May 6, 2013 10:35 AM
In The Washington Post, Allan Sloan points out that while President Obama wants to cap American citizens' IRAs at $3 million or substantially less—discouraging saving and investment in the process—Obama's own-taxpayer-subsidized retirement benefits are worth more than twice as much, a generous $6.6 million. A sweet pension for me, but not for thee, seems to be Obama's thinking. Discussing the president's "proposal to limit the value of 401(k)s, pensions and other tax-favored retirement accounts to about $3.4 million" (or much less, as interest rates rise), Sloan notes that Obama want "to limit savers’ tax-favored accounts to only about half the value of what he stands to get from his post-presidential package. Based on numbers from Vanguard Annuity Access, I value his package at more than $6.6 million. . . .And that doesn’t include [his] IRA . . . Or the $18,000 (plus cost of living) a year he will get at age 62 for his service in the Illinois Senate."
He also notes that "the point at which Obama wants to eliminate the ability of you and your employer to deduct contributions to your retirement account isn’t actually the $3.4 million in his budget proposal—that’s just an estimate. The real number is how much a couple age 62 would have to pay for an annuity that yields $205,000 a year. That $3.4 million—which applies to the combined values of your pension and retirement accounts—is subject to a sharp downward change in the future because annuity issuers charge significantly less for an annuity when interest rates are higher than they do today, with rates at rock-bottom levels."
Obama has discouraged saving in other ways, such as raising taxes on capital gains and dividends, imposing a new Obamacare tax on investment income, and by giving costly bailouts to irresponsible people who, despite ample incomes, saved so little money that they could not "afford" more than a tiny downpayment, and thus ended up with negative equity on their home later on due to declines in the value of their home, qualifying them for the bailouts that certain favored underwater mortgage borrowers have received.
New York Times: Obama Administration Discrimination Settlement Was "Magnet For Fraud" That Enriched Trial LawyersApril 26, 2013 4:51 PM
A page 1 New York Times story today describes how the Obama administration, despite opposition from civil servants, radically expanded a legal settlement that had already become a "magnet for fraud," paying out vast sums of money over baseless claims of discrimination at the Agriculture Department in the Pigford case. As the Cato Institute's Walter Olson notes, its story "today breaks vital new details about how career government lawyers opposed Obama appointees’ insistence on reaching a gigantic settlement for claims of bias against female and Hispanic farmers in the operation of federal agriculture programs" over the objections of "career government lawyers." As the Times reports,
On the heels of the Supreme Court’s ruling [adverse to claimants and favorable toward USDA], interviews and records show, the Obama administration’s political appointees at the Justice and Agriculture Departments engineered a stunning turnabout: they committed $1.33 billion to compensate not just the 91 plaintiffs but thousands of Hispanic and female farmers who had never claimed bias in court.
The deal, several current and former government officials said, was fashioned in White House meetings despite the vehement objections — until now undisclosed — of career lawyers and agency officials who had argued that there was no credible evidence of widespread discrimination. What is more, some protested, the template for the deal — the $50,000 payouts to black farmers — had proved a magnet for fraud.
The ever-growing settlement became “a runaway train, driven by racial politics, pressure from influential members of Congress and law firms that stand to gain more than $130 million in fees.”
April 19, 2013 2:02 PM
Progressives have always assumed that if something is good, it must be provided through coercive force by a central government. This is illustrated in progressive support for continuing large Amtrak subsidies. Various liberal policy outfits including the Brookings Institution and the Center for American Progress have been recently celebrating the mild uptick in the government-subsidized passenger railroad’s ridership levels. The train served a record 32.1 million passengers in 2012, a 55-percent increase since 1997. In earlier times, liberal advocates would have congratulated themselves on the success of a government program’s drive to self-sufficiency and move to let it fend for itself in the private sector, in the same way federally controlled Conrail was privatized and later sold off to CSX and Norfolk Southern. But this doesn’t cut it for today’s progressives, who appear to believe Amtrak’s recent uptick in ridership is reason for increasing federal subsidies. This is because they are well aware that Amtrak’s supposed success is largely a mirage.
The rise in ridership appears impressive, until one realizes that 1997 was a severe low-point for train travel. If measuring Amtrak’s total passenger miles starting in 1991, its increase over the past 22 years is a pathetic 8 percent. Its condition looks even worse when considering that population growth has increased over this period by 25 percent, pushing Amtrak’s share of intercity passenger travel down from 0.45 to 0.36 percent. Passenger rail is alone in the dismal state of its ridership. Despite the airline industry’s financial instability, not to mention the costs incurred due to the September 11 attacks and the TSA, airline ridership increased by 68 percent. Even intercity buses carry three times more passenger miles than Amtrak does, while the vast majority of intercity travel is made by private automobile.
April 2, 2013 11:31 AM
American financial regulators could take a lesson from their European counterparts. The recent EU bail-in/bailout of Cyprus, despite its dangers, shows that reducing moral hazard in the banking industry without provoking bank runs is possible.
As I write in Forbes, Cyprus is one of the most insolvent Euro member states.
Non-performing loans [in Cyprus] (NPLs) are 15.5 percent of gross loans, which is comparable to Italy (13 percent), Ireland (19 percent), and even Greece (21 percent). But the real problem is Cyprus’s staggering inability to absorb losses. NPLs account for an enormous 264 percent of tier 1 capital—a level so high that not even basket case Greece, at 217 percent, can compare.
Cyprus got this way because of the risky actions of its banks, which were heavily invested in Greek debt. Once Greece hit the wall, so did the Cypriot banking system.
Unlike larger countries like France, Italy, and Spain, the little Mediterranean island’s fate does not have great effects upon the Euro in purely economic terms. But its precedent matters because markets extrapolate future EU actions (for example, what the EU will do when larger economies come under financial scrutiny) from present ones. Accordingly, Cyprus represented a low-stakes means through which to change expectations for the future. In February, before the drama and media hype surrounding Cyprus began, I wrote about this opportunity in the Global Post.
Europe should think twice before simply handing out a bailout package equal to the entire Cypriot economy.
As Ireland’s current plight shows, burdening the taxpayers to save the banks and bondholders imposes unnecessary and long-lasting pain. Once the European Union provides the stabilization funding needed to prevent Cypriot contagion to the rest of the euro zone, the EU ought to set a new precedent going forward: that inefficiency has the freedom to fail.
March 20, 2013 5:00 AM
There's no shortage of criticism of the Cyprus "bail-in" -- the one-time tax the government had proposed levying on insured and uninsured depositors to rescue the nations' banks.
And there is no shortage of criticisms that I could levy either on Cyprus and the EU's slapdash approach, which now looks like it will be rejected by the Cyprus parliament. The biggest being that the failing financial institutions should have been put through a bankruptcy system rather propped up -- whether through this levy or general taxation. Having said that, the initial Cyprus approach could have been much worse, and what comes next may be much more likely to spread contagion.
There is one fundamental thing the initial plan got right. Depositors must not be considered sacrosanct in a bank failure, and, conversely, a bank's contractual obligations to creditors such as bondholders cannot be ignored. The controversy should also open a much-needed debate about the role of ever-expanding deposit insurance in spreading moral hazard, as it encourages a lack of due diligence among customers of banks.
March 16, 2013 2:57 PM
If the Conservative Political Action Conference’s (CPAC) organizers wanted a speaker or panel on the causes of the financial crisis and what to do about too-big-to-fail financial insitutions, they could have chosen from among many conservative and libertarian experts who not only issued prescient warnings about government policies that egged on reckless behavior through subsidies, regulations, and flawed monetary policies, but also offered detailed free-market solutions to prevent future financial crises and taxpayer-funded bailouts
Such experts include John Allison, president and CEO of the Cato Institute, former chairman and CEO of BB&T Corp, and author of The Financial Crisis and Free Market Cure; Peter Wallison, counsel to the Reagan White House in the 1980s, co-director of the American Enterprise Institute’s program on financial policy studies, member of the Congressionally chartered Financial Crisis Inquiry Commission, and author of the new book Bad History, Worse Policy: How a False Narrative About the Financial Crisis Led to the Dodd-Frank Act; and Fred Smith, founder and chairman of the Competitive Enterprise Institute, where I work, and board member of CPAC’s parent organization, the American Conservative Union.
All of them sounded the alarms about the dangers of the government-sponsored housing enterprises Fannie Mae and Freddie Mac and mandates such as the Community Reinvestment Act, which encouraged banks to lower standards for borrowers in the name increasing home ownership. In congressional testimony in 2000, Smith warned that if anything goes wrong with the entities, taxpayers could be on the hook for “$200 billion tomorrow.” At the time, his warning was dismissed as exaggerating Fannie and Freddie’s risk, but it turns out he actually underestimated the amount for which taxpayers would later be on the hook.
Yet for CPAC’s single event on the financial crisis , held today, featured none of these experts. Instead, the sole speaker was Federal Reserve Bank of Dallas President Richard Fisher, who also has been a longtime Democratic operative with a decidedly big-government approach to financial regulation. Trying to appeal to the conservative audience, Fisher opened his speech with an anecdote about meeting President Ronald Reagan in 1984. He didn’t mention his having served in the Carter and Clinton administrations or his unsuccessful 1994 run as a Democrat against Sen. Kay Bailey Hutchison (R-Texas), in which he took standard liberal positions, including opposing school vouchers and supporting the Clinton “assault weapons” ban.
March 13, 2013 12:13 PM
This week, Illinois became only the second state in U.S. history to by charged with securities fraud by federal regulators (New Jersey was the first, in 2010). On Monday, the Securities and Exchange Commission (SEC) accused Illinois of deceiving investors regarding the health of its state employee pension funds, in a series of bond offerings from 2005 to 2009. In its cease-and-desist complaint, the SEC claimed:
Specifically, in numerous bond offerings from approximately 2005 through March 2009, the State misled bond investors by omitting to disclose information about the adequacy of its statutory plan to fund its pension obligations and the risks created by the State’s Structural Underfunding of its pension obligations. During this same time period, the State also misled bond investors about the effect of changes to that plan, including the Pension Holidays in 2006 and 2007.
Illinois settled immediately, without either admitting or denying the charges. The state did not have to pay a penalty, which, considering the extent of its pension funding shenanigans, is surprising, to put it mildly.
February 20, 2013 2:00 PM
Pension obligations' strains on state budgets have made pension reform a priority for state policy makers across the nation. Over the last couple of years, states from Utah to Rhode Island have implemented pension reforms once considered politically nigh-impossible. Montana may soon join the ranks of states with pension shortfalls where fiscal reality trumps politics as usual.
Last week, Montana legislators heard testimony from pension experts who painted a bleak picture of the current situation. Taken together, the state's pension plans are only 64 percent funded.
David Draine of the Pew Center for the States said, “If not addressed, Montana’s growing pension debt of $4.3 billion will threaten public workers’ salaries and benefits and will crowd out essential state services.” He added that to pay off the $4.3 billion debt -- equivalent to about half the state's annual budget -- all at once would cost every Montana household $10,600.
Gary Buchanan, co-owner of an investment firm in Billings and former chairman of the State Board of Investments, said, “Pension shortfalls should be direct reductions against any surplus,” and criticized the state's actuarial assumption of average 7.75 percent annual investment returns as "totally unrealistic."
February 20, 2013 1:26 PM
Few state governments are as in as much fiscal trouble as California's, so it's not surprising that few state pension funds have been as mismanaged as the California Public Employee Retirement System (CalPERS). But worse than that, CalPERS -- along with its sister fund, the California State Teachers' Retirement System -- has led the nation in implementing shoddy investment and management practices that have exacerbated led to billions of dollars in losses and foregone revenue.
Now, as policy makers in other states consider ways to address their own pension deficits, CalPERS -- the nation's largest pension fund, with about $230 billion in assets under management -- offers an example of exactly what not to do. They would do well to read "The Pension Fund that Ate California," Steven Malanga's article on the fund in the current issue of City Journal. Malanga, a senior fellow at the Manhattan Institute, recounts CalPERS' history -- which can be characterized as a fall from fiscal rectitude that only seems to get worse.
Even worse yet, CalPERS actively lobbied state lawmakers to implement many of the risky practices that have spelled so much trouble for it.
"When California’s government-employee pension system was established in 1932, it was a model of restraint," writes Malanga. "With the 1929 stock-market crash in mind, California opted for a cautious investment approach, allowing the fund to buy only safe federal Treasury bonds and state municipal bonds." That strategy worked while it lasted, but it began to unravel with the rise of unionization among government workers.
February 12, 2013 7:40 PM
Why not Moody's? Why not Fitch? Of all the questions raised about the U.S. government's strange case against Standard & Poor's—a lawsuit that actually asserts that some of the nation's largest banks were S&P's "victims," and that the credit rating firm somehow fooled these banks about products the banks actually created—the lack of similar actions against S&P competitors still rings the most alarm bells.
S&P, Fitch and Moody's all gave AAA rating to many packages of subprime mortgages that imploded. But of those three, only S&P downgraded the U.S. government from its decades-old AAA credit rating.
Floyd Abrams, the attorney representing S&P's parent company McGraw-Hill in the litigation and a veteran First Amendment lawyer (and yes, the First Amendment is a strong concern here, as I will get to in a second), has said that the government ramped up its investigation of S&P shortly after the downgrade in 2011. “Is it true that after the downgrade the intensity of this investigation significantly increased? Yea,” Floyd Abrams, S&P’s lead attorney, told CNBC in an interview last week. “We don’t know why.”
The Justice Department's civil suit against S&P looks even more suspicious when paired with the action a few weeks ago by another arm of the government against a small, upstart credit ratings firm that also had the temerity to downgrade the U.S. In late January, the Securities and Exchange Commission (SEC) stripped rating agency Egan-Jones of its accreditation as a "nationally recognized statistical rating organization" (NRSRO) in rating the creditworthiness of government or asset-backed securities. This was the first time the SEC had ever stripped a rating agency of its NRSRO status, an action that effectively bars financial institutions from relying on the rating agency to meet capital requirements.
Ironically, Egan-Jones' rating had been widely praised as an alternative to that of the "Big 3" of Moody's, Fitch and S&P. Receiving its funding through investor subscriptions, rather than payment of the entities being rated, it avoided the conflicts of interest that "Big 3" critics say led to inflated ratings for mortgage securities. The firm also turned out to be prescient in its early downgrades of Bear Stearns and Lehman Brothers, the first institutions to implode in the mortgage crisis.