Relevant and even prescient commentary on news, politics and the economy.

Wall Street Bailout comparison

… While it will be many years yet before we can put a hard number on the amount of taxpayer dollars actually lost in the bailout, the Center for Media and Democracy’s latest assessment of dollars disbursed in the bailout graphically illustrates the extraordinary lengths to which the federal government went to bailout the financial sector.

The silence from deficit hawks is deafening on this point, even on how to have the money returned eventually…except, it appears, for Social Security and unemployment insurance. Are you really going to put up with this from either party? Looks to be yes, of course! (update: sources of numbers found at Sourcewatch)

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David Cay Johnston has noticed a tax giveaway through FERC

by Linda Beale

David Cay Johnston has noticed a tax giveaway through FERC

[hat tip to Tax Prof; edited to correct typo and provide links]

David Cay Johnston, writing in Tax Notes, has focused on a tax giveaway that most of us have missed–a provision that permits partnerships that own pipelines to charge consumers for a tax that they don’t actually pay, resulting in considerable profits for the partners of the partnerships with little or no accompanying tax liability. See Master LImited Partnerships: Paying Other People’s Taxes, 129 Tax Notes 1393 (Jun. 21, 2010), available for free at, here. There’s also a brief explanatory video by Johnston, here. This pipeline policy stems from the Federal Energy Regulatory Commission and a 2007 court decision upholding the shift. ExxonMobil Oil Corp v. FERC, 487 F.3d 945 (DC Cir. 2007).

As Johnston explains:

For a traditional corporate owned pipeline, these costs include the corporate income tax on company profits. However, the income taxes ofn individual investors have never before counted as a cost of providing service. …. [But] even though the MLP does not pay the corporate income tax, FERC lets MLP pipelines include income tax in the rates charged to customers. FERC policy assumes the top marginal rate. Since the only income tax paid is by individual owners, this means that the rates include the individual income tax the MLP investors owe. In other words, you are forced to pay the income taxes of the MLP investors when you buy natural gas or petroleum products that were transported on [a publicly traded partnership’s] pipeline. Id.

In fact, Johnston notes, the consumers pay the partners’ income taxes “even if they are only ‘potential’ taxes.” The result is incredible profits for partners in the partnership owning the pipelines.

The math here is stunning. When rates include a tax that does not exist, the investors make out like, well, bandits. Investors in an MLP pocket 75 percent more inn after-tax profits than they would if they invested in a traditional corporation owning a pipeline. Id.

FERC lost the originall BP West Coast case, so then it just issued a statement of policy, with private meetings between commissioners and lobbyists to agree to a general rule allowing a maximum tax to be in included in the rate calculation, even if there were no business level tax to affect business profits (and only individual investor taxes, which are not costs of any business). The court allowed this new policy to survive, based on extraordinary deference to the agency, even for an arbitrary and capricious standard of review. Isn’t it clear that allowing an agency to decide that companies that operate through non-taxed partnerships can nonetheless increase their rates by a non-paid tax is an arbitrary and capririous decision that is unfair to regulated entities as well as to consumers–especially when the order of magnitude is considered–$1.6 billion a year for gas pipelines and $1.3 billion a year for petroleum pipelines. Johnston notes that such pipelines consequently have rent-like profits of 42% of revenues, four times the typical margin for the 12,000 largest corporations.

Further, this tax shifting is inflated by FERC’s own regulatory practices.

FERC has acknowledged that there is some over-collection by oil pipelines and yet it continues to grant rate hikes based not on costs, but on an index. …[T]he overcollection is pure profit except for the income tax burden, which is shifted to customers. Id. at 1395

Johnston makes two important points (paraphrased here):

1. Every industry has an incentive to get this treatment, since the “tax” is hidden from consumers and goes directly to industry investors’ bottom lines, resulting in a small charge to everybody and a huge gain to the industry investors
It would be very simple for Congress to pass this advantage along to more industries, just by a minor change to the loophole exempting industries from the publicly traded partnership provisions intended result (treating publicly traded partnerships like corporations subject to the corporate tax).

2. And he notes that such treatment of monoplies is disturbing as a matter of principle, violating “two long-standing principles of rate regulation that are fundamental to fairness and integrity”–that owners be entitled to recover costs and earn a reasonable return on equity and that customers only be charged for actdual expenses. This is a trend towards “corporate socialism, under which profits are concentrated through government action and losses are socialized through bailouts.”

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Derivatives issue tomorrow

The House-Senate conference committee on financial reform takes up the derivatives issue tomorrow. Will they adopt the Senate version (which covers 90% of derivatives according to the CFTC) or the House version which is riddled with loopholes and covers only 60% of derivatives trading?

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GIIPS labour costs not moving in the "competitive" direction

by Rebecca Wilder

GIIPS labour costs not moving in the “competitive” direction
The GIIPS (Greece, Italy, Ireland, Portugal, and Spain) hope: exports. Fiscal austerity crimps the saving of the private sector. And provided the governments make good their plans to put on the fiscal straight-jacket, there’s no other impetus for growth except foreign demand. Financial crises are often accompanied by currency crises, i.e., Sweden 1991, which drives export growth if there is sufficient external demand. For Sweden, there was.

For the GIIPS, there is not. But worse yet, there’s not a possibility of a currency crisis deep enough to drive sufficient external demand growth in Greece, Italy, Ireland, Portugal, and Spain. Therefore, it’s generally understood that the GIIPS will get the economic boost if internal competitiveness is restored. Put another way, in lieu of a domestic impetus to economic growth, “internal devaluation” (Marshall Auerback calls it “infernal devaluation”), i.e, dropping hourly labor costs and final goods prices through productivity gains and reform, is the only economic means to attract a sufficient boost of external income to grow the economy.

Well, internal labour cost devaluation has yet to materialize in the GIIPS or the Eurozone as a whole. According to last week’s Eurostat release of Q1 2010 quarterly labour costs for the European Union, labour costs are still very much rising:

The two main components of labour costs are wages & salaries and non-wage costs. In the euro area, wages & salaries per hour worked grew by 2.0% in the year up to the first quarter of 2010, and the non-wage component by 2.1%, compared with 1.6% and 2.0% respectively for the fourth quarter of 2009. In the EU27, hourly wages & salaries rose by 2.3% and the non-wage component by 1.9% in the year up to the first quarter of 2010, compared with 1.9% and 2.5% respectively for the previous quarter.

There is a lag associated with labor cost growth, especially in Europe. But over the last two years, the Eurozone 16 saw labour costs rise a cumulative 5.3%, which is on par with the previous two-year horizon, 5.7%; labour cost growth isn’t even slowing.
(this chart was updated at 4:00pm on June 23)

The chart illustrates the two-year cumulative labour cost gains across the Eurozone 16 (seasonally and working-day adjusted) alongside the annual gains over the last year (working-day adjusted only). Note: country-level data for Ireland, Finland are not available. Furthermore, country-level data through Q1 2010 are not available for Belgium, Italy, and Greece, so Q4 2009 is used instead.

According to the measure of “labour costs”, it appears that “competitiveness” is not improving markedly in any country across the Eurozone, especially in the GIIPS that need it. In contrast, US nonfarm business unit labor costs dropped 4.2% over the last two years.

To be sure, there are other measures of “infernal devaluation”, like final goods prices. But strictly speaking labour costs remain too sticky in the Eurozone to attract external demand sufficient enough to offset the drag that would stem from the announced fiscal tightening across Europe.

Rebecca Wilder

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Millenial generation and Social Security

Hilary Doe, the National Director of the Roosevelt Campus Network, spoke this week at the National Academy for Social Insurance conference in Washington, DC. She thinks ahead to the year 2040 — and fighting to keep Social Security around.

Think 2040 is the Roosevelt Institute sponsored platform for Millenial generation input into the whole debate.

Follow the link to the National Academy of Social Insurance website.

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Catfood Commission Update: Simpson on a Hot Tin Roof

by Bruce Webb

Those of us who follow the Obama Deficit Commission and its seeming hyper-focus on cutting Social Security were heartened last week by what turned into a veritable de-pantsing of Commission co-Chairman Alan Simpson in the course of an 8 minute video interview outside the (closed) doors of the Commission by Social Security Works Communications Director Alex Lawson. Alex’s video went viral and then some. Anyway you can read and hear my new buddy Alex speaking for himself:

Plus Jane Hamsher and Firedoglake have been live streaming Alex’s and SSW’s film with the latest installment here: Livestreaming the Closed Door Fiscal Commission Pt. 5. Not real lively on a minute to minute basis, unless you are a big fan of tall polished wood doors, but I thought this little note from Jane was interesting.

[Ed. Note: After Alex’s encounter with Alan Simpson, the committee has apparently moved the meeting location without notice. Alex is trying to find out where it is being held.]

Well it looks like somebody struck a nerve. Congrats to Alex and to his bosses at SSW, Nancy Altman and Eric Kingson (plus Policy Director Lori Hanson), who along with Roger Hickey and his people at CAF are keeping the heat beating on that tin roof.

So to those who have been wondering when someone, anyone besides Baker and Krugman were going to call out the Social Security ‘Reformers’ the answer is “right now”.

P.S. the original revised release date for the Annual Report of the Trustees of Social Security was for next Wednesday June 30th. There are rumors that that date might slip for reasons unstated (the Report by law is due April 1), but when it does come out you can fully expect Social Security Bears Bruce and Dale to come out of our caves and bring you the numbers, plus in due course an updated Northwest Plan for a Real Social Security Fix.

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Proxy access is a killer idea? For whom?

Lest readers fall asleep about the idea of proxy access, take note of the Business Roundtable reaction.

Business Roundtable voices discontent:

Ivan G. Seidenberg, chief executive of Verizon Communications, said that Democrats in Washington are pursuing tax increases, policy changes and regulatory actions that together threaten to dampen economic growth…

The final straw, said Roundtable president John Castellani, was the introduction of two pieces of legislation, now pending in Congress, that the group views as particularly bad for business. One, a provision of the administration’s financial regulation overhaul, would make it easier for shareholders to nominate corporate board members. The other would raise taxes on multinational corporations. The rhetoric accompanying the tax proposals has been particularly harsh, Castellani said, with Democrats vowing to campaign in this fall’s midterm elections on a platform of punishing companies that move jobs overseas.

The Washington Post reports the importance attached to proxy access:

A rush of chief executives from a wide swath of industries has been coming through Washington over the past three weeks, talking to lawmakers about a long-debated issue called “proxy access,” which would make it easier for shareholders at all publicly traded companies — not just banks — to nominate board directors. Opponents say the rule has nothing to do with overhauling Wall Street and doesn’t belong in the legislation.

“This is our highest priority,” said John Castellani, president of the Business Roundtable, which represents 170 chief executives. “Literally all of our members have called about this.”

Advocates for shareholders’ rights, including unions and institutional investors, say the crisis on Wall Street had everything to do with corporate boards failing to do their jobs.

With proxy access, shareholders would be able to send a strong message to management if they weren’t happy with a company’s strategy, for instance, in managing risk or charting growth. On the other side, public companies fear that proxy access will mainly invite activist investors and hedge funds to infiltrate boards and topple existing management — whether out of displeasure with how a company is run or to pave the way for a hostile takeover.

The end result, corporate executives warn, is that board directors will feel constant pressure to juice up their company’s stock price and put short-term considerations ahead of the firm’s long-term health…

While of course not true for all businesses, I thought that 2005 to 2007 were especially good years for stock price pushing and short-term health advocates without the help of proxy access, for instance. And I haven’t even emphasized MSN taxes! Which I will later.

Update: Hat tip Naked Capitalism for this link to Don’t gut proxy access by Lucien Bebechuk from Harvard University.

The primary purpose of a proxy-access reform is to facilitate increased involvement by long-term institutional investors that have “skin in the game” but not a big block of shares. Consider, for example, the asset manager TIAA-CREF, a long-term investor holding on the order of half a percent of the shares of many large public companies. Because such an investor would be able to capture only a very small fraction of the benefits of improved governance, it cannot be expected to undertake a costly proxy solicitation even when it believes that replacing directors would significantly enhance firm value. But if this investor could place a director on the ballot, it might do so when it views governance as especially poor. And the ability of such institutional investors to do so might make boards more attentive to shareholder interests in the first place.

Under the S.E.C.’s proposed rule, the ownership threshold would be 1 percent for large companies. While such a threshold would serve as a meaningful screen, limiting the use of proxy access to special cases, involvement by such institutional investors would remain viable. Moreover, without the proposed legislative limit on its authority, the S.E.C. would be able to lower its initial threshold if it proved too burdensome.

With a hard-wired legislative threshold of 5 percent ownership, however, the proxy-access provisions would be largely practically irrelevant for such long-term institutional investors. Even if all the 10 largest public pension funds hypothetically banded together – a concerted action that would involve overcoming significant coordination costs and collective action barriers – they would commonly fail to reach the 5 percent threshold. For example, data put together by Calpers, the giant California state pension fund, indicates that the 10 largest pension funds hold less than 2.5 percent at Bank of America, Microsoft, I.B.M. and Exxon Mobil; even if all these funds joined forces, they would still have less than half of the amount needed to reach the 5 percent threshold.

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‘Ruthless’ bankruptcies

The NYT has a story on what look to be ‘ruthless’ bankruptcies in store for companies who sought or were forced to take too much leveraged debt:

American companies currently have more than $1.7 trillion in S.&P.-rated bonds and loans maturing from 2011 to 2014. The total debt load coming due will climb steadily over the next four years, with the proportion of debt in the speculative category growing, the credit rating agency said.

In 2011, there will be about $300 billion in debt due, of which 41 percent is considered speculative. But by 2014, the amount of debt due climbs to about $550 billion, 72 percent of which is speculative.

“We believe that many borrowers at the low end of the ratings scale will encounter serious hurdles to their refinancing needs in 2013 and 2014,” John Bilardello, a managing director at Standard & Poor’s, said in the report. “Unlike investment-grade entities, for which the main issue is the rising cost of capital, speculative-grade borrowers may find that financial institutions and investors are wary of lending to them.”

Much of this debt currently owed by American companies was a result of heavy borrowing during the leveraged-buyout boom, which lasted from 2005 to 2007.

Private equity firms borrowed enormous sums of money from banks to finance the buyout of companies and then loaded the target companies up with debt.

But the target companies have since had a hard time paying down their debt because of the down economy, which blunted profits.

S.&P. believes that these companies have been successful in pushing back their debt maturities past 2010, avoiding a potential rash of defaults and bankruptcies this year…

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Proxy Voting 101

Rdan here…The following post is the first of a possible four concerning shareholders, that magic group of owners of publicly traded companies which is invoked as beneficiaries of actions and policies by company officers and Boards. While many readers are well versed in shareholder doings, we also have readers less versed in how this is done, hence Proxy Voting 101 at my request to begin. But if you read news media, all is done for the sake of ‘shareholders’. Lets begin the discussion.

A guest post from Doug Gates, vice president and co-founder of Moxy Vote (
Proxy Voting 101

When you own something you generally expect to be able to control it. This is easy if you’re the only owner – “it’s my car, so I’ll decide when to change the oil.” It gets more complicated when there are multiple owners – “it’s our house, so ‘Honey? Is it time to fix our deck?’” This can create long discussions about budgets, priorities, plans and other issues. Now imagine there are millions of owners. You need to keep these owners informed about what they own and you need their input on big decisions. Organize this mob into a productive committee and you’ll be ready for work in corporate governance.

American companies ostensibly serve at the pleasure of their shareholders, so they periodically look to us for a nudge in the right direction. Our financial and regulatory system has developed the proxy voting process to deliver these nudges and give the shareholders a say.

Here’s how it works in theory: companies assemble proxy ballots and distribute them to shareholders. Shareholders cast their votes, one per share, and the votes are tallied. The result is announced and the business moves on.

Of course, this well-intentioned process is never this easy. Let’s look at this piece by piece:

1. Companies assemble proxy ballots. If you’ve seen a proxy ballot before, you know they don’t usually contain gripping, exciting information. Rather it has information on reelecting a director, appointing an auditor, designating a compensation committee, etc. In their proxy statements, companies recommend how you should vote on each of these.

If shareholders are particularly organized, they can submit their own ballot proposals on specific issues they are passionate about. In general, shareholder proposals are due six months before the vote, they can’t deal with “ordinary business operations,” and are toothless. That’s right — they’re non-binding, although they do put public pressure on management. Shareholder proposals have been used to make statements on issues such as executive compensation, labor relations and global warming. Social activists like PETA and the Teamsters use shareholder resolutions, and they have also been used by activist investors like Carl Icahn and Eric Jackson. Most shareholder resolutions are rejected by voters.

2. Ballots are distributed to shareholders. This is not nearly as easy as it sounds. For various reasons, many companies don’t even know the identities of most of their shareholders. To distribute the proxy materials to unknown shareholders, companies hire a proxy distribution agent, who has relationships with all the brokers, funds and other intermediaries necessary to unravel the ownership chain. Broadridge Financial, a $2.5 billion company, has a near lock on this market. The company sends proxy ballots to the distribution agent, who figures everything out and distributes them to shareholders. Companies can contact their known shareholders by getting their names from the transfer agent they’ve hired to maintain shareholder records.

3. Shareholders cast their ballots – at least in theory. Most shares aren’t bought and sold by individual investors like you and me. They’re controlled by large institutional investors, such as pension funds and mutual funds. With thousands of proxy ballots to vote every year, most of these institutional investors hire a proxy advisory firm to recommend how to vote each ballot. MSCI and The Corporate Library are among a handful of companies that compete in this space. The large institutional shareholders vote because they have the obligation and the resources to figure out the best way to vote.

Small individual shareholders, like you and me, often choose to not vote. If you’ve ever received the thick packet of ballot legalese in the mail, you know why. It takes time and effort to vote when it appears to have little benefit. You can vote on a paper ballot, just like grandpa did, or you can vote via telephone or the Web.

As a shareholder, you’re eligible to attend the company’s annual meeting, which can be a fascinating mix of administrative trivia and theatrics. Just weeks ago, Walmart entertained their shareholders with pep rallies, speeches, the comedy of Jamie Foxx and musical performances by the Barenaked Ladies, REO Speedwagon and Tim McGraw. 16,000 people attended the closed-to-the-public festivities at the University of Arkansas’ Bud Walton Arena.

4. Results. A few weeks after the voting deadline, the company announces the results of the vote, and the business moves forward. Everything starts over in nine months as the next set of proxy ballots are distributed.

As you can see the proxy voting process is simple in theory, but a closer look reveals the complexities of the system and the difficulties individual shareholders face when desiring to vote and influence company management. In our next post, we will discuss what’s wrong with the proxy process and how individuals can increase their participation and influence.

Shameless plug: Doug Gates works at Moxy Vote, which empowers individual shareholders to form sizable voting blocs and get attention in the boardroom. Hear a radio interview here.
Doug has 13 years of experience building and marketing websites at CNET, mySimon, TheFind and Musicmatch, with previous experience as a litigation consultant, and is an MBA from Stanford.

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This idea was lifted from an e-mail exchange with Noni Mausa this morning. The following well seasoned joke reminds me of political communications among the people who write the copy for our leaders:

A carpet layer had just finished installing carpet for a lady. He stepped out for a smoke, only to realize he’d lost his cigarettes. He went back in and in the middle of the room, under the carpet, was a bump. “No sense pulling up the entire floor for one pack of smokes,” he said to himself. He got out his hammer and flattened the hump.

As he was cleaning up, the lady came in. “Here,” she said, handing him his pack of cigarettes. “I found them in the hallway.”

“Now,” she said, “If only I could find my parakeet.”

Part of Noni’s note:

What is worrisome is that we don’t always correct our steering as we should, jumping back and forth between data, predictions, steering, more data and comparisons to our predictions.

But the biggest problem isn’t poor execution of good-faith strategies. It is clever execution of bad-faith strategies.

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