Archive for May, 2009

Pushing Uncle Sam to Be an Activist Investor

Wednesday, May 27th, 2009

unclesam4Now that it’s becoming clear  that the federal government will end up owning nearly three-quarters of the shares in General Motors, the question is: What kind of owner will Uncle Sam be?

In certain respects, the Obama Administration has been acting like a private-equity firm that imposes conditions on a company it is taking over. It already booted out GM’s chief executive, restructured its debt, pressured its union to make contract concessions and bullied its main minority shareholder — which in this case is the autoworkers’ healthcare trust — and is wiping out other investors.

Yet, despite maneuvering to gain an expected stake of some 70 percent in the automaker, the feds don’t want to manage the company. According to the Wall Street Journal, the Treasury regards itself as “a player that has no intentions of directly guiding the company once it emerges from bankruptcy.” Unnamed sources in the federal government told Reuters: “We want to be shareholders for as short a period of time and almost in as inactive a way as we can responsibly be.”

One is tempted to ask: why? The Obama Administration has already taken some bold steps with regard to the rescue of GM. It is disingenuous to now act as if it is improper for the government to exercise any influence.

No one is suggesting that Treasury Secretary Tim Geithner or the Secretary of Transportation take over day-to-day control of the company, but there is still the question of broad policymaking exercised through the board of directors and annual shareholder meetings.  This will not be a situation in which government has a small interest whose voting power is far outnumbered by private investors. GM is heading for a situation in which it is nearly a wholly owned subsidiary of the United States of America.

There are encouraging reports that the federal government will name a substantial number of GM’s board members. But who will these appointees be — and will they be expected to pursue certain policies? It is easy to imagine Geithner installing business types with the mindset of conventional directors who are free to act as they please.

And then there’s the question of whether the federal government will vote its shares at annual meetings. If the government does not make its will known through the board or vote its shares, then who will control GM? Will the UAW healthcare trust end up calling the shots — or perhaps the governments of Canada and  Ontario, which will reportedly end up with a small holding in exchange for the financial assistance they are giving the company.

As the federal government uses its large investment in GM to help steer the company back to some semblance of financial health, why can’t it also use its influence to turn the automaker into a paradigm of the most enlightened corporate governance and accountability practices?

Keep in mind that GM’s track record is not only one of bad business judgments. It also has a long history of acting irresponsibly toward its critics (Ralph Nader et al.), its workers (the speedups that led to the Lordstown revolt in 1972), communities (destruction of streetcar lines in the 1930s and 1940s), the environment (pushing SUVs long after it was clear they were disastrous for the climate), etc. etc.

For years, activist investor groups have tried to promote better practices through proxy resolutions. GM has not yet issued the proxy statement for this year’s annual meeting, which is scheduled for August (two months later than usual), so we don’t know what issues will be voted on by the shareholders. Last year, the resolutions were on issues such as the reduction of greenhouse gas emissions, support for healthcare reform, full disclosure of political contributions and shareholder advisory voting on executive compensation — all of which were opposed by management.

Abstaining from voting on such matters would in effect mean preserving the status quo and giving implicit support to the backward policies adopted by the company for decades. As long as the federal government (and by extension the taxpayers) owns the overwhelming majority of the shares, it should use its influence to clean up not only GM’s financial accounts but its social ledger as well.

Calling in the Vultures

Friday, May 22nd, 2009

vulturesOnly one day after Treasury Secretary Timothy Geithner told the Senate Banking Committee that the nation’s financial system is “starting to heal,” bank regulators took a step indicating that parts of the system are still festering. The FDIC announced that it had seized BankUnited, a struggling institution in Florida with assets of about $13 billion. It was the biggest bank failure this year. The collapse will cost the insurance fund about $4.9 billion.

BankUnited’s demise was expected for some time. The company’s big bet on option adjustable-rate mortgages backfired when the housing market in the Sunshine State began to shrivel. Although BankUnited avoided the subprime market, many supposedly prime customers with those option ARMs, which allow one to lower interest payments in the first years of a mortgage by adding to the principal, found themselves seriously under water and started to default.

But what’s most significant about the takeover of BankUnited is who the FDIC got to buy the bank: a private-equity group led by John Kanas, the former head of North Fork Bank, who has joined forces with prominent vulture investor Wilbur L. Ross Jr. Also involved are funds managed by the Carlyle Group and Centerbridge Partners. In other words, the FDIC delivered BankUnited’s depositors and employees into the hands of aggressive private-equity firms.

The FDIC announcement casually noted: “Due to the interest of private equity firms in the purchase of depository institutions in receivership, the FDIC has been evaluating the appropriate terms for such investments. In the near future, the FDIC will provide generally applicable policy guidance on eligibility and other terms and conditions for such investments to guide potential investors.” In other words, the FDIC realizes it is doing something risky, but it will figure out its policy after approving the deal.

Geithner previously raised the prospect of subsidizing private-equity firms and hedge funds to buy up the toxic assets held by banks. Now regulators are putting a bank itself in the hands of those wheeler-dealers.

Particularly troubling is the role of Ross, who has a long history of bottom-feeding in industries such as textiles, steel and coal. In the latter sector, his International Coal Group was the parent company of the Sago mine, where a 2006 explosion resulted in the deaths of a dozen miners. The mine had been repeatedly cited for safety violations.

The BankUnited deal could open the door to a wave of bank takeovers by private equity firms, which are not known for their enlightened management practices. If you think banks are run irresponsibly now, just wait until the vultures are in charge.

Geithner’s Cod Liver Oil

Wednesday, May 20th, 2009

cod-liver-oilWhat a difference eight months make. Last fall, Treasury Secretary Henry Paulson pushed through a bailout program that was seen as the salvation of the financial sector. The banks eagerly lined up to get their share of $700 billion in federal largesse with few strings attached.

These days, aid from the Treasury Department is about as welcome as the heaping spoonfuls of cod liver oil mothers used to force down the throats of their children. Large institutions such as JP Morgan Chase, Goldman Sachs and Morgan Stanley cannot wait to repay Uncle Sam. Several smaller ones have already done so. Allstate just became the second large insurer to announce that it is not interested in the insurance bailout fund reportedly being put together by the Treasury. “Given Allstate’s strong capital and liquidity positions…we will not participate in this program,” sniffed the company’s chief executive Thomas Wilson.

Bailouts are supposed to be situations in which companies come to Washington with a tin cup and plead with lawmakers to save them from obliteration. Lawmakers have to be persuaded to devote public money to rescue those suffering failure in the private market.

Somehow that has gotten completely turned on its head. We now face a situation in which the federal government is in effect pleading with large corporations to take its money, and those companies find it distasteful to do so. Getting bailed out is viewed as burden rather than deliverance. Financial policy has gone from being wrong-headed to being downright bizarre.

Treasury Secretary Timothy Geithner does not seem to be aware of the absurdity of his position. It is unclear why he continues to push his bailout medicine on financial institutions that claim they don’t need it—claims that on the surface have more validity following the completion of the stress tests that were dubious to begin with and lost all validity after it came to light that many banks successfully negotiated for more favorable findings.

To make things worse, Treasury is, according to the New York Times, allowing those banks buying back the feds’ holdings to do so on extremely favorable terms. “Treasury accepted a lowball offer,” one analyst told the Times.

The time has come for Geithner and his boss President Obama to admit that the bailout program has become a farce. There is little evidence that it ever accomplished the stated aim of freeing up lending. Whether or not the banks really needed the assistance in the first place is something that analysts will be debating for many years to come. The auto industry portion may have provided some breathing room for General Motors and Chrysler, but now it’s become clear that the real plan is to increase imports from low-wage countries such as China.

Let’s wrap up this botched flirtation with state capitalism and focus on rebuilding an effective system of financial regulation. Some investigations and prosecutions of those who caused the mess in the first place would also be welcome.

Trust-Busting Shows New Signs of Life

Friday, May 15th, 2009

varney2“Everywhere you look, powerful forces are driving American industries to consolidate into oligopolies—and the obstacles are less formidable.” That’s the way a February 25, 2002 front page story in the Wall Street Journal began, and for the following seven years those obstacles grew yet more feeble.

With a few notable exceptions, such as the Federal Trade Commission’s long-running effort to block Whole Foods from acquiring its rival Wild Oats Markets, major mergers have sailed through. Last fall the Bush Justice Department issued a policy paper on antitrust that was so soft on anti-competitive practices that three FTC commissioners took the unusual step of issuing a public statement denouncing it.

Now the Obama Administration is repudiating the policy. Christine Varney (photo), head of the Justice Department’s Antitrust Division, gave identical speeches to the Center for American Progress and the U.S. Chamber of Commerce heralding the change of course. She made a telling comparison to the late 1930s, arguing that today, as then, the tightening of competition policy is part of the way government should respond to an economic crisis.

She reinforced this principle by separately stating that the Antitrust Division would work with federal agencies to prevent contractors from unlawfully profiting from stimulus projects funded by the $787 billion Recovery Act signed by the President in February.

Varney’s declarations were all the more significant in that they were soon followed by the announcement of a record antitrust fine – the equivalent of about $1.5 billion – imposed by the European Commission on Intel for unfairly dominating the computer chip market.  During the Bush Administration U.S. officials had declined to go after Intel.

It would be a wonderful thing for the United States to rejoin Europe and take the enforcement of competition laws seriously. Varney is talking a good line now, but the Obama Administration has to make up for an overly tolerant stance toward certain oligopolies—above all in banking policy, where Treasury Secretary Timothy Geithner has accepted the notion that the likes of Citigroup and Bank of America are too big to fail and, rather than cutting them down to a reasonable size, wants to go on propping them up with taxpayer funds. And in the health care arena, the Administration seems to take it for granted that the giant health insurance carriers, who use their power to deny as much care as possible, will go on playing a central role.

At a time when an increasing number of Americans recognize the shortcomings of giant corporations, the federal government cannot afford to be seen to support any oligopolies. And if it really wanted to promote competition, the Justice Department should go after the biggest antitrust scofflaw of them all: Wal-Mart.

Rick Scott’s Crusade to Preserve Fast-Food Healthcare

Wednesday, May 13th, 2009

rickscottIs Rick Scott following the T. Boone Pickens playbook? Pickens is the notorious corporate raider who moved into the public policy arena with his advocacy of wind energy. Scott (photo) is the former chief executive of disgraced for-profit hospital company Columbia/HCA (now just HCA) who has inserted himself in the middle of the debate over healthcare reform.

Both men play down their controversial histories and claim they are driven by principle rather than personal gain. In the case of Pickens, the principle is laudable: he has been pushing the country to adopt renewable energy in a major way. Scott is playing a much less constructive role. He is on a mission to sabotage efforts by the Obama Administration and Congress to make affordable coverage available to all.

Scott is the public face of a new organization called Conservatives for Patients’ Rights, which has been spending heavily on TV ads to argue that the reform proposals being considered by Democrats would take away the ability of patients to make their own healthcare decisions, leaving them at the mercy of the “nanny state.” The group’s website is filled with testimonials from “victims of government-run healthcare” in Canada and Britain.

It’s tempting to laugh all this off. The problem with the reform ideas being considered by the Democratic leadership is that there is not enough government control. The most efficient alternative, single-payer or Medicare for all, has been taken off the table, and some leading Dems are even leaning toward the abandonment of a public option as one of the new coverage options that would be available to the uninsured.

Moreover, does a campaign that puts the now unpopular term “conservatives” in its name, focuses much of its media buys on Fox News and uses a tainted figurehead such as Scott really expect to win widespread appeal? Perhaps this is just another facet of the Right’s current tendency to rally only hardcore reactionaries.

Yet there is more to Scott’s crusade than ideology. He represents a portion of the commercial healthcare industry that is threatened not only by government involvement but even by measures that bring medical costs under control.

Since 2001 Scott has been involved in a privately held company called Solantic, which is a leading operator of “urgent care facilities” throughout Florida. These are standalone clinics located in shopping centers, strip malls and the Orlando airport. Some are in Wal-Mart Supercenters.

The existence of the company – whose president Karen Bowling used to be a Columbia/HCA marketing executive and before that a TV news anchor in Jacksonville – is predicated on the fact that traditional medical care is out of reach for a substantial portion of the population – both the uninsured and the underinsured. Its walk-in clinics treat care as an isolated and seemingly affordable purchase rather than an ongoing relationship between patient and doctor. Critics also charge that the clinics often serve mainly as a way to attract customers to the drugstores and retail outlets in which many of them are located, creating an incentive for them to prescribe medications that will be filled under the same roof.

While the clinics may be a convenient alternative for simple procedures, the industry will succeed only if its services are used also by people with a wider range of conditions, including ones that should involve ongoing monitoring. For those patients, the clinics are as distant from good medical care as fast-food joints are from healthy eating and payday lenders are from responsible banking.

The prospects for Solantic were appealing enough that private equity firm Welsh, Carson, Anderson & Stowe, which focuses on the healthcare and infotech sectors, agreed to invest $100 million in the company in 2007. Last year, Welsh partner Thomas Scully joined Solantic’s board. Scully previously served as head of the Centers for Medicare & Medicaid Services during the Bush Administration. He was at the center of a scandal for threatening to fire the chief actuary of the Medicare program if he told Congress that the industry-friendly drug benefit promoted by Bush would be much more expensive than the White House had acknowledged. After leaving the Administration in 2003, Scully first went to work as a lobbyist for the healthcare industry.

Scully, Scott and Solantic all have a strong vested interest in preserving the current system that deprives so many people of decent coverage and forces them to depend on walk-in clinics. It remains to be seen whether the Democrats are truly willing to create an alternative that frees everyone from fast-food healthcare.

Stress Relief

Thursday, May 7th, 2009

dont_worry_clockTreasury Secretary Timothy Geithner kicked off his big day with the publication of an op-ed in the New York Times asserting that the Obama Administration has brought a “forceful response” to the “damaged financial system” it faced upon taking office. “We chose a strategy to lift the fog of uncertainty over bank balance sheets,” he added, and “help ensure that the major banks, individually and collectively, had the capital to continue lending even in a worse than expected recession.”

Then why does the announcement of the results of the stress tests applied to 19 large financial institutions by federal banking regulators seem to create an even denser fog of confusion? You only had to look at the differences between the front-page headlines in the Washington Post and the Wall Street Journal to see the absence of a coherent story line from Geithner, Federal Reserve Chairman Ben Bernanke and other top officials.

BANKS NEED AT LEAST $65 BILLION IN CAPITAL blared the Journal in reporting the somewhat inaccurate information that had been leaked to it, while the Post presented its leaks with a more upbeat STRESS TEST FINDS STRENGTH IN BANKS. Following the release of the actual results late Thursday, the Post website was going with STRESS TESTS FIND BANKS NEED $75B IN EQUITY, while the Journal cranked up the alarm level with FED SEES UP TO $599 BILLION IN LOSSES.

The divergence in headlines reflects the contradictory messages that the Treasury and the Fed began feeding the public last fall and that have continued under the new administration. We’ve been whipsawed between the idea that there was a pressing banking crisis that required urgent aid from taxpayers and the notion that things were not so bad as to justify a federal takeover of the ailing institutions.

Bernanke continued the equivocation with his statement: “The results released today should provide considerable comfort to investors and the public. The examiners found that nearly all the banks that were evaluated have enough Tier 1 capital to absorb the higher losses envisioned under the hypothetical adverse scenario. Roughly half the firms, though, need to enhance their capital structure to put greater emphasis on common equity, which provides institutions the best protection during periods of stress.”

Given that the report tries hard to make the “adverse scenario” against which the banks were tested seem like a remote possibility, it is significant that nine of the institutions were deemed to have sufficient capital for such an eventuality. Ten did not. Bank of America is said to require an additional $33.9 billion in capital, Wells Fargo $13.7 billion, GMAC $11.5 billion, Citibank $5.5 billion and Morgan Stanley $1.8 billion. Five regional banks need to raise a total of $8.2 billion. These numbers suggest substantial relative weakness, yet Bernanke counsels us to feel comfortable, and many mainstream observers seem inclined to take that advice.

Geithner and Bernanke’s “don’t worry, be happy” approach seems designed to lull the financial markets while making the case for additional use of taxpayer funds to prop up some of the banks. It also serves to blunt any calls for nationalization.

If anything, the case for federal takeover of institutions such as Bank of America is stronger than ever in light of the stress test results. One way that BofA and others are expected to improve the quality of their balance sheets is to convert the preferred stock that the federal government received in exchange for its capital infusions into common stock, thus making the feds a more dominant shareholder.

Rather than seeing this as an opportunity to influence bank business practices, the feds will maintain a largely hands-off stance, according to the Financial Times. So we will continue to have a double standard between the activist approach adopted by the Obama Administration with regard to the auto industry and its unwillingness to challenge the banking elite, for whom the stress tests turned out to be a form of stress relief.

A Blagojevich Senate?

Wednesday, May 6th, 2009

singlepayer-protestPresident Obama and the Democratic leadership say they are serious about enacting health care reform this year, but if the current behavior of some leading Senate Democrats is any indication, we are headed for the weakest kind of change. Some of these senators seem more concerned about protecting the private health insurance industry than in creating a system that does the most to help the uninsured and the underinsured.

Having ruled out the best heath reform of all—the creation of a single payer or Medicare for All plan—the Democrats have been pushing a hybrid system in which everyone who does not already have coverage would be required to purchase it from either a private insurer (with subsidies for those with low income) or a new federal plan. The insurance industry is squawking about that public alternative, saying it would create unfair competition for their offerings.

That’s would you would expect to hear from an industry that wants to hold its long-suffering clients hostage, realizing that if people had the choice of a quality affordable public plan they would abandon the likes of UnitedHealth and Humana in a heartbeat.

What’s amazing is to read in the New York Times that supposedly liberal Sen. Chuck Schumer of New York is proposing to placate the insurers by creating a “level playing field” between the public and private plans. That would mean adhering to “principles” such as the following:

  • The public plan should be self-sustaining, meaning that it would pay all claims from premiums and co-payments.
  • The public plan should pay doctors and hospitals more than the discounted rates now provided by Medicare; and
  • The government should not compel doctors and hospitals to participate in the public plan just because they participate in Medicare.

Is Schumer out of his mind? His proposals would saddle a social insurance program with the drawbacks of a for-profit carrier.

Why stop with those few principles? To make it really fair, Schumer should insist that the public plan spend the same large sums on wasteful administrative costs as the private insurers and be equally ruthless about denying coverage whenever possible. He should also demand that the public plan set its rates high enough to allow lavish compensation packages for its top officials and generate surpluses equal to the billions in profits taken in by its private counterparts. And then, for good measure, the public plan should be made vulnerable to class action suits by participants and have to pay out hundreds of millions of dollars in compensation the way that industry leader UnitedHealth Group did earlier this year.

Perhaps then the public plan would be sufficiently inefficient, unresponsive and dysfunctional to provide the level playing field Schumer seeks.

Given the fealty of Democrats like Schumer to the insurance giants, it was satisfying to see him and the rest of the Senate Finance Committee, including its chairman Max Baucus of Montana, put on the spot by activists who repeatedly interrupted a roundtable discussion on expanding health coverage to protest the fact that there was not a single proponent of single payer among the 15 speakers.

Before being removed by Capitol police (photo), one of the protesters accused the committee of listening only to the views of big corporate contributors. Referring to the former governor of Illinois accused of running a pay to play administration, he asked Baucus: “Is this a Blagojevich Senate? Are you the Blagojevich Chairman?” At least Blagojevich had the decency to compromise his principles behind closed doors; Baucus and Schumer do it in plain view.

Note: The protesters represented groups such as Healthcare-NOW, Single Payer Action, and the Maryland chapter of Physicians for a National Health Program.