Category Archives: Economy

Legislative Headaches: The Tax Man Cometh

Take Two Aspirin

If the three major tax plans in the Nevada Legislature, and their varied explications, are giving you a head ache, the Las Vegas Sun offers a good comparison of them.  There’s a major problem with the Assembly GOP plan which:

“Would change modified business tax rate from 1.17 percent for general business and 2 percent for financial sector businesses to 1.56 percent for all businesses. Exempts companies with payrolls less than $50,000 per quarter and removes a deduction for health care premiums.”

This is a form of “flat tax.” And, there’s one group of businesses which benefit most from a “flat tax,” – the big ones. I know, it sounds counter-intuitive, but what gives the appearance of equity (the flat tax) actually ends up being one of the most inequitable forms of revenue raising.

Beloved by such think tanks as the ultra-conservative Cato Institute, flattening taxes works against middle income groups, both domestic and business.  Let’s assume that the 1.56% tax were to apply to all businesses in the state with payrolls more than $50,000 per quarter ($200,000 per year.) This would apply to all forms of enterprises except those in the financial sector.  For clarity, the financial sector includes commercial banks, investment banks, insurance companies, investment companies, unit investment trusts, face amount certificate companies, management investment companies (closed/open), and three types of non-bank investment companies: (1) savings & loans, (2) credit unions, and (3) shadow banks. [Investopedia]

Current law and the Sandoval Plan keep the tax on those financial sector enterprises at 2%.  The Assembly Republicans would provide them with a 0.44% tax break. At this point, it ought to be asked – Why is a bank like Wells Fargo with a reported revenue of $21.4 billion (up 4% YOY) getting a tax break when a supermarket is running on a 6% margin?  Or, why is a hedge fund, and those similar firms which operated in the shadows in the run up to the crash of 2007-2008, getting a break?

One conclusion is that the Banking Lobby and associated financialists are running full bore at the tax proposals.  Hedge fund managers already have one of the sweetest tax breaks imaginable in the form of the Carried Interest Loophole, and now the Assembled Wisdom is proposing they get a nice break from the state. [See also: TO.org, BusinessInsider]  If nothing else, the Assembly proposal indicates that Financialism is alive and well in the Legislature’s bailiwick.

In short, what looks superficially “equitable” actually makes it easier on the financial sector firms, and places more of the revenue raising responsibility on those businesses which operate on a local level – retailers, wholesalers, and the like.  “Shadow” financial institutions, already the beneficiary of copious tax avoidance strategies, are paying the same “freight” as the supermarket chain and the retailers.

There’s another point which ought to be addressed:  Who is at greater general risk during an economic downturn?  In case we hadn’t noticed – the financial sector is no longer directly connected to the commercial sector. The advent of the Shareholder Value theory of corporate management is what drives stock prices – it doesn’t matter if employment is dropping, if the cuts in payroll are assumed to be part of the management plan to boost the value of the shares.  However, in the real economy it matters very much if employment is reduced because that in turn yields lower demand for goods and services.

In this instance, “sharing the load fairly” actually means that the businesses most likely to be hurt by any economic downturn, and those businesses which are dependent on local economic conditions, are to “share” an equal burden in terms of revenue raising with those which are all too often the perpetrators of commercial difficulties in the “real economy.”

Putting it less diplomatically, the Assembly proposal really isn’t very fair at all.

*And by the way – doesn’t eliminating the deductions for health care insurance make it less likely employers will sponsor such plans, making it all the more necessary that the health insurance exchange markets under the Affordable Care Act be sustained?

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Filed under banking, Economy, Nevada economy, Nevada legislature, Nevada politics, nevada taxation

Union Busting 101: Nevada’s AB 182

Union busting If anyone is functioning under the happy delusion that the current session of Nevada’s Assembled Wisdom is intent upon securing the happiness of the middle class – look no further than AB 182.

“It would clarify the rules that exclude supervisors from collective bargaining, prohibit using government funds to pay employees engaged in union activities, require employees to seek union deductions before they would be collected by a government entity, and make agreements retroactive to the date of the expiration of the previous contract. It would also require a final contract offer to be made public, among other provisions.” [LVRJ]

Welcome to the re-labeled world of corporate sponsored legislation as defined by ALEC and the related ACCE.  The “public final offer” part is straight out of ALEC model legislation.   This has not been overlooked:

“ACCE’s first meeting coincided with ALEC’s national conference. One workshop topic was “releasing local governments from the grip of collective bargaining.” Another report discusses the conservative Heritage Foundation’s plan for localities across the country to experiment with “local” right-to-work initiatives. Heritage predicts that these experiments could provoke a legal challenge ending up in the hands of the US Supreme Court, which they hope will effectively end “fair share” of agency fees for public employees currently under collective bargaining agreements.” [Teamsters]

There’s an agenda at work here, and it’s NOT one conducive to maintaining the middle class families involved in local government, firefighting, police and public safety, teachers, and others who perform vital public services at the state and local level.   The Republican Noise Machine has been relentless in its messaging about public employee unions and the members they serve, and the term “messaging” is appropriate because what’s been transmitted isn’t rational, and often isn’t even factual.

“Two widely shared misperceptions are helping to drive this shift of opinion. The first holds that public sector workers now earn more on average than their private sector counterparts, making them what Indiana’s Republican governor, Mitch Daniels, calls “a new privileged class in America.” The leading candidates for the 2012 Republican presidential nomination have helped promote this view. “Average government workers are now making $30,000 a year more than the average private-sector worker,” declares Mitt Romney. “It used to be that public employees were underpaid and over-benefited,” adds Tim Pawlenty. “Now they are over-benefited and overpaid compared to their private-sector counterparts.” The second perception is that collective bargaining contracts have been major contributors to the growing budget deficits of the states, a view promoted by Chris Edwards, the director of tax policy studies at the Cato Institute.” [Dissent]

What is conveniently omitted from the discussion is the fact that most government workers are older and have more education than the “average private sector worker.”  Using a term like “counterpart” makes it appear that the opponents of public sector unions are comparing average government workers to average private sector employees – they aren’t.  If the term “counterpart” is defined strictly as one person doing an essentially similar job then the numbers don’t back up the union opponents.  The facts are:

Jobs in the public sector typically require more education than private sector positions. Thus, state and local employees are twice as likely to hold a college degree or higher as compared to private sector employees. Only 23% of private sector employees have completed college as compared to about 48% in the public sector.

Wages and salaries of state and local employees are lower than those for private sector employees with comparable earnings determinants such as education and work experience. State workers typically earn 11% less and local workers 12% less.

Benefits make up a slightly larger share of compensation for the state and local sector. But even after accounting for the value of retirement, healthcare, and other benefits, state and local employees earn less than private sector counterparts. On average, total compensation is 6.8% lower for state employees and 7.4% lower for local employees than for comparable private sector employees. [NIRS]

Thus we can discount the “Pigs at the Public Trough” argument for what it is – propaganda, using misleading numbers and comparisons to make an ideological point.  And, we can dismiss the “driving the deficit” argument as well:

“There is no direct correlation between states with unionized public workers and those facing budget deficits. New York State, which boasts the highest percentage of unionized public employees of any state, is running a projected budget deficit of 16.9 percent for fiscal year 2012, while North Carolina, which prohibits public sector collective bargaining, faces an even larger budget deficit (20 percent) according to the data of the Center on Budget and Policy Priorities. Similarly, there is no direct correlation between collective bargaining and pension obligations that have gone unfunded. According to the conservative American Legislative Exchange Council, New York has done a better job at funding its pension obligations (currently at 100 percent funding) than Virginia, which does not permit public sector collective bargaining and is currently funding only 80 percent of its obligations.” [Dissent]

Not only is there no correlation between collective bargaining and budget deficits, but we should also take into consideration the unasked question: Why is it always a matter of cutting expenses, and not a question of whether more revenue should be raised to sustain public services?

There is a correlation ALEC and ACCE don’t want to discuss.  As the EPI documentsthere is a correlation between declining wages and the decline in union membership.   Unless one subscribes to the illogical and oligarchian ideologies of the ultra-conservative think tanks and the billionaires who support them, the logic of good old fashioned capitalism is obvious – the more wages, the more demand, the more demand, the more sales, the more sales, the more profits, the more profit the better for all concerned.

And, this holds true for public employees who pay their mortgages, buy groceries in the local supermarket, buy clothes from local retailers, purchase automobiles from local dealers, pay for gas at the local station, and get their hair cut by local barbers and beauticians.  However, ALEC and ACCE’s perspective isn’t driven by any concern for ‘those small businesses,’ but by a concern for the corporate bottom line – a bottom line which would be enhanced if levels of state and local taxation were to be reduced.  It sounds seductive to the local business owner to hear “we’re going to reduce your taxes,” until that coin is flipped to the obverse and the people who depend on those taxes for income stop thinking about the new car, defer car maintenance, put off buying new clothes, and reduce personal expenditures.

AB 182 launches some very specific attacks on public sector unions which bargain for wages and working conditions.  For example, who is a supervisor? 

Sections 2, 3, and 7 exclude school supervisory and administrative positions from membership in bargaining units, and expands the definition of an excluded confidential employee to include any employee whose duties entail access to proprietary or confidential information.  Therefore, anyone with any supervisory duties is excluded – good by principals and administrators, and with a bit of creativity that “proprietary or confidential” information clause could exclude many others.

Section 1 is a double whammy.  First, there will be no dues deductions. This is nearly always the first point of attack, and if we didn’t figure this out already, there’s a model bit of legislation from ALEC called the Public Employer Payroll Deduction Policy Act.  There are also some alternatives offered by ALEC to this same end. Secondly, the opponents of public employee unions have noticed that union leadership is voluntary and if there is any remuneration it isn’t all that much. So, the “head of the serpent” can be removed by simply refusing to grant leave for union purposes, and also by removing anyone who is not compensated by the union from participating in union activities because they’ll lose time and benefits for doing so.  That would wipe out most committee chairs, officers below the top level, and most local activists.

Section 6 gets rid of the Evergreen provisions. It “generally provides that upon the end  of the term stated in a collective bargaining agreement, and until a successor  agreement becomes effective, a local government employer shall not increase any  compensation or monetary benefits paid to or on behalf of employees in the  affected bargaining unit.”  Thus much for previously bargained cost of living adjustments.

And if there’s an impasse in the bargaining process?

“If an impasse is reached in collective bargaining negotiations, existing law  establishes a process of fact-finding. Under existing law, the findings and  recommendations of the fact finder are final and binding if the parties so agree or a  statutory panel determines that the findings and recommendations are to be final 40 and binding as to some or all of the issues in dispute. (NRS 288.200-288.203) 41 Sections 10 and 15 of this bill eliminate the panel.”

And, there’s more:

“Under existing law, an impasse in collective bargaining negotiations involving  firefighters, police officers, teachers or educational support personnel may be  submitted to an arbitrator, whose decision is final and binding. (NRS 288.215, 59 288.217) Section 15 repeals those provisions, eliminating the statutory right to  arbitration as a means of impasse resolution.”

Remember, public employees in Nevada have no “right to strike” protections, and AB 182 removes the fact-finding and the arbitration options to settle an impasse.  So, what’s left? If an impasse remains unresolved the government entity can’t raise any compensation and the employees are frozen in place?

AB 182 is, for all intents and purposes, an ALEC/ACCE dream piece, based on ideology rather than a rational approach to economic and social requirements, and supportive of corporate as opposed to local economic interests.   The Committee on Commerce and Labor should file this one away in the “unconscionable” part of its cabinetry.

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Filed under Economy, Nevada economy, Nevada legislature, Nevada politics, public employees

Nevada’s AB 196: The Wall Street Casino Protection Act

AB 196 Let’s talk Repos – since it’s a topic under discussion in the Nevada Legislature, specifically in AB 196 being heard by the Assembly Committee on Government Affairs today.  AB 196 is relatively straight forward:

There’s this part:

“Sections 1-3 of this bill authorize the investment of the money of this State, the State Permanent School Fund, the State Insurance Fund and the governing bodies of local governments in reverse-repurchase agreements if those agreements meet certain requirements, which are similar to the requirements on repurchase agreements, to avoid a violation of Section 3 of Article 9 of the Nevada Constitution. Sections 1-3 also impose additional requirements on reverse- repurchase agreements which depend upon the purpose for which the reverse- repurchase agreement is made.”

If the reaction to this verbiage is “Huh?” Let’s back up a step.  Repurchase agreements (repos) and reverse repurchase agreements are defined as:

“A form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day.

For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction, (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement.”  [Investopedia]

Still baffled?  Here’s another way to explain the gamble:

“In a repo, borrowers agree to sell primarily government-backed bonds to another party for cash, with the promise to repurchase the bonds at a slightly higher price in the future. Borrowers are often hedge funds, and lenders are typically money-market funds. Banks stand in the middle, moving cash between the two.”  [WSJ]

That “future” is tomorrow morning (more or less) and those government backed bonds are municipal bonds, state bonds, and/or federal treasuries of some form.  If, say, the state insurance fund decided to buy securities of this type and sell them off almost immediately, that would be a “reverse repo” deal.  The next question, of course, is why on God’s Green Earth we’d want to do this?

We really need to ask this question in light of the divestment in “repos” by the major banks, and the instability “repos” tend to create in financial markets.   Gaze back in time, back to 2008, when Lehman Brothers was for all intents and purposes out of securities it could use as collateral to back up the short term loans it needed for its own survival.  Lehman’s mad scramble to stay alive put a spotlight on the Repo Market on Wall Street.  What lit up wasn’t pleasant.

Enter the Dodd Frank Act, which required banks to maintain more capital in order to absorb potential losses in the Repo Market.  The banks, in turn, have cut back on their participation in the Repo Market game. [WSJ]  However, the Repo Market at present isn’t all rose blossoms, there are still some thorns. As of August 2014, the Boston Fed chief was calling for still more capital reserves to maintain stability in the Repo Market. [NYT Dealbook] (see also: BFR pdf)

Thus we have a Repo Market which is still too volatile for the comfort of the Boston Federal Reserve, in which the major banks are diminishing their participation, and in which the sponsors of AB 196 would have our state and local governments dabble more vigorously.  And, then there’s this:

“Section 3 eliminates the requirement that, when the governing body of a local government purchases commercial paper issued by certain corporations or depository institutions as an investment of its money, the purchase must be made from a registered broker-dealer. Section 3 also eliminates the prohibition against investing the money of the governing body of a local government in a repurchase agreement which involves securities that have a term to maturity at the time of purchase in excess of 10 years.” [AB 196]

Get that? AB 195 eliminates the requirement that the purchases must be made from a registered broker-dealer.  Excuse me, but I get a bit nervous when state and local officials are informed that they can use unregistered broker dealers when those folks  have been under SEC scrutiny since 2013. [Dinsmore] [Kurth]  A registered broker-dealer has to submit to an SEC investigation, and oversight by the SEC and the Financial Industry Regulatory Authority – and yet AB 196 eliminates the need for such certification and oversight when state and local government funds are involved?

When a bill such as AB 196 allows such actions by county commissions, school boards, and county treasurers are invited to indulge in a bit of Wall Street Casino gaming without benefit of a certified, regulated, supervised broker-dealer – What could possibly go wrong? Other than Everything?

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Filed under Economy, financial regulation, Nevada economy, Nevada legislature, Nevada politics

How NOT to finance public works: The Capital Appreciation Bond Saga

Capital appreciation bonds God help school board members. They don’t get paid for their service, and they certainly aren’t compensated for the bombastic late night calls from irate parents when Little Fauntleroy isn’t selected for the lead in the annual 5th grade play.  That said, let’s explore one more reason for them to go gray while doing their civic duty: Swimming with Financial Sharks.

In late 2012 the Los Angeles Times reported that approximately 200 California school districts and community colleges had been talked into Capital Appreciation Bonds which promised to mitigate the problems associated with financing school construction costs. So, what could go wrong?

“CABs, as the bonds are known, allow schools to borrow large sums without violating state or locally imposed caps on property taxes, at least in the short term. But the lengthy delays in repayment increase interest expenses, in some cases to as much as 10 or 20 times the amount borrowed.”

Only, it wasn’t 10 or 20 times the amount borrowed – given the $500 billion borrowed could turn into $2 trillion in future repayments.

“Wall Street exploited the school boards’ lack of business acumen and proposed the bonds as blank checks written against taxpayers’ pocketbooks. One school administrator described a Wall Street meeting to discuss the system as like “swimming with the big sharks.”

Wall Street has preyed on these school boards because of the millions of dollars in commissions. Banks, financial advisers and credit rating firms have billed California public entities almost $400 million since 2007. Lockyer described this as “part of the ‘new’ Wall Street,” which “has done this kind of thing on the private investor side for years, then the housing market and now its public entities.” [SF.com]

This was lucrative business for such firms as Piper Jaffray, which pocketed some  $31.4 million in fees for brokering 165 CAB deals, or for Goldman Sachs which earned $1.6 million for a single deal in San Diego. [SF.com]

The argument in favor of Capital Appreciation Bonds is deceptively simple.  Most bond issues have steady repayment schedules and are limited to 30 years or less.   Capital Appreciation Bonds assume that the asset will appreciate in value or generate revenue for longer than 30 years or less – so, why not spread out the repayment schedule over a longer period? Here’s why, and here are two things to watch as the sharks circle:

(1) Watch for interestingly engineered estimates of future revenues.  If you are looking at property values that are expected to increase exponentially, then imagine the shark grin facing in your direction.  “Gee,” sayeth the Shark, “The recession can’t last forever, and property values will increase. Therefore, why not spread your borrowing costs over a longer period when you’ll be generating larger incomes?”

(2) Watch for the piling up of fees and interest.  Yes, the repayment schedules were such that school districts in California could construct gyms, classrooms, and other facilities that couldn’t get past voter disapproval of bond issues – but as with all loans the longer the repayment schedule the more interest will be paid. For example, the Savanna School District (Anaheim) took on $239,721 in CAB obligations in 2009 on which it will pay approximately $3.6 million by the 2034 maturity date. [Alter]  There are, unfortunately, other examples in Orange County, CA:

“Over the next 40 years, these bonds are projected to cost districts $2 billion as they repay them at rates of 1.1 times to 15 times the principal, according to figures provided by the state treasurer’s office. Conventional bonds typically carry a 2-to-1 or 3-to-1 debt ratio.” [OCR]

It’s entirely possible to call for more infrastructure construction and asset enhancement without having the specter of the Capital Appreciation Bond salesman showing all fifteen rows of teeth in each jaw.  We should also call this kind of dealing what it is – predatory lending.  The Roosevelt Institute provides a summary:

“The financialization of the United States economy has distorted our social, economic, and political priorities. Cities and states across the country are forced to cut essential community services because they are trapped in predatory municipal finance deals that cost them millions of dollars every year. Wall Street and other big corporations engaged in a systematic effort to suppress taxes, making it difficult for cities and states to advance progressive revenue solutions to properly fund public services. Banks take advantage of this crisis that they helped create by targeting state and local governments with predatory municipal finance deals, just like they targeted cash-strapped homeowners with predatory mortgages during the housing boom. Predatory financing deals prey upon the weaknesses of borrowers, are characterized by high costs and high risks, are typically overly complex, and are often designed to fail.” [RooseveltInst]

High cost, high risk, overly complex, and sold to the school boards as a way to finance capital projects without breaking the “no new taxes” pledges.  The thought of paying out at 15:1 when the debt costs should have been no more than 3:1 is possibly worse than the ranting of Fauntleroy’s mother after the 5th grade play cast was announced. And so we come to the camel’s nose into Nevada’s tent with a recommendation for infrastructure funding:

“Along these same lines, there may be instances where changing legislatively imposed requirements relating to bonding may benefit from increased flexibility. For instance, bonds for capital projects are generally limited to terms of less than 30 years. However, in a limited number of cases, such as projects which generate user fees or for which the useful life of the asset extends beyond 30 years, there may be instances where longer financing terms may be useful to accelerating the timeline of a needed capital project.” [Applied Analysis]

What is Applied Analysis (client list includes Chambers of Commerce) recommending?  “More flexibility” in bonding requirements? This sounds ominously like California’s infamous AB 1388 which launched the CAB craze in our western neighbor.  Lengthen the repayment period to the life of the asset? The average functional life of a school building is 40 years. [NCES] So, a capital appreciation bond could be issued for 40 years – go back to the unfortunate example of the Poway School District, wherein borrowing $150 million ended up costing $1 billion.

School board members, as well as city and county officials, should approach suggestions that they want “more flexibility” and “longer repayment schedules” with exactly the same trepidation they’d approach the water when the shark alert sign goes up.

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Filed under Economy, education, Infrastructure, Nevada economy, nevada education, Nevada politics, nevada taxation

Home Defects, Budget Shortfalls, and Picking Losers

Jig Saw Puzzle

Interesting items, each worthy of a post, but in the interest of keeping up to date – here are some newsworthy items deserving of a click and read.

Nevada Legislature: Take a moment to read Eli Segall’s piece in the Las Vegas Sun about the interest taken in the Assembled Wisdom about homeowner complaints in regard to construction defects.  Here’s a taste:

“Supporters say the proposal will boost construction jobs, but outside analysts say it will hammer trial lawyers, a political and business foe of builders, and, despite the bill’s name, will make it harder for homeowners to sue for shoddy workmanship.”  Why?

“As proposed, AB 125 would, among other things, strip homeowners’ ability to recover reasonable attorney fees in defect cases; require homeowners to state each problem in “specific detail” rather than in “reasonable” detail as current law allows and to give the defects’ “exact” locations in the house; and change the definition of a constructional defect, eliminating the provision that such flaws are made in violation of law and local codes and ordinances.”

Republicans in Disarray?  There is an effort to recall Assemblyman Hambrick (R-NVAD2).  Hambrick, GOP opponents say, has Strayed From the No New Taxes Pledge. [LVRJ]

School Daze: There’s this from Let’s Talk Nevada:

“8:00 AM: H/T Ralston for this. Pedro Martinez, the man Governor Brian Sandoval (R) hand-picked to run the new “Achievement School District” where he wants to transfer 10% of Nevada public schools into, is so dedicated to improving public education in Nevada… That he’s now running for School Superintendent in Boston. And yes, that’s Boston, Massachusetts.”

Meanwhile in Wisconsin under the Austerity/Trickle Down Hoax regime of Scott Walker – the governor’s solution to the $283 million budget shortfall created by his tax cuts is to skip $108 million in debt paymentsAnd in Kansas, the legislature backed down and decided to allow governor Brownback to sweep $475 million over the next two years from KDOT into the budget hole created by his tax cuts. [Kansas.comGet ready Ohio, governor Kasich is gearing up his 23% cut in the state income taxes over the next two years.

And in Congress, the Republican leadership is operating on the same theme:

“House leaders plan to schedule votes this week on seven bills recently approved by the Ways and Means Committee to make permanent an array of “tax extenders,” a set of primarily corporate tax provisions that policymakers routinely extend for a year or two at a time.  The seven measures, which will likely be packaged into a smaller number of bills for floor consideration, are the first installment in a series of bills that House leaders are expected to move to make many of the largest tax extenders permanent, while offsetting none of the cost.”

I think we’ve seen this before, and labeling it “Credit Card Capitalism,” wherein the Bush Administration turned the Clinton Administration surplus into a massive deficit – and then blamed the Democrats for “tax and spend” policies.  We might get the drift – the Republicans get into control, lower the taxes and revenues, thereby piling up a massive debt. The Democrats take back the control, enact taxes to fill the holes in the state budgets – and the GOP screams about “Tax and Spend?”

About those “economic development” and “job creating” ideas – a report (pdf) from North Carolina documents that 60% of the recipients of their incentive awards were cancelled because the firms failed to live up to their promises. H/T Angry Bear.  The story is about the same in Wisconsin:

“The Wisconsin Economic Development Corporation, a public-private body set up by Walker shortly after he took office in January 2011, was supposed to help the state climb out of recession by shedding bureaucratic rules and drawing on private-sector expertise.

But the WEDC has fallen short of its own goals by tens of thousands of jobs and failed to keep track of millions of dollars it has handed out. One reason for the agency’s disappointing performance: Walker’s overhaul of the state bureaucracy drove away seasoned development workers, economic development experts who work closely with the agency told Reuters.” [CapBlue]

There are other ways to create jobs and improve our economy; take a look at the CAP proposal for the Appalachian region.

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Filed under Economy, Nevada legislature, Nevada politics, tax revenue, Taxation

GOP: Protect the Sharks!

Pay Day Lending Shark Some dots connect.  Dot Number One:

“A bill passed Wednesday by the House would set new limits on, and effectively cut, the amount of money the Consumer Financial Protection Bureau can spend.

The legislation, passed with nearly exclusive Republican support, was originally aimed at placing new limits on agencies writing regulations, requiring them to conduct more analysis on their impact and subjecting them to additional legal review.” [The Hill]

First, the amount cut from the Consumer Financial Protection Bureau would be some $36 million dollars less than the expected expenses for the CFPB in FY 2016.  Secondly, the “more analysis” part translates to “cost/benefit analyses” which have been a crucial part of the Republican litany.  There’s a reason to suspect that this particular dot comes with some major freight.

The “cost/benefit” analysis nearly always comes skewed in favor of the corporations.  The Institute for Policy Integrity found this to be the case in the instance of coal ash regulation in 2010, and while the major impact of the bill would be to the Environmental Protection Agency – a popular whipping boy for the Right – the abuse of the cost/benefit analysis regime could be equally unhelpful for American consumers.  The problem can be summarized as follows:

“Regulatory cost-benefit analyses are inherently vulnerable to challenge. The long-term benefits of regulations are often difficult to quantify, while the costs can be immediate and straightforward. The calculations can be even more complex with public health and safety issues, where the value of human lives must be weighed against corporate costs.” [HuffPo]

In this case we have to ask do the short term losses to the payday lenders outweigh the long term benefits of not having working Americans subject to usurious lending rates?  Evidently, Representatives Heck (R-NV3), Hardy (R-NV Bundy Ranch), and Amodei (R-NV2) [rc 64] believe that the short term losses which might accrue to the payday lenders are of more significance than the long term problems associated with payday lenders in underserved communities?   At the least, they’ve voted in favor of placing more hurdles – in the form of more litigation – in the way of any agency such as the CFPB seeking to curtail some of the more egregious business practices of payday lenders. (For more information on Cost/Benefit Analysis see Better Markets.)

Dot Number Two:

“But a late amendment from the bill’s primary sponsor, Rep. Virginia Foxx (R-N.C.), would also place new limits on the funding for the CFPB.

Foxx’s amendment, added to the bill at the House Rules Committee before it reached the House floor, would cap CFPB funding at $550 million — $36 million less than the Congressional Budget Office estimated the CFPB would spend in fiscal 2016.”  [The Hill]

Now, why would this particular agency be mentioned in this “late amendment?”  If Dot Number One makes it more difficult for an agency, such as the CFPB, to finalize regulations on corporate activity,  Dot Number Two makes it even more difficult for the CFPB to defend its proposed regulations.  Leading us to Dot Number Three.

Dot Number Three: The Consumer Financial Protection Bureau is, in fact,  about to release rules governing payday lending practices [NYT] against which the $46 billion a year industry is lobbying hard and fast.

“The rules are expected to address expensive credit backed by car titles and some installment loans that stretch longer than the traditional two-week payday loan, according to industry lawyers, consumer groups and government authorities briefed on the discussions who all spoke on the condition of anonymity because the deliberations are private. Certain installment loans, for example, with interest rates that exceed 36 percent, the people said, will most likely be covered by the rules.

Behind that decision, the people said, is a stark acknowledgment of just how successfully lenders have adapted to keep offering high-cost products despite state laws meant to rein in the loans.” [NYT]

Translation: Because the payday lenders have been relatively successful thus far in avoiding or mitigating the attempts by the states to rein in some of their more egregious practices, the CFPB has stepped in to assist consumers avoid these financial pitfalls.  And, the Republicans are quite obviously marching in step with payday lending industry lobbyists.  Now, we can see why this was one of the first bills introduced in the 114th Congress, the timing isn’t simply a matter of coincidence.

Dot Number Four: There is a secondary market for payday lender loans. [HoustonSmallBus] [ABA]  And, wouldn’t you know it – AIG and private equity group Fortress Investment Group launched a securitization of sub-prime personal loans (read: payday) in February 2013. [WallStJ]

“The $604 million issue from consumer lender Springleaf Financial, the former American General Finance, will bundle together about $662 million of loans secured by assets such as cars, boats, furniture and jewelry into ABS, according to a term sheet. Some loans have no collateral.” [WSJ]

The last time someone tried this – Conseco Finance Corporation – things did not end well. Conseco ended up in bankruptcy in 2002.  ZeroHedge opined that the Springleaf Financial deal was a resurrection of the worst of the pre-Great Recession credit bubble.   With this in mind, should it come as any surprise that Springleaf Financial partnered with private equity firm Centerbridge Partners LLP in wanting to buy into Citigroup’s One Main Financial – the big banks subprime lender? But wait, there are more suitors.  Citigroup is trying to offload that subprime business, to focus on “the affluent customer,” and Apollo Global Management has joined the potential buyers list as of January 2015.  [BloombergBus]

Let’s muse: If the Consumer Financial Protection Bureau announces regulations that might put a crimp in the profitability of payday loans, particularly those subprime personal loans which have been securitized (ABS) then the bidders from the Springleaf/Fortress operations and Apollo Global Management might not want to pay more for Citigroup’s One Main Financial – which it would very much like to offload onto someone – Lonestar, Springleaf/Fortress, or Apollo Global Management?

Or, to muse and speculate less kindly:  There’s a deal in the works to sell a subprime personal loan unit from a major U.S. bank; there are bidders from private equity firms, and it would be better for the Big Bank if the CFPB would butt out of any activity which would make the subprime personal loan units less attractive.  Further, the subprime personal loan securitization schemes might be less profitable if the CFPB puts the brakes on some of the more “profitable” practices.   If the subprime personal loan lenders aren’t as “profitable” then they might not be able to bid as much as wished for the One Main Financial spin off?

Hence, it’s necessary, nay Vital, that the CFPB be made to back off the subprime personal loan regulations and allow the bankers to continue to securitize those loans and to deal for a bigger share of the subprime personal loan pie?  Would this be part of the reason for the rush to get H.R. 50 through a compliant House of Representatives?

The Republicans have not demonstrated any particular interest in protecting the sharks of the natural variety, but they seem bent on protecting the financial ones.  And, the bigger the shark the better?  Nevada Representatives Amodei, Heck, and Hardy played right along.  Representative Titus (D-NV1), to her credit,  voted “no.”

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Filed under Amodei, banking, Economy, financial regulation, Heck, Nevada politics

From CDO’s to BTO’s: Wall St. tees up the next financial disaster

Wall Street Greed CDO

Think Progress picked up on a piece from Bloomberg News which ought to be raising eyebrows on Main Street.  The banksters are at it again, only this time those pesky Credit Default Obligations which brought down our financial system in 2007-2008 have been repackaged and served up under a new label: Bespoke Tranche Opportunities.

As the Think Progress analysis reports, these derivatives were an extremely important part of the last mess:

“The Financial Crisis Inquiry Commission concluded that derivatives “were at the center of the storm” and “amplified the losses from the collapse of the housing bubble by allowing multiple bets on the same securities.” In 2010, the total on-paper value of every derivative contract worldwide was $1.4 quadrillion, or 23 times the total economic output of the entire planet.”  [TP]

Let’s be careful here, not all of that $1.4 quadrillion is in BTO’s, but the newly labeled derivative has that same capacity to “amplify the losses” when the underlying value of the securities becomes volatile.  For those who would like this explained in really clear diagrams, click over to the Wall Street Law Blog and follow along with the  White Board Wine Glasses Explanation – one of the best I’ve discovered to date.

Now, we can move on to what makes these BTO’s a problem, beginning with their creation:

“The new “bespoke” version of the idea flips that (CDO) business dynamic around. An investor tells a bank what specific mixture of derivatives bets it wants to make, and the bank builds a customized product with just one tranche that meets the investor’s needs. Like a bespoke suit, the products are tailored to fit precisely, and only one copy is ever produced.” [TP]

Now, why would anyone want to buy one of these products, much less order a special one?  In the Bad Old Days  fund managers could choose to purchase some tranched up CDO, those blew up, so why go out and order one tailored to their specifications?  Let’s return to the Bloomberg article:

“Goldman Sachs Group Inc. is joining other banks in peddling something they’re referring to as a “bespoke tranche opportunity.” That’s essentially a CDO backed by single-name credit-default swaps, customized based on investors’ wishes. The pools of derivatives are cut into varying slices of risk that are sold to investors such as hedge funds.

The derivatives are similar to a product that became popular during the last credit boom and exacerbated losses when markets seized up. Demand for this sort of exotica is returning now and there’s no real surprise why. Everyone is searching for yield after more than six years of near-zero interest rates from the Federal Reserve, not to mention stimulus efforts by central banks in Japan and Europe.”  (emphasis added)

Translation: Because interest rates have been kept low by central banks hoping to keep struggling economies moving ahead, banks haven’t been able to make what they deem to be enough profit off corporate and Treasury bonds, and therefore have started playing in the “financial product” game again (not that they ever really stopped for long) and have started making ‘bets’ (derivatives) in the Wall Street Casino – with ‘products’ (BTO’s) which aren’t subject to the reforms put in place by the Dodd Frank Act.

So, what’s the problem? A hedge fund manager wants to buy a structured financial product from a bank which has a higher yield than what he can get by investing in corporate bonds or Treasuries… what could go wrong?  Let us count the ways.

#1.  These securities aren’t tied to the performance of the real economy as corporate bonds would be.  In the jargon du jour, the BTO portfolio is a table of reference securities.  Here come the Quants again, there are formulas for determining the ‘value’ of these securities which may or may not be valid, and they certainly weren’t during the Housing Bubble.

#2. The yields are related to the the ratings.  Here we go yet again. One of the major ratings services, Standard & Poor, is ever so sorry (to the tune of a $1.5 billion settlement with the Justice Department) they helped create the Derivatives Debacle of ‘07-‘08, but that hasn’t stopped them from continuing to get involved in evaluating derivatives. [See the FIGSCO mess]

#3. The BTO encourages the same Wall Street Casino behavior we saw in the last Housing Bubble/Derivatives Debacle.  It’s explained this way:

“The trouble with this game is that the value of most structured finance products is opaque and subject to sharp and violent change under conditions of financial stress. So when they are “funded” in carry-trade manner via repo or other prime broker hypothecation arrangements, the hedge-fund gamblers who have loaded up on these newly minted structures are subject to margin calls which can spiral rapidly in a financial crisis. And that, in turn, begets position liquidation, plummeting prices for the “asset” in question, and even more liquidation in a downward spiral.” [WolfStreet]

Sound familiar? Sound a bit like Lehman Brothers?  Remove the jargon and the message is all too familiar – no one really knows the value of the structured product, and if the product is purchased with borrowed funds it’s subject to margin calls (people wanting their money back) which in turn leads to sell offs and the price for the “thing” drops off the financial cliff, and…. down we go. Again.  We’ve seen this movie before, and the ending wasn’t pleasant.

#4. The BTO is a way around financial reform regulations. The offerings, be they FIGSCO or BTO’s are being peddled at the same time the Financialists are trying their dead level best to (a) get Congress to whittle down the regulations put in place under the Dodd Frank Act financial reforms; and (b) figure out ways to get around the Dodd Frank Act provisions – witness the BTO.

The profit motive is perfectly understandable. If I can invest in something that pays more than a Treasury bill or bond, or more than a corporate bond, then why not?  However, at this point, as an investor, I need to make a decision – Am I investing or speculating?  If I’m investing then it would make more sense to take a lower yield on something that has a more credible value. If I’m speculating (gambling) then why not borrow some money and purchase some exotic structured financial product the value of which is far less credible (or even comprehensible) and “make more money?”

It’s speculation that tends to get us into trouble. This new round of creative financial products shows all the elements that got us into financial trouble the last time in recent memory.  Formulaic determination of value which ran head first into the wall of reality. Valuations which were based on “what’s good for business,” rather than on what might be other plausible outcomes.  Emphasis on speculation rather than investment – or on financialism rather than capitalism.  Short term yields as opposed to long term investment.

It was a recipe for trouble in 2007-2008 and it’s still a recipe for trouble in 2015.

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Filed under banking, Economy, financial regulation