These Lips Are Not For Reading

"Read my lips," said Republican presidential nominee George H. W. Bush 20 years ago, "no new taxes." The man got himself elected largely on that pledge, then was dismissed by the electorate four years later after, you guessed it, raising taxes. It was an infamous, though hardly unprecedented, example of saying one thing and doing another. Happens all the time in American politics.

And also in American finance. Two weeks ago Merrill Lynch's Chief Executive Officer, John Thain, reassured investors in Tokyo that his company had no plans to raise further capital, that the $12 billion already obtained from sovereign wealth funds would suffice. At that moment Merrill's Chief Financial Officer, Nelson Chai, squirmed in his seat. Chai knew the numbers, which have no lips and thus do not lie. "I wish he didn’t say that," Chai said later of Thain's remark.

Chai's caution was understandable in light of last Thursday's earnings update (see my April 18 post). Despite the reported losses and writedowns, Thain insisted that the firm is "well-capitalized" and that "we do not have any plans to raise any additional common equity, and Nelson actually agrees with that"--at which point Chai squirmed again. During the Q & A segment of the conference call, a Citigroup analyst pressed Thain on the possible need for additional capital. No problem, said Thain, who pointed out that the $12 billion already raised exceeded losses in 2007 by $4 billion. "That capital, that excess capital, was intended to reassure the market that we didn't have to come back into the equity markets and it'd give us the capital base to go forward into 2008. And that continues to be the case."

Given Thain's hope for restored profitability in 2008, Merrill's stock was up on Thursday and Friday. It retreated this morning, however, after the company's announcement of a preferred-stock offering at 8 5/8%. Oops, so much for Thain's reassurances. One wonders if his loose lips in recent days might provoke more shareholder suits. Meanwhile, bean-counter Chai continues to fret over Merrill's balance sheet and the $44 billion of debt maturities coming due in 2008. "We obviously continue to roll commercial paper and repo [repurchase agreements]," said Chai during the conference call.

How long can the juggling continue? Merrill is lunch, in my opinion.

[update, April 24:]
Merrill Lynch announced today that it will continue to pay out a quarterly dividend of 35 cents a share to holders of common stock. No matter that it is rolling over short-term debt at 6% and offering preferred stock at almost 9%. The dividend, which makes no sense from a business standpoint, is obviously meant to buy investor confidence.

[update, May 6:]
Minyanville's Bennet Sedacca has an updated scorecard on the need for new capital and the prices being paid by troubled Wall Street firms:

They just keep coming and coming and coming.
Legg Mason, Fannie Mae, Freddie Mac, Fifth Third, Citigroup. I'm hearing JPMorgan too.
Insurance companies are gobbling up this paper, but at some point they'll say 'no mas'.
What seemed 'cheap' at 7% is now getting done at 9%.
They're on their way to 12%. Or until companies just can't justify paying those yields and start cutting dividends and selling common stock.
As they should.

It Ain't Over

Has it really been three weeks since I last made fun of Merrill Lynch? Well, I am back to fix that. Merrill reported first-quarter earnings yesterday, and it was another disaster. The third-largest investment bank lost almost two billion dollars, compared to a profit of over two billion in the year-ago quarter. It was the firm's third straight quarterly loss. Another $6.8 billion was written off for troubled assets (CLOs and mortgage-backed securities for those of you keeping score), raising the nine-month total to over $30 billion. Money heaven is running out of room to keep all that wealth.

Still, Merrill's CEO said that he was "optimistic" about the remainder of 2008. His remarks harmonized with those heard earlier this week from the CEOs of JPMorgan Chase, Lehman Brothers, and Goldman Sachs, all of whom sang the same tune: the worst of the credit crisis is behind us. This was music to the ears of Wall Street investors, who bid up stocks all week.

Don't be fooled. Nobody's dancing at Merrill, where 4,000 employees will be laid off. Today Citigroup (Q1 loss of $5 billion and write-downs totaling $12 billion) compounded the damage by announcing lay-offs of as many as 6,000. Add another 5,000 at Goldman and 7,000 at Bear Stearns, and pretty soon you're talking about some serious unemployment--over 30,000 up and down Wall Street.

The cheerleading by overpaid executives is a pathetic attempt to buoy investors' confidence and somehow to disrupt the negative feedback loop that threatens to take the financial sector down. The fact is that all these firms hold impaired assets for which there is no market. These collateralized debt/loan obligations--little more than cleverly formulated perfumes to mask the stench of worthless loans--amount to "your basic, garden-variety nuclear waste, which isn't trading," points out Minyanville's Bennet Sedacca. "So how you can you say the crisis is over when the market is frozen? To me, it will be over only when all of this garbage trades, defaults and clears the market. Not until."

So much for the banks on Wall Street. How about the ones on Main Street? On Wednesday Wachovia announced a quarterly loss and slashed its dividend. Particularly ominous were remarks during the conference call by Wachovia's Chief Risk Officer, Don Truslo, who noted that even their most creditworthy customers are abandoning upside-down mortgages. "When a borrower crosses the 100% loan to value," said Truslo, "their propensity to just default and stop building their mortgage rises dramatically and, I mean, really accelerates up." The bank's risk models did not see that one coming, so capital is being hoarded to boost reserves. That means less for business investment, which spells S-L-O-W-D-O-W-N.

At least Wachovia has a Chief Risk Officer. Merrill finally hired one of its own, but only after the sh-sugar hit the fan. And if Merrill wants me to stop picking on them, all they have to do is give Mainers our $20 million back.

Quick Hits: Slots, Minimum Wage

Not on my watch, said Governor John Baldacci yesterday as he vetoed legislation to allow slot machines on Indian Island, the Penobscot reservation near Old Town. Baldacci insists that gambling is too important an issue for mere legislators to decide. In his view, a new gambling venue should be created only through a ballot initiative passed in a statewide election, such as the 2003 referendum that allowed the Hollywood Slots racino in Bangor. The message to Native Americans: get your own referendum. Any exception to the referendum process, in the Governor's words, "sends Maine down a perilous path, fraught with risk of unfair, arbitrary treatment among future gaming proposals."

His logic escapes me. The slippery slope was created when Maine first introduced a lottery in 1974. That was when Maine voters decided that gambling was OK. All regulation since then has been "unfair" and "arbitrary." I may be running against her, but I agree with Representative Sheryl Briggs of Mexico when she sees discrimination against the Penobscots. "What gives us the right to tell them no?" she asks.

The "path" that we are on right now leads us to annual referenda on specific gambling proposals. Last year it was a casino in Washington County; this year it's one in Oxford County. Let's stop cluttering our ballots ad eternam and settle the question once and for all. Either gambling is allowed anywhere in Maine, subject to local approval, or it is allowed nowhere in Maine, in which case we dispense with the Maine State Lottery. It is a matter of fairness and consistency.

Raising the minimum wage gets votes, but is it the right thing to do? The State Legislature on Friday gave initial approval to a plan to raise Maine's minimum wage from $7 an hour to $7.50. Setting a minimum wage is a form of price control (in this case the price of labor), and government has never been good at price controls. Artificial prices interfere with free-market pricing and are ultimately self-defeating. Wages propped up by fiat eventually lead to fewer jobs.

According to U.S. Census data, over 98% of employees whose wages would be increased by this proposal live with working parents or relatives, live alone, or have a working spouse. Less than 2% are sole earners in families with children, and each of these sole earners has access to supplemental income through the federal and state earned income tax credit (EITC). Economists generally agree that the EITC is a better way to target resources at poor families than boosting the minimum wage.

Politicians jumping on the minimum-wage bandwagon will argue that rising wages are needed to counteract inflation in the costs of food, energy, and housing. But will they lower the minimum wage when deflation sets in (as I believe will happen in the coming depression)? Not likely. Ultimately, the ones best able to determine the fair price of labor are employers and employees freely negotiating between themselves.

Pigging Out Is All Too Human

Be careful what you wish for, the saying goes, because you just might get it. So what is so bad about wishing for food? Can't survive without it, right? Throughout human history survival meant successfully finding food--and packing it in when you finally found it. Days of gluttony would get you through weeks or months of scarcity. You became adept at identifying and favoring energy-dense foods. At the end of the day, you burned enough calories hunting and foraging that you never worried about crushing your bathroom scale.

But that was then. Or maybe now, just not here. In 21st-century America a huge caloric imbalance has come to exist, with more energy consumed than expended. And the imbalance is killing us. Two-thirds of American adults are at least 20% over their ideal body weight, an ominous statistic since obesity is a risk factor for diabetes, heart disease, and stroke. What's worse, their kids are being groomed to follow along. "This generation of children," says Yale Psychologist Kelly Brownell, "may be the first in American history to live shorter lives than their parents."

Blaming folks for a lack of willpower, according to Brownell, misses the point. He argues that we are genetically programmed to prefer dense diets. Our bodies still think scarcity even though we live in an age of abundance. Add to that an economic system that strives for surplus and capitalizes on consumption, and you have a recipe for excess. Brownell suggests that we address the problem of overeating the same way we do tobacco consumption: regulate product advertising (especially to children), raise student awareness in public schools, and tax empty calories.

Some may think that a public-policy approach may be too heavy-handed. But if we are looking for ways to share or socialize the costs of healthcare, then we also must make a collective commitment to manage risk. Let me say it another way. If you want society to pay your medical bills, then you have to do your part by adopting a healthy lifestyle. Of course you are free to choose prehistoric pig-outs. Just don't ask the rest of us to pay for the consequences. "Eat less and exercise more," says Arthur Frank, medical director of the George Washington University Weight Management Program. "You cannot violate the laws of thermodynamics."

For more on Kelly Brownells' work, check out:
The Belly of the Beast

Making Money the Old-Fashioned Way (Not)

Remember the old Smith Barney commercial? "We make money the old-fashioned way," a dignified John Houseman solemnly asserted to the camera, "we earn it." He enunciated with such gravitas (we UHR-RN it!) as to signify peerless professionalism and unstinting performance--earnings into eternity. You just knew that it was safe investing with him.

He may just as well have been speaking for General Electric, a veritable icon of American ingenuity and industrial engineering. But the U.S. economy has evolved during the years since the Houseman ad. This morning we got a reminder that GE, like so many American companies, has been juicing earnings by straying from its roots. It doesn't just make stuff anymore; it also plays with its excess cash, hoping to boost the bottom line with vigorish. It has become a financial company in drag.

GE's first-quarter earnings came up light. Net income fell by 5.8% compared to a year ago even though revenue grew by 7.8%. How can that happen, you ask? Answer: only through a markdown in paper assets--or, in the words of Chairman and CEO Jeff Immelt, "higher mark-to-market losses and impairments" in the financial-services side of the business. In truth, GE's global infrastructure business peformed admirably, with revenue up 23% and operating income up 17%. But when your betting operation turns south, you suffer.

GE's stock is getting hammered today, off over 10%, largely because of its tepid guidance for coming quarters. But it is not just GE investors who should be concerned here. If a triple-A credit like GE is struggling, then imagine what will happen to other companies who made money by financial legerdemain and not by earning it. Profits will vanish, as will the corporate tax payments they generate. State governments used to receiving their piece of the action will continue to see revenue shortfalls. Taxpayers will have either to ante up or to lose programs.

Meanwhile the Wall Street firms who specialize in financial alchemy are still at it. The Wall Street Journal reports this morning that Lehman Brothers has repackaged $2.8 billion in unsold debt--stuff that no one wants--into a collateralized loan obligation called "Freedom." The new debt securities issued by Freedom have been given investment-grade ratings by Moody's and S&P, qualifying them to be offered to the Federal Reserve as collateral in exchange for U.S. Treasuries through the Fed's new Primary Dealer Credit Facility. That's the way to do it, as Mark Knopfler sings in Money For Nothing.

Governor Proposes Increased Funding for Bridges

One bridge in seven in Maine is structurally deficient, according to data gathered by the Federal Highway Administration in 2007. This compares to a nationwide average of one in eight. To address the problem, Governor John Baldacci yesterday submitted a bill to the Legislature that would raise an additional $40 million a year through increases in fees for motor vehicle registrations, titles, and vanity plates. The new revenues would boost spending on bridges to over $100 million annually.

Car registrations would jump 40% from $25 to $35. Reviewing registration fees in other states, one cannot easily determine whether the new fee in Maine would be above or below average. Some states charge a flat fee, while others have sliding scales based on vehicle weight, age, horsepower, or sticker price. Comparisons are apples-to-asparagus, at best. While a fee proportional to vehicle weight makes sense--after all, heavier loads have greater impacts--such a fee is better collected at the pump, where fuel usage captures both weight and miles driven.

35 bucks seems cheap to me. Last fall Delaware doubled its fee from $20 to $40. California Governor Arnold Terminator wants to go from $41 to $52, Wisconsin DOT from $55 to $80. Colorado Governor Bill Ritter has floated the idea of a one-hundred-dollar increase. Triple-digit registration fees, I predict, will be commonplace within five years.

And for good reason. As long as we pour hundreds of billions of dollars into securing and rebuilding Iraq and trillions of dollars into treating and managing lifestyle diseases, we will not have enough left to restore our transportation infrastructure without new user fees. Massachusetts Governor Deval Patrick wants to borrow to build now and figure out the revenue sources later. This morning he is unveiling a $3.8 billion bond proposal to repair more than 400 bridges over the next eight years.

Governor Patrick points out that aside from the issue of public safety, the initiative will create jobs during an anticipated economic downturn. We should be doing the same in Maine: putting people to work in order to pave the way to future prosperity.

Chalk Up Number 3

This Jayhawk fan is smilin'. Last night the University of Kansas men's basketball team erased a nine-point deficit with two minutes remaining in regulation, forcing overtime and eventually pulling away from Memphis to claim its third NCAA title ever.

I joined the Jayhawk fan flock as a grad student in 1971-72. Even then Kansas was a storied franchise, with such celebrated alums as Clyde Lovellette, Wilt Chamberlain, and Jo-Jo White and a coaching succession going back to the game's creator, James Naismith. They were coming off a Final Four appearance in 1971, and the highlight of my season in Lawrence was a 50-point blitz by All-American Bud Stallworth against arch-rival Mizzou in the season finale. There was no three-point arc then. Bud was throwing up heat checks from all over the court, and making them. I have been bleeding K.U. blue ever since.

Title Number Two came twenty years ago when Danny Manning carried a dark-horse Kansas team to an upset over favored Oklahoma in the championship game. The first half of that game was played with as much energy as you will ever see in a basketball game, with each team scoring fifty. This year's team brought similar intensity to the Final Four, nearly running a very good North Carolina team out of the gym in the first fifteen minutes of their semifinal. They did it with hyper-alert help defense and breakneck transition. That same ferocity eventually wore down Memphis in the final. The Tigers had no legs at the end and could not hit their shots.

"That's a T-E-A-M, if I've ever seen one," writes the Boston Globe's venerable hoops guru Bob Ryan. Indeed, teamwork has been a trademark at Kansas since forever. This year's edition can be viewed as the Clydesdales of the tournament, pulled together by pedigree, practice, and purpose, perfectly harnessed. Such is the esprit de corps at Kansas that very few players leave early--Paul Pierce, Drew Gooden, and Julian Wright (who would have been a junior on this year's team) are the only ones that come to mind. The Jayhawks seldom want for senior leadership.

So what happens now? First of all, expect a lot of newborns named Mario in the Sunflower State soon after New Year's Day 2009. As for the basketball program, rumors are flying that Coach Bill Self will move on to his alma mater, Oklahoma State, and that Brandon Rush and Darrell Arthur will follow Wright into the pros. We'll see. Sad it would be if rock-solid Allen Fieldhouse were to be retrofitted with a revolving door.

Privatizing Gains, Socializing Losses

Will homebuilders get a mulligan? That's golf-speak for a do-over. When a golfer hits a truly horrendous shot, his buddies (once they get done laughing) might graciously ignore his shot, pretend it never happened. He gets to hit again from the same spot without a penalty--a mulligan.

The U.S. Senate wants to grant a similar reprieve to two industries that conspired to create a bubble in housing. Builders and lenders made fat profits for several years by putting up houses faster than Americans could occupy them. It got to the point where houses were bought not for mere shelter, but for the prospect of resale at a higher price. Why bother moving in when (a) you already had a decent home and (b) you were just going to flip the property anyway? Easy money created by the Federal Reserve led to an artificial demand and, eventually, an over-supply of unaffordable homes.

It was a train wreck in slow motion. We all knew the pace of building was unsustainable, but the lenders kept lending and the builders kept building. The activity served no useful social purpose, but dished up immediate profits. Company executives got mega-salaries and stock options. Investors saw rising share prices, and Uncle Sam collected rising corporate tax payments. Short term, steroids are awesome.

Now come the consequences. Homebuilders and mortgage lenders are reeling from a falloff in demand and the failure of borrowers to keep up with their payments. For these companies, the bad news that they are now losing money outweighs the good news that, hey, at least they don't have to pay income taxes anymore. But wait, Congress has a solution in the Foreclosure Prevention Act of 2008: how about if we refund to these companies the taxes that they paid when times were good!

That's right, we will expand the so-called "tax loss carryover," an accounting tool by which companies are allowed to deduct net operating losses retroactively against earlier profits. Ordinarily companies can reach back two years to erase earlier profits (hence, earlier tax liabilities), but the Senate bill hashed out on Wednesday would double that to four years. Lobbyists had failed to get the new provision included in the economic stimulus bill passed two months ago. But lobbyists are nothing if not persistent. Only once before, in the wake of 9/11, has Congress extended the carryover timeframe.

This is yet another case of taxpayers bailing out risk-takers, this time to the tune of $6 billion. In the words of Minyanville's Fil Zucchi, "if ever there was an action that should undermine investors' confidence in the U.S. market system and reinforce the view that the government exists to grease the palms of those who pay their way into influencing the government, this is it."

What's In Your (Candidate's) Wallet?

"Clean" money has its own agenda. If my candidacy accomplishes nothing else, it may at least disabuse you of the notion that public funding of political campaigns somehow purifies the process. No matter where it comes from, money is money. By itself it is neither "clean" nor "dirty." It is a means toward an end, a means by which people motivate and influence each other. More money means more influence.

The State of Maine spends about $6 million each election cycle in public financing of campaigns for the Legislature. Of the 305 House candidates who have registered thus far in 2008, 258 are seeking public financing (about 85%). The intent of the Maine Clean Elections Act is to level the playing field by limiting campaign expenditures and equalizing contributions, thereby empowering ordinary folks who might not otherwise have the resources to run.

If every candidate were required to run "clean," then the field would indeed be level. But such a requirement would be an unlawful abridgment of a candidate's First Amendment rights. So privately financed campaigns are still part of the political landscape, and any spending limits pertaining to these are strictly voluntary. It is still possible for a candidate to outspend his opponent and for "outside" money to impact a race.

But even a "clean" system can be gamed, and Maine's Democrats have shown that they are quite good at it. Of the 154 Democrats seeking House seats, 146 want house money (95%), compared to 75% of Republicans, 70% of Green-Independents, and 67% of Unenrolled candidates. If you are a Democrat thinking about running, you will be directed by party leaders to the public trough.

Let's look at our local House District as an example. LD 93 serves the towns of Mexico, Dixfield, Peru, Canton, and Carthage. The seat became vacant last August, prompting a special election. Democrats and Republicans had one month to hold their caucuses and nominate their respective candidates for the November election. The Democrats picked a first-timer named Sheryl Briggs and within 48 hours had her seed money of $500 taken care of: $100 from Speaker of the House Glenn Cummings (of Portland), $100 from Rumford Rep. John Patrick, $50 from House Majority Whip Sean Faircloth (of Bangor), $50 from County Sheriff Wayne Gallant (Rumford), $40 from Roy Gedat (Norway), and the other $160 from contributors residing in the district.

Think of it. Two-thirds of Sheryl's seed money came from outside the district. To whom does she owe her loyalty? How about to career politicians with future plans. Cummings is posturing for a gubernatorial run, Faircloth would like to be the next Attorney General, and Patrick is running for County Commissioner. These guys are players. When they tell Sheryl to jump, she will ask "how high," not "what for?"

Counting her seed money, Sheryl spent almost $8,000 on a ten-week campaign. She was authorized by the Ethics Commission to spend $7,495.18 of public funds; of that, she spent $7,493.99 and returned $1.19 to the MCEA kitty. This year she will do it all over again. I expect to spend much less, and none of it will be taxpayers' money.

Tug of War Over Lehman's Stock

Some see a white flag, others a red cape. Late yesterday afternoon Lehman Brothers announced a stock offering to raise up to $4 billion. This is usually considered a sign of trouble for a seasoned company such as Lehman, which has repeatedly denied over the past several months the need for fresh capital. While yesterday's move was not telegraphed by management, it was anticipated by speculators.

Check out the chart above, which tracks Lehman's stock price over the past year. See that downward spike about two weeks ago? Option traders were frothing at the company's prospects, halving and then doubling the share price in a 48-hour period. Newbies tempted to swim with the sharks got a serious case of whiplash.

Strangely, Lehman reiterated its mantra of "no problem" even as it announced its offering. Chief Financial Officer Erin Callan insisted that the capital was not needed to offset the impacts of write-downs or losses. Rather, the deal was meant to end questions about the bank's balance sheet--to restore investor confidence, as it were. "We have not changed our view on our real need for capital, but we have changed our view from a perception perspective," Callan told Reuters. In effect, the firm is double-daring speculators to press their bets.

Lehman is issuing convertible preferred stock that will pay quarterly dividends at a rate of 7.25% per annum, a cost of capital more favorable than that obtained by either Citigroup (11%) or Merrill Lynch (9%) in earlier deals. Holders will have the option of swapping the preferred for common stock at an initial conversion price of just under $50 a share. Should Lehman's stock recover sufficiently to trigger conversions, shareholder equity will be diluted by as much as 20%. For that reason, the common stock should be selling lower today. However, LEH is opening up 10% as I post this, indicating that short-sellers may be covering.

Lehman may be safe for now, but see how times have changed. Six months ago Lehman was offering to buy back stock at $65 a share. Clearly management has revised its idea of what the company is really worth. For preferred shareholders, the risk is minimal. They get paid to wait and are first in line if the company is forced to liquidate. And the short-sellers will be back. Says one: "How can we have confidence in a firm that just diluted shareholders who have been just obliterated in the last year?"

Could Merrill Be Takeover Bait?

A picture is worth a thousand words. And the picture above shows billions of dollars in lost equity for owners of Merrill Lynch stock. The graph traces the price of a share of Merrill's common stock over the past year. If you are a shareholder, you like to see that line move higher from left to right. Merrill's chart is doing just the opposite and is good only for short-sellers, who have sold borrowed shares at a higher price with the intention of buying them back lower.

Regular visitors to this page know that I like to beat up on Merrill. After all, they are the company that sold Maine $20 million worth of toxic commercial paper last summer. Treasurer David Lemoine has since had to write off that entire amount, hoping with fingers crossed that some of that investment is eventually recovered. Meanwhile Merrill, unable to sell more than a fraction of all that risky merchandise that it helped create, has plenty on its own books.

Another investment bank, Bear Stearns, is right now biting the dust. The last remaining order of business is to figure out what the outstanding shares are worth. JPMorgan Chase tried to pull a fast one earlier this month by offering just $2 a share. When angry shareholders speed-dialed their congressmen, the offer was upped on Monday to $10. The very next day Papa Bear Jimmy Cayne, Chairman of the Board, figured that was all the honey he was likely to get, so he dumped all of his 5.6 million shares at a price of $10.84. The proceeds of over $60 million may sound like a lot, but those shares were worth almost $1 billion before credit markets started collapsing in August. Before you start feeling sorry for ol' Jimmy, understand that he was off playing bridge when the run on his bank began. That got him fired as CEO.

The day after Jimmy cashed his chips, rumors were swirling on Wall Street that Lehman Brothers would be the next investment bank to fall. I have a passing interest in Lehman because the CEO, Richard Fuld, was three years ahead of me at Wilbraham Academy. Hopefully Dick has his golden parachute already fabricated and fitted. He has just enough time left to strap it on.

So what about Mother Merrill? This morning Massachusetts Secretary of State William Galvin announced yet another investigation of the firm, this time for the sale of auction-rate securities. "My office has received calls from people who thought they were investing in safe, liquid investments," Galvin said in a statement, "only to find that they had, in fact, purchased auction-market securities that are now frozen, and they cannot get their money out"--exactly what happened with the MaineFail, um, MainSail investment. Meanwhile, back at corporate HQ, the writedowns that began in the third and fourth quarters of 2007 will probably continue for another quarter or two. A falling stock price might entice a foreign buyer, who could touch up those old TV ads proclaiming that Merrill Lynch is bullish on... Brazil?

How Many Legislators Do We Need?

Consolidation is supposed to save Maine money. So, says Governor John Baldacci, let's reduce the number of school districts, the number of administrative agencies, and the number of jails. But why stop there? The case can be made that there is one other public entity with too many people: the legislature.

The Maine statehouse currently has 35 senators and 151 representatives. The total of 186 legislators ranks Maine 10th among the 50 states, even though Maine is 40th in population. The nationwide average is over 40,000 citizens for each state legislator; in Maine the number is 7,081. Only five states have fewer citizens per legislator, and four of those have populations of less than a million (Vermont, North Dakota, Wyoming, and Montana). New Hampshire has about the same population as Maine, but a huge legislature of 424 members, further proof that Granite Staters are way different.

One last tidbit. Maine has five more legislators than Texas with only 5.5% of the population. I ask again: how many do we need?

The number of legislators is set by the Maine Constitution. An amendment would require a two-thirds vote in both the House and the Senate as well as a majority vote in a statewide election. A year ago Representative Edward Finch (D-Fairfield) submitted a bill, LD 1552, to reduce the the number of representatives to 105. On May 22, however, the House voted 79-60 not to advance the bill, and Senate concurrence killed it. The House vote broke along party lines. Democrats, eager to preserve their majority, lined up 73-11 against the bill under the presumption that what is best for the party is best for Maine.

How much would LD 1552 have saved Maine? Reducing the headcount by 46 in the House, by my reckoning, would save around $900,000 annually in salaries and per diems and another $900,000 every two years in public campaign financing.

[update, March 27:]
The calculation above was based on annual salaries of $12,000 and per diem allowances for food/lodging/travel of $70/day x 100 days. But there must be other perks (e.g. health insurance?) that I am omitting. Ed Finch indicates in an e-mail that his bill would save between $1.9 and 2 million each year, not counting the Clean Election money. Golly, I'll just have to get myself elected to find out what all those perks are! They raise the cost of a representative in the Maine Statehouse to over $40,000 a year. Rep. Finch, incidentally, intends to re-introduce his bill in 2009 if re-elected.

Dig Now, Vote Later

Ambulance service in the River Valley is about to get a lot more expensive. The Northern Oxford Regional Ambulance Service (better known as Med-Care) wants a new building in Mexico to house its fleet--and wants it now. It is so eager to get going that it wants member towns to accelerate voter ratification of a new ten-year extension to the inter-local agreement that first went into effect in 1988. The current renewal is set to expire on June 7.

"It is certainly not our intention of trying to underhandedly break ground prior to all eleven towns affirming their desire to continue to have their emergency medical services needs delivered through NORAS," states Board President Stephen Brown in a December letter to the Peru Selectmen, before adding the caveat "however." Brown goes on to explain that any delay would add to the cost of the project and that, in any case, all eleven towns "will most likely be instructed by their voters to renew."

That perception of voter unanimity was shattered last Saturday when the Town of Andover voted not to renew at its annual town meeting. Undoubtedly the $2 million price tag for the new building loomed large in voters' minds, along with the 30 years of debt service to pay for it. But at a follow-up hearing three days later, Med-Care Director Dean Milligan reminded Andover residents that they are still on the hook for their share of the capital project anyway. The vote to renew the agreement is not the same as a vote to proceed with the project.

The NORAS Board, it turns out, does not need voter approval to borrow for a capital project. According to the inter-local agreement, "the Board shall have all necessary and incidental powers granted to directors of non-capital stock corporations under Title 13-B" of the Maine Statutes. And right there in Title 13-B, Chapter 2, Section 202 it says such a corporation has the power "to make contracts and incur liabilities, borrow money on such terms and conditions as it may determine, issue its notes and bonds and other obligations and secure any of its obligations by mortgage, pledge or other encumbrance of all or any part of its property, franchises and income." The inter-local agreement does stipulate that a debt obligation requires a two-thirds vote of the Board.

Despite the Board President's protestation, this seems to be a gun-to-head proposition for voters. The debt obligation practically forces the towns to renew. Peru residents may be reminded of the infamous inter-local agreement with Mexico and Dixfield 30 years ago for the construction of the wastewater treatment plant in Mexico that was to service all three towns. When grant money for the project dried up, Peru pulled out, but still got billed for many years for its share of the plant construction. In the bargain, Peru got to keep its effluent.

Perhaps Peruvians were hoping to avoid a repeat of that fiasco by voting affirmatively for renewal of the ambulance agreement in a December 10 referendum. Missing from the warrant article was any financial disclosure that Peru's monthly assessment for Med-Care service is due to jump by nearly 27% when the new fiscal year begins July 1. Nor was there any disclosure as to what kind of interest rate NORAS is likely to get. The municipal bond market is a tough place to shop merchandise these days.

Maine Goes to Market

Was this free money, or what? Maine voters seemed to think so, last year authorizing the State Treasurer to borrow up to a quarter of a billion dollars for all sorts of good things--road improvements, economic development, land acquisition, water protection, building renovations on college campuses, etc. The list was split between two ballots five months apart, perhaps under the hopeful notion that two smaller lists might somehow cost less than one big one. And we bought it! Channeling old Alka-Seltzer commercials, I can't believe we ate the whole thing.

Fortunately, the Baldacci Administration is not spending the whole thing right off. Treasurer David Lemoine explains in an e-mail that Maine seeks to reduce borrowing costs by "borrowing no more than is needed, no sooner than we need it." Allocations are made on a quarterly basis through Bond Anticipation Notes (BANs). The notes mature at the end of each fiscal year, at which time "we go to the markets for long term (up to 10-year) bonds and use the proceeds to pay off the BAN debt. We work throughout the year with the agencies, legislature, Governor and underwriter to match debt service with budget."

As of Monday Maine had rung up BAN debt of $88,820,000--roughly one-third of the total amount authorized by voters in 2007. So in June we will have to issue general obligation (GO) bonds totaling at least that much, or one-fifth of the total GO debt already outstanding as of December 31. This will reverse a three-year trend of declining GO debt. Maine's annual debt service comes to over $100 million, and that figure is rising.

Maine tries to time its borrowing to actual need, but not to interest rates. In Lemoine's words, a relatively steady capital improvement plan allows for costs to "even out over time. This approach also provides for a more level budgeting approach from year to year." So even with impaired credit markets in 2008 and increased volatility in long-term rates, Maine will conduct business as usual.

Earlier this month Lemoine joined the treasurers of ten other states in a petition to the three largest ratings agencies--Moody's, Fitch, and Standard & Poor's--to have the same rating scale applied to municipal markets that is used for corporate markets. State issuers are currently held to a higher standard than corporate borrowers even though their default rates are historically lower. As a result, states such as Maine (rated only AA by Fitch and S&P) have incurred higher borrowing costs by having either to buy bond insurance or to swallow higher interest rates. Lemoine figures the penalty came to $78,000 for the 2007 bond sale.

In a hearing last week in Washington, Massachusetts Congressman Barney Frank, chair of the House Financial Services Committee, gave the ratings agencies one month to unify their credit standards, or else. Moody's promptly offered to comply, but Maine needs the other two to do the same.

The Smell of Panic in the Morning

Robert Duvall in Apocalypse Now? Oh, right, that was napalm. But the financial equivalent is hitting Wall Street this morning with the news that JPMorgan Chase & Co. is taking under Bear Stearns for a measly two bucks a share. Bear Stearns was trading just below 60 at Thursday's close, but the stock price was cut nearly in half Friday when the investment bank announced that its short-term creditors were fleeing en masse. Shareholders are now looking for the nearest window from which to jump. It's a good thing Maine keeps windows close to the ground.

My concern has been that Maine will be going to market in June with general obligation bonds. Don't forget, we voters approved $265 million in new borrowing in 2007, half in June and half in November. Legislators had cleverly spread the package over two ballots so that we would perhaps not notice how big this number really is. Another $30 million on the June 2008 ballot will be the icing on the cake.

The bonding authority granted by the voters has triggered the issuance of Bond Anticipation Notes (BAN) to begin funding the projects sold on the ballots. The BANs will then be redeemed with the proceeds from the annual GO bond auction. With interest rates for municipal bonds going through the roof, my personal opinion is that we should be putting our capital projects on hold until the credit markets settle down. I have e-mails in to the State Treasurer and the Chair of the Legislature's Appropriations & Financial Affairs Committee requesting information about the upcoming June issuance. As they reply, I shall keep you posted.

The War That Will Keep on Taking

U.S. Senator John McCain, the presumptive Republican nominee for President, points to the rather depressing prospect that American soldiers will be deployed in Iraq not just for months or years longer, but for generations. That will cost money. With federal budget deficits continuing for the foreseeable future, it is money that we do not have. But even if we deploy out of Iraq tomorrow, the meter will still be running. How long will we be paying for the war's collateral damage? For generations.
Another year, another $300 billion - The Boston Globe

A reader of this morning's Maine Sunday Telegram suggests that this protracted conflict is by design. How does he know? Mainah47 of Lewiston, ME, reasons that Osama Bin Laden is still at large because we allow him to be. "We found Saddam in a hole in the ground. We can't find a very tall Arab-looking man, that needs dialysis?" Bin Laden's capture would be Mission Accomplished in the minds of many people, who would then call for an end to the American occupation. But private contractors are not done extracting profits yet. Mission Extended.

Forget the "R" Word, How About the "D" Word?

Please take a break from your regularly scheduled programming and check out what the Federal Reserve is up to. Although prohibited from buying mortgage-backed securities (the low-grade stuff that nobody else wants right now), the Fed proposes to do the next best thing. It will accept these securities as collateral for loans to banks stuck with them. Tricky, but will it work? Yesterday the stock market thought so; the Dow soared over 400 points.

Let us not, however, confuse a bear-market rally--typically violent but brief--with meaningful intervention. The Fed is offering up to $200 billion in this latest injection of liquidity, but that's like pissing in the ocean. The MBS market adds up to $6 trillion. Moreover, the Fed's new deal is a short-term lending facility that will need to roll over in 28 days. Wonder what the collateral will be worth by then.

These events in the credit markets are unprecedented in my lifetime and are beginning to draw comparisons to the 1930s. In the words of MSN's Jon Markman, "true panic has been kept at bay because the size of the potential losses has been underestimated at the same time that the redemptive power of government entities like the Federal Reserve has been overestimated."
Fed takes boldest action since the Depression to rescue US mortgage industry - Telegraph

Expanding Health Coverage: Step Two

Medicare may not be perfect, but it is the best we have. Big Government, often derided as being inefficient, often is. But when it comes to processing medical claims for Americans over 65, it outperforms the private sector. Just take a look at what the industry calls the "medical care ratio." To compute that ratio for any insurer, divide the total benefits paid for medical services by the total premiums collected during a given time period (MCR= benefits/premiums).

A private insurer will go bankrupt if its MCR exceeds or even approaches one. Insurance executives like to see their MCR down around 0.80, and they swap high-fives if the MCR decreases quarter-over-quarter or year-over-year. For them, lower is better. The difference between the MCR and 1.0 goes toward overhead and profits. Operating costs typically range between 10 and 15%.

For Medicare, operating costs are down around 1%, and there is no profit. So when a guy like Ohio Congressman Dennis Kucinich talks about single-payer government-sponsored health insurance, he is talking about recovering the nearly 20% of non-medical costs that support a private industry. He also tacks on another 10% to account for unnecessary paperwork in the billing offices of medical providers chasing after the private insurers, who make their money by not paying. I can tell you from firsthand experience (I am married to a self-employed speech pathologist and have done her billing for twenty years) that insurers can be quite creative and persistent in finding ways not to pay.

There are many reasons why Americans, who pay twice as much per capita for health care than any other industrialized nation, get less in return--lower life expectancies, lower rates of childhood immunization, higher rates of infant mortality. One reason is the skimming by private insurers. During their presidential campaigns, Republican candidates have offered tax credits to help offset the payment of insurance premiums. Cost-benefit analysis indicates that those credits would be better applied toward direct payments to providers.

Ultimately, as suggested by Marcia Angell, M.D. and Editor-in-Chief of the New England Journal of Medicine, we may want to extend Medicare coverage, dropping the upper-age limit to 55, say, and including all children five and under. Over time we could gradually shrink the uninsured middle, implementing cost-control measures as we go to make sure that we can afford the extension of coverage. The migration would be cost-neutral if any increase in taxes does not exceed the insurance industry's current 20% take.

Expanding Health Coverage in Increments: Step One

Fixing health care in the U.S. will take time. The hybrid system that we have now, part government-sponsored and part market- based, has too many moving parts to be easily repaired. A Big Fix, furthermore, is probably beyond the fiscal capacity of this, the world's largest debtor nation. We are going to have to do this in pieces.

One place to start is to expand eligibility for Health Savings Accounts (HSA). This will not matter to workers whose employers offer Flexible Spendings Accounts (FSA), allowing employees to bank pre-tax earnings to save up for future medical expenses. Individuals without such a benefit can set up Health Savings Accounts on their own, but there is one major hitch: they must first buy coverage under a qualifying High Deductible Health Plan (HDHP). In other words, you cannot self-insure with pre-tax dollars until you buy insurance first. Who but a lobbyist could have come up with that one?

Now, the reason that nearly 50 million Americans lack insurance is because they cannot afford to pay both the premiums for a high-deductible policy and the out-of-pocket costs required to spend down the deductible. When you think of it, high-deductible insurance is a mirage. By the time you accumulate medical expenses to offset the deductible, you have nothing left to pay the next premium. Your coverage will lapse before you ever access the promised benefits. That is why they call it "coverage without care."

Out of simple fairness, the prior-coverage requirement for HSAs should be eliminated so that people who do not have "cafeteria" benefits can enjoy the same tax advantages as people who do. Alone among the 2008 presidential candidates, Ron Paul proposes exactly that. A truly level playing field would also call for a rebate of any payroll withholdings on earnings directed into HSAs. John McCain would level the field the other way, by taxing cafeteria plans out of existence and instead offering personal tax credits to help cover medical expenses.

Lacking an HSA, the best a tax filer can do to recover a portion of out-of-pocket medical expenses is to claim a Schedule A deduction. But that deduction only kicks in after you have already spent 7.5% of your Adjusted Gross Income (AGI) on health care in any one year, which makes the deduction pretty useless for most people (Paul would grant deductibility to the first 7.5% as well). Let's face it, the tax code really wants you to buy insurance from the industry that helped write the code in the first place.

River Valley Youth Tighten Their Belts

As I post this, local teens are 19 hours into their fast, with eleven more to go. The 30 Hour Famine has become an annual ritual for Friends on a Mission, a youth group based out of the United Baptist Church in West Peru. They typically go from lunchtime on a Friday to suppertime on Saturday with nothing to eat and only water and clear juices to drink. They fill the hours with community service, camaraderie, and quiet reflection.

The event is meant to sharpen awareness of world hunger, and nothing does that better than a gnawing emptiness in one's own belly. While empathy is a good first step, the Famine also includes a call to action. Again this year, FOAM is raising hundreds of dollars for a donation to World Vision, a faith-based organization addressing issues of hunger and poverty worldwide.

The money will go a long way. Malnutrition and dehydration, largely preventable, lead to much death and disease among infants and young children in developing countries: one in ten will die before age 5. A small fraction of what super-sized Americans now spend on their own health care (over $2 trillion annually) would do wonders overseas. Watch the video:
Welcome to 30 Hour Famine

Quick Shots: Rail Freight Slows, Merrill Shrinks

Maine legislators are serious about improving freight-rail service in the state. Today the Utilities and Energy Committee is expected to pass a formal resolution to seek the forced sale of the rail lines owned by Pan Am Railways, the state's largest railroad. Lawmakers have been jawboning the company for three years about inconsistent service to manufacturers statewide, but little progress has been made during that time. A move is now afoot to direct MDOT and Maine's Attorney General to petition the federal Surface Transportation Board to force a divestiture. If successful, the state could then choose another railroad company to operate trains on the lines.

A Pan Am line runs right up the River Valley as far as the NewPage mill in Rumford. The mill depends on incoming rail deliveries of coal, carbonate, chlorate, and clay. Finished product leaves by truck or in rail-borne containers. Mill officials have been particularly frustrated during the past month or two, as a build-up of ice on a few hundred yards of rail at Smith Crossing has blocked shipments. NewPage has had to scramble to add deliveries by truck and has paid for salt to be applied to tracks owned by Pan Am. The moves have cost the company hundreds of thousands of dollars.

Customers want their paper on time and just in time--no warehousing, no delays. The railroad represents the weakest link in the Rumford mill's transportation chain. While managers are loath to criticize Pan Am publicly, they privately suggest that Pan Am does not value its customers as highly as NewPage does their own.

The implosion at Merrill Lynch continues. The venerable financial-services firm has just announced job cuts and office closures related to its First Franklin Financial Corp subsidiary, which until now has been active in subprime mortgage lending. That part of the business is now history. Merrill expects to incur charges of $60 million over the next two quarters. Remember, Maine is standing in line hoping to recover the $20 million invested in MainSail II last summer, an investment touted by a Merrill broker. There may not be enough Merrill meat to go around.

Dominoes Doing What Dominoes Do

The Federal Deposit Insurance Corporation (FDIC), the government entity created by Congress during the Great Depression to insure bank deposits, expects a busy year in 2008. The FDIC keeps a list of banks at high risk of failure. If necessary, it will take a troubled bank into receivership to protect depositors.

The FDIC is looking for more staff, viz. no-nonsense individuals with, shall we say, a certain skill set. These are guys who arrive for work at a target location at closing time on a Friday afternoon, freeze a bank's assets, and re-open on Monday morning prepared to babysit nervous customers. If you have no more than $100,000 with an insured bank, you're fine. Otherwise, you need to be very careful about where you park all your hard-earned dough.

The FDIC's "help wanted" ads bode ill for the coming year. There were three bank failures in 2007, and before that none since 2004. Fed Chairman Ben Bernanke warned last week that 2008 will be different.
The ultimate sell signal: Part II - MarketWatch

An Idea So Crazy It Just Might Work

Mike Huckabee's candidacy may be about to expire, but it would be too bad if the talk about the so-called Fair Tax expired as well. Fair Taxers propose eliminating the federal income tax and replacing it with a national sales tax. Not only would the income tax go away (and the filing headaches that go with it), but so too would payroll taxes, estate taxes, and taxes on corporate profits. Instead, consumers would tack on 30% to everything they purchase.

Now 30% may sound hefty, but it would apply primarily to discretionary spending. Subsistence spending would be covered by a per-person "prebate" provided by the government. Besides, 30% is the minimum that a self-employed person is already paying in combined income (at least a 15% marginal rate) and Social Security and Medicare taxes (the latter adding to 15.3%). For people who do not borrow to spend, the tax swap is a wash. For those who save some of what they earn, the Fair Tax is better.

One of the problems with the income tax is that it does not get at all the income. Some income is received under the table (and not reported), some is generated by illicit activity (and certainly not reported), and some of it is sheltered by loopholes not available to peons like you and me. Consumption, on the other hand, is much harder to hide. When a drug-dealer surfaces to buy his fancy new car, that is when we extract his contribution to society. In such a case 30% does not seem like too much.

A consumption tax with prebate is more progressive than our current tax system, which wealthy folks have learned to game. Much of their income is reported as capital gains, which are taxed at 15% and are not subject to the same payroll taxes taken from wage-earners. But why even realize capital gains? The rich can borrow cash, using their assets as collateral, at a rate far lower than 15%. Nice work, if you can get it.

What economists have to say about government intervention can be summed up briefly. If you want less of something, tax it; if you want more of something, subsidize it. It would follow, then, that the Fair Tax would lead to more production and less consumption, an outcome that would begin to repair our personal and collective balance sheets. The State of Maine could do its part by adding a penny or two to the state sales tax and shrinking income-tax collections by an equivalent amount.

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.