Bankruptcy on The Huffington Post

Edward Harrison: On the Sovereign Debt Crisis

2009-12-02T09:10:35Z

This post first appeared at my site Credit Writedowns

Given the spate of articles in the business press about this country or that country facing a potential debt crisis, I wanted to write a bit about sovereign debt crises.

In my view, economic stimulus has been warranted in order stabilize the financial system and prevent economic collapse. However, the price of that stimulus is unsustainably high increases in government debt -- in a world in which private sector debt is already critically high. I see the sovereign debt problem as critical, especially in Europe. The sooner we abandon a debt servicing cost mentality, the more likely we are to face up to this challenge.

The debt service mentality

During the boom and bubble which led up to the financial crisis, many in the financial community looked to debt service costs in the private sector as the only relevant metric to gauge whether debt levels were sustainable - both for individuals and in the aggregate. This was bubble mentality which I must take to task now now that we are seeing it crop up in discussions about public sector debts as well. If not, we will likely see some major sovereign bankruptcies in the not too distant future.

The debt service mentality goes a bit like this: Bob and Shirley are looking for a new house. They make $6,000 per month. So they can legitimately afford to pay $2,000 per month for their mortgage. With a 7% interest rate on a 30-year fixed mortgage, that means they can afford to borrow $300,000 - or just over four times income. So, if Bob and Shirley put 10% down on the purchase of a home, they can afford one that costs $330,000.

The problem is when this is the only constraint on borrowing. What happens to house affordability when Bob and Shirley's 30-year rate drops to 5%? Suddenly, they can 'afford' a $375,000 loan. What if they get a 4% rate? Now, they can afford $425,000 in debt - a loan more than 40% larger than at 7% and a massive 5.9 times income. Anyone who has a mortgage recognizes this math as integral to the home buying process.

The lower interest rates go, the more affordable any debt load becomes when debt servicing costs are the only constraint. As rates drop toward zero percent, theoretically Bob and Shirley could afford to buy any house no matter how expensive. But, of course, interest rates don't move in one direction. If rates were to move up significantly when Bob and Shirley wanted to move house, they would face a serious problem. In this sense, artificially low interest rates are toxic. And therefore pointing to debt servicing costs as the only metric of affordability and debt constraints is bubble finance plain and simple.

Here I am talking about bubble finance, not Ponzi finance. In the Ponzi finance schemes in the U.S., we saw fixed rates substituted with lower but unsustainable adjustable rates. Eventually affordability became passé as no-doc, zero-percent down, ninja loans became the norm. In the end, the Ponzi debt scheme collapsed in a heap - as it always must. That's what we saw in the blow-off stage of the bubble after Greenspan lowered rates early this decade. But, the debt servicing mentality is what preceded it.

Relative debt constraints

What is needed is a relative debt constraint like debt to income - or in the case of aggregate figures or sovereign debt figures, debt to GDP. For example, before the bubble in the U.K., one might have seen relative debt constraints like three times income. That meant one could borrow up to three times one's annual income - no ifs ands or buts. If you worked in the City and received a bonus, you might have convinced the bank to count half of it toward your income for loan purposes.

As prudence was thrown out, these constraints were relaxed. The Bradford and Bingleys of the world used lower interest rates to justify jacking these constraints up to 3.5 times or four times income. Eventually these constraints hit six times in the UK.

How do you compete against that as a bank? All of the business is going to Bradford and Bingley and you are getting stuffed. I guarantee you shareholders won't like that. As an executive, you better find the holy grail of prudent but profitable lending or follow Bradford and Bingley on the road to easy money. Otherwise, you will be out of a job.

Eventually, even the prudent relax their standards too - that's how risky behaviour drives out good when risk is rewarded. See my comments in "James Galbraith: How financial stability creates instability."

Operational and effective constraints

So all of the preceding caused Americans and Britons to run up massive amounts of debt. The same was true in places like Latvia, Spain and Ireland - and to a lesser extent in places like Australia. But I am referring here to the private sector. What about the public sector?

Here too there are limitations. For sovereigns with debt in their own fiat currency, there is not the operational constraint that you and I face. After all, they can go to the backyard and just pick some bills off their money tree - something we can't do unless we want to go to jail.

Remember, many countries like the U.S. or the U.K. can just print money to meet creditor demands. After all, the only financial obligation of government in a fiat currency system is the payment of more fiat money. This is a confidence game then. Creditors will only accept more fiat money from the debtor if they believe that the money represents good relative future value (i.e. when debt repayment occurs and where value is relative to other currencies or real assets at that time).

So while there is no operational constraint on government because of the electronic printing presses, there is an effective constraint in the form of debt and currency revulsion and price instability (large measures of deflation or inflation). On countries like Greece or Portugal in the Eurozone, the operational constraint is a lot more real than it is on the U.K. because of currency union. The same is true for countries with a currency peg or large foreign currency debts like Latvia, Hungary or Dubai.

Taxes

What is a sovereign government's income? It is the taxes we pay now and in the future. So this makes tax revenue central to the sustainability of sovereign debt.

How does the Beatles song go:

Let me tell you how it will be

There's one for you, nineteen for me

'Cause I'm the taxman, yeah, I'm the taxman

Should five per cent appear too small

Be thankful I don't take it all

'Cause I'm the taxman, yeah I'm the taxman

Basically, if the net present value of all of the future taxes fall short of the net present value of expected government expenditures, you have a problem. Again, this problem need not be a hard constraint since the government can issue debt in its own currency. Nevertheless, there is a limit to how much paper money people are willing to take if they worry about the future value of that paper.

That's what the worries of a sovereign debt crisis are all about. At some point, the central government's debt become so high that everyone knows they cannot possibly tax the population enough to cover their expenses and service the debt. There are few way outs then - even for sovereigns using their own currency. One can print money, jack up taxes or cut spending drastically. Printing money is inflationary and causes currency and debt revulsion (The inflationary impact depends on the marginal propensity to save in the private sector i.e. the demand for credit). Raising taxes is deflationary as it curbs aggregate demand. And jacking them up far too high invites tax evasion, eventually making money printing the only fallback. And cutting spending reduces aggregate demand, can reduce the future tax base, and risks a nasty debt deflationary spiral. Pick your medicine.

And when I say printing money, I mean 'monetizing the debt' by buying up debt with money printed out of thin air or simply printing money to pay creditors. The two are functionally equivalent in a zero interest rate environment (see my post "On debt monetization").

So, in the short run, we can talk about supply and demand of government debt thinking only about the near-term deficit, budget gaps, and demand for government bonds. We can ignore health care liabilities in the same way we can ignore them for a family's immediate debt problems because this is not actual debt we have to service. Longer-term, there are constraints like huge unfunded liabilities, making the situation that much more difficult.

Enter the debt service mentality

That's where the debt servicing mentality enters this picture again. The public sector can get away with deficit spending for much longer than you or I. But, eventually they too must yield.

Japan is the textbook case. With sovereign debt to GDP well over 150% and rising to well over 200% soon, it will need to cut spending, increase taxes or print money (or all three) to avoid default. The only reason it has avoided problems is the bid for Japanese Government Bonds (JGBs) and Yen due to a huge current account surplus. What happens when that surplus disappears? What happens if interest rates are normalized?

This is the exact same issue Bob and Dorothy faced. When interest rates are low, debt servicing costs are low as well. But, as soon as rates move higher, you have a big problem. Theoretically, of course, if one takes on debt and 'invests' it, receiving a higher rate of return, then one could pile up more and more debt. This is what is commonly known as a "Carry Trade' - and it is a hallmark of bubble finance underpinned by the debt servicing mentality.

What if the investments don't succeed? What if they end up as malinvestments? Then you have wasted money and are now in a deeper hole than you were before. I think there is room to maneuver for the U.S. in terms of deficits to prevent a nasty double-dip recession, especially in regards to job creation. But a lot of what we have seen in terms of stimulus has been more dubious in nature; some will be malinvestment. Going forward, we should expect the same. And there has been absolutely no effort to reduce overcapacity in autos, banking, housing or elsewhere in the bailout nation. This is why relative debt metrics like debt to GDP are actually a good thing. They act as a hard constraint on deficit spending that otherwise does not exist.

Keeping this issue in mind, the following on Bruce Krasting's blog is interesting:

On ABC's "This Week" show there were some interesting thoughts from Paul Krugman.

He remarked:

"The cost of the deficit is only 1.2% real rate of interest at the Federal level."

This is economic speak. What Mr. Krugman was saying is that the Government can borrow long term at 3.2% and inflation is 2% so the real cost of debt is only 1.2%.

In response, George Will made the point:

"In ten years the interest cost of servicing the debt will go to $700 billion per year!"

Mr. Krugman responded:

In ten years GDP will be $20 trillion, debt service would still be 3.5%. "That doesn't sound too bad".

Mr. Krugman believes in the ultimate carry trade. His view is that growth will come from affordable (cheap) debt capital. He thinks that the US can go to 100% Debt/GDP without upsetting the applecart. I think he is dead wrong.

We are at the point where the laws of big numbers start to come into play. For Mr. Krugman' view to work out we would have to successfully sell an additional $900 billion of debt each year for the next decade. I think that is an impossible task. But what is truly impossible is that that amount of debt can be sold without an increase in the 1.2% after inflation cost of the debt that Mr. Krugman is relying upon. You can just fool so many bondholders for so long before they look elsewhere.

The cost of servicing our debt will likely double. The increase will be a combination of a general rise in interest rates and in increase in the "spread" that the US will have to pay. If debt expense was a modest 6% it would put the cost at $1.2 trillion. I don't think we will get to that level. We will blow up first.

The Carry Trade is fraught with risk.

Federal Bankruptcy Filings Are Up By 34.5%

2009-11-26T01:00:37Z

WASHINGTON (AP/HuffPost)-- Bankruptcy filings in federal courts jumped by more than one-third this year, as businesses and individuals struggled to regain their footing in a weakened economy.

New numbers from the Administrative Office of the U.S. Courts show about 1.4 million bankruptcy cases were filed this fiscal year. That's up 34.5 percent compared with the more than 1 million cases filed last fiscal year. The bankruptcy figures cover a period from Oct. 1, 2008, to Sept. 30.

Filings under Chapters 7, 11, 12 and 13 all rose -- particularly filings for Chapter 11 protection, which increased 68 percent. Overall, business filings were up 52 percent, while nonbusiness filings rose by 34 percent.

States with the highest bankruptcies per 1,000 population are:

1. Nevada
2. Tennessee
3. Alabama
4. Indiana
5. Michigan
6. Ohio
7. Kentucky
8. Arkansas
9. Illinois
10. Colorado

Go to the economics and finance blog Calculated Risk to see these rates graphed.

Swim Club Accused Of Racism To File For Bankruptcy

2009-11-14T18:52:16Z

PHILADELPHIA — A suburban swim club accused of discrimination last summer after revoking the memberships of mostly black and Hispanic children plans to declare bankruptcy, a newspaper reported Saturday.

Valley Swim Club president John Duesler sent an e-mail to club "friends and families" Friday saying the board of directors had voted to file for Chapter 7 bankruptcy this week, The Philadelphia Daily News reported.

Wall Street Conspiracy Theories: Which Are The Most Plausible?

2009-11-13T15:04:54Z

So here's a field guide to the five most prevalent Wall Street conspiracy theories, with each one graded on scope, durability, crowd appeal, and plausibility and each graded on a sliding scale from 1 to 5, with 1 being "fugetaboutit" and 5 being "damn right."

Jerry Chautin: CIT's Bankruptcy Is Not Doomsday for Small Businesses

2009-11-12T16:27:38Z

CIT
will not be around much longer if it emerges from bankruptcy without a more
sustainable way to finance small businesses. More specifically, it must learn
not to depend on the commercial paper market as an ubiquitous source to fund
its lending activities. Additionally, it has to do a better job of laddering
its bond obligations to match the term loans and lines of credit that it
provides to companies.

According to the mainstream press, CIT lends to over one
million small businesses with an emphasis on franchises, seasonal funding for
retailers and lines of credit. Its franchise financings are mostly term loans
that are partially guaranteed by the U.S. Small Business Administration.

SBA’s basic 7(a) term loans
for working capital fully amortize in five to seven years. Equipment and real
estate loans pay off in 10 and 25 years, respectively. As such, CIT’s current
loans will remain intact even if CIT ceases to exist or reduce its lending
appetite.

If CIT is not around when its term loans come due, there are
other financiers waiting in the wings. As expected, the new lenders will
underwrite applicants on their own merits. But CIT would do likewise and refuse
to re-lend to borrowers that no longer meet its benchmarks.

Applicants with good credit, a history of adequate cash flow
and prospects for continued growth can get term loans ─ regardless of what
happens to CIT. Notably though, the recession has made it more difficult for
some businesses to qualify.

Most small-business lenders do not finance start-ups. The ones
that do will require collateral. In many instances, that means pledging real
estate. So if your projected cash flow is inadequate to make debt service
payments, the lender will grab the collateral as a secondary way to get paid
off.

Seasonal funding, lines of credit and other
servicing-intensive financing vehicles are less available than term loans. CIT
filled that important niche and finding a replacement may be more difficult.
Large banks have the expertise and servicing capabilities. But most will not
take on clients as small as the ones that CIT catered to. And smaller community
banks do not have the trained staff to service that business. Moreover, they
may not gear up to fill the void.

That is where companies like The Interface Financial Group
can help when businesses need cash flow. “We don’t compete with banks,” says
Fred Dunayer, owner of an IFG franchise in southwest, Fla. He says that the
banks refer business to him when the deal does not meet traditional lending
parameters. “Examples include the company not being in business long enough,
being too small, or having had credit problems in the past,” he says.

IFG buys discounted invoices. Instead of underwriting their
small-business clients’ as a bank would do, they are more concerned with the
quality of the invoices and the likelihood that they will be paid on time.
“Assuming the company (IFG’s client) has current receivables from solvent
companies, we’re able to step in,” Dunayer says.

Similar to buying invoices, factoring companies buy accounts
receivable. As with invoice buyers, the factors will also scrutinize the
quality of your accounts receivable.

According to Steve Bloom, a volunteer SCORE business advisor
in Atlanta, Ga., factors provide “short-term capital based on the credit of the
buyer of the goods or services.”

But whether you are selling accounts receivable or invoices,
Bloom says that it “can also be expensive.” He warns, “If costs of goods sold
are too high, profitability and economic feasibility is difficult.” Even so,
short term funding by selling invoices or accounts receivable may be necessary
for a fast cash flow injection to meet your operating expenses.

CIT has been a stalwart lender for small businesses. But
there are alternatives if you look for them.

Jerry Chautin is a volunteer SCORE business counselor,
business columnist and SBA’s 2006 national “Journalist of the Year” award
winner. He is a former entrepreneur, commercial
mortgage banker and business lender.

What U.S. Bailout Money Could Do For The Rest Of The World

2009-11-09T20:40:53Z

Ever wonder how all that money spent on government bailouts of U.S. companies and banks could have been spent differently? The Business Insider did. On the heels of commercial lender CIT's recent bankruptcy announcement and the loss of $2.3 billion in taxpayer money, the publication asked several humanitarian groups how they would have spent the money to help people around the world.

Here are a few of our favorites from the International Rescue Committee:

378.3 million malaria-preventing mosquito nets
$6.08 would pay for a family-sized, insecticide treated mosquito net. Add to this malaria treatment --232 would provide treatment for 200 people - and you have an effective way to prevent the deaths of millions worldwide.

44.2 million girls in school for a year
$52 would enable an afghan girl to attend school for one year.

Emergency medicine for 5.16 million people
$446 would pay for an emergency medical kit which includes medicine, equipment and other supplies, enabling an IRC health team to provide medical services during an emergency for up to 10,000 people.

To read all 10 ways that $2.3 billion could have been spent to improve lives in developing countries, check out The Business Insider article and slideshow.

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Big Pharma's Crime Spree: Drug Makers Pushing Products For Unapproved Uses

2009-11-09T00:23:26Z

Pfizer and Lilly lead a parade of U.S. companies that have paid $7 billion in penalties after promoting drugs for uses not approved by the FDA. This unlawful behavior may not end until prosecutors force a drugmaker into bankruptcy.

Manisha Thakor : Celebrity Money Meltdowns

2009-11-05T15:44:47Z

Tough economic times have tested the vast majority of Americans - and that includes celebrities. Lately there have been several high profile individuals from the worlds of sports, entertainment, and the arts who have seen their financial woes hit the front pages. A money meltdown is right up there with death and divorce as one of life's most stressful experiences. So let me say straight up that my intent in highlighting these experiences is not to poke fun or make light of their situations. Rather it is to help others by highlighting common financial pitfall that all of us (myself included) can learn from.

NBA Star Antoine Walker - Broke & In Big Trouble: During a successful career spanning 12 years, Antoine earned over110 million. Now it's gone. At age 33, Antoine has creditors chasing after him and is facing felony check fraud charges. Much has been made of his bling (the cars, watches, entourage). However, he was also by many accounts extremely generous with friends, family and those in need. Antoine's problem was that he spent as if his peak earnings years would repeat every year. He's not alone. Many people with variable incomes (commission-based sales people, entrepreneurs, etc.) fall into this trap. What we all can learn is if you have a volatile income stream, you should spend based on your average, or even trough, earnings to avoid a cash crunch when leaner times appear.

Bestselling Mystery Novelist Patricia Cornwell - Looking for40 Million: This prolific, smart, and highly popular writer has suffered losses estimated in the range of40 million. She's suing the money management firm that handled her money, arguing they didn't heed her instructions to "invest conservatively" and even cut checks for gifts given to people she didn't know. Patricia's problem was that she handed over complete control of her finances to her advisers. As it frequently takes single-minded devotion to one's craft to excel, the need for some delegation is understandable. What we all can learn is when it comes to your money, your motto (to quote President Regan) should be "Trust, but verify." Remember, no one will ever care about your money as much as you do. So you must stay involved, even if you have an adviser.

Uber-talented photographer Annie Leibovitz - Fighting to Keep Her Home: This American icon has taken some of the most famous photos... ever. From John Lennon & Yoko Ono (hours before he was shot) to a very pregnant (and very bare) Demi Moore, that was Annie's work. In the go-go years Annie's day rate was rumored to be $250,000. Today she is $24 million in debt and is a single mom of three young children fighting to keep her home. Annie's problem was spending liberally and borrowing aggressively against the equity in her home to make up the difference. When the credit markets seized up, she found herself in a cash flow crunch, and resorted to putting up her homes and copyrights to her lifetime work up as collateral for a loan. Now, that collateral may be called in. What we all can learn is that debt really is a four-letter word. Borrow at your own risk and understand that there will be consequences if you can't pay it back.

Famed Actor Nicholas Cage - Owes Over $6 Million in Back Taxes: This super talented actor owes the IRS. Big time. Uncle Sam wants over $6 million in back taxes from Nicholas Cage. The vast majority stems from the 12 million-ish in income he earned in 2007 that apparently he did not pay taxes on. Nicholas's problem is that he appears to be cash-strapped when it comes to paying those takes. What we all can learn is that if you are self-employed, as so many more of us are these days, it's vital to set aside money for taxes at the time you earn that income.

When Donating A Kidney Becomes A Pre-Existing Condition

2009-11-03T15:42:58Z

As part of its Bearing Witness 2.0 project, the Huffington Post is rounding up a few of the best local stories of the day.

Some organ donors are improperly billed for surgery and wind up unable to obtain insurance because of their generosity, reports Mary Ann Roser of the Austin American-Statesman. Last year Philip Knisely, 53, of Austin, Texas, donated his kidney to his co-worker, Jose Luis Vara Jr, a father of three who was suffering from the same disease that killed Knisely's father. Knisely had some post-operative complications, for which he was improperly billed $18,000 (the charges were later refunded).

But now Knisely is worried that if he loses his job the "pre-existing condition" of having just one kidney will render him ineligible for new insurance. A 52-year-old mother of five in Wheaton, Ill. told the Statesman that that's what happened to her after she donated her liver in 2002.

While organ donation advocates say insurers do deem organ donation a pre-existing condition, the practice is hard to track, the Los Angeles Times reported in July; there's a dearth of data to support the claim.

*********

A family in Newton, Mass. is struggling to hold onto their home after their father, a beloved local community athletic coach, passed away from a heart attack two weeks ago. Local NBC affiliate WHDH reports that Jeff Beatrice, 49, left behind his wife 11 children.

The family started falling behind on their bills months ago, after Jeff, a self-employed CPA, lost his investment in a renovation project that went sour. The family made cuts to get by, including dropping Jeff's life insurance. Then in January, Jeff's mother, Dorothy, who lived just next door -- in a house Jeff built by hand -- was trapped in her home and died as it burned to the ground. Jeff's blind brother, John, was also living in the house, and had no one where to go. Jeff and his wife, Elinor, took him in. "All of this stress just killed him,'' said Elinor.

The Beatrice home, originally set to be auctioned on Thursday, has been spared until January 5 because of a reprieve the bank granted after Jeff's death. A memorial website and family fund have been established to help the Beatrices raise money to keep their home.

*********

Robin Ennis called her daughter Amanda "our two-million dollar child," she said, because at two years old she was diagnosed with brain cancer, and "[t]hat was the total of all the medical bills." Robin's husband, Bill, had insurance that covered 80 percent of the costs, but the remaining hundreds of thousands of dollars bankrupted the family and put their home in foreclosure, reports the Warren Reporter. Two years later, despite persistent hospital visits, transplants, surgeries and chemotherapy, Amanda passed away.

Now the Ennis family has dedicated themselves to helping neighbor Claudia Smith, 6, who was diagnosed with brain cancer. A donation fund has been established to help the Smith family avoid the bankruptcy that the Ennises had to experience.

HuffPost readers: Seen a good local story? Know of a neighbor going to bizarre lengths to get through the recession? Tell us about it! Email jmhattem@gmail.com.

Icahn Loans CIT $1 Billion, Backs Restructuring Plan

2009-10-30T14:47:06Z

NEW YORK — Commercial lender CIT Group Inc. said Friday that billionaire investor and bondholder Carl Icahn agreed to support the company's restructuring plan amid reports CIT may soon file for bankruptcy protection.

Icahn also agreed to provide CIT with a $1 billion line of credit.

Nelson Montana: Giving Credit Where Credit Will Do: How the Banks Have Changed the Rules Halfway Through the Game

2009-10-28T18:19:45Z

Who knows this one?

Here's my story, it's sad but true. It's about the banks that we all knew. They took our money and then skipped town. Now, when we need help, there's none to be found.

That just about sums up how the credit card companies are working these days. The way it stands, you might be better off dealing with loan sharks. At least they'll warn you before breaking your legs. The banks sneak up behind you and do it.

I used to believe in using credit - not to buy stuff I didn't need, but to get the things I needed to survive. I'd go as far to say that I have no sympathy for anyone who runs up too much debt by being frivolous. But it is no longer the reckless and the irresponsible who are paying the price of using a credit card. It's the average Joe and Jane who use credit in a prudent manner. It's the ones who run up more debt than they can afford to pay who seem to get the free pass.

In its original intent, credit was actually a pretty good system. Aside from the convenience of not carrying cash and ordering purchases via mail and online, people can borrow money they need in the short run for things that will make money in the long run, after which, a fee is paid for the advance. That's fair. Everyone wins. But it no longer works like that.

For years I used credit cards to stay ahead of the game. As an artist, I've never been a high finance guy. I live pretty much hand to mouth, I always hustled for work (being self-employed I can't even collect unemployment insurance), I don't play the stock market (with what?) and to be honest, I never concerned myself much with elaborate fiscal manipulations other than to transfer the credit card accounts to the lowest interest rates. Over time, I always paid them off. My credit rating was excellent. They made just enough money off of me to give me a high limit and my payments were always on time, making me a good risk. But as of last year, it got a little out of control. I still paid on time but the payments were often the minimum. I just couldn't get ahead. Then, one day I realized why. Overnight, my interest rate went from 4% to 27%! They knew I was having a hard time so instead of cutting some slack, they lowered the boom. I was falling behind and it looked like there was no hope in sight. Sound familiar?

With a few strategic moves and a bit of luck, I eventually managed to generate enough money to pay it all off. I kept just a Visa and one MasterCard and have paid in full every month. So what did I get for my efforts? They kept the 27% interest and lowered my credit limit from $10,000 to $1,000! And, just to add insult to more insult, they pulled a few more underhanded tricks. Like enrolling me in programs (that had an annual fee) without my consent. And double charging me on purchases - to which they gave a very sincere apology but asked me to contact all the vendors in order to straighten it out. (This was after hours of being shuffled from one representative to another.) They justify arbitrary alterations by saying the entire process was explained in that nine-page document with six-point font they sent last month. (Am I supposed to read that myself or is that when I'm required to hire a lawyer, investment analyst and a team of accountants? Because I have no idea what they're talking about.)

You can never get anyone on the phone who can actually do anything. You can't pay over the phone either. That costs extra. Computers are always down. Administrators are always away from their desks. Apparently, money can be extracted from one's bank account based on what seems like little more than a reluctance to check their own records. I could have gotten a comparable deal if I just declared bankruptcy and paid only a portion of the fees. Thanks, guys. Anything else you need?

What is probably most egregious in this entire debacle is the fact that credit card companies lose billions of dollars each year in fraud. When a card is lost or stolen, anyone can run up charges and they have to eat the loss. Wouldn't it make sense to have to use a pin number when charging, just as we do with debit accounts? That would make sense. But why should they bother when they can just keep slamming the people who play by the rules?

The latest word is that in just the past few weeks, rates across the boards have been jacked up as high as 30% in anticipation of the impending crackdown by Congress that will restrict how much the creditors will be able to extort, um, I mean charge.

It looks as if they may try to bilk their "valued customers" for every cent they can while they can get away with it. Congress needs to move a little quicker on this, though expecting them to act with urgency is like expecting a three legged mule to win the Kentucky Derby.

I've gotten to the point where my grandfather was. He didn't trust banks and kept all his money in a small safe in his bedroom closet. I used to laugh at his lack of sophistication. Now I realize he was pretty damn brilliant. He always knew how much he had and even though he was the sole earner in a family of four, he always had enough.

I'm thinking of doing the same thing with my liquid assets. The only difference is, instead of a safe in the closet, I'm pretty sure it'll all fit in an envelope in the dresser drawer.

Don McNay: Just Say "No" to Adult Children Wanting Money

2009-10-20T19:12:24Z

My old man is another child that's grown old

-John Prine

It seems like every family has one -- the Child Who Never Grew Up.

They mooch off their parents well into their "adulthood." They frequently need to "borrow" money, with no intention of paying it back. They always have car problems, relationship problems, "bad luck" or other sob stories.

All their problems have the same proposed solution: Money from mom and dad.

Often they are living with mommy and daddy, long past the time when their contemporaries are starting careers and families.

Concepts like budgeting, responsibility and ambition don't make it into their vocabularies.

According to multiple media accounts, former Michigan basketball star Rumeal Robinson took mooching to a new art.

He tricked his mother into letting him mortgage her home. A headline in the Miami News Times sums it up: "Hoops hero Rumeal Robinson blew a fortune on strippers, got indicted and left his mom homeless."

Sounds like a great guy.

Mooching children usually don't hurt parents as dramatically as Rumeal Robinson did, but the results are still bad. Adult children with a "failure to launch" are dragging down parents who can't afford to subsidize them.

The headline from a recent Newsweek online article read "Retired and Broke."

According to the AARP, people over 55 is the age group most likely to declare bankruptcy. The article cites the usual bankruptcy causes, like medical expenses and credit card debts, but hammers on the idea of parents not giving money to their children.

The article ends by noting that "parents may want to help the next generation extricate itself from debt. Leading by example might be a more valuable gift."

Wise advice.

It's not an easy decision to implement. There are situations, like medical emergencies or short term downturns, where families don't have another alternative. I'm also not talking about children with severe illnesses or who are unable to work. I wouldn't throw my sick child out on the street and neither would you. I'm talking about the child who has a car, an iPhone and running-around money but doesn't chip in for rent or groceries.

You are not doing your children any favors by not allowing them to grow up.

Roger Ailes did an interview for CSPAN a few years ago. He said when he turned 18, his father asked him where he planned to live.

Ailes was puzzled, but his dad said, "I can get you a job at the factory, (where his dad worked) but you can't live here." Ailes decided to go to college at Ohio University and got into broadcasting. He went on to create Fox News, CNBC and play major roles in some presidential campaigns.

Love him or hate him, Ailes is one of the most influential people in American media. His father forced him to grow up and make his mark.

I had a similar moment on my 18th birthday. My father took me outside and said, "You are going to get what I got on my 18th birthday -- the whole wide world to make your living in." (Dad had to quit school and go to work at age 15.)

Dad pointed to his car. He said, "You see that Cadillac? That is MY Cadillac, not OUR Cadillac. Make some money and buy your own." 20 years later, I did.

It wasn't "tough love." It was making me realize that I was an adult and had adult responsibilities.

I'm OK with parents helping children through college (in four years, not forty), but after that they are on their own.

People in my father's generation were drafted and sent off to war. There are 18 year-olds today who are fighting in Afghanistan and Iraq.

I saw a Frontline story about Afghanistan where the soldiers are sleeping on the ground without mattresses. I suspect those soldiers don't have much sympathy for a 30 year-old who is still living with mommy and daddy.

I work with people who receive "big money" from lotteries, inheritances and injury settlements. All of them have the same problem that retirees have. Once they lose all their money, they have very little ability to make it back. Like retirees, their financial downfall often comes from family and friends who want to "borrow" money from them.

Which gets us back to the adult in your house who still acts like a child. I can go on for hours about how making life too soft for him or her is bad. I can go on about how eating away your savings will leave you in a situation where death is your only way out of the mess. I can go on for hours about how giving adult children money is not actually love. It is enabling bad behavior, like giving heroin to an addict.

Instead, I give you three words to remember: Rumeal Robinson's mother.

Don't end up like her.

Helen Ford adopted Robinson at age 10 after his biological mother abandoned him. She and her husband raised him, helped Rumeal become part of a national championship basketball team at the University of Michigan and a player in the National Basketball Association, making millions of dollars.

Rumeal blew through his money, spending it on strippers, nightlife and high living. He never gave anything to the people who raised him. After his career ended, he got his mother to agree to let him take a mortgage on her house. Later, it was foreclosed on.

She used the house as a center for foster children. Now she lives in a two room apartment.

Rumeal's mother had good intentions. She wanted to help her son.

Parents are often the last to see that their child is a piece of human garbage. They are the easiest of prey.

I'm seeing a lot of elderly people lose their houses, savings and often their lives (financial pressure is a key trigger for suicide) because children "borrowed" money and never paid it back.

It's time to cut them off.

The kids will pout and cry. They will try to make you feel guilty. Immature people do that. Show them that you are a real, loving parent and not a patsy. Just say "No." Your own survival is at stake.

If you want some reassurance, I would ask you to call Rumeal Robinson's mother, but I assume her phone has been cut off.

Read more at: http://editorial.huffingtonpost.com/tmp/individual-entry-archive13.html

Don McNay, CLU, ChFC, MSFS, CSSC is one of the world's leading authorities in helping people deal with "Big Money" issues.

McNay is an award-winning syndicated financial columnist and Huffington Post Contributor.

You can read more about Don at www.donmcnay.com

McNay founded McNay Settlement Group, a structured settlement and financial consulting firm, in 1983, and Kentucky Guardianship Administrators LLC in 2000. You can read more about both at www.mcnay.com

McNay has Master's Degrees from Vanderbilt and the American College and is in the Hall of Distinguished Alumni of Eastern Kentucky University.

McNay has written two books. Most recent is Son of a Son of a Gambler: Winners, Losers and What to Do When You Win The Lottery.

McNay is a lifetime member of the Million Dollar Round Table and has four professional designations in the financial services field.

Read more at: http://editorial.huffingtonpost.com/tmp/individual-entry-archive24.html

Max Fraad Wolff: Divergence, of Course

2009-10-20T12:36:40Z

It is the best of times. It is also the worst of times and everything in between. You are probably sick of hearing the cheerleading about the recovery. You are probably equally sick of hearing many -- present author included -- pontificate skeptically. Let's look at what is going well and what is going poorly and leave it to you to guesstimate, fume and grapple toward comfort about where the U.S. is headed.

Consumers have not vanished altogether from the marketplace. Some people are still buying many things and many people are still buying some things. We are not buying like we used to. Between January and August 2008 we imported $1.74 trillion on our way to a $491 billion trade deficit in the first eight months of 2008. In total, we tallied a $691 billion trade deficit in 2008. From January to August 2009 we imported $1.23 trillion -- $500 billion less -- on our way toward a $400 billion annual deficit. We are buying a lot less. Our trade deficit is tracking 52% below where it was at the end of August 2008.

Part of this story is the incredible shrinking dollar. The US Dollar has been trading near or below its lowest levels in over a year. Most of the consumer weakness is a result of declining income and purchasing by American households and firms. Our spending is down and our savings are up since 2008. We have seen a decline in personal consumption expenditure of $150 billion since the first half of 2008. We have also seen a decline of $125 billion in non-housing related consumer credit. These numbers are close for a reason.

The credit markets are the area to watch. Despite the excitement in the more widely covered stock markets, the credit markets remain ground zero. These are the markets where households, government and enterprise borrow. This is also where the delinquencies and defaults buffet fortunes. New stock issuance -- raising money by selling stock -- remains very low. Banks continue to lend little and exclusively to those in relatively decent shape. Thus, credit markets have become essential. This is where the US Government does its gargantuan borrowing, where home loans are sold and valued and where more and more corporations turn for funds. This is also where America's retail investors are investing as they slowly move back into markets. It is here where we should be looking to see what asset markets have to say about recovery.

Credit markets are distorted by many interacting programs from the Treasury, to the FDIC and the Federal Reserve. As of Wednesday October 14, 2009, the Federal Reserve owned $763 billion in mortgages-backed securities. The US Treasury has raised $1.4 trillion in debt markets in 2009. Thus, what we see in these markets must be judged in the context of approximately $12 trillion in government intervention. That is a lot of intervention. Across the first half of 2009 about three in four new home mortgages were sold through or to government agencies. Fannie Mae reported $38 billion in losses across the first six months of 2009. Fannie Mae's portfolio presently includes ownership or interest in $3.1 trillion in home mortgages, more than a quarter of all mortgage debt outstanding. Freddie Mac is similarly active in the markets. The private market for mortgages and mortgage-backed securities remains volatile. There is little interest in buying new mortgages not backed by the government. The prices of mortgage-backed securities have risen impressively across the last few months. We do have relatively greater strength in the asset prices in this market. We don't have the kind of activity that helps the macro economy. This is the story of our economy.

Credit markets do well to describe where and why things have improved and where and why the challenges linger. Our Federal Government is deeply involved in the asset markets. Leading banks have access to cash at low rates. A la the New Deal, there exists an alphabet soup of special programs offering support to the banking and financial sector. It is essential to the US economy that these firms survive and put their balance sheets in order. It is every bit as essential that the nation's households survive and get their balance sheets in order. This is only beginning for some and is disorderly and painful for many. There was a 35% yearly increase in personal bankruptcies across the first nine months of 2009: 1 million Americans filed bankruptcy. The period between July and September 2009 broke all existing records for foreclosure filing. Lenders have seized 632,852 homes in 2009, 237,052 were taken back between July and September. Federal, State and local governments are staggering under sliding tax revenues and rising demand for assistance. The Federal Government is running a $27 billion deficit per week in 2009. The State of California and Jefferson County Alabama are struggling to survive financially.

It remains the worst of times for many. Times have improved in asset markets and some financial firms. This is important but, not enough. We will likely see positive GDP readings for the last six months of 2009. Real recovery still requires job growth and strength on household and government balance sheets. That remains in the distance.

Carl Icahn Extends CIT $6 Billion Loan To Help Stay Afloat

2009-10-19T17:24:18Z

NEW YORK — In another sign that CIT Group Inc. is struggling to restructure its debt, billionaire investor Carl Icahn offered the lender a $6 billion lifeline.

In a letter Monday to CIT's board of directors, Icahn said he would give the company the loan to replace a debt restructuring plan CIT has asked bondholders to approve.

Congressional Committees Quietly Kill Portion Of Derivatives Bill; No One Watching For Systemic Risk

2009-10-17T16:23:06Z

Two congressional committees in charge of drafting legislation to regulate derivatives have quietly killed a provision that would allow the Federal Reserve to police the complicated financial transactions. The kind of derivatives that many blame for the near-collapse of the American financial system have never been regulated.

In July, the Obama administration sent a proposed bill to Congress requesting that the Federal Reserve be given authority to oversee those aspects of the financial system that posed "systemic risk" -- in short the kind of firms and activities that could bring down the entire financial system. It would be up to the Fed and other federal regulators to determine what constituted "systemic risk." The trading of derivatives, essentially contracts that can act as insurance against a future event or as just a simple bet, were part of the package.

Derivatives brought down the Wall Street investment banks Lehman Brothers and Bear Stearns and nearly caused insurance giant AIG to go belly up. The reason why they nearly brought down the entire financial system is because every major financial firm and bank were tied to them through derivatives deals. They were all interconnected. But there wasn't a single regulator looking at that. Rather, individual government regulators -- both state and federal -- were overseeing their own individual part of the pie, instead of the whole thing. Obama's plan is an attempt to change that.

But late Friday afternoon, the House Agriculture Committee quietly posted to its Web site a revised version of the Obama administration-proposed legislation. The Committee, which has jurisdiction over one of the two federal regulators of derivatives trading -- the Commodity Futures Trading Commission (CFTC) -- deleted the portion of Obama's bill that gives the Federal Reserve a say in those derivatives activities that pose a risk to the financial system. Specifically, the Fed would have been given the power to oversee new rules set up by the exchanges and clearinghouses where derivatives trading takes place. The previous version of the Agriculture committee's bill, released Oct. 9, included that passage. The current bill places that power solely in the hands of the CFTC.

A spokesman for House Agriculture Committee Chairman Rep. Collin Peterson, a Democrat from Minnesota, could not be reached for comment late Friday.

The move follows that of the House Financial Services Committee, where Rep. Judy Biggert, an Illinois Republican, offered an amendment striking the same provision in their version of the bill with the agreement of Committee Chairman Rep. Barney Frank (D-Mass.). The original version of the Financial Services bill, though, was a bit stronger than the Agriculture bill (at least in this aspect) because it included all of the language originally put forward by the administration regarding systemic risk. Specifically, the administration's proposal gave the Fed authority over not only new rules governing derivatives trading that threatened the system, but also over new derivatives and how the trading of them would be processed.

Frank allowed Biggert's amendment to pass without debate, punting the issue to the Agriculture committee. His spokesman says the Financial Services Committee lacks jurisdiction in this area, thus calling the committee's move "irrelevant." However, Frank and the rest of the committee did impose additional regulation on other aspects of derivatives trading that fall under Agriculture's jurisdiction.

In its white paper announcing its detailed plans to overhaul financial regulation, the administration explained how derivatives led to the economy's near-collapse, and why the Federal Reserve would need additional power over them:

"Through credit derivatives, banks could transfer much of their credit exposure to third parties without selling the underlying loans. This distribution of risk was widely perceived to reduce systemic risk, to promote efficiency, and to contribute to a better allocation of resources," the administration said.

"However, instead of appropriately distributing risks, this process often concentrated risk in opaque and complex ways. Innovations occurred too rapidly...for the nation's financial supervisors.

"The build-up of risk in the over-the-counter (OTC) derivatives markets, which were thought to disperse risk to those most able to bear it, became a major source of contagion through the financial sector during the crisis," the administration said. "We propose to enhance the Federal Reserve's authority over market infrastructure to reduce the potential for contagion among financial firms and markets."

Derivatives, the administration said in its draft legislation, "may also concentrate and create new risks and thus must be well designed and operated in a safe and sound manner. Enhancements to the regulation and supervision of systemically important financial market utilities and the conduct of systemically important...activities by financial institutions are necessary to provide consistency, to promote robust risk management and safety and soundness, to reduce systemic risks, and to support the stability of the broader financial system."

Thus, "responsibility and authority for ensuring consistent oversight of all systemically important...activities should be assigned to the Federal Reserve," the administration said.

Officials from the Federal Reserve also have lobbied for the added role, arguing that it's best suited to minimize destabilizing threats to the financial system.

"The [Federal Reserve] Board believes that all systemically critical firms should have a consolidated supervisor, as well as be subject to the oversight of any systemic regulator that might be created," said Patricia White, associate director of the Fed's division of research and statistics, in June during testimony before the U.S. Senate. "The scope of a firm's activities in the OTC derivatives market will likely be an important factor in making that assessment."

Fed Chairman Ben Bernanke echoed those remarks the next month during testimony before Barney Frank's Financial Services Committee.

"It is critical that systemically important systems and activities be subject to strong and consistent prudential standards designed to ensure the identification and sound management of credit, liquidity, and operational risks," Bernanke said. "The Federal Reserve also would expect to carefully monitor and address, either individually or in conjunction with other supervisors and regulators, the potential for additional spillover effects...For example, the failure of one firm may lead to deposit or liability runs at other firms that are seen by investors as similarly situated or that have exposures to such firms. In the recent financial crisis, exactly this sort of spillover resulted from the failure of Lehman Brothers, which led to heightened pressures on other investment banks."

Thus, in explaining why the Fed would need additional police power over things like derivatives trading, Bernanke brought up the failure of Lehman Brothers, the largest bankruptcy filing in U.S. history. At the time of its demise, the storied Wall Street investment bank listed more than $613 billion in debt.

But as it stands, the Fed won't be getting that power from the two derivatives bills currently snaking through congressional committees. Rather, it will be fragmented across an array of federal and private regulators -- just what the Obama administration warned against.

The Treasury Department declined to comment.

Bankrupt Retirees: Older Americans Are Most Likely To Declare Bankruptcy

2009-10-14T14:07:42Z

Older Americans are heading into and through retirement with a boatload of debt. They're carrying everything from mortgages and home-equity loans to big credit-card balances, and many are finding the burdens harder and harder to bear. In the last eight years, the over-55 crowd has become the age group most likely to declare bankruptcy, according to the AARP.

Lawrence G. McDonald: The Case For Dismantling Giant Banks

2009-10-12T15:07:09Z

The long awaited resignation of Bank of America's CEO Ken Lewis finally arrived this week, but I guess we'll still have to wait until January to see it come to its full, well deserved conclusion. Ken is "retiring" at the "end of the year." Since the news broke I've seen a collection of old school bankers rush to poor Ken's defense. Ken's old buddy, Bank of America Board Member Don Powell included.

After writing my new book, A Colossal Failure of Common Sense, the Inside Story of the Collapse of Lehman Brothers and watching this charade I was struck by the similarities of Richard Fuld and Ken Lewis.

As many people know, Richard Fuld was CEO and Chairman of the board of Lehman Brothers. Like Ken he enjoyed the perks of having constructed a board of directors of old pals and cronies. Richard Fuld was as close to a banking Monarch as anything we've ever seen in modern capitalism. During his almost 18-year reign at Lehman Brothers, Goldman Sachs had four different CEOs, Whitehead, Rubin, Paulson and Blankfein. There have been no Kings over on 85 Broad Street in recent years; maybe that's one of the reasons Goldman has survived this desperate credit crunch.

While Ken was certainly no King, his CEO and Chairman of the board stint will have lasted just under 10 years if he finally retires in January. Ken was stripped of his Chairman role in April. A look at the Bank of America Board reveals some interesting similarities with the Lehman Board.

While the average age of the Lehman Board, 70 will go down in the record books as the most outrageous, Bank of America's 64 is not far behind. Of the 10 member Lehman board only one spent his life in finance -- and he was 82! Of the 15 member BOFA board, only 2 had investment banking experience, 6 were from outside the world of finance and 7 were just like Ken Lewis ... old school regional and commercial bankers. Not one member of his board is younger than 56 years of age.

Now I don't opine in this regard to be mean, we must get the best people into the important positions as soon as possible. I worked on the trading floor at Lehman Brothers ... right in the trenches, where the rubber meets the road, so to speak. I saw firsthand the design and construction of what Warren Buffett calls financial Weapons of Mass Destruction -- credit derivatives.

These 21st century banks have become deadly systemically risky dominoes that can crush us all if they fail, or can bankrupt us all with debt if we have to bail them out. These are not country clubs. With the demise of Glass Steagall at the turn of the century, banking was placed in a new, modern, neutron era while the makeup boards of directors are back in the Ozzie and Harriet days of the 1950's. This is a mistake fraught with peril. In our government's quest to save our system last fall, their main line of defense was to make banks bigger and more deadly. It's the golden rule; he who has the gold makes all the rules. Shot gun marriages had never been more common at the US Treasury, Wells Fargo / Wachovia ... JP Morgan / Bear Stearns and Washington Mutual, Bank of America / Countrywide and Merrill Lynch. Risk is more concentrated than ever. The dominoes are much bigger and closer together than ever before.

These banks are not too big to fail, they're too big to succeed ... too big to manage. There's no transparency of risk. They're much too big. Years ago when banks failed, say Continental Illinois or Drexel Burnham, they didn't crush the entire global economy and require trillions of government borrowed bail out dollars.

I hate to be the bearer of bad news, but these boards do not have modern risk takers and sophisticated 21st century financial thinkers on them. Bank of America lost billions and billions of dollars and put innocent depositor's money at risk when Ken Lewis allowed his company to get up to their neck in off balance sheet SIVs, CDOs, CMBS, CLOs. Many people argue she was insolvent before Uncle Sam saved them with $50 billion. You cannot underestimate the difference between a commercial / regional bank and an investment bank / hedge fund in the 21st century. We cannot allow regional bankers to oversee 21st century risks. The stakes are just too high now.

I've laid out some solutions. Going forward we must do a few simple things that will go a long way in making sure a disaster like this never happens again.

Abolish CEO and Chairman of the Board rolls in any systemically risky financial institution. That's an institution that can potentially obliterate the world's economy. The fox should never be watching the chicken coup. Make Boards indepenant of CEO influence.

Put financial experts on boards of these big banks, 21st century experts. Can we have one member of BOFAs board in his or her 40s? Maybe two. Eliminate the retirement country club.

Pay Board members more. Paying them more will bring in the right talent with experience in modern financial products. It makes no sense to have traders and investment bankers on Wall Street making $5 to $10 million a year and some board member, overseeing all their risk, only making $140k?

These boards shouldn't meet quarterly or monthly, pay them and have them meet three times a month. The stakes are just too high now. Boards must be more involved. Get them down on the trading floors talking to traders and risk takers on a regular basis. At Lehman, our board had zero interaction with the best risk takers and traders. That's wrong.

Term Limits for CEOs and Boards or Directors. If the President of the United States is limited to 8 years I say that's good enough for CEOs of giant banks. Power corrupts and the bottom line is the longer a CEO is in power the greater the number of his old pals seem to end up on Boards of Directors.

We simply cannot allow tradition and the status quo to get in the way of sound risk management. We must make changes soon as our financial system is no more safe today than it was on the eve of Lehman's collapse. The same troubling issues that placed us all on the doorstep of disaster are still there. Capitalism cannot work without transparency and there is no transparency of risk and the people overseeing those risks are not the best people for the monumental task at hand.

Lawrence McDonald is the bestselling author of A Colossal Failure of Common Sense, and is now spending his time on the lecture circuit, making sure the world learns the great lessons of this financial crisis. To contact his booking agent, click here.

Bill Mundell: In Support of a California Enterprise Commission

2009-10-08T20:05:49Z

Question: How do you run California without a balance sheet?

My answer: Apparently, rather poorly.

We all know about California's liabilities, the $72 billion in debt, the $100 billion plus in unfunded pension liabilities, IOU's, etc. But, where is the list of the state's assets? Incredibly, the state of California, the 8th largest economy in the world, doesn't have a complete balance sheet.

California needs to show the world that our state isn't bankrupt, isn't in dire need of raising taxes or cutting essential services. How? By redeploying its significant assets.

Some of these assets are tangible, like the Rose Bowl, or our University system, others are not, like the value of a large and technologically advanced workforce. California is not only home to some of the best beaches and most beautiful parks in the world, but the busiest ports, major airports, and a DMV whose revenue is the largest in the United States. In total, it has some 22,000 different properties recorded, most of which are vastly underutilized. California is not bankrupt. It's just not making effective use out of what it has right under its nose. If we did, we would not need to cut spending or raise taxes.

We need to leverage the tools of modern finance to ensure premium value for the assets held in the public trust. That means using the capital and expertise of the private sector to create partnerships with the state so that the assets can become more valuable over time and create more revenue for the state. It does not mean selling public assets outright. That's old school. Few in our state would want to do that, especially in a down market.

But through leasing arrangements, and especially by pooling assets together, something that is second nature in modern finance, but that has not been done before with public assets, we can not only ensure premium value, but also raise significant revenues upfront, money that can be used to pay down debt, and even build a reserve, a rainy day fund of sorts for the future.

Where to start? How about the DMV, a woefully inefficient $3.5 billion behemoth bereft of adequate technology investments and likely one of the least popular points of interaction with the state for citizens. Talk about nothing to lose.

What I'm proposing is a far cry from mere "privatization" which means handing over control to the private sector. In my proposal, the state is capitalizing on the private sector's money and expertise but keeping ultimate ownership and control over key decisions. My plan includes a comprehensive regulatory body, similar in nature to the public utility commissions that define the ground rules for price increases and maintaining the integrity of state property.

Australia, an economy significantly smaller than California's, was saddled with 100 billion Aussie dollars of debt in the mid 1990's. In April 2006, their central bank announced that all of the country's debt had been paid off. Thanks largely to redeploying its public assets, Australia now has an $80 billion rainy day fund called the future fund. California, under my plan, can do the same thing.

California is sitting on an embarrassment of riches. Some estimates say the land value alone is worth more than $200 billion, more than enough to pay off all of our debt and have $100 billion left over for our fund for the future.

I have asked Governor Schwarzenegger to issue an executive order to form the California Enterprise Commission. This commission would be responsible for valuing the State's assets, selecting which ones should be part of a first ever California Enterprise Fund, and finding the type of marquis investors that once and for all can shift the whole psychology about the state.

To paraphrase Mark Twain: "the reports of California's demise have been greatly exaggerated." We have technology, incredible weather, education, great citizens and all the resources needed to get us back on track. What I'm proposing is a sound plan to make it happen.

Russ Baker: Something to Sleep On

2009-10-06T18:15:04Z

The New York Times lead story yesterday describes how a series of private equity firms managed to repeatedly flip the venerable Simmons mattress company, earning themselves huge profits while the company became increasingly mired in debt and ultimately forced into bankruptcy and massive layoffs, with ordinary investors, employees, and company retirees taking a huge hit.

I thought it would be worthwhile to have a further look at some of the players cited briefly in the article, so here is a bit more on the private equity kingpin Thomas H. Lee, typical of the masters of the universe who so affect our lives yet generally fly below the radar.

First, the Times' "nut graph":

Simmons says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company -- the seventh time it has been sold in a little more than two decades -- all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money.

For many of the company's investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company's downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees -- more than one-quarter of the work force -- laid off last year.

But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company's fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.

Here's what Forbes had to say about Mr. Lee (who was involved with acquiring Simmons but left his own firm prior to the unraveling), listed as #717 on its 2007 roster of "The World's Billionaires":

Fortune: self made

Source: leveraged buyouts

Net Worth: $1.4 bil

Marital Status: married, 5 children

Education: Harvard University, Master of Business Administration

Soft-spoken buyout titan had a tough fall in 2005: After taking Warner Music public with Edgar Bronfman Jr., flipped commodities outfit Refco. Refco quickly fell apart; then-chief executive Phillip Bennett charged with securities fraud, conspiracy. Company's assets bought up by London hedge fund Man Group. Lee claims he personally lost only $2 million. Harvard grad started investing with $150,000 inheritance 1974.

Greatest hit: Snapple, bought for $135 million 1992, sold to Quaker Oats for $1.7 billion in 1994. Today invested in Dunkin' Donuts, Michael Foods. Left Thomas H. Lee Partners to start Thomas H. Lee Equity Partners last March; believed to have been forced out by partners, he says he wants a fresh start. Now leveraging connections with hedge fund managers with his Blue Star fund-of-funds outfit.

How are people like Lee able to turn a $150,000 inheritance into $1.4 billion? Some of it is smarts, and hard work, and good information. But if the practices themselves might otherwise face the wrath of the people's representatives, it helps to have them on your side. Proving that the GOP is hardly the sole party of the moneyed, Lee's donations over the years seem to have been almost exclusively to Democrats--including many senators and House members. Among his most recent contributions are between $100,001 and $250,000 to the William J. Clinton Foundation, $28,500 to the Democratic Senatorial Campaign Committee, and the maximum of $4,600 to the Obama Victory Fund.

Though comparatively small sums for a wealthy man, they buy an awful lot of good will. So, too, does anything else that improves one's odor and influence. Lee, for example, sits on many civic and charitable boards, among them Lincoln Center for the Performing Arts, The Museum of Modern Art, NYU Medical Center, The Rockefeller University and Whitney Museum of American Art, and the Executive Committee for Harvard University's Committee on University Resources. The Times article mentions the sense of betrayal felt by a longtime Simmons employee who has been laid off after 22 years, with two months' severance. But how often do we get a detailed look at the folks whose actions cause the pain? Very seldom indeed.

Goldman Sachs To Be Paid $1 Billion If CIT Fails; Taxpayers Would Lose $2 Billion

2009-10-04T18:36:49Z

Goldman Sachs stands to receive a payment of $1bn -- while US taxpayers would lose $2.3bn -- if embattled commercial lender CIT files for Chapter 11 bankruptcy protection, people familiar with the matter said.

Personal Bankruptcy Filings Soar

2009-10-02T21:56:13Z

Consumer bankruptcies topped one million for the first nine months of this year, the highest point since the system was overhauled in 2005.

Diane Tucker: Alert The TV News Media: Obamanomics Isn't Working

2009-10-02T09:22:52Z

According to government data released today, the unemployment rate rose to a 26-year high
of 9.8 percent in September as 263,000 more Americans lost their jobs. The last president to govern with such high unemployment was Ronald Reagan in 1982. Back then, the TV news media often aired footage that showed union leaders, the unemployed, and Democrats characterizing Reagan's economic policies as sadistic. Yet for some reason, in 2009 most TV news outlets are giving President Barack Obama a free pass on equally bleak numbers.

The Business and Media Institute just released a special report that exposes the double-standard in unemployment coverage. Here are some of the major findings:

In 1982, an overwhelming majority (91 percent) of stories mentioning the Reagan Administration were negative, while in 2009 only 7 percent of Obama Administration mentions were negative.

Unemployment stories in 1982 mentioned the Reagan administration 71 percent of the time, but unemployment stories in 2009 mentioned the Obama administration only 40 percent of the time.

Shame On You, Charles Gibson: The unemployment rate reached 9.4 percent under both Reagan and Obama. But ABC's Charles Gibson covered the identical rate very differently in 1982 and 2009. Gibson told viewers on May 7, 1982, "There really isn't any good news in the statistics. All the numbers are bad." But this year Gibson turned into an optimist, saying on August 7, 2009, that he hoped "the economy may be finally turning the corner."

Instead of using stimulus money to immediately create jobs for millions of unemployed Americans, Obama first gave our taxpayer dollars to the so-called "too big to fail" financial firms, a decision some are calling a bad precedent. It's hard to argue with business journalist John Cassidy, who had this to say in the New Yorker magazine this week:

Since the federal government has now demonstrated that it will do whatever is necessary to prevent the collapse of the largest financial firms, their top executives will have an even greater incentive to enter perilous lines of business. If things turn out well, they will receive big bonuses and the value of their stock options will increase. If things go wrong, the taxpayer will be left to pick up some of the tab.

Compare Obama's strategy to the approach of former president Franklin Roosevelt, who used taxpayer dollars to provide nearly 8 million jobs between 1935 and 1943. FDR's program, while not perfect, employed people to build public buildings, projects, and roads. The program fed children, and redistributed food, clothing and housing. Today almost every community in America has a park, bridge or school constructed by Americans working for FDR's new deal agency, the Work Projects Administration.

Naturally President Obama has agreed that job creation is "the single most important thing we can do," but talk is cheap. Obama predicted the stimulus plan would likely create three to four million jobs, but that hasn't happened yet. Today 15.1 million people are unemployed in the United States, and the number is still growing. Some 52 percent have exhausted state jobless benefits, and some are reaching the end of the makeshift strands of emergency extensions.

But, hey, no worries -- the President and First Lady are appearing on all the TV news broadcasts this week, super-excited about trying to lure the Olympics to Chicago.

Obamanomics isn't just jobless, it's heartless.

* * *

UPDATE 10.02.09 Despite President Obama's whirlwind trip to promote his adopted city, Chicago was eliminated in the first round of International Olympic Committee consideration today.

Meanwhile, upon hearing the grim unemployment numbers, Obama said simply, "We'll just have to grind it out." (Easy for him to say, he's got a job.)

UPDATE 10.03.09 "Wanted: Leadership on Jobs" says the NYTimes editorial staff.

UPDATE 10.04.09 "It's the Unemployment, Stupid" says Robert Kuttner, co-editor of the American Prospect.

UPDATE 10.05.09 "Does Obama Get It?" asks Bob Herbert, NYTimes op/ed columnist.

UPDATE 11.1.09 "Are 650,000 jobs enough?" asks Benjamin F. Carlson at the AtlanticWire.

Denver DA Employee Suspected of Torching Own Car

2009-10-01T11:02:15Z

A former supervisor at the Denver District Attorney's Office is under scrutiny, suspected of involvement in torching his own car then sending himself an anonymous, threatening letter to divert attention away from himself.

Frontier Airlines Bankruptcy Over: Brand Emerges A Part Of Republic Holdings

2009-10-01T09:23:51Z

Update: In an interview with Westword's Michael Roberts, Frontier Spokesman Steve Snyder reassures Denverites that Frontier isn't going anywhere:

"Even if we're talking about a few hundred jobs that may be relocated somewhere else, we are always going to have a strong presence in Denver from an operational perspective... We have about 5,000 employees, the vast majority in Denver, and even if a small part of the operation is moved to another city, Denver is still going to be our hub."

Read the AP story on Frontier coming out of Bankruptcy below

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Joshua Freed (AP)

Frontier Airlines is set to exit bankruptcy protection on Thursday as part of Republic Airways, which seems determined to run an efficient airline even if it ruffles some feathers in the process.

By buying Frontier, Republic is transforming itself from a regional jet hauler of travelers for other airlines into a carrier that competes for its own passengers. Earlier this year it bought Milwaukee-based Midwest Airlines, too.

Mom Goes Blind So Her Daughters Can See (VIDEO)

2009-09-28T14:15:33Z

As part of the Huffington Post's efforts to bear witness to the effects of the current economic environment on ordinary Americans, we're rounding up some of the most compelling stories reported by local news organizations around the country.

Monique Zimmerman-Stein has been nearly blind for the last two years from Stickler syndrome, a rare genetic disorder. She recently decided to forego her own treatment to save funds to treat her two daughters, who also suffer from the condition, reports Lane DeGregory of the St. Petersburg Times.

The family is covered under husband Gary's Blue Cross/Blue Shield plan, but that coverage only pays for 80 percent of medical expenses.

She will no longer get treatment to preserve that last slice of light. The injections that might help cost $380 after insurance, and she needs one every six weeks. She could be spending that money on her daughters' care.

If forgoing treatment might help them see, she said, "That's a choice any mom would make."

The expensive care has already forced the family out of their home, which was foreclosed, and forced them to sell their furniture and to cash in their life insurance.

Tampabay.com put together an excellent video to accompany the story:

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A family fallen on hard times after their 12-year-old daughter was diagnosed with a brainstem tumor has been served foreclosure papers, reports Elizabeth Prann of local NBC affiliate WJHG.

Amber Howard underwent surgery that could only remove part of the tumor. Her father, Neil, is the only member of the family who is able to work. Amber's weak immune system requires home-schooling. But the Howards don't let the situation keep them down.

The Howard family is fascinatingly optimistic, each one picking up the other when he or she is down.

"When she has a good day, that's when we charge our batteries!"

And if it's one thing none of them is lost is hope.

Amber is living proof.

"She said to me, God came to me mom. He told me, it's not my time. But I said, you can't remember Amber, you were asleep. She said no Mom, I remember! He came over, God came over and he talked to me, he said everything would be OK, it's just not my time," Shawn said.

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Kenneth Hoagland, of Nashville, Tenn., was put in jail for getting a cold, reports Janell Ross of the Tennessean. Hoagland, previously bankrupted by a week-long stay in a hospital for his diabetes, was on a health insurance waiting period for a new job when what started as a cold landed him in a hospital for two days with a $1,200 tab. He could not pay, was afraid to miss work to show up in court, and was arrested on what's known as a "body attachment."

"They fingerprinted me, took my picture and asked some questions about my medical history," he said. "When the guy who tested (my blood sugar) asked me why I was there and I told him ... he said, 'I didn't know we did that in this country.' I told him, 'Until now, I didn't either.' "

The Tennessean reports that "Hoagland, 36, is one of the hundreds of thousands of Americans -- insured and uninsured -- facing collection suits, wage garnishments and, more rarely, trips to jail because of medical debt."

HuffPost readers: Seen a good local story? Heard about a heroic judge, neighbor, or doctor helping people stay in their homes? Tell us about it! Email jmhattem@gmail.com.