Taxing Issues

Tom Daschle has hit a snag in his appointment to head HHS. Apparently he has had to correct his tax filings for the last three years and is paying around $130,000 in back taxes and interest (no penalties). He somehow forgot to account for his use of a free limo and driver for this period of time. (I think he has also had tax problems in the past associated with a vacation home he owns in North Carolina.)

Tim Geithner, just shamelessly confirmed to head our Treasury Department, has also had to pay self-employment taxes for 2001-2004 when he worked for the IMF. After these oversights were found, he had to pay back taxes and interest (no penalties) of $43,200. (Even though Geithner was re-imbursed by the IMF for the taxes he hadn’t paid, President Obama labeled this an “innocent mistake”.)

Representative Charlie Rangel also failed to report some $75,000 in rental income from vacation properties he owns in the Dominican Republic. He will (someday) be filing amended returns. It is expected he will owe the IRS thousands of dollars. Strangely he also has paid no interest on the mortgage he used to buy this property … weird? (He heads the House committee that writes our tax code.)

There are many, many more politicians who face IRS scrutiny, Ted Stevens from Alaska and William Jefferson from Louisiana to name but two … maybe even Christopher Dodd if he ever gets around to disclosing the terms of his sweetheart mortgage from Countrywide Finance.

Therefore, my solution to our rapidly growing national deficit is for the Internal Revenue Service to give all politicians of any stripe a colonoscopic audit of their tax filings for the last five years. The money that they would recover should be monstrous. But wait, since Geithner is now head of the Treasury Dept. under which sits the IRS, this seems somewhat unlikely to happen.

Politicians vs. Statesmen

My memory is becoming more and more unreliable, but I seem to recall that we once had such things as “statesmen”. These were people who placed what would be best for our country ahead of their and/or their party’s political ambitions. I recall such people as Daniel Patrick Moynihan, John Danforth, John F. Kennedy, Everett Dirkson, Barbara Jordan, Alan Simpson, and Sam Nunn often exhibiting such patriotic selflessness. Now, we have a new administration that, together with Congress, has placed before the American public an $800 billion package of government programs that is meant to stimulate job creation and insure economic recovery. It is called the “Economic Stimulus” package. It is, in fact, a wish list of liberal power grabs, special interest spending programs, and constituent payoffs that have only a passing semblance to job creation. What we need instead is a set of tax and regulatory incentives that lead to a re-awaking of the economic giant that is the United States.

What we also need are statesmen. What we have instead are Nancy Pelosi and Harry Reid … unbridled by our new President who has promised change and is now trying to take advantage of our current economic problems to lock in four years of his leftist programs in one fell swoop. If this Economic Stimulus package gets implemented as it currently stands not only will it not bring us out of our current economic malaise, but it will surely sink us further … only to create the need for more shined-up Socialism within the following year.

Na Na Na Na-Na!

You think you could run up deficits!

Family Shopping

(a rhyming poem)

With the hours spent waiting for my wife,
I could've added two more years to my life.

Politics Ain’t Beanbag

Caroline Kennedy’s on-again, off-again, on-again, off-again quest for Hillary Clinton’s Senate seat ended with a whimper as she finally gave up, you know, and reacquired her married name, you know, Schlossberg. There is lots of speculation as to why Governor Paterson left the daughter of Camelot slowly swing in the wind for so long and then, assumedly, told Caroline that she wasn’t going to be the anointed. Now, the obvious question is, why?

May I suggest that Caroline’s early endorsement of Barack Obama (along with her uncle, Ted) and her serving as co-chairman of the Obama’s Vice President selection committee … both together made her mega-toxic to Hillary and Bill Clinton. And this Pleasantville daring-duo are not used to losing their political skirmishes. Therefore, I can easily imagine that the Clinton’s famed opposition research team finally found some real dirt on Caroline and consequently flushed her into political purgatory.

Now, despite what the Clintons may have found out, I don’t believe that she was as scummy as most politicians we are exposed to these days (Ted Stevens, William Jefferson, Charlie Rangel). So, in a strange way, I’m sorry to see her savaged by her political enemies the way she is … kind of like that doey-eyed baby impala having its throat ripped out by a cheetah.

Chicken Little

Jim Hansen, a leading NASA scientist has been crying wolf about Global Warming since 1988. His latest warning (see The Sky Is Falling) is particularly shrill and doomsday predicting. Now Herr Hensen might be right in his dire warnings but, then again, the tone of his rhetoric suggests to me a bit of panic in that there has been a decided public opinion shift toward the doubters … perhaps due to the spate of very cold weather we have had lately. (Also, perhaps because global temperatures have not increased since 1999 and, many scientists say, are falling back to levels more normal to the last century.) I chose to believe that it is cognitive dissonance that is driving the Chicken Littles of the Global Warming Cult to up the heat-level of their public pronouncements … from the sanctity of their Gore-created-and-protected Mount Olympus.

If we could only package all this bluster and shoot it off into space, we surely could delay the possibility of real global warming for another century.

More Compound Interest

In the previous piece on Interest Rate Swaps (IRSs) it is stated that these derivatives now total some $400 trillion. This is a huge number, yes, but there is some amelioration to this figure. First, this number represents the principle debt that is being hedged and not the interest on this principle. Therefore, the amount of interest that is being hedged must be something like 5 or 6% of this figure, or about $20-$24 trillion -- still a very big number, but not as large as all credit default swaps (including the Collateralized Debt Obligations, CDOs, arising from the sub-prime mortgage industry) that may total $60 trillion.

Also, in most cases (except for runaway inflation … a very important exception) the amount of exposure to the guarantor or guarantee against interest rate swings would be smaller than this number, say just one or two percentage points (100 to 200 basis points). This suggests that the total risk exposure from IRSs is smaller still, say around $4-$8 trillion, far from a trivial number. But this may have also effectively doubled (to roughly $10 trillion) the total counter-party risks that financial institutions found themselves burdened with last summer when the LIBOR swung up one and one-half basis points at the same time as Credit Default Swaps on sub-prime mortgages were being called in … if (and a big “if”) we assume just the first level of CDS exposure. One more salient point, unlike CDSs, the IRSs are zero-sum. In other words for each financial loser, there should be, without defaults, a financial winner. Who they are and were I haven’t a clue.

But still the $400 trillion of IRS’s principal does show the degree to which the world financial markets had been over-leveraged … perhaps encouraged to do so by the false sense of security that IRS derivatives seemed to provide them. This is a good reason why this whole notion of interest rate swing hedging should be rethought in the future. It might be OK if just a few do it, but not OK if everyone is doing it.

Compound Interest

I have written in the past about Credit Default Swaps (CDSs), a form of financial derivatives that appear to be a major reason for our recent banking and insurance industry crises (see here). Basically CDSs are unregulated insurance policies naively written by many companies without sufficient reserves to cover any subsequent claims. When, due to the sub-prime mortgage crisis, many of these “policies” came due and there was not enough money at the guarantors to pay the guarantees off. A rough estimate is that there are now almost $4 trillion of defaulting sub-prime mortgages but something over $50 trillion of CDSs written against them. In other words, CDSs had become a huge financial industry Lotto game.

Now I am learning about another financial derivative that may be even more onerous – Interest Rate Swaps (IRSs) … again, unregulated and seemingly out of control. IRSs are a form of financial barter that allows institutions to hedge their monetary return from variable-rate interest-bearing securities by exchanging this interest for a “less-risky” fixed-rate cash-flow stream. The unsettling statistic is that these derivatives now total some $400 trillion … yes, $400 trillion. This pile of monetary obligations far exceeds the Gross National Product of the world … and probably also is approaching total world assets ... estimated to total around one quadrillion dollars. To better understand this mare’s nest of financial legerdemain see Interest Rate Swaps and also PIMCO Explanation. And, if you do understand IRSs, please explain them to me (and to many of the Risk Assessment Officers at the companies that are now receiving TARP funds.)

When you read these explanations of IRSs you will see that the key variable interest rate that is the touchstone of many of the various IRS options is the LIBOR (London InterBank Offering Rate). This is the rate at which banks around the world are willing to lend to one another … a little like the U.S.’s Federal Reserve Discount Rate. Now, if hundreds of trillions of dollars of interest rate bets are keying off this one number, then small perturbations in this number can whipsaw IRS guarantors and guarantees dramatically. And if, as it happened, the LIBOR rose dramatically when the world-wide financial crisis hit last summer (see LIBOR Rate Chart) , then the shock to the IRS markets must have been mind-numbing. Yes, the LIBOR rate swung dramatically back at the time of Clinton’s last year in office. But, the amount of IRSs in force then were lower by at least 80%.

Now, to let my paranoia surface a little, why wouldn’t someone or some country that wanted to damage our world’s financial markets do their best to perturb the LIBOR rate? This seems to me to be an Achilles’ heel of the financial derivative markets and may be a reason to reformulate IRSs entirely.

The More Things Change …

Obama’s Clintonista pre-election advisors – Franklin Raines, Jim Johnson

Obama’s Clintonista transition team members -- John Podesta, Sandy Burgler, William Perry, Madeleine Albright, Robert Rubin, Betty Currie

New Clintonista Obama administration members -- Rahm Emanuel, Eric Holder, Greg Craig, Tim Geithner, Bill Richardson (oops), Larry Summers, Hillary Clinton, Susan Rice, Carol Browner, Shaun Donovan, Leon Pinetta, Elena Kagan, David W. Ogden, Thomas J. Perrelli, Dawn E. Johnsen, Nancy Killefer, Julius Genachowski

Can we (you) get (y)our money back?

Are We Mad?

Here are a translation of some of the cell phone conversations between the Mumbai terrorists and their Pakistani handlers: Praise Allah. I don’t know where they came from (NSA?) but surely, were they intercepted inside the United States, they would be deemed by many as an invasion of the Constitutional rights of the callers. This by itself would cause paroxysms of consternation at the ACLU to the point where what actually went on there would be drowned in the din of protest. Sigh …

Thumper Stumper

Barack Obambi proposed today an economic stimulus program which will cost taxpayers (our children and grandchildren mainly) at least $800 billion and create (or save) 3 million jobs. This works out to $267,000 per job created (or saved). Now I don’t currently have a full-time job and, considering what is happening to our economy, I think that I need to get one. But musing further on this issue, I think I would rather have the cash.

Skin Flint

Times are really tough … and I mean tough. It seems that the pornography industry is suffering because of the softening in our economy. Because the porn industry is barely making it, Larry Flint, publisher of a series of skin magazines (“Hustler”, “Barely Legal”) is traveling to Washington along with Joe Francis (“Girls Gone Wild”) to beseech Congress to pony up $5 billion of aid to revitalize their industry. Flynt is quoted as saying, "It's time for Congress to rejuvenate the sexual appetite of America." Why not? Banks are screwing us. Wall Street is screwing us. The auto industry is screwing us. Barney Frank and Chris Dodd are screwing us. Why not Larry Flint and Joe Francis? We could call it the "Public Money for Private Parts" bill.

Thought for the New Year

And see here.

And here.

And here.

And especially here.

Dark Ages

Rush Limbaugh offered something like the following perceptive observation on Friday last:

Scientists have become alarmed at the accelerating decrease in sunlight available each day in the Northern Hemisphere. Since the end of this past June, the minutes of daylight have steadily shrunk to the point of near panic. All U.N. scientists now agree that, if this decrease continues apace, our 24-hour day will be totally dark by the end of this coming June … not one glimmer of luminescence. And what is worse – it seems that this lost light has been leaking down below the equator. While we here would be forced to live without natural illumination, those in Africa, South America, and Australia would enjoy twenty-four hours of sunlight … obviously Nature’s reward for these peoples’ limited use of the world’s natural resources.

So everyone in the Northern Hemisphere is besought to stop driving their cars, heating their homes, and using electricity for any purpose. And moreover, everyone is also asked to purchase daylight offsets from the George Hamilton Daylight Offset Foundation. Each $1,000 donated will allow us to regain one more second of daylight over the next six months. Please, please, please don’t let George Hamilton fade to pastiness. Thank you all!

Bush Derangement Syndrome

President Bush was interviewed on television today … of which snippets were replayed on MSNBC tonight. I happened to catch this exchange:
Questioner: “What are you going to do about the auto industry bailout?”
Pres. Bush: “You’re assuming I’ve made up my mind.”
Switch to Keith [D]Oberman back in the MSNBC studio: “No, that’s assuming Bush has a mind!”

Also today I received the following link from my wife’s cousin in France: http://www.sockandawe.com/
At this site you get to throw shoes at President Bush. Over 44 million shoe hits have occurred (from around the world). Now, isn’t that special?

Both these instances above indicate a galloping lack of civility toward the United States and our current leadership. They display a degree of rabid disrespect and even hatred that I have seldom seen exhibited … except perhaps for our mortal enemies in time of war. This “Bush Derangement Syndrome” is freely displayed by TV commentators/talking heads, in many published venues, by most reporters, and very often in “polite” conversation. It seems that everyone is now vying with John Stewart of the “Daily Report” to out-snide him. As bad as Jimmy Carter was, I don’t recall him ever being excoriated like President Bush. We have now a wood-chipper main stream media which likes to pulverize public figures just for the sport of it. And, if Barack Obama thinks he will be forever immune from their blood lust, then he is more naïve than perspicacious.

I Believe …

- Many powerful liberal politicians believed that everyone in America should own a home regardless of their means or morals. (Some now believe that they were wrong ... how quaint.)
- They coerced, with regulatory and oversight threats, banks and other institutions into offering such “sub-prime” mortgages.
- Banks and these other institutions discovered that they could package these mortgages (collateralized debt obligations -- CDOs) and sell them to, among others, Fannie Mae and Freddie Mac.
- Since the origination fees from this pass-through sub-prime mortgage process was very profitable to these banks and other institutions, they became willing co-conspirators.
- Because of the implicit government guarantees of these packaged mortgages, credit rating agencies placed unrealistic high ratings on them and on the institutions that held them.
- Fannie and Freddie were overly-populated with liberal ex-pols who were more than willing to participate in this fraud since their annual compensation was based on the volume of said transactions. The growth in the portfolios of sub-prime mortgage packages at Freddie and Fannie was exponential.
- All efforts to monitor and/or regulate this sub-prime process at Fannie and Freddie were squelched by accusations of racism from liberals in Congress
- At the start, the ease with which these sub-prime mortgages were off-loaded caused banks and others (such as Countrywide) to drop any semblance of checking the credit-worthiness of their mortgage borrowers. The writing of mortgages without suitable documentation became rife. Home-buyers couldn’t believe their luck and many went hog wild.
- The volume of these sub-prime mortgages grew to such an extent that many remained at their originators because, for no other reason, the origination fees were so profitable.
- Concurrent with this, because of accounting frauds at Enron and others, accounting rules were changed by the SEC to force companies to “mark to market” all balance sheet assets
- Also concurrent with this, a financial instrument appeared called a Credit Default Swap (CDS) which allowed institutions to insure most any financial asset against credit default
- Banks and other institutions sold CDS’s to protect themselves against losses that would occur if the collateralized mortgages on their books went into default. But they went much further; they (including many insurance companies and foreign institutions) bought and sold CDS’s far beyond the face value of the underlying assets (as much as ten times their value). CDS’s became, effectively, a gigantic, unregulated casino.
- When sub-prime mortgages began to default in droves, asset packages including these mortgages became difficult to value (or mark to market). Many of these asset packages (even though producing a steady, albeit somewhat reduced, income flow) were forced to be drastically devalued on balance sheets.
- Because of the sheer size of the CDS market ($60 trillion?) and its lack of regulation, many of the insurance policies on these defaulting sub-prime mortgage packages could not be honored which put the buyers and sellers of these CDS’s in great financial jeopardy (eg. AIG). This then began the world-wide freezing up of capital markets.
- Because of the capital-ratio requirements at banks, many of such institutions were forced to raise more capital in a capital market that was rapidly freezing up. It was then either insolvency or a government bailout.
- Enter Henry Paulson and the U.S. taxpayer.

Car Czar

My wife made a beautiful suggestion this AM regarding the automaker's bailout. Make Mitt Romney the "Car Czar" ... the one who oversees the bailout money and the reorganization plans of the automakers (since it now seems inevitable that they will get a ton of taxpayer money). He has all the qualifications and then some ... and seems to have the time. Nah!!! He would probably insist on the unions biting the bullet and it would also set him up as a political rival to the Democratic juggernaut. We can't have that!! It will probably be some doofus like Robert Kennedy Jr. Sigh ...

It’s not what you say …

it’s the way that you say it. A comparison was drawn recently between Barack Obama’s interview on 60 Minutes … his talking in dulcet tones and in complete sentences … and George Bush’s grating, fractured English. However, it seems to me that we all need to pay more attention to what people say and not to the melodious nature of their rhetoric. For instance, shortly after his election to the most powerful political position in the world, I would still like to know if Obama:
- Is going to raise taxes on the wealthy and lower taxes on 95% of Americans?
- Is going to withdraw American troops from Iraq before the most recent Iraq-set target date of the end of 2011?
- Is going to zero-out unproductive and non-effective government agencies?
- Is going to reach across the aisle to Republicans or have Rahm Emanuel take out his Uzi?
- Is going to bail out unconditionally the big three auto makers or make the United Auto Workers first bite the bullet?
- Is going to install almost a trillion dollar stimulus package or pull in the U.S.’s fiscal horns?
- Is going to create a civilian defense force bigger than our military?
- Is going to renegotiate NAFTA and back away from other free-trade agreements?
- Is going to eliminate workers’s secret union ballot?
- And many more.
Somehow, after cringing through one of GWB’s leaden presentations, still I always knew where he stood. Not so the case with our current President elect.

Speak Up Joe Biden

Golly gee, I sure hope that the Indian government didn't torture those terrorists that they captured last night in Mumbai. That would surely be wrong.

The Fox in the Henhouse

Let's see:
Barney Frank is set to fix the sub-prime mortgage mess.
Robert Rubin is pulling the strings to unravel the credit default swap debacle.

What's next?
Osama Bin Laden will be asked to remedy Islamic terrorism?