Detroit Reverts To Nature

Man's mark can seem permanent, but it takes constant vigilance to keep nature at bay. Parts of Detroit are reverting to urban prairie.

Over The Tarmac And Through The T

My brother, his wife, and infant daughter live in Boston. The family gathered there for Thanksgiving and we have ten for dinner. We our now in the fourth day of our visit. No one has rented cars, my brothers car hasn't moved since we arrived, and the only one to make a car trip, to and from the house, was a guest from Western Massachusetts.

We flew in and took the T (their subway) to his home in the shadow of the Boston's Sam Adams Brewery. We walked for a quick missing grocery run.

I was asked a little while before I left which Denver neighborhood is most like Boston. After some meditation after arriving, I've decided that the closest match (cheating a little) is actually Breckenridge. Its streets, while not the truly irregular mix of Boston, are also not the Manhattan matrix of Denver, and its housing with lots of three story condominiums built to look like single family homes is typical of much of Boston. The little shops with high end eclectic offerings are also similar, and of course, Breckenridge gets a far more Bostonian measure of moisture than desert Denver.

We were going against the grain. The Boston-Logan airport appeared to have much more outgoing traffic than incoming at the start of the long weekend. Most people go to grandmother's house over and through the woods, instead of grandchild's house, over the tarmac and through the T. But, it is no less pleasing, even though my brother, unlike one of my cousins who has 4600 square feet of house, doesn't exactly have a great deal of space for us in his two bedroom condominium.

More Wet Kisses For Denver

Continuing my prior post Wet Kisses For Denver:

28. There is apparently some secret city regulation in Denver proclaiming that all baristas must be either handsome or gorgeous.
29. Direct flights to everywhere from DIA with prices kept in check by an absence of a dominant carrier.
30. Excellent people watching opportunities.
31. Tattered Cover and Borders book stores in easy range.
32. An abundance of landmark public artworks produced by a requirement that 1% of public building projects be dedicated to art.
33. Wash Park, Commons Park, Alamo Placita, City of Brest, Mir, Harvard Gulch, City Park, and a host of other neighborhood defining parks.
34. There are enough non-Christians (e.g. Jews, Muslims, Unitarians, pagans, atheists), and atypical Christian (e.g. Ethiopian Orthodox, Greek Orthodox, Metropolitan Church, Mormon, Community of Christ, Christian Scientist, Friends, Mennonites), and there is enough religious diversity among those who remain, to prevent religious hegemony from taking hold.
35. There are people who drive Smart Cars and plug in electric cars here.
36. We have urban gardens, beekeepers in the city, friends who keep chickens in the backyard (in Denver proper) and a colleague who has two live turkeys in her backyard (in Brighton).
37. We are within an easy drive of the highest elevation yatch club in the world in Frisco.
38. We have good sushi.
39. We have Korean, Southeast Asian, Middle Eastern, Greek, Jewish and Mexican grocery stores, in addition to five competing companies offer conventional grocery stores (three union and two non-union), two wholesale grocery stores (Costco and Sam's Club), and four natural food grocery store chains.
40. The Denver Chamber of Commerce is one of the most political moderate in the nation. Many local businesses support Democrats (except the strip clubs -- the owner of both Shotgun Willies and the Penthouse Club in Glendale took public positions in favor of McCain presumably because he had the strongest pro-adultery credentials).
41. A majority of Denver voters favor decriminalizing marijuana.
42. Somebody wants to create a City of Denver extraterrestrial commission, and it might very well end up on the ballot.
43. We counted more than 90% of our provisional ballots.
44. The Columbus Day parade usually attracts more protesters than the annual gay rights march.
45. We are known for our foam art.
46. We have a public radio station that plays classical music, a public radio station that plays jazz, a public radio station that plays folk music, and a public radio station that plays rock.
47. We brought the world Chipolte and Good Times.
48. We are home to the National Renewable Energy Laboratory just down the road from the Colorado School of Mines.
49. Focus on the Family just laid off boatloads of people.
50. Our City owns ski resorts, Buffalo grazing areas, golf courses and minature golf courses.
51. We have been here for 150 years and we will be here stronger and better for the next 150 years.

Illegal Section 382 Tax Regulations Adopted

The Bush Administration has illegally adopted regulations under Internal Revenue Code Section 382 in Notice 2008-83, that give banks a tax break of more than $100 billion. The regulations concern the power of banks that acquire other banks that have accumulated net operating losses to apply those loses to their profits.

The banking industry has repeatedly asked Congress to amend Section 382 to permit this and been rebuffed.

The question is who has standing to challegen the illegal regulations, and whether anyone with standing will choose to do so. A challenge could threaten several bank mergers that have taken place in reliance on the illegal regulations.

Because Colorado tax laws are linked to federal tax law, this illegal regulation will also produce a significant hit to Colorado's corporate tax revenues.

Seasonal Variation In Radioactivity

There is persausive scientific data to indicate that on Earth, Silicon-32 and Radium-226, and probably other but not all radioactive isotypes, have radioactive half lives that are proportionate to one divided by the square of the distance from the Earth to the Sun. This varies over the course of the year with the seasons.

Radioactivity is greater further from the sun, and slower closer to the sun.

My first thought was to wonder if this might be a time dilation due to gravity as a result of general relativity. The direction of the conclusion is right. Deeper in the gravity well, where time moves slower, radioactivity is decreased. But, there are problems with this analysis.

First, clocks on Earth should undergo the same time dilation as the radioactive isotypes they measure. Thus, the radioactivity level would have to be a function of, for example, change in time squared, rather than time itself, something that ordinarily wouldn't be apparent.

Second, time dilation in general relativity isn't directly proportional to the strength of the gravitation field. Instead, it is a complex non-liner relationship, although I haven't done the analysis to see if a linear relationship to gravitational field strength might be a good approximation in a weak field, something that is true of many complex non-linear relationships.

Of course, one divided by distance from Earth squared is also proportionate to surface area of a circle concentric with the sun. In other words, if some particle is spewed from the sun (say gravitons or neutrinos or photons), in equal amounts in all directions, the formula would track the flux of particles. This theory was discussed in the article linked above.

Given the direction of the change, these particles would have to tend to suppress radiation in some kinds of isotypes.

At any rate, this is one of the most promising discoveries for producing new physics in a long time and bears mention.

Also notable is a recent atom smashing experiment that is detecting muons (higher generation electrons) where they are not expected.

In the far less impressive catagory are new quantum chromdynamics (i.e. strong force) calculatios that establish proton and neutron masses from quark and gluon constants to plus or minus 4% from first principles. This sounds impressing until you've seen somebody do this kind of theoretical physics work and learn that playing around with math and constants can easily and in multiple ways produce much more accurate results with only a little noodling. When the theory can come up with numbers in the 0.4% or 0.04% range, which even at that accuracy can still have practical experiemental significance, I'll start getting interested.

Fish Ship

Imagine a blimp shaped like a fish that moves like a fish. Then, watch an impressive tuna sized model in action at a recent airship event in Germany.

Hat Tip: Nature Blog.

Rethinking The Safety Net

The safety net is an apt metaphor for the American social welfare system. You are either self-sufficient, on a high wire, perilously clinging to a working or middle class life, or you plummet far below to a net that prevents your death as you are face to face with homelessness, unfed children, and immediately life threatening medical mishaps that send you to the emergency room.

The High Cost of Unemployment For The Unemployed

If you have a decent regular income, you can insure yourself against all sorts of risks: disability, the need to use a nursing home, illness, car accidents, professional malpractice, on the job injury, burglary and larceny, a tornado hit, a fire, and even your untimely death. But, the only way you can insure yourself against one of the most common and devastating risks in our society, unemployment, is to save so much money that you don't need to work for months.

Even if you are among the minority of unemployed people eligible for so called "unemployment insurance" (more accurately described a layoff insurance) your coverage is a small fraction of what you earned before you were unemployed*, is subject to income taxes, and lasts only a few months. Also, eligibility for unemployment is generally accompanied by a sort of unemployment uninsurance. The unemployed (whether or not laid off), are immediately faced with a Hobson's choice -- lose their health insurance or pick up a major new monthly expense that is often bigger than their mortgage or rent payment, to provide themselves with health insurance at their own expense. Often this new expense rivals or exceeds unemployment insurance benefits in magnitude for those who are eligible for them.

[* Under current Colorado law, weekly unemployment benefits are limited to the greater of (1) 60% of average wages for your best two quarters in the last year up to $431 a week, or (2) 50% of average wages over the last year up to $475 per week. This is paid for up to six months, but in no case with a total benefit more than a third of the wages received over the past twelve months. The maximum benefit is $12,350, for workers who earned at least $49,400 over the last year.]

Unemployment insurance also encourages irrationally short term thinking. If you fail to pursue to potential job while receiving unemployment benefits, you can be summarily punished with the loss of even this thin safety net, even if the beneficiary accurately predicts that holding out a little longer will produce a better paying or longer lasting job.

By the time unemployment benefits run out, most people trying to get buy on them have also exhausted any savings they had, maxed out their credit cards, and are on the brink of foreclosure and bankruptcy. If you have fewer savings and bad credit, eviction from your apartment will come sooner, you won't be able to afford to file for bankruptcy, and your next stop will be accept the slightly lower, but tax free payments that come from poverty programs.

The Hidden Costs Of a Weak Safety Net

No developed country in the world permits its citizens to fall further, with serious, but mostly invisible economic consequences. While we don't generally execute people for failure, like tyrannical military commanders, dictators and Chinese politicians do, the price of economic failure in the United States for a typical household is extremely high.

Hundreds of thousands, if not millions, of would be entrepreneurs, work at big businesses instead so that they can keep their health insurance. While many of the businesses that would have started would have failed, many others would have helped our economy grow and created jobs.

The catastrophic consequences of being laid off from work, particularly for less skilled workers, drives unions to seek layoff protections that have devastated the Big Three as they have steadily lost market share by encouraging them to keep money losing factories operating. When a lost job wrecks havoc on union members, unions lose any interest in helping companies be more efficient.

Fear of lay offs also drives much of the anti-immigrant and protectionist instincts in our politics, and is a not insignificant factor in the politics of economically questionable farm subsidies. A few efforts have been tried to create benefits tailored to people harmed by trade agreements, but the practical difficulties involved in linking a particular lost job to a particular trade agreement makes these programs dramatically under inclusive.

This cliff that any household that is not economically self-sufficient falls from also fuels both high divorce rates, which are closely associated with economic insecurity, and the economic suffering of single mothers (sometimes mothers who have children outside of marriage, and sometimes divorce mothers). The hardest hit in divorces are displaced homemakers, who sacrificed their careers to focus on caring for children in reliance upon a spouse's income. Divorced families generally struggle as they must support two households on incomes that once supported one family, while picking up the added costs of divorce litigation, often for decades.

Also particularly hard hit are foster children. They have no family safety net to fall back on to supplement our nation's weak government safety net, and they have had no opportunity to build up savings or seniority to buffer them from misfortune. Yet, they are particularly prone to making mistakes because they have had less consistent and quality parental guidance, and no experience living on their own as adults, to forewarn them of perils to avoid. One mistake, by people particularly at risk for making them, can leave these children at the very bottom of the cliff.

Indeed, the examples of people who are particularly hard hit, illustrate the main coping mechanism our society has developed. The self-employed often rely on a spouse for health insurance, or upon family resources to weather hard times, or secure the working capital that they need to stay in business until profitability can be established. It isn't unusual these days for adult children to return home to live with their parents multiple times after being wiped out by economic failures. Middle class parents make it possible for their children not only to pay tuition but to give up significant income while having adequate room, board and medical care while they get educations that make future economic security possible.

People, particular children, whose families aren't sufficiently strong or affluent to weather hard times suffer the most.

Imagine if currency brokers at big banks, and investment bankers were treated the way our society treats households that aren't affluent already. What if every single trade had to make a profit, on threat of eviction or missing meals or not having family illnesses treated? What if an investment in a failed company made you personally responsible for all of its debts? While we want to there to be consequences for taking economic risks that don't pay off, if downside risks are too economically punishing, people won't take risks that, on average, do pay off and should be encouraged.

The economically catastrophic impact of underemployment and unemployment is behind all sorts of other serious social problems.

For example, while vagrancy is closely associated with mental health problems, substance abuse, and criminal histories that provide a barrier to employment, most homelessness is simply a consequence of lack of money, often due to unemployment.

An article in the Rocky Mountain News earlier this month, noted the striking correlation between economic hardship and domestic violence.

While there is a fairly weak correlation between the percentage of people who are below the poverty line and crime, there is quite a stronger correlation between extreme, concentrated and sustained poverty and crime.

Milton Friedman, the famed free market economist, was a proponent of a negative income tax, or the equivalent, to buffer the downsides of low incomes. He also argued strenuously that one of the most important differences between the rich and the poor was that they rich had more money, i.e. that more money was all that was necessary to cure the ills of many of the poor, without little further direction.

Insecure incomes and meager savings lead to foreclosures that in turn bring down our entire economy.

Large numbers of people who can't afford health insurance and don't have "no fault" car insurance, produces huge percentages of unpaid bills for ambulances and emergency rooms, driving up the costs of these kinds of care even further, and indirectly providing a major driver for increased health insurance premiums that in turn grow the ranks of the uninsured.

It is easy to blame the personal shortcomings of the jobless for their unemployment when the economy is growing, unfilled jobs are plentiful, and unemployment is relatively rare. But, when the economy slows down, as it is starting to now, we become aware of how often, even in good economic times, people lose jobs for reasons that don't justify draconian economic punishments.

Losing a job that pays $26 an hour, and not being able to find a new one for a few months, brings with it economic consequences to that person comparable receiving a new DUI conviction every month, or a new prostitution or shoplifting conviction every few weeks.

Short term economic hardship can also have long term consequences.

I will never forget representing a landlord in an eviction where one of the items of personal property put on the curb was a stack of college applications being prepared by one of the children who lived in the home, quite possibly lost in the process and preventing that child from going to college.

I will never forget a client of mine with a job that required him to have good dexterity in his hands, who didn't have health insurance, suffered an off the job hand injury, and while he received emergency treatment that stabilized his condition, was unable to raise enough funds quickly enough to pay for the follow up surgery he needed to prevent permanent impairment to his ability to use his hand. A personal injury lawsuit settlement didn't come quickly enough to pay for the treatment that needed to be provided within a couple of weeks to be effective.

A poor family with young children who can't afford pre-school for their children, may never be able to make up that lack later in life, when that critical time period has passed.

The economic game that we play with its incentives and rewards and punishments is an important one to making our society work. But, sometimes the cost of losing can be so high that we need to stop playing and make sure that everyone is O.K. first, and worry about incentives later.

Exceptions

American indifference isn't universal.

We treat our elders far better than almost any other segment of our society. While our Social Security system isn't particularly generous by international standards, almost everyone is eligible for it at retirement age, and the benefits are usually enough to allow beneficiaries to survive on it alone, although part-time work or retirement savings are necessary to spend one's golden years in comfort. Medicare is single payer health insurance for essentially everyone in the United States aged sixty-five or older, it doesn't cover everything, but is more generous that the health insurance available to a substantial share of people with private sector health insurance. Additional government provides supplement the income of the elderly poor and assist the elderly poor and the middle class poor in securing nursing home care.

We also provide considerable tax benefits, in a greater variety of ways than any reasonable person could want, for retirement savings. The tax benefits for retirement savings, which mostly benefit the middle and upper middle class, rival the direct expenditures from Social Security, in magnitude. Retirement savings and home equity, which often serves as a form of retirement saving, also receives generous protection from creditors.

Social Security is the third rail of American politics because it works.

Interestingly, public schooling provides considerably more economic benefit to families with children than simply shifting the expense of tuition from families to their states and communities. It also dramatically reduces poverty rates by providing reliable child care that makes it easier for family members to secure work, thereby increasing family income.

The most successful social safety net programs in our society are categorical, rather than means tested, producing greater security for beneficiaries, and greatly reducing administrative costs.

Alternatives

Some form of subsidized universal health insurance, and public funding of legal assistance in custody matters are two important steps we can take to strengthen our safety net.

Another is to fix the sometimes odd incentives of our higher education financial aid system, which is essential for everyone but members of the upper middle class, who hopes to go to college. The children with poor and working class parents can often obtain substantial need based assistance to go to college, but have trouble achieving the academic preparation needed to succeed in college. Middle class kids are more likely to have adequate academic preparation for college, but often find it hard to secure financial aid. Children of poor, working class and middle class parents alike almost invariably have to work considerable hours at a part time job to stay in school, despite often being less prepared for college work (and hence having a greater need to focus on their studies exclusively) than their upper middle class peers.

But, the piece that none of these better explored proposed additions to our social safety net addresses is the need to reduce the intensity of the economic consequences of unemployment and underemployment.

One model, perhaps the cheapest and simplest, would be to pay every man, woman and child in every household, a check, simply for being a citizen, every single month, regardless of work status. This is what Alaska does. It is cheap to administer, sets a floor on economic hardship, and is a particularly helpful buffer for those closest to the bottom economically. It is the economic equivalent of Milton Friedman's negative income tax regime, in an administrable form. Indeed, such a payment could replace the need for devices like a standard deduction, personal exemption or per child tax credit in the tax system to effectively remove lower income people from the tax system entirely.

Alternately, the concept of the per child tax credit could be strengthened, or converted into a direct payment, so that household with children would face less intense economic hardships relative to households without children.

A variant on the idea is a substantial property tax exemption for each residential property unit, in the same dollar amount regardless of the value of the property. Colorado, consistent with the larger pattern of the American social safety net, has something like that for elderly homeowners, but not for younger ones.

Simply eliminating the need to pay for health insurance while unemployed, would be a major improvement.

Another solution could be a transition from a laid off worker oriented unemployment regime to a "no fault" unemployment insurance regime, where employers didn't have rates set on their "claims experience" and employees could obtain unemployment insurance for a certain number of weeks simply by proving that they were unemployed rather than having to prove that they were looking for work, or that they were unemployed through "no fault of their own," would significantly reduce the administrative costs of the system so that they could be devoted to benefits instead, and the opportunity costs associated with unduly intense pressures to find work. The relatively modest amount and limited duration of unemployment benefits under the current system already provide an ample incentive to seek new employment. Indeed, given the fairly low amount of a typical unemployment benefit, even a much longer duration of benefits would still provide a strong incentive to seek new employment.

Strengthening unemployment benefits, dependent merely on an absence of employment in a household, with reduced benefits available in households with only part-time, low paying employment, might be preferable in many cases to existing welfare programs with elaborate rules and complex means and asset tests.

Many countries have mandatory severance benefits based upon how long one has worked for a company, for example, requiring a severance payment of one month of pay for each year someone worked at a firm. One could also have a system where some percentage of each months pay went to a savings account accessible at any time that the person contributing to it was unemployed.

For single mothers, increasing the amount of child support payments, or making alimony or the equivalent available by formula to all former stay at home parents in addition to child support, might help address the well established pattern of post-divorce economic hardship under the current system.

For foster children, perhaps they are owed, at least, something like the nest egg that many parents with the means to do so, provide for in the event of their untimely deaths. While most foster children still have parents living, their parents are legally dead to them, without so much as a modest life insurance payout or tort settlement.

We do need incentives to work and to seek work. But, they don't necessarily need to be so intense. Categorical benefit programs that are indifferent to actual income and assets, and instead target households where a large percentage of people need income assistance, don't undermine the incentive to work much if the benefits aren't huge. And, by liberating people to take greater risks in self-employment and to fear losing a job less, they can actually encourage greater economic efficiency.

Auto Industry Wages

How much does blue collar labor at the Big Three cost? Not $70-$73 an hour. You only get to that figure if you include retiree benefits in calculating hourly compensation.

Straight wages are about $28 an hour. By my calculations, once you include a fairly generous health insurance package (about $7 an hour), employer payroll taxes (about $2.25), worker's compensation and unemployment insurance for current workers, you are in the vicinity of $40 an hour for total compensation for active workers. The other $30-$33 per hour worked goes to people who have ceased to be Big Three employees.

Huge liabilities to retirees is a problem for the Big Three. Moreover, since the pension is as close to any other big corporation to being fully funded, and the retirees also receive substantial PBGC protection for that part of their package, payments to laid off workers and retiree health insurance are the predominant unfunded liabilities of the Big Three. But, payments to retirees look more like payments to bondholders and shareholders who are also getting a return on distant past contributions to the enterprise, than they do like labor costs.

Indeed, in an ideal world, the Big Three would have borrowed money from ordinary bondholders to pre-fund retiree costs as it went, rather than leaving these as an unfunded liability. One plausible way to bailout the Big Three in a labor friendly way would be for the U.S. to assume this unfunded retiree costs in exchange for long term debt from the Big Three, in part as payback for NAFTA and other trade agreements and strong dollar exchange rate policies that have hurt auto workers.

But, that wouldn't solve the problem either. This retiree debt obligation isn't the only way that retiree costs are a drag on Big Three survival prospects. Since the Big Three have to make big continuing payments to anyone they lay off, they have a built in financial incentive to keep operating plants long after they have ceased to operate at a profit, because the company has to pay a good share of the labor costs of ooperating that plant, whether or not it is making cars. While this has a lot of economic justice to it, since the factors that cause layoffs are rarely in control of the worker, but are in the control of the company to a much greater extent, very few companies anywhere else in our economy are so generous.

A bailout that really left labor harmless would also have to assume future retiree costs cause by the nearly inevitable tens of thousands of additional automobile industry layoffs that are in the pipeline.

There is some fat in the amount paid to current employees under the existing collective bargaining agreements. Long time employees are paid a very substantial premium over new employees for the same work in their hourly pay. The premium for old employees over new employees in on the order of $10-15 an hour. The premium exists because it is much easier for an employer to pay less to new workers than it is to cut pay for existing workers, and because the companies can't simply fire existing employees who have what amounts to tenure protections (as do the vast majority of long time workers in union shops).

Atrios deserves the final word in this post:

Damn those unions for destroying Citigroup!!!

Citigroup Bailout Unwise

The Associated Press reported late Sunday that under the loss-sharing arrangement, Citigroup will assume the first $29 billion in losses on the risky pool of assets. Beyond that amount, the government would absorb 90 percent of the remaining losses, and Citigroup 10 percent. Money from the $700 billion financial bailout package approved by Congress and funds from the FDIC would cover the government's portion of potential losses. The Federal Reserve would finance the remaining assets with a loan to Citigroup.

As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains consent from the three federal agencies, AP reported. The agreement also places restrictions on executive compensation, including bonuses, it said.

Citigroup will issue $20 billion in preferred stock to government agencies, a move that would give taxpayers a benefit but could hurt existing shareholders. The preferred shares will pay an 8 percent dividend. . . . The immediate $20 billion capital infusion follows an earlier one — of $25 billion — in Citigroup in which the government received an ownership stake.

From here.

The Trouble With Guarantees

While there have been many bailouts during the financial crisis, this is one of the first big guarantee of assets that the government wasn't required to guarantee anyway that has stuck. A similar guarantee was proposed in a prior buyout, but overtime negotiations ultimately produced a deal that didn't include an asset guarantee.

In an equity purchase or loan, taxpayers can't be on the hook for more than the amount provided. It is a limited liability investment. This particular guarantee could cost the U.S. government more than $250 billion, but it appears that this $250 billion liability will not be counted against the $700 billion that Congress has authorized the Treasury to spend, even though the full faith and credit of the United States government is now obligated to make good on protecting the shareholders and bondholders of Citigroup from losses.

I have seen nothing to indicate that Congress anticipated the prospect of huge guarantees when it passed the bailout package. It contemplated purchases of troubled assets, and it contemplated loans or equity purchases, but not such a large contingent liability. Effectively, the Bush Administration is using asset guarantees to try to circumvent the dollar limitations that Congress placed on the bailout package with an accounting trick since guarantee liability is hard to value.

It is troubling that these deals, made with public funds authorized by Congress, are not disclosing what the American people are buying with their money. There is little or no indication of what kind of risk of loss the guarantee involves.

There are certainly some collateralized mortgage securities the government could choose to insure, for which Citibank's agreement to bear the first 9% of the loss constitutes almost all of the plausible risk of the securities. One could expect a loss that small on a bundle of mortgages with a significant minimum downpayment and better than subprime loans.

But, some collateralized mortgage securites are far higher risk. For example, it wasn't uncommon to get together a pool of mortgages and then sell them in ten tranches, with one tranch bearing the first 10% of the losses from the pool, and another bearing the last 10% of losses from the pool. If Citibank had significant first tranch investment in that kind of pool, those securities would be at high risk of having zero value.

Why Preferred Stock With No Strings Attached?

Like prior bailouts in this financial crisis, there are also no serious strings attached to how the lastest $20 billion of preferred stock funds can be used. This is a blank check investment. Certainly, there are dividend and compensation restrictsion that prohibit certain uses of any funds, but Citigroup has provided no plan of action (and apparently hasn't been asked to) to explain how the money will be used.

Unlike funds injected by the FDIC into troubled financial institutions to protect guaranteed depositors, which have priority in bankruptcy over the claims of stockholders, bondholders and other creditors, the preferred stock purchased in this case can't insist on payment of the interest due at a specific time in the near term, is an investment that is repaid only after all Citibank bondholders are made whole, provides no voting control, and doesn't appear to offer the kind of upside that a common stock investment would provide to taxpayers. It is a worst of both worlds form of investment.

The U.S. preferred stock investment does have priority in bankruptcy over common stock, but Citibank stockholders have already lost the lion's share of their investment as Citibank's share prices have collapsed in recent days, and didn't have any realistic expectation of dividends in the near future in any case.

No Upside

It is also troubling that there appears to be little upside benefit for the American people to a guarantee of a pool of toxic assets like this one. It isn't clear that the American people get anything but their money back with 8% interest on the latest $20 billion preferred stock buy (and $7 billion of immediate gain) and guarantee, if Citibank prospers. Indeed, the taxpayers seem certain to lose in any situation where the guaranteed assets lose 15% or more of their value, even if the company survives and the preferred stock are redeeed with interest.

In contrast, if the U.S. government had bought Citigroup's portfolio of $306 billion of collaterized mortgage securities at a deep discount, for example, for $240 billion, it would have limited Citigroup's losses while securing an upside for the U.S. taxpayer if the assets really are undervalued as a result of an irrational market panic, which is a key intellectual premise if the bailout in the form of an asset guarantee makes any economic sense. A purchase of troubled assets would also have given the U.S. a greater capacity to negotiate reasonable terms for people obligated to pay these mortgages who are in financial distress.

A Citibank relieved of toxic assets, but forced to take an immediate $68 billion loss, would probably survive, and even if it did go bankrupt, would probably continue as an enterprise outside of bankruptcy. But, now, if the U.S. was correct in betting that the toxic assets were worth more than the market would pay for them, it receives no benefit from this good judgment.

This contrasts with the Swedish solution:

Faced with a similar crisis in the 1990s, Sweden forced banks to write down bad loans, then the government injected liquidity into the system and profited from the upside after taking equity stakes in the banks.

Citigroup Financials

On paper, Citigroup doesn't have a particularly unhealthy balance sheet. Common stockholders had $99 billion in equity at the end of the September, and there was another $27 billion in preferred stock, about $25 billion of it from the last round of government bailout investments.

The market capitalization of Citigroup at the close of business on Friday, before the bailout was certain, was less impressive, at about $20.5 billion.

Even backers of the Citigroup bailout think that the taxpayers were screwed and that the stock isn't worth investing in, even after the bailout.

UPDATE:

It appears that the loans break down as follows:

*The first $29 billion of losses from the portfolio will be absorbed by Citi entirely.
*The Treasury Department will take 90% of the next $5 billion of losses, with Citi taking the rest.
*The FDIC will step in and take 90% of the next $10 billion of losses while Citi absorbs the balance.
*Losses beyond that will be taken by the Federal Reserve in the 90% government role.

"Note that Citi is still supposed to take the remaining 10% at this stage but it's hard to believe that anyone really thinks Citi would be able to take any more losses once it had written down $40 billion more in this portfolio," Carney writes.

To the extent that this is a legitimate guarantee because the Fed is making the biggest part of the guarantee, and its losses are not public funds in precisely the same way as general appropriations, why is the Fed taking the lowest risk position in this deal? It takes losses only after the assets have been devalued by almost 15% and taxpayers have been hit with $13.5 billion of losses. It the real value of these assets is 80%-85% of their face value, the Fed may take a fairly small haircut on the deal, why the direct taxpayer involvement in the deal is maxed out.

Historically, the FDIC has protected depositors, but typically, banks have enough assets to make insured depositors, and indeed often all depositors, whole while still wiping out all shareholder equity and bondholders, because banks are such highly leveraged institutions.

Day of Remembrance

Too much to remember, including Angie Zapata and Aimee Wilcoxson, very close to home:

2008

January 8th - Patrick Murphy, Age 39 - Albuquerque, New Mexico, United States - Shot multiple times in the head.

January 22nd, in her 20s - Fedra - Kota Kinabalu, Malaysia - Found dead in a pool of blood.

January 23rd - Adolphus Simmons, Age 18 - North Charleston, South Carolina, United States - Shot to death while taking out the trash.

February 4th - Ashley Sweeney - Detroit, Michigan, United States - Found dead in Detroit's East Side, shot in the head.

February 10th - Shanesha Stewart, age 25 - The Bronx, New York, United States - Stabbed to death.

February 12th - Lawrence King, age 15 - Oxnard, California, United States - Killed by a fellow student after being asked to be Lawrence's valentine.

February 15th - Cameron McWilliams, age 10 - South Yorkshire, England, United Kingdom - Suicide by hanging.

February 22nd - Simmie Williams, Jr, Age 17 - Fort Lauderdale, Florida, United States - Killed by two gunmen.

March 15th - Luna, Age 42 - Lisbon, Portugal - Beaten to death, and thrown in a dumpster.

May 26th - Felicia Melton-Smyth - Puerto Vallarta, Mexico - Stabbed.

July 1st - Ebony Whitaker, Age 20 - Memphis, Tennessee - Shot to death.

July 11th - Rosa Pazos - Sevilla, Spain - Stabbed in the throat in her apartment.

July 17th - Angie Zapata, Age 17 - Greeley, Colorado, United States - Beaten to death.

July 29th - Samantha Rangel Brandau, Age 30 - Milan, Italy - Beaten, raped and stabbed.

September 21st - Ruby Molina, Age 22 - Sacramento, California, United States - Found floating in the American River.

November 3rd - Aimee Wilcoxson, Age 34 - Aurora, Colorado, United States - Found dead in her bed.

November 9th - Duanna Johnson, Age 42 - Memphis, Tennessee, United States - Found shot and left on a street.

November 11th - Dilek Ince - Ankara, Turkey - Shot in the back of the head.

November 14th - Teish Cannon, Age 22 - Syracuse, New York, United States - Shot

Ali - Iraq - Executed

Unknown - Iraq - Executed

Unknown - Iraq - Executed

GM and Ford Stocks and Bonds Have Collapsed

Telling Congress that your company is about to die turns out to be less than wonderful for your company's stock price, particularly if Congress seems skpetical:

Automaker shares also tumbled. General Motors shed 50 cents, or 16 percent, to $2.59, while Ford dropped 41 cents, or 24 percent, to $1.27.

General Motors has a market capitalization of about $1.7 billion. Ford Motor Company has a market capitalization of about $3.1 billion. The combined fair market value of all three of the Big Three automobile markers combined is about a fifth of the $25 billion bailout loan that the industry has requested. The current proposal from Barney Frank in Congress would give a bailout loan priority over other debts in bankruptcy, so a bailout would help stockholder and bondholders only if a bankruptcy is avoided with the loan.

The stock price of the major automobile makers doesn't tell the whole story, however. You have to look at bond prices as well to see the sorry state of these companies:

Bonds issued by Ford Motor Co. and General Motors Corp. have been trading well below par value, at about 25 cents for every dollar invested, down from about 75 cents to 80 cents a year ago.

They sold off further Wednesday, with GM's 8.38% bond due in 2033 selling at just 17 cents per dollar, down from 21 cents Tuesday, according to KDP Investment Advisors. Ford's long bond, due 2031, fell 1.5 point to 24.50 cents.

Prices at these levels, or about one-fifth of the bond's face value, are similar to the recovery rate bondholders often see after a company goes through bankruptcy and indicate investors think a government bailout unlikely.

In interest rate terms, the current effective yield on GM bonds is 49.3% per year.

At its peak, General Motors has a market capitalization above $66 billion. The General Motors balance sheet is also worth reviewing:

The market capitalization of General Motors is now $2.69 billion and a book value of negative $57 billion. Book value has been negative since sometime in 2006. The Company has lost $62 billion over the last twelve months on sales of $171 billion.

At the end of the second quarter of 2008, GM had about $20 billion in cash, $35 billion in current assets like inventory and accounts receivable, $11 billion in financing and insurance operations assets (like its interest in GMAC), and $62 billion in non-current assets like plant and equipment, and $18 billion in pre-payments to the pension plan. The value of plant and equipment would probably plummet if GM failed, as it has few good alternative uses and the overall market for the vehicles that GM makes in those plants is in decline -- that is why General Motors is in trouble.

On the liability side, General Motors had $75 billion in short term liabilities (like accounts payable, short term loans and current portions of long term debt), $4 billion in debt and liabilities in connection with finance and insurance operations, $32 billion of long term debt, $47 billion of post-retirement obligations other than pensions, $12 billion of pension liabilities, and $21 billion of other long term liabilities.

More than 97% of the stock value of General Motors (more than $64 billion) and about 83% of its bond value (about $28 billion) has been wiped out.

Critics of a GM bankruptcy worry that consumers will not buy cars backed by a warranty from a bankrupt company, but the value of a standard five year warranty from General Motors or Ford is actually probably worth less now than a warranty from a company that is actually bankrupt, where post-petition warranty claims might be entitled to priority as an administrative expense.

Warranty expenses over the life of the product for a GM car or truck average about 2.7% of the sales price. It would cost General Motors about $8 billion (its current reserve for warranty expenses) and 2.7% of new sales to pre-fund all of its warranty liability. If an ability to back old warranties really is essential to a bankrupt automaker's survival, that is $8 billion less that will be available to other creditors (mostly retirees and bond holders) in a bankrupty.

Gasoline prices have fallen to below $2 a gallon from a peak of more than $4 a gallon in the U.S., and may fall further as a global recession slows demand, but it isn't obvious that this will significantly restore sales of SUVs and light trucks that get poor gas mileage. While consumers tend to ignore predictions of high future gasoline prices in their buying decisions, once burned they are twice shy.

Bad Economic News Keeps Coming

The S&P 500, widely considered the broadest snapshot of corporate America, slipped 6.12 percent to 806.58; and the Dow gave up 5.07 percent to 7,997.28. Both closed at their lowest levels since March 2003.

The financial crisis has already wiped out $6.69 trillion of value from the S&P 500 since its October 2007 high . . . . The Russell 2000 index gave up 35.13, or 7.85 percent, to 412.38.

From here.

Stocks are far below where they were when President Bush took office, when the Dow was at 10,587. In addition, the past eight years have seen 25% inflation. In real dollar terms, the Dow Jones Industrial Average has lots about 40% of its value during the Bush Administration.

Put another way, not only has the Dow not made any progress during the Bush Administration. Even before adjusting for inflation, the stock market has also erased all the gains made in the last three years of the Clinton Administration. In inflation adjusted terms, money invested in the stock market when I entered the work force in the early 1990s is worth no more than it was when it was invested, despite the standard dogma of financial planners that stock market investments can be expected to earn 7% per annum nominal total returns in the long run.

The construction industry remains particularly hard hit:

Housing starts fell in October to their lowest levels nationally for any month since the Commerce Department began record-keeping in 1947.

Mortgage applications are also down almost 80% from their May 2003 peak:

[T]he Mortgage Bankers Association said mortgage application volume fell 6.2 percent during the week ended Nov. 14. The trade group’s application index slipped to 398.6 during the week, down from 425 a week earlier. The index peaked at 1,856.7 during the week ending May 30, 2003, at the height of the housing boom.

According to Calculated Risk the current financial collapse is has gone deeper than the initial 1929 crash that launched the Great Depression, and is neck and neck for percentage losses as many days into the Great Depression as we are into the current financial crisis. The markets have lost almost as much value as all prior financial collapses other than the Great Depression, for their entire duration (the Tech Crash lost a couple percentage points more over a much longer period of time than we hav lost so far).

Obama On Tort Law

Anthony J. Sebok, writing for Findlaw, offers a brief analysis of the impact that an Obama administration may have on tort law. He concludes that tort reform may stop dead in its tracks, but that Obama will have little impact on this area of law and that Congress will be more important.

My reaction is that Sebok is "not even wrong." Nothing he says is obviously inaccurate, but he missed the point. He is unaware of, or overlooked, the real key tort issues of the last eight years, many of which are thoroughly within the President's province.

The most important tort issue during the Bush Administration has been the degree to which federal regulatory involvement or national security concerns pre-empt state and federal tort remedies. The Bush Administration have frequently taken this position, often over staff recommendations from within regulatory agencies, and is currently pushing a final raft of regulations to achieve the same result before President Bush's term ends on January 20, 2009.

For example, a product liability case pending now involves a drug which was approved by the Food and Drug Administration on the basis of fraudulent and incomplete information provided to the agency, and that approval was later revoked. A Michigan statute allows a product liability suit to proceed to trial if the injured party can prove that the normally pre-emptive FDA approval was based upon fraud and is no longer in force. The Bush Administration has argued to the U.S. Supreme Court that state lawsuits should be barred in all cases by an FDA approval, even if it appear in hindsight to have been improperly secured. The policy argument made has been the highly disputed claim that this would unduly burden the FDA with requests for information and testimony related to product liability lawsuits.

An Obama administration very likely would not have asserted FDA pre-emption at all in this situation, in accordance with FDA staff recommendation, rather than taking politically motivated action to protect industry bad actors.

Similarly, the Bush Administration has largely taken the position that military contractors are immune from civil liability in either Iraq or the U.S., even for intentional torts like rape, committed against fellow U.S. contractors. Many states, however, while permitting waivers of liability for negligence, do not give effect to contractual waivers related to intentional torts and assume jurisdiction in cases where there is a U.S. party who is connected to the incident as either a Plaintiff or a Defendant, particularly if there is no other forum available for the suit. Many U.S. Courts would also permit rescission of a contractual waiver, if a party to that waiver did not act in good faith to make its obligation to provide a fair forum for disputes arising under the employment contract of the parties.

As a third example, the Bush Administration has used the claim of a state secrets privilege as a complete defense to a variety of suits against the government, even where the party suing is not a party to a privacy agreement with the government. The doctrine was invented in a plane accident where the state secret assertions made by the federal government were lies, and it is not at all clear that the doctrine was ever intended to be more than an evidence rule, as opposed to a form of governmental immunity. An Obama administration is likely to take a less hard line in this kind of case.

Finally, the Bush Administration and its relevant appointees, have taken a very hard line in interpreting law designed to protect employees in unions, in the civil service, and in private employment, both against direct violations of rights, and involving retaliation or whistle blowing. An Obama administration is likely to take a more balanced approach to employment law, a good portion of which is administered by federal agencies.

Are Demographics Destiny?

Alan Ambramowitz notes that the GOP needs the shrinking married white Christian vote to win elections. But, how will coalitions change?

Ginkgo Biloba Doesn't Stop Dementia

The supplement Ginkgo biloba has failed to ward off Alzheimer’s disease or other forms of dementia any better than a placebo in a long-term trial, researchers report in the Nov. 19 Journal of the American Medical Association (JAMA). . . . U.S. sales of ginkgo averaged $170 million from 2000 to 2004.

From here.

The herb joins homeopathy, over the counter cough and cold medicine for children under six, and a number of common over the counter herbal and conventional medicines used for long periods of time that have been established to be ineffective medical treatments for the conditions that they are reputed to treat.

There are effective over the counter drugs (asprin for minor pain, fever and cardiovascular health, naproxin for prolonged minor pain and fever), herbs (e.g. Russian herb Rhodiola rosea and marijuana), foods (honey for children's coughs) and drinks (alcohol for cardiovascual disease, certain teas, and alcohol in moderation all have well established medical benefits for example). But, many don't work.

The verdict is still out on other herbs like Echinacea (taken to reduce the severity of a cold).

In the case of St. John's Wort, there is some evidence that it may be helpful in alleviating minor depression, but it is ineffective at relieving major depression.

Mobile Homes and Public Buses

Colorado Public Radio's "Colorado Matters" program had an interesting piece (warning: audio file) on transforming mobile homes from drek to groundwork for a cottage living paradigm. Images of the CU Architecture student project discussed appear above.

The remodel of an existing trailer cost about $45,000 and was put in an existing downtown Boulder trailer park. It was sold for about $29,000. The story also notes that Aspen, unlike Boulder, has trailer lots that can be owned, rather than merely rented.

The need to have a mobile home on a chassis, rather than a foundation, was cited as a serious problem with mainstreaming the concept. Federal law prohibits local zoning codes from excluding prefab and manufactured housing that complies with the HUD code and would be properly zoned but for a method of construction specific exclusion. For example, there is a nice little manufactured home at S. Lincoln and Virginia in Denver next to Caboose Hobbies.

The problems run deeper, however. Consider the devastation suffered by an upscale trailer park in California in the latest wildfire, destroying almost 500 of them in one go. Trailers inevitably bear the brunt of every passing tornado, hurricane and flood as well. And, then the are the worries spurred by the Katrina trailers, but apparently more widespread, of formaldehyde exposure risks. Also, many trailer parks, particularly those that don't cater particularly to the elderly, because their residents tend to be poor, are fraught with crime.

There are multiple attractions to manufactured housing. One, identified by the professor in the CPR story, is the notion of allowing people to have single family starter homes on small lots at an affordable price. Another, is the ability of a factory to be more precise and efficient (in terms of both price and waste) in building housing because mass production and controlled conditions make it possible -- minimizing the unpredictability and hazards of an outdoor work site.

A web page on the topic discusses the industry:

Prefab, modular, manufactured and panelized housing are terms that are used pretty loosely to describe various types of home building options that are preassembled to some degree before they are delivered to the site. There is overlap between very low end 'tornado-magnet' trailer housing and very top drawer architecture delivered in modules.

Newer "housetrailers or mobile homes", are much more likely to be called the better sounding term: "manufactured housing". A manufactured home is constructed in a controlled environment. It is built to the Manufactured Home Construction and Safety Standards (also known as HUD Code). Mobile home is the term used for factory built manufactured housing made prior to the introduction of the HUD Code. Around here in the South, everyday folk still refer to them as "house trailers"--code or no code !

Prefab, panelized, and modular are terms that usually refer to upscale housing that can be any combination of pre-engineered home parts that re delivered to the building site ready to be assembled in a quick manner. There is some very creative and high style architecture in some of the latest introductions into the prefab and modular housing arena. A home of this type, when properly installed and maintained, will appreciate the same as the surrounding site-built homes in it's area. If you are buying the home and land together or plan to place the home on land that you already own, financial institutions offer traditional real estate mortgages with similar interest rates.

Manufactured housing is built on a trailer chassis and is considered portable or temporary in nature. Typically constructed from light-weight metal framing, manufactured housing is less durable and less versatile than modular structures. Modular houses are comprised of all the same materials, techniques and standards as site construction, except that the units are assembled in less than a day.

Dozens of specific current examples of prefab houses follow the quoted language at the link. Technology is not what has held back prefab housing. Current technology can produce good quality housing, with very little waste, at a lower cost, with better quality control, with a longer building season, and with greater worker safety, and a less disruptive on site construction progress that goes more quickly. Past tragedies of poor predecessor technologies, public unfamiliarity with the concept, and an aversion to smaller and more affordable housing generally, are to blame.

Traditional manufactured housing, because of its poor ability to withstand extreme weather conditions and often low trim quality has been largely discredited. The HUD Code is supposed to have made a difference, and some are apparently now build on slabs, rather than remaining on a trailer chassis, but breaking the bad image earlier models created isn't easy, and the general public can't tell the difference (if indeed there is a material one) between older and newer models. There is still room for some form of prefab or modular concept to gain respectability and prove itself, however.

Technology isn't the only barrier. One also has to figure out a way to build modest, affordable housing in a way that doesn't produce toxic concentrations of poverty. This has nothing to do with the housing itself -- no one complains seriously about crime spawned by modest housing stock for college dorms or resort cabins. It has to do with the fact that in our materialistic society, people spend as much as they can afford on housing, and the fact that in our meritocratic society, low income is frequently a proxy for some combination of a lack of job skills, poor social skills, impulsiveness, substance abuse problems, mental health problems, a criminal record and/or weak intellectual and academic abilities. Even if a majority of residents have none of these problems, a substantial majority who do can turn an affordable neighborhood into "Salem's Lot" as rapper Eminem called it.

The social issues transcend the prefab and modular technologies. The same issues will arise if one tries to market neighborhoods of low cost, stick build single family homes or cottage communities, or affordable apartment buildings. Public housing projects, where the average resident is too poor to afford even the modest units that they are living in, tend to be centers of urban crime. Sun Valley (just South of West Colfax, just West of I-25), is one of Denver's largest traditional housing projects, and not coincidentally, it is also one of its highest crime neighborhoods, year after year after year.

Small homes on small lots built in an affordable way make a great deal of sense ecologically and financially. Much of the spending we see on houses larger than the people who buy them actually need, or with trim levels finer than greatly desired, is really aimed at excluding the poor, rather than because the housing stock itself is needed.

The Parallel Issues In Transit

The biggest barriers to public transit, be it a bus or passenger rail, is likewise social. When only those who are disabled and hence have no other choice, or are too poor to own their own car, are the predominant users of transit, and it doesn't take much money to own a cheap used car, those who are able avoid transit due to the fear of concentrated poverty and the associated fear of crime (or petty nuisances like crass language and social discord short of crime that often also comes with it).

There are many people who would take transit if they felt safe, resulting in huge traffic drops, reductions in demand for oil, and reduced pollution. With current technology, city buses are a much easier path to reduced oil consumption than super efficient cars. But, the upper working class, middle class, upper middle class and the wealthy will all shun transit unless they feel safe on it. This is the main reason why light rail is more popular than public buses with the middle class commuting public, even though the technological benefits of light rail are smaller than one might suspect, and the cost of light rail infrastructure is so high.

In places where almost everyone uses public transit because cars are exceedingly expensive or parking in impracticable or traffic is out of control or individual cars are otherwise impracticable, transit doesn't have a disproportionately poor user base and is popular among middle class riders. For example:

* People ride buses in Israel and passenger trains in India despite repeated terrorist incidents on each.
* Commercial air travel is the quintessential form of middle class public transit.
* The FREX bus from Colorado Springs to Denver, with its commuter customer base, doesn't have this problem.
* Charter buses for senior citizens and tourists lack this problem.
* School buses generally lack this character, especially in places where almost everyone has to ride the school bus to get to school.
* Subway/rail systems in New York City, Japan, Paris, London, Boston, Chicago, Denver, and Washington D.C. largely avoid these issues.
* U.S. passenger trains, prior to the advent of commercial air travel in the 1960s.
* RTD buses are notable less dominant ed by very low income people in Boulder, Colorado, where college students universally have passes, parking is difficult to secure, and for whom money is often scarce.
* Dedicated high speed bus lines in Brazil (also called Rapid Bus Transit).

No Solution In This Post

The problem is long standing and not susceptible to being solve in one blog post. But, it is worth clarifying what is going on in these two areas (prefab housing and transit) where there is great room for ecological progress and an American way of life that is less focused on high consumption, but we haven't solved the social barriers to making them work yet.

FAC Webcomics

Here are a few comics worth reading on the web:

Tozo Public Servant: a detective thriller amidst political intrigue in a steam punk setting. The full color art is a bit like Babar.

Paradigm Shift: a fast paced Chicago action-detective story with were-tigers and Chinese gangs that run guns, portrayed in realistic line art.

Alpha Shade: a WWI type war in a steam punk world, talking psychic cats, inter dimensional political drama, and deep social class conflicts, portrayed in a beautiful, full color, realistic painting style.

Red River: a vivacious, virtuous Japanese middle school girl is sucked by magic into ancient Turkey where a prince claims her as his concubine to protect her from an evil queen, drawn in typical Japanese manga style.

Elle, and all the others: an NC-17 rated tale of an ordinary man seduced with the aide of magic by a mysterious elf girl in crude color cartoons.

If your a movie fan instead, take a gander at the projection booth which has some nice coverage of the Denver Film Festival which is now in progress in our fine city (I'd like to see some of their headline productions at the Ellie, but $30 bucks a ticket is a bit rich for me for a movie of any kind).

On the other hand, if you are a short story fan, consider, A Dozen on Denver, a Rocky Mountain News feature with twelve new short stories highlighting Denver's first 150 years.

Oops!

I like the American Association of University Women. My mother was a member. But, their campaigning savvy leaves something to be desired. Today, November 14, 2008, I received in the mail a postcard from them saying:

On Tuesday, Nov. 4 AAUW of Colorado encourages you to vote NO on Amendment 46.

I did, but it is a bit late to ask. Given that it was sent from the 802XX mailing area by pre-sort, it must have been mailed after the election was over. Heck, in Colorado, given the percentage of people who vote early or by mail, it would have been late if it arrived the day before the election.

Amendment 54 Author Defends Work

Colorado Amendment 54, which limits campaign contributions by certain government contracts and certain unions, as well as certain parties related to them, is another of a long string of abysmally drafted and constitutionally dubious initiatives approved by Colorado voters in the ballot box.

It was written by attorney, a partner at Robert M. Liechty, of Cross & Liechty, P.C., in Denver, who has written a guest column in The Denver Post defending the constitutionality of Amendment that he wrote, in advance of looming litigation over its constitutionality. He states, in defense of his work that:

No-bid contracts are awarded without the government putting the contract out to bid, i.e., the work is awarded to a contractor that the county commissioner, for instance, has done business with in the past. This has potential for kickbacks, as in, "If you give me this government contract, I will contribute to your campaign." The people understood the abuse and, even with our opponents spending an estimated $30 million to defeat us, the people approved the Clean Government Amendment while rejecting most of the other amendments.

We applaud The Post's position in its Nov. 7 editorial that "reining in such 'pay to play' practices is a legitimate objective." However, the principal point in the editorial was incorrect: The Clean Government Amendment does not restrict political contributions of union members. It only restricts the principal contract-holder — the union itself, to use the context of The Post's example, or the owner of Joe's Paving, to use another example. The Clean Government Amendment is tailored to the abuse and only restricts the contributions of the principal players who contribute to political campaigns to ensure future business for themselves.

The Clean Government Amendment defines the contract-holder, the person affected by the amendment, as "persons that control 10 percent or more shares or interest in that party; or that party's officers, directors or trustees; or, in the case of collective bargaining agreements, the labor organization and any political committees created or controlled by the labor organization."

There is nothing vague in this definition (as The Post asserted) and we were careful to tailor the amendment to control only the people or entities that abused and benefited from the old system. As the amendment concerns unions, it only affects the union's coffers and leaves the union members, even its leaders, free to contribute as they did before.

Amendment 54 does not restrict the political contributions of all family members of anyone remotely associated with a no-bid contract. (The Post used the brother-in-law of a union janitor as an example.) That would probably be unconstitutional — if it were true. The amendment restricts immediate family members only when the contract-holder is using them as a pass through for the contract-holder himself. We would have been naïve to have allowed a loophole to allow Mr. Big to contribute to the county commissioner through his wife (with a wink). However, any family member of Mr. Big still has the right to donate to any political campaign.

The firefighters, nurses, teachers, and police of Colorado who serve us every day will not be silenced or denied their right to actively participate in the political process. They may lobby, contribute to, and work for any campaign of their choice. The voters did not fall for this propaganda spread by our opposition before, nor will we let their attorneys win by spinning these misconceptions in the courtroom.

The people want to stop the politicians, contractors and unions from taking advantage of their relationships and money to work the system. Those in power do not like such restrictions. But the people have spoken, and we are confident that the judges will uphold their will. Such carefully tailored amendments that express the will of the people are seldom overturned.

I agree that Amendment 54 does not cover union members acting as individuals. But, it does prevent union members for taking political activity collectively, in any matter coordinated or facilitated by their union.

Also, the author's statement notwithstanding, it is not at all obvious from the language that says that Amemdment 54 "persons that control 10 percent or more shares or interest in that party; or that party's officers, directors or trustees; or, in the case of collective bargaining agreements, the labor organization and any political committees created or controlled by the labor organization." that it does not covers union leaders and their family members in the way that it covers business owners and their family members. An equally plausible reading would be that "officers, directors or truseee" of "labor organizations and political committees created or controlled by the labor organization" are covered. The language could have been drafted to make clear another interpretation, but due to sloppy drafting, was not made clear.

Likewise, the language does not clearly limit family members to persons acting as a pass through for a covered business owner. The language in question says:

Because of a presumption of impropriety between contributions to any campaign and sole source government contracts, contract holders shall contractually agree, for the duration of the contract and for two years thereafter, to cease making, causing to be made, or inducing by any means, a contribution, directly or indirectly, on behalf of the contract holder or on behalf of his or her immediate family member and for the benefit of any political party or for the benefit of any candidate for any elected office of the state or any of its political subdivisions.

The proposed reading would be absurd, because it would imply that an unrelated person can act as a pass through and allow a government contractor to particpate. Surely, any strawman donation is prohibited.

Furthermore, the defense by Liechty fails to address the overbreadth of Amendment 54 which prohibits contributions across the board, even when the contribution has no connection to the entity from which the contract is obtained,or the impact that Amendment 54 has on political activity by a huge number of non-profits, colleges and universities in the state. He also does not offer any examples of pay to play laws with similar language being upheld in any other state.

Robert M. Liechty has every right to argue that his shoddy work is valid, and I wouldn't read the Rule of Professioal Conduct for lawyers to prohibit lawyers from drafting ballot issue language that they believe to be unconstitutional, so long as they think that the constitution is wrong and should be interpreted differently. But, the argument he makes is not a very persausive one.

More ominiously, there is a fair inference to be drawn that Liechty was not sloppy in his drafting because he was stupid, but was intstead, sloppy in his drafting because he deliberately wanted to chill political speech by leaving open a broad reading of the Amendment that would criminalize political activity by many people, while holding open the fall back position of a more narrow reading of the Amendment. Liechty is after all, an attorney, not someone like Doug Bruce representating himself in a technical area for which he lacks formal qualifications.

Finally, even as interpreted by Liechty, whose statements as to intent probably don't have much weight at this point anyway, since it is voter intent, and not drafter intent that is really relevant, Amendment 54 retains the serious constitutional flaws described above and not addressed in his guest column, so I stand by my prediction that a court will invalidate it, in whole, or in part.

This won't necessarily be seen as a defeat by Amendment 54's sponsors either, because they managed to burn through $30 million of union political money that might have otherwise been spent to defeat anti-union politicians in the course of the fight.

The Ownership Of Enterprise

One of my all time favorite non-fiction books, written by law professor Henry Hansmann, now teaching at Yale Law School, and published in 1996, has the same title as this post. Unlike most books on choice of entity, his book is largely empirical. He looks at what businesses are organized in which way and then asks what purpose this serves. By doing so, he deduces what factors are really important.

One of the most trenchant observations of the book, which spends quite a bit of time looking at cooperatives, employee ownership and non-profit organizations, in addition to more traditional shareholder ownership, concerns the pre-FDIC banking industry. Historically, the officers of shareholder owned banks consistently took big risks with other people's money. This paid handsomely when the risks paid off, and left somebody else holding the bag when the risks went south.

But, historically, not all companies behaved in this fashion. Credit unions and their counterparts, mutual insurance companies, both of which are customer owned cooperatives, were more cautious. Directors genuinely accountable to people who face serious down side risks make more conservative risk choices and are less prone to catastrophic collapse.

The FDIC ended this cycle for commercial banks. By imposing reserve requirements sufficient to make its insurance benefits mostly irrelevant, it became as safe to put your money in a bank as it was to invest in the safest investment in the marketplace, Treasuries. Free of the need of depositors to fear deposit threatening bankruptcy, shareholder owned commercial banks went on to thrive and become the dominant form of organization for the banking industry, although lightly regulated credit unions remained.

The state regulatory framework came later and less consistently to the insurance industry, and as a result, many significant insurance companies, like Northwestern Mutual and Amica, continue to be organized as consumer cooperatives.

This provides some context for some of the closing words of Michael Lewis, the author of Liar's Poker, discussing the collapse of major Wall Street financial institutions he'd assumed would happen a couple of decades earlier. He is discussing the collapse of an investment bank that changed its form of organization from an employee owed partnership to a publicly held corporation with the man who took it public.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

No partnership, for that matter, would have hired me or anyone remotely like me. Was there ever any correlation between the ability to get in and out of Princeton and a talent for taking financial risk?

Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.

Investment banks are doing precisely what killed pre-FDIC commercial banks in wave after wave of financial panics. They are taking excessive risks with other people's money because they have upside risk, but not downside risk.

The defining executive compensation tools of the quarter century "Wall Street era," from the start of the 1980s boom around 1983 through the 2008 financial crisis, have been the stock option and the profit sharing bonus. A stock option rewards executives for increases in stock prices but is merely worthless if stock prices fall. A profit sharing bonus gives senior employees a fat check if the company is doing well, but asks no one to give anything up if the company does poorly. These compensation methods exemplify this bias in favor of the upside without due regard to the downside that exists on Wall Street.

Stock options are strongly encouraged by our tax code, which explains why the lion's share of senior executive compensation in publicly held companies is structured in this way. Stock options defer taxation, while ordinary pay must be taxed immediately. Stock options also convert compensation for services ordinarily taxable at the highest individual income tax rates and in addition 1.45% of FICA taxation for both employer and employee (for a combined 37.9% marginal tax rate), into capital gains taxable at a mere 15% tax rate with no social insurance taxation.

You can't simply prohibit "excessive risk taking." Excessive is too malleable to operationalize without more context.

But, you can create incentives that require management to better weigh the relative upside and downside risks associated with business decisions like compensating them with shares of stock that have both an upside and a downside, instead of stock options. You can change the tax code so that it doesn't have a bias in favor of debt over equity financing for big businesses and people's personal lives. You can create director selection methods that make management more accountable to shareholders, and hence less prone to expose companies to risks that are excessive in the eyes of shareholders.

One could, for exmaple, require that firms that invest other people's money as a principal, the way that a mutual fund or private equity fund does, be investor owned, and that such firms be segregated from firms that provide investment services to others but do not invest their own funds, like investment advisors, retail brokerages and firms the underwrite initial public offerings.

One doesn't have to create incentives. One can opt instead for the road that commercial banking took. Whole industries can be prohibited from engaging in practices known to be risky for investors, like excessive leveraging, beyond a certain point defined by government regulation. Companies could be limited in the volume of guarantees that they are allowed to undertake.

Furthermore, while there is compelling evidence that allowing markets to set prices advances economic growth, the evidence that forcing the market to fit its offerings into one of a wide range of governmentally standardized products with only a few "moving parts" causes any economic harm is far less persausive. This may have costs at the margins, where innovative opportunities are lost. But these costs may come in exchange for the benefit of creating a market that participants in it actually understand, and thus are more likely to behave rationally within.

Perhaps new financial products ought to be treated the way the FDA treats new drugs. They would have to be tested under close supervision with people who know they are guinea pigs, and approved as safe and effective, before they are unleashed on the wider marketplace.

Ultimately, this particular post isn't about a solution. It is simply about identifying one of the central problems that created the financial crisis, which is that some of the key players had the wrong incentives. In another part of the conversation quoted above, Lewis notes that:

He thought the cause of the financial crisis was “simple. Greed on both sides—greed of investors and the greed of the bankers.” I thought it was more complicated. Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed.

I agree with Lewis.

Hat tip to NewMexiKen.

The Dog That Didn't Bark: PMI

Through the 1990s, the typical way to obtain a mortgage with less than a 20% down payment was to buy private mortgage insurance (PMI). A private mortgage insurance company typically guarantees the portion of a bank's mortgage loan in excess of 80% of the purchase price of the property, in exchange for a substantial fee that is passed on to the home owner.

Thus, one would think that PMI companies would have taken the brunt of the foreclosure crisis and protected other institutions from losses. But, this isn't what happened. Why?

This practice declined dramatically in the early 21st century. Instead, borrowers making small down payments took out multiple loans at the same time. One, a conventional loan at low interest rates with no private mortgage insurance, and in addition, a second loan without private mortgage insurance at a high interest rate for the balance of the borrowered portion of the purchase price.

So, a buyer wishing to buy a $200,000 house with a $10,000 down payment would take out a $160,000 conventional loan and a $30,000 high interest second loan, rather than taking out a single $190,000 loan with private mortgage insurance that would have to be kept in place until the principal balance on the loan was paid down to $160,000.

The trend towards multiple lien mortgages and away from private mortgage insurance, coincided with a trend towards smaller down payments and the rising use of home equity loans to convert home equity into cash as sustained growth in real estate prices made homeowners feel rich, and made lenders comfortable that appreciation would soon add equity to homes purchase with little money down.

Between 2003 and 2007, the percentage of first-time home buyers with no-money-down loans rose to 45% from 28%, according to the National Association of Realtors. Of first-time home buyers with down payments, the average amount they deposited fell to 2% from 6% of the purchase price of a home.

Private mortgage insurers, meanwhile, were losing business. In 2003, the industry wrote $376 billion in new insurance. Within three years, that number had fallen 40%, according to the Mortgage Insurance Companies of America, a trade group. Another indicator of the industry's financial health also showed signs of stress — its "combined ratio," which is the percentage of insurance premium income that insurers have to pay out in claims and expenses, rose to 65% in 2006 from 48% in 2003.

These uninsured second mortgages circumvented the conservative systemic risk reducing requirement of Fannie Mae and Freddie Mac that low down payment mortgages that they bought be insured and the requirement of private mortgage insurers that there be some down payment from the purchaser.

Buyers usually have to make a down payment of at least 3% to 5% to qualify for PMI loans. Major investors in mortgages, namely Fannie Mae and Freddie Mac, which provide liquidity in the mortgage market by buying home loans, require insurance on loans with less than 20% equity.

Incidentally, this further exonerates Fannie Mae and Freddie Mac as sources of bad policies that drove the financial crisis. The practices that caused the problems took place in spite of their policies, not because of them.

The Internal Revenue Code encouraged the systemic risk increasing practice of using second mortgages to turn low down payment loans into conventional ones that the secondary market would purchae, by allowing homeowners to deduct interest paid on second mortgages on a home, but not on private mortgage insurance premiums. Private mortgage insurance premiums were not tax deductible prior to the 2007 calendar year, and this tax deductibility remains temporary and subject to limitations.

The good news from this turn of events for private mortgage insurers is that while they have been battered by the collapse of the housing bubble, their declining sales in the early 21st century has reduced their exposure to foreclosure losses.

As of April 2008, "Major mortgage insurers such as PMI Group (PMI), Radian (RDN) and MGIC Investment (MTG) each lost more than, or nearly, $1 billion last year. In turn, the already small stocks have shed some 80% to 90% of their value over the past 52 weeks. With credit losses yet to peak, Standard & Poor's expects few mortgage insurers to turn a profit from underwriting again before 2010."

This is hardly good news. But, the subprime mortgage originators and the investment banks that securitized those loans and issued credit default swaps to enhance the creditworthiness of mortgage backed securities, are all bankrupt or facing bargain basement takeover attempts after falling stock prices wiped out investors anyway. In contrast, all of the major private mortgage insurers from before the financial crisis remain in business as free standing companies today.

Simply staying in business is truly remarkable for companies that are designed to cushion other financial institutions from losses in the event of mortgage foreclosures, during the largest wave of foreclosures the country has seen since the Great Depression and a huge collapse in housing prices.

Furthermore, now that investor money to fund uninsured second mortgages with little or no equity cushion has almost completely evaporated, regardless of the interest rate the investors could be paid, the private mortgage insurance business is picking up dramatically. The newly insured mortgages are likely to be fairly low risk because mortgage underwriters have greatly tightened their underwriting standards by requiring some equity, better documentation of ability to pay, and better credit from would be borrowers. And, the private mortgage insurance tax deduction is a huge subsidy to the private mortgage insurance industry that makes its product more affordable now.

Footnote: Bad Loans Go Bad Early

While mortgages are typically amortized over thirty years (although ten and fifteen year loans aren't unheard of to secure interest rate reductions for borrowers with good credits, and forty year amortizations and "interest only" loans were common for buyers in expensive markets trying to afford more house), the average mortgage is oustanding for only about ten years on average. The average homeowner refinances a mortgage or sells a home after ten years. For that reason, controlling for creditworthiness, mortgage interest rates tend to track ten year Treasury bonds, rather the thirty year Treasury bonds.

Mortgages that go bad tend to go bad even earlier, and this is particularly true of subprime loans. The longer a homeowner has owned a home, the more likely it is that the home has appeciated, due to the tendency of price bubbles and collapses to average out over time, and due to inflation. And, in any loan other than an "interest only" loan, principal amounts fall over time. So, the equity cushion of the lender grows over time, shifting the risk of loss in the event of default and foreclosure from the lender to the borrower.

Loans that go bad are overwhelmingly new ones. A New York Times review of metro New York City foreclosures a little more than a year ago found that:

[O]n Long Island, the average age of a loan in foreclosure last month was a little more than two years, according to Long Island Profiles. In January 2004, the average length of time it took borrowers struggling with loans was five years before losing their property through foreclosure.

Early foreclosures are particularly common in subprime loans, but quite early in most mortgages. A January 2005 study of subprime foreclosures, citing a 2001 study by HUD of the same subject found that:

[L]oans by subprime lenders in Baltimore were on average 1.8 years old at the start of foreclosure, compared to 3.2 years for prime and FHA loans.

Similarly, a December 2003 study of foreclosures in a set of 12,000 new mortgages by a federal government agency found that: "the average age of the loans at foreclosure in the data set was approximately 30 months or 2½ years."

The result is that the effect of loose loan underwriting at the peak of the housing bubble will produce most of the resulting foreclosures quickly, and that the benefits of tighter loan underwriting after the subprime mortgage crisis is likely to appear within two or three years of the establishment of stricter lending standards in mid-2007.

PMI companies and other firms that take losses when loans go bad, will likely be out of the wilderness by 2010 and may start to see improvement sometime in 2009, regardless of what Congress and government agencies do to intervene. Indeed, measures that slow down the foreclosure process, like Citibank's recently announced several month moritorium on new foreclosures, while good for homeowners in trouble, may actually prolong the foreclosure driven element of the financial crisis.

Second Footnote: Other Promising News For PMI Companies

The fact that each major PMI company has suffered $1 billion in losses in the housing bubble collapse is actually good new for new investors. It means that all earning of each company for the next many years will be tax free due to net operating loss carry forwards. This both creates a strong incentive to keep the existing entities alive, and also discourages competition from entering the PMI market since the competition's earnings would be taxed, while the existing companies' earnings would be tax free.

A second aspect of the PMI companies that is attractive is that their exposure is limited and easier to quantify than many toxic mortgage assets. Unlike a typical securitize mortgage or credit default swap, a PMI company is not always on the hook for the full amount of the mortgage, only for the insured portion of the loan (typically less than 17% of the purchase price of the house). In normal times, this means that the PMI company is exposed to virtually all of the risk of loss in a foreclosure. But, in the extraordinary times that we are in now, when some housing markets have seen housing price declines of 40% of more, many loans facing losses beyond those covered by PMI. Most observers expect real estate prices in bubble collapse markets to fall more before they go up, but no one knows how much they will fall. Since many financial decisions are driven by worst case scenarios, this makes PMI exposures look better than other kind of bad mortgage and guarantee exposures.

Furthermore, since PMI companies are in the business of valuating default risk exposure and pricing it, their estimates of their exposure to losses in this crisis are more credible than that of the many New York derivative and investment banking firms that set up mortgage backed securities and credit default swaps which the financial markets are now trying to value without having any real experience in doing so.

Finally, there is the issue of leverage. PMI companies are far less leveraged than either commercial or investment banks. PMI Group, Inc., for example, had liabilies that were just 34% of assets at the end of the second quarter of 2008, and only about a quarter of the outstanding liablities are long term debt. Furthermore, about 90% of those assets are cash and investment securities. This lack of leverage gives PMI companies great staying power.

Similiarly, the absolute numbers are encouraging. PMI Group, Inc. had a book value at the end of the second quarter of 2008 of $3.76 billion. Its losses so far in the financial crisis have been about $1 billion, and as explained above, those losses are likely to be fairly short lived. Yet, the company's market capitalization is only about $154 million. The company is a value even on a liquidation value basis, even if it sustains $1.5 billion more in losses and loses $2 billion in the financial markets in the next few years. Yet, one would prsume that PMI has a more conservative investment strategy than the S&P 500 and that $1.5 billion in additional losses is in the high end of what is likely going forward.

Other major players, like most insurance companies, are also not highly leveraged.