Obama Stars in Celebrity Apprentice President

No doubt Obama is a fan of the "Celebrity Apprentice" show where "the Donald" Trump, real estate mogul, famously fires one celebrity a week in the boardroom after team or individual competitions until one remains. (And no doubt Obama, seeking yet another scapegoat for the financial tsunami instead taking responsibility as the President, wishes he had the Donald in his own boardroom so he could blame him for the housing bubble and crisis and fire him in front of the whole nation.)

In the Obamaian version of the game, an inexperienced manager, a rookie President, puts three industry veterans (this season, featuring the auto industry) into a competition for taxpayer money for survival so they can build the kinds of cars Obama wants them to make. The first competition was a song-and-dance routine in front of Congress. But they flunked Obama's Fundamentals of Symbolism course by taking company planes to the event (but who could blame them? I mean, are you sure an American-built car can make it to DC from Detroit without breaking down?) Nancy Pelosi was beside herself; her military-flown flights home don't have the same perks. Ford decided government meddling in its business affairs wasn't worth it and dropped out of the competition.

The second competition was "Obama Says". This is the Democratic Party's version of the childhood game "Simon Says". In this version of the game, each time Obama tells you to do something, you have to do it, of course. But the House Democrats can also decide ex post facto what Obama said, no matter what the rules were when the competition started.

The latest competition was a challenge: given the world's highest autoworker compensation rates, how many vehicles can you sell with the President talking down the economy, criticizing the vehicles you're selling and consumer credit only beginning to thaw? The results were in this past weekend: Obama told CEO Rick Waggoner of GM, "You're fired!" After irresponsibly stoking populist outrage with class warfare arguments and over the AIG retention bonuses, Obama needed a fall guy.

President Obama solemnly assured Americans, in the aftermath of Waggoner's termination: "The United States government has no interest or intention of running GM." Are you kidding me? Obama protests too much. He's made it clear: "We cannot, we must not, and we will not let our auto industry simply vanish." "Too big to fail" GM. In fact, he's picking winners and losers: he's let Ford's competitors have billions of taxpayer money andis willing to guarantee the American taxpayer will stand behind new car warranties. He's stalling bankruptcy, although a surgical bankruptcy (meaning an Obama-controlled process) is now a possibility. He also has conflicting objectives; for example, GM is not a leader for fuel-efficient vehicles, its most popular and profitable vehicles are trucks and SUV's, and Obama's task force complains GM management is glacially slow, but Obama insists America will be the global leader in clean car technology and wants to subsidize their purchase.

Obamaian "Fairness": Time for a Reality Check

One of the more interesting provocative essays appearing in a 3/20 Wall Street Journal op-ed is Alan Blinder's "Obama is No Socialist". Blinder, a Princeton economist, served on Bill Clinton's Council of Economic Advisors and served as an advisor to the John Kerry campaign in 2004, so it's hardly surprising that he would be an apologist, defending the Obama's super-budget which by most measures would account for the federal government's highest spending as a percentage of GNP since World War II.

Let me make the point right now: we conservatives are not worried simply about the next fiscal year's budget and dealing with relief spending during a severe recession. Rather, it's the fact that Obama is engaging in precisely the kind of stealth entitlement expansionism that is almost politically impossible to cut in future fiscal years; he is misleadingly low-balling costs, just as the Massachusetts' "grand experiment" in guaranteed health insurance is facing runaway costs with only marginal increases in insurance coverage, promising certain spending increases are "temporary" (e.g., extensions to unemployment insurance), and underestimating costs by creating unrealistic expectations of federal revenues to pay for it. Obama is also perpetuating a hoax on the American people, leading them to believe that he can pay for it all with only a modest tax hike on the upper 5% of American taxpayers, while at the same time--during a recession when oil consumption is naturally down--trying to impose a carbon emissions "cap-and-trade" tax scheme which will significantly cost American consumers, all so Obama can deliver on a political chit to his special-interest environmental constituents, regardless of its drag on the national economy. Also, giving people a choice between private insurance holders, fighting interstate roadblocks, and joining a subsidized federal program is a de facto backdoor move towards national health insurance. In fact, Obama has already been caught trying to shift the medical costs of veterans with service-related disabilities to private-sector health insurers.

The issue has more to do with Obama's seeming attempt to move towards European social democratic policies--precisely at the time that Europeans are looking to ease some of the government cost burden to compete in a global economy.

But what has really annoyed conservatives like me is Blinder's misleading use of tax brackets to argue that the tax system is unfair. The argument goes like this: consider any taxable deduction, say $1000 to charity. To a person in the 35% tax bracket, he is getting $350 back from Uncle Sam, so the real cost to the rich person is $650. To a middle-income person in the 25% tax bracket, he only gets $250 back from the IRS, so the real cost of the contribution is $750. The rich man got an extra $100 back. That's "unfair".

This is disingenuous argument, because it knowingly ignores absolute tax revenues. So the higher-income person is paying over 10 times the amount of tax than the first person, although he or she doesn't get over 10 times the amount of government services. In fact, the higher-income person is unable to participate in income-restricted government assistance programs like welfare, food stamps, public housing, SCHIPS, etc.

In fact, under the Obamaian plan, nearly half of American workers will not pay a SINGLE PENNY (never mind an individual's "fair share") towards the costs of our national government and its operational programs (our justice system, national defense, environmental protection, etc.) (Payroll taxes are supposed to be self-financed entitlements.) In fact, many will be given "tax credits" or refunds, which is a transfer of income from higher- to lower-income workers.

Unfortunately, we don't have children around vocalizing the fact the emperor is wearing no clothes as Obama goes around repeating preposterous claims about how hundreds of billions in government spending is an "investment", how he's going to grow us out of a recession by increasing permanent entitlements on an aging population like health care, increasing regulations on business and taxes on higher-income job creators, and throwing government money at alternative energy and the environment (Obama, with no job creation experience, can see profitable opportunities that the private economy, with industry participants with dozens of years of experience, can't see) will yield good-paying American jobs in the short term (when, in fact, we graduate a mere fraction of the engineers graduating annually in China and India).

But Obama repeats the same misleading statistics in arguing that the middle class has not participated in the prosperity under the Bush and other Republican administrations. First, let me point out that it is not unreasonable to understand the impact of more attractive income and investment tax rates and policies in attracting capital. However, there are a number of articles, e.g., James Sherk's June 2007 Heritage Foundation article, "Analyzing Economic Mobility: Compensation is Keeping Pace with Rising Productivity". Scherk makes a convincing case that liberals are misusing statistics, e.g., focusing on wages vs. total compensation (including more rapidly growing benefits, such as health insurance, paid time off, and retirement contributions), the use of the wrong inflation measure (i.e., CPI vs. IPD), the use of median vs. average wages in relation to average productivity, and certain demographic shifts (e.g., the effects of divorce on median household income). And, of course, liberals fail to acknowledge the fact that Bush eliminated income tax burdens for millions of lower/middle-income Americans.

Obama seems calm, cool, and collected even as he knowingly spouts cuts in medical costs from the computerization of health records which even some of Obama's own followers have disputed (a topic discussed in a prior post). He argues transparency but at the same time argues passage of a bloated stimulus bill, using misleading Keynesian multipliers, with no time to debate. It's time for the press to start doing their job and calling Obama's bluffs.

Just Say 'No' to Geithner's Regulatory Power Grab

I must say, from the get-go, that I don't believe what happened during the financial tsunami of last September was okay. However, Tim Geithner's attempts, announced this past week, on behalf of the Obama administration, seeks to expand the federal government footprint over the financial services sector--steps that would be unprecedented, which would unfairly extend to private companies that managed themselves prudently over the crisis, which would likely deter the development and introduction of innovative financial services products, and which could unconscionably intrude into the internal affairs of private businesses, including their rights to make operational decisions, e.g., hiring executive talent.

The real question is what happened last September? Liberals argue that it was lack of regulation, the excesses of capitalism run amuck. But what liberals fail to acknowledge is that the government has not been blameless but part of the problem, it has not been proactive and timely, and it wants to be rewarded by expanding its reach in new and unprecedented ways, potentially allowing for political influence and corruption, the very sorts of things Thomas Jefferson worried about and warned us against.

Diebold and Skeel, in a 3/27 Wall Street Journal op-ed entitled "Geithner is Overreaching on Regulatory Power", reminds us of some government missteps during the crisis, including the fact that the FDIC brokered an initial uncompetitive offer to sell Wachovia to Citibank, only to find its arranged offer trumped by Wells Fargo: Did the federal intervention respond in the best interests of the American taxpayer and reflect a superior understanding of the valuation of Wachovia over the private sector? In addition, the FDIC waited until IndyMac had dug itself into a $10B hole before pulling the plug. They also pointed out the way vacillating regulators swerved Lehman Brothers by implying a Bear Stearns-like bailout was in the offing but not delivering, resulting in an ill-prepared bankruptcy.

We also haven't really been calling the federal government to task for not recognizing and reacting to clear signs of a housing bubble, for allowing GSE's like Fannie Mae and Freddie Mac to grow too big, for political pressure on lenders to write mortgage loans to higher-risk homebuyers (i.e., without a conventional down payment or proof of creditworthiness). Why did the regulators allow derivatives to be used for reserve requirements and why didn't they anticipate the vulnerability of required but tradeable swaps to bear raids? Why didn't regulators stress-test mark-to-market accounting changes and the effects of having to liquidate positions in a frozen market? Why didn't regulators question or enforce reserves or collateral for CDS writers and/or otherwise hedge for commensurate risk?

We reward this kind of unacceptable performance with various federal regulatory bodies fighting for their own share of an expanded regulatory pie? What could possibly lead Obama and his cronies to believe that the answer to an incompetently administered status quo of regulators is to expand their reach into business? This is the same line of reasoning we see time and again from liberals: so what if we aren't reaching all the truly poor households with SCHIPS before we start opening eligibility to the upper middle-class, many of which already pay for their kids' health insurance? Liberals always feel the answer to a leaky bucket is not to fix the bucket, but to buy a bigger leaky bucket.

As usual, I expect conservatives to be the voice of reason. There is need for reform, but these reforms should not come at the expense of a viable, globally-competitive financial services industry and American leadership in innovative products and services. We need to know why the market, the accountants attesting to financial statements of financial services companies, bond-rating agencies, and government regulators failed to anticipate the same kinds of problems that hedge funds were able to exploit. We need to ensure there is proper, timely disclosure of material market-influencing transactions, e.g., by hedge funds. We need to make sure risk is properly valuated with commensurate risk premiums and collateralization (e.g., heightened margin requirements for low-priced stocks). We need to insist on structural independence of risk assessment just as we insist on independence of auditors. We need to balance accounting valuation issues to smooth the impact of asset writedowns on otherwise profitable concerns during frozen markets.

However, I personally believe that the best guard against systemic risk is not by setting up an expansion of ineffective, behind-the-curve federal regulators and increasing their span of control in the markets; if anything, it creates a barrier to entry and lessens competition (e.g., to AIG) which I feel is necessary to lessen systemic risk. There are companies which simply failed to anticipate and hedge against the risk of deleveraging in a highly leveraged market, and the companies, their managers, and their shareholders should accept responsibility for unduly exposing the company to catastrophic risk, not the American taxpayer. What we have right now is a government which picks winners (e.g., Bear-Stearns) and losers (Lehman Brothers) and has done little to prevent moral hazard; it has gone through 2 or 3 shifts in strategy in allocating TARP funds, which has not inspired confidence in government leadership.

The best thing that the federal government can do is to be consistent and unbiased, let the vested, knowledgeable players in the economic arena act without the threat of incompetent government actions introducing fear, uncertainty and doubt, reduce threats of counterproductive tax hikes on businesses, investments, and job-creating executives and small business owners, improve the nature and extent of salient market information for participants, and execute its existing regulatory mandate more effectively and efficiently.

Taxpayers should not be an enabler of statist liberal addiction to Big Government. We need to show tough love and just say 'no' to this unconscionable bureaucratic power grab by Obama and Geithner.

AIG Failure: Was the Company Greedy or Stupid?

I read a couple of interesting op-ed's this week in The Wall Street Journal: "Have We Seen the Last of the Bear Raids" by former hedge-fund manager Andy Kessler (3/26) and "One Way to Stop Bear Raids" by left-wing billionaire George Soros.

Credit default swaps (CDS) (which AIG marketed) served as de facto required insurance for derivatives such as collateralized debt obligations (CDO's) and mortgage-backed securities (MBS's) that banks owned and wanted to use as part of their reserve, a critical foundation for lending.

It is also important to understand the underlying valuation debate involving historical cost vs. mark-to-market (MTM) accounting. Robert Arnott, in an excellent letter to the WSJ editor, provides a good summary of the debate (a response to a recent pro-MTM opinion by James Chanos entitled "We Need Honest Accounting"). Historical cost can be misleading because it represents a transaction at a particular point in time, and book value accounting tacitly and often misleadingly implies that the asset price remains stable. On the other hand, MTM accounting, as implemented, including its application to regulatory capital, can result in unnecessary volatility and the need for immediate, short-term deleveraging drastic responses, such as sales of assets in a frozen market or having to raise capital, unduly watering down current shareholder stakes, even if current operations are robust and profitable. Arnott does not argue against transparency or the need to write down unrealistic asset book values but allowing companies to smooth out the effects of fully disclosed bad news over multiple accounting periods. Arnott concludes, and I agree, "We had no need to eviscerate the U.S. financial services industry in the past year."

Kessler argues that the bank bears found a different method of attack. Bears typically make money by borrowing shares at current prices and repaying the shares at lower prices. (Kessler gives us the bear's inverted version of market-manipulative "pump-and-dump" tactics, which I'll call "trash-and-buy".) He says that the bears wanted to exploit the vulnerability of banks holding derivatives in reserves, given MTM accounting. The bears had no hope of cornering the $62B derivatives market. But they could make use of CDS--which regulators required banks to own in order to hedge against losses.

Kessler suggests that bears took advantage of an inverse relationship between CDS's and derivatives. An increase in the price of CDS's was viewed by the market as implying a higher risk and hence lower value of the relevant derivatives. He quotes the GE CEO, whom saw his own company's stock tank from $36 to $6, complaining how a few million dollars of transactions in the unregulated CDS market could threaten the survival of major corporations.

Who were these bears? Kessler says that they were hedge funds. And he finds a great deal of irony in the fact that the US Treasury seems to be encouraging hedge funds to invest in Geithner's Public-Private Investment Program, which he seems to think gives the bears an additional way to profit from the situation they're responsible for (and yet another incentive to redouble the CDS manipulation and depress asset prices further). Kessler suggests that the government fight the bears by turning the tables on them, i.e., dumping CDS's on the market, driving down their prices and stabilizing the CDO's.

Kessler has little sympathy for AIG, noting they never properly hedged against their large CDS exposure (including setting up reserves or collateral, coasting on the reputation of their AAA rating). Soros concurs, accusing AIG of conceptually misunderstanding the nature of swaps, viewing them as primarily insurance but never fully grasping the fact they are tradeable and also served as a proxy for shorting bonds. Soros argues unlike stocks, where risk-reward ratio works against the bear, purchasing CDS's works in favor of the bear through a self-validating adverse effect on CDO's. He view CDS's as warrants which do not require defaults on underlying CDO securities to be profitable.

Soros' suggested response to the bear's tactics of shorting financial service stocks and purchasing CDS's is to restrict short selling to rising markets and to rid the CDS market of market speculators through appropriate regulations.

The Wall Street Journal Friday ran a story I found disturbing that many of the same people whom oversaw and approved many of the disastrous AIG CDS's (roughly 5 of 10 members in the Credit Risk Committee), and a related Enterprise Risk Management group are still working for AIG. Additional questions had been raised (by independent auditors or regulators and recently echoed by current CEO Edward Liddy) as to the limited access and cooperation the risk groups had from the financial services and other divisions. Mr. McGinn, a top deputy to Mr. Lewis, chief risk officer since 2004, however insists that risk evaluators were involved with the CDS business from the get-go. Whatever the case may be in terms of interference with risk assessment, its failure to set up reserves or collateral or otherwise to hedge its risks in the CDS market, I think there was a clear management failure, and I would be looking for alternative, capable leadership.

In response to the question I posed, I think that the company leadership was incompetent. I have no doubt that the financial services group wanted to maximize sales of CDS's, but any insurer from the get-go knows about the need to establish adequate reserves for expected losses.

Popcorn Question at Lunch

One of my favorite habits during my years in academia was shelf-reading at university bookstores. I particularly liked to see what other disciplines were requiring for their research methodology courses. Although my discipline (MIS) is interdisciplinary in nature, I went qualitatively beyond that, aiming to publish in other disciplines as well. I personally am fascinated by people with multiple talents (in part, because I consider myself one): e.g., athlete Bo Jackson who played in two professional sports, actor Ben Stein, who played the monotoned junior high science teacher Mr. Cantwell in The Wonder Years, is also an essayist and financial advisor, and the Beatles who not only revolutionized popular music but wrote most of their timeless hits.

[On a personal note, I'm a very good, articulate orator, a talented writer in different genres, a good conversationalist and humorist, and a gifted evaluator, reviewer, and problem-solver. I had a reputation for diagnosing my students' programming code issues in a single glance, and one student got creeped out when he came to my office to ask me a question and I answered it before he opened his mouth. When I worked for an APL timesharing company in Houston, one of my colleagues asked for a small utility; I wrote something off the top of my head that rated at about 79 cents (lower cost being better). My branch manager took it as a personal challenge to trump my effort and made several efforts, never getting closer than about $1.20 (and was not gracious in defeat). In another case I wrote an APL program for a manager at an Exxon real estate subsidiary to track computing costs, and the manager told me my utility (without documentation or training) spread like wildfire, with over a dozen managers using it.

On a different level, I once participated (with 4 or 5 other students) in a reading of the Passion at Good Friday Mass at the University of Houston. I played the role of Pontius Pilate. I guess my performance was effective, because this one woman in the congregation made a beeline to me after Mass and mentioned how I reminded her of the miracle plays she watched when she was a young girl. I was honored but felt a little sheepish about being praised for playing the most despised man in human history, whom ordered the execution of Christ.]

During a recent staff lunch at work, we had an interest popcorn question, a general interest item asked round robin: If you had the opportunity to have lunch with anyone, living or dead, who would you choose and what would you talk about? (The reader is invited to ponder that question.)

Some of my colleagues responded flippantly: one guy mentioned his wife (whom works two blocks away), and a follow-up respondent said he wanted to have lunch with the first guy's wife. One of my colleagues, a fellow Catholic, said he would have lunch with Jesus and (tongue-in-cheek) ask him for next week's lottery number. I hate to tell him this: no doubt after he won, the Congress would ex post facto declare him to be an AIG "bonus baby" manager to accomm0date their unconstitutional bill. Actually, if I was to have lunch with Jesus, I would ask Him a different question--like whether I'm going to heaven or to where Obama is sending our economy.

A couple of my colleagues wanted to have lunch with Barack Obama; they can have my tickets (yeah, right). (Obama would need to pay an RAG retention bonus for me to stay through lunch.)

Two of them mentioned a long-deceased parent. I was empathetic to that; I've wondered about my maternal grandmother whom died from cancer when I was about 3 or my paternal grandfather whom died when my dad was in his teens.

However, a few touched close to my runner-up: one of the founding fathers, Thomas Jefferson. (They chose Alexander Hamilton and Benjamin Franklin, respectively.) According to Wikipedia, "A polymath, Jefferson achieved distinction as, among other things, a horticulturist, statesman, architect, archaeologist, inventor, and founder of the University of Virginia."

Who did I choose as #1? Another polymath, Leonardo da Vinci: an artist, sculptor, inventor (e.g., conceptual designs for a helicopter, tank, and calculator), engineer, geologist, musician, architect, and scientist. As for what I would ask him, I told my colleagues I would ask him what kinds of things he would do if he was to make a fresh start today. (A couple of colleagues wisecracked "Java developer"; guess what they do for a living...) However, it was clear to me that my choice was unexpected and had created a buzz beyond any of the other choices.

One of the reasons I wrote this post is because I think people have certain stereotypes of conservatives. Condoleezza Rice, the Bush Administration Secretary of State and a classically-trained pianist, loves to listen to hard rock band Led Zeppelin while exercising. I have a book shelf of books on creativity. The fact is, there are conservative think-tanks and even former Speaker Gingrich whom are seriously interested in solving our nation's problems and aren't interested in simply rerunning the Reagan elections and 1994 (i.e., when the Republicans took control of the House for the first time in decades).

Miscellany: 3/24/09

Texas School Board: Say 'No' to Science Curriculum Change

I graduated from a public high school in Texas, representing my high school in various university interscholastic league science contests. So it's with more than a passing interest that I look with alarm at certain misguided social conservatives, including the Texas Board of Education chairman Dr. Don McLeroy, trying to impose sophistry (i.e., creationism or so-called intelligent design) into the school curriculum. The last thing we need, in a country where ready availability of quality math and science teachers are crucial to the development of scientists and engineers necessary for America's future in the global economy, is to confuse impressionable young men and women, posing propaganda and intellectual surrender as legitimate scientific inquiry and criticism. Let me make myself perfectly clear, Dr. McLeroy: I believe what you are attempting to do undermines the integrity and foundation of our public schools. What we need is higher rigor and expectations of our young people, not settling for anti-scientific mediocrity and regurgitation of fringe arguments. Texas deserves better; America deserves better.

Obama as Commencement Speaker at Notre Dame? Cuomo redux.

I have no doubt that we will hear Notre Dame justify the invitation in the interests of academic pluralism (and, of course, the historic nature of the first black President). As President, Obama does not need this particular pulpit, but if there's anything Obama understands, it's symbolism. As a Catholic, I resent a prominent Catholic university being used to promote Obama's agenda, including expansive pro-abortion choice rights, embryonic stem cell research, and gay rights, all of which go against definitive Church moral teachings. (In terms of gay rights, I'm speaking of attempts to redefine marriage and sexual behavior, not in terms of tolerance and fundamental dignity as a person.)

We have already the precedent of former New York Governor and Roman Catholic Mario Cuomo, whom in 1984 used the soapbox to delineate his personal "I-personally-oppose-abortion-but-will-not-impose-my-religion" philosophy, which has been a blueprint for all subsequent Catholic Democrats (e.g., Pelosi, Biden, Kennedy, and others) to rationalize their groupthink politically expedient position in favor of abortion rights. It has all the moral foundation of Stephen Douglas' stand in favor of popular sovereignty to deal with the matter of slavery (let majority vote in a state decide whether a state should be slave or free); Douglas claimed he was personally opposed to slavery, but he supported the infamous Dred Scott decision and was willing to let any state, even a Northern free one, vote itself a slave state. To those of us whom believe in the political ideals of republicanism (I'm speaking here of political philosophy, not necessarily the GOP), the idea of majoritarian rule determining an individual's unalienable rights is unaccceptable.

Despite high marks for his oratorical excellence, Obama often comes across as wonkish, long-winded, maddeningly nuanced, evasive and indirect, and overreliant on cheap tactics like straw men, scapegoats (in particular, George Bush) and mock indignation. A case in point was when Obama, who used to teach Constitutional law at the University of Chicago, contradicted his own administration, which insisted the AIG management contracts were legal, and once again sparked an overreaction from the Democratic House of Representatives, resulting in an initial passage of a retroactive, punitive tax measure targeted at bonuses on bailout recipients. When asked to comment by 60 Minutes, specifically asking him to evaluate the measure's constitutionality, Obama subtly implied there were problems with the House measure's approach, but stopped short of threatening a veto, which would have killed the bill in the Senate.

Notre Dame is trying to mute criticism of inviting the most radically pro-abortion choice President ever elected by also inviting pro-lifers. I don't think we pro-lifers are trying to censor the President; we realize not all Americans share our commitment to the unalienable rights of unborn children. But Obama goes beyond lip service on behalf of unrestricted abortion. He prevented passage of the Illinois Born Alive Infant Protection Act, which requires medical personnel to assist babies born alive in abortion procedures. (Certain Illinois hospitals even left some relevant babies to die unattended.) The act was passed and signed into law the year Obama joined the U.S. Senate. Transcripts at the time show Obama was concerned that signing the law would undermine Roe v. Wade and thought the mandate to provide necessary medical assistance to a surviving baby constituted an undue burden on abortionists--but he also opposed it after language was added to the bill that specifically addressed Roe v. Wade concerns. Not only that but the US Conference of Catholic Bishops strongly opposes Obama's 2007 co-sponsored version of the Freedom of Choice Act, which would go beyond codifying Roe v. Wade, in terms of promoting abortion and rolling back even modest restrictions against partial-birth abortions, informed consent, and parental notificaton.

Illinois Empress Casino v. Giannoulias: Ruling Violates the Bill of Rights

Former Governor Blagojevich and his brother were caught discussing political contributions of about $100K from horse racing track operators (not to mention over $300K in contributions in 2002-2007 from track owner John Johnston) as a quid pro quo for signing legislation transferring "purse money" from riverboat casinos to racing tracks. The casino owners are furious, rightfully claiming violations of their Fifth Amendment rights. The Illinois Supreme Court denied the constitutional argument, claiming that the precedents normally deal with things like land, not money. This is unconscionable, taking a nuanced position on type of property which is not based on strict interpretation of the Fifth Amendment. I wonder if any of these justices took classes in Constitutional law under Professor Obama; if so, they probably took a little too literally his concept that "it's good to spread the wealth around". It's time for the US Supreme Court to take the Illinois Supreme Court to the woodshed and reaffirm the Fifth Amendment means what it says.

Obama, FDR, and Presentism

One of the things that almost went unnoticed was when White House Chief Economist Christina Romer went on "Meet the Press" last Sunday and said, "Of course, the fundamentals [of the economy]  are strong", following Obama's own words days earlier regarding "all the fundamentally sound aspects of our economy". And how did Romer describe those fundamentals? "The American workers."

Does this sound familiar? It should. During last year's campaign, on September 15, McCain insisted that "the fundamentals of our economy are strong" and then later in the day clarified his remarks: "My opponents may disagree, but those fundamentals, the American worker and their innovation, their entrepreneurship, the small business, those are the fundamentals of America and I think they're strong."

And just how did Obama respond to McCain's message? "Out of touch." "Stubborn." "Incapable of understanding" the economic crisis. You know, the kinds of words that embody the Obamaian ideals of non-partisanship, mutual respect, and  a different tone in Washington.

After a de facto bear market by itself just in this year alone (a 20% drop in the stock market), weeks of talking down the economy and a sharp jump in the unemployment rate and the budget deficit, Obama has finally come to the same conclusion McCain came to 6 months ago. That's leadership for you. I wonder if Obama was honest with himself, would he evaluate himself to date as "out of touch", "stubborn", and incapable of understanding the economic crisis?

Presentism

I think one of the rituals of every election is that each candidate soberly tries to convince the voters that the challenges he or she faces are the most daunting in the history of the republic and the candidate has just the right knowledge and skills to lead us out of the morass.

However, one could beg to differ. For example, when FDR took office, two-thirds of the states had closed their banks, millions were homeless, a quarter of the workforce was unemployed, and industrial production and farm prices had contracted by over half, devastating farmers.

There is a similarity in the strident populism espoused by FDR, McCain and Obama: the need to create a bogeyman, the greedy, corrupt capitalists run amuck. In a certain sense, just as there are unfounded conspiracy theories regarding the assassination of JFK or even the events of 9/11, there is this feeling that the housing bubble and its burst were somehow mastermined by a conspiracy of moneyed interests.

But in fact is that just a few people can cause disproportionate impact; they skirt about the soft spots in our regulatory systems and are often exposed only when they are cornered by overwhelming circumstances. A case in point is Ponzi schemer Bernie Madoff whom did not have the liquidity to cover mass redemptions. Another example is the rogue currency trader Nick Leeson in 1995 whom single-handedly brought down vunerable Barings Bank, founded in 1762. Leeson was supposed to hedge his trades (to minimize downsize risk) but emboldened by initial winning trades, began making riskier bets and started losing. Largely unsupervised and using a hidden account to mask his accumulating losses, Leeson was basically exposed by the Kobe earthquake in early 1995 and a collapsing Asian market, resulting in a $1.4B shortfall.

No doubt the response of Obama and other demagogues is to demonize the regulatory system (or alleged lack of a regulatory system). Yes, there are lessons to be learned from the examples of Leeson and Madoff. It involves the need for proactive vs. reactive management and control, and individual or business trust is subordinate to auditability of transactions.

I learned a related lesson years ago when I discovered students cheating in my classes at UWM and UTEP.  The students seemed more concerned with their loss of face in being caught than in admitting what they did was wrong. They were more interested in how I caught them, no doubt so they could work around my methods. Regulations are similar in nature; they are necessary so we can make contracts in good faith and enforce them. 

I also once shared an office at the University of Houston with an MBA student whom couldn't solve the most basic problems in managerial finance and had come to me for help. I had earned an A under the same professor and knew he gave wicked multiple-choice problems. What I didn't know is that this professor was reusing exams between semesters, and there was a small black market selling the exams to a select number of students to avoid detection. So the same student told me how he had finished his first exam in 5 minutes, purposefully marked one of his answers wrong and turned in his exam a half hour later. I was troubled with what I heard and sought to tip off the professor, more in terms that unnamed students had access to his old exams. At first, the professor's response to the situation was that the students were showing laudable initiative and implied there wasn't that much he could do about it. I suggested that perhaps he could invite some of the stellar students to the blackboard to show the rest of the class how they went about solving the problems. A few weeks later, the same professor, visibly shaken, stopped me in the hall and said that he now understood what I was talking about, and he was taking steps to remedy the problem. The issue here was not so much the fact of the black market but the culpablity of the professor in being too lazy to rewrite exams between semesters, and certain students exploited that vulnerability. I myself have no problem with students looking at old exams--but there's a difference between learning from taking a practice test and memorizing an exam key.

What we know is the housing bubble was caused by too much money chasing a limited number of houses. In latter phase of the cycle, this was made possible by making cheap money available to new buyers not qualifying under traditional criteria, such as 20% down. Loan gimmicks emerged to service this new class of risky buyers, fed by easy funds from the government and also foreign investors snapping up mortgage securities and T-bills. This was never going to end well, just as Madoff admitted the exposure of his Ponzi scheme was just a matter of time. Even with a modest regression back to historical mortgage rates, the terms of these loans would overwhelm lower-income homebuyers. All of this depended on interest rates remaining under historical norms for an extended, indefinite period of time, during which new homeowners hoped that their incomes would rise sufficiently to accommodate higher payments or they could sell out for roughly what they paid for the property. In fact, in more than a few cases, with no down payment and declining property values, homeowners were in a de facto negative equity position, with heightened risk of default to the note holder.

Several people, including myself, were insisting years ago that these assumptions were unrealistic. But politicians from both parties were in a state of denial. In particular, the Democrats had no incentive to jawbone lower-income Americans from taking on gimmick mortgage loans and thus participate in the American dream of homeownership. No, if anyone is to blame, it's the "greedy" lender, not the real estate agent, whom looked the other way when the bad faith homebuyer misrepresented his or her credit record and/or ability to pay on his mortgage, fast-talked him buying a home he really couldn't afford.

Does that mean the lender was not blameless? No, he had a responsibility to the bank and its shareholders to perform due diligence on creditworthiness of the buyer. In turn, the secondary market, in buying the note, had a fiduciary responsibility to its investors and other partners. (In particular, I'm referring to Fannie Mae and Freddie Mac, which as GSE's have had access to low-cost funds from the Treasury and hence put taxpayers at risk.) But unlike McCain and especially Obama claimed, it wasn't a just a failure of "greedy" capitalists. For example, I don't think Leeson intended to bring down Barings Bank. He got undisciplined and then dug himself into an even bigger hole by compounding speculative currency bets. He had deluded himself into believing his trading skills alone could make him whole--not unlike addicted gamblers running amuck in Las Vegas. There are few "sure bets" on currency trades other than the parties servicing the trade, like the vendors selling Levi's or pans and shovels during the California gold rush. (And even parties servicing trades find it difficult to make profits with lower volumes and/or increased competition.)

There were multiple points of failure with various parties not engaging in due diligence and no one wanting to admit the emperor was wearing no clothes.

The Comparison with FDR

Whereas the frenetic pace of spending initiatives under FDR has a parallel under Obama's, there are distinct differences. First of all, FDR had run against the federal deficit and did things like slash federal salaries, cut the military budget, even attempting to reduce military/survivor pensions.  There was no attempt to misrepresent funding of public sector positions (e.g., for state and local positions) as a macroeconomic stimulus. Obama, on the other hand, through the stimulus and omnibus budget bills, expanded some agencies by up to 500% and then added roughly 8% in operating budgets beyond that. 

Second, FDR made getting banks operational  his first priority. Presumably we'll see Geithner start to flesh out his proposal this coming week--in the aftermath of Obama scapegoating the greed of banks and other financial services companies in attacking the AIG bonuses. This is on top of the stock market tanking another 20% this year under Obama, clearly reflecting the market's lack of confidence in Obama's approach, which seems to be based on punishing sources of growth, e.g., higher investment taxes and higher marginal income taxes on job creators.

Third, FDR struck a more positive message at his inauguration, i.e., "the only thing we have to fear is fear itself." It is true, of course, like Obama, he refused to work with his predecessor in the waning days of that administration, and he also blasted the greed of Wall Street.

Fourth, FDR's social net was relatively modest. For example, at the beginning of Social Security retirement, there was something like 16 workers for every recipient.

Finally, FDR had more of a concept of shared sacrifice, e.g., war bonds and rationing. I'm certainly not advocating steps like rationing.  But Obama has been focusing on revenue raisers like investment and upper income tax rates, particularly for the top 5% of American workers, and income redistribution: Obama made a priority of increasing the percentage of households paying no net federal income tax to almost half and increasing the amount of federal credits and programs to the same population by significant numbers. Thus, Obama is shoving the idea of sacrifice strictly to upper-income households. He has attempted to justify this on ideological grounds of "class exploitation".

Retroactive Taxation: Unconstitutional

It's rare that you see such an egregious abuse of majoritarian power: this week the House of Representatives decided to impose a 90% tax rate on paid bonuses relevant to employees of federal bailout recipient companies (in particular, AIG) starting at the end of  last year. Article 1, Section 9, clause 3 of the US Constitution states: "No Bill of Attainder or ex post facto Law shall be passed." This law is manifestly ex post facto--punishing AIG employees and others whom agreed to stay on in exchange for a retention bonus, not knowing the Congress would arbitrarily abuse its taxmaking power after the fact of the contract to strip them of their compensation. That totally changes the facts material to the employee's agreement with management.

In a recent post, I explained how the State of California had essentially done the same thing to me. I had done a Roth IRA conversion in 1998 in Illinois and was taking advantage of a one-time IRS offer to spread the income over 4 tax years. Like all but a few states, Illinois had waived its 3% state income tax on Roth splits.  I would not have made the split knowing some other state would try to tax me down the line--like California did with its nearly 10% income tax. It was--and is--unconscionable for California to make a claim on that income, which was not earned in California, without my knowing how California was handling Roth conversions or not even having any intent to move to California at the time of the transaction. [The state revenue people claim that some  judge ruled that since California did not chase people moving out of state having made the Roth conversion by California rules, they were entitled to tax the Roth conversion split from out-of-state residents moving to the state. That took a leap of logic and fairness, even in a state infamous for its activist jurists.]

I also think there's an equal protection issue: When a professional is taxed differentially simply because he works for a federal bailout company, it provides the competition with an unfair hiring advantage. 

It's counterproductive; the Congress isn't helping AIG CEO Liddy spin off profitable tax-paying operations, by perversely providing the best and brightest managers a tax incentive to leave. That would essentially lower the attractiveness of a spinoff and hence the price Liddy could obtain on behalf of the American taxpayer.

Finally, it's bound to be ineffective as tax attorneys advise companies on ways around artificially high tax brackets, e.g., deferred compensation or shifting compensation towards more attractively-taxed base salary, or perhaps an external consulting relationship.

You would think that Bernie Madoff's ability to escape detection for so long in an industry subject to so many regulators would have tempered the demagogues from their johnny-come-lately tax schemes. As the Citibank CEO recently mentioned, the fact is the real villains of the bad housing market deals are already gone. Attacking the remaining managers does nothing to stabilize the banking environment, and the President and Congress need to focus on that, not inciting taxpayers to riot with populist nonsense.

The Grandstanding Fools on the (Capitol) Hill

You would have thought, of all the news I heard relevant to AIG and this self-righteous grandstanding over retention bonuses committed to certain AIG executives 6 months before AIG received a penny in federal bailout funds, the pernicious idea that federal bailout funds were possibly used to shore up housing market bets placed by certain largely unregulated hedge funds, benefiting a number of high-worth individuals, and/or foreign banks, should have been the focus of Congressional outrage, not this national obsession, based on the politics of envy, on the bonuses.

Part of the furor deals with most Americans misunderstanding the concept of bonuses in the context of financial services and, in particular, retention bonuses, and politicians, e.g., the Demagogue-in-Chief, that Pied Piper of Failed Liberalism notably using the provocative, misleading term "extra pay",  treating the bonuses as "found money", rewarding the same people responsible for bringing a world-class company to the brink of bankruptcy, furthermore paying out those bonuses on the taxpayer dime. The analogy is really more like a salesperson working on commission or a waitress depending on tips. This is so well-known a compensation paradigm that certain financial services firms have advertised over the past few years to boast that their account agents are paid straight salary (and hence have no vested interest in pointing the client to a particular investment). I have experience with these approaches, even within the IT industry. After my first year performance review at a Japanese chip tester facility, my boss structured half of my compensation increase in the form of a retention bonus to be paid out evenly over 6 months. In another case, an employer would not meet my market-based salary requirements but promised compensatory bonuses and emphasized its no-layoff policy. In these cases, bonuses were not really add-ons but an integral part of my compensation; the nature of the bonus had more to do with my sharing the employer's risk of business conditions, e.g., a cancelled bonus serving as the equivalent of a salary cut.

We don't know enough about the nature and structure of the bonuses, but we do know that AIG entered into these legal obligatons to its employees in the spring of 2008, several months before federal intervention. The target $165M in bonuses were basically part of AIG's attempt to keep the conglomerate with profitable operations beyond the embattled target financial services unit. This is important as Edward Liddy, the federal-approved AIG chief, with a reputation of spinning off units from Sears (e.g., Allstate, Discover Card, Dean Witter, etc.) looks to possibly uncoupling business units and hence reduce the government's risk. He is not going to be able to sell off units if the best and brightest, even in the financial services unit, jump ship.

Douglas Poling

This is not to say I don't have my own reservations about some of the bonuses that I've heard about. In particular, there was news this week that the receiver of the top ($6.4M) bonus, Douglas Poling, has returned his bonus. At first, Douglas Poling, a current executive vice president of energy and infrastructure, seems, by title, to be as removed from the derivatives scandal as anyone. But in fact, according to the Wall Street Journal, Poling was the former counsel and chief administrative officer under former financial services chief Joseph Cassano. A former Wall Street law who joined in the 1990's, he oversaw the terms of the steady-fee-producing swaps/derivatives contracts. INCLUDING TERMS REQUIRING AIG TO PUT UP OVER $100B IN COLLATERAL last year due to collapsing real estate prices. 

According to an investor transcript, Poling made the following statement during sunnier times: "We are very careful and disciplined and rigorous in the way in which we structure and document these transactions, and are very sensitive to ensuring that we have early termination rights so that if the rules change, we're able to unwind those transactions and move on to other segments of the business that are more attractive."

You did a heck of a job, Dougie. How in the world did you stand by silently, allowing the company to assume catastrophic risk? Was the math too hard? Are you going to scapegoat some geeky actuary? Those calls for over $100B in collateral is the fruit of your legal expertise and due diligence? I am at a loss to understand why AIG did not force Poling to fall on his own sword along with Cassano, never mind give him a bonus!

On top of that, serious questions have been raised by a former AIG in-house auditor, Joseph St. Denis, when he raised questions over a now-defunct joint venture with Tenaska Energy that was Poling's baby. St. Denis alleges that his reporting ties to the parent company were cut after he raised accounting questions over the venture. This sort of alleged behavior reeks of Enron-Arthur Andersen like stench.

Irresponsible Politician Behavior

It would seem that being out of power, the Republicans should be the major beneficiary of this scandal. Obama's blast against the raises follows his own administration's report that the bonus contracts were legally enforceable. The fact that Obama felt compelled to do so reflects the administration's failure to anticipate the explosive nature of the issue although certainly Geithner and others had known about it for weeks. The problem is--inflammatory rhetoric by Obama and his cronies are making Edward Liddy's job more difficult to maintain a viable insurance company, in whole or part, and drawdown the American people's exposure. The American consumer and business concerns will not be better served by fewer comparable competitors in domestic and global markets.

Harsh rhetoric by politicians like GOP Senator Chuck Grassley (who suggested that AIG executives take an example from the Japanese tradition of honor suicides from the Samurai life and Bushido code) have fired up an outraged public on the verge of lynch mob mentality. A visibly shaken Edward Liddy was pleading before Congress, noting that some of his employees are receiving death threats.

This whole obsession over bonuses amounting to literally a penny on the federal bailout dollar is particularly egregious. Money is fungible. You would think from listening to the national press and the fools on Capitol Hill that AIG sold nothing but customized derivatives. It serves as a general warning to companies (as if they needed one!) over the dangers of doing business with the government. Why are we stopping with bonuses? What about salaries? Why not pick sides by essentially letting the competition know internal/privileged information so they can poach key AIG personnel? I certainly do understand that the federal government has a vested interest in cost containment in firms being bailed out, but I do not believe that the federal government is capable of running an insurance company, and this whole scandal is little more than a textbook example of why companies should not get in bed with the federal government.

Democrats, in particular, are easily distracted by surface-level details that fit their class warfare agenda. "Greedy" American employees sharing $165M in "bonuses" (from operational cash flow generated by its own business) get more negative press attention than, for example, foreign banks Societe Generale and Deutsche Bank, which received $4.1 billion and $2.6 billion in actual federal taxpayer bailout money.

Furthermore, the Democratic-controlled Congress seems to be giving far more scrutiny and due diligence to $165M in AIG bonuses than over a trillion dollars in the so-called stimulus and omnibus budget bills.

I think it's time for President Obama "to put aside childish things" and exercise due diligence and leadership. He sternly warned us we had no time to scrutinize over a trillion dollars in new federal spending, an obligation to be paid by our children and grandchildren, but he directs the US Treasury to do whatever it takes to find a way of setting aside employee contracts (but not union contracts with the autoworkers) while Geithner hasn't delivered  a concrete plan to deal with toxic assets held by banks, which is really the bottom line of what we've been dealing with since last September.

Why are the American people not demanding more of a President whom puts a higher priority on signing nearly 9000 earmarks than a concrete plan for toxic assets, which is behind sinking bank assets, home values and loan availability?

Obama's Attempt to Shift Veteran Care Costs to the Private Sector

One of the things I really liked about America, particularly in the earlier period of the Afghanistan and Iraq campaigns after 9/11, was the way there was spontaneous support for our traveling uniformed troops; on many flights I heard pilots on overhead bring attention to our troops onboard, and the rest of the travelers broke into spontaneous applause. I was thrilled, not envious, on other flights when smiling flight attendants quietly upgraded troops in coach to unoccupied seats in first class.

To me, honoring troops is not simply a bumper sticker. I remember in middle school pretending to be a newscaster like Walter Cronkite; there were the casualty figures from Vietnam. To a youngster, it seemed like war was a permanent fact of life. Then my Dad got orders to Vietnam. The war suddenly got very real to me--I was the oldest of 7, not even a teen. Even though Dad wasn't in the infantry, warzones are never safe. I was in a state of denial, not even going to the airport to see my Dad off.  My Dad wrote in a Christmas message to me that I had to be the man of the house while he was gone. My Dad came back.

One of my Kansas friends was a diehard Green Bay Packers football fan. I had once reduced him to tears, insisting major league baseball was the national pastime, not football. Then it seemed he wasn't there anymore. My Mom later told me that his Dad didn't come back alive. All I could think about was that stupid argument and wishing I could take it all back.

It's not just about Dads and their kids. One of my sisters-in-law used to write these upbeat letters with smiley faces liberally sprinkled about. My brother was on an isolated tour in Korea at the time. One day I got a very uncharacteristic dark, gloomy letter and dashed back what I thought was an expression of concern over the change in tone. The response caught me totally off-guard; she wrote the following (somewhat paraphrased), carbon-copied to everyone in my extended family: "Of course I'm not doing well, you jerk. Your brother isn't here with me, I've got 4 kids to deal with, and I'm having to cope with everything on my own. I've started seeing a psychologist over it. There, I've said it. Are you happy now?" I was just stunned; I, of course, knew she missed my brother. My other sister-in-law, who doesn't write her letters with smiley faces, immediately replied to all, congratulating the former for having put me in my place.

The status quo involving veteran medical treatment is, in theory, that the VA will provide full, free medical care for any service-related condition. If the veteran gets treated at the hospital for unrelated issues, the VA will bill his insurance company reasonable charges. However, it seems like Medicare will not accept such charges. (See David Rehbein's recent Wall Street Journal article entitled "Will Obama Go AWOL on VA Health Benefits".)

Obama's proposal, until late Monday, was to make private insurance cover preexisting service-related treatment. (The justification was to extend related medical services.) Rehbein argues that Obama's position is a bait-and-switch from what he promised veteran groups during the general election campaign. He furthermore feels that it would make it more difficult for service-disabled to get a job with health benefits, for a small business owner to get private health insurance, and the veteran's own treatment costs may push his or her family's costs to the private insurance caps, leaving the veteran's own family uncovered.

Obama apparently has backed down, but not before meeting with several veteran groups, trying to sell them that "change we need" is the US government dumping the costs of service-disabled veteran health care on the private sector. This was unjust and unprecedented.

Let me make my position clear: veterans who put their lives and bodies on the line for this country deserve a commensurate response from a nation grateful for their service: the best medical treatment, no questions asked: whatever it takes. A solution to VA care does not make it harder for a veteran to find a job or to get his family coverage.

Why I'll Never Work in California Again

The truth is, I never wanted to live in California. I had been commuting from Chicago for over 3 months as a temporary corporate DBA for the American subsidiary of the leading Japanese memory chip tester manufacturer in Santa Clara. As I got ready to drive to San Francisco late in September for my trip home, my client boss stopped me to talk to me.

He had been hinting at me for weeks that he wanted me to go perm, but I never took him seriously because I had signed an agency contract with a no-compete clause. In fact, the DBA I had replaced had been rehired at the beginning of August--and then resigned again (in less than 2 weeks) when an even earlier employer offered him stock options, which were very hot in 1999. That DBA, angry at my boss for keeping me as lead on the ERP production database, started spreading rumors that I had been offered a job by my boss--totally untrue (but ironically my boss believed it and was angry at me because the rumor had apparently undermined his intent to make an offer). The fact is my original assignment had been due to expire at the end of July, but an Indian colleague was going to India for the month of August, and my boss used that as a pretext to keep me on.

I expected for him to try once again to hint at going perm and tried to evade the topic, but my boss had a different plan, which caught me off-guard: He told me the company wanted to make me an offer. If I did not accept then and there, this would be my last billable day, and they would look to bring me back if and when they upgraded their version of Oracle Apps (not anytime soon). 

When I went to the explicit discussion of the no-compete clause, it turned out he was prepared for it. It turned out my agency had made some unbelievable blunders. The sales guy on the account misrepresented the terms of the contract to his management, won a high bonus and then resigned. The agency was slow to replace him.  The agency didn't get the contract signed, and to make things even worse, had invoiced them, instead of exploitively double my rate as they intended, at below the rate they were paying me. My boss could simply pay the amount they invoiced him, and the agency would be in the hole. (I of course received subsequent virulent emails from company officers, and "Benedict Arnold" was probably the tamest thing I can post here; they used abusive language, vowed to sue me, and denigrated my professionalism and personal character. The fact is that I never initiated or encouraged any discussion of a permanent offer.) I was given an ultimatum, and if I turned it down, I was unemployed.

To this day, I have to smile at the cheesiest sales pitch I've ever heard from my client boss: He literally used the fact I could buy a can of Coke for a quarter in the company vending machines. (I mean, other IT employers didn't even charge for soft drinks, and a later client once invited me to their weekly Friday beer bust.) 

Not to mention the experience I had a few weeks earlier where my boss invited me to go downstairs for some leftover pizza after a company meeting/luncheon. I was initially reluctant, pointing out I wasn't an employee, but my boss insisted. I went downstairs, and a female Filipino accounting manager,  who resented me for replacing the former DBA, saw me approach the unattended open boxes and sprang into motion, closing the boxes and standing in front of me, screeching that the pizzas were for employees only, not me. This, I think, is one of the most pathetic things I have ever experienced at a customer site. The fact of the matter is, my boss probably figured he was saving the company money by letting me have some cold leftover pizza rather than my going out and expensing a lunch.

In any event, I reluctantly agreed under my boss's extortion to accept, which required my moving to California. I would then live in California over the next 20 months or so until returning to Illinois to work on a project in the Milwaukee suburbs.

I was not thrilled (although hardly surprised) when my state income tax nearly tripled and my living expenses went up roughly 40%.  To those who have never lived in Silicon Valley, there is a perverse attitude that defies any attempt to describe it. I'll try with one minor example. I rarely go to the movies, but I think Silicon Valley was one of the first places to see movie theater prices go up over $10 a ticket. When asked to justify it, some theater owner effectively said if you could buy a home starting at half a million dollars, you are disgracing yourself by even raising the question.

But my unhappiness with the California government is based primarily on two facts, which offend me even more than the sky-high taxation. Both of them, in my view, are ethically unconscionable. I had no choice, because I was living in Illinois, and I couldn't find a California lawyer interested in pursuing the issues because it wasn't worth their while.

In 1998, the Congress allowed taxpayers a special deal to convert an existing IRA to be converted into a Roth IRA (which requires recognizing the amount of the IRA as income at the time of the conversion). Under the special terms, you could split the amount of the conversion in 25% splits for 4 years, starting in 1998. (What makes the story even worse is my broker at the time, Fidelity Investments, refused my mid-December plea to reset my then underwater conversion because they didn't have enough staff (I could do it the following month, but I would have to declare all the income in 1999)).

Most states, including Illinois, did not tax the proceeds. Before going further I want to point out that at the time of the conversion not one dime of that income was earned in California, I had no desire or intention of moving to California, if I knew I would ever be state-taxed on the conversion, I would have reconsidered the conversion decision because the additional taxes would have lowered my returns.

The California tax revenue people docked me for subsequent Roth IRA splits declared during the time of my residency in California. California docking me nearly 10% for a transaction that did not occur in California and did not involve income earned in California is chutzpah.

The state income tax people were absolutely shameless and unyielding to any discussion of reason. They claim that some moronic (my word) California judge had decided BECAUSE CALIFORNIA DID NOT GET A CUT OF ROTH SPLITS ORIGINATING IN CALIFORNIA WHEN TAXPAYERS LEFT THE STATE, CALIFORNIA HAS THE RIGHT TO TAX THE SPLITS OF OTHER STATE RESIDENTS MOVING TO CALIFORNIA. Say what? Anyone making a conversion in California  KNEW they were on the hook to pay the greedy bureaucrats nearly 10% for all splits. So they move to Illinois, and surprise, surprise, they find themselves in a tax windfall. Only in California can you find a judge stupid enough to think it's fair to tax me when I had no knowledge at the time of the conversion I would be living in California over part of the next 4 years.

The second example involves the SDI deduction (a mandatory California tax, at the time I believe which maxed out at somewhere around $250). I left the Japanese subsidiary in July of 2000. By that time I had already paid the maximum for SDI. I joined a consulting company which laid me off in early December 2000 (and I did some subsequent subcontracting work before and after on a W-2 basis). Each employer assumed I had paid no SDI. So I ended up paying about double my maximum.

To my utter astonishment, the sleazy California tax people decided to disallow my credit owed for excess SDI.  (This was after I moved to Illinois in 2001 and to this day I haven't found my personal W-2 stubs.) I had itemized the exact amounts in my tax spreadsheet, but my former consulting company employer was no longer in business and I couldn't get a copy. That shouldn't have made a difference, but somehow California "lost" the state copies of my W-2's and thus decided it was only fair to disallow my excess SDI deduction and put the burden of me to "prove" that I had overpaid SDI by furnishing my personal W-2 copies, which were/are probably stored in some unpacked moving boxes.

I argued that they should be able to determine that from my employers that year. They claimed they couldn't do that because employers only submit lump sums with no breakouts of individual employees. It was just mind-boggling how they "lost" my state W-2's, weren't disputing my declared income--but were disputing the excess SDI, which is obvious to anyone with rudimentary skills in arithmetic.

I had no choice but to pay under extortion from the State of California for two circumstances where the facts are indisputably in my favor.

The response is that I will never let the State of California get a chance to steal my money again or to tax 10% or more of my income. As I heard Governor Arnold Schwarzenegger moan over the state $42B shortfall and shamelessly pander to the Obama regime for his fair share of our children and grandchildren's income, I felt, cry me a river. The State of California can kiss my blue-eyed Canuck ass.

 

Obama: Politically Exploiting the AIG Bonus Issue

I'm personally tired of hearing Obama blast the "recklessness and greed" of Wall Street. The "extra pay" he derides is misleading; apparently many of these bonuses were for purposes of retention, so that the best and the brightest would not jump ship as AIG's financial condition began to deteriorate. Many people sneer at the concept of a retention bonus, feeling that given 8% unemployment and a devastated financial services industry, these executives have no alternative to stave off being unemployed and unemployable. But Andrew Sorkin, in his recent New York Times article "The Case for Paying Out Bonuses at AIG", quotes Pearl Meyer, a compensation consultant, as saying that the AIG executives are being heavily recruited, and already many, after receiving the bonuses, have jumped ship. (There could be a variety of reasons for this; for example, competitors to AIG  may be trying to raid AIG's top customers, looking to trade advantageously against AIG, or looking to possibly acquire AIG businesses, or perhaps consultancies can charge the government huge fees for discovering where the bodies are buried in the complex accounting of relevant transactions.)

The ironic thing is that the hostile public reaction against AIG or its bonuses makes the retention problem even worse--and is killing the federal government chances of spinning off all or individual profitable operations to the private sector at a decent price, which could reduce the net cost to the American taxpayer. The last thing Obama needs is not containing the AIG problem, which is difficult when the executives in the know are deserting, given very low morale and being publicly blasted by politicians and the press. Should Obama know better? Of course. An experienced executive would know that, but not Obama. But then blame the American people for electing an inexperienced leader. Obama couldn't see the big picture but was afraid the AIG situation was hurting his public approval ratings and wanted to remind the American people no one does class warfare rhetoric better than he does.

If Obama wants to continue such rhetoric, I feel we should in turn talk about pay-for-performance in Congress and the White House, which seem to be good at only one thing: running up the federal deficit. It turns out that the Congress continues to play games with compensation, even whether it should have an automatic raise (without evidence of better productivity)--but then you see expense accounts being padded.

The fact is that Obama's own administration and outside lawyers have reviewed the AIG contracts and concluded they are enforceable. This means not only will the bonuses have to be paid, but the US government would have to pay for the employees' legal fees if and when they almost certainly would lose the court cases. But maybe we're expecting too much of Obama; it's not like he has a Harvard law degree and is a former editor of its Law Review. Oh, wait a minute...

Obama: Incompetent on Foreign Trade

One of the things Obama wanted to do at the recent G-20 summit was to persuade other countries to follow his lead in upsizing their stimulus packages. Most European leaders, including German chancellor Angela Merkel, rebuffed the move as irresponsible, given the fact they are already operating with budget deficits above European Union target limits. [They also believe that Obama and Geithner have taken their eyes off the ball, which is to deal with the banks and the toxic assets.]

One of the things the G20 did seek a common ground on was guarding against a "beggar thy neighbor" form of trade protectionism. However, don't expect much from the Obama Administration on behalf of free trade. Obama used long-overdue trade pacts with Colombia and South Korea, two of America's strongest allies, as political scapegoats during the Presidential campaign. And in the recently passed stimulus bill there was protectionist language in favor of "Buy American" or against H1B's  (foreign knowledge workers).

One little-noticed provision in the stimulus bill involved the Democrats delivering on an IOU to the Teamsters by killing funding for a pilot program involving some 27 Mexican truckers (in violation of NAFTA: by 2000, Mexican truck drivers were to be given access to drive trucks across the US). (Mary Anastisa O'Grady has an excellent summary of the facts in today's column entitled "Washington Starts Another Trade War".)

The pretext is a straw man created by the labor unions and their crony politicians regarding Mexican truck safety. In fact, Ms. O'Grady makes a strong case that the Mexican truck drivers actually have comparatively better driving records. This trade restriction, of course, has the net effect of reducing competition and thus enabling higher delivery costs.

Tonight the Wall Street Journal reports that Mexico intends to respond by imposing tariffs against 90 American goods to be announced.  This is a troubling development, and the Obama administration is apparently looking at trying to correct the problem in Congress. However, this is yet another issue (like earmarks) where the Obama Administration failed to take a proactive stance with Congressional leadership.

The AIG Bonuses: A Contrary Opinion

The Sunday morning talk shows are buzzing about the $165M in bonuses going out to executives in the financial services division of AIG, which has received some $170B in taxpayer bailout money. The AIG problem was caused by writing a large number of credit default swaps, which served to protect bondholders from defaults on riskier (e.g., subprime) mortgages. 

There are a couple of salient facts: First, not all executives were responsible for the problems resulting in the need for federal bailout funds, but in fact led profitable operations. Second, these bonuses reflect contractual compensation obligations, preexisting before federal bailout operations, and a provision to bailout terms championed by Senator Chris Dodd specifically grandfathered existing contracts. The New York Times reports that the contracts in question had been reviewed by U.S. Treasury lawyers, whom concluded they could not be broken.

What I don't like in particular is the fact that these issue, mostly symbolic in nature, is being demagogued both by the left and right. The fact is that what we are talking about is less than 1% of the total amount of bailout money. Moreover, AIG does more than credit debt swaps. If the purpose is for AIG to emerge as a viable financial services company, they have to stand by their commitments to their successful executives. To scapegoat talented professionals for the sins of a few is unconscionable.

But don't we allow unsuccessful businesses to go bankrupt, and bankruptcy judges can dissolve contracts? After all, I have been arguing precisely the same point with respect to the automakers and their unrealistic labor union contracts. AIG serves a fairly distinct corporate role in terms of the nature and extent of operations in different sectors, both domestically and internationally. I believe that the reasoning behind the federal bailout was that if AIG itself defaulted on its own liabilities in terms of the credit default swaps, the clients who purchased those swaps would be forced to realize those additional losses on their own books, which could have exacerbated issues with client bank solvency: Dealing with AIG made the crisis easier to manage, and I personally believe that professional managers are better able to handle operations than government bureaucrats.

The idea that the government would chase away the very managers it needs to turn around the company over popular dismay about its legal obligations to its workers is unseemly. Why stop with executive employees? Why not cut salaries or hourly pay across the board? The fact is, most of these bonuses are going to be highly taxed.

I have to admit that I have mixed feelings about defending a payout of $157M to managers whom already make an income multiple of the average household pay (more than I've ever made), and during my own professional career, I've rarely gotten a bonus beyond a holiday turkey. (Technically, certain IT companies offered bonuses, but with lower base salaries.)

But I've never bought into Obama/Democratic Party politics of envy and class warfare, where success is viewed as a zero-sum game: if a person achieves success, it happens only through the alleged exploitation of less fortunate people . I, like millions of Americans, believe in the land of opportunity where we have the freedom to chase our dreams. If we aspire to a career as a well-paid financial services executive, we have a chance to make it happen with talent and hard work. If we were to have spent a lifetime chasing our dream and finally achieve it, how would we feel about jealous people wanting to deprive us of fair market-based compensation commensurate with our abilities and experience? For me, it's not just about these executives: "There but for the grace of God go I." It really is an assault on the American Dream, on all of us.

Buyer's Remorse Already on Obama

Who would have thought it? Well, millions of American voters bought into Obama's post-partisan rhetoric and phony pragmatism, despite the facts that McCain had a proven record of bipartisan measures, Obama had the most liberal voting record in the US Senate in 2007, and not only did Obama fail to join the McCain-led Gang of 14 which resolved a Senate crisis over judicial nominees, but he had announced his intent to filibuster Sam Alito's nomination to the Supreme Court in the spring of 2005.

For months before the election, conservatives, including myself, sounded alarms. I had termed him the "Pied Piper of Failed Liberalism" and warned about the empty rhetoric: "Pay attention to what he does, not what he says."

To be sure, Obama has done his best to soft sell his real agenda: He has assured Americans he can expand the government footprint and resolve longstanding issues in energy, health care, the environment and education, all while giving 95% of working American households a tax cut and marginally raise them on higher-earning Americans. He could promise to resolve all the serious problems facing the country and bridge the partisan divide in Washington while burnishing a paper-thin resume of executive experience and legislative accomplishments.

We conservatives watched in dismay as normally intelligent voters bought into vacuous "hope" and "change we need", while handing, without check and balances, both the Presidency and the Congress to the Democratic Party after an economic tsunami: the same Democratic Party which for decades in control of Congress never balanced the budget, launched a New Deal program that prolonged the Depression, and promoted a Great Society suite of social spending programs which have done little but perpetuate a dependency on government assistance, substandard public schools, and collapsing family structures in inner cities. The same party which pressured lenders into giving loans to low-income workers without a conventional down payment and allowed government-subsidized Fannie Mae and Freddie Mac to dominate the home mortgage market, increasing risk to the American taxpayer. The same party which has added bureaucratic rules and regulations to the cost of doing business in America, retained some of the highest business tax brackets among the major economic powers,  and has stonewalled domestic energy exploration and production offshore and in ANWR, leaving oil companies with no commercially viable alternative than to seek imports, produced by foreign workers. The same party with ties to labor unions, which aid and abet failing American auto companies and fight trade treaties tooth-and-nail, hurting American exporters (and related American jobs); teacher unions, which fight perceived threats to government monopolies in failing public schools; environmental groups, which seek to unilaterally impose higher energy costs on American consumers and industries; and trial lawyers, whom are indirectly responsible for about 30% in defensive medicine costs, passed along to policyholders.

And yet American voters, whom have rarely seen Democrats take the lead on business and investment tax reform since the JFK/LBJ era in the 1960's, expect Obama to resolve issues in energy, health care, and education, beyond throwing good taxpayer money at wasteful budget-busting subsidies, easier passed than paid for, at the problems?

David Brooks, in his recent New York Times editorial entitled "A Moderate Manifesto",  writes the following:

The U.S. has traditionally had a relatively limited central government. But federal spending as a share of G.D.P. is zooming from its modern norm of 20 percent to an unacknowledged level somewhere far beyond.

Those of us who consider ourselves moderates — moderate-conservative, in my case — are forced to confront the reality that Barack Obama is not who we thought he was. His words are responsible; his character is inspiring. But his actions betray a transformational liberalism that should put every centrist on notice. As Clive Crook, an Obama admirer, wrote in The Financial Times, the Obama budget “contains no trace of compromise. It makes no gesture, however small, however costless to its larger agenda, of a bipartisan approach to the great  questions it addresses. It is a liberal’s dream of a new New Deal.”

Drs. Groopman and Pamela Hartzband, in a recent Wall Street Journal article debunking Obama's cost-saving claims regarding electronic medical records, wrote the following:

We both voted for President Obama, in part because of his pragmatic approach to problems, belief in empirical data, and openness to changing his mind when those data contradict his initial approach his initial approach to a problem. We need [him not to] rely on elegant exercises in wishful thinking.

Oh, but we do know Obama can change his mind--like when the self-styled ethics reformer renounced his vow to abide by federal financing for the general election campaign (when he discovered he could attract more campaign money than McCain and could use that fact to his political advantage) or when he vowed during the Presidential debates to fight earmarks, but just signed the omnibus budget bill with almost 9000 of them (because he wanted the politicians pushing the earmarks on his side in upcoming votes).

Megan McArdle of The Atlantic writes:

Having defended Obama's candidacy largely on his economic team, I'm having serious buyer's remorse.  Geithner, who is rapidly starting to look like the weakest link, is rattling around by himself in Treasury.  Meanwhile, the administration is clearly prioritized a stimulus package...over fixing the banking system.  But he also promised to be non-partisan and accountable, and the size and composition stimulus package looks like just one more attempt to ram through his ideological agenda without much scrutiny, with the heaviest focus on programs that will be especially hard to cut...He has now raced passed Bush in the Delusional Budget Math olympics.

No wonder Douglas Schoen and Scott Rasmussen state:

Mr. Obama's appoval rating is dropping and is below where George W. Bush was in an analogous period in 2001...Rasmussen Report...shows a third strongly disapproving of the president's performance...Mr. Obama has lost virtually all of his Republican support and a good part of his independent support, and the trend is decidedly negative.

Unfortunately, elections of incompetent Presidents have consequences. There are no "lemon laws" to save us from fast-talking Presidential candidates selling glossy exteriors, but lousy job engines that quit just after you vote him off the lot.

Obama's Got a Brand New Math

In my mind, Obama daughters Malia and Sasha come home from school frustrated, because their math teacher called on them in class to solve a hard problem: how to make their daddy's budget and legislative proposal numbers add up. Despite being home-schooled in Barithmetic and Obamatry, the girls couldn't figure it out. Their teacher smiled and told them it was a trick question, because the numbers don't add up; she also suggested from now on they go to their Mom for help with their homework.

There are different ways to discuss this issue, but Obama voters Drs. Jerome Groopman and Pamela Hartzband highlight a key example in their Wall Street Journal op-ed piece, "Obama's $80 Billion Exaggeration." Obama hyped the results of an IT industry sponsored Rand Company study, saying that the national rollout of electronic medical records would save $80B a year, reduce medical mistakes and malpractice suits, and contain costs associated with chronic illness. The authors review a number of studies casting doubt on all of these alleged benefits; in particular, they cite a recently-published Canadian study reviewing over 3700 papers on patients from seven countries and the use of electronic medical records showed no conclusive advantage or disadvantage in terms of better patient outcomes. The Rand study conveniently dismisses contrary evidence: "We choose to interpret evidence of negative or no effect of health information technology as likely being attributable to ineffective or not-yet-effective implementation." The op-ed authors conclude their column by rightfully saying, "We need the president to apply real scientific rigor to fix our health-care system rather than rely on elegant exercises in wishful thinking." 

[As an MIS academic and veteran IT professional, I loathe the use of hype to sell computer technology (including Internet access) for self-evident reasons. One of my own professors ridiculed the purchase of a PC costing thousands in order to replace the functionality of a $1 plastic recipe box. As a computer database administrator, I can, of course, cite numerous reasons to maintain professionally-managed repositories of key data; data can be centralized, instantly accessed, reliably backed up and restored and easily shared among relevant medical professionals; sophisticated rules and alerts can be implemented, and aggregate accumulative data across patients could be mined for health-related insights (e.g., effective utilization of treatments). But they're expensive, involve hard-to-quantify qualitative benefits, and ultimately rely on the functional competence of users: A well-designed information system cannot make up for the shortcomings of a poorly-trained doctor.]

Henninger's current WSJ op-ed piece, entitled "The Obama Rosetta Stone", cites one of the first studies of the pollyannaish Obama economist Romer-Bernstein budget-related projections, which assume unrealistic projections of job gains through 2010 of  3.6M and GNP gains of 3.7%; the article, written by economist John Taylor and others, tempers the classic Keynesian claims with contemporary adjustments (e.g., tentative spending behavior by consumers whom anticipate that Obama will be forced to raise taxes across a broader group of taxpayers to accommodate skyrocketing federal spending) and concludes that the growth and jobs stimulus will be ONE-SIXTH of what the Obama Adminstration claims.

Karl Rove, in his current column "The White House Misfires on Limbaugh", points out some of the disingenuous Obama sleight of hand tricks meant to mislead the American public on the true costs of his social reengineering agenda: cost savings from an American drawdown in Iraq are ongoing (vs. permanent); Obama's increases in SCHIP and new "college access" funding are short-term;  Obama's economic growth numbers are more optimistic than the more nonpartisan Blue Chip consensus, implying an upward bias to tax revenues and the reverse for relief spending; Obama's pledge that the highest domestic spending increase in American history over the next two years will be cut in real terms is suspect. [Does anyone really believe that veteran Democratic legislators will risk insurgent liberal challengers hitting them hard on cutting benefits to lower-income people? Every Democrat knows the price former Vice Presidential candidate Joe Lieberman paid in his 2006 Senate primary over just one issue: his dissent from anti-war groupthink for a unilateral American troop withdrawal from Iraq.] 

But the good news is that not all Americans are buying our fast-talking President's rhetoric. Pollsters Douglas Schoen and Scott Rasmussen in Friday's Wall Street Journal found over two-thirds of the Americans surveyed don't think Obama's stimulus plan will work, are worried about inflation and the federal budget deficit, and disagree with Obama's philosophy to expand the federal government's footprint (e.g., national health care).

Malia and Sasha get a $1 weekly allowance. I don't think they will be happy when they discover how little a dollar will buy under their dad's economic policies. Perhaps President Obama should worry more about the legacy of his administration's unprecedented deficits written on the backs of his daughters and future grandchildren. Otherwise, he may find himself late in life being signed into one of those government-run nursing homes by his kids.