A Casino in Oxford County?

Rumford attorney Seth Carey has one thing right. The manufacturing jobs that sustained Oxford County in the 20th century are not coming back. By the end of next week we will know the precise number in the latest round of layoffs at the NewPage coated-paper mill, a number that may approach 5% of the mill's workforce. Sure, the mill is doing great, making more paper with fewer workers and less pollution than ever before. But a good chunk of that cash flow is going to service corporate debt. Less is coming back to the community as wages.

So the region needs to diversify its economy, and Mr. Carey sees a casino as one way to do that. He has urged the River Valley Growth Council to support his endeavor, but directors have been hesitant. Some have a personal aversion to gambling; others point to the lack of a solid business plan. Most would prefer an enterprise that would actually create value by making something over one that would merely shuffle currency from one pocket to another.

With Mr. Carey's casino bill now on the November ballot, there will be heated debate in which each side will accuse the other of hypocrisy. Casino proponents are justified in pointing fingers at the State, which operates a lottery on the one hand while strictly regulating other forms of gambling on the other. But the Carey bill, as presently crafted, will also simultaneously promote and restrict gambling. If voters give the go-ahead, a casino will be allowed in Oxford County and nowhere else in Maine. One can hardly imagine the disgust that such an outcome would arouse in the Passamaquoddies, whose campaign for a racino in Washington County was shot down last November.

Mr. Carey wants a state-chartered monopoly, a cozy arrangement at odds with his otherwise consistent advocacy for openness and accountability in government at all levels. He would be creating his very own special interest. A more forthright initiative would be one that opens the entire state to gambling, individual projects subject to local approval. Period.

[update, March 4:]
As long as we are talking about gambling, how about the bill offered by Rumford's own John Patrick (with the Governor's blessing) to collect an annual $30 licensing fee from nonprofits that run pay-to-play cribbage tournaments. Testifying yesterday before the Legal and Veterans Affairs Committee, Patrick commented, "Thirty dollars for a year, that's insignificant." Right, so why bother? Maine cedes the moral high ground when it insists on a piece of the action. Patrick, incidentally, sponsored the Carey bill during the 2007 Legislative Session.

The Model of Vigor and Rigor

This morning's Boston Globe has a great piece on William F. Buckley, Jr., who passed away yesterday at age 82. You might have disagreed with his politics, but you had to admire his wit and his way with words. He once said of Big Government, "one must bear in mind that the expansion of federal activity is a form of eating for politicians." Buckley's debating prowess was unmatched, making today's presidential "debates" (the term is used loosely) seem nothing more than sandbox antics. The man will be missed.
William F. Buckley Jr., conservative icon, dies - The Boston Globe

Updates on Health Care, Maine Budget

How are the Democrats going to pay for THIS? There are new estimates out this morning that the total cost of health care in the U.S. will double in the next ten years to over $4 trillion in 2017, or 20% of GDP. That will be over $13,000 for every man, woman, and child. Nearly half will be paid by federal and state governments--make that taxpayers. Using just my fingers, I arrive at an average public subsidy of $6,500 per person. And that's without universal health coverage.

Blame baby boomers like me. We'll be eligible for Medicare starting in 2011, when all hell will break loose. According to Health and Human Services Secretary Mike Leavitt, "Medicare, on its current course, is not sustainable." Leavitt's boss, President George W. Bush, actually has some good ideas in his 2009 budget about how to begin to deal with the problem. But all that "political capital" that he said he earned from his reelection in 2004 got spent somewhere else.

Solution: get healthier. Start now. Do it for yourself and for your fellow taxpayers.

Maine is in for some belt-tightening. This we knew, and the Legislature's Appropriations Committee will be reviewing the gory details today, one day after the Revenue Forecasting Committee upped the projected shortfall for 2007-2008 to $190 million. Among the proposed spending cuts: a 5% reduction in the "Clean Election" money made available for publicly funded state legislative candidates, which would save the taxpayers almost $300,000.

You know what that might mean? That might mean fewer lawn signs cluttering our highways and byways this fall. That might mean fewer campaign flyers in our mailboxes from Democratic and Republican offices in Augusta (you know, the stuffers that we don't look at anyway because they spout the party line, not the candidate's nuanced views). In the end, it might mean less landfill. Can we handle that?

As a candidate for the House District 93 seat, I am relieving the taxpayer by funding my campaign privately. Perhaps that makes me an "Unclean" candidate, but I am not convinced that public money is best spent on campaign paraphernalia. There are channels of communication available to candidates today that allow them to run on a shoestring. An example is this blog, which Google is enabling at no cost to me.

So vote dirty. Elect Bill Hine.

Walker Walks: Is Anyone Paying Attention?

America's auditor-in-chief is looking for a bigger bullhorn. One week ago David M. Walker resigned as Comptroller General of the U.S. and head of the General Accountability Office. The GAO is a Congressional watchdog agency tasked with making federal programs "more efficient, effective, ethical and equitable" (www.gao.gov).

Walker is relinquishing a position that he has held for ten years, during which time he has pleaded with Congress to address a looming fiscal crisis born of unsustainable entitlement spending. With Congress paying scant attention, Walker in 2007 took his message directly to the nation in a "Fiscal Wake-Up Tour." Demographic trends, he warns, will bring about a huge increase in the costs of Medicare and Social Security in the decades ahead. Benefits will need to be trimmed and revenues enhanced to keep those programs solvent.

Bob Bixby, executive director of the Concord Coalition, agrees. "Whether you are liberal, conservative, middle of the road, Democrat, Republican, Independent, the numbers don't add up," says Bixby. "It's a matter of arithmetic, not ideology."

Screw-ups in the here and now have not escaped Walker's attention, either, as he has criticized Congress for pork-barrel spending and support of a "dysfunctional" government in Iraq. Still, entitlement shortfalls remain the major cause of concern, and they will get worse if Democrats succeed in mandating universal health care. With five years left before the end of his term, Walker decided he couldn't wait. He will head up the newly formed Peter G. Peterson Foundation to try to light a fire under Congress.

"As Comptroller General of the United States and head of the GAO, there are real limitations on what I can do and say in connection with key public policy issues, especially issues that directly relate to GAO's client--the Congress," Walker said in his resignation statement. "My new position will provide me with the ability and resources to more aggressively address a range of current and emerging challenges facing our country."

The Peter G. Peterson Foundation - Our Mission

Free Fallin' Foreclosures

You can't fix what you can't see--a major reason that distressed mortgages are cascading into default at a such a dizzying pace. It used to be that a homeowner struggling to keep up with his payments could sit down with a loan officer at his friendly neighborhood bank or mortgage lender and work something out. Perhaps the lender could allow some breathing room by accepting interest-only payments for an interim period. Or the payback period could be extended, reducing monthly payments. Or a short sale could take place, where the lender agrees to accept a discounted payoff.

It was all subject to negotiation. In some cases the lender would recognize a deficiency, but at least there would be an accounting mechanism in place by which the lender could write off a loss over the life of the mortgage. Problem is, such a workout can only take place with two people at the table. Lenders who have securitized loans for re-sale have insulated themselves from their customers. They have ceded their place at the table to anonymous investors with no local knowledge. If you are the borrower trying to make ends meet, who are you gonna call?

Many lenders in recent years became motivated not to give their customers something called "service," but to push their customers' loans off their balance sheets and into the secondary market, recovering their capital so that they could make more loans. Long-term customer relationships were sacrificed for short-term profits. To keep the money in motion, lenders inevitably migrated down the customer food chain to unqualified borrowers with insufficient means to repay the loans (so-called NINA loans: no income, no assets). The collateral for such transactions was nothing more than the imagined future price of each property in an inflating market.

Now housing prices are going the other way. Many mortgages have gone "upside down" (the amount owed exceeds the value of the house), and borrowers are walking away. Repossessed homes are being auctioned off at fire-sale prices, exacerbating the downward spiral. The default rate for subprime loans originated in 2007 hit double digits before the year was out, stark evidence that there were fools on both sides.

Meanwhile, many investors in mortgage-backed securities are left holding the bag now that this game of musical chairs has come to an end. Those investors will not be able to amortize their losses over time; they will be recording them all together, all at once (MaineFail, anyone?). This will be a once-in-a-lifetime destruction of debt. Be thankful if you are fortunate enough to be but a spectator.

Pay ME Now, Not Later

Wow, what a news day. I can hardly keep up. So let's set aside for now the stories about fires in Belgrade and the heat under John McCain's collar. More deserving of your attention is the word out of Augusta that Maine may take back some of the economic stimulus offered by the U.S. Congress earlier this month in a bill designed to forestall recession.

Previous posts of mine (1/16, 1/24, 2/9) pointed out that most of the stimulus package is election-year fluff that does not get at the root of the problem. But there was one piece in there that might actually work: an accelerated depreciation schedule for businesses considering the purchase of new equipment. If you are a business owner, Uncle Sam wants you to make that investment now, not later. The incentive is a bigger write-off in the first year that the equipment is placed in service, resulting in lower taxable earnings, hence lower taxes for that year.

But now a spokesman for Governor Baldacci says, whoa, maybe Uncle Sam is willing to defer a small fraction of corporate income taxes, but not us. The governor points to a projected $200 million shortfall in FY2008 as a reason to "decouple" Maine tax rules from the new depreciation rules in the federal stimulus package. Uncle John wants you to pay your taxes now, and invest later. And how much are we talking about? Maybe $2.5 million this year, and another $20 million next year. Why, that's peanuts! We blew away $20 million just on that MainSail investment last summer.

Then there's the PITA factor (I will explain PITA in the weeks ahead). Here it manifests itself in the added complexity of computing two different depreciation schedules for the same piece of equipment. The bonus depreciation allowed on a federal tax return would have to be deleted from the state return, creating an accounting headache for this and subsequent years. Makes you want to rush right out and expand your business, doesn't it?

Hunkering Down, Part Deux

Echoing themes from yesterday's post, Gary Stern, President of the Federal Reserve Bank of Minneapolis, referred in a speech this morning to the ongoing "credit crunch," which he describes as "an environment in which quality borrowers find credit either unavailable or available only on very expensive terms." This causes delays in investment projects in both the private and public sectors. Stern expects this drag on the economy to last 1-2 years.

The Fed is trying furiously to pump liquidity into the economy by lowering interest rates, but lenders are not cooperating. "Many large banks," according to Stern, "both here and abroad, have found it desirable to protect balance sheet capacity in the wake of unanticipated asset expansion and material financial losses." In other words, they are being much more cautious about originating new loans.

Once we work through this period of "dysfunctional" credit markets, Stern expects annual GDP growth of 2.5%, not exactly rip-roaring (below the 3.0-3.5% of the past 55 years). And looking even further out, he sees shortfalls of tens of trillions of dollars in Social Security and Medicare. Did you catch that? Tens of trillions! In rather dry language, Stern calls these shortfalls "unsustainable and difficult to address." Well, yeah.

Stern's advice: think about cutting back on entitlements. "If debt financed, such deficits are likely to restrain growth over time through their effects on interest rates and, in turn, the consequences for investment, capacity, and productivity. If tax financed, there could be disincentives to work and/or to invest depending on the form of the increases, and the implications for growth would likely be negative. Finally, if program benefits are to be scaled back, it is far preferable to take this step sooner rather than later so that potential beneficiaries can plan appropriately and adjust."

Time To Hunker Down

We are three years away from the next upturn in the economy. So suggests investment strategist Jeremy Grantham in a Barron's interview last week. He expects the current recession to be more severe than in 2000-2002 as we experience an overdue reversion to the mean in several areas:

(1) housing prices: they need to drop 20-25% to become affordable again (or, alternatively, incomes needs five years to catch up to prices). Houses are considered "affordable" at 2.8 times family income, and the current nationwide multiple is 3.9.

(2) profit margins: they will undoubtedly shrink from historically high levels. Private-equity firms trying to manage leveraged buyouts will be unable to service their debt. Next domino.

(3) total debt: needs to be unwound, and there is nothing the Fed can do to save it. From 1952 to 1982, debt amounted to 1.2 times the Gross Domestic Product; now it stands at 3.1 times GDP. And all that debt bought a slower growth rate.

If historical patterns hold up, stock-market investors will have some lean years ahead. The S&P 500 typically retreats during the last year of a lame-duck President's term, as well as during the first two years following a change of party in the White House. Check and check.

What does this mean for Maine? It means that the revenue shortfall forecast for the state between now and June 30 will persist throughout the next biennial budget cycle. To balance the budget, the Legislature will have to either cut government spending or raise taxes. Doing the latter would further dampen economic activity and prolong the recession in Maine.

Grantham's best line: the economy is driven by education, man-hours worked, capital investment and technology. The interview (link below) should be required reading for all our legislators.

This Credit Crisis Has a Long Way to Run - Barron's Online

Opportunity Cost of the War in Iraq

What else could we be doing with that money?

On Deck for Healthcare Reform: Rhode Island

It was a swing-and-a-miss for California last month, when the Governor's plan for universal health coverage failed in the state senate. Now Rhode Island steps to the plate. Yesterday Lieutenant Governor Elizabeth Roberts brought before the Legislature a plan to expand coverage in that state. Significantly, she stopped short of using the word "universal."

That is because universal coverage is ungodly expensive. The politic term now is "near-universal," and even that may not fly. To help fund the program, Roberts recommends both an individual mandate and a penalty for businesses with uninsured employees, measures that inflame Republicans and Libertarians. And not just them--I present Tourette's-like symptoms whenever I hear the word "mandate."

To her credit, Roberts recognizes that changes need to be made in the way care is delivered to make it more affordable. In other words, cost control must come before universal enrollment. She recommends such strategies as emphasizing primary care over emergency care, managing treatment of people with chronic diseases, and paying doctors to keep patients healthier. Her proposal would also establish a massive database of healthcare treatments, outcomes, and costs to help evaluate the efficacy and cost-effectiveness of all the surgeries and medications thrown at us these days. Do they work, and do they work well enough to justify the expense?

The cost-control programs are modeled after Vermont's health-insurance initiative, which is in its second year. The only other states to adopt comprehensive healthcare programs are Maine and Massachusetts.

Coverage Does Not Insure Good Health

If you are counting on politicians to take care of you, think again. Universal health coverage is not a panacea, nor is good health one of those inalienable human rights. It is a choice that each of us must make, as the American Heart Association again reminds us with a just-released collection of studies on hypertension.

73 million Americans have high blood pressure. That is nearly one in four, and the problem is getting worse, particularly among women. After age 60, hypertension is more prevalent in women than in men. Only 60% of hypertensive women are getting treated, and of those only one in three have their blood pressure under control (<140/80). So what is the big deal, you ask? The big deal is that hypertension is a serious risk factor for heart disease and stroke.

Cardiovascular disease is the leading cause of death among women in the U.S., yet most women don't realize that. Only one in eight view it as a personal health issue. Before asking for HillaryCare, they should face the facts and take personal responsibility for their health through proper diet and exercise. And that goes for you too, gentlemen.

One of the AHA's studies focused on adults in Jackson, Mississippi--specifically on the prevalence, awareness, treatment, and control of hypertension in a largely African-American population. It was found that lack of health insurance was only marginally associated with poorer control, whereas use of preventive care was positively associated with prevalence, awareness, and treatment, particularly among men. Got that? Prevention trumps coverage. The same study found that comorbidities (diabetes, chronic kidney disease, and cardiovascular disease) correlated with hypertension prevalence. The common risk factor appeared to be obesity.

Given the fragmented delivery system now in place in the U.S. (not to mention the high-risk population), a national healthcare plan is likely to be more expensive than we could possibly afford. A national plan should emphasize the availability and continuity of primary care promoting awareness and prevention. Those who feel entitled to cost-sharing should also be willing to share in managing the risk through their own personal behavior.

You Mean We Actually Have To Count 'em?

Huckabee protests Washington caucus results
In my Jan. 12 post I gave us credit for being, if not a first-rate democracy, at least a banana republic. Miracle Mike thinks our inability to get the vote-count right makes us worse than that. In a TV interview this morning, he downgraded us to Soviet-bloc satellite state. Ouch!

He also threatens to call in a posse of lawyers, who seem to be getting a lot of work these days, what with all these contested elections, bankruptcy proceedings, shareholder suits, congressional hearings, regulatory investigations, insurance-policy cancellations, celebrity divorces, etc. etc. Who says complacency rules the land?

Back to the Future

It was not only the era of muckraking; it was also a crucial period of transition, wrote Scott Nearing about the U.S. in the years leading up to World War I. "There was no radio or television in those days to divert and entertain. People were anxious to hear public questions discussed and debated in the lecture hall."

A similar restlessness was on display in Maine yesterday as tens of thousands of Democratic voters plowed through winter weather to attend presidential caucuses. Here in the River Valley, nearly 200 from seven towns packed the lunchroom at Mountain Valley High School. Many had never caucused before and had the hyper-alert, wary looks of school kids on their first day, determined to get up to speed quickly. Imagine their consternation when they discovered that there were no paper ballots.

Caucuses, they found, are cumbersome. Some first-timers were undoubtedly looking for drive-thru convenience; get in, get out, and get to where you gotta go. But party organizers had an expanded agenda. They wanted voters to stay a while, chat, meet local candidates, sign petitions, leave campaign contributions--in general, to get a good whiff of participatory democracy. The vets were giddy about the turnout.

There was even time enough for some people to change their minds about a preferred candidate. In my group an 8-to-7 split for Obama became 8-to-7 for Clinton when a young couple came to consensus, the husband deferring to the missus. Makes you wonder if they had discussed it much at home beforehand. If they and others talk about it some more afterwards, then the caucuses will have succeeded.

By the way, the River Valley towns went roughly 5:4 for Clinton, at odds with the statewide tally of nearly 3:2 for Obama. Elsewhere, in the more urban precincts, lines were out the door. Surveying the clumsy logistics in Portland, Maine House Speaker Glenn Cummings conceded that "the caucuses are not prepared for this level of capacity. It does make a case for primaries or absentee balloting." Perhaps the caucus will go the way of that uptown restaurant of which Yogi Berra once said, "Nobody goes there anymore, it's too crowded."

Red Bull, Anyone?

The bill passed Thursday night by Congress will do little to stimulate the economy. American consumers will play it smart this time. According to a survey by financial firm UBS, three in four will use their rebate checks either to reduce debt or to increase savings. Only one in four will "pass it on" by spending. Put away the radar guns; that cash is screeching to a halt.

Never mind, the real reason for the warp-speed congressional action was something else. Home values are spiraling downward, threatening a whole pyramid of lenders and investors--not to mention the borrowers who now have negative equity in their houses (i.e. outstanding mortgage balances that exceed current market values). The "stimulus" bill seeks to stabilize values by expanding the reach of the federally chartered mortgage companies known as Fannie Mae and Freddie Mac. Loan limits will be ratcheted up from $417,000 to as high as $729,750.

But wait a minute. The GSEs are designed to "expand affordable housing," according to the mission statement posted at the Fannie Mae website. So how is that mission served by enabling Fannie and Freddie to scoop up jumbo mortgages on properties built and priced during a speculative bubble in the real estate market? It isn't, says James Lockhart III, head of the Office of Federal Housing Enterprise Oversight, who tried to explain to the Senate Banking Committee on Thursday that taking on jumbo mortgages could actually divert money away from less expensive housing. After all, Lockhart pointed out, funding one $600,000 mortgage takes as much capital as three $200,000 mortgages. Alas, that logic was dismissed.

Taxpayers, who ultimately guarantee GSE loans, are being enlisted to re-liquefy a seized market. The cynics among us might suggest that this is crony capitalism at work: gains are privatized, losses socialized. It works for Wall Street insiders. Heads they win, tails we lose.

McCain Plays Hooky, Stimulus Plan Bogs Down

A single vote could have made the difference yesterday. A coalition of Democrats and moderate Republicans, 59 in all, were ready to vote on an economic-stimulus package in the U.S. Senate. One more Senator was needed to end the debate, and that turned out to be the one not in attendance, John McCain. The Straight-Talk Express was parked on a siding somewhere, his campaign coming before country.

You see, McCain is trying to sew up the Republican nomination for President. To do that, he needs to mollify conservatives in the party, something he hopes to accomplish by attending the Conservative PAC Conference beginning today in Washington. But how do you walk into such a gathering having just voted in favor of a 12-figure spending bill?

Taking a stand against the bill would be risky as well, for tens of millions of voters have already spent (at least in their minds) the election-year handouts offered by the House last week. Wouldn't they be pissed if John took the money back! So McCain did what any self-respecting politician would do in similar circumstances. He ducked.

Wanted: a graffiti artist to change the logo on that train to the Keep-Talking Local.

[7:30 p.m.]
P.S.--Since posting the above earlier today, I see where Mitt Romney, the putative "conservative" in the GOP race, has suspended his campaign, clearing the way for McCain to return to the Senate chamber to support a $170 billion stimulus bill. What conviction!

Follow-up: Maine Piles On

Treasurer Lemoine Congratulates City of Springfield. So reads the banner posted at maine.gov last Friday as the Treasurer of Maine leads the cheers for all those lawyers seeking restitution from Merrill Lynch for trafficking in subslime securities. Forgive Mr. Lemoine for getting emotional. After having his pocket picked by Merrill last summer, our CFO needs all the help he can get. "The Maine State Treasurer’s Office," trumpets Lemoine, "continues working with both the Maine Attorney General and the Maine Office of Securities to support their investigation into details of the Mainsail II investment." In other words, he is on the case, or they are, or maybe somebody is.

Let us hope Maine is not too late. A credit analyst for Standard & Poor's has issued a warning today that Merrill may be in big trouble. "Bond insurers are suffering as a result of their roles as guarantors of mortgage-related securities, and downgrading them could affect all markets in which they are active, including the municipal bond, commercial mortgage-backed securities, and other structured finance areas," Tanya Azarchs wrote in a note to investors. "In turn, dislocation in those markets could affect banks."

Merrill is the bank most at risk. The company thought it had hedged its CDO positions with guarantees purchased from bond insurers. But the insurers themselves are being overwhelmed by a perfect storm of credit defaults. Expect even more write-downs in the months ahead as Merrill is forced to eat it losses.

After the lawyers get their share, one wonders if there will be anything left from the carcass for aggrieved investors.

Fuel Oil With Zero BTUs

Who would buy the phantom fuel? Actually, anyone prepaying for future delivery runs that risk. A fixed-price contract for heating oil works for the consumer only if the product is delivered when needed. If the dealer goes out of business prior to delivery, then the consumer is S.O.L. He would have been better off burning his money instead.

With the volatility in energy prices these days, a fixed-price contract seems a lose-lose proposition. If oil prices go down between payment and delivery, then buyer's remorse sets in ("geez, I overpaid last August"). But if prices go up, then the dealer gets squeezed, jeopardizing service. "It never occurred to me that, by signing a prepayment contract, I was placing all my money at risk," says a Saco landlord in today's Portland Press Herald.

The landlord goes on to suggest that the state should be monitoring business activities more closely to protect consumers. I disagree. Adding more state regulation means increasing the burden on taxpayers, who in this case would be enlisted to partially subsidize the delivery of heating oil. Even worse, the state would be collaborating in a price-fixing scheme that is ultimately self-defeating. Free markets exist to match supply and demand, and prices need to fluctuate freely to work.

Champions of a nanny state have forgotten the age-old dictum: caveat emptor. Besides, there is a whole class of hired guns ready to sue on the consumer's behalf for breach of contract. They are called vult...um, lawyers.

Wardrobe Malfunction? Not For the Giants

The Super Bowl is all about what to wear (or not). So tell me that Eli Manning was not wearing something made of Teflon, nor David Tyree something of Velcro. How else can we explain that last-minute pass play? Because of it, the 2007 New England Patriots are now dismissed as impostors and Tom Brady as just another Tony Romeo.

Get a grip, Pats fans, and put away the black. This was still a great season. The team was attempting to run a marathon at sprint speed, wire to wire, and they were seconds away from doing just that. The league is built for parity, and the game is played by human beings (not automatons) with a ball that is not round. Sometimes the difference comes down to a crazy bounce or a fuzzy rule. That's just the way it is.

One more fashion note: it has been suggested that Coach Belichick's red hoodie may have affected the outcome (too much yin, not enough yang). That garment has in all likelihood been incinerated. Incidentally, Bill should get over his sense of entitlement and accept that games are supposed to be fun and that opponents deserve a bit more respect. His stalking off the field prematurely was the larger disappointment for this fan.

D.O.A.: The President's FY2009 Budget

Welcome to OMB
If Dubya gets his way, the U.S. will spend over $3 trillion in a single year for the first time ever. Trouble is, revenues will fall at least $400 billion short. Such a deficit would represent 2.9% of GDP, well above the 40-year average of 2.4%. That's OK, we'll just keep borrowing from the Chinese.

Updates on Health Care, Investment Losses

Repeat after me: health care in the U.S. is expensive. And if you want the government to buy it for everyone, get ready to dig deep. According to this morning's Boston Globe, Massachusetts Governor Deval Patrick is wrestling with revised projections for the state's new Commonwealth Care program, which partially subsidizes insurance premiums for individuals who are now without coverage and not eligible for Medicaid. Guess what--those subsidies are going to cost more than originally thought.

It seems that officials underestimated both the number of uninsured out there and the average subsidy for each. Multiply those two factors together, and you get some serious upside. A program that was supposed to cost $725 million by FY 2011 will likely run closer to $1.35 billion, with an average subsidy approaching $4,000 per enrollee. California senators did the math earlier this week and decided thanks, but no thanks (see my Jan. 29 post). Governor Patrick hopes the feds will come to the rescue, but good luck with that.

Merrill lynches two brokers. In the aftermath of the Springfield CDO scandal (Feb. 1 post), Merrill Lynch has fired two brokers who sold the risky investments to the city last spring. Merrill has no choice but to portray the two as rogues who strayed from company policy. But you know and I know that these guys were only doing what they were trained to do. Otherwise they would have been fired months ago.

Merrill is sweating bullets these days, hoping to contain the damage. But lawyers are circling (and I hope Maine's Attorney General is one of them), intent on demonstrating that Springfield is just one of many wronged clients. Also circling are some very smart bond traders, who are selling short the credit not only of Merrill, but of the other mega-brokers as well. Think of it. Merrill Lynch, the bullish icon of American prosperity in the latter half of the 20th century, may be going under. Like the Titanic, it was not too big to fail after all.

As for the two scapegoats, they are probably typical of the young dudes that brokers hire all the time (for little or no pay on a probationary basis--remember Will Smith in The Pursuit of Happyness?) simply to harvest their address books. My brother worked briefly in the early '80s for a Denver broker named Blinder, Robinson & Co., which specialized in penny stocks. He made plenty of cold calls and was eventually parted from his client list: he went, it stayed.

My brother went back to being a carpenter, joking afterward that he had worked for Blind 'Em & Rob 'Em--a suitable nomer not just for that firm, but for all the financial engineers who have made careers out of pyramiding wealth rather than creating it. Blinder, Robinson & Co. eventually collapsed amid investigations of securities fraud, and founder Meyer Blinder ended up in the slammer.

Merrill Lynch is now the subject of multiple investigations. Stay tuned.

Springfield Gets Its Money Back--What About Maine?

Merrill admits to at least one screw-up. Wall Street brokerage Merrill Lynch & Co. late yesterday agreed to reimburse the City of Springfield (MA) for nearly $14 million in risky investments which its brokers sold to the city last spring and which have since lost 90% of their value. The announcement caught my attention because (a) I grew up in Springfield's suburbs and (b) Merrill created a similar mess in Maine. You will recall that last July Maine's Treasurer was suckered by Merrill brokers into sinking $20 million from the state's cash pool into the infamous MaineFail fund. Oops, did I say MaineFail? I meant MainSail.

Yesterday's deal means that Merrill will repay the city for all its holdings in collateralized debt obligations, plus another 200 grand in legal fees incurred by the city since. The city agrees not to pursue a threatened lawsuit against the firm. However, Massachusetts Attorney General Martha Coakley and Secretary of State William Galvin will continue their investigations, so Merrill is not out of the woods yet.

It remains to be seen whether Maine can extract a similar settlement. Springfield was in a strong position because Merrill had purchased the CDOs on the city's behalf without actually telling city officials until months later. Massachusetts law limits the investment of municipal cash to conservative instruments. Similarly, the primary investment objective for Maine's cash pool is the protection of principal, an objective that was poorly served when MainSail's assets were frozen in August.

In Maine's case it appears that the State Treasurer had an opportunity to perform some due diligence before signing off on the MainSail investment being pushed by Merrill. But that's OK, he has promised that it won't happen again, ever.