Saturday, July 25, 2009

Breaking News: Weekend Update

From the Desk of Joe Rollins

When I was a relatively young man, I took a job working in the accounting department of an international construction company that built elevated water tanks. I’ve written about my experiences at this job in the past, but current events have made me reflect on some of the lessons I learned from the elders at that company.

Mr. Elliott Brown, Sr., was barely 5’8” tall, but he had the reputation of being the toughest man in the tank building crew. He boasted – and I never heard anyone challenge him – that he could easily beat-up any other man on the crew, regardless of size. He was a true self-made man who began working in the yard of the old R.D. Cole Manufacturing Company in Newnan.

After Mr. Brown became disenfranchised with the R.D. Cole way of doing things, he opened his own manufacturing company in his backyard in direct competition with R.D. Cole. Even though he had virtually no education, he was street smart. Building elevated water tanks requires significant engineering support, of which he had little. He simply knew how to work hard and who the right people were who he could hire to help him. Slowly but surely he gained respect; and some time later, he purchased his former employer, the R.D. Cole Manufacturing Company. He lived in a 1,000-square foot house right next to the manufacturing plant until his death.

Mr. Brown was an interesting man, and late in life he wrote two books regarding tank building. He told me that he self-published the books because he didn’t think he’d live long enough to see them published by a company, and he was probably right. I’ve read both books and find them extraordinarily entertaining and insightful. They reflect a true American entrepreneurial spirit and the hardships of steel construction on the road.

Late in his life, Mr. Brown had a tendency to drink too much and oftentimes he would show up at the office in the middle of the day wearing his bathrobe with the smell of Listerine on his breath in an effort to cover up the smell of alcohol. All of us were amused when he would enter the office at lunchtime wearing his bathrobe, reeking of Listerine.

Mr. Brown would sometimes come into my office to discuss whatever was on his mind. These conversations would often go on for over an hour, but I would continue doing my work and let him ramble on. He seemed to be perfectly satisfied discussing issues whether anyone was listening or not. I was sad when he passed away years later, as I learned a great deal about business from Mr. Brown.

Being involved in the financial aspects of Mr. Brown’s business, I would seek his input when we needed to purchase new equipment. Two of his comments live with me to this day. I would approach him with a recommendation on buying a new piece of equipment, usually having worked out in my mind exactly how I was going to sell him on it. I’d say, “With this piece of equipment, we will be able to do our jobs better.” Almost always, his response was, “Sometimes you can go broke doing things better.”

The other thing that amused me about Mr. Brown and his frugalness was his inability to throw anything away. He was known to have kept every piece of equipment he ever purchased, well beyond its usefulness to the company. If I approached him about a capital acquisition and explained that someone in the company really wanted this piece of equipment, he would say, “Don’t let your wants get to hurtin’ you too bad.” At the time, his comments were very frustrating. But when I look at them through today’s eyes, I see the significance and importance of simply slowing down, taking a deep breath and thinking through your actions.

The current economic environment often reminds me of Mr. Brown. Wanting a “better” health care program will probably make us all go broke. Maybe it’s time for us to not let our wants get to hurtin’ us too bad. And so, I’ve been reflecting on some of the posts I’ve written over the last year to see what updated information I can provide to you.

On September 24, 2008, I posted that the TARP plan proposed by Congress was not a bail-out (This is NOT a Bailout!!). At that time, I said that contrary to what you read in the media, the TARP was not designed to be a bail-out. Rather, it was a loan to let the banks get back on even-footing. I indicated back then that it was highly likely that the Treasury would get back the money from the TARP, and they would also probably make a profit. An update of the current information supports my forecast from last September.

You may recall that the original TARP proposal was in excess of $700 billion. The intent was to buy toxic assets from the banks that later became an investment tool to buy the preferred stocks of those banks. Some people may not recall that the second half of the TARP ($350 billion) was never even utilized. The original numbers on the TARP were that only $204 billion was ever utilized to support the banks. There was another $100 billion that was put into AIG and to General Motors and Chrysler. These amounts were never authorized by Congress and never had anything to do with the original TARP act. They were simply used on an emergency basis to essentially nationalize those three companies. However, as it relates to the TARP itself, the numbers are overwhelmingly positive.

To this point, of the original $204 billion loans to banks, $70 billion has already been repaid to the Treasury. As of today, there is only $134 billion still outstanding from the related banks. Of this amount, $80 billion of it is to two financial institutions alone – Citigroup in New York and Bank of America in Charlotte, North Carolina. It appears now that the Treasury will recover every dime of this money. As such, to classify it as a “bail-out” was absurd, even though the majority of the public still believes to this day that the government bailed out Wall Street. Now you know the real story.

I even argued in that post that the Treasury would likely make money from this transaction. As of the end of May, which is the most recent record available on the government’s website, almost $6 billion has been repaid to the Treasury in the form of dividends by these banks. In addition to the above, many of the banks have bought out their warrants that were issued in connection with these equity offerings. In fact, Goldman Sachs agreed to purchase on Wednesday of this week their warrants for an amount in excess of $1 billion. The Treasury has absolutely no cost on investment in these warrants, and this amount is all profit.

Also on Wednesday, BB&T announced that they will repurchase their warrants this quarter for $67 million. I think we will see many more banks repurchasing their warrants and paying off their loans to the Treasury, which should offer a significant windfall to the taxpayers. Given that the bonds were issued to purchase these equity investments at a cost of approximately 1% per annum, the Treasury has so far enjoyed an enormous profit on these transactions. If you would like to look at the official government website of these amounts, please follow this link to review the spreadsheets that are updated regularly - FinancialStability.gov.

I’ve written many times about the 3-month Libor rate (View all of my posts mentioning the Libor rate). You may recall that I discussed the chaotic nature of the 3-month Libor interbank rate and the obstacles that rate causes other banks. Essentially, this is the rate at which banks loan money to one another. Since there was such a high level of pessimism among the banks that any other bank could repay their loans, the Libor rate skyrocketed to well over 5% at the height of the crisis in the 4th quarter of 2008. Here we are today, not even one year later, and the 3-month Libor rate has dropped to 0.5% per item. In fact, the 3-month Libor rate and the general credit spreads in the debts markets are lower today than when Lehman Brothers declared bankruptcy. You may recall that Lehman Brothers bankruptcy was the catalyst that kicked off the worldwide credit scare.

Credit spreads are defined as where interest rates are in respect to risk to the underlying securities. As the credit spreads widen, it signals a healthy debt market. Today those credit spreads are as wide as they have ever been, signifying normalization of credit conditions. In fact, I went back and checked to see where the NASDAQ Composite was when the credit spreads were as good as they are today. At that time, the S&P 500 Index was trading at 1,250. If it were to maintain that level today, that would be an upward move in stocks of approximately 30% from where it is trading as I write this post.

Because of all the publicity the health care reform has received, I have been reading more on the subject. It is really a scary time where the White House and Congress are trying to ram through legislation that will ultimately transform America as we know it today. There is absolutely no question that health care reform is needed, but a nationalization of the health care industry is not in any American’s best interest. I thought maybe I was swimming upstream on this matter until – to my amazement – I read The New York Times on Wednesday and noticed that they are also skeptical of the White House’s proposal - Challenge to Health Bill: Selling Reform - By David Leonhardt.

What I found especially interesting in that article is that 90% of voters already have insurance. Therefore, it’s natural for those who already have insurance that they are happy with to be skeptical and wonder why they’d want to approve such an overwhelming change in the system that could dramatically increase taxes and make fewer prospects for employment in the United States.

I think there is a general consensus that is now developing among most voters. Basically, people think the White House and Congress should slow down, take a deep breath and think this through clearly before passing the bill. I don’t think it could be more clearly conveyed than in the final paragraph of The New York Times article:

“In recent weeks, polls have shown that a solid majority of Americans support the stated goals of health reform. Most want the uninsured to be covered and want the option of a government-run insurance plan. Yet the polls also show that people are worried about the package emerging from Congress.

Maybe they have a point.”


When The New York Times questions whether this bill is appropriate or not, the liberal community needs to take notice. The New York Times has never been known for its conservative thinking – when they question liberal goals on health care reform, it will hopefully make everyone sit back and give it some additional thought.

The more that comes out about this plan, the more devastating it would appear to be to small businesses. I keep coming across things that absolutely “blow me away” when I think about how it would affect my clients. One of the provisions in the bill is that you can maintain your current medical plan, but it would come under the scrutiny of the new government-supported decision makers on medicine. Therefore, it’s clear to experts that all the plans would eventually offer the same benefits but the private companies wouldn’t be able to compete in price with the public option, which will be supported by your taxes. For that reason alone, private employers would opt for the smaller premiums, and in short order, there would only be one medical plan in America.

As detailed in the proposed bill, there are too many penalties for employers to continue to offer medical insurance to their employees. This is the reason the government plan will be the only survivor. For example, an employer would be required to pay an 8% premium on all employees they do not provide medical insurance coverage. Interestingly, this would include employees that elected not to participate. Therefore, if the employee elected not to participate, he would get his insurance provided for free at the full expense of the employer. What is even more interesting is that the employer would still have to pay an 8% premium even if an employee is covered under someone else’s plan (like their spouse’s).

Clearly, employees will quickly figure out the cheapest form of insurance and employers will choose the government plan since it would be cheaper. Additionally, there would be a burdensome reimbursement rate for employers. Under the House’s plan, businesses would be required to pay 72.5% of an employee’s coverage. My suspicion is that most employers do that anyway, but the biggest change is that employers would be required to pay 65% for family coverage. It is uncommon for businesses to pay for family coverage, much less at a 65% level. This one change alone will dramatically increase the cost to employers, forcing employees off private insurance programs and into the public plan in order to obtain family coverage.

Even though most people are not covered by self-funded plans like those offered by big businesses, there is still a high percentage of employees in the United States who are covered by self-funded plans. Essentially, this bill will mandate that those plans will cease to exist, and therefore, the benefits of self-funding the plan with no administrative costs will go away. As incredible as it may seem, the bill also opens the door for attorneys to sue any self-funded plans that do not currently exist. As a clear payback to the trial attorneys, this bill opens up the door for further costs of the system in frivolous litigation. Costs going down? The public is not this dumb!

In an opinion piece in The Wall Street Journal on July 20, 2009, they adequately sum up their take on the health care bill - Repealing Erisa. No matter how you feel about The Wall Street Journal, it is still one of the most respected financial publications in the world. The last paragraph of this piece summarizes their feelings on the bill:

“So when Mr. Obama says that “If you like your health-care plan, you’ll be able to keep your health-care plan, period. No one will take it away, no matter what,” he’s wrong. Period. What he’s not telling the American people is that the government will so dramatically change the rules of the insurance market that employers will find it impossible to maintain their current coverage, and many will drop it altogether. The more we inspect the House bill, the more it looks to be one of the worst pieces of legislation ever introduced in Congress.”

I don’t know about you, but if The New York Times and The Wall Street Journal are both saying we need to take a closer look at this matter, I think we’d be na├»ve to ignore their warnings. Let’s slow down and review this matter.

In my post of July 16, 2009 (Follow Up on the Cap and Tax Bill), I told you about my letters to the Georgia Congressmen regarding the Cap-and-Trade bill. If you recall, I asked each of them if they had actually read the 1,300 pages of this bill before they voted on it. As of today’s date, I’ve received only one response – from Representative Westmoreland who admitted that he hadn’t read the bill himself, but that he had voted against it. The other Georgia Congressmen have elected to ignore my letter, which presumably means they didn’t read the bill, either.

I think we should take a clue from this lack of response. Any representative who doesn’t read a bill prior to voting on it doesn’t deserve another vote of confidence from their constituents.

Interestingly, the health care reform bill also runs over 1,000 pages. Almost every day, I read where 20 to 30 pages of this bill are undergoing amendments. I read yesterday that in the House Finance Committee, there are more than 160 amendments to the existing bill that have yet to be addressed. Given what I have discovered on how many of our representatives actually read the cap-and-trade bill, I wonder how many people have read the 1,000 pages of the health care reform bill.

I think it would be useful for all concerned taxpayers to contact their representatives and ask them if they have read the Cap-and-Trade bill in its entirety that was passed by the House and the 1,000-page Health Reform Act being considered by the House. Remember that President Obama’s original deadline for approval on this bill is in only one week. I dare say that if it’s approved in that period of time, none of our respected members of Congress will have read the proposed act.

The Cap-and-Trade bill has lost a lot of its momentum in recent weeks and has yet to even be considered by the Senate. It’s likely at this point that if the bill is considered by the Senate, it will be dramatically altered, if not completely destroyed. What is even more interesting in the bill is that President Obama’s EPA administrator now admits that the law would have virtually no impact on the climate. It would seem to me that the bill was sold on the premise that it would have a major effect on the environment in its operation. What we now know is that it’s really only for the purpose of raising money and the bill itself has no environmental effect. Everyone agrees that we need to move towards a cleaner environment, but the last way we need to move there is by overtaxing businesses that employ Americans on a daily basis.

I once wrote in these posts that I get aggravated by those who point out only problems without offering any solutions. I guess I come from the “Keep it simple, Stupid!” point of view. There are lots of ways to attack the issues regarding the problems we are facing today. Admittedly, most of them are far too complex for the average American to understand, but here’s my shot at a few of them:

Rather than create a tremendous bureaucracy to tax carbon emissions, why not just add a simple tax to the gasoline tax? If there was a $0.20 tax attached to the sale of fuel that was separately allocated to environmental causes only, it would be much more focused and useful. Everyone would see the tax and know how the money was spent. Yes, it’s true that this is a regressive tax in that it taxes the rich and poor in the same manner, but it taxes based on your usage of gas, which is the correct way to tax.

The money received from this tax could be used to convert vehicles to run on natural gas. Natural gas is emissions-free, and there’s enough natural gas in the United States to provide for every car running in America today. It would be such a simple and easy transition automobiles that run today on gasoline to natural gas over time. The government would sponsor and provide natural gas fueling areas convenient to the cities and give tax incentives for taxpayers to convert their automobiles. Perhaps this idea is too simple that it defies logic.

It is now clear that the $743 billion stimulus bill was an absolute failure to this point. It was promised that this money would be spent on shovel-ready projects and would be immediately put into the economy. To date, the economy has lost two million jobs since its passage and only 10% of the money has even been spent. The administration now projects that the impact of the stimulus bill will not be felt until the end of 2010. That may be exactly the opposite of what we were told during the debate – that the money would be immediately placed into the economy to provide jobs.

There are ways that this could be fixed almost overnight. By reallocating some of the remaining stimulus money to fund federal highway construction, you could put that money into the economy almost overnight. The current gas tax fund is out of money, and therefore, private projects are not being funded. By using $30 billion to $50 billion of the remaining stimulus money, we could fund those jobs that have been delayed due to a lack of federal money. These projects are truly “shovel ready” and would not take two years to begin.

Additionally, there could be a FICA tax holiday for both businesses and employees for 90 days. By eliminating the FICA tax on both employers and employees, one-quarter of a trillion dollars could be put into the economy is only 90 days. This would be a 7.5% raise for each employee and employer for a short period of time. By virtue of such a simple provision, you could put more money into the economy in a shorter period of time than the stimulus bill has spent so far. During Christmas, it would help retail sales and increase employment immediately – not in the future. It would also be a nice holiday present for all working Americans.

The provisions related to the remaining stimulus money could be pared back to accommodate this request without spending more money. You wouldn’t need the constant Congress bickering about its own little private projects that do not create jobs, and you would put an instant and immediate charge into the economy that would benefit all Americans. I guess this is just too simple, and therefore, it will not work. Since it does not add to government earmarks, it’s unlikely that our corrupt Congress will ever even consider such a simple plan.

Health care reform will take longer to achieve. I am often asked by clients why the doctor groups endorsed the bill if it’s so bad. Quite simply, they were bought off in the proposal. Doctor reimbursements under Medicare go up 5% under the new bill. Essentially, they traded out their support for higher reimbursements. Similarly, the pharmaceutical companies and the hospitals have traded out not for higher reimbursements, but so they would not have catastrophic reductions. Essentially, both agreed to lower reimbursements in order to block out the potential for something quite worse.

The more I get to thinking about the numbers, the more I question why we’re going through so much trouble. If there are 47 million Americans not covered under a medical plan today, that doesn’t mean that they don’t receive medical care – they’re just not covered under a plan. As you well know, any sick person that enters an emergency room in the United States is required by law to be seen, whether or not they have insurance. Of the 47 million uninsured, 10 million are illegal immigrants.

The true number of uninsured American citizens borders on 35 million. A great number of these individuals can be covered under other plans, but they have elected not to be covered. Essentially, of the U.S. population of over 300 million, only 10% of the population is uninsured. We as a country certainly need to do something to cover these people, but in a manner that doesn’t break the bank for taxpayers.



I always find it interesting that the poor go to the emergency room for care regardless of how minor the injury. Emergency care is the most expensive medical care in America due to the highly sophisticated nature of that care. All the government has to do is develop clinics for routine care instead of making emergency rooms be the sole providers for the uninsured. The main concern is catastrophic conditions that would essentially bankrupt the individual. It would not cost that much money for the government to basically develop a catastrophic universal policy that would be a safeguard for all Americans for large medical expenditures.

Everyone is now talking about how this medical care reform bill will affect Medicare. Quite frankly, there is a simple and swift solution to the exploding Medicare costs that should be addressed immediately. When it comes to Medicare, one of the principal fixes would be for higher income individuals to pay more for the cost of Medicare. There’s a deal currently in the works, and I have clients who are seeing their premiums increase. However, it’s not effective and not universally applied to those who could afford to pay for Medicare if they so elected. Additionally, many people on Medicare have private policies that overlap, and therefore, create duplication. A simple fix would require potential recipients to choose one or the other, but not both.

The simplest fix for Medicare and Social Security is to increase the age limits for coverage. While younger people cannot collect full Social Security until age 67, the age for collecting full Medicare benefits is 65. If the government began increasing that age today, it could be moved to age 70 without affecting anyone over the age of 40. This would dramatically reduce the actual cost of servicing the younger generations with a Medicare plan that has no funding and only gets its funding from employees who are currently working. Since young people are a long time away from collecting Social Security, I highly doubt they’d object to such a change.

With the length of this post, I’m sure I’ve lost most of my readers already. I could give you many more “KISS” solutions to governmental issues. One thing I always scratch my head about is the issue concerning balancing the federal budget. When the State of Georgia cannot balance the budget, the Governor requires each department to cut their budgets enough of a percentage to balance the current budget. It’s not pick and choose an expenditure; it’s cutting all expenses by whatever percentage necessary.

With the current deficits projected under the Obama Administration at approximately $2 trillion per year, then every federal department would have to cut their budget by 50%. The government receives $2 trillion a year in revenues, but spends $4 trillion. I cannot tell you one more bullish move that the federal government could make today to improve the U.S. economy and the financial status of the United States in world economics than cutting the size of government by 50% overnight.

As always, the above are my opinions, thoughts and observations. Of course, I could always be wrong.

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