Monday, March 30, 2009

Why Not Fire Chrysler's Execs As Well?

The Obama Administration rejected the plans submitted by Chrysler and GM as part of the conditions of receiving funding from the Bush Administration. These plans were viewed as unrealistic, which is an understatement for saying Chrysler is essentially bankrupt. The Administration, while willing to advance another two months of funding for GM and one month for Chrysler, mentioned that bankruptcy might be an option down the road.

The Obama Administration imposed conditions on the short term financing, as any financier with leverage can do.

GM’s Chairman, Rick Waggoner, had to resign as will most of GM’s Board of Directors. Those that rode the company down should not remain in office. That is a fundamental rule of capitalism, even when imposed by the government. Waggoner headed GM for a decade. Regardless of the handicaps facing GM, he simply did not get the job done.

Employees, suppliers, dealers, investors, Michigan, Ohio, Indiana, and Wisconsin are paying the price for GM’s market collapse.

So too should management.

That I understand.

What is inexplicable is that Robert Nardelli, who previously failed at Home Depot, should stay on at Chrysler. The explanation is that Nardelli represents new management, which came in from outside the industry – thus new blood and a new perspective.

Nardelli was the bean counter brought in by Cerberus, when it acquired 80% of Chrysler from Daimler Chrysler (side bar: I’m exalted having sold my Daimler Chrysler shares a year ago, even after paying capital gains taxes). He was initially unwilling to cut his salary in negotiations with the Bush Administration.

Cerberus will in theory “lose” its stake in Chrysler, but all is not as it seems.

In acquiring control of Chrysler, Cerberus spun off the highly profitable Chrysler Finance Company to itself, thereby earning a nice profit stream.

In addition, Cerberus took ownership of the Chrysler’s Auburn Hills Headquarters & Technology Center, which at 5.3 million square feet is second only in size to the Pentagon. It then recouped much of its cash investment by mortgaging the office complex, and then sticking Chrysler with the mortgage payments.

That was the hedge fund Cerberus hedging its investment.

How valuable an empty office outside Detroit will be remains to be seen.

The next step was to maximize Chrysler's cash flow, priming it for a resale to the public.

Nardelli immediately fulfilled that objective by eliminating not just existing product lines, but more critically by eliminating funding for future products. He stripped the Chrysler design cabinet bare. It has nothing new to offer the public in future years.

Chrysler thereby needs Fiat, Nissan, Peugeot, Honda, Toyota, VW, someone, anyone, to supply it with a small car line to build in America. All but Fiat have passed on Chrysler.

A condition of the Chrysler funding is that the company reach agreement with Fiat within 30 days, at which point the Obama Administration will advance another $6 billion.

Fiat will provide Chrysler with a small car product line, but no money, in exchange for 20% of Chrysler. In other words, Chrysler hopes to survive by building Fiats in the United States with taxpayer money.

If AMC Jeep’s earlier affiliation with Renault, and Chrysler’s with Daimler, not to mention Chrysler’s acquisitions of Rootes Motors and Simca, failed, why do they think affiliation with a weak Fiat will succeed?

Fiat did not have a reputation for high quality in its earlier forays in to the United States, the joke being that Fiat stood for “Fix it again, Tony.”

We have to hope that the Chrysler-Fiat merger will succeed, but the odds are better betting on one of the three Detroit casinos.

Friday, March 27, 2009

How GM Blew it With GMAC

April 3, 2006 is the Day the Music Died, the day GM agreed to sell 51% of GMAC to Cerberus, a hedge fund. The sale was completed in November 2006. For $14 billion spread over 3 years, it lost control of its future. GM’s fate was ordained.

Having previously sold off its non-automotive assets (Hertz, appliances, busses, locomotives, and heavy equipment), GMAC was the last crown jewel in the shrinking GM Empire. The thirst for capital was so great that GM ceded control of GMAC.

GMAC was not just a subsidiary of GM; it was the key to GM’s viability, more critical than Chevy, Cadillac, Buick, Pontiac, Saturn, Saab, Hummer, Adam Opel, Vauxhall, or Holden. These divisions would be worthless without GMAC to finance GM’s dealers and retail customers while GMAC earned a consistent profit. GMAC was a license to make money.

GM’s desperate management forgot how critical GMAC was. Oldsmobile was expendable, but GMAC was not.

The rising GM founded GMAC in 1919 as a captive finance company to facilitate the sale of GM products. Credit was essentially non-existent then for individuals; the consumer finance industry did not exist. Banks did not deal with individual consumers.

GMAC would finance wholesale sales to dealers (“floor financing”) and then the retail sales and leases to consumers. The plan was brilliant. GMAC would borrow funds using GM’s capital strength and low interest rates, and then lend the borrowed funds at higher rates to dealers and consumers. The steady, almost risk free profit would come from the spread on the borrowed funds.

By 2006 GM’s credit rating had shrunk to junk bond status, substantially raising the borrowing costs of GMAC and cutting into its profits. Even so, GMAC earned $2.8 billion in 2005.

In good times and bad times GMAC had the funds to finance the sale of GM products. GMAC was always there to facilitate sales and keep the assembly lines rolling.

Without GMAC, GM would not have become the world’s largest corporation. Without GMAC, GM would have collapsed decades earlier.

Good times or bad times, popular or unpopular models, high quality or poor quality vehicles, high or low mpg vehicles, GMAC financed the sales and leases of GM products.

GMAC helped GM survive the Great Depression, and Cadillac, previously an also ran, rose to the top of the luxury car market while competitors, such as Pierce Arrow and Packard lacked the capital to compete. In 1979 when President Carter drove the prime rate to 19.5%, GMAC had funds available, albeit at 9.75%.

GM’s problems were compounded because it was seduced by the quick, easy, seemingly risk free profits in the subprime mortgage market. GMAC dove headfirst into the subprimes without looking.

GMAC wrote off billions from subprime mortgages last year, and was no longer able to finance its operations. It hemorrhaged $7.5 billion in 2007-2008.

Cerberus’s interests and those of GM are inconsistent. Cerberus’ primary goal is to earn a profit. GM’s is to sell GM vehicles.

Cerberus made a bad investment, and cut its losses by refusing to invest additional funds into GMAC. Cerberus looked to Washington for a bailout.

GMAC normally financed 45% of GM’s new vehicle sales and leases, but was down to 14% in October. GM was in the tank.

GMAC had no money to lend, and GM lost 45,000-50,000 sales monthly as willing buyers were unable to obtain financing. Cerberus raised the minimum credit score for GMAC financing to 700 and above, cutting off many of GM’s traditional customers as the recession set in.

GMAC’s response was to convert itself into a bank holding company in December and issued $5 billion in preferred stock to the Treasury Department for TARP funds, and received an additional $1 billion in loans.

Indicative of GMAC’s problems is that Cerberus appointed the prominent investor Ezra Merkin to be GMAC’s Chairman. Ezra may have been prominent, but shrewd he was not. His funds lost at least 2.4 billion in the Madoff scandal and he facilitated the investments of others into Madoff. The once proud, but now chastened, if not bankrupt Merkin, resigned from GMAC in January.

Madoff, Merkin and GMAC - How the mighty have followed!


Postscript

GMAC announced on May 5, 2009 that it lost an additional $675 million in the first quarter, of which $125 million came from (subprime) real estate loans. It has now lost money in 5 of the most recent 6 quarters.

Tuesday, March 24, 2009

Waren Buffett, Russell Apparel, and Union Busting

We know that Warren Buffett believes we are undertaxed. We also know that the Oracle of Omaha has consistently spoken out against the excesses of Wall Street, but has strangely been silent on the role of the rating agencies in the recent housing bubble. Perhaps Buffett’s reticence is because his Berkshire Hathaway owns 20% of Moodys.

Now we learn that Warren Buffett, the capitalistic icon of the Democrats, is a union buster.

Berkshire’s subsidiary, Fruit of the Loom, acquired Russell Apparel, the sporting goods company, in 2006 for $607 million.

750 of the 1800 employees at Russell’s Choloma, Honduras plant voted to unionize in 2007. Russell responded by shuttering the plant for “economic reasons.” The company now claims to be saving $2 million annually by ending the lease on the facility. Russell denied anti-union animus played a role in the decision to close the plant.

What goes in Honduras does not stay in Honduras. Moises Elias a Bovado and Norma Estela Mejia Castellano, union leaders, are touring United States campuses, crying out about the Honduras closure.

College students are concerned about sweat shop operations in the apparel industry. Roughly two dozen colleges have responded to the union leaders by canceling their licensing agreements with Russell. Among the campuses dumping Russell are Columbia, Cornell, Georgetown, Harvard, Houston, Miami, Michigan, NYU, Penn, Purdue, Rutgers, Washington, and Wisconsin.

Buffett is notorious for buying value investments at a bargain. The Russell asset though is rapidly depreciating, consistently losing universities to Nike, founded by Phil Knight.

Buffett could learn from Knight, who has been a substantial contributor to the academic and athletics programs at his alma mater, the University of Oregon. Students voted in 2000 to boycott Nike on the Oregon campus. Phil Knight responded on April 17, 2000 by announcing that he was summarily cutting off his alma mater without another nickel. He cancelled a $30 million pledge to the University.

Nike is still featured at Oregon, and Knight has renewed his generosity to the Ducks.

Buffett, with an undergraduate degree from Nebraska, and an MBA from Columbia, has not been so generous to Columbia.

Sunday, March 22, 2009

President Obama Prefers the Tin Lizzie to the SUV

President Obama Prefers the Model T to the SUV

Last week between a town hall meeting in Costa Mesa and an appearance on Jay Leno, President Obama spoke at an Edison Electric Car plant. Forget the hybrid and the Prius, the President lauded the Model T.

He touted the Tin Lizzie: “The 1908 Model T – Think about this – The 1908 Model T earned better gas mileage than the typical SUV in 1908.” Yes, those were the days a century ago.

Henry Ford introduced the revolutionary, mass produced, 1200 pound Model T in 1908.

The fabled Tin Lizzie achieved a 10-25MPH gas mileage compared to the 18.7MPH of a typical SUV today.

Of course, the Model T lacked such amenities as doors, windows and a roof. Non-existent air conditioning, automatic transmissions, cruise control, and mufflers did not add any weight to the Model T. For exercise, you had to turn the crank to start the car. Charles Kettering didn’t invent the self-starter until 1912; power steering, power mirrors, power brakes and power outlets came much later. Needless to say, the Model T lacked cup holders, radios, 8-track, cassette, cd or dvd players, rearview or side mirrors, windshield wipers, defrosters or adjustable seats.

Gas mileage maybe good, but safety is another issue. Air bags, collapsible steering columns, seat belts, shoulder harnesses, child seats, head restraints, padded dashboards, laminated windshields, safety glass, brake lights, and even reflectors were unavailable to provide safety.

The internal combustion engine spewed out pure air pollution, lacking even rudimentary pollution control measures, much less catalytic converters.

The 4 cylinder engine was underpowered since Ford did not introduce the V-8 until a quarter century later. You might get the Model T up to a speed of 45MPH going downhill, listening to a litany of “Are we there yet?”

Soccer moms would be frustrated with the Model T since it lacked not only cargo space but also a trunk.

The best aspect of the Model T was Henry Ford’s famous option: “You may order the Model T in any color you want so long as it’s black.”

But think of the gas mileage. Give me the SUV any day!

Friday, March 20, 2009

The Constitutionality of the Punitive AIG Taxation

The Punitive AIG Tax is Probably Constitutional

It may be punitive, egregious public policy, and unprincipled, but it’s constitutional. It may echo the old English practices of seizing personal and real property, practices which led to the Constitutional ban on bills of attainder, ex post facto laws and the impairment of contracts, but it’s constitutional.

Bills of attainder are those that penalize an individual or concern by name. Legislatures learned decades ago how to avoid this constitutional proscription by using a “generic” description to describe the offensive behavior rather than the “Name” of the offender.

For example, a tax of 90% on

1) Bonuses
2) of employees of companies receiving TARP funds of $5 billion or more
3) with family adjusted gross income of $250,00 or more

is not a bill of attainder because it applies generically to any specific individual, company or group fitting the description, whereas an express tax on "AIG employees" would be unconstitutional.

As for ex post facto laws, courts have long held that the constitutional bar on ex post facto laws applies only to criminal prosecutions. Since these taxes apply only in a civil context, they will not be unconstitutional ex post facto laws.

A trillion dollar ex post facto law has been in effect for almost three decades. It’s CERCLA (The Comprehensive Environmental Response, Compensation, and Liability Act), which imposed retroactive, joint and several, strict liability on owners and/or operators, past or present, generators, and transporters to hazardous waste sites. The contamination may have occurred a century ago, but the liability is today’s. Congress also did not provide many defenses to this liability. CERCLA liability can be draconian, but society has recognized the need to cleanup these toxic sites.

The Supreme Court has essentially ratified the concept that the power to tax is the power to destroy. The City of Seattle was competing decades ago with a private utility, Puget Sound Power & Light, for customers in Seattle. The city settled the conflict by imposing a gross receipts tax on Puget Power’s sales in Seattle, thereby giving the City an insurmountable cost advantage. The Supreme Court upheld the tax in 1954.

Fifteen years later the City of Pittsburgh imposed a 20% gross receipts tax on off-street parking receipts in Pittsburgh. It exempted though from the tax the municipally owned parking lots. Once again the City used the power of taxation to cripple a competitor. The Pennsylvania Supreme Court ruled the tax an unconstitutional takings.

The United States Supreme Court in 1974 upheld the tax. It held that the only question was if taxes raise revenues. If they do, then they are constitutional. Justice Powell in a concurring opinion, in dicta, opined that a point might exist when a tax became unconstitutional, but provided no guidance on that proposition.

The Court will not pass on the reasonableness of a tax that is within the power of Congress. A tax will not be unconstitutional even if it is so excessive as to render a business unprofitable or threaten its existence.

The bar against statutes impairing the obligation of contracts is similarly inapplicable. One of the first major steps taken by FDR during the New deal was to ban the private possession of gold, followed by signing on June 5, 1933 a Joint Resolution of Congress, which declared "gold clauses" unenforcible. About $100 billion in bonds in 1933 contained gold clauses, which pegged the repayment of the debt to the value of gold.

The Supreme Court in three 5:4 opinions on February 18, 1935 upheld the bans. So much for the sanctity of contracts.

Congress in the Stimulus Bill recognized bonuses issued prior to February 11, 2009.

However, the government is free to impose taxes. For example, California may collect royalties on oil production on lands the state has leased to oil companies. It may also, much to the surprise of the lessees, impose a severance tax on all oil production in the state, including state lease lands.

The retroactivity of newly imposed taxes is a wonderful phenomenon. Governor Clinton campaigned in 1992 on a plank of middle class tax cuts. After being sworn in on January 20, 1993 as President, he announced that the budget would require not tax cuts, but tax increases for all, retroactive to January 1, 1993. By an amazing coincidence, President Clinton’s wife, Hillary Rodham Clinton and her partners at the Rose Law Firm, cashed in their bonuses in late 1992, earlier than normal.

Congress is now trying to ride the wave of public outrage, which it could have averted had the members of Congress read the Stimulus Bill before voting on it.

Tuesday, March 17, 2009

The Demagoguery of AIG

One year ago AIG announced its $135 million in retention bonuses, payable March 15, 2009. The bonuses, ranging from $1,000 to $6.5 million, were actually paid out last Friday. $55 billion had peviously been distributed in December without a peep. The Treasury Department and Federal Reserve Bank were aware of the bonuses last fall. These bonuses though ignited a firestorm in Washington, editorial pages, commentators, and blogs.

The outrage; the outrage; but not as will see the real outrage.

The normal suspects showed up, including the President, Senators Dodd, Reid and Schumer, Representatives Nancy Pelosi, Barney Frank and Elijah Cummings, and New York Attorney General Andrew Cuomo. For once, this Congress acted bipartisan in expressing its outrage. Indeed, Senator Mitch McConnell called the AIG situation an “outrage.” That was a temperate remark!

Senator Charles Grassley jumped on board saying the AIG people should follow the Japanese example and come before the American people, take that deep bow, apologize and then either resign or go commit suicide.

Senator Grassley may have been engaged in Senatorial hyperbole, but Senator Schumer of New York, in his inimical style, told the employees to give back the bonuses or “We will do it for you.” Is he from New York or Chicago?

Senator Snowe called the bonuses a “staggering insult to the American people,” although her vote for the Stimulus Bill apparently was not.

Congressman Frank was somewhat more creative. He would let the beneficiaries keep their bonuses, but at the cost of losing their jobs.

President Obama said these bonuses are an affront to the taxpayers, reckless and greedy. Yet, the $787 billion Stimulus Bill, packed with pork, is not an affront to the taxpayers. Nor is the $410 billion budget bill with roughly 9.000 earmarks.

Senator Dodd proposes taxing these bonuses at 98%. Senator Dodd, the same Senator Dodd who received the largest campaign contributions by AIG in 2008, in his Dodd Amendment to the Stimulus Bill, exempted bonuses contracted before February 11, 2009.

Ah, the hypocrisy and demagoguery. These threats, punitive taxation, and confiscation are the acts of third world dictators, such as Hugo Chavez, who do not believe in the rule of law.

President Obama instructed his Administration to “pursue every single legal avenue to block” the bonuses. His economic advisor, Lawrence Summers, an economist, and Treasury Secretary Geithner, know something the President, a constitutional law professor, apparently does not know. The United States Constitution protects the sanctity of contracts. They concluded over the weekend that AIG was legally obligated to pay the bonuses, as did outside counsel to AIG.

Summers stated on Face the Nation: “The government cannot just abrogate contracts.” We are “not a nation where contracts just get abrogated willy nilly.” He added “But you have to think of the consequences of breaking contracts for the overall system of law.”

The purpose of the retention bonuses was to keep the employees around for the upcoming year. Once you realize your position may be eliminated, you need an incentive to stay around. AIG needed these experts to clean up and unravel the complex financial instruments that essentially bankrupted AIG. $2.7 trillion in derivatives alone had to be unraveled. Andrew Cuomo reported that the contracts written in March 20008 guaranteed the employees 100% of their 2007 salary for 2008. Individual performance was not a factor in the contracts.

The financial instruments involved were 1) collateral to back up credit default swaps; 2) the purchase of collateralized debt instruments; and 3) payments to counterparties of a securities lending program.

The simple question is: How many members of Congress understand any of this?

Paying the bonuses is part of the cost of the bailout in lieu of bankruptcy, in which many of these employees would have been laid off without bonuses. The cost to the global financial system might have been greater than we are currently experiencing though.

AIG has received $173.3 billion in bailout funds from the United States – that is an outrage to the taxpayers. Even more outrageous is where these funds went, mostly foreign banks. They did not bail out AIG; through December 31, 2008 they bailed out:

Societe Generale 11.9 Billion
Goldman Sachs 12.9 Billion
Deutsche Bank 11.8 Billion
Barclays 8.5 Billion
Merrill Lynch 6.8 Billion
Bank of America 5.2 Billion
UBS 5.0 Billion
BNP Paribas 4.9 Billion
HSBC 3.5 Billion
Calyon 2.3 Billion
CitiGroup 2.3 Billion
Dresdner Kleinwort 2.2 Billion
Wachovia 1.5 Billion
ING 1.5 Billion
Morgan Stanley 1.2 Billion
Bank of Montreal 1.1 Billion
Deutsche Zentral-Genossenschaftsbank 1.0 Billion
Rabobank .8 Billion
DZ Bank .7 Billion
The Royal Bank of Scotland .7 Billion
AIG International .6 Billion
KFW .5 Billion
Credit Suisse .4 Billion
JP Morgan .4 Billion
Dresdner Bank AG .4 Billion
Banco Santander .3 Billion
Citadel .2 Billion
Danske .2 Billion
Paloma Securities .2 Billion
Reconstruction Finance Corp. .2 Billion
Landesbank Baden-Wuerttemberg .1 Billion

In other words, as soon as AIG received the government funds, it turned around and paid out $120 billion. 20 European banks received $58.8 billion.

Senator Snowe’s remarks that “I think it looks like we are simply laundering this money through AIG” seems right on.

Punitive steps by Congress and the President send a message to private investors in the financial industry – Stay Out! Do not get involved with the untrustworthy government in a bailout because it will neither respect contracts nor its own legislation. So much for any public-private partnership!

It also sends a message that the rule of law does not matter in America.

Indeed, Senator Robert Melendez has gotten into the act by asking Morgan Stanley to scrap $3 billion in retention bonuses for 6,500 brokers who might otherwise leave when the brokerage operations of Morgan Stanley and Citigroup are combined. The Senator in a letter to Treasury Secretary Geithner asked the Secretary to use “every legal means available” to stop the payouts.

Another outrage is that the current disgust with AIG can be traced back to March 15, 2005. That is the day when the then Attorney General of New York, Eliot Spitzer, forced Hank Greenberg out as Chair of AIG in an "accounting scandal,' which ultimately turned out to be much ado about nothing. Greenberg was the entrepreneur who, over 4 1/2 decades, built a tiny insurance company into one of the world's greatest. He kept tight control on risk. That ended with his departure.

The final, and most worrisome, outrage is how quickly the American public has been manipulated into a mob frenzy, which diverts attention from the roughly $100 billion paid out to banks and, as I write this piece, apparently to hedge funds.

The AIG disclosure of its transfers was made on Sunday. The employee bonuses were known many days sooner, but suddenly became the issue. Most of us were diverted from looking deeper at the bailout.

It can happen again.

Sunday, March 15, 2009

March Madness: Random Questions

How can the tournament be legitimate without Kentucky?

Which traditional basketball power, Duke, Indiana, Kansas, Kentucky, North Carolina, or UCLA has a chance of going all the way?

Will injuries ruin UConn and North Carolina’s chances?

Has Memphis learnt to shoot free throws?

What ever became of George Mason?

Why do they talk about 64 teams, when it is really 65?

How come the Big Ten is still called the Big Ten?

Is this why the math section was removed from the LSAT?

Will the Big Ten be as embarrassing in basketball as in bowl games?

Quick, name the mascots of all 64/65 teams?

Why is Duke a 4 letter word, but UCLA is five? (Hint, put an “f” in front of UCLA)

Aside from Duke, Louisville, Memphis, and perhaps Purdue, how many of the conference tournament winners are cannon fodder (Akron, Alabama State, American, SUNY Binghamton, Cal State Northridge, Chattanooga, Cleveland State, East Tennessee State, Mississippi State, Morgan State, Northern Iowa, Portland State, Radford, Robert Morris, Siena, Temple, USC, Utah, Utah State, Virginia Commonwealth, Western Kentucky)?

How many schools with “State” in their name have won the title?

Will any Vegas casino be saved by sports betting on the Big Dance?

Is San Diego State paying for the past sins of Steve Fisher?

When, if ever, will Northwestern be in it?

Why does the Big Ten get seven teams?

When is the last time a Big Ten team won the NCAA?

Will Michigan make it out of the first round and help us repress football?

When the last whistle blows, does anyone care about the other three teams in the Final Four?

Who goes around screaming “We’re Number 2” or “We’re third in the nation,” much less “We are Number 4.”?

Why Arizona?

Why not the Galloping Gaels of Saint Mary’s?

Which Cinderella will be the next Gonzaga?

Is it better to be a 2 seed?

Does a bracketologist need a medical license?

Does any team really want to win this year?

Who will be the next coach to pull a Rick Neuheisel?

Will any of the teams have to forfeit their victories this season?

What will be the graduation rate of the championship team?

How many have a law school the basketball team can be proud of?

What about the UConn women’s team?

Beware the Ides of March!

Wednesday, March 11, 2009

Health Reform? I Think Not

Americans are justifiably upset by the continuous increases in health costs. Premiums increase, deductibles rise, HMO’s and PPO’s deny coverage, limit access, and refuse payments. Frustration is understandable.

We hunger for reform, while being clueless as to what reform is.

True reform will provide equal or greater medical care at a lower cost. Otherwise, it will fail – a very costly failure. Health reform should curb the price increases while continuing to deliver outstanding service – an unsolvable equation.

Meaningful reform is impossible unless we control the reasons for the cost increases. These options never seem to be on the table. Without addressing the underlying root causes for the escalating costs, the federal government will be no more effective than the private insurers in controlling costs.

The underlying pressures are:

1) An aging population;
2) Mandated benefits;
3) Malpractice litigation and trial lawyers;
4) Defensive medicine;
5) Innovation and technology;
6) Pharmaceuticals;


We are a graying society; the baby boomers are entering their golden years. We know that our needs for medical care increase with age. As we pass through 40, our medical visits rise and the medical procedures become increasingly intrusive. “Oscopies” become periodic.

Our once reliable bodies are showing the wear and tear of decades of use and abuse - all that beer and pizza in college, the greasy burgers, dogs and fries, the donuts, cake, ice cream and pies, show up in high blood pressure and cholesterol.

Cancer is primarily a disease of aging. For example, almost every man if he lives long enough will have prostrate cancer, not to mention prostrate problems along the way. Dementia with all its problems is a growing risk of aging.

The 1990 census found 31.2 million Americans aged 65 and over. The number rose to 35 million in the 2000 census, and is estimated to be 38 million today. That is an enormous pressure on the health care system.

We are not going to throw grandma off the bus, so these costs will escalate.

Health insurers are increasingly required by legislatures to extend coverage; that is, they are mandated to cover hundreds of risks and procedures they wish to exclude, beginning with the coverage of preexisting conditions. Some of these procedures may be individually inexpensive, but cumulatively they pose a substantial increase in health care costs. Other mandates, such as in-vitro fertilization may be very expensive.

The point is not rather or not these mandates are desirable, but that they raise the costs of health insurance by an estimated 20-50% depending upon the state.

A large proportion of our health care costs cover malpractice insurance and liability. Trial lawyers accurately point out that the number of large verdicts against medical providers is not increasing. However, large settlements are escalating because insurers do not want to risk large jury verdicts. When in doubt, they settle.

President Obama is not about to take on the trial lawyers.

Medical providers engage in defensive medicine to minimize the risks of litigation. In other words, they order extra tests and procedures to minimize risks. The cost of an extra X-Ray or glaucoma test may be small, but the cumulative cost to society is high.

The risk of liability for problems in deliveries result in doctors performing an excessive number of C-sections - over twice as many as are medically necessary. The medical joke is that no doctor has ever been sued for performing a C-section, but that many have been for not performing one. Litigation almost always follows a child being born with cerebral palsy, presumably caused by an insufficient amount of oxygen during the birthing process. John Edwards made his legal fortune in winning these cases.

Doctors also increasingly prescribe extensive periods of bed rest for pregnant women, often exceeding a month. The practical issue is not whether bed rest is medically necessary, but is it legally recommended.

We witness medical miracles daily because of rapid advances in technology. Cat Scans, MRI’s, organ transplants, arthroscopic surgery, neo-natal, novel treatments save and prolong lives, but they are costly. Someone has to pay for the research, or it will not occur.

We need prescription drugs, especially as we age, but they are expensive. New drugs might require $2 billion in research and development costs to bring to market. Foreign governments, including Canada, sharply limit the price of prescription drugs. That is why pharmaceuticals are substantially less costly in Canada. The companies offset it by charging more in the United States.

Similarly, the Medicare and Medicaid plans limit the reimbursement rates to healthcare providers. Doctors and pharmacists respond by dropping the plans, charging more to private insurers, or retiring.

Unfortunately, the discussion of health reform centers on two constructs. The first is universal coverage, and ultimately a single provider, the government.

Increasing demand, that is universal coverage, without increasing supply, that is medical providers, is a classic recipe for inflation. It will also be accompanied by rationing of services through gatekeepers, i.e. the government. The British and Canadian healthcare systems are plagued with rationing.

Second, the Obama Plan is premised not on cutting any of the causes of the healthcare cost increases, but on imposing new taxes and raising others while further squeezing the providers, that is, doctors, pharmacists and hospitals. The increased squeeze will result in a large number of experienced specialists retiring early, reducing the supply of physicians. We are already experiencing shortages of general surgeons and family physicians because these fields are increasingly financially unattractive.

Congress is capable of many acts, including moving the Sierra Nevada Mountains scores of miles to subsidize the Central Pacific Railway, but it has never been able to repeal the basic law of supply and demand.

The Obama healthcare reform will result in reduced health coverage. We will call it rationing. History will record it as a misguided disaster.

Tuesday, March 10, 2009

Solidarity for Ward Churchill in Boulder

The tragic events of 9/11 witnessed a variety of responses. Congress came together for a few days to sing a bipartisan Kumbaya. The Bush Administration dedicated itself to the safety of the American people. Ward Churchill wrote a tract in which he characterized the innocent victims of 9/11 as “Little Eichmanns.”

Ward Churchill’s remarks lay dormant until shortly before a scheduled speech at Hamilton College in 2005. The disclosure outraged the American people and proved a national embarrassment to the University of Colorado, which was trying to recover from scandals in the Athletics Department.

His academic background was interesting. He received a B.A. in Technological Communications in 1974 and M.A. in Communications Theory in 1975 from Sangamon State University, since renamed the University of Illinois at Springfield.

He was hired by Colorado in 1978 as an affirmative action officer. He discovered his Native American ethnicity, became active in AIM (The American Indian Movement) and lectured on Indian issues in the Ethnic Studies Program. CU then hired him in 1991 as an Associate professor and granted him tenure in 1992 in the Communications Department, after both the Political Science and Sociology Departments declined to do so.

He moved to the Ethnic Studies Program in 1996 and was named its Chair in 2002.

Quite a fast track for one with only a masters degree from one of America’s non-elite academic institutions! Presumably affirmative action was a factor.

But he was “Native American,” as self-proclaimed in both his 1978 application for a lectureship on Native American studies and in his 1990 application for Associate Professor. As Ward variously said, he was Muscogee and Creek, Cherokee, 1/8 Creek and 1/16 Cherokee, 1/16 Creek and Cherokee, and 3/16 Cherokee, and an enrolled member of the United Keetoowah Band of Cherokees.

He couldn’t get his story straight, perhaps because both his parents are 100% Caucasian. He has never been an enrolled member of any tribe.

He also misrepresented his military background.

He claimed the need for tenure because, he said, a California State University had offered him tenure.

Such is the academic background for which the University of Colorado is now chagrinned. They should not be surprised by his scholarly misconduct in light of his background.

Colorado had a problem though. His comments about 9/11 were protected speech, and the University clearly overlooked his academic deficiencies.

What to do? What to do?

The answer was clear. A close look at his scholarship, or more accurately what passed for scholarship, revealed a pattern of scholarly misconduct.; i.e. plagiarism, fabrications, false descriptions of the works of others, and perhaps even passing off his writings as his then wife’s. In short, he was an academic fraud. Some of his fabrications include the charge that Captain John Smith intentionally exposed the Wampanoag Indians to smallpox in the 1600’s and then repeated the claim with the US Army contaminating the Mandan Indians in North Dakota with smallpox in 1837.

The investigatory report provides academicians an object lesson on how not to do scholarship.

The CU Board of Trustees voted 8:1 on July 24, 2007 to fire Ward Churchill. He filed a lawsuit shortly after. The case went to trial yesterday.

The Ward Churchill Solidarity Network has been established in his support. Bill Ayres spoke last week at a rally for Churchill in Boulder. Only in America can two unrepentant domestic terrorists become professors at major universities: Bill Ayres at the University of Illinois at Chicago and his wife, Bernadette Dohrn at Northwestern University. Ayres is rumored to have been offered a position by Harvard.

David Layne, Churchill’s attorney, in his opening argument to the jury placed Ward` Churchill on the pantheon with Galileo and Scopes.

The University faces three major problems in the litigation. First, the only reason for the scholarly investigations was his protected speech. Second, the University hired him, tenured him and made him a Chair, all with knowledge that his academic record was scant. Third, it rejected affirmative action as a basis for employing Ward, eventhough that is the rational explanation for hiring someone as otherwise academically unqualified as Ward Churchill.

The jury pool is four women and four men, some of whom are of color.

CU’s advantage is that it can easily show Churchill is an academic fraud.

The bigger problem for America is that his balderdash passes as scholarship and teaching at many of our institutions of higher education.

Friday, March 6, 2009

What Do the Chinese Communists Know About Capitalism That the United States Does Not?

Communist China, once a pillar of the international communist movement, is now capitalist in all but name. Chairman Deng Xiaoping’s reforms started China on the path to capitalism and unleashed one of the greatest industrial revolutions in economic history. He encouraged foreign investment.

His successors built upon his lessons. They encouraged capitalists, even capitalists from Taiwan, to invest. They preserved Hong Kong.

And most of all they encouraged private initiative. They understand that the essence of capitalism is the individual and not the state.

The tax on capital is zero. Zero on long term capital gains. Zero on short term capital gains. Zero on same day trades. All the Communist Party asks is that the capitalists stay out of politics.

The Chinese believe in real capitalism – not the state sponsored capitalism of Russia, nor the capitalistic socialism of Western Europe.

Chairman Deng learnt the lesson from the disastrous Cultural Revolution.

We though have forgotten our lesson from Plymouth Rock. The earliest Pilgrims practiced socialism, owning the land in common. The harvests were distributed to each family in accordance with their needs. The result was starvation as no incentive existed to work hard. The common was to provide for all so no one had to provide for the common.

When President Obama was told during the campaign that raising capital gains tax rates results in a reduction of tax revenue, he replied that raising the capital gains tax rate is a question of fairness. Taxing the rich is a matter of fairness. Squeezing insurers and medical providers is a matter of fairness. Limiting salaries and bonuses is a matter of fairness.

Fairness to the Chinese is economic growth and employment. Fairness to President Obama is equality and class warfare.

How ironic the Communists became capitalists and the Democrats became statists!

Of Chapman Law School, John Yoo, Richard Falk, and Tom Campbell

The university is a cathedral of learning, open to the free exchange of ideas, the dissemination of knowledge, and the search for truth. A diversity of viewpoints, a cacophony of voices, tolerance of dissent, the intellectual and ideological diversity, is the essence of the university. At least that is the theory.

In recent decades the Academy has become overwhelmingly liberal, just as it was conservative decades earlier. Instances have arisen in recent years of students and faculty being discriminated against for their conservative views in specific programs and at specific schools. Academic intolerance of conservatives in unfortunately all too common today.

Many law schools have no registered Republicans on their faculty. In other schools conservatives are a small minority, or stay in the academic closet, such as in Hollywood.

Chapman University is proud of its academic diversity. The Faculty represents the broad span of political views from left to right. This diversity is reflected in our visiting faculty.

Dean John Eastman, a noted legal conservative, has the authority, as is common in the academy, to hire visiting professors on his own initiative. Dean Eastman seeks out a combination of academic excellence and intellectual diversity.

Chapman University School of Law has received publicity recently in the Los Angeles Times and the Huffington Post for one of our visiting professors, Professor John Yoo of Boalt Hall (Berkeley). The Bronx Cheers have been loud and the praise low. We have even been picketed.

Professor Yoo, while on leave as the Deputy Assistant Attorney General in the Office of Legal Counsel in the Justice Department, co-authored a series of memos after 9/11, one of which is referred to by critics as the “Torture Memo.”

Just a few years ago, members of the political left were salivating at the prospect that Karl Rove or Vice President Dick Chaney might be indicted for disclosing Valerie Plame’s identity as a CIA employee eventhough a cursory glance at the governing statute would show no violation occurred. Similarly today, many are obsessed with Professor Yoo either being indicted and convicted or disbarred for the memos.

Interestingly, they do not exhibit similar enthusiasm in seeking whatever Justice Department memos, if any, authorized Ruby Ridge and Waco. The justification for the attack against innocent children or the shooting in the back of a fleeing unarmed woman in a law enforcement action in the United States escapes me. Even the Justice Department concluded that the rules of engagement were violated at Ruby Ridge. Large settlements were paid to the survivors.

Professor Yoo is currently occupying the faculty office across from mine. This same office was Professor Richard Falk’s last semester. Professor Falk is a distinguished legal scholar. He is the Albert G. Milbank Professor Emeritus of International Law at Princeton.

He has been an advocate of peace for over three decades. He is highly critical of Israel’s treatment of the Palestinians, using the word “genocide.” The United Nations Human Rights Council appointed him last March as the Special Rapporteur on Occupied Palestine to the dismay of Israel. Israel denied him entry into Israel and the Palestinian Territories in May and December 2008. He is highly critical of the United States’ wars in Vietnam and Iraq. He has questioned the official story of 9/11

Professor Falk is one of the professors profiled in David Horowitz’s book, The 101 Most Dangerous Academics in America. I asked Richard to autograph my copy, which he did with great √©lan.

We received no adverse publicity or picketing by having this distinguished leftist scholar and his wife on our faculty last semester.

Professor Tom Campbell is also a distinguished visitor this year. He formerly served as a law professor at Stanford and from 2002-2008 as Dean of the Haas School of Business at Berkeley. Before that Professor Campbell was a moderate Republican Congressman representing Silicon Valley. Moderate Republicans are an endangered species in California. The LA Times quoted Professor Campbell as supporting the recent tax increases in the California budget deal. He will probably not receive many votes in the Republican primary next year if he runs for Governor, but if he survives the primary, would have a fair chance for victory.

I am enriched by Professors Yoo’s and Campbell’s presence today as I was with Professor Falk last semester. Our students and faculty, as well as Chapman and the Academy are equally enriched by their presence. All are wonderful colleagues.

That is the essence of the Academy.

Sunday, March 1, 2009

Three Judges, a Special Master, 55,000 Prisoners, and $8 Billion

Three law suits have been filed complaining of poor prison conditions, overcrowding, and inadequate medical care in California. The prisons, with a design capacity of 84,000 inmates, currently host a prison population of 158,000. Prisoners are often tripled bunked in the prison gyms. About 42,000 prisoners are serving life sentences because of California’s three strike law.

Two of the suits have just surfaced with inexplicable recommendations.

The first, by a panel of three judges, gives a “Great Out of Jail Free Card” to 55,000 prisoners over the next three years to reduce prison overcrowding and reduce prison size to 101,000. They held the prison overcrowding constituted cruel and unusual punishment violated the 8th and 14th Amendments.

The three judges are Court of Appeals Judge Stephen Reinhardt, and District Court Judges Thelton Henderson and Lawrence Karlton. All three were appointed to the bench by President Carter.

We respect freedom of association in America, but also recognize that membership in an organization such as the ACLU or Federalist Society sends a message about the person’s perspectives. Let the record show I am in neither.

Judge Reinhardt is the most liberal of all the judges on the Ninth Circuit - truly an impressive achievement. He declared the Pledge of Allegiance unconstitutional. He figures that no matter how often the Supreme Court overrules the Ninth Circuit (24 out of 25 one year), they can only hear so many cases a year. Judge Reinhardt’s wife, Ramona Ripston, is the long time, revered Executive Director of the Southern California ACLU.

Judge Henderson had struck down California’s Proposition 209, which outlawed affirmative action in the state’s public universities, and more recently held that marine mammals were entitled to greater protection than the Navy’s use of sonar in national defense. Both decisions were overturned by the Supreme Court.

Judge Henderson held in 2005 that California was in violation of the 8th Amendment in failing to provide adequate medical care to the prison inmates. He appointed Professor Clark Kelso as Special Master in 2008.

Judge Karlton recently held unconstitutional the 2006 Sex Offenders Registration and Notification Act. The statute made it a federal offense for sex offenders to fail to register in one estate and then move to another. His reasoning was not deterred by the fact that 18 other district courts and two Federal Appellate courts had upheld the statute. He held that the statute was unconstitutional because it did not meet the Supreme Court’s standards for interstate commerce, eventhough the Court has long held federal jurisdiction attaches to crimes crossing state lines, such as interstate flight or violation of the Mann Act.

He had formerly headed the Sacramento ACLU.

Some things I just can’t make up.

Professor Kelso recently petitioned the court, that is, Judge Henderson, to approve his $8 billion recommendations to improve prison medical care in California, and to hold Governor Arnold Schwarzenegger and Comptroller John Chiang in contempt of court for failing to improve prison medical conditions. He sought fines of $2 million per day for the two officials. The Governor wants to act in a fiscally responsible way, realizing that the State is essentially bankrupt while the Legislature in May refused to fund the projects with lease revenue bonds.

Seven new facilities, called chronic care facilities and each the size of 10 WalMarts, would be erected to house 10,500 inmate patients while another 33 state prisons would witness substantial medical unit upgrades. The seven new facilities would be in Chino, Folsom, San Diego, Solano, Stockton, Ventura and Whittier.

Professor Kelso proposed that the hospital environment should be “holistic” in expression with natural light: “In the place of sterile prison corridors or barren, large-scale yards, both staff and patients should experience landscaped courtyards and places of rest and respite.”

The exterior perimeter should be landscaped to hide the fences and external surveillance systems.

The new facilities would include open air court yards and workout rooms with exercise machines and space for aerobics and yoga classes. Patients in the outdoor courtyards would be encouraged to participate in recreational therapy programs such as horticulture.

Gymnasiums would be built with basketball courts and music rooms as well as a crafts room, game room and a therapy kitchen. Outdoor running tracks would also be built.

This isn’t a blueprint for prison care, but for a spa at the Ritz Carlton. The prisoners would be receiving better medical care than many Californians.

Professor Kelso justified his recommendations by looking to the new state facility at Coalinga State Hospital. Coalinga though is not a normal state prison or prison hospital. Technically, it is not a prison at all, but a “civil confinement” facility for sexual predators, who have served their prison sentences, but are adjudicated too dangerous to release into the general population. Thus, while their freedom may be restricted, they are entitled to amenities and a life style unavailable to prison inmates.

Professor Kelso recently announced that he would reluctantly scale back his proposals. He still doesn’t seem to understand that these are prisoners, not model citizens, much less that the state is broke.

Christopher Dodd, the Senator From Countrywide, is Liberated

Senator Dodd, the Senator from Countrywide, has liberated himself. He just refinanced his $781,000 sweetheart mortgages from Countrywide with another bank after saving thousands in finance costs.

The Senator’s poll ratings are in the tank in Connecticut and he is up for reelection in 2010. Being known as “A friend of Angelo” or the “Senator from Countrywide” is hurting his reelection changes. Therefore he must free himself from the Countrywide curse.

He has done so, at least in his mind.

Chris Dodd was also the Senator from Arthur Anderson. In exchange for $54,843.00 in campaign contributions from the firm, more that any other Democrat received, he fought to eliminate the firm from liability in the Enron collapse. He failed, but so did they; hence, no problem.

Senator Dodd is also the Senator from Fannie May and Freddie Mac, Citigroup, Bank of America, J.P. Morgan Chase, Wells Fargo, Bear Stearns, Lehman Brothers, Morgan Stanley, and a host of insurance companies.

Senator Dodd received $2.7 million from the financial industry in 2004. Citigroup contributed $198,550 and Bear Stearns $186,500 in the 2006 Election Cycle. AIG kicked in an additional $121,378.

He must free himself from them; he must show that he is for the people and not for the financial industry. The Senator was known to be easy on the financial industry, but now he will be hard and tough.

Senator Dodd facilitated the passage of the Private Securities Litigation Reform Act of 1995 and the Securities Litigation Uniform Standards Act of 1998. These statutes were a needed improvement in the fight against strike suits, such as those specialized in by the corrupt firm of Milberg Weiss Bershad, Schulman & Lerach.

Forget the moneyed classes of Greenwich and Stamford; he must now demagogue the poor of Hartford, and Bridgeport, and New London, and New Haven. Perhaps the voters will have short memories!

The chameleon from Connecticut is now a populist.

The Obama Administration was toying with the idea of limiting bonuses to $500,000 for executives of companies receiving TARP funds. Over the strong objections of the Administration, Senator Dodd buried in the fine print of the Stimulus Bill a draconian bonus limitation.

The top five executives and 20 highest earners at banks receiving TARP funds are limited to bonuses no higher than 1/3 of their regular salary. Any bonuses are to be in restricted stock. Base salaries are normally low, with bonuses awarded on performance. The practical effect of these new restrictions will be to cripple performance in these firms.

Capitalism without incentives is statism or socialism.

So what if the provisions are so onerous that key personnel would be driven from the companies to competitors. Some top performers are already receiving 5-6 offers a day to change firms and bring their customers with them. That is the price to pay for the Senator’s reelection.

A true political chameleon, Senator Dodd, ostensibly the Senator from Connecticut, was also the Senator from Iowa last year as he moved his family to Iowa in an attempt to capture the Iowa Caucus.