Washed It!

Perhaps all those concerns about a negative backlash against the town hall protests that would ultimately inure to the benefit of those pushing ObamaCare were overblown, because it looks like the public is siding with the protesters:

WASHINGTON — The raucous protests at congressional town-hall-style meetings have succeeded in fueling opposition to proposed health care bills among some Americans, a USA TODAY/Gallup Poll finds — particularly among the independents who tend to be at the center of political debates.

In a survey of 1,000 adults taken Tuesday, 34% say demonstrations at the hometown sessions have made them more sympathetic to the protesters’ views; 21% say they are less sympathetic.

Independents by 2-to-1, 35%-16%, say they are more sympathetic to the protesters now.

(…)

• A 57% majority of those surveyed, including six in 10 independents, say a major factor behind the protests are concerns that average citizens had well before the meetings took place; 48% say efforts by activists to create organized opposition to the health care bills are a major factor.

• There’s some tolerance for loud voices: 51% say individuals making “angry attacks” on a health care bill are an example of “democracy in action” rather than “abuse of democracy.”

• Some actions are seen as going too far. Six in 10 say shouting down supporters of a bill is an abuse of democracy. On that question, unlike most others, there isn’t much of a partisan divide: 69% of Democrats and 58% of Republicans agree.

If these numbers stand up, it would be a significant blow to the Obama Administration and to the fortunes of health care reform in Congress.

How the Wall Street giant used your money to make $3.4 billion in profits.

They will never admit to this at Goldman Sachs (they don’t really fess up to much over there at the Big G) but in the fall of 2008, just after the Lehman Brothers bankruptcy gave the world a lesson in systemic risk, Goldman, the world’s greatest risk taker, was finished too.

That’s right, it was toast. Finished. Kaput. Until, that is, the firm that was built on wheeling and dealing in some of the most esoteric investments the world of high finance had ever seen, needed a government bailout to stay afloat, which included $10 billion in cash from the Treasury Department (granted by its former CEO, then-Treasury Secretary Hank Paulson) and more importantly, full access to the Federal Reserve’s discount window to be a commercial bank.

Goldman Sachs, which was bailed out by the federal government, is now using the bailout to resume some of the same risk-taking activity that got it in trouble in the first place.

Goldman, of course, is a commercial bank like no other. You won’t confuse Goldman with the ol’ Bailey Building & Loan. It has no customer deposits—which are what the access to the discount window was first set up to protect—and you won’t be getting a toaster or a debit card from Goldman Sachs anytime soon.

But being a bank has its rewards. With full access to the discount window, Goldman can now borrow cheaply and massively from the Fed in a pinch, and because of that access, it can borrow more cheaply in the credit markets. It’s a loophole that has allowed Goldman to turn back the clock and once again resume much of its risk-taking activities, only this time it’s being financed by the American taxpayer.

There are, of course, many urban legends about Goldman and how it uses its clout in Washington and in the financial business (both Paulson and another former CEO, Robert Rubin held the Treasury secretary post) to advance its allegedly nefarious corporate agenda.

Recent reports have the firm gaming the energy markets, creating the dot-com bubble, and the subprime-debt crisis that took down Wall Street, and then for a time benefitting from its implosion when it “shorted” subprime-related investments, a trade that allowed the bank to profit from the downward spiral. (Hell, I’m sure there are people who also believe Goldman was somehow behind the swine-flu epidemic to corner the market on drug stocks.)

Some of these stories have a basis in fact and some don’t—I’ll leave it up to the reader to figure this out—but what is true is equally disturbing: Goldman Sachs, which was bailed out by the federal government, is now using the bailout to resume the many of the same risk-taking activities that got it in trouble in the first place.

The question I have, of course, is why is the Obama administration, which has decried corporate greed whenever it’s politically feasible, allowed Goldman all the advantages of a bank, when it is really a big hedge fund?

The Treasury Department won’t say and it’s obvious why Goldman is doing what it is doing: Money, and lots of it. The firm announced Tuesday morning that net income for the second quarter was $3.44 billion, while its biggest rival, Morgan Stanley, is likely to announce a quarterly loss.

And it all comes down to risk, or to be more precise, how much risk Morgan is willing to take on the taxpayers’ dime compared to what Goldman Sachs is now taking. Morgan Stanley’s CEO John Mack, chastened by the firm’s own near-implosion last year when it too was forced to become a bank, has radically reduced the amount of borrowing, or “leverage,” Morgan is taking in trading. People inside the firm say it’s difficult to meet client demands without borrowing money.

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“We just can’t get anything done,” said one senior Morgan Stanley executive, speaking on the condition of anonymity. Borrowing to finance trades amplifies gains, but it also amplifies losses when trades go bad. During the first quarter of 2009, Morgan borrowed just $11 for every dollar it had in capital (by comparison during the Wall Street boom, firms borrowed as much as $35 for every dollar in capital), while Goldman borrowed a significantly higher amount—close to $15 for every dollar it has in capital. “Our leverage is the result of risk-taking on behalf of our clients,” Goldman spokesman Lucas van Praag says about the strategy.

And keep in mind this is only for the first quarter. Goldman’s second-quarter leverage is likely much higher given the fact that interest rates have remained remarkably low. Those low interest rates have had another benefit—it has allowed Goldman to make winning bets in the bond markets (bond prices rise when interest rates fall), the same place that decimated Wall Street in 2007 and 2008.

Of course, there are lots of reasons for Goldman’s success. The firm has amazing intellectual capital; some of the smartest people in the world of finance work there. It also knows how to game the system better than any firm on the face of the earth. Case in point: In mid-September 2008, when the world was crashing following Lehman’s bankruptcy, Goldman held $13 billion in highly risky mortgage bonds known as collateralized debt obligations. These bonds were insured by American International Group, which itself was about to go bankrupt.

Without that insurance, Goldman itself would have imploded because the bonds would have been marked down to just pennies on the dollar. The rescue of AIG was supposed to prevent a large-scale crash of the financial system, but it also prevented a crash of Goldman Sachs, which bought those crappy CDOs from Merrill Lynch, which was forced to find a buyer (Bank of America) because it too held the same sludge.

The Goldman purchase of the Merrill CDOs is proof positive that the geniuses at Goldman screw up like everyone else. And I don’t buy van Praag’s spin on the firm’s famous hedges that minimized its losses because the smart money in the markets didn’t at the time. Goldman’s shares were in a freefall, bottoming out at around $50 in the fall of 2008, compared to close to $235 just a year earlier.

Now with all the government help, Goldman is marching its way back up to $235 a share—trading at around $150 Monday—by embracing much of the same risk that nearly led to its demise. It would be nice, though, if the next time Goldman losses money taxpayers didn’t foot the bill.

Wednesday, June 24

A poll released Monday showed 72 percent of Americans favor an insurance health care plan with a public option. So why do only 36 senators support it?

Sure, the Senate is supposed to be a more deliberative body and not be swayed by public opinion to the same extent as the House. But, if there’s widespread backing for this concept, and it’s getting a renewed push from President Obama, why so much resistance in the Senate?

Is it because senators are standing on good old-fashioned apple pie principles?

Maybe not. Here’s an analysis that suggests insurance company PAC money is having the greatest impact on middle-of-the road Democratic senators. According to the report:

“Liberal Democrats are likely to hold firm to the public option unless they receive a lot of remuneration from health care PACs. Conservative Democrats may not support the public option in the first place for ideological reasons, although money can certainly push them more firmly against it.

“But the impact on mainline Democrats appears to be quite large: if a mainline Democrat has received $60,000 from insurance PACs over the past six years, his likelihood of supporting the public option is cut roughly in half from 80 percent to 40 percent.”

As I’ve said, there may well be legitimate philosophical reasons to oppose this type of national health care plan, or any other approach, for that matter. An umbilical cord flowing with ready cash from major insurers isn’t one of them.

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To his credit, Obama finally put pressure on health care companies, and opponents of the public option, in a news conference Tuesday.

As he correctly pointed out: “If private insurers say that the marketplace provides the best quality health care … then why is it that the government, which they say can’t run anything, suddenly is going to drive them out of business? That’s not logical.”

It’s only logical if you understand that cash is the conduit through which public policy decisions are often made.

Money doesn’t talk, Dylan said, it swears.

WASHINGTON – President Barack Obama cited his own long struggle to quit the cigarettes he took up as a teenager as he signed the nation’s strongest-ever anti-smoking bill Monday and praised it for providing critically needed protections for future generations.

“The decades-long effort to protect our children from the harmful effects of smoking has finally emerged victorious,” Obama said during the sun-splashed Rose Garden signing ceremony.

The bill marks the latest legislative victory for Obama’s first five months. Among his other successes: a $787 economic stimulus bill, legislation to expand a state program providing children’s health insurance and a bill making it easier for workers to sue for pay discrimination.

The president has frequently spoken, in the White House and on the campaign trail, of his own struggles to quit smoking. He did so again during the ceremony, bringing it up while criticizing the tobacco industry for marketing its products to young people.

“I know — I was one of these teenagers,” Obama said. “I know how difficult it is to break this habit.”

Before dozens of invited guests, including children from the Campaign for Tobacco Free Kids, the president signed legislation giving the Food and Drug Administration unprecedented authority to regulate tobacco.

The Family Smoking Prevention and Tobacco Control Act allows the FDA to lower the amount of nicotine in tobacco products, ban candy flavorings that appeal to kids and block misleading labels such “low tar” and “light.” Tobacco companies also will be required to cover their cartons with large graphic warnings.

The law won’t let the FDA ban nicotine or tobacco outright, but the agency will be able to regulate what goes into tobacco products, make public the ingredients and prohibit marketing campaigns geared toward children.

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“It is a law that will save American lives,” Obama said.

Anti-smoking advocates looked forward to the bill after years of attempts to control an industry so fundamental to the U.S. that carved tobacco leaves adorn some parts of the Capitol.

Opponents from tobacco-growing states such as top-producing North Carolina argued that the FDA had proved through a series of food safety failures that it was not up to the job of regulation. They also said that instead of unrealistically trying to get smokers to quit or to prevent others from starting, lawmakers should ensure that people have other options, like smokeless tobacco.

As president, George W. Bush opposed the legislation and threatened a veto after it passed the House last year. The Obama administration, by contrast, issued a statement declaring strong support for the measure.

General Motors said Thursday that a group representing many of its largest bondholders had accepted a proposal offering up to a 25 percent stake in exchange for not opposing G.M.’s bankruptcy reorganization plan.

In a regulatory filing, G.M. also filled out many of the details of the reorganization plan, crafted under the eye of the Treasury Department.

G.M. confirmed that the government would provide more than $50 billion in bankruptcy financing to see the company through its Chapter 11 filing. What will emerge, through an asset sale known as a 363 transaction, is a newer, slimmer G.M. with about $17 billion in debt.

Under the terms of the deal, G.M. would sell itself in Chapter 11 and bondholders would receive a 10 percent stake in the newly reorganized company in exchange for about $27 billion in bonds. They would also receive warrants to buy an additional 15 percent of a new G.M., exercisable if G.M.’s value rises to certain levels.

G.M. said in the regulatory filing that the proposal depends on the government getting enough bondholders to make statements of support backing the terms of the swap. Without those statements, which are due by Saturday, the amount of stock and warrants for bondholders would be “substantially reduced or eliminated.”

The bondholder committee, which represents holders of about 20 percent of the bonds’ value, had already said they support the proposal, G.M. said.

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“The ad hoc committee of G.M. bondholders supports the revised offer from G.M. and believes that when contrasted with the alternative — uncertain and costly bankruptcy court litigation — that it represents the best alternative for bondholders in the current difficult and dire situation,” the group said Thursday in a statement.

Earlier this week, bondholders overwhelmingly rejected a debt exchange offer that would have swapped their bonds for 10 percent of the company’s equity. It is believed that G.M.’s bonds are held by tens of thousands of investors, ranging from institutions to individuals.

Thursday’s announcement came after German and American negotiators in Britain failed to agree on a crucial bridge loan to sustain Opel and the rest of the European operations of General Motors in the event of a bankruptcy filing, following a marathon negotiating session that stretched till nearly 5 a.m. Thursday.

But officials did manage to narrow the field of potential suitors for Opel to two companies — Fiat, the Italian automaker, and Magna, a Canadian auto parts giant. A Belgian private equity firm as well as a Chinese automaker were knocked out of contention.

NY Times

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax — called a value-added tax, or VAT — has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

At a White House conference earlier this year on the government’s budget problems, a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT. A recent flurry of books and papers on the subject is attracting genuine, if furtive, interest in Congress. And last month, after wrestling with the White House over the massive deficits projected under Obama’s policies, the chairman of the Senate Budget Committee declared that a VAT should be part of the debate.

“There is a growing awareness of the need for fundamental tax reform,” Sen. Kent Conrad (D-N.D.) said in an interview. “I think a VAT and a high-end income tax have got to be on the table.”

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American — a tangible benefit that would be highly valuable to low-income families.

Liberals dispute that notion. “You could pay for it regressively and have people at the bottom come out better off — maybe. Or you could pay for it progressively and they’d come out a lot better off,” said Bob McIntyre, director of the nonprofit Citizens for Tax Justice, which has a health financing plan that targets corporations and the rich.

A White House official said a VAT is “unlikely to be in the mix” as a means to pay for health-care reform. “While we do not want to rule any credible idea in or out as we discuss the way forward with Congress, the VAT tax, in particular, is popular with academics but highly controversial with policymakers,” said Kenneth Baer, a spokesman for White House Budget Director Peter Orszag.

Still, Orszag has hired a prominent VAT advocate to advise him on health care: Ezekiel Emanuel, brother of White House chief of staff Rahm Emanuel and author of the 2008 book “Health Care, Guaranteed.” Meanwhile, former Federal Reserve chairman Paul A. Volcker, chairman of a task force Obama assigned to study the tax system, has expressed at least tentative support for a VAT.

“Everybody who understands our long-term budget problems understands we’re going to need a new source of revenue, and a VAT is an obvious candidate,” said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his own VAT plan. “It’s common to the rest of the world, and we don’t have it.”

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Seeking New Revenue

The surge of interest in a VAT is testament to the extraordinary depth of the nation’s money troubles. While some conservatives have long argued that a consumption tax would provide a simpler and more efficient alternative to the byzantine U.S. income tax code, this time it’s all about the money.

The federal budget deficit is projected to approach $1.3 trillion next year, the highest ever except for this year, when the deficit is forecast to exceed $1.8 trillion. The Treasury is borrowing 46 cents of every dollar it spends, largely from China and other foreign creditors, who are growing increasingly uneasy about the security of their investments. Unless Congress comes up with some serious cash, expanding the nation’s health-care system will only add to the problem.

Obama wants to raise income taxes for high earners and impose new levies on business, but those moves would not generate enough cash to cover the cost of health care, much less balance the budget, and they have not been fully embraced by Congress. Obama’s plan to tax greenhouse-gas emissions could raise trillions of dollars, but again, Congress is balking.

Key lawmakers are considering other ways to pay for health reform, including new taxes on sugary soda, alcohol and employer-provided health insurance. The last proposal could raise a lot of money — nearly $1 trillion over the next five years, according to White House budget documents. But options on the table would raise a fraction of that sum. And while it might pay for health care, it would barely dent deficits projected to total nearly $4 trillion over the next five years and to grow rapidly in the future, as baby boomers draw on Social Security and Medicare.

Enter the VAT, one of the world’s most popular taxes, in use in more than 130 countries. Among industrialized nations, rates range from 5 percent in Japan to 25 percent in Hungary and in parts of Scandinavia. A 21 percent VAT has permitted Ireland to attract investment by lowering its corporate tax rate.

The VAT has advantages: Because producers, wholesalers and retailers are each required to record their transactions and pay a portion of the VAT, the tax is hard to dodge. It punishes spending rather than savings, which the administration hopes to encourage. And the threat of a VAT could pull the country out of recession, some economists argue, by hurrying consumers to the mall before the tax hits.

A VAT’s Bottom Line

What would it cost? Emanuel argues in his book that a 10 percent VAT would pay for every American not entitled to Medicare or Medicaid to enroll in a health plan with no deductibles and minimal copayments. In his 2008 book, “100 Million Unnecessary Returns,” Yale law professor Michael J. Graetz estimates that a VAT of 10 to 14 percent would raise enough money to exempt families earning less than $100,000 — about 90 percent of households — from the income tax and would lower rates for everyone else.

And in a paper published last month in the Virginia Tax Review, Burman suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent. A gallon of milk would jump from $3.69 to $4.61, and a $5,000 bathroom renovation would suddenly cost $6,250, but the nation’s debt would stabilize and everybody could see a doctor.

Sales Tax Gains Momentum

Burman, who helped House Democrats craft an unsuccessful 2007 plan to repeal the alternative minimum tax, said he’s received a number of phone calls from lawmakers interested in his idea, though “they can’t quite imagine how to make it happen politically.” Burman said the 25 percent rate has caused some sticker shock, and he’s trying to figure out how to bring it down.

Graetz’s proposal drew an endorsement from Volcker, who last year called it “a sensible plan for reform.” (Volcker did not respond to a request for comment.) It also has piqued the interest of Conrad, the Senate Budget Committee chairman who argues that it could be modified to accommodate Obama’s pledge not to raise taxes on families who make less than $200,000 a year.

“I think interest is quietly picking up,” Graetz said. “People are beginning to recognize that the mathematics of the current system are just unsustainable. You have to do something. And a VAT has got to be on the table if you want to do something big and serious.”

Still, the Senate Finance Committee declined to include a VAT among the options it is considering to pay for health reform. And even VAT supporters doubt the tax will find a place among the tax-reform proposals the Volcker panel has been asked to produce by Dec. 4.

Though the nation’s fiscal outlook is grim, Burman said “the situation will have to get more desperate” before lawmakers are likely to consider a new levy aimed directly at the pocketbooks of every one of their constituents.

Most lawmakers are still looking for “a painless source of revenue” to overhaul the health-care system and dig the nation out of debt, Burman said. “Who knows?” he added. “Maybe the tooth fairy will bring that to them.”

By JOAN WHITELY

Robert Kahre, who owns numerous construction businesses in Las Vegas, is standing trial on 57 counts of income tax evasion, tax fraud and criminal conspiracy. If convicted on most counts, he could live out his life in prison.

But attorney William Cohan paints Kahre as an American “hero” who believes his payroll system helped keep the U.S. monetary system sound, and was also a form of legal tax avoidance.

A self-made entrepreneur, Kahre, 48, paid his workers in gold and silver coin, and said they could go by the coins’ face value — rather than the much higher market value of their precious metal content — for federal tax purposes. He did not withhold taxes from their wages, and he provided the same payroll system to 35 outside clients, which were other local businesses.

Judge David Ezra is presiding over the criminal trial, which began May 19 in U.S. District Court. Joining Kahre as defendants are his longtime girlfriend, a sister who works in his businesses, and a former business assistant.

Three of the four present defendants were among the nine people tried on similar charges two years ago, but no convictions resulted. In the 2007 trial, four others of the nine defendants, including Kahre’s mother, were entirely acquitted. Two individuals were only partially acquitted, but dropped from the indictment that forms the basis for the trial before Ezra.

This time around, the only new defendant is Danille Cline, Kahre’s girlfriend of 19 years, and the stay-at-home mother of his four children. The government claims she obstructed the Internal Revenue Service by allowing Kahre to place several homes in her name, thus attempting to conceal his assets.

Cline’s former brother-in-law, Thomas Browne, also was indicted this time, for his role as broker in some of the real estate transactions, but has since reached a plea bargain. He is expected to testify against the defendants.

“This is a case about money, greed and fraud.” The line appeared on screen in court during the government’s opening statement by Christopher Maietta, a trial lawyer from the Washington, D.C., office of the Department of Justice.

According to the government, Kahre and others concocted a fraudulent cash payroll “scheme” and then peddled it to other Las Vegas contractors. Defendants did not report to the IRS any payments made to workers, “either at the true amount or at the bogus amount, … being the face value of the coin or coins,” according to the indictment.

The now-suspended payroll service handled about $114 million over six years, according to court records. Between 17 and 25 percent of that went to Kahre or his workers; the rest went to the 35 client businesses to pay their workers, court records show.

The government did not indict most of the outside businesses or their personnel as co-conspirators with Kahre; although on May 6, Daniel McCartan of Action Concrete, which was one of Kahre’s payroll clients, was finally sentenced in connection with a plea agreement reached in December 2006. McCartan received five months in prison and five months of home detention for one count of tax evasion.

Kahre contends his workers had agreed to be independent contractors, so he did not have to withhold taxes for them. His six businesses are in the trades of painting, drywall, tiling, plumbing, heating-cooling and electrical work.

Further, the $50 gold coins and the silver dollars Kahre used for payroll are designated by Congress as legal tender, so people are entitled to value them at their stamped denominations, he also contends. Taken at face value, each defendant’s annual coin income placed him below the threshold for filing a federal tax return.

Earlier cases on the question of how to value gold or silver coins have focused on collectible coins that had been pulled from circulation but still have value as property, according to the defense. Kahre used coins minted after 1985, which are allowed to circulate.

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“It’s not whether what Mr. Kahre did was legal under the law,” defense attorney Michael Kennedy told the jury in his opening statement. “It’s whether he believed what he did was legal,” in the absence of explicit instructions by the IRS — on its Web site, in its publications or in response to written correspondence from Kahre — on how to value post-1985 gold or silver coins.

“We’re not here to determine if moneys are owed,” said Kennedy on behalf of his client, Lori Kahre, who had relied on her brother’s tax theory. A tax mistake is different from a tax crime, so the IRS can still use administrative channels to force the defendants to pay back taxes, Kennedy has noted in the past.

A sincere, but mistaken understanding of the tax-filing process is different from adopting a “pretextual” belief system in order to dodge taxes, Ezra acknowledged in court Wednesday.

Cohan described Kahre’s payroll system as a “boycott of the Federal Reserve.” But when the lawyer attempted to elaborate on Kahre’s view that the nation has debased its paper currency by abandoning its former gold standard, Ezra added, “We’re not here to convince the jury that the … (U.S.) monetary system belongs to an international cabal.”

Contact reporter Joan Whitely at jwhitely@reviewjournal.com or 702-383-0268.

The above chart shows the projected sources of funding (receipts) for the U.S. Government for 2009.  Borrowing (the federal budget deficit) is projected to account for nearly half of all funding.  If you read yesterday’s post, you also know that the amount of borrowing in 2009 is likely to increase (because the Obama administration’s budget assumptions are too optimistic).

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