Howard Rich's Blog

August 21, 2009

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May 27, 2009

A Judge to Far

From the Washington Times:

With his nomination of Judge Sonia Sotomayor for the U.S. Supreme Court, President Obama has abandoned all pretense of being a post-partisan president. While he may like to think of himself as a thoughtful moderate soaring above the issues that divide America, his actions reveal what hides under that hopeful lining.

Presidents usually nominate judges that espouse their philosophy. So what does this nomination tell us about Mr. Obama’s true colors?

Even the liberal establishment worries that Judge Sotomayor tilts too far to the left. New Republic essayist Jeffrey Rosen reports that fellow liberals who have watched or worked with her closely “expressed questions about her temperament, her judicial craftsmanship, and… [they have said] she is ‘not that smart and kind of a bully on the bench.’ ”

A suspiciously high number of her decisions have been overruled by higher courts. Wendy Long of the Judicial Confirmation Network said that record shows “she is far more of a liberal activist than even the current liberal activist Supreme Court.”

There will be much to say in days to come about Judge Sotomayor’s manifest lack of appropriate judicial restraint and about other problems in her record. For now, though, three red flags beg for attention.

Speaking at Duke University Law School in 2005, Judge Sotomayor said the “Court of Appeals is where policy is made.” On its face, the assertion runs counter to more than 200 years of American legal tradition holding that courts are merely meant to interpret existing law, not actively make policy choices.

Immediately realizing she was on thin ice, the judge continued: “. . . and I know this is on tape and I should never say that, because we don’t ‘make’ law.” To much laughter, and with facial and hand gestures to indicate that her next line was to be taken with humor as a useful fiction, she added: “I’m not promoting it and I’m not advocating it.”

But judicial activism is no joke. It undermines the Constitution and substitutes judicial whim for democratic decision-making. Unelected judges, answerable to no one but themselves and serving for life, can all too easily become dangerous oligarchs.

Judge Sotomayor seems to think that inherent racial and sexual differences are not simply quirks of genetics, but make some better than others. Consider her 2002 speech at the University of California-Berkeley School of Law.

“I would hope that a wise Latina woman with the richness of her experiences would more often than not reach a better conclusion than a white male who hasn’t lived that life,” she said. “I simply do not know exactly what that difference will be in my judging. But I accept there will be some based on my gender and my Latina heritage.”

She also accepted as potentially valid the idea that the “different perspectives” of “men and women of color” are due to “basic differences in logic in reasoning” due to “inherent physiological or cultural differences.”

If a white male had said these openly racialist words in a prepared speech, his chances of reaching the U.S. Supreme Court would be gone in an instant. Instead, it seems that these outlandish remarks are what qualified Judge Sotomayor in Mr. Obama’s eyes.

Judge Sotomayor seems to favor racial discrimination. Consider the case of Ricci v. DeStefano. In that controversial case, 19 white firemen were denied promotion because no blacks scored high enough on a race-neutral test to also be promoted. Judge Sotomayor ruled against the white firefighters.

If Mr. Obama wanted a judge with the right “empathy,” he struck out with Judge Sotomayor. One of the white firefighters denied promotion, Frank Ricci, is dyslexic. In order to ace the promotion exam, he quit a second job, spent $1,000 for instruction materials, and spent many hours reading those books into an audio tape to help him study. For his extraordinary efforts, he finished sixth out of 77 applicants for promotion – but then was denied, simply because he is white.

Second Circuit Court of Appeals Judge Jose Cabranes, appointed by a Democratic president, complained that the ruling written by Judge Sotomayor and two other judges “contains no reference whatsoever to the constitutional claims at the core of this case.”

The Supreme Court is expected to rule on Ricci v. DeStefano before the Senate votes on Judge Sotomayor’s nomination. It would be an extraordinary rebuke were a current nominee to be overruled on such a controversial case by the very justices she is slated to join.

Judge Sotomayor seems to be the most radical person ever nominated for the high court. To continue to command public respect, the Senate will have to ask her some hard questions. The simplest one to ask will be the hardest one for her to answer: Given her statements against whites and males, can she be fair to all Americans?

May 1, 2009

Committee votes 16-2 in favor of term limits

From the Denton Record Chronicle:

A Denton city committee voted 16-2 on Wednesday in favor of keeping term limits for council members, weighing in on a controversy that overshadowed last year’s local election.

“There are pluses and minuses of having term limits, but it seems to me that the pluses of term limits outweigh the minuses,” said committee member Richard Hayes, who voted with the majority. “Political office should not be a legacy.”

The vote was the first major decision from the Term Limits Charter Review Committee, which the City Council created in February to study possible changes to council terms of service. The committee will report to the council, and voters would have to approve any changes as part of a city charter amendment election.

The committee now must decide whether council terms should be longer than two years and whether past years of service should count against council members who switch seats. The next scheduled meeting is May 13.

Denton has faced pressure to clarify its term limits statute since a 2008 lawsuit challenged the city’s traditional interpretation, which essentially lets council members avoid term limits by switching seats. The suit also sought to disqualify Mayor Mark Burroughs, Mayor Pro Tem Pete Kamp and then-Mayor Perry McNeill for alleged term limit violations.

A state district judge dismissed the suit in October over procedural issues; the plaintiffs have appealed.

Burroughs served on the council from 1998 to 2004 before unseating McNeill in last year’s mayoral race. Kamp resigned in May with a year left in her third consecutive term in District 2 to take an at-large council seat.

The city charter limits the mayor and council members to three consecutive two-year terms, but opinions differ over whether the limit applies per seat or across all seats. City attorneys say past years of service do not count against council members who run for a different seat, including mayor, or sit out a term.

Denton voters approved term limits in 1980 as part of a series of charter changes that also expanded the council from five to seven members and created the current design of four geographical district seats and three at-large positions. The mayor’s seat is one of the three at-large positions.

Some residents advocate strict term limits to avoid entrenched power, while others say six years is too short for council members wishing to master the job or become leaders in regional, state or national government bodies.

Many who voted Wednesday to uphold term limits in Denton said they didn’t think residents would accept a major overhaul of the system.

Committee member Jim Alexander voted with the majority even though he personally opposes term limits, saying he believed the panel’s primary role was to clarify the existing rules. Alexander, a political science professor, is a 16-year veteran of the Denton school board and a former City Council member.

Committee members Pat Cheek and Salty Rishel cast the only votes against term limits, saying the city already has elections and recall initiatives as checks on entrenched power.

“I just think we defeat a lot of good people from staying on the council if we give them term limits,” Cheek said. “If somebody is really bad, we can vote them out.”

Three committee members were absent.

Part of Wednesday’s meeting took place behind closed doors, including a discussion on “committee policy, procedures and rules,” according to the posted agenda. City Attorney Anita Burgess cited an exception to the state’s open meetings law that allows government bodies to receive legal advice in a closed session.

Burgess said part of the discussion involved Section 2-83 of the Denton Code of Ordinances. That code deals with general rules for city boards and commissions, including what constitutes a quorum. The 45-minute closed session also involved a review of legal opinions on term limits and terms of service, according to the agenda.

April 30, 2009

Congress OKs $3.6 trillion Obama budget

From the Washington Times:

Congress signed off on President Obama’s $3.6 trillion budget largely along party lines Wednesday night, handing him a legislative victory that paves the way for a health care overhaul.

The Senate cleared the plan by a vote of 53 to 43 after the House passed it 223 to 193. Not a single Republican in either chamber voted for the measure. Democratic defections included Sens. Evan Bayh of Indiana, Robert C. Byrd of West Virginia, Ben Nelson of Nebraska and Pennsylvania’s former Republican Sen. Arlen Specter, all of whom joined 17 House Democrats in voting no.

The budget – a nonbinding resolution meant to guide congressional spending – includes a fast-track provision that would block a Senate filibuster on Mr. Obama’s bid to transform the health care system, as well as his plan to change student lending.

In remarks prepared for his evening news conference, Mr. Obama said the budget “builds on the steps we’ve taken over the last 100 days to move this economy from recession to recovery and ultimately to prosperity.”

House and Senate budget chiefs trimmed Mr. Obama’s original $3.6 trillion budget proposal, leaving out certain items, such as additional bailout funding, and scaling back his “Make work pay” tax cut. Lawmakers also opted against reducing the level of charitable tax deductions taken by wealthy Americans.

But the blueprint preserves many of Mr. Obama’s initiatives and tees up efforts by congressional committees to expand government-subsidized health care. It also implements an administration-backed plan to cap greenhouse gas emissions, though it stipulates that the final budget specify how to finance both reforms. Because health care was included under a procedural mechanism known as “reconciliation,” Mr. Obama’s health care plan will require only 51 votes to pass the Senate.

“I think it’s a good beginning,” Senate Budget Committee Chairman Kent Conrad said after the vote. “I do think it is putting us on the right trajectory in the first five years and we have captured the president’s major priorities.”

However, North Dakota’s Mr. Conrad noted, lawmakers must pass tax and entitlement reform “if we’re going to get the country on a sustainable course.”

The budget aims to cut the deficit from an expected $1.2 trillion this year to $523 billion by 2014. The total national debt would skyrocket from $11.2 trillion to $17 trillion.

Republicans, who have used reconciliation in the past to push through the Bush tax cuts and other items, protested its use for health care. They also seized on the budget’s overall spending level, saying it threatens future generations.

“I don’t want a legacy of stealing opportunity from my grandchildren or anybody else’s,” said Sen. Tom Coburn, Oklahoma Republican, who described the plan as “an escape from responsibility.”

A deal on the budget was only reached after Democrats agreed to demands from conservative Blue Dogs to consider legislation, known as pay-go, to help control spending. House Speaker Nancy Pelosi of California and House Majority Leader Steny H. Hoyer of Maryland have pledged to do so in a letter, while Mr. Obama has reportedly promised to help push the cause in the Senate.

April 27, 2009

Lies, Threats, Deal: Paulson, Bernanke, Lewis

From Forbes.com

The ramifications of the startling revelations about Bank of America’s controversial acquisition of a failing Merrill Lynch are explosive, and they will have a major impact on the tragic drama’s main actors, from BofA chairman Ken Lewis to Federal Reserve Chairman Ben Bernanke, and especially former Treasury Secretary Hank Paulson and whatever legacy he hopes to leave.

The events of December 2008 were absolutely crucial to understanding the financial crisis that threatened global markets. That they have become public four months afterward should trigger congressional hearings and raise once again the specter of machinations worked up by Wall Street and Washington out of public view and quite arguably out of the public interest.

“We have uncovered facts that raise questions about the transparency of the TARP program, as well as about corporate governance and disclosure policies at Bank of America,” reads a letter from New York Attorney General Andrew Cuomo to Sen. Christopher Dodd, D-Conn., Rep. Barney Frank, D-Mass., and Securities and Exchange Commission Chairman Mary Schapiro.

Lewis may well be ousted at the Bank of America annual meeting in May, as many large institutional shareholders have organized a campaign to get a vote for his ouster. Since the Bank of America-Merrill Lynch deal was approved, Bank of America shares have fallen from $14.11 in mid-December to $3.75 a share at the low on March 9, and recovered to a still depressed $8.50 today.

None of the details revealed by Lewis’ testimony to Cuomo’s office–all substantive matters that would have been of keen importance to shareholders of Merrill Lynch and Bank of America–were ever made public before the deal went through on Dec. 31. That is a shocking violation of the requirement to inform shareholders of any material matters that could impact their vote or holding of shares in either company. This nondisclosure of market sensitive information means all the trading between Dec. 15 and April 22–tens of millions of shares of the largest U.S. bank–was executed on the basis of withheld information. This is a shocking violation of 75 years of securities regulation.

Incredibly, the SEC was never informed of any of this: that Merrill was about to report a huge $15 billion loss, that Lewis wanted to kill the deal, that Paulson told Lewis that Bernanke had instructed him to fire Lewis and dismantle his entire board if he refused to go through with the merger. It’s not exactly clear what authority Paulson and Bernanke were going to use to replace Lewis and his board–powers they might assume in a pending systemic breakdown?

“Notably, during Bank of America’s important communications with federal banking officials in late December 2008, the lone federal agency charged with protecting investor interests, the Securities and Exchange Commission, appears to have been kept in the dark,” states Cuomo’s letter to congressional leaders. “Indeed, Secretary Paulson informed this office that he did not keep the SEC chairman in the loop during the discussions and negotiations with Bank of America in December 2008.” In other words, Paulson’s disdain for SEC Chairman Christopher Cox meant that the Treasury was operating in an autonomous, somewhat high-handed fashion.

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A former SEC commissioner tells Croesus today that Lewis certainly violated securities laws by submitting a vote to BofA shareholders in December of 2008 and willfully failing to disclose highly material facts to them and the investing public.

A huge black mark for Lewis is that he never discussed with his board the problem of disclosure to shareholders. As incredible as it may seem, Lewis, at the very least, did not even file an amendment to the merger agreement after it closed on Jan. 1, disclosing all the recent material developments concerning Merrill Lynch and Bank of America. This would have included deterioration of earnings, asset write-downs, his attempt to scuttle the deal and his negotiations with the Bush administration about top-level governance of the bank.

Lewis should be legally liable for not reporting all these machinations to the public and to financial market regulators. Apparently, he has testified that both Paulson and Bernanke urged him to remain silent about the threats to the transaction, using threats of replacing him. If this is true, then it could be argued that these two senior officials suborned information that was crucial to market decisions.

Another major problem that will be aired in hearings is the evidence that the chairman of the Federal Reserve, supposedly an independent institution, apparently dictated to the Treasury secretary an order to replace Lewis if he wouldn’t go along with the deal. Paulson told Cuomo’s office that the government “either could or would remove the board and management.”

This opinion, Paulson explained to Cuomo’s office, “was entirely based on what he was told by Federal Reserve officials.” Late Thursday, however, a Paulson spokesman took a slightly different tack, explaining that “Bernanke did not instruct him [Paulson] to indicate any specific action the Fed might take.” Will the real story please stand up?

If Paulson and Bernanke induced Lewis to violate the securities laws, then they are possibly party to a civil crime. Some investment bankers say that current Treasury Secretary Timothy Geithner is a party to these dealings as well. That would be logical and messy as hell. In all, it’s another black eye to the Wall Street rescue plan and another blow to the small shareholder who had no idea of all this backroom infighting. It’s also a real threat to the whole concept of transparency regarding the decisions that decide the fate of tens of billions of dollars and hundreds of millions of people.

Obama team reverses union transparency

From the Washington Times:

The Obama administration, which has boasted about its efforts to make government more transparent, is rolling back rules requiring labor unions and their leaders to report information about their finances and compensation.

The Labor Department noted in a recent disclosure that “it would not be a good use of resources” to bring enforcement actions against union officials who do not comply with conflict of interest reporting rules passed in 2007. Instead, union officials will now be allowed to file older, less detailed conflict reports.

The regulation, known as the LM-30 rule, was at the heart of a lawsuit that the AFL-CIO filed against the department last year. One of the union attorneys in the case, Deborah Greenfield, is now a high-ranking deputy at Labor, who also worked on the Obama transition team on labor issues.

Labor officials declined to say whether she played a role in the new policy, noting that Ms. Greenfield is abiding by all government ethics rules. In court filings, she and other union attorneys called the 2007 rules “onerous.”

The Labor Department also is rescinding another key labor financial disclosure regulation. The expansion of the so-called LM-2 rule, approved during the last days of the Bush administration, requires unions to report more information about finances and labor leaders’ compensation on annual reports.

Critics worry that the rollback of union reporting requirements will keep hidden potentially corrupt financial arrangements aimed at rooting out corruption, but unions say the Bush administration reporting rules were unfair and burdensome.

“Strong financial disclosure requirements are necessary to root out and combat union-related corruption,” Rep. Howard P. “Buck” McKeon, California Republican, and Rep. John Kline, Minnesota Republican, wrote in a recent letter to the department.

Sen. John Cornyn of Texas sent the department a similar letter signed by more than two dozen other Republicans.

But Labor Department spokeswoman Gloria Della said Secretary Hilda L. Solis “is committed to strong, fair and balanced enforcement of labor-management reporting laws.” She said the department’s move to rescind the expanded LM-2 financial reporting requirements gives the department “the opportunity to evaluate whether we are taking the best actions toward that goal.”

The department declined to comment on the potential for more changes in the financial reporting rules for unions. But officials referred to a lengthy statement the department recently published in the Federal Register.

The statement, by Shelby Hallmark, acting assistant secretary for employment standards, and Andrew D. Auerbach, deputy director for the Office of Labor-Management Standards, deemed it “a mistake” for the Bush administration to propose further changes to LM-2 disclosure regulations. The officials said not enough time had passed since previous reporting rule changes were passed in 2003.

“The department agrees with the contention that financial transparency is necessary to protect against union fraud and corruption and to enhance accountability among union officials, and that it is necessary for members to effectively engage in union-self governance,” the labor regulators wrote.

However, Mark Mix, president of the pro-business National Right to Work Legal Defense Foundation, which provides legal services to workers who say unions have violated their rights, called the rollback of union financial disclosures troubling.

“The department’s decision not to protect simple union disclosure protections creates increased vulnerability for American workers and should serve notice to legislators that now is not the time to grant union bosses more unchecked power over workers and our economy,” he wrote in a recent letter to the department.

He said the AFL-CIO would “benefit greatly” from the delay or rollback of expanded reporting rules. “It immediately allows the AFL-CIO to avoid financial disclosure that is beneficial and necessary to rank-and-file workers who are forced to pay union dues and fees to keep a job,” he said.

Jim Coppess, associate general counsel for the AFL-CIO, discounted the criticism. He said the Labor Department’s recent moves did nothing to affect the transparency of union financial reports or the ability of federal regulators to monitor expenditures.

“All the department has done is propose the withdrawal of a rule hastily adopted on the very last day of the Bush administration and an examination of the actual costs and benefits of extensive reporting requirements imposed on unions in 2003 as the basis for possible future changes,” he wrote in an e-mail to The Washington Times.

Ms. Greenberg’s new role at Labor has prompted Mr. Mix and his group to file a Freedom of Information Act request seeking details about whether she or any other union leaders played a role in the union’s financial disclosure policies.

Ms. Greenfield declined an interview request, although Labor Department spokeswoman Amy Louviere said she is “complying with the president’s ethical guidelines.”

Last year, Ms. Greenfield and AFL-CIO attorneys sued Labor, saying the new conflict of interest forms would force thousands of unpaid union shop stewards to report detailed information about their finances to the department each year.

“Treating individuals, such as shop stewards, who are not on their union’s payroll as ’employees of a labor organization’ sweeps tens of thousands of rank and file union members” into the new reporting requirements, Ms. Greenfield and other union attorneys argued in a 51-page court filing.

Under the Bush administration, the department defended the rules in court. In court filings, government attorneys argued that the new rules were needed to “bring to light a wide variety of financial transactions and arrangements – whether proper or improper – that pose conflicts of interest arising from the relationships between unions, their officers and employees, employers and businesses.”

Ms. Greenfield’s job transfer is one of several appointments that suggest organized labor will hold much greater sway in the Obama administration than during the Bush years. Organized labor, which spent tens of millions of dollars helping to elect Barack Obama as president, has other likely allies, including:

• Patrick Gaspard, White House political affairs director, who worked at the Service Employees International Union.

• T. Michael Kerr, who served as assistant to the secretary-treasurer at SEIU in charge of finance and administration before he was picked to serve as assistant secretary for administration and management at Labor.

In her new job, Ms. Greenfield is in charge of the department’s executive secretariat office, which handles incoming correspondence to Ms. Solis, as well as memoranda and other documents from throughout the department.

April 24, 2009

Global Warming Overreach

Congressman Henry Waxman played to the crowds this week with high-profile hearings designed to boost his climate legislation. To listen to the Energy and Commerce committee chair, a House global warming bill is all but in the recyclable bag.

To listen to Congressman Jim Matheson is something else. During opening statements, the Utah Democrat detailed 14 big problems he had with the bill, and told me later that if he hadn’t been limited to five minutes, “I might have had more.” Mr. Matheson is one of about 10 moderate committee Democrats who are less than thrilled with the Waxman climate extravaganza, and who may yet stymie one of Barack Obama’s signature issues. If so, the president can thank Democratic liberals, who are engaging in one of their first big cases of overreach.

Not that you couldn’t see this coming even last year, when Speaker Nancy Pelosi engineered her coup against former Energy chairman John Dingell. House greens had been boiling over the Michigan veteran’s cautious approach to climate-legislation. Mr. Dingell’s mistake was understanding that when it comes to energy legislation, the divides aren’t among parties, but among regions. Design a bill that socks it to all those manufacturing, oil-producing, coal-producing, coal-using states, and say goodbye to the very Democrats necessary to pass that bill.

Such sense didn’t deter Mrs. Pelosi, who first tried an end-run around Mr. Dingell in 2007 by putting Massachusetts Rep. Edward Markey in charge of a new global-warming committee. When that didn’t get her a bill, she helped her fellow Californian, Mr. Waxman, unseat Mr. Dingell. Environmentalists threw a party, and the Waxman-Markey duo got busy on legislation to please their coastal crowds.

Cap and trade was already going to be a brawl, but the two upped the ante by including tougher targets and restrictions. If that weren’t enough, they rolled in every other item on the green wish list: a renewable electricity standard; a low-carbon fuel standard; a broader renewable fuels policy; new efficiency standards. Any one of these is a monumental fight on its own. Put together they risk an intra-party committee mutiny.

There’s Mr. Matheson, chair of the Blue Dog energy task force, who has made a political career championing energy diversity and his state’s fossil fuels, and who understands Utah is mostly reliant on coal for its electricity needs. He says he sees several ways this bill could result in a huge “income transfer” from his state to those less fossil-fuel dependent. Indiana Democrat Baron Hill has a similar problem; not only does his district rely on coal, it is home to coal miners. Rick Boucher, who represents the coal-fields of South Virginia, knows the feeling.

Or consider Texas’s Gene Green and Charles Gonzalez, or Louisiana’s Charlie Melancon, oil-patch Dems all, whose home-district refineries would be taxed from every which way by the bill. Mr. Dingell remains protective of his district’s struggling auto workers, which would be further incapacitated by the bill. Pennsylvania’s Mike Doyle won’t easily throw his home-state steel industry over a cliff.

Add in the fact that a number of these Democrats hail from districts that could just as easily be in Republicans’ hands. They aren’t eager to explain to their blue-collar constituents the costs of indulging Mrs. Pelosi’s San Francisco environmentalists. Remember 1993, when President Bill Clinton proposed an energy tax on BTUs? The House swallowed hard and passed the legislation, only to have Senate Democrats kill it; a year later, Newt Gingrich was in charge. With Senate Democrats already backing away from the Obama cap-and-trade plans, at least a few House Dems are reluctant to walk the plank.

Rumors were in fact flying earlier this week that Mr. Markey might have to postpone next week’s subcommittee markup. For now, he and Mr. Waxman are busy trying to buy or arm-twist votes. They have some potent tools, in particular the enticement of giving some carbon-emission permits away for free, or allocating them to specific industries. Yet having set expectations so high, the duo risk losing liberal members if they give away too much.

The Obama team is aware it has trouble, which explains last week’s well-timed Environmental Protection Agency “finding” that carbon is a danger. The administration is now using this as a stick to beat Congress to act, arguing that if it doesn’t the EPA will. (Reality: Any EPA actions will be tied up in court for years.) It also helps explain EPA’s Monday analysis claiming the legislation won’t cost all that much. (Reality: The agency could only make this claim by assuming an endless recession.)

The real risk to the president is that his bill goes down at the hands of his own party — with nary a Republican to blame. Whether Mrs. Pelosi and Mr. Waxman considered this as they crafted their gem is unclear. But the overreach has made it a possibility now.

When Expenses Outweigh Benefits

From Investor’s Business Daily:

Regulation: Should the Environmental Protection Agency place limits on carbon dioxide emissions, the costs to the oil industry, its customers and consumers in general will be stiff. Fighting global warming is not cheap.

For now, we’ll forget that there’s no reason to go to war against a mythical enemy that has been created through vain imaginings and focus on the expenses humanity will incur in the battle to keep man from heating his planet. Because either through EPA regulation or by legislative initiative, there’s a better than even chance carbon emissions will one day be regulated in America, and those rules won’t come without costs.

But before the rules are carved into the cornerstone of the Washington Monument, it’s policymakers’ duty to take a sober look at the price and determine if demon carbon is worth the prohibition crusade.

U.S. petroleum refineries discharge hundreds of million of tons of CO2 into the sky each year. Oil companies don’t spew carbon into the air out of malice toward the environment or through a misanthropic negligence. They do it to make products, in particular motor fuels, the world demands and the global economy needs if it is to continue growing.

The oil industry employs a complex finishing process for crude and will not be able to simply flip a switch that will reduce its carbon dioxide discharges. It will have to make expensive changes in its operations if it is to keep providing the market with energy. The power it uses to run its refineries and light its buildings will cost more. To comply with regulations, oil companies will likely have to sink resources into new equipment that is not as cost-effective as what they are running now.

At the production level, costs will increase as the industry will no longer have the same economies of scale that keep prices down. With demand being lowered by regulation, the volume that oil companies will be able to spread their costs over will shrink, making each unit more expensive to produce.

Karen Campbell, a macroeconomic policy analyst at the Heritage Foundation, says that to operate within the government-imposed limits oil companies will have to cut their production by “about 2.2% below where it would be in the baseline scenario.” In terms of costs to the industry, “Producers of refined petroleum would see their price index (costs) grow 81% more than the baseline.”

Congressional Democrats and agitators on the left would have the public believe that the additional expenses incurred by the oil industry will come out of the pockets of the obscenely (in their minds) wealthy Big Oil executives. Some of it will. If the companies become less profitable, workers at all levels will lose income.

But consumers, some of whom support CO2 caps, will take a hit, as prices are expected to increase by 28% over the next 20 years. Oil industry workers will be affected, as well, with as many as 14,000 in both the oil and coal industries losing their jobs, Campbell reckons.

Meanwhile, investors, some of whom also support CO2 caps, will find that their investments in the oil industry will lose strength.

“The increase in prices and decline in operations is not only bad for consumers and employees, but also bad for all the owners of these stocks — pension funds, mutual funds, 401(k)s, etc. — who would get an average 3.25 percentage points lower return on their equity — about 11%,” said Campbell.

“The power of compounding makes this loss in return, year over year, significant. A $1 million investment would grow at a slower rate over the 20 years resulting in about $20 million less wealth accumulated for the saver or fund that invested in the petroleum industry.”

It’s hard to see how this trade-off could ever be of any real benefit. In exchange for a decrease in anthropogenic emissions of carbon dioxide, American jobs must be sacrificed; investors will have to expect — and receive — lower returns; capital in an essential sector that needs investment to find and produce new sources will be depressed; and consumers will have no choice but to use a greater share of their incomes for energy.

Washington, as is too often the case, has it wrong on CO2 emissions. It is treating speculation as if it were a genuine emergency. The political leadership needs to stop, take a deep breath and rethink the trendy position on carbon.

April 20, 2009

U.S. May Convert Banks’ Bailouts to Equity Share

From the New York Times

WASHINGTON — President Obama’s top economic advisers have determined that they can shore up the nation’s banking system without having to ask Congress for more money any time soon, according to administration officials.

In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.

Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.

While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.

The Treasury has already negotiated this kind of conversion with Citigroup and has said it would consider doing the same with other banks, as needed. But now the administration seems convinced that this maneuver can be used to make up for any shortfall in capital that the big banks confront in the near term.

Each conversion of this type would force the administration to decide how to handle its considerable voting rights on a bank’s board.

Taxpayers would also be taking on more risk, because there is no way to know what the common shares might be worth when it comes time for the government to sell them.

Treasury officials estimate that they will have about $135 billion left after they follow through on all the loans that have already been announced. But the nation’s banks are believed to need far more than that to maintain enough capital to absorb all their losses from soured mortgages and other loan defaults.

In his budget proposal for next year, Mr. Obama included $250 billion in additional spending to prop up the financial system. Because of the way the government accounts for such spending, the budget actually indicated that Mr. Obama might ask Congress for as much as $750 billion.

The most immediate expense will come in the next several weeks, when federal bank regulators complete “stress tests” on the nation’s 19 biggest banks. The tests are expected to show that at least several major institutions, probably including Bank of America, need to increase their capital cushions by billions of dollars each.

The change to common stock would not require the government to contribute any additional cash, but it could increase the capital of big banks by more than $100 billion.

The White House chief of staff, Rahm Emanuel, alluded to the strategy on Sunday in an interview on the ABC program “This Week.” Mr. Emanuel asserted that the government had enough money to shore up the 19 banks without asking for more.

“We believe we have those resources available in the government as the final backstop to make sure that the 19 are financially viable and effective,” Mr. Emanuel said. “If they need capital, we have that capacity.”

If that calculation is correct, Mr. Obama would gain important political maneuvering room because Democratic leaders in Congress have warned that they cannot possibly muster enough votes any time soon in support of spending more money to bail out some of the same financial institutions whose aggressive lending precipitated the financial crisis.

The administration said in January that it would alter its arrangement with Citigroup by converting up to $25 billion of preferred stock, which is like a loan, to common stock, which represents equity.

After the conversion, the Treasury would end up with about 36 percent of Citigroup’s common shares, which come with full voting rights. That would make the government Citigroup’s biggest shareholder, effectively nudging the government one step closer to nationalizing a major bank.

Nationalization, or even just the hint of nationalization, is a politically explosive step that White House and Treasury officials have fought hard to avoid.

Administration officials acknowledged that they might still have to ask Congress for extra money. Beyond the 19 big banks, which are defined as those with more than $100 billion in assets, the Treasury has also injected capital into hundreds of regional and community banks and may need to provide more money before the financial crisis is over.

Treasury officials say they have more money left in the rescue fund than might be apparent. Officials estimate that the fund will have about $134.5 billion left after the Treasury completes its $100 billion plan to buy toxic assets from banks and after it uses $50 billion to help homeowners avoid foreclosure.

In practice, the toxic-asset programs are not expected to start for another few months, and it could be more than a year before the Treasury uses up the entire $100 billion. Likewise, it will be at least a year before the Treasury uses up all the money budgeted for homeowners.

But the biggest way to stretch funds could be to convert preferred shares to common stock, a strategy that the government seems prepared to use on a case-by-case basis.

Ever since the Treasury agreed to restructure Citigroup’s loans, officials have made it clear that other banks could follow suit and convert their government loans to voting shares of common stock as well.

In the stress tests now under way, regulators are examining whether the big banks would have enough capital to withstand an economic downturn in which unemployment climbs to 10 percent and housing prices fall much further than they already have.

As their yardstick, regulators are expected to examine a measure of bank capital called “tangible common equity.” By that measure of capital, every dollar a bank converts from preferred to common shares becomes an additional dollar of capital.

The 19 big banks have received more than $140 billion from the Treasury’s financial rescue fund, and all of that has been in exchange for nonvoting preferred shares that pay an annual interest rate of about 5 percent.

If all the banks that are found to have a capital shortfall fill that gap by converting their shares, rather than by obtaining more cash, the Treasury could stretch its dwindling rescue fund by more than $100 billion.

The Treasury would also become a major shareholder, and perhaps even the controlling shareholder, in some financial institutions. That could lead to increasingly difficult conflicts of interest for the government, as policy makers juggle broad economic objectives with the narrower responsibility to maximize the value of their bank shares on behalf of taxpayers.

Those are exactly the kinds of conflicts that Treasury and Fed officials were trying to avoid when they first began injecting capital into banks last fall.

April 15, 2009

Tax Day Becomes Protest Day

Today the hot news causing a hurricane of activity through the blogosphere is of course the Tea Party Protests. The Lead story on NetRight Nation Today comes from Glenn Harlan Reynolds it’s a great piece about these protests being a true grassroots movement of everyday people coming together to demonstrate their distaste for our out of control government.


From NetRight Nation: Tax Day Becomes Protest Day

Today American taxpayers in more than 300 locations in all 50 states will hold rallies — dubbed “tea parties” — to protest higher taxes and out-of-control government spending. There is no political party behind these rallies, no grand right-wing conspiracy, not even a 501(c) group like MoveOn.org.

So who’s behind the Tax Day tea parties? Ordinary folks who are using the power of the Internet to organize. For a number of years, techno-geeks have been organizing “flash crowds” — groups of people, coordinated by text or cellphone, who converge on a particular location and then do something silly, like the pillow fights that popped up in 50 cities earlier this month. This is part of a general phenomenon dubbed “Smart Mobs” by Howard Rheingold, author of a book by the same title, in which modern communications and social-networking technologies allow quick coordination among large numbers of people who don’t know each other.

In the old days, organizing large groups of people required, well, an organization: a political party, a labor union, a church or some other sort of structure. Now people can coordinate themselves.

We saw a bit of this in the 2004 and 2008 presidential campaigns, with things like Howard Dean’s use of Meetup, and Barack Obama’s use of Facebook. But this was still social-networking in support of an existing organization or campaign. The tea-party protest movement is organizing itself, on its own behalf. Some existing organizations, like Newt Gingrich’s American Solutions and FreedomWorks, have gotten involved. But they’re involved as followers and facilitators, not leaders. The leaders are appearing on their own, and reaching out to others through blogs, Facebook, chat boards and alternative media.

The protests began with bloggers in Seattle, Wash., who organized a demonstration on Feb. 16. As word of this spread, rallies in Denver and Mesa, Ariz., were quickly organized for the next day. Then came CNBC talker Rick Santelli’s Feb. 19 “rant heard round the world” in which he called for a “Chicago tea party” on July Fourth. The tea-party moniker stuck, but angry taxpayers weren’t willing to wait until July. Soon, tea-party protests were appearing in one city after another, drawing at first hundreds, and then thousands, to marches in cities from Orlando to Kansas City to Cincinnati.

As word spread, people got interested in picking a common date for nationwide protests, and decided on today, Tax Day, as the date. As I write this, various Web sites tracking tea parties are predicting anywhere between 300 and 500 protests at cities around the world. A Google Map tracking planned events, maintained at the FreedomWorks.org Web site, shows the United States covered by red circles, with new events being added every day.

The movement grew so fast that some bloggers at the Playboy Web site — apparently unaware that we’ve entered the 21st century — suggested that some secret organization must be behind all of this. But, in fact, today’s technology means you don’t need an organization, secret or otherwise, to get organized. After considerable ridicule, the claim was withdrawn, but that hasn’t stopped other media outlets from echoing it.

There’s good news and bad news in this phenomenon for establishment politicians. The good news for Republicans is that, while the Republican Party flounders in its response to the Obama presidency and its programs, millions of Americans are getting organized on their own. The bad news is that those Americans, despite their opposition to President Obama’s policies, aren’t especially friendly to the GOP. When Republican National Committee Chairman Michael Steele asked to speak at the Chicago tea party, his request was politely refused by the organizers: “With regards to stage time, we respectfully must inform Chairman Steele that RNC officials are welcome to participate in the rally itself, but we prefer to limit stage time to those who are not elected officials, both in Government as well as political parties. This is an opportunity for Americans to speak, and elected officials to listen, not the other way around.”

Likewise, I spoke to an organizer for the Knoxville tea party who said that no “professional politicians” were going to be allowed to speak, and he made a big point of saying that the protest wasn’t an anti-Obama protest, it was an anti-establishment protest. I’ve heard similar things from tea-party organizers in other cities, too. Though critics will probably try to write the tea parties off as partisan publicity stunts, they’re really a post-partisan expression of outrage.

Of course, it won’t be the same everywhere. There are no national rules, and organizers of each protest are doing things the way they want. And that’s the good news and the bad news for Democrats. It’s not a big Republican effort. It’s a big popular effort. But a mass movement of ordinary people who don’t feel that their voices are being heard doesn’t bode well for the party that positioned itself as the organ of hope and change.

Will these flash crowds be a flash in the pan? It’s possible that people who demonstrate today will find that experience cathartic enough — or exhausting enough — that that will be it. But it’s more likely that the tea-party movement will have an impact on the 2010 and 2012 elections, and perhaps beyond.

What’s most striking about the tea-party movement is that most of the organizers haven’t ever organized, or even participated, in a protest rally before. General disgust has drawn a lot of people off the sidelines and into the political arena, and they are already planning for political action after today.

Cincinnati organizer Mike Wilson, a novice organizer who drew 5,000 people to a rally on March 15, is now planning to create a political action committee and a permanent political organization to press for lower taxes and reduced spending. Tucson tea party organizer Robert Mayer told me that his organization will focus on city council elections in the fall as its next priority. And there’s lots of Internet chatter about ways of taking things further after today’s protests.

This influx of new energy and new talent is likely to inject new life into small-government politics around the nation. The mainstream Republican Party still seems limp and disorganized. This grassroots effort may revitalize it. Or the tea-party movement may lead to a new third party that may replace the GOP, just as the GOP replaced the fractured and hapless Whigs.

Mr. Reynolds is the author of “An Army of Davids: How Markets and Technology Empower Ordinary People to Beat Big Media, Big Government, and Other Goliaths” (Thomas Nelson, 2006). He will be covering the tea party protests today at PJTV.com.

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