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Disconsolate

Wednesday, March 25, 2009

The Norwich YMCA is closing. It’s a great loss to the Norwich community.

But I come not to grieve for the town, I come to grieve for me. For the past 20 years or so, unless I’ve been in court, I have made my way at lunchtime to the Y’s excellent swimming pool to log another mile. I would venture to say that I’ve swum more laps in that pool than anyone else. Before it opened, I would get up early in the morning to swim at what was then the Mystic Community Center, sharing a lane with as many as three other swimmers at 6:00 o’clock in the morning. At the Norwich Y I could swim at high noon; always with my own lane, often alone in the pool. Not only that, but when other people were in the pool, I was almost always far faster than them, a real shot in the ego for someone who nearly always came in dead last during a less than lackluster competitive career.

Of course the fact that the pool was so often near empty was emblematic of the problems that led to the closure. I was always mystified about the fact that so few of the folks who worked in downtown Norwich took advantage of the facilities at the Y. Come April 30th I’ll have to find some alternative to my daily swim. If I was a little older I could just throw in the towel and retire completely but that’s not a viable option at the moment, as indeed, given the state of my 401(k) it may never be.

I have quite speedily skipped the first three stages of grief, zooming right through to depression. There I’ve been stuck, at least since this morning when I first heard the news. Acceptance will come, I am sure, but right now I’m singing the blues.


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A Short Lesson in Constitutional law

Tuesday, March 24, 2009

Just before Obama’s press conference (which I thought went well) I happened to catch a snippet of Chris Matthews opining with certainty that the bill recently passed by the House, which seeks to tax those bonuses, was obviously a bill of attainder and quite obviously unconstitutional.

This, along with a related meme that the bill is an ex post facto law and unconstitutional for that reason, has been spewed by many a talking head. Both claims are laughably false.

A bill of attainder is a legislative act declaring that an individual is guilty of a crime (or merely a person that the legislature doesn’t like), which act imposes criminal sanctions on that person, i.e., imprisonment or death. The victim of a bill of attainder gets no trial. He or she just goes directly to jail or to the hangman.

An ex post facto law is a legislative act that retroactively declares a completed act to be a criminal. The person charged has the right to a trial, but the act for which they are being prosecuted was not illegal at the time. Elementary notions of fairness dictate that a person should be on notice, before they commit an act, that the act is illegal and subject to criminal sanctions.

Each of these involves criminal sanctions. The tax bill does not.

Civil statutes can be, and often are, retroactive or retrospective. Retrospective civil legislation can raise constitutional issues, but it isn’t necessarily easy to get a law knocked out just because it’s retrospective.

In any event, this legislation appears to be changing the law for the present tax year, and not previous tax years, so it doesn’t appear to qualify as retrospective. It is not unusual for changes to be made in tax laws that either increase or decease taxes for that tax year.

I myself had an unhappy experience regarding retrospective legislation. One of the first appeals I ever took involved a guy who had some retrospective liability imposed on him (or more precisely, a class of people to which he belonged). I can’t remember the precise facts anymore, but I do recall that the case law is all over the place regarding what is and what is not allowed. I lost the case, and as I recall, it wasn’t even close.

The fact that this legislation is aimed at a fairly narrow class of people is also a not uncommon thing, apparently. Normally this sort of narrowly crafted legislation is designed to grant special treatment to a very narrowly defined class, and such legislation has been upheld. It is not immediately obvious why legislation aimed at disadvantaging a narrow class of earners couldn’t be upheld.

This is not to say that there are not some constitutional questions raised by the tax bill. My guess is that the strongest might be made under the due process clause, but the case would by no means be a slam dunk. Given our corporate friendly Supreme Court, it’s not unlikely that the bonus recipients would win in that arena. But even this Supreme Court would likely refuse to rely on either the ex post facto clause or the bill of attainder clause.

In sum, there are legitimate policy reasons to oppose the bill, and there may even be some constitutional issues involved, but these blatherers who casually invoke the bill of attainder clause should really be required to do a little research. It it truly amazing how ignorant are the people who monopolize our discourse.


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A Lamb prepares for the slaughter

Monday, March 23, 2009

According to the Norwich Bulletin, at least one Republican is ready to take on Joe Courtney in 2010:

Glastonbury Republican Matthew M. Daly has declared his candidacy for the Second Congressional District, challenging two-term incumbent Democrat Joseph Courtney.

Daly said he will campaign on a platform of “bringing efficient, effective governance to Congress, restoring core values and sound economic policies.”

It would be interesting to hear about the sound economic policies he wants to restore. Would those be the policies that got us into our present mess? Or, is he hearkening back to the 19th century, back to the days of freewheeling capitalism and child labor?

Unless someone else gets into the mix quickly, Daly will be the guy. It takes the better part of two years to put together a respectable campaign against a popular incumbent. I don’t expect Daly, who was crushed by Edith Prague in a State Senate race, to put together much of a campaign, but he may be all they have.

I look forward to Daly’s candidacy. I was somewhat hampered last time around by the fact that Sean Sullivan occupies a desk at my law firm within my line of sight. It wouldn’t have done to get all full throated about someone if you know you’ll be working with them after the election. No such inhibitions will be in play this time around, though this guy sounds like such a loser there might not be much need to pay attention to the race.


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Scapegoating Dodd, take 2

Sunday, March 22, 2009

Factcheck.org has weighed in on Dodd’s responsibility, or lack thereof, for the legislative language that allowed those bonuses (or, more accurately, did not stop them).

Some Republicans are blaming Democratic Sen. Chris Dodd of Connecticut for millions in bonus payments paid by taxpayer-owned American International Group.

…

As it was passed in the Senate, the stimulus bill contained a strict prohibition on recipients of TARP funds paying “any bonus” to at least the 25 highest-paid employees – or more, at the discretion of the Secretary of the Treasury. The language is contained on page 736, and it said the Treasury Department’s regulations governing recipients of funds under the Troubled Assets Relief Program (TARP) “shall” contain:

H.R. 1, Senate version: … a prohibition on such TARP recipient paying or accruing any bonus, retention award, or incentive compensation during the period that the obligation is outstanding to at least the 25 most highly compensated employees, or such higher number as the Secretary may determine is in the public interest …

This language was authored by Dodd, who offered it as an amendment to the Senate bill on Feb. 4. He said it was aimed at quelling public anger over lavish pay for executives of bailed-out financial firms. “Many of our constituents are so angry with what they see in executive compensation, it is difficult to have a conversation about the larger questions,” he said. The amendment passed quickly on a voice vote.

As was widely reported at the time, Dodd’s language was much tougher than the White House wanted. No such language appeared in the version passed by the House. When the two versions went to a Senate-House conference to work out a final compromise, Dodd’s strict ban was rewritten. Most important, the final bill said the prohibition on bonus payments (page 404) …

H.R. 1, Final version: … shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.

In simple language, Dodd’s ban would have applied to AIG and any institution that had yet to repay TARP funds, regardless of whether existing employment contracts called for the bonuses. The bill that emerged from the House-Senate conference committee, and was signed into law by President Obama, only applies to bonus agreements made after Feb. 11.

This is yet one more demonstration that Dodd has been unfairly maligned. It does no more than repeat what was, at the time, a much publicized situation.

One interesting thing: the final language allows for valid contractually required bonuses “as such valid employment contracts are determined by the Secretary or the designee of the Secretary.” That means Geithner could still have held them up, by making a preliminary determination that they were not valid, or by, as majority shareholder, instructing his minion, Liddy, to hold off until he or his designee could investigate their validity. There seems to more than a scintilla of evidence that they were not arms length transactions.


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Half Measures

Sunday, March 22, 2009

The headlines this morning were all about Obama’s intention to rein in executive pay as part of his overall plan to impose some order on the outlaw financial markets. There isn’t much detail because at the moment there isn’t much plan, but it seems pretty clear that they’re not thinking of doing much on the compensation side besides coming up with regulations that will make some lawyers rich, who will be tasked with coming up with ways of getting around them. And get around them they will.

So long as we consider the executive pay issue a problem of matching compensation with performance, we are bound to fail to address the issue. First, because that perspective demands that the problem be addressed as the Obama folks appear to want to address it: through more or less easily circumvented regulations. Second, because that perspective ignores the fundamental issue that really needs to be addressed: the rapidly rising and illogical income inequality that is threatening to destroy the middle class, and, sooner or later, our political system. It is widely recognized that raising revenue is only a secondary purpose of the estate tax. The primary purpose is to prevent the creation of an aristocracy of unearned wealth in this country. That’s why the Republican insistence on ending the estate tax is so insidious. We need to use the income tax for the same purpose. High marginal tax rates on outsize incomes are the way to go. They have the virtue of simplicity, making them all the harder to evade.

Since the plan is still in it’s formative stage, there’s also not much detail on what they intend to do about the financial instruments that got us into this mess:

An important part of the plan still under debate is how to regulate the shadow banking system that Wall Street firms use to package and trade mortgage-backed securities, the so-called toxic assets held by many banks and blamed for the credit crisis.

We can only hope that they will take a look at first principles here. Do we, as a society, gain anything by the very existence of some of these instruments? Credit Default Swaps have only been with us since 1997, meaning we managed to get along swimmingly without them for most of our history. Do we really need mortgage backed securities? Do they do anything other than make money for those who package them? They certainly appear to encourage risk on a mega-scale and were a prime factor in creating the housing bubble in the first place. We should consider treating these folks like polluters. Some types of pollution just shouldn’t be allowed into the marketplace, no matter how much it might harm the polluter’s businesses.

On another front, Geithner’s plan to clean up the toxic asset mess has come in for a lot of criticism. Brad Delong, a guy who deserves a hearing, says that it’s a good plan, and explains it here. I’m a bit dubious about any plan that creates more billionaires, but he appears to make some solid points.


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The Sanctity of Contracts

Sunday, March 22, 2009

Promises made are apparently sacred only up to a point:

Elizabeth and James Pham put all their savings into the deposit they made on a $956,990 two-bedroom apartment at Maxwell Place, a new development in Hoboken, N.J.

They signed an agreement for the apartment in 2005, put down $93,199 and were preapproved for a mortgage for the rest of the purchase price.

But when their closing date arrived last September, several banks told them that to get a mortgage, they would have to increase their 10 percent down payment by another 15 to 25 percentage points. With no way to come up with that much money, the Phams notified the developer, Toll Brothers, that they could not get financing for the apartment. Toll Brothers declared them in default and kept their deposit.

“It would take us another 15 years to save that money again,” Ms. Pham said.

I’m aware, by the way, that banks always put escape clauses in these commitments; escape clauses that buyers can’t put in their contracts with sellers. I’m also somewhat surprised that the seller is holding the deposit; here in Connecticut they are held by the agents, and can’t be released until both sides authorize it or a court orders the release. Perhaps that’s just not clear in the story. That gives even the most blatant defaulter some leverage to get some of the escrowed money. Perhaps the money is escrowed, and that’s just not clear in the story.

Still, the sacredness of these contractual arrangements seems stacked against the little guy doesn’t it. Someone made a representation to these people that wasn’t kept, and that someone will apparently suffer no consequences.


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Friday Night Music-The Eagles

Friday, March 20, 2009

Double feature. Take it Easy, with Linda Ronstadt and Jackson Browne playing along.

And Silver Threads and Golden Needles, with just Linda.


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AIG: The gift (to bloggers, anyway) that keeps on giving

Friday, March 20, 2009

Every time you think you’ve reached level red on the outrage meter, AIG manages to come up with a way to out-do itself. And I’m not even talking about the fact that it recently sued the government for a tax refund it feels its owed for laundering money through a series of offshore corporations:

The lawsuit, filed on Feb. 27 in Federal District Court in Manhattan, details, among other things, certain tax-related dealings of the financial products unit, the once high-flying division that has been singled out for its role in A.I.G.’s financial crisis last fall. Other deals involved A.I.G. offshore entities whose function centers on executive compensation and include C. V. Starr & Company, a closely held concern controlled by Maurice R. Greenberg, A.I.G.’s former chairman, and the Starr International Company, a privately held enterprise incorporated in Panama, and commonly known as SICO.

The lawsuit contends in part that the federal government owes A.I.G. nearly $62 million in foreign tax credits related to eight foreign entities, with names like Lumagrove, Laperouse and Foppingadreef, that were set up or controlled by financial products, often through a unit known as Pinestead Holdings.

No, this Enron type activity is only to be expected. But there’s more. We have been assured in the past that although AIG’s financial products division (the one getting those bonuses and suing for the tax refund) has helped drive the world and AIG into bankruptcy, its core insurance business is quite profitable. No hanky panky there.

Well, that was then. Turns out that they came up with a nifty little way to disguise risk in their insurance business as well. Most insurance companies get reinsurance to protect themselves against outsize losses. As with all insurance, it’s a way of minimizing risk. AIG apparently came up with a way not only to minimize risk (on its books, at least), but to book revenues.

How? Simple, set up a bunch of subsidiaries, and have then reinsure each other. Of course, functionally, it’s as if AIG was selling insurance to itself, so they have not, in fact, reduced any risk. But of course you know there’s more. The company AIG is using to write the reinsurance is set up as a Bermuda corporation, so that it can take advantage of loose accounting rules that allow it to keep very low reserves for that reinsurance:

…AIG admits that its got a company, AIRCO, that is reinsuring its own insurance, and AIRCO is using a Bermuda accounting trick to limit the reserves it holds for this reinsurance.

You can read the whole story at the link above. You may be surprised (if you have been living under a rock) to find out that the potential losses from this clever little stunt could be in the hundreds of billions.


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3 more days

Wednesday, March 18, 2009

I took this picture on Sunday. These are Snowdrops, which I believe usually come out earlier than this time of year, though I’d defer to my wife on that if she were around to ask. I’m posting this just because, with all the bad news on the political front, we can still take solace from the fact that this very unpleasant winter is coming to an end, and that sooner or later, Spring will surely come.


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Tax the Bastards (all the Bastards)

Wednesday, March 18, 2009

Looks like there’s a bit of a disagreement among the financial writers at the Times. Yesterday Andrew Sorkin told us that we desperately need the folks who created this mess to get us out of it, so we should swallow hard and let them have their bonuses.

But David Leonhardt is having none of it. He puts Sorkin’s arguments in the mouths of others, and shoots them down tidily.

But I come not to dump on Sorkin (again). I come to praise Leonhardt, primarily because he agrees with me on the surefire way to stop executive compensation abuse:

It’s entirely understandable, then, that the Obama administration, the Federal Reserve and Congress are looking for creative, legal ways to claw back some of the bonuses. That bonus money is really taxpayer money: absent a bailout, no A.I.G. would exist to pay bonuses.

The larger question is how to change the rules on corporate pay to reduce the odds of future crises. Throughout this crisis, policy makers, starting with President George Bush and Ben Bernanke and now including President Obama, have been a bit too deferential to Wall Street. That deference has fed populist anger, which threatens the political viability of the necessary continuing bailout of the credit markets.

The bonus scandal offers Mr. Obama and Mr. Bernanke a chance to get ahead of the curve — so long as they come up with changes that extend well beyond A.I.G.

…

Today’s tax code makes no distinction between income above $373,000 and income above, say, $5 million. Both are taxed at 35 percent.

That is a legacy of the tax changes of the early 1990s, when far less of the nation’s income went to millionaires. Today, you can make a good argument for a new, higher tax bracket on the very largest incomes.

In the past, the economist Thomas Piketty says, higher marginal tax rates tended to hold down salaries and bonuses, because executives had less incentive to angle for multimillion-dollar pay.

Do these ideas stem in part from anger and bitterness? Of course they do. How can you not be a little angry and bitter about the role that huge, unjustified pay played in causing the worst recession in a generation?

In fact, that’s sort of the point. Given the damage that’s been caused by our decidedly unmeritocratic system of paying executives, the most irrational course of all would be the status quo.

Nothing that these people do is worth the money they are stealing being paid. In fact, most of what they do is totally unproductive, as Obama said today, they produce paper wealth for themselves, but no real wealth for anyone. They can cause a lot of harm to the average person, but don’t ever seem capable of producing much that’s useful for anyone but themselves.

Let’s go back to the 50s. A 90% marginal rate on these guys makes sense to me. If we do it to all of them there will be no constitutional problem, so long as Justice Roberts keeps his lawless hands off of the legislation. Sure we take some worthy rich folks down, but this is a question of the greatest good for the greatest number.


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