Corrections Corp of America, the same company that wrote most of the law, and not coincidentally, has the Arizona contract to hold detainees awaiting Immigration Department disposition or deportation. I guess they thought of it as a kind of marketing plan. Pretty clever, when you think about it. State legislators are probably very grateful for contributions of even a couple thousand dollars. CCA could probably get their private meetings and/or support from a decent majority for less money than the profit from holding a couple of extra “privatized” inmates.

Once again, a single company stood to make millions or even tens of millions by making political contributions that were just a tiny fraction of the upside.

With Citizens United making anonymous unlimited direct political spending the law of the land, any company or union can affect the outcome of elections, and they won’t have to deal with the potential trouble their shareholders or customers or the public might give them if they knew who was spending.

Today’s strange crop of conservative politicians all say they want to reverse a “socialist agenda,” but that’s just good old fearmongering, and not rooted in reality. After all, the two most hated items passed by the “Pelosi” Congress were a cap-and-trade energy bill and a private health insurance mandate that follow almost to the letter proposals that came out of those famously Marxist organizations, the American Enterprise Institute and the Heritage Foundation. In case you’ve been too busy trying to live your life and provide for your family to watch where far-right policymakers go when not on government payrolls, the Heritage Foundation and AEI are where the neocons who ginned up the plans for the Iraq war and Bush tax cuts went to collect nice salaries funded by tax deductible contributions after we voted out their political bosses.

If we were actually “going socialist”, we’d be launching a free national health service supported by general tax revenues, as they have in other democratic countries. Or we would at least pay for everyone to go to private doctors as they do in most developed economies. Of course, that might actually give us more freedom and a stronger free market economy by having insurers and health care providers compete, and by freeing entrepreneurs to strike out on their own and start new businesses. It doesn’t escape my notice that Germany has more of its citizens working for small companies than we do. Without the burden of health insurance to worry about, they are free to start businesses when many of us can’t take the risk.

The energy bill, the other big “government takeover” so hated by Tea Partiers, is another example of distinctly un-socialist action. As Newt Gingrich said in a one-hour interview with PBS way back in 2007, cap and trade is a “free enterprise” solution to the carbon emission problem modeled after the successful sulfur dioxide cap and trade system the first President Bush put in place to deal with acid rain—again, hardly the stuff of Lenin and Mao.

So let me suggest that we put every politician who claims to support free markets and cutting government “interference” to a simple test. I know that they all (and most other people in the country) find something inherently distasteful about limiting profits, except in the cases where a company has a government-enforced monopoly.

The question is, are those same “free marketeers” willing to let the free market give the private enterprise unlimited losses?

If they don’t want government dictating to business through regulations and oversight (see Rand Paul’s statements on mine safety regulations for the extreme version), then they should also let anyone damaged by a corporation or person have unlimited potential to extract compensation for their damages. In other words, every politician who claims to support free markets but wants tort reform to limit damage awards is simply lying, and using the free market banner to hide their agenda: supporting government-imposed limits to corporate liability. In the cases of mine owners, literally giving them a license to kill, if the economics favor that.

Leveraged returns, in other words. In the vernacular, “Heads, they win; tails, we lose.” Not a bit different from the Wall Street bailouts, in my mind, and certainly not consistent with the claims of every Tea Party supporter I’ve met.

The sad part of this whole equation is that the benefit of not having a single corporation or concentrated industry rip us off is so diffuse that no one can economically justify spending the big bucks it takes to counter the efforts of the profiteers.

In the 2012 presidential campaign, the numbers make it obvious. The top five contributors to the Obama campaign have ponied up an average of just over $2 million apiece. Since Obama’s policies tend to favor very wide constituencies, it’s unlikely any of those big contributors will get anywhere near $2 million in benefits from an Obama second term. On the other hand, Sheldon Adelson and the other top four Romney supporters have donated tens of millions, and the tax policies, promises to roll back regulations and future government contracts will most likely give every one of those big fish a huge return on investment, personally.

The outsize political spending under the 501(c) rules has provided both tax deductibility and cover from exposure for very large, very profitable corporate welfare queens that make Ronald Reagan’s imaginary Cadillac owners look like pikers. And let’s not kid ourselves about the reason that today’s Super PACs, with their megabucks, give cover to companies that might lose half their customers if their political activism were known the public. It’s all about the profit they’ll get from owning the government and milking the taxpayer. Just like Massey Coal buying its own judge, today’s corporate and billionaire funded Super PACs exist for the same reason the companies themselves exist—to maximize profits.

Protecting the public and the public resources is not something we do on an individual basis. Teddy Roosevelt recognized this when he broke up the industry trusts.

In a way, TR recognized it also by establishing national parks, monuments and forests owned by all of us. That doesn’t stop the asymmetric economics from tempting companies to ruin even that legacy. In the last year of the Bush presidency, a proposal that was not subject to Congressional approval was making its way through the Bureau of Land Management. That proposal was to permit “hard rock” mining in the upper reaches of the Grand Canyon National Park. But for an organized protest of those “leftist” anti-American conservationists, we almost got the chance to see an accidental toxic mine waste spill come flooding down the Grand Canyon. But at least the mining companies took their shot at maximizing shareholder value.

The same goes for giving all these new political entities tax exemptions. Since when should all of us subsidize their politicking? They need to disclose who their donors are, and how much they gave. They need to disclose when those donors dictate where the money gets spent. They need to pay sales and property taxes like the rest of us, and the donations that support them shouldn’t lower the tax bill of the person or company signing the checks.

It still won’t level the playing field, because the concentrated benefits of a government handout for a company so outweigh the benefit of not getting ripped off once it’s spread across the entire population.

Much of what our government does is protect and improve private property. If the Tea Partiers get their way, that’s all the government will do. That concentrated benefit can and should be paid for by the beneficiaries as much as possible, and in proportion to the benefit they gain. It worked pretty much that way until 1913. Tariffs and taxes on commercial activities paid for our federal government until the income tax was introduced, so the customers for imported goods basically paid for our Navy, and so on.

But the conservatives I’ve spoken with don’t like the idea of oil companies paying tariffs to support the U.S. Navy. They would much rather have all of us pay that corporate subsidy with a gigantic sales tax. It would, after all, maximize shareholder value.

Same goes for selling our jointly owned resources to the highest bidder to exploit as they see fit. Can we really say that removing one mountaintop only affects the value of that mountain, and not the surrounding mountains, valleys and downstream watershed? Give me a break. And if a holding pond of tailings and toxic water lets go, it will turn out that a special purpose company was formed for just that mountain, letting the people who made the decisions walk away. Asymmetric economics at its finest.

The right wing really doesn’t seem to like Article 1, Section 8 of the Constitution, where it explicitly gives the Congress the ability to levy taxes to provide for the common welfare of our citizens. Yet there seems to be no problem at all when it levies taxes to provide for the specific welfare of non-breathing corporate “persons.”

The problem is, while “competition” sounds good to all of us, in a lot of industries competition was replaced by collusion a long time ago, and there’s simply no customer more ripe for the fleecing than the taxpayer. And the cost is pennies on the dollar, as long as those pennies buy the right ads for the right candidates.

Leveraged election returns, indeed.

So here’s the law or Constitutional amendment we need to fix this problem:

If we limit advertising and spending for any election to those who can vote in that election, we can stop out-of-state money from swinging a small state’s Senate race their way by overwhelming the resources of the people in that state. If we limit spending to actual voters, with one stroke we roll back spending by corporations or unions.

I have no doubt that such a rule will cut our government spending, since the pigs sidling up to the taxpayer trough will be lobbying for their goodies with legislators they didn’t put into office in the first place. And we’ll all get some relief from the endless stream of political ads on TV.

Wouldn’t that be nice?

Howard Hill is a former investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio. He writes and blogs at Follow on Twitter: @hhill61

Debate Arithmetic, Round Two

Debate Arithmetic, Round Two

Mitt Romney’s most glaring arithmetic falsehoods from the first debate reappeared last night, along with some new ones.

It’s still impossible to spend more and take in less without increasing the deficit. It’s also impossible to cut domestic spending drastically without increasing unemployment, and most people realize that claiming four years is the same as 10 years just doesn’t work when it comes to job creation.

For me, the most interesting Romneyism was the use of percentages to change the meaning of the word “same.”

He said the top earners would pay the same – 60%. The problem for our national deficit is that when you lower the total taxes collected, it increases the deficit. It would be great for the richest among us, since they’ll enjoy 60% of that total tax cut as extra money to put into their Cayman Islands accounts.

Unfortunately, it will hasten the day when America goes broke, and can’t borrow the money to pay for Social Security and Medicare benefits.

Maybe that’s the plan, after all.

In the meantime, Romney thinks that America is stupid enough to believe that 60% of less money is somehow the same amount of revenue, as long as the percentage is still 60%.

He may claim that the loss in revenue will be offset by spending cuts, but certainly not by cutting out PBS and Planned Parenthood.

Let’s not forget the plan to increase military spending by $2 trillion above the Joint Chiefs’ requested budgets and the promise to reinstate $716 billion of Medicare corporate welfare. And there was the promise not to cut the education budget.

That only leaves the Veterans’ Administration, Medicaid, agriculture and some odds and ends like the CDC, the National Weather Service or the Air Traffic Control system. But who among us believes he will keep his GOP supporters in line if he proposes to cut every dime out of agriculture? The VA? The federal prison system? Who thinks even the smaller federal programs like drug safety, air traffic, etc. will actually be cut out?

The bottom line:

Last night Romney proposed that we double the deficit, and make sure the richest get yet another round of lower absolute taxes.

Such a deal. And now we can enjoy using a new definition for the word “same.”


Howard Hill is a former investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio.  He writes and blogs at Follow on Twitter: @hhill61

Photo credit: AP/Carolyn Kaster

Mitt Romney’s Fuzzy Debate Math

Mitt Romney’s Fuzzy Debate Math

Let’s take Mitt Romney at his word, and see how the numbers he cited during Wednesday night’s debate add up. We can begin with a pop quiz in Presidential arithmetic:

If you have a $1.3 trillion annual deficit, and you are going to make it shrink to zero without raising any tax, how many new jobs will the economy have to create? Show your work.

Starting with Romney’s assertion that his policies will lead to 12 million new jobs over four years and provide the government with fresh tax revenue, how close will that come to plugging the gaping hole in the federal budget? Answer: Not very close.

If we assume that those jobs pay $40,000 per year and that each new job pays 20 percent in Federal taxes, the total additional revenue comes to just $96 billion in 2016.

That $96 billion obviously doesn’t come close to the $1 trillion currently projected deficit — not to mention the $300 billion in additional spending Romney proposes for the military and the insurance company subsidies he’s “returning” to Medicare.

Never mind that there’s a problem lowering the top tax rate to 28 percent from 35 percent, which will cost $250 billion in revenues. Plugging that hole by taking away the $165 billion in deductions used by top earners simply doesn’t work. Then there’s an even bigger problem making his tax cut of $5 trillion “revenue neutral” while giving the middle class “tax relief.”

But let’s continue taking Romney at his word, even if it’s not worth the paper it isn’t printed on.

Let’s imagine those new jobs are really, really good jobs. How good do they have to be to provide enough new tax revenue to cover the deficit?

At a 25 percent Federal tax rate on all the new income, the average new job would have to pay a mere $433,333 per year to fill the gap. Sign me up for one of those new jobs, please.

The other possibility is that Romney’s policies will magically create even more jobs than he’s assuming. If the new jobs were those $40K per year jobs each paying 20 percent in taxes, we’d need 162.5 million new jobs. For those playing along at home, that’s more jobs than the total current civilian labor force, which stood at 154.6 million last month.

The bottom line?

Romney’s real problem is that when he talks numbers, the numbers never add up.

Howard Hill is a retired investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio.  He writes and blogs at Follow on Twitter: @hhill61

Photo Credit: AP/David Goldman