Tuesday, February 27, 2007

The Stock Market Heard Around the World

After China's 9% decline in their stock market, stock markets all over the world fell too. The US stock market indexes fell over 3%. (It fell over 4% at one point, but this was blamed on a computer glitch.) Several people reported being locked out from trading.

Barry Ritholtz wrote back on December 27, 2006, that we had -- at that time -- in the stock market's history.

The long-awaited correction has now happened. What remains to be seen is whether there will be a further correction or whether this has wrung the excess out of the market.

Monday, February 26, 2007

Inflation Conundrum

John Stucco in a post over at Minyanville says that real inflation is running at between 12-13% based on reconstructing the M3 numbers (which the Federal Reserve has stopped reporting again). All this inflation is being run up by extension of credit.

The U.S. saw a total of $4 trillion in new credit created last year. All that money you see out there has been borrowed.

Normally all that money would go to bid up consumer prices. It is not because of the U.S.' sickness.

All that free money (first fostered by Japan's ridiculously low interest rates, a rate that was just raised yesterday because it is clearly causing malinvestment) combined with globalization has created overcapacity. The latest capacity numbers show it now falling from already below average numbers. The U.S. has too much production in the world so producers can't increase prices. The U.S. has too many houses so the prices are beginning to fall. The U.S. has too much commercial real estate so REIT stocks are showing severe weakness. The U.S. made too many risky loans so the subprime mortgage market is falling apart. The U.S. has too many strip malls so the countryside is getting ugly.

All that borrowed money is now going into speculation because there is nothing left to build. It is going into stock prices, gold, commodities as the last flushes before the market says "we can't take anymore debt." Total U.S. debt is 3.5 times GDP, a level never seen before. The second highest level was 2.9 times in 1929. Total U.S. financial debt (excludes consumer debt) is 2.1 times GDP, the highest ever and up from one time in 1987.

The timing is uncertain, but logic tells us that this must end.

There is a lot of anecdotal evidence that middle America is starting to wake up to the fact that they are getting too deep in debt. Blogs are starting to pop up wherein people are trying to blog their way to financial health by exposing their consumption and use of debt to the world. (Let me just say for the record that I think this is a bad idea. If you need to get your spending under control, buy a financial software program as in Microsoft Money or Quicken. Most consumers only need the cheap $30 version that you can buy anywhere.)

Now, as for there not being anything left to build, I can tell you that there is a lot of new building going up near where I live that I think was needed. They are taking old run-down shopping areas and creating new shops. I can only speak for my local area, but I am glad they are doing it. Now if they don't get more money into consumer's hands, it may not help much. That may be a legitimate fear. Based purely on my observations, the new shops seem to be rather busy. So, at least for this area, they seem to be good investments -- at least for now.

Sunday, February 25, 2007

Movie Review: Amazing Grace

Today I went and saw the new movie Amazing Grace. The movie tells the story of William Wilberforce, who, after his conversion to Christianity, became an advocate for the abolition of slavery. He also became an advocate for greater access to health care, prison reform and laws prohibiting cruelty to animals.

The movie has received pretty good reviews by critics and I concur. The movie moved along at a steady pace -- dramatizing the legislative and general political considerations involved in winning over converts to the cause. The movie goes from his young days as a member of Parliament (MP) to when abolition of slavery was finally passed by the British Parliament. The movie shows it being passed while he is still a member, but the link for him above indicates that it didn't pass until after his death. However, dramatization aside, this is a movie worth watching.

The struggle for justice continues to this day. Coinciding with the release of the movie, a group called The Amazing Change has formed to fight against modern forms of slavery: from child soldiers to forced prostitution.

To their issues I would like to add one more: debt slavery. The United Nations has recognized debt bondage (aka debt peonage in the US) as a modern form of slavery.

From Answers.com:

Peonage is a system where laborers are bound in servitude until their debts are paid in full. Those bound by such a system are known, in the US, as peons. Employers may extend credit [to] laborers to buy from employer-owned stores at inflated prices. This method is a variation of the truck system (or company store system), in which workers are exploited by agreeing to work for an insufficient amounts of goods and/or services. In these circumstances, peonage is a form of unfree labor. Such systems have existed in many places at many times throughout history.

Historical examples

* In Colonial America, some settlers used indentured service to obtain passage or an initial settlement, then continued working independently after completing their bonded labor.

* The American South - Such a system was often used in the southern United States after the American Civil War where African-American and poor white farmers, known as sharecroppers, were often extended credit to purchase seed and supplies from the owner of the land they farmed and pay the owner in a share of the crop.

* In Peru a peonage system existed from the 1500s until land reform in the 1950s. One estate in Peru that existed from the late 1500s until it ended had up to 1,700 peons employed and had a jail. Peons were expected to work a minimum of three days a week for their landlord and more if necessary to complete assigned work. Workers were paid a symbolic 2 cents per year. Workers were unable to travel outside of their assigned lands without permission and were not allowed to organize any independent community activity.

Modern views

According to Anti-Slavery International, "A person enters debt bondage when their labor is demanded as a means of repayment of a loan, or of money given in advance. Usually, people are tricked or trapped into working for no pay or very little pay (in return for such a loan), in conditions which violate their human rights. Invariably, the value of the work done by a bonded laborer is greater that the original sum of money borrowed or advanced."

At international law

Debt bondage has been defined by the United Nations as a form of "modern day slavery" and is prohibited by international law. It persists nonetheless especially in developing nations, which have few mechanisms for credit security or bankruptcy, and where fewer people hold formal title to land or possessions. According to some economists, for example Hernando de Soto, this is a major barrier to development in those countries - entrepreneurs do not dare take risks and cannot get credit because they hold no collateral and may burden families for generations to come.

Where children are forced to work because of debt bondage of the family, this is considered not only child labor, but a worst form of child labor in terms of the Worst Forms of Child Labour Convention, 1999 of the International Labour Organization.

Despite the UN prohibition, Anti-Slavery International estimates that "between 10 and 20 million people are being subjected to debt bondage today."

In the bolded paragraph above, doesn't that sound a lot like where we are headed with our new bankruptcy laws?

Income Disparity Grows Widest in 30 Years

Yahoo News is reporting that income disparity is at a three-decade high in America.

WASHINGTON (AFP) - The gulf between rich and poor in the United States is yawning wider than ever, and the number of extremely impoverished is at a three-decade high, a report out Saturday found.

Based on the latest available US census data from 2005, the McClatchy Newspapers analysis found that almost 16 million Americans live in "deep or severe poverty" defined as a family of four with two children earning less than 9,903 dollars -- one half the federal poverty line figure.

For individuals the "deep poverty" threshold was an income under 5,080 dollars a year.

"The McClatchy analysis found that the number of severely poor Americans grew by 26 percent from 2000 to 2005," the US newspaper chain reported.

The surge in poverty comes alongside an unusual economic expansion.

"Worker productivity has increased dramatically since the brief recession of 2001, but wages and job growth have lagged behind. At the same time, the share of national income going to corporate profits has dwarfed the amount going to wages and salaries," the study found.

"That helps explain why the median household income for working-age families, adjusted for inflation, has fallen for five straight years.

And more families are in need of filing bankruptcy than ever before, but the BAPCPA "reform" passed by the Republicans when they gained complete power in Congress and the Presidency has severely limited that option. Bankruptcy was one of the few safety valves that our country had. The BAPCPA law sought to weld it shut.

It is just more evidence that we are shifting more of the burdens of cost of society onto those who are least able to afford it. And other stories show how we provide government welfare to those who need it the least.

Sunday Music: Happy

I just got a copy of Wow 2007,

and the song Happy by Ayiesha Woods was the bonus track on the first CD. I don't know what it is about the Wow annual CDs; the bonus songs are always the best ones. As far as I am concerned, this could be a hit on mainstream Top 40 radio. The song plays when you visit Ayiesha Woods' website. She also has a MySpace page which has her upcoming concert dates.

Last year, she toured with Toby Mac from DC Talk.

Given how catchy this pop song is, I am surprised it hasn't received more airplay on K-Love radio. Actually, I would think it would have gotten more Top 40 radio attention had it not been on a Christian CD.

If Ayiesha Woods puts out more songs like this in the future, she will be one to watch.

One of the Dominoes

This song comes from Mark Heard's Stop the Dominoes album, which was one of his earliest. It was one of the first albums I ever bought.

One Of the Dominoes

Heaven help a timid child in a trendy tide
He really doesn't know
That his heart's being taken for a ride
Doing what the world lays down
As a steadfast rule
And changing when the world says to change
Like a steadfast fool

Heaven heaven help me
I'm one of the dominoes
Chain reaction coming
Blow by blow

Heaven help a heedless man in a time of need
He can't feel the knife In his back
Or see the blood that he bleeds
Walking 'round blind
To the harm that's being done
He thinks it's alright
'Cause it's happening to everyone

Heaven heaven help me
I'm one of the dominoes
Chain reaction coming
Blow by blow

Heaven help a seeker of truth
In an age of lies
Gonna make himself believe
That the truth is whatever he buys
Gonna buy what the world says to buy
In a monotone
Gonna cry when the whole world cries
And the truth is known

Heaven heaven help me
I'm one of the dominoes
Chain reaction coming
Blow by blow

Written by Mark Heard
© 1981 Bug and Bear Music (ASCAP)

Heaven help a seeker of truth
In an age of lies

Heaven heaven help me; I'm one of the dominoes.

Saturday, February 24, 2007

Why Market-Based Health Care Doesn't Work

Blogger Bonddad over at DailyKos gives three situations where consumers are harmed when insurance companies maximize their profits:

First, let's remember we are trying to provide a solution to people's health problems. This is a unique market. We're not trying to build a product more efficiently with better parts. We're focusing on peoples lives. A delayed decision or a cost-cutting treatment may prevent someone from having a high quality of life or actually lead to someone's premature death.

Let's flesh out the above statement. The insured (I) has a policy with health insurance company (X). I has a complicated medical situation and seeks treatment. I sees 2 doctors. One prescribes a cheaper treatment that is less effective while the other prescribes a more expensive treatment that is more effective. X says it will only pay for the cheaper treatment. I starts and completes the this treatment and it is ineffective.

At this point, notice what has happened.

1.) Time has elapsed and I is not better. In fact, I could be in worse condition because the ineffective treatment has now allowed the medical problem to become worse.

2.) I's quality of life has decreased because he is still sick. Personal and family level stress have increased because I is not at 100%. I is probably less productive at work because he is still sick.

3.) However, X has saved money. Because the company is profit oriented the company has increased shareholder value which is a prime motivator in a market based system. In other words, the company has operated exactly how it should in a market-based economy.

Let's look at another situation. I has a life-long medical condition that can be treated but only with an expensive prescription drug regimen. If I doesn't have medical insurance the entire expense may be too much for him to pay. This may lead to a premature death. If I does have insurance, it may be cheaper for the company to continually deny coverage instead of paying the claim.

Here's the end result.

1.) Time has elapsed and I is not better. In fact, I could be in worse condition because the ineffective treatment has now allowed the medical problem to become worse.

2.) I's quality of life has decreased because he is still sick. Personal and family level stress have increased because I is not at 100%. I is probably less productive at work because he is still sick.

3.) However, X has saved money. Because the company is profit oriented the company has increased shareholder value which is a prime motivator in a market based system. In other words, the company has operated exactly how it should in a market-based economy.

Let's look at a situation from the company's perspective. They want to increase profit to increase shareholder value. This means they want to pay as little in claims as possible. That means the only insurance risk they want is a low risk -- a policy holder who will not make a claim. To increase profits, X will deny coverage to anyone with a potential medical problem.

Here's the end result.

1.) Time has elapsed and I is not better. In fact, I could be in worse condition because the ineffective treatment has now allowed the medical problem to become worse.

2.) I's quality of life has decreased because he is still sick. Personal and family level stress have increased because I is not at 100%. I is probably less productive at work because he is still sick.

3.) However, X has saved money. Because the company is profit oriented the company has increased shareholder value which is a prime motivator in a market based system. In other words, the company has operated exactly how it should in a market-based economy.

The above situation clearly illustrates the divided loyalties of profit-motivated health insurance companies. On one hand, they have customers who must be given services they paid for. However, the profit motive prevents the company from actually delivering service to its customers. And by denying service, the insureds are no better.

Bonddad's examples show how for-profit health insurance and health care reduce the quality of care given, reduces productivity and ultimately interferes with the best interest of the patient. Which do we value more: people or profits?

Friday, February 23, 2007

Are Credit Card Penalty Fees Unconstitutional?

Kevin LoVecchio over at Warren Reports writes a post entitled The Problem with Credit Card Penalities writes a compelling argument why credit card late fees, overlimit fees, universal default clauses and mandatory arbitration clauses are unconstitutional. To wit:

Contracts aren't punitive, so penalty clauses in contracts aren't enforceable. Liquidated damages are valid, which essentially means that parties can contract in advance for a reasonable amount to be paid should a party breach a contract, but liquidated damages are meant to cover the costs associated with the breach rather than serve as a penalty. Terms which call for a penalty above and beyond such an amount, however, are invalid.

Credit card contracts are loaded with penalty clauses, either on the face of the text or as put into operation by the lenders. For example, how many readers are familiar with a situation where a credit lender raises your interest rate for a late payment? You also get slapped with a late fee. It's arguable whether the fee is really a reasonable amount of liquidated damages given the fact that the credit card companies won't really have significant costs associated with your paying a day or two late. But regardless, assuming the fee does serve as a liquidated damages amount, how can the additional step -- the hiking of your APR -- be anything other than a penalty once the liquidated damages amount is covered? Under any argument, either the fee or the interest rate hike must serve as a penalty clause.

Universal default clauses are no different. These clauses basically allow the credit lender to raise your rates for any credit-based mistake, such as a late payment, to other lenders. In other words, if you pay your phone bill late Citibank can raise your credit card APR from 12% to a default rate of 29%. Does Citibank have a tangible cost associated with your late phone bill? Did you breach your contract such that this clause would serve as liquidated damages? Clearly this is a penalty.

As one more example, I'll point to the simple "change terms at will" clause in contracts. I've written numerous times about the problems associated with these provisions being included in a contract, but there's one further problem to note. Any time a credit lender uses this clause to negatively change the terms of your contract in response to your actions -- whether that means raising your APR, hiking your fees, stripping away your rewards program or promotional incentives, or anything else -- they are employing a penalty clause. This is clear simply by the fact that the contract itself specifies particular fees (liquidated damages) for all such situations. The additional step of altering your contract can be nothing more than the imposition of a penalty, and is therefore invalid.

It's time to make credit card companies play by the rules, whether those be constitutional restrictions or the basic principles of contract law -- rules that govern everyone who doesn't have a multi-billion dollar lobbyist arm to push the rules out of the way.

Mr. LoVecchio's post points to a scholarly paper written by Seana Shiffrin.

Now, if only we can find someone to litigate it. Oh wait. I guess there is already. Kevin posted a comment later which said:

So, what to do? First, I'll note that we are pursuing litigation options to really drive these points home. This is something we take seriously, and we don't mean to just toss out blog posts in a vacuum. Efforts are underway to battle these issues out using the resources, training and experience of an extraordinary group of attorneys.

Second, I'll suggest a new line of thought that might sound a bit absurd at first glance: the First Amendment. Remember that oft-overlooked portion of the amendment known as the Petition Clause? It guarantees us the right to petition the government for a redress of grievances. The Supreme Court has held that the Petition Clause applies to all branches of the government -- including the judiciary. I would argue that state laws which enforce (a) mandatory arbitration argeements in contracts, and (b) class action bans, effectively deny citizens the right of access to the judiciary to sound complaints such as those we've raised here. As you might imagine, this is a line of thought that has never been explored (or at least isn't found in) current First Amendment jurisprudence, but maybe it's time to make that push.

I hope they can make some headway. They have a lot of hurdles to overcome before they succeed.

The New Debt Bondage

A new story in the New York Times brings light to the exploitation of young workers in magazine subscription sales.

In interviews over seven months, more than 50 current and former members from almost as many crews painted a similar picture of life on the road.

With striking uniformity, they told of violence, drug use, indebtedness and cheating of customers during their cross-country travels, often in unsafe vehicles and with drivers who lacked proper licenses.

Hat Tip to Josh Marshall of Talking Points Memo who says that it is a "a mix of Fight Club, Urban Cowboy and pretty much any other dark, sex, violence and drug drenched movie or cultural phenomenon you can think of."

From the story:

In Collinsville, Ill., Daniel Burrus scrolled through digital photographs of bloodied faces as he described how, on a crew he helped manage for several years, men who missed their sales quota were forced to fight each other.

In Flagstaff, Ariz., Isaac James sat with his wife and newborn daughter as he told how he and others on his mag crew — as they are typically called — stole checkbooks, jewelry, medicine-cabinet drugs and even shoes from customers’ homes.

When I first started practicing law, I received a call from a distressed father whose son was severely injured in an auto accident from an unsafe van crash in Oklahoma. Here is one from 1999. I don't think it is the same one as the one I got called about, but the facts are very similar. The one I was called about would have been in 1995 or 1996 (I think), which is when I first started practicing.

I remember when I investigated the corporation that was involved, I found that the owners (I am pretty sure it was the same ones in the story from 1999) were creating a new corporation almost every week -- or at least month -- to hide who the real owners were. There were corporations within corporations and addresses were changed frequently. I didn't have the capital to handle such a complex case, so I didn't get the chance to work on it. But I am glad some attention is being brought to the problem now.

This is just a small part of the big picture of what is wrong with our business values today.

A Government Cover-Up? Say It Isn't So!

Josh Marshall of Talking Points Memo has a couple of posts speculating about the Carol Lam firing out in San Diego. Mr. Marshall writes:

A number of TPM Readers have written in suggesting that former US Attorney Carol Lam's firing was at the heart of the US Attorney purge. The others were meant as cover, to deflect attention from what looked like an attempt to shutdown her investigation and make her appear to be just one of several firees. I think that's quite possible actually. And there are people involved in the case who think the same thing.

Carol Lam is the U.S. Attorney who prosecuted Congressman Randy "Duke" Cunningham for corruption. Just as she was set to bring indictments against a CIA officer and Pentagon contractor -- and right when the investigation was heating up -- she was removed from her position.

Official corruption and a cover-up in Washington? Say it isn't so!

Don't Confuse Savings With Wealth

From The Mess That Greenspan Made Blog:

Everyone just stop it! If, in some twisted sort of way, redefining "wealth" or "net worth" as "savings" makes you feel better about the world and your own lot in life, then go ahead and do it - just do it in private.

Whatever gets you through the day.

But, please, stop sharing your rationalizations with the rest of us who prefer to continue believing that "savings" (as either a verb or a noun) is not something that can come and go as quickly as a subprime lender.

Call it old fashioned if you want, but, just leave the word "savings" alone. Please.

Since the personal saving rate turned negative in 2005 and then plunged even further into the red last year, there has been a steady stream of commentary and research papers intent on blurring the lines between "wealth", "net worth", and "saving(s)" - sort of like a bad doctor anxious to ease the immediate discomfort of an ailment with one pill or another while the underlying illness remains untreated.

Wealth is the value of your assets.

Net worth is assets minus liabilities.

Saving is income less expenditures or money put aside.

Stop confusing them.

Mr. Iacono may be willing to give them the benefit of the doubt, but I am not convinced that those who post "confused" information are doing it unknowingly. I have a suspicion that said "confusion" is actually disinformation.

I fear that the comment by "Python" may be the correct one. Python said:

Apollo, I see it as: "sacrifice the sheep to hasten the inevitable." The PTB are straight out of "1984". Their newspeak is designed to confuse and to ensure conformity. God help anyone who is not exercising critical thinking skills in every aspect of their life. The sheeple are about to get slaughtered.

(I think "PTB" stands for Powers That Be.)

Read the rest of the linked article and educate yourself so you can be wary of financial traps.

New Look

I figured out how to make a three-column blog. It wasn't quite the layout that I wanted, but it will have to do for now. What I like about the new layout is that I am able to separate out the advertising from the links and other related info. The advertising is on the left, the content in the middle and the links and widgets are to the right. Eventually, now that I figured out how to do three-column, I will be adding other features.

Let me know how you like the new layout.

Thursday, February 22, 2007

Another Stock Market Record...for Margin Debt Levels

Here's a data point to make you stop and think: As of today, more people have borrowed money from their their brokers to buy stocks than ever before.

That number was reached this past month, with Margin debt hitting an all-time high, passing even the days of the tech/telecom/internet boom.

According to the NYSE, margin totaled $285.61 billion in January, up from $275.38 billion in December and passing the previous peak of $278.53 billion.

As Barry says:

Fascinating stuff. None of this stuff matters, until it does. Than it matters a whole lot.

I previously asked Is this what is keeping the market up? It provided a link to the previous all-time high records of margin debt.

Barry Ritholtz gives 4 other things to consider:

• The VIX, commonly known as the “fear index,” is hovering around 10, a low point, suggesting a lot of carefree folks out there these days. This level is often a turning point, a calm before the storm, so to speak.

• The Treasury yield curve inverted months ago, suggesting a recession was on the way. It hasn’t happened.

• The Dow industrials, transports and utilities all closed at new highs on the same day last week — something that became a routine occurrence in just two years, 1929 and 1986, both preludes to big market falloffs.

• The current rally is now the third longest since 1900 without a 10% correction.

Click on the title to read the rest of Barry's post at the Big Picture.

Wednesday, February 21, 2007

The New Faces of Foreclosure

I just got back from a day at court. After court was over, I went to see another attorney about some work he needed done. He had just returned from a seminar where a local judge recounted how many foreclosures that are starting to take place locally. The real shocking news was that about half of the foreclosures were homes owned by attorneys. Apparently the market is worse than I previously thought.

Now, the judge's account is merely anecdotal, but the fact that she is noticing a significant number of attorneys who are losing their homes in foreclosure is, to me, substantial.

Based on what I am generally hearing at the courthouse, and from this lawyer in particular, incomes are down for attorneys. After the change in the bankruptcy law, mine sure is. I went from doing 3 or 4 consumer bankruptcies a week to 4 all of last year. Because of the nature of the law practice, it is not so easy to "retool" your practice if your area of concentration or specialty is curtailed due to legislation. I am not the only attorney to face a fractured market. Oklahoma severely restricted worker's compensation. (I don't really practice this area, but my understanding is that they eliminated all compensation for "soft tissue" injuries.) Oklahoma also has limits on punitive and exemplary damages. I have previously written on the attempted restriction on medical malpractice lawsuits.

The net result of all these "reforms" is that it has led to lower incomes for attorneys. So it is no wonder that attorneys are feeling the same crunch as the rest of middle America. In some ways, I'll admit that there may be some good in it. Lawyers are still the educated class. They will be able to articulate why the conservative attempts to limit access to the courts is a bad idea.

In the past, lawyers argued for more access to the courts because "jaw-jaw" is better than "war-war." That is to say: it is better that people be able to fight out their differences in the courtroom than riot on the streets with weapons and violence. Less access to the courts mean less avenues for responsible and peaceful resolutions of real or perceived injustices.

I have actually considered (and am still considering) getting out of the practice of law completely. But getting out of the law practice is not so easy. Once on a case, it can be a tar baby to get out of. (On a side note, although I touch on racial issues in this post, I am not using "tar baby" in the sense of a racial epithet. I would use another term -- if I could think of one -- but I cannot find any references to other terms that have the same meaning.)

Yesterday, Barry Ritholtz of the Big Picture blog published a series of colored maps on the risk of foreclosures around the country. He got the maps from a site called Neighboroo. Based on this map, the far west side of Oklahoma City is at the least risk for foreclosures, while the rest of the metropolitan area are at a greater risk.

Based on what I know about Oklahoma City, it appears there is some correlation to African-American areas having a greater risk of foreclosures than other areas. There has been some hints in the past that African-Americans have been steered into more risky loans than other racial groups, so this could be an indication of it as well.

I have more of a tendency to believe that it has a greater correlation to poorer and less-educated populations being taken advantage of rather than on a strictly racial basis. But I think that because African-Americans have less economic power as a group that it shows up as a racial correlation.

Here is a page that explains the terms "Collateral Risk" and "Foreclosure Rate."

How Poverty Kills and Maims

If anyone doubts that the scourge of poverty exacerbates problems, one only need watch Nicholas Kristof's reports at the New York Times.

The real sad part about his reports is that economic empowerment could alleviate -- or even solve -- many of these problems.

New Supreme Court Case Limits Punitive Damages

WASHINGTON - The Supreme Court threw out a $79.5 million award that a jury had ordered a cigarette maker to pay to a smoker's widow, a ruling that could bode well for other businesses seeking stricter limits on big-dollar verdicts.

The 5-4 decision Tuesday was a victory for Altria Group Inc.'s Philip Morris USA, which contested an Oregon Supreme Court decision upholding the jury's verdict.

Yet the decision did not address a key argument made by Philip Morris and its supporters across a wide range of businesses - that the size of the award was unconstitutionally large. They had hoped the court would limit the amount that can be awarded in punitive damage cases.

Instead, Justice Stephen Breyer wrote in his majority opinion that the award to Mayola Williams could not stand because a jury may punish a defendant only for the harm done to the person who is suing, not to others whose cases were not before it.

"To permit punishment for injuring a nonparty victim would add a near standardless dimension to the punitive damages question," Breyer said.

What concerns me about this principle is that in the financial torts area, it is possible for a business to "overcharge" for it's services or product and then make out like bandits after paying the damages that are limited to the actual plaintiffs. For example: credit card company charges customers an $85 annual fee when they only should be charging $30.

Most people never notice the charge and pay it -- not knowing that they have been overcharged.

Others notice and call to complain, but the $85 charge puts them over their credit limit and they are charged an overlimit fee of $49. When they don't pay, they are charged a $49 late fee. When they cancel the card, the fees run their balance up to thousands of dollars. Credit card company sues customer. By the time the case goes to an overcrowded small claims court, the judge is not even the slightest bit interested in the defendant customer's complaint of how they were overcharged. Credit card company gets a judgment for the entire amount and collects.

Of those that complain, some will make the minimum payment, but the $85 charge doesn't get corrected for several months "due to computer glitches." In the meantime, the credit card company makes money in interest "on the float." That is, by the time the error gets corrected, they have been able to collect 18-30% APR interest (with an APY -- annual percentage yield -- even greater than that) on the $85 for several months which, in the aggregate, amounts to millions of dollars.

Of those that complain and pay their bill in full, the credit card company makes money "on the float" because they have had the use of the aggregate $85 from all those customers and invest it in short term securities and they have the use of $55 (the overcharged $85 - $30 legitimately owed) of the customer's money to invest in the market or short-term securities. The use of the money nets millions of dollars in interest gained from the use of that money.

Assume for the sake of argument that a lawsuit ensues. If damages are limited to actual plaintiffs, how can the credit card company be discouraged from repeating the practice?

If you think this example is just a fantasy, see this. The Supreme Court needs to recognize that if you put too many limits on punitive damages, you get abuses that are profitable from the other direction.

I think the Supreme Court may have forgotten the old principle in the law: no one should be allowed to benefit from his own tortious or criminal conduct. That is why punitive damages could be assessed at the level they were. Oftentimes, plaintiffs are able to show that the defendant has profited off of the suffering they have inflicted on others. Limiting punitive damages in this regard can lead to perverse results where tortfeasors (or even criminals) can learn to benefit from their wrongful acts.

Monday, February 19, 2007

Allstate's Good Hands' Boxing Gloves

From the Sun Herald:

Allstate's use of McKinsey also has led to litigation and even a book by Santa Fe, N.M., attorney David Berardinelli, called "From Good Hands to Boxing Gloves." Berardinelli told Lexington (Ky.) Herald-Leader reporter Brandon Ortiz in July 2006 that Allstate forced policyholders to accept 65 cents on the dollar as payment or face protracted litigation.

The Allstate-McKinsey connection made its way into Money magazine on Feb. 13 after an investigative report on CNN about Allstate's treatment of policyholders.

Tales of policyholder mistreatment by insurance companies occasionally make headlines, then fade. But the pattern hasn't changed, Marr said. In shaping up their claims operations with the help of consultants, insurers have learned that outcome-oriented investigations improve the bottom line.

He represents 70 Oklahomans whose homes were subjected to the most severe category of tornado, an F5, on May 3, 1999.

No matter what the catastrophe, he said in one interview, "the objective is the same: You go find an expert that's bought and paid for and you go get them to give you a report that justifies denial of the claim. Period.

"They represented that these engineers came up here to do an objective and fair assessment of these homes. And they got quite the opposite. Not one report agrees with the policyholder on the nature and extent of the damage. They all sided with State Farm."

A jury found in May that State Farm "intentionally and with malice breached its duty to deal fairly and act in good faith" with policyholders through the use of Haag Engineering Co. and independent adjusting firm E.A. Renfroe.

The same companies worked for State Farm after Katrina. Haag and Renfroe deny any bias, but State Farm did suspend its business with Haag after the Oklahoma verdict.

That was too late for Coast policyholders. One of the same Haag employees who testified for State Farm during the Oklahoma trial, damage and failure consultant Timothy P. Marshall, completed a Hurricane Katrina Damage Survey about a month after the storm.

Sunday, February 18, 2007

Sunday Video: The Buggles -- Video Killed the Radio Star

The music video of this song was the first one to be played on MTV when it first started.

You know. Back when MTV had music videos.

I would put up the music video, but I suspect it will just get pulled again. A comment over at YouTube's site indicates that Viacom is planning on creating their own YouTube-type video site. That is fine with me. I just hope they will let us link to them in Blogger.

Sunday Video: Pop Musik by M (Robin Scott)

Here is a one-hit wonder that is still catchy. YouTube has apparently taken down the music video for this song and I can't find it anywhere. So this is all that remains. Doesn't matter, he is lip synching this song anyway (and not as good as in the music video).

Friday, February 16, 2007

Response to JM's Exemption Suggestions

Reader JM asked me to comment on some suggested changes that he proposed in Oklahoma exemptions in light on the BAPCPA changes in bankruptcy law. Here are his suggestions that he posted on a Okie 100 website and my responses.

1. Abolish wage garnishments — Many states don’t have them (including Texas) and they get by just fine.

I would rather exempt the first, say, $2000 per month of wages and salary from creditors, and index it for inflation. This insures that a person has enough income to pay for some kind of housing, food, insurance, health care, utilities and the like. Currently, Oklahoma law allows a worker to exempt the first 75% of wages, but if someone is making only $1000 per month (full-time minimum wage, roughly) then a $250 garnishment (plus $5 fee) has more impact than 25% from someone making $10,000 per month.

2. Double the exemption amounts for tools of the trade and farm equipment.

This was implemented last year, if I remember correctly. The exemption was $5K, now it is $10K, if I remember it correctly. Interesting story: my law school classmate, Clark Jolley, who is now a State Senator, became a bankruptcy lawyer after law school. He is a hardcore conservative on every issue except on the bankruptcy deform. It has been my observation in life that people tend to become politically progressive in areas where they have life experiences. The only exception to that is when you become a victim of crime, then you have a tendency to become "lock 'em up and throw away the key" on your own case. (See my post Lex Taliones.) Revenge may be a powerful motivator, but it can be just as destructive.

3. Add an exemption for inventory for small businesses.

There is no practical way to implement this. Furthermore, it is too open to fraud and abuse by less-than-honorable people. The current ability to create a business as a corporation (within the time limits of bankruptcy law) is plenty of protection.

4. Increase the urban homestead exemption to 10 acres (to protect small truck farms that are located in OKC & Tulsa city limits).

Oklahoma law currently exempts 1 acre of land within city limits. The one area where people are punished is when they own manufactured homes. Zoning requirements mandate 5 acres for manufactured homes (at least the last time I checked). I think it would be better to reduce the zoning requirement to 1 acre so as not to waste so much space for a manufactured home.

See Oklahoma's exemptions here.

Actually, Oklahoma is considered to have the 3rd best exemptions in the country behind Texas and Florida. No one ever moved here to file bankruptcy under the previous law because our property values aren't great compared to south Florida or certain parts of Texas. The new law effectively did away with that kind of forum shopping because it changes the length of time required to reside in a state to take advantage of its exemptions. So if you think that Oklahoma's exemptions are weak, you ought to see other states' exemptions!

Paul Krugman on the United Health Lawsuit

Is the health insurance business a racket? Yes, literally — or so say two New York hospitals, which have filed a racketeering lawsuit against UnitedHealth Group and several of its affiliates.

I don’t know how the case will turn out. But whatever happens in court, the lawsuit illustrates perfectly the dysfunctional nature of our health insurance system, a system in which resources that could have been used to pay for medical care are instead wasted in a zero-sum struggle over who ends up with the bill.

So it’s an arms race between insurers, who deploy software and manpower trying to find claims they can reject, and doctors and hospitals, who deploy their own forces in an effort to outsmart or challenge the insurers. And the cost of this arms race ends up being borne by the public, in the form of higher health care prices and higher insurance premiums.

Like denial management, however, marketing and underwriting cost a lot of money. McKinsey & Company, the consulting firm, recently released an important report dissecting the reasons America spends so much more on health care than other wealthy nations. One major factor is that we spend $98 billion a year in excess administrative costs, with more than half of the total accounted for by marketing and underwriting — costs that don’t exist in single-payer systems.

And this is just part of the story. McKinsey’s estimate of excess administrative costs counts only the costs of insurers. It doesn’t, as the report concedes, include other “important consequences of the multipayor system,” like the extra costs imposed on providers. The sums doctors pay to denial management specialists are just one example.


Krugman concludes:

But the larger problem isn’t the behavior of any individual company. It’s the ugly incentives provided by a system in which giving care is punished, while denying it is rewarded.

Thursday, February 15, 2007

Barry Ritholtz: How Do You Define Your Reality?

Barry looks at the market with the perspectives of a Trader, as a Strategist/Economist, and as an Asset Manager. What he sees puts him at unease.

Click on the title for his post.

United Health Group Sued for Racketeering

United Health Group, its United HealthCare and Oxford subsidiaries and several United and Oxford executives, including former United CEO William Maguire, are accused of violating the U.S. Racketeer Influenced and Corrupt Organizations Act in a law suit filed Tuesday in the U.S. District Court, Eastern District of New York, by Jamaica Hospital Medical Center and Flushing Hospital Medical Center.

The hospitals, in their RICO suit, accuse United Health Group and United HealthCare and other subsidiaries of implementing a “rogue business plan” on a “national level” that, for more than three years, “has contributed to UHG’s profits, which, in turn, have been utilized in attempts to justify outlandish compensation to Maguire and to enhance the value of illegally backdated options for UHG stock” which were given to Maguire, other UHG senior executives and to managers of its business units.

The suit also accuses UHG and Oxford of fraud, breach of contract and unjust enrichment. “The defendants’ fraudulent business plan relied on their size to overwhelm the New York State Department of Health and numerous other regulatory agencies across the United States, using the claimed ‘complexity’ of their computer systems to excuse and camouflage the purpose of their repeated violations of law, while at the same time committing thousands of ‘little frauds’ against their members, health care consumers and their service providers,” said Michael Brown, attorney for Jamaica Hospital and Flushing Hospital.

The Attorney General of the State of New York, in a recent “consent decree,” concluded that United Health Care of New York had committed both “fraudulent business practices” and “deceptive business practices” in providing inaccurate information about the network status of approximately 141 participating providers. These acts either improperly shift to the health insurer’s members financial obligations properly belonging to the insurer or to deprive service providers of payment for services properly rendered.


Here is the story of United Health fining doctors for allowing patients to go to other lab facilities other than LabCorp.

Hat Tip to nyceve of DailyKos. You can see more about this story with commentary and discussion wherein she discusses Murder by Spreadsheet.

That Sinking Feeling

An article in BusinessWeek yesterday indicates that the fallout from subprime loan defaults could have implications for the overall economy.

The gathering storm clouds over the nation's housing and lending markets grow darker each day. Fueling the latest concerns is further fallout in the subprime mortgage loan market, where lenders offer financing to less-creditworthy buyers.

Global banking giant HSBC Holdings (HBC), the third largest subprime lender in the U.S., disclosed on Feb. 7 that full-year 2006 impairment charges at its U.S. mortgage unit would be 20% higher than the $8.8 billion or so that analysts had been projecting. On Feb. 8, New Century Financial (NEW), the nation's second largest lender to subprime borrowers, said it expected to report a loss for the fourth quarter, and that it would have to restate its financial results for the first three quarters of 2006 (see BusinessWeek.com, 2/9/07, "Subprime Time Bomb"). Another subprime lender, ResMAE, filed for bankruptcy on Feb. 13, bringing the total failures to 21 since December, according to www.ml-implode.com, reports Action Economics.

Wrong-footed by the rapid deterioration in subprime loans, primarily those originated in 2006, lenders such as New Century have had to buy back a growing portion of these loans, which they had sold to investors and other financial institutions, because of faster-than-expected defaults. HSBC particularly identified second-lien or "piggyback" loans (loans made above a first mortgage, generally to help buyers come up with downpayments) in its mortgage book as those that could be hurt by higher interest rates as adjustable-rate mortgages (ARMs) reset over the next few years. HSBC acknowledged that some borrowers face fewer refinancing options amid slowing growth in home prices, and limited if any appreciation in their home equity.

Wednesday, February 14, 2007

Create National Health Care, Reduce Crime

Recently I represented a criminal defendant and did a plea agreement for him. He had been charged with obtaining prescription drugs using a forged prescription. When the judge asked him why he did it, he said it was because his teeth hurt and he couldn't afford the $100 doctor bill to get a valid prescription and he could not afford the dental appointment, either. His story seemed credible (tone of voice, body language, etc) and the judge apparently believed it because he agreed to some terms in the plea agreement that he normally wouldn't have.

Now, in many cases, people who obtain pain medication do so simply because they are drug addicts or are self-medicating for mental problems that have otherwise gone untreated. But this did not appear to be one of those cases.

Because his condition was not imminently life-threatening, he was not entitled to medical treatment as a matter of law. While his could not be excused, it made me wonder once again how many social problems that we could alleviate -- even solve -- if only people had the right to a doctor and proper medical treatment. People in this situation don't know where to turn. I'm not sure I would know where to turn.

This appears to be yet another example of why we need a national health care system. The defendant in this case now has a criminal record, with all of the life choice limitations that it imposes. This is a travesty. When will this madness end?

Tuesday, February 13, 2007

Treasure of the Broken Land

Treasure of the Broken Land is the last song on the High Noon and Satellite Sky CDs. Some footage from Mark's last concert (where he had his first heart attack) appears in the video.

Here are the lyrics courtesy of the Mark Heard Lyrics Project.

Treasure Of The Broken Land

I see you now and then in dreams
Your voice sounds just like it used to
I know you better than I knew you then
All I can say is I love you

I thought our days were commonplace
Thought they would number in millions
Now there's only the aftertaste
Of circumstance that can't pass this way again

Treasure of the broken land
Parched earth, give up your captive ones
Waiting wind of Gabriel
Blow soon upon the hollow bones

I saw the city at its tortured worst
And you were outside the walls there
You were relieved of a lifelong thirst
I was dry at the fountain

I knew that you could see my shame
But you were eyeless and sparing
I awoke when you called my name
I felt the curtain tearing

Treasure of the broken land
Parched earth give up your captive ones
Waiting wind of Gabriel
Blow soon upon the hollow bones

I can melt the clock hands down
But only in my memory
Nobody gets the second chance to be the friend they meant to be

I see you now and then in dreams
Your voice sounds just like it used to
I believe I will hear it again
God how I love you

Treasure of the broken land
Parched earth give up your captive ones
Waiting wind of Gabriel
Blow soon upon the hollow bones

Written by Mark Heard © 1992 Ideola Music/ASCAP

Is It Any Wonder?

This is one of only two music videos made by Mark Heard himself. Again, this is not among his most popular songs. The only place that this video appears, to the best of my knowledge, is on the Strong Hand of Love VHS tape. At the end of the song, a clip of the song Orphans of God is playing from the CD Satellite Sky (from which the name of this blog is derived).

In a few hours, I anticipate having one of Mark Heard's hit songs Treasure of the Broken Land available for your viewing pleasure.

Insurance Companies Have Upper Hand in Lawsuits

A few days ago, Anderson Cooper in his 360° blog covered the tactics of insurance companies when presented with claims.

Put yourself in the driver's seat of this accident. You are heading down the street when a truck comes out of nowhere and slams into the right side of your car. The damage to the vehicle is obvious: dents across the passenger door.

You are hurt too, thought it's not obvious how much: a slight cut above your eye, an ache in the neck.

Your doctor says your spine was injured, you have soft muscle tears, and the pain in your neck mostly likely is whiplash.

It's going to need therapy, she says, and some time off work to heal. And in the end it's going to cost you $15,000 in medical payments and another $10,000 in lost wages, because you took so much time off work.

But when you send the $25,000 bill to the insurance company of the person who hit you, the insurance company says it's only going to pay you $15,000. You can take it or leave it.

What do you do?

That's what producer Kathleen Johnston and I have been investigating for the last 18 months -- accidents most of us don't pay attention to, the fender-benders we pass by without even slowing down. In part, we looked at how Allstate handled the claim of one woman, Roxanne Martinez. Her car was hit in Santa Fe, New Mexico. Her medical bills and lost wages added up to $25,000.

Allstate offered $15,000 to settle. Roxanne Martinez didn't know what to do.

CNN had a parallel report on hardball insurance tactics in what we in the law practice call "low impact" auto accident cases.

Oklahoma County has one of the very lowest average jury awards anywhere in the country. I can't find the report on the internet, but I have seen it. Insurance companies have the upper hand in any litigation, for the following reasons:

1. The plaintiff has the burden of proof to prove first, liability; then, assuming he has proved liability, damages. This is especially difficult in "he said-she said" traffic light cases, where there are usually no witnesses (because people rarely stop).

2. The Rules of Evidence prohibit mentioning that a defendant has insurance at all (to prevent unfair prejudice).

3. Even when you show clear liability the jury may decide that you didn't really get hurt. Juries will often react like the ones in the CNN story referenced above:

Taylor was not as fortunate when her case went to trial.

The Indiana nurse was rear-ended by a State Farm employee driving a State Farm car. Damage to her car was minimal but she suffered herniated disc and muscle tears.

Taylor racked up medical bills and lost wages amounting to about $15,000. The company offered her $2,000.

"I was just very insulted," she said.

She sued, but three years later a jury came back with a judgment for her of only $1,500.

The jury didn't believe she could be hurt in an accident in which the vehicle had barely a dent.

Three jurors told CNN photos of the two cars involved in the accident -- enlarged and prominently displayed by the defense -- played a huge role in their decision.

And one said they assumed Taylor had already been compensated by the insurance company and was just trying to get more money.

It is not unusual in these kind of cases for a jury to think just like this. Many times, we will try to use mediation before going to trial, but my experience has not been that fruitful.

4. Even if you get hit cleanly in the rear, the defendant will often simply claim that you pulled in front of him and slammed on the brakes. (I saw this defense in a high-impact rear-ender case where the defendant was driving a dump truck full of sand. The case, as far as I know, is still pending. It has been in litigation for several years.)

5. The long period of time that it takes to get to a jury trial often lends itself to the delay tactics talked about in the Anderson Cooper blog entry. Oftentimes, the plaintiff, when poor, gets sued by the medical providers for the medical bills. The stress of having to deal with collection calls, lawsuits, loss of job due to the collection calls at work and other stresses pressure individual plaintiffs to settle for less than what they probably deserve.

There is good and bad on both sides, but right now in our history, insurance companies have the upper hand in the public square. They have managed to convince the majority of the public that virtually every lawsuit is just a scam. From the CNN report referenced above:

The cases, CNN found, illustrate a carefully developed strategy to make the victims look like they are trying to defraud the insurers.

But documents CNN obtained indicate profit, not fraud, is the reason companies decided to play hardball in small accidents.

For Allstate and State Farm, according to documents obtained by CNN, the strategy was developed in the mid-1990s with the assistance of consulting giant McKinsey & Co.

Looking for a way to boost profits, McKinsey focused on soft-tissue injuries incurred in minor crashes.

While the McKinsey documents -- numbered in the thousands -- are under seal in courts around the country, CNN saw several of them during a court hearing in Lexington, Kentucky.

Playing off Allstate's signature slogan, one document recommends the insurer put boxing gloves on its "good hands" for those who insist on going to court.

The strategy, according to former Allstate and State Farm employee Jim Mathis, relies on the three D's -- denying a claim, delaying settlement of the claim and defending against the claim in court.

"The profits are good, and as long as the community, the public allows this to occur, the insurance companies will get richer and people ... will not get a fair and reasonable settlement," Mathis said.

I remember talking with the named lawyer for a very successful and large insurance defense firm this last year. He admitted in private that the injury awards -- even in clear-cut cases -- was far too small. But, he said, the problem is that the juries just don't give out high-enough awards in Oklahoma. "Oklahoma is just too conservative of a state when it comes to personal injury awards."

One other thing, it is important to understand the legal distinction between your own insurance company -- which has a legal duty of good faith to you -- and an opposing insurance company, which does not have a duty of good faith to you. Your own insurance company must deal with you fairly. That doesn't mean they will, but you have more remedies in the law if they don't. The stories above don't make the distinction very well.

The answer is to somehow convince the public (the pool where juries come from) that even small impact auto accidents can lead to injuries, and that a plaintiff with any injury -- no matter how small -- is entitled to compensation from the tortfeasor.

Monday, February 12, 2007

Elizabeth Warren Interview on Medical Debt, Credit Cards and the New Bankruptcy Law

You can listen to the interview here.

NYT Editorial: Passing the Buck on Health Care

The New York Times in an editorial today criticized the President Bush's budget to reduce money for Medicare and Medicaid:

President Bush’s new budget would extend the administration’s warped priorities deep into the realm of federally supported health care programs. The administration long ago sacrificed any meaningful domestic agenda to finance tax cuts for the wealthy and its reckless war in Iraq. The White House’s reckless determination to make the tax cuts permanent is now driving it to slash domestic spending in health and other vital programs.

Instead of trying to address the underlying problems of escalating health care costs, Mr. Bush’s strategy is to cut services or shift more of the bill to states, health care providers and individuals.


The real outrage is that the administration has not proposed comparable reductions in the large overpayments — roughly 12 percent more per patient — made to private managed care plans that enroll Medicare beneficiaries. The budget would also phase out Medicare bad-debt payments, forcing hospitals to swallow beneficiaries’ unpaid bills.

If I understand this correctly, President Bush has proposed that less money go directly to hospitals to pay for care already provided, but increased to insurance companies who do not provide care.

Hmm, let's see: give more money to insurance companies, less to actual medical providers and require individuals -- who are already struggling -- to pick up more of the tab. All this to finance his tax cuts for rich people. It's a continuation of the ""Starve the Beast" policy. But the only thing that the policy will starve is the middle class who will have to pick up the tab caring for their increasingly elderly parents.

Sunday, February 11, 2007

Sunday Music: Newsboys

What Mark Heard's music is to the serious, intellectual side of Christian music, the Newsboys are the mainstream, popular, syruppy, fun and danceable side of Christian entertainment.

The Newsboys music tends to be very traditional in that their music is very blatant in preaching a Christian message. The Newsboys' songs are usually celebratory in nature and it is no wonder that their concerts are so popular in the U.S. I have to admit, I am a fan, too. I have seen them in concert three times: twice at Winter Jam (which was a very shortened version of their concert) and once at Frontier City Amusement Park (which I think may be closed permanently now), which was a full two-hour concert.

You can watch their videos online at the Newsboys Television site. It requires a high-speed internet connection, but, other than that, you can play it in any format (RealPlayer, Quicktime or Windows Media). The main videos to watch (in terms of popularity of their songs) are: Shine, Entertaining Angels, Million Pieces and He Reigns.

The Newsboys will apparently be in Oklahoma City on April 21, 2007, at the Cox Convention Center, at 7pm.

Saturday, February 10, 2007

Health Care Glutton: the New "Welfare Queen"

Judith Warner of the New York Times writes that the Department of Labor is asking for information on how workers are abusing the Family and Medical Leave Act (FMLA).

In response to pressure from business groups, the Department of Labor has put out an official request for information on the Family and Medical Leave Act to find out if, as critics contend, the law is too generous and places an undue burden on employers who are required to comply with it.

Many of you may already be rolling your eyes. The United States, after all, ranks as one of the world’s most backward nations when it comes to family and medical leave benefits. A recent study from the McGill University Institute for Health and Social Policy in Montreal found that of 173 countries surveyed, 168 guaranteed women paid maternity leave. The United States – along with Lesotho, Liberia, Papua New Guinea and Swaziland – was not one of them. Eighty-six million working Americans have no paid sick days to use to care for ill children, and nearly one in two workers – 59 million in all – has no paid sick leave at all.

(sarcasm) Yeah, those are the countries that I want the U.S. to be compared to: poor third world countries that can't -- or won't -- provide basic health care for one of the most fundamental attributes of being a woman: motherhood. (/sarcasm) And then they have the audacity to claim that the FMLA is too generous.

(rant) A personal anecdote: when my father was dying of cancer, I had moved my law office into the house so that I could be with him full-time. I had to reduce my law practice to take care of him. Fortunately, my secretary was a home health aide and was able to work half the day assisting him. The only time I was able to take off for "me" time was when my sister or brother was able to take unpaid time off from their jobs under the FMLA. I wish the conservatives would spare us the canard that any benefits that accrue to workers will only be abused. (/rant)

Ms. Warner goes on to write:

What’s interesting to me here is that it clearly isn’t politically acceptable anymore to attack family and medical leave by bashing working mothers. Our current villain du jour is the health care glutton, who consumes doctor’s visits like so many donuts, sloughing off the burdens of his waste onto the hard-working and the health-care abstemious.

The health care glutton is the new millennium’s version of Ronald Reagan’s welfare queen, whose appetite for spawning children and sucking down public funds knew no limit, and whose specter ultimately led our country to accept a situation in which low-income mothers were forced back to work without child care or medical benefits for their families.

If the past is any guide, the appearance of the health care glutton may portend similarly bad news for those lucky American workers who are entitled to sick days and family leave, or who enjoy adequate health insurance benefits. If we let it happen.

Oh, and the name of the group that is pushing to reduce or even eliminate the FMLA? The National Coalition to Protect Family Leave. Conservative groups have become masters of creating Orwellian names for their organizations. This one is no different.

Hat Tip to Credit Slips for this find.

Social Security as a National Pension System

Charles Smith of the Of Two Minds Blog posted part of an email that I sent him concerning my idea of converting Social Security into a national pension system:

Social Security is / was meant to be a supplement to a pension. I think that Social Security could be converted into a pension system if we ended the Social Security and Medicare taxes limitation to the first $120K of income. Then we could fund a full pension and national health care system. The payroll taxes could be reduced for all workers since more would be contributing. The payroll tax is one which wage earners pay. I have never had anyone explain to me why the wage earner under $120K should bear so much of the financial tax burden.

Higher income workers could get a guaranteed pension up to a certain amount set by law, based on their pay during their lifetimes. To make the conservatives happy, you could even allow a percentage (based on age) to be invested in a index fund. As a worker gets older less and less should be invested in stocks and more toward bonds. Management fees could be set by statute and reduced due to the economy of scale.

I want to put my idea into context.

First, Charles has been blogging about the threat that many municipalities, with their pension obligations, will file Chapter 9 bankruptcy. Chapter 9 is very rare. Most of the time, Chapter 11 is used. Here is an article discussing Municipality bankruptcy with the traditional Chapter 11 (large debtor or corporate reorganization).

The reason I am "thinking outside the box" and proposing to convert Social Security into a full pension system is that I am not sure we can afford to leave so many workers without access to retirement and health care. Conservatives have argued and still argue that it is (should be) the worker's own responsibility to save and invest for retirement. I believe this fails on three fronts:

1. The workers were contractually promised a pension so that they did not have to worry about it;

2. Much of the lack of pensions were based on fraudulently taking money from the workers (Enron, et al) or investing in highly speculative and excessively risky investments, much of which was based on fraud as well (ex: appraisal fraud in housing appreciation, which led to controllers suggesting investing pension funds in REITs for higher returns, but as housing depreciates...). I should also note that some of the pension investments in credit swaps and derivatives are above my head, but writers such as Mike Shedlock indicate they may be a bad deal for cities in many cases;

3. Even many educated workers do not understand financial instruments and can easily be duped by financial advisors who will sell them financial "plans" which are not in their best interest. I have seen this in my own life. I would rather not elaborate on this here, but suffice it to say that I have seen elderly people get put into highly risky investments that garnered high fees for the financial advisor, but was completely unwarranted for the elderly person who needed safe returns. This same problem holds true for non-elderly people as well.

The conservatives that I have argued with would say "caveat emptor" (let the buyer beware). In the past, we moved away from such a rule as it was discovered that there were many forms of dishonesty that were sprung on an unsuspecting buyer/consumer. As a result, the courts started putting more responsibility on the seller due to the fact that the seller was in a better position to understand what the consumer was getting into and prevent any harm (example: product liability). The problem with financial torts/crimes is that by the time the tort/fraud is discovered, it is too late to correct the problem because the wrongdoer is long gone or the statute of limitations to sue/prosecute has run.

It is for this reason that I feel that all workers should be guaranteed a pension that is suitable to live out their twilight years in relative comfort. There is enough pain and suffering in this world from disease and brittle bones in our old age. After someone has contributed a lifetime of productivity they deserve some security in their financial planning.

The same holds true for health care; while a large percentage of medical costs are spent on the elderly, I don't see this as "unfair." We will all grow old. We will all die. The least we can do is alleviate some of the suffering that comes before the end of our lives.

I think the best way to deal with these two problems is to put it in the hands of someone who does not have a financial conflict of interest with the worker or patient. Another advantage to a national pension system is that there would be less risk for the worker. A national pension system would be backed by the Full Faith and Credit of the U.S. Government.

I have come to this conclusion after seeing so many people cheated out of their hard-earned money. I just don't think private financial institutions and corporations can be trusted enough with the worker's pension funds to allow the private system to continue. Even where the wrongdoing is discovered and where there is a legal theory to recover, many times (Enron, et al) the assets have been destroyed, cannot be found (in overseas banks), or can be found, but are in overseas banks and in trusts which are sometimes beyond the power of the U.S. courts to force back.

The theory has always been that the worker receives a safer guarantee and that the owner of the business has a greater return due to his putting his capital at risk. But now all of the risk is being thrust upon the worker while the corporate owner continues to receive the return. A national pension and health care system would return some balance to the free market.


I should add that corporate taxes should be levied to cover what the contribution would have been to any worker's pension plan. That way, even if the corporation goes bankrupt or just simply goes out of business, then the worker would still be able to collect his retirement. This would also allow a worker who changes jobs or careers to take his retirement with him (the principle of portability).

The Pelosi Plane Chimera

The other day I posted a rant in response to one of my regular readers and commenters, Teri Pittman, when she was trying to make the point that the Democrats have been just as callous to the needs of the middle class as the Republicans in many ways. I can't totally disagree. However, her comment deserved a more reasoned response. CNN did a follow-up on the story which showed that Pelosi didn't even ask for the plane: the Sergeant at Arms for the House of Representatives did. But John Murtha is planning hearings on the matter of congressional use of military planes.

Meanwhile, Rep. John Murtha, D-Pennsylvania, chairman of the House Defense Appropriations Subcommittee, said on Thursday that he's planning hearings this spring on executive and congressional travel on military aircraft.

Murtha said he's requested from the Defense Department records on travel and logistics from the past two years. He asked the Defense Department to hand those over within a month.

Friday, February 09, 2007

Krugman on Edwards' Health Care Proposal

From the editorial:

Many other people are uninsured because they simply can’t afford the cost. So the Edwards plan, again like other proposals, offers financial aid to help lower-income families buy insurance. To pay for this aid, he proposes rolling back tax cuts for households with incomes over $200,000 a year.

Finally, some people try to save money by going without coverage, so if they get sick they end up in emergency rooms at public expense. Like other plans, the Edwards plan would “require all American residents to get insurance,” and would require that all employers either provide insurance to their workers or pay a percentage of their payrolls into a government fund used to buy insurance.

But Mr. Edwards goes two steps further.

People who don’t get insurance from their employers wouldn’t have to deal individually with insurance companies: they’d purchase insurance through “Health Markets”: government-run bodies negotiating with insurance companies on the public’s behalf. People would, in effect, be buying insurance from the government, with only the business of paying medical bills — not the function of granting insurance in the first place — outsourced to private insurers.

Why is this such a good idea? As the Edwards press release points out, marketing and underwriting — the process of screening out high-risk clients — are responsible for two-thirds of insurance companies’ overhead. With insurers selling to government-run Health Markets, not directly to individuals, most of these expenses should go away, making insurance considerably cheaper.

For the rest of the editorial, click on the title.

Home Sick: How Medical Debt Undermines Housing Security

A report by The Access Project shows that medical debt affects people's ability to acquire or maintain housing. Among the key findings:

The survey shows important connections between medical debt and significant financial hardships:

Housing problems were common

More than one-quarter of respondents with debt said housing problems resulted from the debt. Problems included:

• the inability to qualify for a mortgage
• the inability to make rent or mortgage payments
• being turned down from renting a home
• being forced to move to less expensive housing.

In addition, some people said they have been evicted or were now homeless because of medical debt.

These findings establish medical debt as a barrier to important elements of economic advancement, namely asset development and housing security. Respondents in all racial and ethnic categories, as well as all income categories captured in the survey, were substantially affected.

Bad credit was a frequent result of medical debt

Our survey found that most people did not know whether their medical debt was on their credit reports, but of those who did know, three in five said it had damaged their credit. Damaged credit affects people's ability to secure a mortgage or to rent an apartment. It may also be a barrier to employment and auto or home insurance, and has other repercussions as well. The effects of damaged credit linger: a delinquent account can remain on a credit report for seven years.

To see the full report, click on the headline above.

Bankruptcy Report on PBS

Friday, February 9, the PBS show NOW will air a report about the United States bankruptcy laws. Here is their press release announcing the show:


Friday, February 9 at 8:30 p.m. on PBS (check local listings)

The average American owes an estimated $9,200 on credit cards. And while recent changes to bankruptcy laws may put a smile on the face of some banks and credit card companies, they're making it hard for average Americans to dig themselves out of debt. On February 9 at 8:30 pm (check local listings), NOW returns to Waterbury, Connecticut, where it first began reporting about these laws, and revisits a family struggling with their bankruptcy.

The NOW website at www.PBS.org/now will provide additional coverage starting Friday morning, February 9, including useful advice on keeping your personal finances in check, and a look at high-profile death row exonerations.

If you miss the broadcast, it will be available for free in its entirety starting Monday at http://www.pbs.org/now.

Drano for the Heart

There is a new experimental drug being tried in Oklahoma:


Researchers in Oklahoma and elsewhere are infusing heart disease patients with a high-density lipoprotein, which they say reverses years of heart disease damage. Researchers essentially inject patients with a laboratory-produced version of HDL, or "good cholesterol," which naturally removes fatty buildups from arteries. Thirty-six patients received doses of HDL, and 11 patients served as a control group in the study. Researchers say they got the idea for their study after observing a group of people who lived in Limone sul Garde -- a town in northern Italy. These Italians had exceptionally low levels of good cholesterol but lived long, healthy lives. Researchers later discovered that these people had a mutation in their HDL gene that caused good cholesterol to break down quickly even though their bodies made plenty of it. Researchers then turned this same strain of HDL into an experimental drug and gave it to heart disease patients.

For more information, contact:

Kathy Stillwell
Research Coordinator
Southwest Cardiology Associates, Inc.
(405) 644-5120

For the complete story, click on the headline.

Thursday, February 08, 2007

Bankruptcies Down After BAPCPA

While at the bankruptcy court today, I talked with a colleague about the number of bankruptcies being filed. She told me that she went through the records and found that bankruptcies are down 80% since before the law changed in the Western District of Oklahoma.

So far, all bankruptcies that I have filed have qualified for Chapter 7 (liquidation) or Chapter 13 (reorganization). However, I feel that it is just a matter of time before we run into a case that will fit into neither section. If that happens, I think that would raise the issue of the BAPCPA's constitutionality. All laws must pass the Rational Basis Test ("RBT") in order to qualify as constitutional. Usually, this is a very easy test to pass. In order for a law to pass constitutional muster, it must at least have some rational relation to a legitimate government interest. There is also the question, if the scenario of a debtor not being eligible for wither section of the bankruptcy act happens, the issues of denial of due process and equal protection will come into play. It hasn't happened yet, and it may not happen; but the law is so roundly criticized by all attorneys, trustees and judges because of how confusing it is that it is not out of the realm of possibility that at some point someone will raise the constitutional question.

Predatory Mortgages Creating Crisis

Predatory mortgage lending, fueled by an explosion in high-cost, subprime loans, is creating a "crisis for millions of American homeowners" that requires action, Senate Banking Committee Chairman Christopher Dodd, D-Conn., said Wednesday.

Underscoring his point, Amy Womble of North Carolina told the panel how she refinanced into what she thought was a less-expensive mortgage after her husband died, only to find the monthly payments were $2,100, more than twice what she'd been told.

"I cannot afford this loan, and I'm very afraid I'm going to lose my home," Womble said, calling the house a constant for her children since their father's death.

Dodd and other lawmakers in a recent letter to regulators also expressed concern that most subprime loans are now adjustable-rate products, where monthly payments can jump 50% or more after an initial two- year period. "Subprime foreclosures threaten to displace more African-American families than (Hurricane) Katrina did, but it will be a silent and invisible storm," said Martin Eakes, CEO of the North Carolina non-profit Center for Responsible Lending.

Click the title for the rest of the story.

Comparison of National Health Care Systems at DailyKos

The link provides a good comparison of national health care systems in other Western democratic countries.

Wednesday, February 07, 2007

Medical Debt and Credit Cards

A new report shows medical debt has become a significant part of credit card debt for insured and uninsured patients alike. That trend may grow as more employers switch to high-deductible, smaller-benefit health plans.

These new plans help companies control their rising benefits costs, but they're hard on lower-income and middle-income families who can't afford all the higher out-of-pocket costs that come with them – increasing the likelihood that they'll add medical bills to their growing credit card debts, according to the Access Project and Demos, two public policy organizations.

"The other thing we found was that being insured really didn't protect you from being medically indebted," said Mark Rukavina, director of the Access Project.

Until we create a national health care system, this problem is only going to get worse.

SEC Investigating Possible Insider Trading

SEC Asks 10 Firms to Turn Over Stock-Trading Records (Update3)

By Otis Bilodeau

Feb. 6 (Bloomberg) -- The U.S. Securities and Exchange Commission requested 10 securities firms turn over stock-trading records for the last two weeks of September, opening a review of how Wall Street handles confidential information.

The examination is aimed at determining whether details about trades big enough to push a stock price up or down were leaked to other firms, Lori Richards, director of the SEC's office of compliance inspections and examinations, said today in an interview.

The review may be the first to target a specific period of time for a group of the biggest firms, and is focusing on possible insider trading at brokerages that cater to the most profitable customers, including hedge funds, Richards said. She declined to name the firms. The New York Times reported earlier today that they include Merrill Lynch & Co., Morgan Stanley, UBS AG and Deutsche Bank AG.

Hat Tip to blogger BDG123, who has a post and discussion titled Stock Pools And SEC Investigations Into Leaked Trading Data.

If true, it is more evidence that the stock market is being manipulated for the benefit of a small group of insiders. BDG is saying that it is the 1920s all over again.

Tuesday, February 06, 2007

"This Has to End Badly"

The link above is from a new web site built around a new book that is coming out that apparently describes a potential financial "doomsday scenario" taking place in the near future.

"There's too much money and they are paying too high prices and leveraging themselves too much," Rogers said. "There's going to be a gigantic shakeout when that whole mess starts coming apart. This has to end badly."

Indeed, that sounds just like what some astute observers were saying about the housing market a year-and-a-half ago, the stock market in late-1999, and the Asian markets in the summer of 1997, when most people believed otherwise.

I guess we'll have to wait and see.

I am pretty bearish myself right now, but I am not quite sure what to make of this scenario. Hat tip to Barry Ritholtz for finding it. It is being discussed at his site.

More Middle Class Squeeze

Families Feel the Pressure as Mortgage Delinquency Rates Rise

By Christian E. Weller

December 14, 2006

America’s middle class is already burdened by a trifecta of economic pressures: the labor market is slowing, household debt burdens are reaching new record highs, and interest rates have been creeping higher for most of this year. Now comes a distressing new report from the Mortgage Bankers Association, which reported yesterday that delinquencies on mortgages rose sharply in the third quarter of 2006.

Delinquency and default rates on loans and personal bankruptcy rates are still at comparatively low levels—only 4.7 percent of all loans in the third quarter—but they have been rising rapidly over the course of this year. Other measures of financial distress are also pointing one way for American families—up. With all pieces of the trifecta staying in place, rising delinquency rates on mortgages may be the beginning of a trend toward more middle class financial insecurity.

The data on bankruptcy rates also show a worrisome trend over the course of 2006. Bankruptcy rates dropped precipitously in 2006 in the wake of large filings in 2005 just before the new bankruptcy law went into effect. However, from the first quarter of 2006 to the second quarter, the annualized personal bankruptcy rate, measured as bankruptcy cases relative to the U.S. population, grew from 1.2 in 1,000 to 2.0 in 1,000—an increase of 33.7 percent. The bankruptcy rate in the third quarter stood at 2.2 in 1,000, an additional increase of 9.6 percent in that quarter alone.

Middle class families are caught between low income growth, a high debt burden, and rising interest rates—and for the moment, these ingredients are here to stay. The most recent third quarter delinquency, default, and bankruptcy figures show that the dangers to middle class economic security are not theoretical concepts. They are a harsh reality for a growing share of middle class families.

Click on the title for the rest of the article.

For a discussion on what all of this means, see Mish's Delinquency Footnote #12

Emailed False Analogy: Baseball and Taxes

I stumbled across a new blog recently called Debatable Politics. The stated purpose of this new blog is to break down political arguments into their basic components, linking them with political philosophies of the past.

Today, they posted an email that is going around the conservative circles alleging that "Democratic tax policy" (specifically, the Earned Income Tax Credit) is akin to the refund of tickets on a rained out baseball game:

50,000 people go to a baseball game, but the game was rained out. A refund was then due. The team was about to mail refunds when a group of Congressional Democrats stopped them and suggested that they send out the ticket refunds based on the Democrat National Committee's interpretation of fairness.

Originally the refunds were to be paid based on the price each person had paid for the tickets.

Unfortunately that meant most of the refund money would be going to the ticket holders that had purchased the most expensive tickets. This, according to the DNC, is considered totally unfair. A decision was then made to pay out the refunds in this manner:

People in the $10 seats will get back $15. After all, they have less money to spend on tickets to begin with. Call it an "Earned Income Ticket Credit." Persons "earn" it by having few skills, poor work habits, and low ambition, thus keeping them at entry-level wages.

People in the $25 seats will get back $25, because it "seems fair." People in the $50 seats will get back $1, because they already make a lot of money and don't need a refund. After all, if they can afford a $50 ticket, they must not be paying enough taxes.

People in the $75 luxury box seats will each have to pay an additional $25 because it's the "right thing to do."

People walking past the stadium that couldn't afford to buy a ticket for the game each will get a $10 refund, even though they didn't pay anything for the tickets.

They need the most help. Sometimes this is known as Affirmative Action.

And what about people who would have earned more to buy better tickets, but someone didn't pay them enough to buy those tickets -- even though they worked enough to afford them had they been paid like they should have been?

You can find even more here. And that is just one company!

Now, if the rich ticket holders got enough money to buy those expensive tickets because they cheated the $10 ticket holders out of their wages, it would only seem fair that those who would have been able to afford the more expensive seats should get a refund for what they could have afforded. It's a small price to pay if you consider that a baseball game is probably not the only thing they are not able to afford because they are not paid the wages the deserve.

That's not to mention the other ways in which the middle and lower classes are being exploited.

Click on the title for Debatable Politics' discussion of the topic.