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hay rick

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Member since: Thu Jan 31, 2008, 10:08 PM
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The AIG Bailout, Part 1.

I am currently reading Neal Barofsky's "Bailout" which recounts his tenure as the Inspector General overseeing TARP. The chapter on the AIG bailout is very enlightening, so I thought I would extract and share some of the highlights.

Barofsky breaks the AIG bailout into two parts. The first part was a $85 billion loan from the New York Fed in exchange for 80% of the stock of AIG. Barofsky continues the story:

A second part of the November deal covered the ongoing payouts required each time AIG was downgraded or the prices of the CDOs covered by AIG's credit default swap contracts plunged lower. Geithner and his team decided to terminate $62.1 billion of AIG's contracts with the banks. The deal had two parts. First, the counterparty banks were paid the approximate market value of the CDOs covered by the credit default swap contracts, about $27.1 billion in cash, which was provided almost entirely by the New York Fed in return for the CDOs themselves. For the second part of the deal, AIG and the New York Fed agreed that the banks could keep all of the previously posted collateral, approximately $35 billion, in return for the banks agreeing to rip up the credit default contracts. As a result, the bleeding of cash was staunched and the taxpayers became the proud owners of a mass of ill-conceived CDOs. For the banks, between the cash that they received from the Fed and the collateral they had previously received from AIG, they had essentially been paid 100 cents on the dollar for $62 billion in CDOs that were actually worth far less than that.

The deal was a gross distortion of the normal functions of the market. In a bailout-free world, instead of being saved by the government, AIG would have been unable to make its cash collateral payments to the banks and gone into bankruptcy. As a result, the banks would have been left with the CDOs and stuck with their continued declines in value. Those losses would have punished the banks for what had been bad and risky bets- i.e., assuming that AIG would be able to meet all its obligations. In market parlance, each of the banks would have borne the "counterparty risk" of doing business with AIG and suffered the consequences of betting on the wrong counterparty. Instead they were paid out in full.

In that respect, Geithner's opening of the spigot of taxpayer cash for AIG was more of a bailout of the banks than it was of AIG itself. The government thereby sent Wall Street a very dangerous message: counterparties who do business with financial institutions whose collapse could have devastating consequences for the entire financial system needn't do due diligence or worry about their counterparty risk. Instead they can rely on the government to bail them out.

That is the crux of the too-big-to-fail problem. The failure of giant financial institutions that are so big and have built up so many obligations to one another could cause a domino effect that could take down other major players and eventually the entire financial system. If the government had not stopped in to save AIG, major banks in the United States and Europe would have potentially suffered tens of billions of dollars in losses at a time when neither they nor the system could withstand such a further shock. The government felt it had no choice, and perhaps that was correct, but as long as there are financial institutions of such size and with so many interconnections, future massive crises- and bailouts- are all but inevitable.

Barofsky contrasts the favored treatment of the banks that dealt with AIG with a more typical scenario that played out earlier in 2008 with the bond insurer Ambac and in which counterparties recieved between 28 and 60 cents on the dollar. The problem with too-big-too-fail institutions is that the American people are taken financial hostage. We are involuntary counterparties to Wall Street's transactions, liable for losses without the offsetting benefit of participation in profits.

AIG Bailout, Part 2: http://www.democraticunderground.com/111632332
AIG Bailout, Part 3: http://www.democraticunderground.com/111632331

The AIG Bailout, Part 2. Bonuses.

More from "Bailout" by Neil Barofsky.

Back in the fall of 2008, the New York Fed tried to get a handle on AIG's various bonus agreements, but it wasn't terribly concerned with the details of who would be paid what. The bonus commitments were considered simply in terms of getting a full accounting of how much cash AIG needed. When you are on the hook for $85 billion and counting, as the New York Fed was, $168 million in bonus payments may well seem like just a drop in the bucket.

But as the later reaction to the payments showed, Treasury should have had different priorities. The TARP legislation required that Treasury include executive compensation limits in its contracts, and Treasury had done so with AIG. Executive compensation had already become a hot-button issue with the public, particularly in the beginning of 2009, when news came out that bailed-out Wall Street banks were issuing tens of billions of bonuses. But other than sending some Treasury officials over to AIG in November 2008 for a quick review of the compensation structure for its top executives (but not the Financial Products executives), Treasury took a hands-off approach toward AIG's compensation issues, doing little to oversee the taxpayer's $40 billion investment.

As a result, Treasury was caught flat-footed, finding out about the bonus payments only a couple of weeks before they were due. Had Treasury officials been more effectively monitoring the government's investment in AIG and more concerned with accountability and basic fairness, they might have helped prevent the blowup. For example, they could have forced AIG to renegotiate the terms of the contracts as a condition of the additional $30 billion in TARP funds that they announced several days after learning about the imminent bonus payments. They could have refused to allow AIG to make the payments and dealt with the legal consequences that might have followed. At the very least, they could have alerted Congress and the public before making the payments. Instead, with no notice, Treasury and Geithner stood behind the "sanctity" of the executives' contracts.

Meanwhile, the rationale Neel Kashkari had given me for making the payments- that the bonus recipients were essential personnel necessary to wind down AIG's complex transactions- didn't quite wash. When I asked the audit team for a breakdown of the bonuses by position, I saw that although the overwhelming majority of the payments had gone to a small group of executives, every single employee at the Financial Products group seemed to have received some payment, including $7,700 to a kitchen assistant, $700 to a file administrator, and $7,000 to a mail room assistant. Though I was skeptical that the executives were so essential, I was pretty sure that those lower-level employees receiving taxpayer-funded bonus payments had nothing whatsoever to do with the supposedly complex work of resolving AIG's positions.

Ironically, the very executives who were most responsible for AIG's problems were the ones that received the bonuses. Geithner's insistence on the "sanctity" of the executives' contracts could be construed as taking the high road- if he consistently advocated that position. The book makes it clear that was not the case as his concern for the sanctity of contracts seemed to evaporate as soon as it applied to someone other than his Wall Street friends. For example, Geithner and Treasury simply couldn't be bothered with the contract rights of auto dealerships during the GM bailout or homeowner's rights in the administration of HAMP.

As Barofsky notes, the bonuses, more than anything else, solidified the notion "that TARP was little more than a massive transfer of wealth from taxpayers to undeserving Wall Street executives.

AIG Bailout, Part 1: http://www.democraticunderground.com/111632333
AIG Bailout, Part 3: http://www.democraticunderground.com/111632331

The AIG Bailout, Part 3. Negotiations.

Barofsky paints a devastating portrait of Geithner's deference to Wall Street in his account of the "negotiations" on the price that the government would pay the banks for the toxic CDOs that AIG had insured.

Even worse than the bonus payments, at least in terms of financial cost, was the subject of our other AIG audit, which explored the reasons for Geithner's agreement to effectively pay full value to the banks for the CDOs the government purchased from them. These beneficiaries included Societe Generale ($16.5 billion in CDOs bought), Goldman Sachs ($14 billion), Deutsche Bank ($8.5 billion), Merrill Lynch ($6.2 billion), UBS ($4.3 billion), Wachovia ($1 billion), and Bank of America ($800 million). Our audit sought to find out why Geithner hadn't negotiated a lower price on behalf of the public.

On its face, it seemed unfair and unnecessary that the government would so grossly overpay for the bonds, particularly to those banks that had already received so much TARP money. The New York Fed, obviously aware of this problem, did initially seek some concessions from the banks, asking them to take less than full payment for the bonds. But we found that these negotiations were halfhearted at best and demonstrated a characteristic deference to the banks, taking an almost apologetic approach. It was as if the New York Fed found the whole process of negotiating unseemly.
...

If Paulson, Geithner, and Bernanke's discussions with the banks over CPP {the Capital Purchase Program} were a lesson in Negotiations 101, Geithner's approach to concessions in the CDO purchases was Neville Chamberlain-esque. Instead of gathering the CEOs of the banks together in one room and personally explaining that it was "for the good of the country" and necessary to ensure ongoing support for the bailouts to negotiate a deal that fairly protected the taxpayers' interests, Geithner handed the job over to midlevel New York Fed staffers. The staffers were then required to use a prepared script that emphasized, up front, that any concession made by the banks would be "entirely voluntary." He also put the staffers into negotiating straitjackets: they were prohibited from suggesting that they would pull the plug on AIG and leave the banks high and dry; and they were prohibited from using their leverage from being the regulator of several of the entities. That approach resulted in a departure from the normal workings of the marketplace, where concessions on debt owed by struggling companies are not uncommon. For example, in 2008, the bond insurer Ambac reportedly settled claims on $1.4 billion of mortgage-related CDOs that it had insured for Citigroup for about 60 cents on the dollar, and later settled with a number of other counterparties on $3.5 billion in mortgage-backed debt exposure for just $1 billion.

Geithner's team also undercut any chance for getting relief for the tax payer by deciding that no one concession would be accepted unless all of the banks agreed to the exact same percentage reduction. The New York Fed told us that for this reason, after the regulator overseeing AIG's French bank counterparties told them that it would be against French law to accept less than full value for the bonds, the negotiations effectively ended.

The story gets worse. Geithner avoids meeting with the auditors and Treasury fails to provide requested documents. One bank (UBS) offers a concession, but the offer is never used as leverage with the other banks and UBS receives full price for their CDOs even after offering the concession. The French law against accepting less than full value for the bonds turns out to be a less than insurmountable barrier...

AIG Bailout, Part 1: http://www.democraticunderground.com/111632333
AIG Bailout, Part 2: http://www.democraticunderground.com/111632332

Gutting the Postal Service.

James Royal recently published an article at Motley Fool evaluating the Postal Service as a business. Link: http://www.fool.com/investing/general/2013/03/04/how-the-postal-service-is-being-gutted.aspx

The title of the article is "How the Postal Service is Being Gutted" and draws the conclusion that "...the postal service is a fundamentally sound business, though not without its challenges. If you look closely, you'll see a concerted campaign to drive USPS out of business..."

Royal outlines three myths about the Postal Service. The first myth is that recent losses demonstrate that USPS is not a viable business. Royal notes that the majority of the red ink is the result of the healthcare pre-funding mandate imposed by the lame-duck Republican Congress in 2006. The pre-funding mandate requires the Postal Service to pay for 75 years of future employee health care benefits in a 10 year period. This onerous requirement means that the Postal Service is currently paying for future health benefits for employees who have not been hired yet and, in many cases, not born yet. Despite this burden, credit needs to be given where credit is due:

And the USPS has been a model for prudent squirreling. As of Feb. 2012, it had more than $326 billion in assets in its retirement fund, good for covering 91% of future pension and health-care liabilities. In fact, on its pensions, the USPS is more than 100% funded, compared to 42% at the government and 80% at the average Fortune 1000 company. In health-care pre-funding, the USPS stands at 49%, which sounds not so good until you understand that the government doesn't pre-fund at all and that just 38% of Fortune 1000 companies do, at just a median 37% rate. The USPS does better than almost everyone.

As if the pre-funding mandate were not a sufficient burden, the Postal Service is also restricted to investing those funds in low-yield Treasury bonds. This forces the Postal Service to save even more now than a private company would to obtain the same payout later.

The second myth that the article examines is "snail mail is dead." The article points out that, even though letter mail volume is declining due to replacement by e-mail, the larger problem is that, at 46 cents, first class mail is grossly underpriced compared to European services which are priced closer to $1 for a letter. Though the article doesn't mention the fact, European postal services tend to be more privatized than their American counterpart. FedEx and UPS provide no comparable service at anything close to the same price. Another area in which USPS provides underpriced service is pre-sorted bulk mail. Bulk mailers get discounts for pre-sorting mail that exceed the cost-savings to the Postal Service.

One barrier to proper pricing is that price increases are overseen by a separate agency, the Postal Regulatory Commission, and are restricted to increasing no more than the general rate of inflation. If costs exceed the inflation rate during a given period, they can not be recovered.

Proper pricing is important for a business mandated to deliver everywhere for a fixed price, a burden not faced by private services. Of necessity, many locations, such as rural ones, lose money -- part of the price of a national postal service. Private services can simply leave a location if it's not profitable. In fact, private services rely on USPS to deliver to unprofitable locations for them.

In addition to saddling the Postal Service with the suffocating health care pre-funding mandate and preventing it from properly pricing its products, Congress has also prevented the USPS from increasing revenue by expanding its services into related lines. While our representatives exhort the Postal Service to operate like a business on the one hand, on the other they also say that USPS can not "unfairly" compete with private companies. Recent restrictions include: implementation of an online payment system in 2000 (internet companies complained); putting public copy machines in Post Office lobbies; selling phone cards; and selling postage meter cartridges (Pitney Bowes objected). "And, of course, rivals such as UPS complained, ultimately leading Congress in 2006 to restrict USPS to mail delivery."

The third myth examined is that "privatized mail delivery would be cheaper and more effective." The article points out that in 2011, USPS delivered more than 30% of FedEx Ground's packages. FedEx uses the Postal Service because it is cheaper. Another way the Postal Service is forced to operate at a handicap is by preventing it from negotiating volume discounts with large parcel shippers. And then there's this:

It's bad enough that USPS is forbidden from entering new markets. When it does well on its home turf, rivals turn to Congress, silencing USPS when it delivers better rates. As economist Dean Baker explains, "About a decade ago, the Postal Service had an extremely effective ad campaign highlighting the fact that its express mail service was just a fraction of the price charged for overnight delivery by UPS and FedEx. {They} went to court to try to stop the ad campaign. When the court told them to get lost, they went to Congress. Their friends in Congress then leaned on the Postal Service and got it to end the ads."

The article concludes by suggesting that the only sensible reason for handicapping the Postal Service in this fashion is to set it up for "failure" and subsequent privatization. The Cato Institute, which was founded by Charles Koch, has been advocating for this outcome for decades. FedEx founder and CEO Frederick Smith has served on the Board at the Cato Institute and FedEx continues to help fund the think tank.

Royal points out "two plums" that can be plucked from a privatized Postal Service. One would be "busting the union, lowering wages, and shifting that profit into investors' hands..." And the other:

Second, and perhaps sweeter, that well-funded USPS retirement account might be opened for raiding. An acquirer could invest in higher-return securities and adjust their return assumptions (not even unfairly), freeing tens of billions that could then be returned to investors. For context, FedEx and UPS have a combined market cap of $110 billion against nearly $330 billion in USPS retirement assets.

I have been following the Postal Service's plight for many years and have explained the financial squeeze imposed by Congress to numerous people. In doing so I have witnessed a curious phenomenon. When I explain the health care pre-funding mandate people suddenly appear almost disoriented. Not a minute later they often refer to it as "pension pre-funding" and I have to correct them. "The pensions are fully funded. The pensions are actually overfunded. The pre-funding mandate covers future health care premiums..." People need to be told twice- and then their jaw drops...

I think people resist understanding the truth about the mandate because the truth is- it is blatantly abusive. Nobody wants to examine what else is hiding underneath that rock. If Congress will sabotage the Postal Service, what else might they be capable of doing? Is the handling of the Postal Service an anomaly or a template? They also have Social Security, Medicare, and Medicaid in their hands...

NALC (the carriers' union) is sponsoring a national day of action to mobilize public support on March 24. Details here: http://www.nalc.org/

Highly recommended site for information on USPS: http://www.savethepostoffice.com/






Third Way, William Daley, and the Grand Bargain.

Third Way: Friends in High Places.

Third Way is a self-described "moderate" think tank. They are currently advocating for a Grand Bargain on entitlements. Third Way was founded in 2005 but is closely linked with former Clinton staffers as well as former and current members of the Obama administration. Former Third Way Honorary Co-chairs include Secretary of Health and Human Services Kathleen Sebelius and Secretary of the Interior Ken Salazar.

The current roster of Honorary Co-chairs is: Representatives Clyburn (SC), Dingell (MI), Kind (WI), Crowley (NY), Schwartz (PA), and Polis (CO) and Senators Carper (DE), Coons (DE), McCaskill (MO), Udall (CO), Shaheen (NH), and Hagan (NC). All are Democrats. It seems reasonable to suppose that if these Democrats are willing to lend their name to Third Way they are also sympathetic to their policy positions.

Third Way's website includes the following description of their methods: "Unlike traditional think tanks, which focus on producing academic-oriented papers, we aggressively market our ideas to policymakers and advocates to maximize their impact on the national debate. Third Way’s policy and political work has been incorporated into President Obama’s State of the Union addresses, introduced in more than fifty bills in Congress, included as part of major bipartisan budget deals and the President’s Deficit Commission recommendations..." They aspire to be a neoliberal ALEC.

Third Way = Wall Street Power Play?

President Obama's former Chief of Staff, Bill Daley, is on Third Way's Board of Directors. During the Clinton administration, he served as Special Counsel and coordinated the campaign to pass NAFTA. He also served as Clinton's Commerce Secretary. Prior to joining the Obama administration he was a Vice Chairman of JP Morgan Chase.

Including Daley, Third Way has 29 Directors. The Board is dominated by representatives of the financial industry. Chairman John Vogelstein is Chairman of New Providence Asset Management and is the retired President of the private equity firm Warburg Pincus. The Vice Chairman is David Heller who was formerly the global head of equity trading for Goldman Sachs.

David Coulter is Managing Director of Warburg Pincus. He is an alumnus of JP Morgan Chase and Bank of America. Andrew Feldstein is the CEO and Chief Investment Officer of BlueMountain Capital Management. He also previously worked at JP Morgan. Derek Kaufman is Head of Global Fixed Income at Citadel LLC. He previously worked at JP Morgan. Michael Novogratz is President and Director of Fortress Investment Group LLC. He previously was a partner at Goldman Sachs.

Brian Frank is a Director and Portfolio Manager at MSD Capital and previously worked in mergers and acquisitions at Lazard Freres. Michael Goldberg is Managing Director at the private equity firm Kelso & Co. He also has prior experience in mergers and acquisitions at First Boston Co. Derek Kirkland is a Managing Director and Co-Head of the Global Financial Institutions Group at Morgan Stanley’s Financial Institutions Group in Investment Banking. He has a background in mergers and acquisitions. Joseph Zimlich is the Chief Executive Officer of Bohemian Companies, a group of family-owned real estate and private equity holdings. Mr. Zimlich also has a background in mergers and acquisitions.

John Dyson is Chairman of Millbrook Capital Management. Robert Dyson is Chairman and CEO of Dyson-Kissner-Moran Corp., a privately owned investment holding company. Andrew Parmentier is a founding partner of Height Analytics, an investment research firm. Howard Rossman is President of Mesirow Advanced Strategies, a manager of hedge fund portfolios. Kirk Radke is an internationally recognized private equity attorney. Barbara Vogelstein has a background in venture capital and private equity, including a tour as a partner at Warburg Pincus.

Two other Directors who do not have a Wall Street background are worth a mention because they help complete the picture of Third Way. Jonathan Cowan is a co-founder who also co-founded Lead...or Leave, a Generation X advocacy group that was largely financed by Pete Peterson. The other director is Ron Klain who recently served as a senior White House aide to President Obama, and Chief of Staff to Vice President Joe Biden. Pairing Klain with Daley gives Third Way recent Chiefs of Staff of both the President and Vice President. If Daley and Klain can't provide access to the administration, it's difficult to imagine who could.

This think tank/advocacy group, which seeks to shape Democratic Party policy, includes no representives from the labor movement. By contrast, individual financial firms including JP Morgan Chase, Goldman Sachs, and Warburg Pincus each provide more than one Director to Third Way's Board.

Pushing a Grand Bargain- the Talking Points.

Third Way recently released a Memo entitled "Six Facts About a Grand Bargain."
Link: http://www.thirdway.org/publications/609

Summary:
Claim #1: The deficit is not a real economic problem.
Fact #1. Our current fiscal path, unchanged, guarantees higher interest rates and lower economic growth.

Claim #2: Social Security and Medicare don’t contribute to the deficit.
Fact #2. Social Security and Medicare’s fiscal shortfalls directly contribute to the deficit problem.

Claim #3: A grand bargain “betrays” voters.
Fact #3. Large majorities of voters support the core principles of a grand bargain.

Claim #4: A grand bargain means austerity.
Fact #4. A grand bargain is the best alternative to austerity.

Claim #5: Taxing the rich is enough to resolve deficits.
Fact #5. Leaving Social Security and Medicare untouched guarantees middle class tax hikes, because no plausible tax increase on the wealthy, alone, can stop deficit growth.

And finally, in its entirety:
Claim #6: President Obama promised not to touch Medicare and Social Security.
Fact #6: The president has repeatedly endorsed a deal that includes reasonable savings to make Social Security and Medicare stable for future generations.

President Obama has been entirely consistent on the deficit and entitlements. He proposes to cut deficits by $4 trillion, over ten years, “in a balanced way.” There is no question as to what balance means to the president. In the midst of the 2011 debt ceiling negotiations, Obama said, “Despite what some in my own
party have argued, I believe that we need to make some modest adjustments to programs like Medicare to ensure that they’re still around for future generations.”

The president has maintained that position throughout the presidential campaign. In the first presidential debate alone, he referred to “balanced” deficit reduction seven separate times. And the transcript of his Des Moines Register interview is clear: “I am absolutely confident that we can get what the equivalent of the grand bargain that essentially I’ve been offering to the Republicans for a very long time, which is $2.50 worth of cuts for every dollar in spending, and work to reduce the costs of our health care programs.”



What does it mean to be a Third Way Democrat?

A more expansive exposition of Third Way's policy prescriptions is contained in a recently released paper entitled "The Bargain."
Link: http://content.thirdway.org/publications/613/Third_Way_Report_-_The_Bargain.pdf

Third Way's program is based on the premise that America's biggest problem going forward is a reduction in projected growth of GDP from 3.3% to 2.3% per year. This leads, in short order, to an economy that is too small to sustain promised safety net benefits. In this paper they offer a 7-point plan to spur growth in the economy and thereby save as much of the safety net as possible.

A summary of their prescription:

1. Entitlement reform and tax increases. "Democrats must accept reconfiguring the budget so that, in relative terms, the amount of spending on health care and income supports is reduced compared to public investments."

2. Become an export giant. "Democrats must accept that expanding U.S. exports comes primarily through aggressive new trade measures like the Trans Pacific Partnership."

3. Reform corporate taxes and business regulations. "Democrats must accept that a simpler tax code with a low corporate rate and a streamlined regulatory regime that helps businesses grow is good for America."

4. Increase the productivity and educational attainment of the American workforce. "Democrats must accept that education funding comes with a commitment to reform that puts student performance above all else. They must accept that it is virtually impossible to reform and improve education without restructuring the way teachers are hired, promoted, and dismissed." Third Way Directors active in the charter school movement include William Budinger, Andrew Feldstein, and Derek Kaufman.

5. Become a global magnet for talent. "Democrats must accept that legislation must tilt future immigration flows into the country decidedly in the direction of skills and education." The vague language here suggests support for expanding HB1 visas.

6. Improve infrastructure.

7. Spur breakthrough innovation.

Notably absent from the list are cuts to military spending and serious reform of our hugely expensive employment-based and private insurance-based health care system. Third Way's program appears to be indifferent to the interests of minorities and hostile to the interests of teachers and labor unions. A party that disregards the concerns of a sizeable portion of its base is likely to shatter- sooner rather than later.

Busting Allen West- a Political Diary, 2012.

I have always had an interest in politics, but work and my other commitments made it difficult for me to do much more than donate money and volunteer for some phone-banking and door-knocking in the last week or two before elections. This January I retired, moved to Florida, and decided to become more politically active. Now I had plenty of time available to pursue my interest- I just needed a candidate.

Florida redrew its congressional map last year based on the 2010 census. In February, Tom Rooney, the current congressman for Martin County, announced that he would run for re-election in the new District 17 which he expected to be more favorable territory for a Republican. Soon after, Allen West announced that he would move his campaign north and run for re-election in the new District 18 which included Martin County, St. Lucie County, and northern Palm Beach County. He wanted to be my new congressman. His likely Democratic opponent was a 29-year-old political neophyte, Patrick Murphy. In June I received a phone call from a Murphy campaign intern. The only thing I knew for sure about Mr. Murphy was that he was not Allen West. That was enough- I had found my candidate.

Though neither candidate had been officially nominated (the primary would be held in August) Murphy already had an active phone-banking operation up and running. I volunteered and started the next day. The office was in Palm Beach Gardens- 40 minutes away. I got into a routine of volunteering on Mondays and Fridays and mostly kept that schedule through election day. Fortunately, after a month the campaign opened another office in Martin County and I was able to cut down my commuting time significantly.

My prior volunteer experience was limited to working with other union members and calling from AFL-CIO generated lists. This was different. Now I was working mostly with younger people who had taken a temporary job with the campaign. In many cases they were just out of school and were expecting to return later to graduate school or law school. The internship was a temporary diversion from their career path but they still approached their task with enthusiasm and dedication. Most days that meant calling 400 strangers- a grueling and thankless job. I usually worked half days and found even that level of engagement mind-numbing.

The lists we used were generated from voter registration information. We called a lot of Republicans and independents. Many of those conversations were less than cordial. In the handful of calls on a given day that turned into an actual discussion of issues, I found myself talking a lot about Medicare. West had twice voted for Ryan's budget bills, which called for turning Medicare into a voucher system, and I knew that vouchers were politically toxic in the retiree haven of South Florida.

The formality of the primaries was dispensed with on August 14 and the campaign began in earnest. As the summer wore on and turned to fall, I got to know Patrick. He was young, energetic, driven, and accessible. He was merely adequate as a public speaker, but won people over with his enthusiasm. He came from a prominent and wealthy South Florida family- something that the West campaign would use against him in their relentless series of negative commercials. He graduated from a prep school in New Jersey and the University of Miami and then became a CPA. Later, he joined the family construction business. The highlight of his business career was putting together a fleet of skimmers and spending 6 months in New Orleans working on the oil cleanup after the BP catastrophe.

Politically, he is a self-proclaimed centrist- occupying a still largely undefined area someplace to the right of my preferred positions but well to the left of the ground staked out by Allen West. He is a strong advocate for the environment and women's rights. He is against turning Medicare into a voucher program. He touts his CPA background and states that he is pro-business. He makes a general distinction between short-term needs of the economy and long-term needs, suggesting that he recognizes the macroeconomic case for stimulus when appropriate. He is in favor of restoring higher taxes on those earning over $1,000,000 a year. Patrick Murphy is not my ideal candidate, but he is a huge improvement over Alan West and I had no reservations about working for his election.

In September, the campaign suggested topics for letters to the editor and I was happy to oblige. Two of my letters were published in local papers. Here's a reprint of one, a letter on Medicare:

Rep. Allen West likes to quote the Medicare Trustees Report from 2012 that states that the Medicare trust fund will be exhausted by 2024. What he doesn't mention is that the same report also states that without the savings made in the Affordable Care Act, which he wants to repeal, the trust fund will be exhausted 8 years earlier.

Rep. West says that he is in favor of prohibiting insurance companies from excluding people with pre-existing conditions, and he too would close the prescription drug "doughnut hole." He's in favor of extending the benefits promised by Obamacare, just not in paying for them. He says they will be paid for by private insurance company competition. That's the miracle we can expect to witness right after we've seen Rep. West walk on water.

It's telling that when Rep. West addresses seniors on "defined contribution," he's careful to say that it would not affect anyone 55 and over. If defined-contribution is better, why exclude seniors? And if it is worse, does he really think seniors are so selfish that they want a better plan for themselves than for their children and grandchildren?


The other letter was on sequestration, highlighting the fact that West sponsored the National Security and Job Protection Act- a measure which would exempt all defense spending from the across-the-board cuts mandated by the Budget Control Act.

While I was gradually getting to know Patrick Murphy, Allen West was using his massive war chest to paint a completely different picture of the candidate. West enjoyed a $17 million to $3.6 million advantage in fund-raising and he spent a large portion of it attacking his opponent. One television ad in particular drew a lot of attention nationally- the "contrast" ad that featured a mug shot of Murphy when he was arrested outside a nightclub. Murphy was 19 at the time and all charges stemming from the incident were dropped, but those facts were not mentioned in the spot. The contrast provided in the ad was a picture of Alan West in uniform from the same time period as he was preparing to deploy to Iraq.

Murphy's campaign responded within a week with an ad that pointed out that West's deployment had resulted in an Article 15 hearing, a $5,000 fine, and his removal from command. The only problem was that West was able to carpet bomb the airways with his ad while Murphy's ad aired infrequently and was little more than a blip on the media radar screen.

West appeared to have grabbed the advantage and led in the polls. The West campaign continued to hammer away with negative ads up to and past the point of saturation. They were joined in the fray by outside groups, such as the Treasure Coast Jobs Coalition, which launched ludicrous broadsides against Murphy for supporting, among other things: the stimulus, $1 million bonuses for insurance executives, ant research, and using taxpayer money to send jobs to China. Anyone who realized that Murphy was a private citizen during the time that these supposed outrages were perpetrated was likely to be puzzled or even offended by the attacks.

West's momentum was blunted by the one televised debate which took place on October 19. An accomplished public speaker, West was expected by many to dominate in the debate, but did not. He looked foolish on at least a couple of occasions- when he unsuccessfully attacked Murphy's CPA credentials and when he tried to doubletalk his way out of his Medicare votes.

Murphy also won a lukewarm endorsement from the area's largest newspaper- the Palm Beach Post. It was better than not being endorsed and much better than anybody did in adjacent District 22 where the Post refused to endorse either candidate.

The campaign lurched into the final weeks. Many more volunteers climbed aboard for the final push. The phone-banking was transformed into a GOTV effort promoting both voting by mail and early voting. The West campaign continued to fill the airways with negative ads which, through sheer overexposure, seemed to have lost their power to do little more than irritate viewers.

Election day arrived and the race had tightened. The GOTV effort continued right up until the polls closed at 7 p.m. Murphy's election night party was held at the Double Tree in Palm Beach Gardens. Patrick showed up around 9:30 and mixed with everybody, thanking them for their hard work and patiently had his photo taken dozens of times with his supporters. By 10:30, over 80% of the vote was counted and West was up by about 2,000 votes. A glimmer of hope remained in the fact that many of the uncounted votes were in St. Lucie County, a Democratic stronghold. Most of the remaining St. Lucie votes came through around 1 a.m. and Murphy vaulted into the lead.

Meanwhile, Allen West's troops were holed up on Hutchinson Island. West never showed his face to thank his supporters, including over 100 volunteers who had traveled from Texas to knock on doors for his campaign. When West finally did make an appearance the following day it was to announce that he was filing suit to challenge the results of the election in Palm Beach and St. Lucie Counties. Florida law calls for automatic recounts when the margin of victory is 0.5% or less. Murphy's lead is currently greater than that and is expected to hold up.

I helped clean up the Stuart office after the election and then went around and collected and returned all the leftover Murphy roadside signs from my area. During the campaign, when I put out signs I checked on them from time to time. Some got vandalized, some got stolen, and some were obscured when West supporters placed their signs directly in front of mine. West's most avid supporters evidently shared their candidate's arrogance. The roads in my area are now mostly empty of Murphy signs while many West signs remain in place, neglected reminders of a lost battle.

The campaign is over and I have mixed feelings about my first intensive electoral experience. The good part was winning. The best part was beating Allen West and it felt really great to contribute to that victory. I know Patrick Murphy could have won without my help, but I also know he couldn't have won without the combined efforts of all the people like me. Close races increase the value of each vote and every volunteer.

The tale is incomplete, however, without recognizing the rest of the story. I spent a lot of time during the campaign talking to the people who gave Allen West 49.6% of the vote. They are detached from reality and one lost election is not going to change that for most of them. One of the darker truths emerging from the election is that Allen West could easily have prevailed in spite of our efforts if he had run a smarter campaign. His defeat was in large part a function of his flawed character- his propensity for self-righteous bullying.

Our win was one small victory, but our democracy as a whole remains in disrepair. Our electoral system is perverted by money, our media fail to inform the public on important issues, and the overall result is that the majority of voters are poorly equipped to defend their own interests and function as responsible citizens.










The collapsing middle class- now they are going after pensions.

The story as reported.

On July 6th, President Obama signed the "Moving Ahead for Progress in the 21st Century Act", also known as MAP-21. Headlines chronicling the event focused on the extension of lower interest rates on student loans. Second billing on this bipartisan legislation went to the reauthorization of federal funding for transportation programs, which was touted by the administration for creating jobs. The law also dealt with various unrelated matters, including taxation of roll-your-own cigarette machines and changes in pension regulations...
Typical coverage of the bill here: http://www.cnn.com/2012/06/29/politics/congress-highway-bill/index.html

The very last paragraph of the article includes a single sentence on pension funding: "During negotiations this week, legislators decided the revenue to pay the $6 billion cost should come from changes to the way companies fund pension programs..." The media focus on student loan rates meant that the change in pension funding went mostly unnoticed and unremarked.

Pension fund "stabilization."

An AP article in the Money section of USA Today gives the new pension legislation more coverage, including this summary of its content and effects (emphasis added): http://www.usatoday.com/money/industries/story/2012-07-09/New-law-gives-companies-pensions-break/56114600/1

A new law will let companies contribute billions of dollars less to their workers' pension funds, raising concerns about weakening the plans that millions of Americans count on for retirement.
...
The bill Obama signed into law on July 6 renews transportation programs and extends low interest rates on student loans. It was partly paid for by changing pension laws. It would raise around $10 billion over the next decade by gradually boosting the premiums companies pay the government to insure their pension plans, and another $9 billion by changing how businesses calculate what they must contribute to their pension funds.

That computation change will let companies estimate their pension fund earnings by assuming the interest rate will be near the average of the past 25 years, rather than the past two years when interest rates have been extremely low. Since they will now be able to assume that their pension investments are earning higher profits, they will be required to contribute less money from corporate coffers to make up the difference.

The government makes money because companies will make fewer pension contributions, which are tax deductible.


The cover story.

The Pension Fund Stabilization provision in the new law is a compromise primarily designed to serve two purposes- to provide more revenue for existing government programs and to reduce annual pension contributions for companies. From the New York Times: http://www.nytimes.com/2012/06/29/business/tweak-in-a-pension-rule-could-finance-roads-and-student-loans.html

Congress has been struggling for years to find a new source of money for roads and other infrastructure, because the main source, an 18.4-cents-a-gallon tax on gasoline, no longer covers the cost. The gas tax has not been changed since 1993, and as oil prices have spiked in recent years Americans have been switching to more fuel-efficient cars and driving less.

Pressure has also mounted this year to find a way to keep the interest rate on Stafford loans from doubling on Sunday, when a five-year rate relief program is set to expire. The current rate, 3.4 percent, will rise to 6.8 percent without an extension, affecting more than seven million students who are expected to take out such loans for the next academic year.

Lawmakers tussled over other sources of money, with Republicans and Democrats shooting down each other’s proposals, until pensions came into focus, both as a possible revenue source and a much-needed piece of bipartisan common ground. Lawmakers of both parties are inclined to find ways to help companies operate their pension plans...

Low interest rates may help the economy overall, but they are a hardship for the companies that offer pensions to their workers. When interest rates are low, the funding rules call for companies to put more money into their pension plans, on the assumption that the money will compound more slowly. And this year, because the economy is still weak, companies with pension plans were back on Capitol Hill once again, asking for additional help. But this time they proposed a new way of calculating pension obligations, by adjusting the interest rates they use to calculate contributions.


Estimates of the near-term savings on corporate contributions vary. According to Jacques Goulet, US leader of Mercer's Retirement, Risk & Finance, "...relief could be in the range of $40 to $50 billion for S&P 1500 plan sponsors for 2012 and could total well over $100 billion through 2014." The Society of Actuaries, quoted in the AP article in USA Today, estimates that the reduction in contributions will be $35 billion this year and will peak at $73 billion next year.

Just three days after the bill was signed, the first shoe dropped when AK Steel announced it was cutting its planned pension contribution for 2013 from $300,000,000 to $200,000,000.

What it means.

While the legislation was tailored to suit the needs of Congress and corporations, it did so by shortchanging the needs of pension plan participants and, quite possibly, taxpayers. Congress and the companies got a quick cash infusion while the public got more risk and less solvent pension plans. The loosening of funding standards comes at a particularly bad time as far as the plans are concerned. Milliman, Inc. reports on the condition of the largest pension plans: http://www.businessinsurance.com/article/20120709/NEWS03/120709911

Funding levels of pension plans sponsored by large publicly-held U.S. employers plunged in June as lower interest rates fueled a rise in plan liabilities, Milliman Inc. said in an analysis released Monday.

Defined benefit plans offered by the 100 U.S. employers with the largest pension programs were an average of 75.6% funded as of June 30, down from 77.9% at the end of May 31.

In all, the funding deficit jumped $77 billion last month. At the end of June, the value of aggregate plan assets was $1.283 trillion, while the value of plan liabilities was $1.698 trillion. That resulted in a $415 billion deficit, up from $358 billion at end of May.

"With the help of the lowest discount rate in the 12-year history of our study, corporate pensions last month saw their funding deficit increase, to a near-record $415 billion,'"John Ehrhardt, a Milliman consulting actuary in New York and co-author of the analysis, said in a statement.


This is a continuation of the recent trend as shown in the chart below (also from Milliman):

It is difficult to believe that relaxing contribution requirements at this time will not exacerbate the trend toward pension fund insolvency. Perversely, the cash injection into corporate coffers comes at a time when companies are already sitting on record amounts of cash. From the Wall Street Journal: http://online.wsj.com/article/SB10001424053111903927204576574720017009568.html

Corporations have a higher share of cash on their balance sheets than at any time in nearly half a century, as businesses build up buffers rather than invest in new plants or hiring.

Nonfinancial companies held more than $2 trillion in cash and other liquid assets at the end of June, the Federal Reserve reported Friday, up more than $88 billion from the end of March. Cash accounted for 7.1% of all company assets, everything from buildings to bonds, the highest level since 1963.


In short, this is money that many companies don't need. But in a business culture in which the only acceptable motive is profit, leaving money on the table is viewed as weak, foolish, or irresponsible, and greed trumps decency.

If the economy continues to wallow in a long-term recession, the Fed is likely to extend its zero interest rate policy (ZIRP). As it is, the Fed has already announced that it will extend ZIRP through late 2014. Facing continuing low returns on their pension fund assets, companies will surely want to extend their benefit contribution holiday. Given the bipartisan support for MAP-21, it is difficult to imagine that companies would not get an extension if they lobbied for it. Recent history reinforces this point. The Pension Protection Act of 2006 tightened pension funding requirements. The provisions of the PPA were supposed to be phased in gradually, including a stipulation that any "funding shortfall" would be amortized over a seven year period starting in 2008. Additionally, the act provided for accelerated funding requirements for "at risk" plans- where "at risk" is defined as less than 80% funded. Sadly, the good intentions of these reforms disintegrated with the passage of MAP-21.

Artificially inflating the "expected" return on existing pension fund assets serves no useful purpose except to reduce current employer contributions. The contribution shortfall is then replaced by projecting increases in asset appreciation and interest income which are counted on to make up the difference. Sound financial practice is abandoned and replaced with an appeal to wishful thinking or the power of prayer. This is exactly the sort of thing that someone with questionable motives might do with other people's money. Nobody in their right mind would do it with their own money, especially if they were relying on those funds for retirement.


For those interested in the subject, more reading:
http://www.investopedia.com/university/financialstatements/financialstatements9.asp#axzz20ejQiuKf
http://www.pensionrights.org/issues/legislation/pension-provisions-hr-4348-%E2%80%93-moving-ahead-progress-21st-century-map-21-act
http://www.heritage.org/research/reports/2012/04/pension-funding-issues-hidden-in-transportation-highway-bill
http://blog.ebeclaw.com/2011/02/summary-of-pension-protection-act-of.html
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