The Selfish States of America?

Have we become the Selfish States of America? The question popped into my mind after reading news reports about rampant contractor abuse in Iraq, union leaders suggesting employer based health insurance is a relic of the past, millions of Southern Baptists turning their back on public schools and obscenely paid investment fund leaders decrying the prospect of surrendering their preferred tax breaks.

In Iraq the $400 hammer is back, courtesy of layers and layers of contractors, each with their own profit incentive. The only problem is it comes with a $1,200 security bill to use properly. That is roughly the ratio spent on security in "rebuilding" Iraq. Selfish!

Bob Herbert's column in the NY Times quoted a union leader. “We can’t be the only country on earth that asks our employers to put the price of health care on its products when a lot of our competitors don’t.” Those same employers covered 1 million fewer workers this past year as the number of uninsured rose over 2.1 million to 47 million Americans. The number of uninsured children rose by 700,000 to 8.7 million. The day these statistics were released, President Bush raised the specter of nuclear holocaust in the Middle East. He failed to mention the very real human toll caused by legions of citizens without health insurance coverage. That fallout didn't cross his lips.

Months back Democratic and Labor leaders offered a proposal jettisoning employer based health insurance. As usual our leaders reach to the lowest common denominator. Do we not compete with British, German, and other European firms whose governments provide universal health care? And don't forget about Japan which ensures everyone has coverage. They don't seem ready to dump it. Of course we compete with these countries, but instead our Washington bobbleheads raise China and India.

Unions want to become the group purchaser for health care, with you paying. Corporate America is looking for the next big profit boost and dumping that pesky insurance benefit would do the trick. Disturbing and disgusting. When more people should be paying into the system at levels they can afford, the deep pockets look to bail. Selfish!

Many Southern Baptists apply "who is not for me, is against me" to educating today's youth. They are offended by secularism which teaches evolution over creationism, world faiths over Christianity, sex education over abstinence, and moral relativism over Christian claims of truth. (I thought kids went to school to learn math, English, and science.) As a result, many of the 16 million Baptists are avoiding public school altogether. It seems the above concerns could be addressed in an out of school Christian education environment, Wednesday evening or Sunday school. What happened to "he who is not against me, is for me"?

As for business leaders, I was appalled by the widespread cheating by corporate executives on their incentive stock option programs. But that outrage multiplied when I found the most handsomely paid leaders in our country want to keep their cushy tax breaks. Top investment fund managers make $657 million a year. They pull down in ten minutes what the average worker makes in a whole year. When challenged over the preferred tax rates given to both private equity firms and their investment managers, they cry out "raising taxes will hurt the economy". They threaten to take their firms overseas and our elected leaders cave. Selfish!

Both Democratic and Republican leaders court American corporate interests. Their duplicitous behavior is difficult to see, frequently requiring much digging. But it's there, if you look!

Borrowers Paying Price for Bush's Increased Availability of Credit

Over two years ago President Bush bragged on the just passed Bankruptcy Bill. "These commonsense reforms will make the system stronger and better so that more Americans - especially lower-income Americans - have greater access to credit." After signing the bill he added "By making the system fairer for creditors and debtors, we will ensure that more Americans can get access to affordable credit."

According to the BBC subprime loans ballooned the last few years. The quality of those loans is rapidly deteriorating according to another report. Loans made last year have nearly a 15 percent delinquency rate, a faster growth rate than any other year. An industry expert says the most recent loans in 2007 are not performing much better.

During the Bush years, mortgages changed dramatically. In 2001 roughly 85% of loans were the 30 year fixed rate kind. In 2006 ARM's or adjustable rate mortgages comprised 45% of housing loans. Subprime mortgages fall into the ARM category. according to the testimony of FDIC Vice Chairman Martin Gruenberg:

The subprime mortgage market accounted for a relatively small share of total mortgage originations until a few years ago. But at the same time that nontraditional mortgages began growing rapidly a few years ago, subprime mortgage lending also began to escalate. The subprime share of mortgage originations grew to over 20 percent by 2006 compared to 5 percent in 2001. Subprime mortgages account for about 14 percent of first lien mortgages outstanding and represent about 7.5 million loans.

The volume of dangerous loans tripled under Bush's watch. On top of the 2 million currently delinquent and facing foreclosure, some 2 million more subprime loans will reset in 2007 and 2008, with many expected to default. Mr. Gruenberg went into great detail regarding the structural problems with such loans. They include low teaser rates which can rise as much as six percentage points, not verifying the borrower's income, huge prepayment fees, not escrowing insurance and taxes, and piggybacking loans. Wouldn't one expect some of these practices to be addressed in a bill that "ensured more Americans can get access to affordable credit"? Apparently not, even thought the FDIC identified such predatory lending practices in 2001.

Until the bubble burst, who made out like bandits off these risky mortgages? Wall Street investment houses did via the securitizing of loans. Mr. Gruenberg stated:

In 2006, over 70 percent of the subprime mortgages originated were securitized. Most of these mortgages made their way into the so-called private label mortgage backed securities (MBS) market. Subprime MBS accounted for about 40 percent of private label MBS last year. The rapid growth of subprime lending and securitization helped drive the private label share of total MBS to 56 percent last year from 18 percent in 1999. This development represents another significant shift in the mortgage industry.

Wall Street investment houses expect their several year run of record profits and bonuses to come to a screeching halt. The BBC reported:

The credit rating agency Standard & Poor's estimates that investment banking revenues could fall by nearly 50% in the second half of this year because of exposure to non-performing mortgages and loans. In the case of Goldman Sachs alone, that would be a drop of $1.75 billion.

One can understand Treasury Chief, Hank Paulson's concern as ex-CEO of Goldman Sachs. An industry based on securitizing mortgages virtually vanished overnight. Who will fare better from government help, the investment houses, the individual mortgage holder, or the 40,000 people who lost their jobs due to the crash?

The relief President Bush announced today will help 80,000 mortgage holders refinance through the Federal Housing Authority. That addresses about 10% of the potential problem, but we're used to that given the President's efforts to reduce the number of uninsureds in our country. Homeless and without health insurance, that sounds like a double whammy...

Carlyle Doesn't Need Tax Breaks

Which level of The Carlyle Group doesn't need a tax break? We can start at the top where investment fund managers make huge incomes. According to Bloomberg News, top fund managers make more in ten minutes than the average worker does in a year. At $210,700 an hour they don't have to work long hours, unless they want to make a lot of money, which they do at $657 million a year.

Yet, Carlyle is worried about taxes going up for both the company as it is taxed at the lower capital gains rate and for fund managers who get the same break on any company returns they personally receive.

The private equity firm on Pennsylvania Avenue just closed another sale, this time a German human resources software company. How did they make out? They purchased 4.7 million shares or 61.3% of the firm for 7.40 Euros in 2004. While the story didn't indicate a selling price per share, it did show Carlyle got 4 Euros in dividends last year and this year. That means they only needed to sell for 3.40 to break even. Reading between the lines, Carlyle cashed out at 22 Euros or as Michael Wand said "a three-fold increase in share value to all public shareholders."

It looks like Carlyle got nearly 18 million Euros in dividends and 100 million in sale proceeds for a profit of 98 million. Converted to our currency that equals a $160 million take with $133 million in profits. How much did the Bush capital gains tax save them, assuming they repatriated the profits? It kept another $6.6 million out of the Federal Treasury, but Carlyle needs all the returns they can get.

Their European IPO, intended to let the smaller investor get a taste of big private equity returns, is faltering. Carlyle just injected a second round of $100 million into the investment vehicle. If they piss off the small guy, the big wigs just might lose their preferred tax breaks. We already heard the PEU's position on that, raising taxes could hurt! How about paying the same freight as other corporations and non PEU employees? Not under Bush's watch...

Bush Claims "State Secrets" on Bank Privacy Suits

The Bush administration invoked its traditional state secrets defense in response to lawsuits testing George's steps into uncharted spying territory. How can a legal determination be made if the case is thrown out for secrecy reasons? The latest case involves Bush's monitoring the SWIFT database for terrorist activity. SWIFT is a Belgium, bank owned cooperative that processes financial transactions worldwide. The NY Times reported:

The Bush administration is signaling that it plans to turn again to a legal tool, the “state secrets” privilege, to try to stop a suit against a Belgian banking cooperative that secretly supplied millions of private financial records to the United States government, court documents show.

The suit against the consortium, known as Swift, threatens to disrupt the operations of a vital national security program and to disclose “highly classified information” if it continues, the Justice Department has said in court filings.

The “state secrets” privilege, allowing the government to shut down litigation on national security grounds, was once rarely used. The Bush administration has turned to it more than 30 times in terrorism-related cases, seeking to end public discussion of cases like the claims of an F.B.I. whistle-blower and the abduction of a German terrorism suspect.

SWIFT defended its actions after they became public with the following statement:

Only governments can define the boundary between security and data privacy. Private companies, like SWIFT, can play their part by upholding the law, but they cannot make policy and cannot enforce compliance by others. Ultimately they are dependent on governments and elected officials to develop the legal framework in which they operate.

If the Bush administration gets its way, the legal framework remains unclear as it won't have survived a court challenge. If the case is tossed, who else benefits? Last year The Carlyle Group purchased FRS Global, a Belgium headquartered software company that specializes in bank government regulatory compliance. Might their software be mining the millions of transactions?

Michael Wand, Director, The Carlyle Group said, “FRS is the leading regulatory and compliance software vendor in the financial services industry. With an evermore complex risk and compliance market, driven by a continuous wave of regulation in the financial services sector, we believe this market is critical for the industry. FRS provides an outstanding technology-driven ‘knowledge’ service to enable financial institutions to manage their regulatory reporting and compliance activities, and we believe the business will continue to grow significantly in the coming years.”

Who is George Bush trying to protect with his state secrets defense? Time may tell, then again it may not.

Bush's Bankruptcy Actions Revisited

Now that America faces a crisis from people unable to afford their subprime mortgages, a quick look back is instructive. When the House of Representatives passed the Bankruptcy Bill the spring of 2005, President George W. Bush issued this statement:

I commend the House for acting in bipartisan fashion to curb abuses of the bankruptcy system. These commonsense reforms will make the system stronger and better so that more Americans - especially lower-income Americans - have greater access to credit.

A week later he signed the bill adding "By making the system fairer for creditors and debtors, we will ensure that more Americans can get access to affordable credit."

The problem came in the kind of "fair" credit the law allowed, rising variable interest rates with huge prepayment fees, usually hidden from the borrower. Fed Chief Ben Bernanke spoke to these problems the other day. Today he assured the public the Fed is in control.

President Bush just addressed the country from the Rose Garden on home ownership financing. I tried to listen to the webcast prominently displayed under the "Latest News", but the White House server couldn't find the file. I'll try again later to find out why so many citizens on Congress.org are hopping mad at George over those mortgage bailouts. They think he's trying to help deadbeats who overspent on housing. My guess is he's trying to help mortgage backed security holders recoup some of their losses. But either way, some 80,000 people could get help through FHA refinancing.

Bush Administration Concerned about Dubai?

President Bush and his staff spoke to an issue recently tackled on this blog, trade with the United Arab Emirates through its shining city by the sea, Dubai. The administration has deep concerns about products smuggled through Dubai to our enemies in Iran and Afghanistan. Yet, 30 days ago two U.S. aircraft service companies, Landmark Aviation and Standard Aero, were sold by The Carlyle Group to Dubai Aerospace with the full approval of CIFUS, a committee of the U.S. Treasury Department.

This morning the news reported:

The Bush administration is pressuring the United Arab Emirates to crack down on foreign companies the White House believes are smuggling equipment to nearby Iran to build explosive devices killing American soldiers in Iraq and Afghanistan."

The UAE is among the world's largest shipping hubs for international commerce, and is located just across the narrow Strait of Hormuz from Iran. The countries have been trading partners for centuries. Much of Iran's trade flows through Dubai, which also ranked as the top export destination in the Middle East last year for American companies with $12 billion worth of goods.

U.S. intelligence agencies have collected evidence that at least 11 individuals and companies operating in the United Arab Emirates are smuggling electronic components and devices - sometimes through Iran - to build explosive devices used to ambush American soldiers in Iraq and Afghanistan.

"The regulation of re-exports should be established by the UAE without the threat from the U.S.," the director general of the Dubai Chamber of Commerce and Industry, Hamad Buamim, wrote in a letter to the Bush administration obtained by the AP. "Only the UAE is able to judge the balance of concerns for re-export relative to national security against the risk of the trade moving to another re-export location."

The dispute highlights the conflicted relationship between the United States and the UAE. The administration considers the emirates a close ally, especially on military matters in the Middle East. But Dubai was forced last year to abandon plans for Dubai-based DP World to take over significant operations at six major U.S. seaports amid intense national criticism. (Yet, there was no public discourse on the sale of operations at some fifty U.S. airports. CIFUS analysis of the deal is not yet available on the Treasury Department website.)

"They have been getting a lot of pressure from the U.S. government," said Arthur Shulman of the Washington-based Wisconsin Project on Nuclear Arms Control, a nonprofit group that supports limiting shipments that could be used for nuclear weapons or missiles. "The UAE clearly have their own interests, and one of those interests is promoting trade and transshipments with few restrictions."

So CIFUS approved the sale of two aircraft operations companies in America to Dubai Aerospace whose interest is "promoting trade and transshipments with few restrictions"? I feel a Michael Brown moment approaching. Or should we call that a Lord John Browne moment?

Update 8-28-13:  In a Carlyle-like move Dubai Aerospace is ready to flip Standard Aero for a double.

Update 12-9-18:   Carlyle looks to buy Standard Aero yet again, this time from Veritas Capital.

What Didn't Make the 2005 Bankruptcy Bill

This week the federal government and the Federal Reserve Chief released information on two major causes of bankruptcy, subprime mortgages and high medical bills. Ben Bernanke spoke to ways policy makers can help, while the Census Bureau released data on the number of uninsured Americans in 2006. Neither issue was addressed in the most recent Bankruptcy legislation, passed by a Republican Congress in 2005.

The number of uninsured rose by over 2.1 million people to 47 million Americans. The largest jump came courtesy of employers who dumped the benefit or shifted jobs to non-benefit workers. The number of uninsured children rose by 700,000 to 8.7 million as President Bush did everything in his power to thwart state expansion of children's health insurance programs. High medical costs were the number one cause of bankruptcies in 2005 but the bill completely failed to address this issue.

As for mortgage failures, the words of Fed Chief Ben Bernanke are instructive.

Bernanke said the development of "a broader range of mortgage products which are appropriate for low- and moderate-income borrowers, including those seeking to refinance" might help the situation. "Such products could be designed to avoid or mitigate the risk of prepayment shock and to be more transparent with respect to their terms

Does that mean the 2005 bill didn't require transparency in terms or regulate prepayment penalties? Did that leave low and moderate income borrowers vulnerable to predatory loan practices? It appears leaving out two important causes of bankruptcies left the American public open to financial ruin. What will Congress do about it today? My bet is more of the same, companies get the presents, while the average citizen gets a lump of coal.