Our Bonds that Blind

Matt Taibbi continues to hound the too big to fail banks, and it's to our advantage. He's done it yet again in an expose' of the rigged game that's government bonds, long held to be the safest investments around. While to some extent that may be true, keep in mind that things have changed over the course of the last few decades as debt loads have exploded at every level. Thinking about buying any Cali bonds? Look at how the governator has shredded our books and then think twice. Then read the last chapter of Michael Lewis' latest and quite excellent book, Boomerang, then think again. Lewis' book -- which profiles the way EM08 played out in different countries such as Iceland and Greece, ominously ends with his home state of California, itself a nation state at about #8 in the world's largest economies. And in case you haven't heard, we are sunk to our eyeballs in debt. And although he wasn't alone, thank you governator, for trashing our future.

Over a year ago I posed a simple question to my good friend Torben who I see eye to eye with on EM08, and while researching over a year and a half ago, I was astounded at the debt loads, not just of credit cards, student loans, car loans... let alone mortgages, but of states and munis. I asked him, "What if Cali defaults on its bonds? Then what?" Torben said, more or less, "Then we're sunk." Cali's far bigger than Greece and as big as Italy's economy! No less than JPMC chairman and ceo (it's a conflict of interest to be both, btw) Jamie Dimon thought the same. And with a self pat on the back, yours truly beat him to the punch. And yet, in spite of a couple of noodnicks like us figuring this out, not a single major mass media merchant I know of has addressed this ticking time bomb.

Personally, I think bonds have been paying off by robbing Peter to pay Paul. That is, because of our unified economy, folks in other states will pay for Cali's tragedy, similar to the way Germany has now become the EU's piggy bank. In other words, the federal government will just keep injecting us with money, because *they* know how important it is to keep California from blowing up the entire world. One thing's for sure, after reading Taibbi's piece, the cat's out of the bag on what a rigged game bonds are. Which means that to add to the long roster of welfare money cons, we can now add red, white and blue bonds.

Nothing means "not a thing." Neither is sacred anymore.

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[Some of the links in Taibbi's piece may be dead/lost; that's why I always supply the link to the original article. if you need to, just click on the title of the piece. -jp]

How Banks Cheat Taxpayers

by Matt Taibbi

Rolling Stone, 12/27/11

A good friend of mine sent me a link to a small story last week, something that deserves a little attention, post-factum.  

The Bloomberg piece is about J.P. Morgan Chase winning a bid to be the lead underwriter on a $400 million bond issue by the state of Massachusetts. Chase was up against Merrill for the bid and won the race with an offer of a 2.57% interest rate, beating Merrill’s bid of 2.79. The difference in the bid saved the state of Massachusetts $880,000.

Afterward, Massachusetts state treasurer Steven Grossman breezily played up the benefits of a competitive bid. "There's always a certain amount of competition going on out there," Grossman said in a telephone interview yesterday. "That's good. We like competition.”

Well … so what, right? Two banks fight over the right to be the government’s underwriter, one submits a more competitive bid, the taxpayer saves money, and everyone wins. That’s the way it ought to be, correct?

Correct. Except in four out of five cases, it still doesn’t happen that way. From the same piece [emphasis mine]:

Nationwide, about 20 percent of debt issued by states and local governments is sold through competitive bids. Issuers post public notices asking banks to make proposals and award the debt to the bidder offering the lowest interest cost. The other 80 percent are done through negotiated underwriting, where municipalities select a bank to price and sell the bonds.

By "negotiated underwriting," what Bloomberg means is, "local governments just hand the bid over to the bank that tosses enough combined hard and soft money at the right politicians."

There is absolutely no good reason why all debt issues are not put up to competitive bids. This is not like defense contracting, where in some situations it is at least theoretically possible that X or Y company is the world’s only competent manufacturer, say, of armor-plated Humvee doors, or some such thing. It’s still wrong and perverse when companies like Halliburton or Blackwater get sole-source defense contracts, but at least there’s some kind of theoretical justification there.

But this is a bond issue, not rocket science. In most cases, all the top investment banks will offer virtually the same service, with only the price varying. Towns and cities and states lose billions of dollars every year allowing financial services companies to overcharge them for underwriting.

It gets even worse in the derivatives markets, where banks routinely overcharge state and local governments for things like interest rate swaps, for one very obvious reason – swaps are not traded on open exchanges, so only the banks know how to price them.

Imagine what NFL gambling would be like if the casinos didn’t publish the point spreads every week, and you’ll get a rough idea of how the swap market works. If you couldn’t look it up, how many points would you give the Dolphins against the Jets next week? Two? Five? Seven? The big casinos know, because they’re taking all that action, that the real number is one point.

In the same vein, exactly how accurately do you think some local county treasurer might be able to guess the cost of an interest rate swap for his local school system? Answer: he’d probably do about as well as you or I would, guessing the odds on a Croatian soccer match.

The big banks know this, which is why there should never, ever be non-competitive bids for those sorts of financial services. In a sole-source contract for a swap deal, you’re trusting a (probably corrupt) Too-Big-To-Fail bank to give you a good deal for a product whose price is not publicly listed anywhere.

There have been numerous investigations and lawsuits across the world connected with this sort of systematic overcharging, from Erie, Pennsylvania to the notorious Jefferson County, Alabama case, to Milan, Italy (which sued Chase and four other banks for misleading them about derivative prices).

In the Erie case, Chase recommended to the locals that they hire a financial adviser to review the deal. What they didn’t tell the local government was that Chase had paid a fee to this adviser, a firm called Investment Management Advisory Group Inc., or IMAGE. They pulled the same scam with the school district of Butler County, Pennsylvania.

And in the oft-discussed Jefferson County case alone, Chase reportedly overcharged the locals $100 million for the crooked swap deals that, in a completely separate outrage, will probably leave Birmingham bankrupt for the next generation.

All of which is exactly what people like the OWS protesters are complaining about when they talk about greed and excess on Wall Street. Nobody is begrudging a bank’s desire to make money, and nobody is saying a bank shouldn’t be allowed to make money, even a lot of money, performing legitimate services for the state and the taxpayer.

But when you put a thumb on the scale in a financial services contract, the costs start to get outrageous very quickly. The banks would still do a very crisp, almost effortlessly lucrative business if they just stuck to submitting competitive bids for legitimate work – but instead of that, they for some reason have to game the system, grease politicians, rig bids, and stick the taxpayer with overpriced products. Which sucks, of course. Hopefully politicians will catch on and go the Massachusetts route more often.

Down to This

We here in Cali can take down the States and the world in a way few can. Bigger than most countries, we've gone from $4 Bil to now $42 Bil in debt under Arnie's watch. This is what we booted Grey Davis out for?

Questions:

1. How is it that Retardicans get the image of "fiscally conservative"? Everything they touch economically blows up. (Answer: They are superior in terms of marketing.)

2. How does Arnie hold his job??? This is perhaps the most troubling, because in the private sector, the board would have been up his ass and booted his butt out a long time ago. (Answer: This is bizarro world, where "The Governator" rules.)


California, once a dream state, strives to get back its groove
As it has slid, the state's citizens have begun to focus on its core dysfunctions.
By Daniel B. Wood | Staff writer of The Christian Science Monitor

from the February 23, 2009 edition

Los Angeles - Perhaps more than any state in America, California represents the end of the rainbow. Generations of fortune-seekers have seen it as a place of almost magical light and color where they could obtain, if not a big pot of gold, at least a good living in a climate where oleander bushes and innovation thrive equally as well.

That storied vision, fading for some time, is now in danger of disappearing altogether.

From drought to high taxes, from overcrowded classrooms to overflowing prisons, California confronts a perfect storm of troubles – one that elected officials here seem unable to navigate with any surety, as last week's herculean effort to simply produce an annual budget demonstrated to all of the nation.

But even as California's woes multiply, compounded by the broader recession, there are stirrings of reform in the land. Longtime observers of political and business trends here see a somnolent giant awakening and realizing that it is wrapped in something of a political straitjacket.

For one thing, state voters, who flocked to the polls in the last election, have begun to tackle election reforms, which many say are crucial if government is to function more effectively.

"Californians are finally sick of all this. There's never been such conversational currency with the intricacies of government by the average citizen," says Barbara O'Connor, director of the Institute for the Study of Politics and Media at California State University, Sacramento. Noting that California voters in November approved redistricting reform to help end political gridlock, Ms. O'Connor says, "The era of the disengaged voter is over."

Activism is bubbling up in two formal moves to recast government, echoing the move by state Sen. Abel Maldonado (R), who finally cast the vote that broke the long budget deadlock after winning assurances of support for an election reform he says is needed to bring more moderates into office.

One is a bid to amend California's constitution.

"This state has a crisis everywhere you look.... California has slipped from first or best in country to the worst," says John Grubb, spokesman for the Bay Area Council, which spent the past year building a coalition to push for a constitutional convention that would craft a new California constitution. Political, economic, and citizens groups are slated to meet in a first-time summit Tuesday in Sacramento.

"The thing that drives this coalition is the great fear of the status quo – that we could be stuck like this forever," says Mr. Grubb. "People desperately want change, and we feel that a constitutional convention is probably the most foolproof way to get the reforms we need in the quickest amount of time."

Another group, California Forward, has been holding focus groups across the state for nearly a year to find bipartisan, citizen-driven solutions to end the structural problems that plague the state.

"The reality is we can't exist this way anymore. We can't just keep plugging a hole until the next year," says Jim Mayer, executive director of California Forward, which includes leaders from business and labor, on the left and right, from around the state. The group was co-chaired by Leon Panetta, before President Obama tapped him to head the Central Intelligence Agency.

"There is a huge gap between the innovation that is out there and the government. The ideas never get translated into policy in California," Mr. Mayer adds. "California has to step back and reinvent its government to meet the challenges of this state and the ambitions of its people."

The challenges are daunting.

Contributing to lawmakers' fight to close a $42 billion budget deficit – the largest budget gap by any state in American history – is a litany of other problems: crumbling infrastructure, water shortages, prison overcrowding, gang crime, traffic congestion and smog, illegal immigration, and sliding school performance.

Some California watchers say the state's political rules also handicap the government that serves the nation's biggest population, at 34 million, and its most diverse.

Those include the often-used citizen referendum process, which allows ballot initiatives to spring from the grass roots but which, some say, has also had the effect of limiting officials' budgetary options. Term limits for elected officials may also contribute, making it difficult for new and relatively inexperienced officeholders to understand the needs of a mammoth government that oversees 58 counties, 480 cities, 1,050 K-12 school districts, and 72 community college districts.

"California has a governance structure that is too rigid, not just in regard to fiscal spending but in political matters as well," says Mark Baldassare, executive director of the Public Policy Institute of California. On a ballot measure, he says, "a 50 percent vote can get ... embedded in the constitution both tax and spending requirements that are difficult to maintain and don't have much flexibility."

The state's tax system, which relies heavily on personal income and capital gains has proved to be unstable again and again, he adds. Political districts drawn by the party in power, moreover, create too many "safe" seats that allow candidates and legislators to forgo learning the art of compromise. Instead, they dig in, and gridlock ensues.

In several lists and indexes comparing states' performance, the Golden State seems to have some leaden weights around its ankles.

It's never done particularly well on the one that rates tax favorability for businesses, but now it comes up 48th for fiscal year 2009, according to the Tax Foundation. Next-door neighbors Nevada and Oregon are among the best 10 in terms of business tax climate, which is an incentive for businesses to locate or relocate nearby. As for taxes on individuals, the state has the highest sales tax in the nation, and its income-tax rate ranks toward the top, too.

Moreover, a California Faculty Association report last month warned that the state "is on course to wreck its own economy" because of failure to invest in higher education, and a US Chamber of Commerce "State-by-State Report Card on Educational Effectiveness" gives California an F on academic achievement.

In December, California had the fourth-highest jobless rate of states in the US, at 9.3 percent, according to the US Bureau of Labor Statistics.

California Forward wants to establish a network of regional, private-public partnerships to pursue long-term recovery from the current economic challenges.

One example is prisons, says Mayer. A panel of three federal judges found Feb. 9 that overcrowding in state prisons has deprived inmates of their right to adequate healthcare and ruled that the state must reduce its prison population. California's 33 prisons were designed for 84,000 inmates but now hold 158,000.

"Our state's prison budget has been growing faster than any other outlay for a decade, not because of the prison system itself, but because of costs," says Mayer. In 2001, California spent $26,556 per inmate, ranking 23rd in the nation. By 2005, costs per inmate had increased to $34,150, sixth in the nation. By contrast, 31 states reduced costs.

The Bay Area Council, in its bid to hold a constitutional convention, hopes to limit ideas to four categories: budget reform, election reform, more local control of locally collected funds, and the establishment of an oversight commission to examine and make recommendations on the function and viability of every state agency.

"It's modeled on the very popular Texas system," says Grubb. "They will investigate every state agency and make suggestions on whether or not it should be continued, disbanded, or merged in some other form with another agency. We feel this is a great way to get better efficiency out of government."

Although some sociologists and writers predict continued decline for Californians' quality of life, historian Kevin Starr, who has writen seven volumes about the state, has described California as an open-ended experiment in "global ecumenical civilization." "The state is increasingly difficult ... and aware of enormous challenges that are forcing its citizens and institutions to struggle mightily," he said in a 2004 interview with the Monitor. "The typical American dreamer can no longer merely say, as he once did, 'The solution is that I have come to California.' The ante has been upped."

Cars Cars Cars, Traffic Traffic Traffic, Pollution Pollution Pollution!!!

Being born and raised in car capitol, USA, that is, LA, having a car is a must. But the freeway system, once touted as the way of the future, is now critically over-stressed, and our city street system is likewise.

And here's a crucial point: LA is slated to grow by another 10 million people within the next 5 or so years. OY!!!

But the arguments against cars don't just stop at traffic. Here's a laundry list that I hope is thorough:

1. Pollution - Needs no further explanation, but just think of it as car dookey doo doo.

2. Acid rain - Related to pollution, it completes the cycle by leeching into crops and ground water. Whoopee, car dookey in my coffee!!!

2A. Global warming. Yeah yeah, dumbya denies it.

3. Health - Studies have shown that kids raised in heavy traffic areas have higher numbers of respitory problems.

4. Health 2 - Think about working like a dog all day, then think about hitting rush hour when your commute is elongated by at least double. See, here in LA, other factors play in this, such as real estate demand, which incentivizes folks to buy outside of the LA area. A friend bought a home in Rancho Cucamonga and works about 60-70 miles away, in Universal Studios. So now you're on the road about 2 hours. That's stressful. And where are the studies that show not just the long-term effects of this kind of life style, but, the ripple effects - alcoholism, drug abuse, over-eating, diabetes, wife/partner/child abuse, broken homes...

5. Costs - Money AND time; Here're the costs associated with owning a car (If I missed some, please write):

A. Your car note.

B. Insurance.

C. Gas.

D. Parking tickets.

E. Traffic tickets.

F. Traffic school.

G. Courts - Judges are pulled away to hear cases, officers are subpoenaed to appear, you must take time away from your life... all except your time on tax payer dollars, and at a time when the courts are bulging with dockets and officers should be tackling much bigger problems, imho. Lest you think this trivial, go down to superior court sometime early in the morning and see the line that snakes around waiting to get in to handle their traffic violations. Look at the docket of traffic cases EVERY DAY - I once had a chance meeting with someone who was a manager in the parking violation bureau for a city in L A I asked him where the revenue from parking ranked in their coffers, and he said without even thinking, that it was by far their number one cash cow. Now, with CAMERAS AT INTERSECTIONS, the ante has been upped by big brother. Is it for safety? Perhaps. Is it for cash? In a capitalistic society, where EVERYTHING is moving toward monetization, you betcha.

H. Smog test certification.

I. Car repairs.

J. Pay parking - pretty big business in LA & NYC. And while we associate pay parking with general paid lots, many if not all corporate buildings pay to park.

K. Impound and towing. This is a bummer for those that have had their rides impounded. It's a nice little cottage industry that involves the repo people, the courts, the cops, and big plots of land used to store the rides.

I'm sure there're more - let's hear them...

For a finishing touch, here's a NYT article on the Apple...

November 26, 2005
Battle Lines Set as New York Acts to Cut Emissions
By DANNY HAKIM

ALBANY, Nov. 23 - New York is adopting California's ambitious new regulations aimed at cutting automotive emissions of global warming gases, touching off a battle over rules that would sharply reduce carbon dioxide emissions while forcing the auto industry to make vehicles more energy efficient over the next decade.

The rules, passed this month by a unanimous vote of the State Environmental Board, are expected to be adopted across the Northeast and the West Coast. But the auto industry has already moved to block the rules in New York State, and plans to battle them in every other state that follows suit.

Environmentalists say the regulations will not lead to the extinction of any class of vehicle, but simply pressure the industry to sell more of the fuel-saving technologies they have already developed, including hybrid systems that use a combination of electricity and gasoline. And that, they say, will curtail one of the main contributors to global warming.

"The two biggest contributors to global warming are power plants and motor vehicles," said David Doniger, a senior lawyer for the Natural Resources Defense Council. "If you deal with them, you deal with more than two-thirds of the problem."

But automakers contend that the regulations will limit the availability of many sport utility vehicles, pickup trucks, vans and larger sedans, since they will effectively require huge leaps in gas mileage to rein in emissions. The industry also says the rules will force them to curb sales of more-powerful engines in the state, and ultimately harm consumers by increasing the cost of vehicles.

The standards are the most ambitious environmental regulations for automobiles since federal fuel economy regulations were enacted in the 1970's. They will be phased in starting with 2009 models and require a roughly 30 percent reduction in automotive emissions of carbon dioxide and other greenhouse gases by the 2016 models.

The new rules will also effectively require an improvement in fuel economy on the order of 40 percent for vehicles sold in the state.

Ten states follow or plan to follow California's air quality rules, which have previously focused on auto emissions that cause smog, and the latest set of rules would for the first time limit carbon dioxide emissions. And as the largest of the 10 states, New York is being closely watched as it institutes the new rules.

If all 10 states and California succeed in enacting the rules, they will form a powerful alternative regulatory bloc accounting for about a third of the nation's auto sales.

"That is so much of the market it should reach a tipping point," Mr. Doniger said. "It won't make sense for the automakers to build two fleets, one clean and one dirty."

New Yorkers will certainly notice the regulations should they survive the court challenges. The state estimates that the rules will increase the cost of a new car or truck by more than $1,000 when fully phased in, an amount it expects car owners to recoup over time through savings at the pump. Vehicles will need to comply with the new standards to be registered in the state.

In early August, more than three months before the regulations were even adopted, automakers from Detroit to Tokyo joined in a suit to block them, making New York the latest legal front in the industry's fight against the measures. After California adopted the regulations in their final form in September 2004, automakers sued in state and federal courts, where the battle is still playing out.

California, unlike other states, has special authority to set its own air quality rules because it did so before passage of the federal Clean Air Act. Other states can pick California's tougher regulations over Washington's.

"If the California regulation actually were in effect today, only a handful of models would meet it," said Gloria Bergquist, a spokeswoman for the Alliance of Automobile Manufacturers, which includes Toyota, General Motors and several other major automakers.

Judith Enck, a policy adviser to Attorney General Eliot Spitzer, said she expected more challenges on many fronts, with automakers battling New York every step of the way. "We're ready for them to file a lawsuit if the state sneezes," she said.

An analysis by the State Department of Environmental Conservation said it would take one to five years for drivers of cars, smaller sport utility vehicles and pickup trucks to make up for the higher initial cost of their more fuel-efficient vehicles, assuming a gas price of $2 a gallon. For drivers of heavier S.U.V.'s and pickups, it would take one to three years.

But automakers estimate that the regulation will add about $3,000 to the cost of new cars and trucks and be hard to make up over time. To comply, they say, they will have to restrict sales of their vehicles with the poorest mileage, or redesign them to add new technologies, or to be more aerodynamic and lighter in weight.

"The California legislation would hurt the most the people that rely on large cars, pickups, S.U.V.'s and minivans," Ms. Bergquist said.

Environmental groups say the rules can be met with technology already on the shelf.

"They said that seat belts would put them out of business; they said that air bags would put them out of business; they said fuel economy and emissions regulations would all put them out of business," said David Friedman, a senior analyst at the Union of Concerned Scientists.

"It turns out it's their unwillingness to innovate that's putting them out of business right now," he added, referring to the current struggles of General Motors and Ford Motor Company.

The legal battles do come at an awkward time. After years of saying that customers cared little about gas mileage, automakers are rushing to assert their green credentials as oil prices have risen. G.M. and Ford have been particularly scarred by the sales slump of their large sport utility vehicles and pickup trucks.

In a recent advertisement that has appeared in The New York Times and in many other publications, Ford's chairman and chief executive, William Clay Ford Jr., promoted his company's plan to sell 250,000 vehicles next year that can run on a corn-based ethanol blend instead of on gasoline, and 250,000 hybrid vehicles annually by 2010.

"Innovation is our mission," the advertisement said, adding that the company was building "smarter, safer, more fuel-efficient vehicles."

Industrywide, however, the gas mileage of the average new vehicle sold in the United States is below what it was two decades ago, because leaps in efficiency have been overtaken by increases in the weight of vehicles and in the power of their engines.

The 10 states that either follow California's car rules or are in the process of adopting them are New York, Maine, New Jersey, Vermont, Massachusetts, Oregon, Washington, Rhode Island, Connecticut and Pennsylvania.

While states are supposed to follow all of California's car rules or stick with Washington's, in practice that has not always been the case. The administration of Gov. George E. Pataki, however, has been an early supporter of the global warming regulations, getting approval from the State Environmental Board on Nov. 9. (The rules do not need to be approved by the State Legislature.)

Many of the industry's legal arguments against the rules are likely to be drawn from a playbook automakers have used in California. One contention is that the regulation of tailpipe emissions is superseded by Washington's authority to regulate fuel economy. Regulators in California have countered that they have authority to take action on any emissions threatening public health.

While global warming and what contributes to it have been controversial issues in the United States, a wide body of international science has linked it to health and environmental dangers, including increases in rates of asthma and infectious disease and threats to coastlines from rising sea levels.

The auto industry does not dispute the issue of global warming, but says policies should be set nationwide, rather than at the state level. President Bush has shown little inclination to do that, having rejected the Kyoto global climate accord early in his first term, but his administration has modestly increased federal fuel economy standards.

In New York, automakers also plan to argue that the regulations were not vetted as thoroughly as the state's laws require. And they will contend that the standards will actually harm the environment by leading to what Ms. Bergquist called "the jalopy effect" because higher initial car prices will discourage people from trading in older models that pollute more than newer ones.

"Less efficient autos will stay on the road longer, and that will increase smog-forming pollutants," she said.

Daniel F. Becker, a top global warming strategist at the Sierra Club, said, "If there were an Olympics of chutzpah, the auto industry would win a gold medal for suing New York claming that their clean car law is bad for the environment."