risk

David Isenberg: Contractors Overseeing Contractors

April 13, 2010

Holy freaking Yahweh! I go away for just a week and private military contractor news busts out all over. Thus I’ll be doing more posts than normal this week in an effort to catch up. Let’s start with the report the U.S. Government Accountability Office released earlier today on the subject of contingency contracting. While the widespread dependence of government on private contractors is no longer front page news, the fact that the government also relies in a big way on private contractors to help manage contracts is startling, if not surprising. The GAO report is titled “Improvements Needed in Management of Contractors Supporting Contract and Grant Administration in Iraq and Afghanistan.” Contract and grant administration functions represent the government’s primary mechanism for assessing whether it is getting the expected products or services from contractors or whether grantees are performing in accordance with grant programs. Examples of such functions include on-site monitoring of contractor activities, supporting contracting and program offices on contract-related matters, and awarding grants and monitoring grantee performance. Using contractors to support these functions can provide benefits, such as flexibility to meet immediate needs, but it can also introduce risks the government needs to consider and manage. For example, contractors performing certain contract or grant administration functions may closely support the performance of inherently governmental functions, which increases the risk that government decisions will be inappropriately influenced by, rather than independent from, contractor actions. In addition, reliance on contractor support to meet agency missions can increase the risk of conflicts of interest among companies and individuals, particularly for cases in which contractors closely support inherently governmental functions. How reliant is the U.S. government on private contractors? Good question. Unfortunately the government does not know. The report found that: DOD, State, and USAID’s use of contractors to help administer contracts and grants was substantial, although the agencies did not know the full extent of their use of such contractors. GAO found that the agencies had obligated nearly $1 billion through March 2009 on 223 contracts and task orders active during fiscal year 2008 or the first half of fiscal year 2009 that included the performance of administration functions for contracts and grants in Iraq and Afghanistan. The specific amount spent to help administer contracts or grants in Iraq and Afghanistan is uncertain because some contracts or task orders included multiple functions or performance in various locations and contract obligation data were not detailed enough to allow GAO to isolate the amount obligated for other functions or locations. Overall, the agencies relied on contractors to provide a wide range of services, including on-site monitoring of other contractors’ activities, supporting contracting or program offices on contract-related matters, and awarding or administering grants. Well, okay, we all understand that government might need to turn to contractors as it does not have enough qualified personnel of its own to manage contracts. So long as the government has a policy in place on how to use contractors for contract management and the contractors are competent it should be okay. So what is the policy? Surprise, there isn’t one. Decisions to use contractors to help administer contracts or grants are largely made by individual contracting or program offices on a case-by-case basis. In doing so, the offices generally cited the lack of sufficient government staff, the lack of in-house expertise, or frequent rotations of government personnel as key factors contributing to the need to use contractors. Offices also noted that using contractors in contingency environments can be beneficial, for example, to meet changing needs or address safety concerns regarding the use of U.S. personnel in high-threat areas. GAO has found that to mitigate risks associated with using contractors, agencies have to understand when, where, and how contractors should be used, but offices’ decisions were generally not guided by agencywide workforce planning efforts. Well, at least the government is smart enough to avoid the obvious conflict of interest issue that critics would raise about the risks associated with contractors helping to administer other contracts or grants, isn’t it? Agencies generally complied with requirements related to organizational conflicts of interest, but USAID did not include a contract clause required by agency policy to address potential conflicts of interest in three cases. Also, some State officials were uncertain as to whether federal ethics laws regarding personal conflicts of interest applied to certain types of contractors. In almost all cases, the agencies had designated personnel to provide contract oversight. DOD, State, and USAID contracting officials generally did not, however, ensure enhanced oversight as required for situations in which contractors provided services closely supporting inherently governmental functions despite the potential for loss of government control and accountability for mission-related policy and program decisions.

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Citigroup’s $14 Billion `Liquidity Put’ Loss Is Focus of U.S. Crisis Panel

April 13, 2010

By Bradley Keoun, Jesse Westbrook and Ian Katz April 13 (Bloomberg) — The U.S. panel probing the financial crisis has zeroed in on Citigroup Inc. guarantees used to spur sales of mortgage-backed debt that ended up costing the bank $14 billion. Financial Crisis Inquiry Commission investigators may conclude a primary cause of Citigroup’s 2008 bailout was the use of “liquidity puts” by traders to bolster sales, Chairman Phil Angelides said in an interview yesterday. Those puts allowed customers to sell debt securities back to the bank at face value if credit markets froze, something that Citigroup’s traders bet would never happen, according to Angelides. Instead, Citigroup was forced to buy back $25 billion of collateralized debt obligations now valued at 33 cents on the dollar as financial markets broke down in 2007, according to the New York-based bank’s statements . The same kind of flawed logic pushed American International Group Inc. to the brink of bankruptcy in 2008 after insuring billions of dollars of CDOs against default, Angelides said. “Institutions across a broad band were guaranteeing risks that they did not understand,” Angelides said. In Citigroup’s case, “they clearly got it wrong.” Chief Executive Officer Charles O. “Chuck” Prince , Executive Committee Chairman Robert Rubin and regulators testified before the commission last week they didn’t know about risks posed by the instruments. The bank’s annual report for 2003 — signed by Prince and posted on the Securities and Exchange Commission’s Web site in early 2004 — disclosed the risk of “contingent liquidity facilities” tied to CDOs. Concentration Risk Citigroup kept its liquidity puts in place even after the bank’s own financial-control group wrote a memo in October 2006 saying they might lead to a “severe concentration risk,” based on excerpts of the memo read by Angelides during an April 7 hearing. “It certainly looks bad,” said Andrew Davidson , president of New York-based Andrew Davidson & Co., which advises investors on the mortgage market and asset-backed securities. “The fact that they didn’t know that they had this exposure, that’s obviously screwed up.” Citigroup spokesman Steve Cohen declined to comment. The CDO business generated $400 million in “total annual revenue in 2005 and 2006,” Nestor Dominguez , co-leader of the unit, testified at hearings last week. The revenue included fees from setting up the deals as well as profit from trading them, he said. A liquidity put allows investors to “put back” their securities to the issuing bank under certain conditions. In Citigroup’s case, the guarantees were tied to CDOs created by the bank that pooled mortgage-backed bonds, corporate debt and other securities, Dominguez testified. Commercial Paper To raise money to buy the assets, Citigroup sold commercial paper, with the assets pledged as collateral. Commercial paper is a type of debt that matures in less than a year and was popular with money-market funds and corporate treasurers who want to invest their surplus cash in readily redeemable funds while earning higher yields. Liquidity puts were added to “facilitate” the sales of the commercial paper, Dominguez said; investors could “put back” the commercial paper to Citigroup if the market went cold. Dominguez described this as a “significant widening in credit spreads or a temporary inability to issue commercial paper.” Widening credit spreads, or the gap between a bond’s yield and benchmark rates, indicate slackening investor demand. Remote Risk Citigroup’s traders viewed the risk that anyone would use the puts as remote and didn’t notify senior executives, according to testimony at the hearings. Since the risk was considered so unlikely, the bank kept the puts off its balance sheet , and held little capital to cover any costs that might arise, commission member Byron Georgiou said at the hearings. While the CDOs weren’t included among the bank’s $2 trillion of assets, they were mentioned in footnotes detailing off-balance-sheet commitments, Citigroup’s financial statements show. Transactions designed to move assets and potential risks off the balance sheet may have masked billions of dollars of risks at Lehman Brothers Holdings Inc. before its collapse, according to a report last month by a bankruptcy examiner. Citigroup is getting extra attention from the FCIC panel because it got a $45 billion emergency infusion and $301 billion of government asset insurance. That represented the biggest taxpayer bailout for a U.S. bank. Citigroup repaid $20 billion of the funds in December and canceled the insurance. The U.S. retains a 27 percent stake in the bank. Hearings The FCIC’s commissioners used hearings last week in Washington to delve into Citigroup’s liquidity puts, calling Prince and Rubin as witnesses along with former Federal Reserve Chairman Alan Greenspan and Comptroller of the Currency John Dugan . The risk of the CDOs and the liquidity puts “came as a surprise” to the OCC, Dugan said at the April 8 hearing, adding that “subsequent review and investigation showed this to be both a risk management and an internal reporting breakdown by the company.” The liquidity puts, backed by the Citibank banking unit, were insulated from close examination by Dugan’s Office of the Comptroller of the Currency, according to Georgiou. That’s because the puts were created by Citigroup’s investment bankers, which operated in Citigroup’s non-deposit-taking securities unit, Georgiou said during last week’s hearings. No Authority “The OCC examiners that we talked to suggested to us that they regarded these liquidity puts as essentially outside of their purview, because they were only supposed to be looking at the, you know, this was a principal business that was existing within the investment bank,” Georgiou said. “Not only wasn’t it their responsibly, they were effectively precluded from examining it.” Greenspan told the panel April 7 that regulators probably should have scrutinized the bank’s liquidity puts along with its loans and other assets . The Federal Reserve oversees Citigroup’s holding company. “You’re raising a legitimate question,” Greenspan said. Citigroup used the liquidity puts partly because they required less capital support than backup credit lines that bank’s typically offer, Georgiou said. The liquidity puts were subject to a 0.8 percent capital charge, Georgiou said. Put another way, the bank had to set aside $1 of capital for every $125 of commercial paper. That compares with Citigroup’s overall ratio of $1 for every $14.50 of loans, securities and other investments as of Dec. 31. “Would the team create products and in the course of creating the products try to minimize capital burdens?” Prince said during his testimony. “My guess is the answer is yes, but I don’t know for sure.” Angelides said at the hearings that Prince and Rubin failed to take responsibility for what happened at Citigroup. “One thing that is striking is the extent to which senior management either didn’t know or didn’t care to know about risks that ultimately helped bring the institution to its knees,” Angelides said in this week’s interview. “If you’re having to offer buyers a put back to you, that should be a big red flag.” To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net ; Jesse Westbrook in Washington at jwestbrook1@bloomberg.net ; rschmidt5@bloomberg.net ; Ian Katz in Washington at ikatz2@bloomberg.net .

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China Banks to Reassess Risk as Regulator Aims to Stop Credit Boom Souring

April 11, 2010

By Bloomberg News April 12 (Bloomberg) — China’s banking regulator told lenders to reassess their risk exposures and submit reports by the end of June as officials try to prevent the nation’s credit boom from leading to more bad loans. Inspectors will visit banks in the third quarter to check on the reports, Liu Mingkang , chairman of the China Banking Regulatory Commission, said yesterday at the Boao Forum for Asia in Hainan province. The regulator will discuss any discrepancies found, he said. “By the end of the third quarter we will downgrade assets if needed and increase provisions,” Liu said, without elaborating. China has tightened regulations on concern a record $1.4 trillion of lending last year is fueling asset bubbles and wasteful investment. The banking regulator last month reiterated a call for lenders to increase scrutiny of loans to property developers as the government ordered 78 state-controlled companies to exit the real-estate sector. Some lenders in Beijing have “voluntarily and prudently” raised down payment requirements for second mortgages to 60 percent of a property’s value, the banking watchdog said in a statement elaborating on Liu’s speech. Nationwide, banks are asking for down payments of between 40 percent and 50 percent for second mortgages, Liu said. The world financial crisis showed that leverage needs to be reduced, Liu said. Markets can never regulate and supervise themselves, he said, adding that financial regulations in China will go “back to the basics.” Climbing Property Prices China’s property prices rose 10.7 percent in February, the fastest pace in almost two years, fueling concern at the risk of asset bubbles as inflows of capital from abroad add to the money from domestic lending. Liu cited Shanghai and Beijing as examples of property markets affected by so-called “hot money” and speculation. The government aims to cut new lending by 22 percent this year from last year’s record. Officials last month raised deposit requirements for buyers at land auctions to 20 percent of the minimum price to increase costs for developers. They have also lifted banks’ reserve requirements twice this year and re-imposed a tax on home sales. The CBRC ordered lenders not to lend to developers holding land without building houses in a March 26 statement. It also asked banks to stop approving new credit lines to the 78 state-owned companies if they use collateral other than construction projects already in progress. To contact the reporter on this story: Yidi Zhao in Beijing at yzhao7@bloomberg.net Belinda Cao in Beijing at lcao4@bloomberg.net

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Video: Duessel Sees Earnings Driving `Next Move Up’ in Stocks: Video

April 9, 2010

April 9 (Bloomberg) — Linda Duessel, market strategist at Federated Investors Inc., talks with Bloomberg’s Carol Massar and Matt Miller about the outlook for U.S. stocks. Duessel also discusses corporate earnings and the risk posed to equities by China and Greece. (Source: Bloomberg)

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Kidney Donors Don’t Shorten Their Lives by Giving Up Organ, Research Shows

March 9, 2010

By Nicole Ostrow March 9 (Bloomberg) — People who donate a kidney in the U.S. don’t die any faster than nondonors long term, according to a large study that looked at donors over 15 years. Within the first 90 days after surgery to donate a kidney, their death rate was slightly higher at 3 per 10,000, compared with less than 1 per 10,000 in healthy nondonors, according to research from Johns Hopkins University. Over 15 years, there was no difference in deaths of donors compared with others matched by age, health status, gender and race, said the study in today’s Journal of the American Medical Association . Kidney transplants have almost doubled over the past 15 years in the U.S. as more older people became eligible and higher rates of diabetes led to kidney disease and increased demand, said Dorry Segev , lead author of the study. The need for kidneys far outpaces the organs available each year, with more than 83,000 on a U.S. waiting list and 15,402 transplants performed from January through November last year, according to the Organ Procurement and Transplantation Network . “Over the last 15 years, live kidney donation remains a very safe operation,” said Segev, an associate professor of surgery and epidemiology at Johns Hopkins University in Baltimore, in a March 5 telephone interview. “There is no evidence that living with one kidney rather than living with two kidneys after donating a kidney is associated with any increased risk of dying prematurely.” Earlier Evidence Previous studies that found kidney donation was safe have been much smaller and often lacked well-matched comparison groups, according to the study authors. The research analyzed data from a national registry of 80,347 living kidney donors in the U.S. who gave their organ from April 1994 to March 2009. They were compared with 9,364 people who were part of a national health survey . Over those 15 years, 25 people died in the first 90 days after surgery, making their risk of dying from surgery 3.1 per 10,000 cases. That compared with 0.4 per 10,000 people for similarly healthy people who participated in the health survey. That makes the short-term risk of death after kidney donation surgery six times lower than from dying after gallbladder removal , when patients are sent home the same day as their surgery, the authors said. Donating a kidney is “one of the safest operations you could ever undergo, although the risk is not zero,” Segev said. One Year Later A year following the surgery, the risk of dying for those who donated a kidney was similar to the nondonors who participated in the health survey, the study found. Men and black people had a slightly higher risk of dying following the procedure, but their overall risk was still small, the researchers said. The need for U.S. kidney donations has increased as rates of diabetes and obesity have risen. Diabetes can lead to kidney disease over 20 to 30 years, eventually requiring treatment by dialysis or a transplant, according to the International Diabetes Federation. In the U.S., the number of people with diabetes awaiting a kidney transplant has almost tripled e over the past decade to almost 25,000 from about 9,600, according to data from the Organ Procurement and Transplantation Network. Most kidney donations from the living go to families and friends, Segev said. About 100 people every year will donate a kidney without a specific person in mind. The study was funded by the Organ Procurement and Transplantation Network, supported by a federal agency. To contact the reporter on this story: Nicole Ostrow in New York at nostrow1@bloomberg.net .

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China Plans to Sell $29 Billion of Yuan Debt This Year as Part of Stimulus

March 4, 2010

By Bloomberg News March 5 (Bloomberg) — China will sell 200 billion yuan ($29 billion) of bonds for a second year to help local governments fund infrastructure projects, Premier Wen Jiabao told today’s annual meeting of the National People’s Congress . The finance ministry, which will organize the debt auctions, plans to offer three- and five-year securities and channel funds between bondholders and the local authorities issuing the notes, according to a person familiar with the proposal who asked not to be identified. The central government’s role in local debt sales has reduced the cost of building roads and railways as part of a two-year $586 billion spending package that drove expansion of 8.7 percent in the world’s fastest-growing economy last year. Policy makers are seeking to maintain financing for such projects, while curbing record new bank lending that has increased the risk of property and stock-market bubbles. “This alternative source of funding is healthy – Beijing may have realized the risk that local governments borrowed too much from banks last year,” said Mark Williams , an economist at Capital Economics in London who worked at the U.K. Treasury as an adviser on China from 2005 to 2007, in a telephone interview. A spokesman for China’s Consulate General office in New York said he wasn’t aware of the government’s plans. ‘Sensible’ Three-year bonds sold last year on behalf of local governments, 30 provinces and five municipalities, yielded between 1.6 percent and 2.36 percent when they were auctioned, compared with the one-year lending rate in China of 5.31 percent. The sales are part of the government’s economic stimulus plan, announced in November 2008. “It sounds like a perfectly sensible thing to do,” Charles Dumas , research director at Lombard Street Research Ltd. in London, said it an interview. “It undoes some of the monetary consequences of this huge spending surge by taking it out of the money supply. But of course it doesn’t in any way hold back the overheating of the total economy.” China sold 1.42 trillion yuan of treasury debt last year to partly finance a record-high fiscal deficit in addition to the 200 billion yuan in securities it sold for provincial authorities. China’s deficit in 2010 will be similar to last year, when it was less than 3 percent of gross domestic product, Jia Kang , the head of the Finance Ministry’s research institute, said as law makers gathered in the capital this week. Unbalanced Growth The NPC convenes every March, with almost 3,000 lawmakers from China’s 32 provinces, autonomous regions and municipalities congregating at the Great Hall of the People in Beijing. Wen has on at least two occasions said China’s growth was unsustainable and unbalanced; in a Dec. 27 interview with the official Xinhua News Agency and at the 2007 National People’s Congress. China’s law prohibits local governments from incurring debt directly. Even so, the government plans a crackdown on investment companies set up by local governments to circumvent those regulations, the 21st Century Business Herald reported this week. Borrowing by local-government entities, not counted in official estimates of China’s debt ratios, may push up the country’s borrowing to 96 percent of GDP , Professor Victor Shih , a political economist at Northwestern University in Evanston, Illinois, said on March 1. His forecast compares with an International Monetary Fund estimate for China of 22 percent this year, which excludes local-government liabilities. The central bank has also ordered banks to set aside more funds as reserves and to rein in lending . In 2009, new loans rose to a record 9.59 trillion yuan. — Belinda Cao , Michael Forsythe , Kevin Hamlin , Zijing Wu and Michael Patterson . Editors: Sandy Hendry , Laura Zelenko . To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net

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Aspirin Doesn’t Prevent Heart Attacks in Those With No Symptoms

March 2, 2010

By Nicole Ostrow March 2 (Bloomberg) — Aspirin doesn’t prevent heart attacks or strokes in people who have a high risk of heart disease yet show no symptoms, a study in Scotland found. Half of the 3,350 people in the study were given low-dose aspirin after a screening test showed they had a higher-than- average risk for heart disease. They had a similar number of heart attacks and strokes to the other half of participants taking a placebo, researchers reported today in the Journal of the American Medical Association . The study is the first to look at an apparently healthy population, screen them for their heart disease risk using a test that detects artery blockages in their legs and then try to reduce that with aspirin, lead author F. Gerald Fowkes said. Aspirin has been shown to lower heart attacks in people who have symptoms of heart disease, and more studies are needed to find a way to prevent cardiovascular problems in people who have a high risk and no symptoms, he said. “One of the problems we have with coronary heart disease and stroke is we’re still not that good at preventing it in people who are supposedly healthy,” said Fowkes, a professor of epidemiology at the University of Edinburgh, in a telephone interview today. “We’ve not cracked that. This was an opportunity to pick people who are at increased risk and try to target a new population to try to prevent getting a heart attack or stroke.” Alternative Drugs Research is needed to see if Pfizer Inc. ’s Lipitor and AstraZeneca Plc ’s Crestor, two cholesterol-lowering drugs called statins, work in these patients to reduce their risk of heart attack or stroke, Fowkes said. Another approach is to test whether Bristol Myers Squibb Co. ’s Plavix, an anti-clotting drug, works in this group. More than 81 million people in the U.S. have one or more forms of cardiovascular disease, including coronary artery disease, high blood pressure and chest pain, according to the American Heart Association. It is the leading cause of death in the U.S. Aspirin helps prevent clots from forming in the arteries and has been shown to be effective in people who have symptoms of heart disease, said Jeffrey Berger , an assistant professor of medicine and surgery at New York University, who wrote an accompanying editorial in the journal. Right Population “I still think aspirin is a very effective drug,” Berger said in a telephone interview today. “We just have to find the right population to do it in for prevention of first heart attack or stroke.” Fowkes said he isn’t sure why aspirin didn’t appear to work in the study. It may be that the trial wasn’t large enough to detect a difference or people didn’t continue taking their aspirin, he said. The study included 3,350 people who had a low score on a test called the Ankle Brachial Index . The test measures blood pressure at the ankle compared with pressure in the arm. It is used to determine if someone has peripheral artery disease, or blocked arteries in their legs and other parts of the body, which increases the risk of heart attack and stroke. Eight Years Those in the study were randomly assigned to receive either a low-dose, 100 milligram aspirin tablet or a placebo. They were followed for about eight years. The researchers found that 181 people, or 10.8 percent, of the aspirin group and 176 people, or 10.5 percent, of the placebo group had a heart attack or stroke. Today’s study, was sponsored in part by the British Heart Foundation and Bayer AG, maker of a low-dose aspirin for cardiac health. Future trials should help identify patients who have increased levels of blood platelets, Berger said. Doctors know they have a higher risk for heart disease. Such research may determine if aspirin therapy decreases heart attacks and strokes by reducing those platelet levels, he said. For Related News and Information: To contact the reporter on this story: Nicole Ostrow in New York at nostrow1@bloomberg.net .

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Cholesterol-Cutting Drugs Raise Risk of Diabetes by 9%, Researchers Find

February 17, 2010

By Michelle Fay Cortez Feb. 17 (Bloomberg) — Pfizer Inc. ’s Lipitor, AstraZeneca Plc ’s Crestor and rival drugs to lower cholesterol also boost diabetes rates by about 9 percent, according to a study that quantified a complication that doctors only recently discovered. The drugs, which generated $34 billion in 2008 sales, prevent heart attacks, strokes and death, and their benefits outweigh the diabetes risk, said lead researcher David Preiss, a research fellow at the University of Glasgow. The pills were linked to one additional case of diabetes and prevented five heart attacks and deaths for every 1,000 patients who took them for a year, he said. The researchers analyzed 13 studies of the medicines known as statins after a 2008 trial from London-based AstraZeneca unexpectedly found patients given Crestor had a 25 percent higher risk of diabetes. The new analysis involving more than 90,000 patients, published in the journal Lancet , shows the actual increase in diabetes is 9 percent, the risk is tied to the entire class of medications and the danger increases with age. “Even though there is a slight risk more than what we knew before, it’s still a reassuring message,” Preiss said in a telephone interview. “We’re not talking a huge risk at all, and what we don’t want people to do is take this as a sign to stop taking statin therapy.” Future studies and researchers conducting long-term followup should include blood-sugar reading and diabetes development, the investigators said. Patients and doctors should also be aware of the potential risk and adjust treatment if the drugs’ potential benefits no longer outweigh the risk, they said. Patients may benefit from blood-sugar monitoring during their regular medical checkups, said Chris Cannon , a cardiologist at Brigham and Women’s Hospital in Boston, in an editorial that accompanied the study. “Whilst a new risk of statins has been identified, the risk seems small and far outweighed by the benefits of this life-saving class of drugs,” he said. To contact the reporter on this story: Michelle Fay Cortez in London at mcortez@bloomberg.net

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Video: Ferguson Discusses Outlook for European Debt Contagion: Video

February 5, 2010

Feb. 5 (Bloomberg) — Harvard University Professor Niall Ferguson talks with Bloomberg’s Lori Rothman about Greece’s fiscal problems and the risk of debt contagion spreading through the euro-zone and to the U.S. (This is an excerpt of the full interview. Source: Bloomberg)

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Video: ING’s Condon Says Investors `Panicking’ on Default Risks

February 5, 2010

Feb. 5 (Bloomberg) — Tim Condon, chief Asia economist at ING Groep NV, talks with Bloomberg’s Linzie Janis about the risk of sovereign default by members of the euro-zone. Condon speaks in Singapore.

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U.S. Must Adjust More Quickly to Security Threats, Obama Aide Jones Says

January 30, 2010

By Viola Gienger Jan. 30 (Bloomberg) — The U.S. will be able to protect itself only by adjusting more rapidly to threats such as extremism and cyber attacks and by working more closely with other countries and alliances, Obama administration National Security Adviser James Jones said. “The forces of globalization shape a radically different security environment” than the dangers posed during most of the past half-century, Jones told an audience yesterday at the Center for Strategic and International Studies in Washington. Violent extremists, nuclear arms and other weapons of mass destruction, disease and economic turmoil move across borders, and climate change threatens communities worldwide, Jones said in an address that focused on President Barack Obama ’s national security aims. “The ties and technologies of our interconnected world mean that threats are emerging and challenging our national security faster than ever before,” Jones said. “We have to be just as fast in responding to those threats.” Such changes may be reflected in the Defense Department’s Quadrennial Defense Review due to be issued next week, a plan devised every four years to update the military’s programs and priorities. The administration also is developing a new national security strategy to be completed within weeks, Jones said. The defense review will seek to balance the need to continue developing conventional weapons for major conflicts with an imperative to modernize war-fighting techniques and build up foreign allies so they can do more. Critics’ Concerns The review is raising concerns among critics of Obama’s approach to defense. A Heritage Foundation report earlier this month, co-written by former House and Senate Armed Services Committee member Jim Talent , a Republican from Missouri, cited “signs” that the review results will be “shortsighted.” Talent and co-author Mackenzie Eaglen said that, intheir view, Defense Secretary Robert Gates has signaled a reduced military force “inconsistent with the nation’s security commitments,” along with a focus on a limited number of threats and today’s wars at the expense of preparing for another conventional war. In a speech in Singapore in May that cited the defense review, Gates said the U.S. will shift away from “conventional military deterrence” illustrated by “mechanized divisions poised along the Korean demilitarized zone or on the central plains of Germany” to a mix of military, diplomatic, economic, cultural and humanitarian approaches. Increased Engagement Obama, in his State of the Union speech on Jan. 27, cited increased engagement with alliances such as the Group of 20 as helping pull the global economy back from the brink. The U.S. in the past year “strengthened partnerships from the Pacific to South Asia to the Arabian Peninsula,” Obama said. Renewed discussions with Russia on an agreement to further reduce each side’s nuclear weapons stockpiles and talks with China on issues from Iran to climate change are examples of engagement to increase security and spread the burden of doing so, Jones said. Obama described nuclear weapons as “perhaps the greatest danger to the American people.” The risk that such weapons might fall into the hands of terrorists or regimes that aim to threaten others creates “one of the great ironies of the nuclear age,” Jones said today. “Just as the risk of a nuclear exchange within superpowers decreased, the risk of a nuclear weapon being used against an American city has gone up,” he said. “Nations with nuclear weapons have a responsibility to move toward disarmament. Nations without them have the responsibility to forsake them.” Deeper Cuts The administration expects to reach a new Strategic Arms Reduction Treaty with Russia, and plans to follow that with a Nuclear Posture Review that will “open the door to deeper cuts and reduce the role of nuclear weapons,” Jones said. The prospect of Iran developing nuclear weapons heightens the urgency for a political resolution between Israel and the Palestinians, Jones said. History shows that pressure such as what Tehran is experiencing internally and will see externally in the event of more international sanctions will increase the risk of Iran lashing out through militant groups opposed to Israel, Jones said. “It’s only becoming even more important, even more urgent to restart the negotiations between Israelis and the Palestinian Authority to show that progress cannot be derailed or denied,” Jones said. To contact the reporter on this story: Viola Gienger in New Delhi via vgienger@bloomberg.net .

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Sitting Is Silent Killer, Say Swedish Doctors in Warning to Couch Potatoes

January 19, 2010

By Michelle Fay Cortez Jan. 19 (Bloomberg) — Desk jockeys and couch potatoes beware: Too much sitting, and not just a lack of exercise, may cause heart disease and other life-threatening illnesses, according to doctors from the Karolinska Institute and the Swedish School of Sport and Health. The more time people spend in a completely sedentary state, independent of the exercise they get at other times, the higher their risk of becoming obese, and developing diabetes, heart disease and cancer, the doctors wrote in an editorial in the British Journal of Sports Medicine . The dangers are greater still for people who do little exercise as it is, the authors wrote. Public health officials have designed elaborate programs to encourage people to exercise, recommending a minimum of 2.5 hours of physical activity each week to stay fit and healthy. Individuals should also be encouraged to climb stairs rather than take the elevator, walk to the store, and take regular 5- minute breaks during a working day spent behind a desk, said doctors led by Elin Ekblom-Bak, from Karolinska and the Astrand Laboratory of Work Physiology. “In the demanding and stressful society of the present, to prescribe these low and minimally time-consuming efforts may encourage many people with problems in maintaining a sufficient level of exercise,” the doctors wrote . “Encouragingly, research has shown that simple forms of prescribing individualized physical activity in clinical practice has had a beneficial impact on exercise level as well as sedentary time.” While many people think of being sedentary as lacking in exercise, this is more accurately described as the time when the body’s muscles get no activity, the doctors said. They cited an Australian study showing that each extra hour women spent watching television boosted their risk of developing a group of heart complications known as metabolic syndrome by 26 percent, regardless of what exercise they took. “The present amount of research supporting the independent importance of sedentary behavior is small but consistent,” they said. “People already insufficiently physically active will increase their risk even further by prolonged sitting time.” To contact the reporter on this story: Michelle Fay Cortez in London at mcortez@bloomberg.net

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2010 Commercial Real Estate Outlook: Welcome to Weather Markets …

January 17, 2010

Commercial real estate is just now feeling the effects of the economic downturn. For the past several months talk has centered on commercial real estate loans being the next shoe to drop due to a wave of loan maturities that won’t qualify … To be sure, there are significant differences in the cause of distress between then and now. But the cycle is the same. Then as now, when the markets are in such a state of confusion that “ distressed ” assets define the risk curve, …

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Anemia Drugs from Amgen, J&J To Be Reviewed by FDA Advisors for Dose Risk

January 6, 2010

By Rob Waters Jan. 6 (Bloomberg) — Anemia drugs from Amgen Inc. and Johnson & Johnson will be reviewed by a U.S. advisory panel to weigh appropriate dosages after studies finding that high amounts boost the risk of heart attacks, blood clots and stroke. The Food and Drug Administration will convene an advisory committee to re-evaluate the use of the medicines in treating anemia in patients with kidney disease, agency officials said in a commentary published online today in the New England Journal of Medicine. The date of the meeting is not yet set, FDA spokeswoman Karen Riley said in an e-mail. Anemia treatments such as Amgen’s Aranesp and Epogen and Johnson & Johnson’s Procrit are known as erythropoiesis- stimulating agents, or ESAs, and are used to boost levels of hemoglobin, an element of red blood cells, in anemic patients. Sales of Amgen’s drugs fell to $5.6 billion in 2008 from their high of $6.6 billion in 2006 after cardiovascular risks began to emerge in 2007. A series of studies have suggested that using high doses to get hemoglobin to normal levels may increase the risk of heart attacks and strokes rather than lower it. “Randomized trials have endeavored to show that using ESAs to raise hemoglobin concentration to higher targets improves clinical outcomes,” Robert Temple, deputy director for clinical science at the FDA’s Center for Drug Evaluation and Research, and his colleagues said in the commentary. “Unfortunately and unexpectedly, all results have suggested the opposite.” Amgen Shares Amgen fell 43 cents, or less than 1 percent, to $56.79 at 4 p.m. in Nasdaq Stock Market composite trading. The shares fell two percent in 2009 while the Nasdaq Biotech Index advanced 16 percent. J&J gained 52 cents, or less than 1 percent, to $64.35 in New York Stock Exchange composite trading. The advisory committee meeting “will provide an opportunity to discuss the latest evidence on the benefits and risks of ESAs for patients with chronic kidney disease,” said Amgen spokeswoman Emma Hurley in an e-mail today. The company has already updated prescribing information for its anemia drugs to highlight the risks, she said. Amgen, based in Thousand Oaks, California, is the world’s largest biotechnology company by market value and Aranesp was once its best-selling product. Johnson & Johnson’s Procrit generated $2.5 billion in 2008. In one recent study on anemia drugs, sponsored by Amgen, Aranesp was found to increase the risk of blood clots and strokes in patients with kidney disease and diabetes. That study was published Oct. 30 in the New England Journal. In the study of 4,000 patients, 5 percent of those who took Aranesp had strokes, about double the rate in those who took placebos. The research also found that in patients with a history of cancer, 60 of 188 patients taking Aranesp died, compared with 37 of 160 on placebos. “For many patients, the increased risk of stroke that was uncovered and possible deaths in those patients with prior malignancy outweigh the potential benefit” of the drug, Marc Pfeffer , a heart specialist at Brigham & Women’s Hospital in Boston who led the study, said at the time. To contact the reporter on this story: Rob Waters in San Francisco at rwaters5@bloomberg.net .

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Risk Of New Government Defaults Worries Investors

December 28, 2009

After two years of worrying about mortgage and corporate risk, attention is now shifting to managing the risk of country defaults and bankruptcies of heavily indebted regional governments and city administrations, say bankers.

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China’s Economic Growth May Surge 12% as Exports, Domestic Spending Rise

December 23, 2009

By Bloomberg News Dec. 23 (Bloomberg) — China’s growth may surge to as much as 12 percent next year, increasing the risk from inflation, unless the government raises interest rates, Citic Securities Co. Chief Economist Zhu Jianfang said. The economy may be boosted by a rebound in exports and domestic spending next year, Zhu said. He expects the benchmark rate to increase by between 27 basis points and 54 basis points from 5.31 percent. A basis point is 0.01 percentage point. “We will see a change in monetary policy next year, otherwise, the growth will reach 12 percent, which will be a bit too fast,” Zhu said in an interview after his presentation at a forum in Shanghai. A record 9.2 trillion yuan ($1.3 trillion) of loans in the first 11 months of this year drove a recovery in the world’s third-biggest economy and increased the risk of bubbles in property and stocks. The Shanghai Composite Index surged 67 percent this year, while home prices in 70 major Chinese cities rose at the fastest pace in 16 months in November. The economy may expand 10.1 percent next year with higher interest rates, Zhu said, increasing from his forecast of 8.6 percent growth in 2009. Economists estimate rates may increase 54 basis points next year, according to data compiled by Bloomberg. ‘Very Attractive’ “The recovery is strong and the economy is very attractive,” Hugh Simon , co-manager of the $1.1 billion Dreyfus Greater China Fund, said in a Bloomberg Television interview today. Gains in housing prices have prompted the government to come up with measures aimed to curb speculations in the property industry. The government will target “excessive” growth in property prices in some cities, Xinhua News Agency reported last week. Chinese central bank Governor Zhou Xiaochuan said yesterday reserve ratios are a tool “which we still put quite some emphasis upon.” The nation is targeting 8 percent growth in 2010 amid a “fragile” global recovery, industry minister Li Yizhong said on Dec. 21. The Shanghai Composite has fallen 4.7 percent this month, the worst performer among the so-called BRIC nations that also include Brazil, Russia and India. “The market would fall much lower than people expect, if the government continues to crack down on the property market and tighten liquidity,” said Zhang Gang , a strategist at Central China Securities Holdings Co. in Shanghai. — Zhang Shidong , with assistance from Haslinda Amin in Hong Kong. Editors: Linus Chua , Paul Panckhurst To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at +86-21-6104-7014 or szhang5@bloomberg.net

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Banks Report CRE Exposure Risky but Manageable

December 2, 2009

For the U.S. banking sector overall, commercial real estate exposure remains a significant risk. But it appears the risk level is becoming generally more manageable — more so among the largest financial institutions than regional mid-size and smaller…

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China’s Industrial Overcapacity Is Harming Global Economy, EU Chamber Says

November 25, 2009

By Bloomberg News Nov. 26 (Bloomberg) — China’s excess industrial capacity is “wreaking far-reaching damage on the global economy,” stoking trade tensions and raising the risk of bad loans, the European Union Chamber of Commerce in China said. A 4 trillion yuan ($586 billion) stimulus package is worsening overcapacity, especially in the steel, aluminum, cement, chemical, refining and wind-power equipment industries, according to a study by the chamber and Roland Berger Strategy Consultants, released in Beijing today. The world’s third-biggest economy has rebounded this year on stimulus spending and a $1.3 trillion credit boom . China is adding capacity when global demand is yet to recover from the financial crisis, increasing the risk of trade frictions undermining commerce and making the threat of non-performing loans within the nation “ever larger,” the EU Chamber said. “The Chinese stimulus package has poured credit into increasingly questionable projects,” the business group said, without identifying specific ventures. “The global impact already can be felt in the form of growing trade tensions.” U.S. President Barack Obama and Chinese President Hu Jintao pledged this month to work to ease frictions, exacerbated by U.S. duties on Chinese tires. The chamber recommended 30 measures to cut overcapacity, including letting an undervalued yuan gradually appreciate, reducing a “subsidy” for Chinese manufacturers. Energy Prices It also proposed lowering energy-price subsidies, raising interest rates to reduce easy credit, increasing dividend payments by state-owned enterprises, and spending more on health care and social security to encourage consumption and cut precautionary savings. In September, China’s State Council approved plans to curb expansion in industries including steel, cement, glass, coke, wind turbines and shipbuilding. The government has also introduced measures to limit land supply to sectors with excess capacity. So far, the government’s efforts have been ineffective, the chamber said. China’s excess capacity is an “international concern” as goods that can’t be sold locally may be sent to markets that shrank because of the global slump, European Union Trade Commissioner Catherine Ashton said in Beijing Sept. 9. Ashton has since been named the EU’s top diplomat. Yu Yongding , a former adviser to the Chinese central bank, said yesterday in Melbourne that that the “worrying” long-term effects of China’s expansionary policies include overcapacity, bad loans, and inefficient investment. China Is ‘Victim’ Too China’s own economy is the main “victim” of excess capacity, the chamber said. Lower profits mean companies lack cash to invest in research and development and develop more valued-added goods, it said. Businesses are also forced to cut costs, contributing to slower wage growth and less consumption, the report added. “This is a major obstacle on the government’s path to become both an innovative and sustainable economy,” the report said. China’s lending surge this year focused mainly on expanding production at state-owned enterprises, the report said. This led growth in fixed-asset investment by manufacturing companies to jump to 50 percent by mid-year from 25 percent in January and February, the chamber said. Companies in industries with overcapacity will struggle to repay credit, increasing the risk of a repeat of the 1990s surge in non-performing loans, the chamber said. China’s five largest banks have submitted plans to regulators for raising money after unprecedented lending eroded their capital, according to four people with knowledge of the matter. It’s “particularly troubling” that more than 140 billion yuan was invested in the steel industry in the first half of this year and that 58 million tons of capacity are under construction when global demand may decline 14.9 percent in 2009, the report said. The chamber also warned of “a looming deluge” of extra cement capacity in the nation. To contact the Bloomberg News staff on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

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Salud! The More Spanish Men Drink, the Lower Their Heart Risk, Study Says

November 19, 2009

By Trista Kelley Nov. 19 (Bloomberg) — Alcohol, blamed for social ills ranging from liver disease to disorderly behavior, turns out to also lower the risk of heart illness in men. And the more they drink, the lower their risk, a study in Spain found. The study of more than 41,000 adults, published in the journal Heart , found that regularly drinking alcohol of any type lowers the danger of serious heart disease by almost a third, according to the researchers, led by Larraitz Arriola at the Public Health Department of Gipuzkoa in San Sebastian, Spain. The research confirms previous studies that showed a benefit from alcohol. Japanese scientists reported last year in the American Heart Association’s journal Stroke that heavy drinking may protect men from heart disease, although it raises the risk in women. The likelihood of stroke increased in both men and women. The Spanish study analyzed alcohol intake of about 15,500 men and 26,000 women between 29 and 69, and tracked their health for an average of 10 years. Men who drank moderate, high, and very high levels of alcohol had a lower risk of coronary heart disease, they found. The type of alcohol they drank didn’t affect the level of heart protection and the study included beverages other than wine. For those classified as former drinkers, the risk was 10 percent lower. Among those who drank “little,” or from zero to 5 grams per day, the danger of heart disease was 35 percent lower. “Moderate” drinkers who consumed between 5 and 30 grams a day cut their risk by 54 percent, while “high” and “very high” drinkers, consumers of 30 to 90 grams and more than 90 grams, respectively, cut their likelihood by 50 percent. Spain ranks third globally in beer and wine production and ranks sixth in per capita alcohol consumption, yet the country also has one of the lowest death rates from coronary heart disease. Benefits among women weren’t statistically significant, “possibly due to lower numbers of coronary events they experienced than men,” the authors said. “Women process alcohol differently, and female hormones protect against heart disease in younger age groups,” they wrote. The study received funding from the Spanish Ministry of Health and the Center for Biomedical Investigation in Epidemiology and Public Health . An estimated 2 billion people globally drink alcohol and more than 76 million of those have ill health as a result, the authors cautioned, citing the World Health Organization . Alcohol also causes 1.8 million deaths annually, they said. To contact the reporter on this story: Trista Kelley in London at tkelley2@bloomberg.net

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Dan Solin: The Risk of Not Understanding Risk Adjusted Returns

October 13, 2009

Nothing galls me more that hearing that index funds are fine for those who don’t have time to research stocks. Let’s look at the performance of those who do nothing but research stocks — managers of actively managed mutual funds. Every educated investor knows that over time index funds outperform the majority of actively managed funds. However, as reported in The Wall Street Journal , a new study by Morningstar takes a look at the risk adjusted returns of the funds that beat the comparable index on an absolute basis. Morningstar found that over three, five and ten year periods, only 37% of actively managed funds beat their indexes on a risk adjusted basis. Why is this significant? Because if a fund took more risk, it is more volatile and the potential for loss is increased. If you are going to take more risk than the index, the fund should yield greater returns. Investors should be rewarded for the risk they are taking. How can you tell how much risk your actively managed fund is taking? Yahoo Finance reports the standard deviation of all funds under “risk.” Compare the standard deviation of the actively managed fund to its benchmark index. If it is higher, the actively managed fund is assuming more risk. Here’s an example: The Fidelity Large Cap Stock Fund (FLCSX) is an actively managed fund. Its three year standard deviation is 25.56%. Its benchmark index is the Russell 1000 or the S&P 500 index. The Vanguard Large Cap Index Fund (VLACX) is an index fund which benchmarks the S&P 500 index. Its three-year standard deviation is 19.74%. The Fidelity fund has outperformed its Vanguard counterpart on a absolute basis over the past five years: 2.53% vs. 1.56%. But it took significantly more risk to do so, thereby increasing its potential for both the upside and downside. Here’s the bottom line: When comparing the returns of comparable funds, it is critically important to be aware of the risks they are taking. Dan Solin is the author of The Smartest Retirement Book You’ll Ever Read. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

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Eating Fish Doesn’t Stave Off Heart Failure, Dutch Research Study Shows

September 30, 2009

By Albertina Torsoli Sept. 30 (Bloomberg) — Eating fish, shown in previous studies to promote heart health, failed to stave off cardiac failure in a study by Dutch researchers. The analysis, which started in 1990 and involved 5,299 men and women over the age of 55 living in a Rotterdam suburb, found no difference in the risk of developing heart failure between those who ate fish and those who didn’t, according to a press release posted on the AlphaGalileo science Web site. The study will be published today in the European Journal of Heart Failure , the release said. “Scientists and health authorities are increasingly persuaded that the intake of fish, even in small amounts, will protect against the risk of fatal myocardial infarction,” or heart attack, study investigator Marianne Geleinjse, from the Wageningen University in the Netherlands, said in the statement. “However, there is no strong evidence that eating fish will protect against heart failure.” Heart failure isn’t a one-time event like a heart attack. It’s a gradual weakening of the heart’s pumping power, leaving sufferers with poor circulation that leads to shortness of breath, painfully swollen legs and fluids that pool in the lungs. About 30 million people in Europe are affected with heart failure, the single biggest reason for acute hospital admission, according to the release. The researchers set out to investigate whether the fatty acids and vitamins found in fish protected consumers against heart failure the way they seem to do against heart attacks. During the 11.4 years of follow-up, 669 of the people monitored developed heart failure, according the release. Individuals had been asked to indicate the frequency, amount and kind of fish they had eaten, either as a hot meal, a sandwich or between meals. Fish consumption in the Netherlands is very low, on average less than one portion a week, the researchers said. A daily fish consumption of more than 20 grams a day, high for the group studied, led to no added protection against heart failure, the researchers said. “Maybe higher intakes are needed for any protection against heart failure,” Geleinjse said. To contact the reporter on this story: Albertina Torsoli in Paris at atorsoli@bloomberg.net

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Flu May Trigger Heart Attacks Say Researchers Who Urge Greater Vaccination

September 22, 2009

By Michelle Fay Cortez Sept. 22 (Bloomberg) — The flu may trigger heart attacks and raise the risk of dying from heart disease, said researchers who analyzed data collected the past 75 years. A review of 39 studies conducted from 1932 to 2008 found consistent links between influenza and major heart attacks, bolstering previous observations that the heart can be damaged in patients with influenza, according to the report in Lancet Infectious Diseases . People at risk for heart attacks, including those with diabetes and cardiovascular disease, should get vaccinated against influenza, said the researchers led by Andrew Hayward from University College London’s Center for Infectious Disease Epidemiology . While the immunization is recommended for people with chronic conditions, fewer than half of them in the U.K. were vaccinated last year, the researchers said. There is “consistent evidence” that influenza triggers acute heart attacks and death from cardiovascular disease, the researchers concluded. There is also some evidence that influenza vaccines may reduce the danger, particularly in patients with existing heart disease, they said. The number of people expected to develop the flu is higher than normal this year as a novel swine flu circles the globe. Rising Cases The pandemic has spiked over the last two weeks in the U.S. and U.K. as students returned to tightly packed classrooms. Health officials are racing to begin vaccination campaigns to curtail the outbreak, which in the U.S. is already higher than the peak rate in two of the last three flu seasons, according to the Atlanta-based Centers for Disease Control and Prevention . Influenza may increase levels of inflammation in the body, raising the risk that fatty plaque in the arteries breaks off to form a heart attack-causing clot, the researchers said. “We believe that influenza vaccination should be encouraged wherever indicated, especially in people with existing cardiovascular disease,” the researchers said. More evidence is needed to determine the effectiveness of vaccines to reduce heart risks in patients without existing disease, they said. To contact the reporter on this story: Michelle Fay Cortez in London at mcortez@bloomberg.net

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Les Leopold: Size Matters: Why the Obama Administration is Wrong about Wall Street Pay

September 20, 2009

“The Obama administration opposes strict caps on pay, arguing that the size of the bonuses are not as important as the risk to the financial health of the bank that bonuses linked to performance can create.” New York Times , Septermber 18, 2009 ((http://www.nytimes.com/2009/09/19/business/economy/19pay.html?_r=1) ) The size of the bonuses are not that important? For Wall Street elites, the size of your pay package is everything. It’s why you’re there. It’s your plumage, your pecking order, your future and your legacy. But the financial crash, which nearly pushed us into the Great Depression II, threatened to end pornographic pay. It finally dawned on the American public that our financial dons not only were wildly overpaid, but also were running the wildest casino ever. They were the house and they got to bet with other people’s money. When the fantasy finances games crashed under their own weight, (not because of unqualified home buyers or greedy consumers or big government), it became clear that the profits and pay schemes were built upon phony assets which turned toxic in a hurry — but not before the bankers and traders safely took home their fantastic fees. (For more on this sordid story, please see The Looting of America .) Just one year ago it seemed plausible that our government would do the obvious: bring the hammer down on the sky-high salaries and bonuses, which clearly had no economic justification. The Europeans were ready to move and still are. But the Obama administration is holding out because Geithner, Summers and Bernanke don’t see a necessary connection between systemic risk and obscene pay packages. To preempt both the populist moves from Congress and from Europe, the Fed is putting forth new “principles” that will allow outrageous compensation packages to continue as long as they don’t encourage risky financial behavior. These very flexible rules will pertain primarily to the twenty or so institutions that have been deemed “too big to fail.” And they will be implemented in private, mano a mano between Fed regulators and the institutions. How considerate and chummy. Crack open the Champaign! It’s party time again on Wall Street. The financial elites are thrilled with the new “principles.” In fact, they couldn’t have come up with a more harmless regulatory effort if they wrote it all themselves, (which perhaps they did.) They don’t care about the risk-averse rules. They don’t care about clawbacks or delayed compensation. It will be kids play to work around them. That’s what financial engineers are for. You can bet that these rules will permit Andrew J. Hall, the oil speculator, to get his $100 million paycheck from CitiGroup, a bank owned by the American taxpayer. Perhaps his pay package will be restructured or even stretched out, but in the end nothing really will change. He will get his $100 million even though he wouldn’t have gotten a dime had we let CitiGroup go under. The Obama Administration is just plain wrong. Size does matter. You can clearly value pay packages and limit them. But risk is a much slippery concept: you can always find a way to fudge subjective risk calculations when big money is at stake. Take the big money away and you take away the risk. That’s not regulation, that’s human nature. Here are the obvious ways to tame elite animal spirits. . 1. Because we have given more than $13 trillion to Wall Street in terms of taxpayer TARP funds, asset guarantees and liquidity programs, we should insist that no one on Wall Street earn more than the President of the United States, at least until the unemployment rate falls below 5 percent. That would be a fitting tribute to those 29 million who are now without work or forced into part time work, especially since Wall Street’s crash created most of that unemployment. As for risk, few Wall Street dons will stay up late at night dreaming up new scams for only $400 k a year. 2. If you think the President’s Wage Cap is too draconian how about a 90 percent progressive income tax on any compensation over $1 million a year? This would reduce Andrew J. Hall’s compensation from $100 million to about $11 million. Still far too generous in my book, but more than enough for an oil speculator who has yet to explain how his work contributes any real economic value to society. 3. Or we could put a 90 percent windfall profits tax on all Wall Street profits . Why? Because there would be no financial profits at all if we hadn’t bailed out the entire gang out with our $13 trillion worth taxpayer gifts. 4. And if you’re really bold and adventurous, we could place a small transaction tax on high speed, high frequency speculative trading , as advocated by Lord Turner, Britain’s chief financial regulator. That would serve as a powerful “just say no” damper on risky financial behavior. That’s how you deal with size. That’s how you deal with risk. And that’s what President Obama said last May, before he was afflicted with financial amnesia. Remember this? “What I think will change, what I think was an aberration, was a situation where corporate profits in the financial sector were such a heavy part of our overall profitability over the last decade…. That means that more talent, more resources will be going to other sectors of the economy. I actually think that’s healthy. We don’t want every single college grad with mathematical aptitude to become a derivatives trader. We want some of them to go into engineering, and we want some of them to be going into computer design.” President Obama, May 2, 2009, Reuters That’s the president I voted for, not the one who refuses to challenge Wall Street entitlements. Les Leopold is the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It , Chelsea Green Publishing, June 2009.

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Stephen M. Davidson: Paying for Health Care Reform: Part 1

August 12, 2009

The critical question of how to pay for health care reform seems more difficult than it needs to be because Congress has chosen to rely on a reform strategy that depends on competition among traditional insurance companies. The assumption is that, to win and retain customers, insurers will find ways to keep their prices low in order to persuade individuals and families to buy their coverage. But indemnity insurers that pay providers fees for each service they provide do not have the means to do that without undermining the value of the coverage. Insurers have few tools for keeping costs down. They can reduce what they pay for services, but some providers are likely to cope by increasing volume. They can impose prior authorization and other administrative requirements to make it harder for patients to receive covered services and for providers to be paid for them. They can segment the market and discourage potential high users of service from buying their policies in the first place. Insurers use these tactics now. In fact, one of the goals of reform is to eliminate them so that more people can have coverage and obtain the care they need. Regulation can mitigate their effects. Requiring insurers to accept any applicant and to renew any policy can reduce inequities. Requiring them to use community rating to set prices can keep premiums affordable for many higher risk people. Requiring them to cover a comprehensive set of services will provide access to the services subscribers need. Enforcement will be a challenge, and insurers are likely to continue to raise prices each year — constrained only by competitors that are up against the same forces. A simpler solution is available that will achieve the main reform goals and avoid most of the problems from relying on price competition among insurers. In this first post, I describe where the money would come from. In the next one, I talk about how it would be used. Here is the idea: Require that everyone contribute an income-related amount (that is, more for higher-income people than for others) to a dedicated pool of funds for paying insurers and health plans. Then issue vouchers which entitle everyone to choose a health plan or insurance policy. Before dismissing this idea for the cardinal sin of raising taxes, consider these facts: If everyone is covered, per capita costs will be much lower than currently because everyone will be in the risk pool, including millions who will need few or even no services. Also, the currently uninsured who now rely on expensive hospital emergency departments could select community-based primary care physicians. And the vast sums now spent on administrative functions – by insurers to keep from spending money on care and by providers to cope with the vast variations in coverage – would no longer be needed. Furthermore, for people who are currently insured, this “tax” will not only be lower, but will substitute for the premiums they pay now. Employers would pay either a percent of payroll or an amount based on their taxable income. Since the rates will be determined by the size of one’s income, the burden should be manageable for everyone. People with pre-existing conditions and other risk factors will not pay more. Those who don’t earn enough to pay taxes would be covered, too. Cost-sharing amounts, if any, would be kept small so as not to be a barrier to utilization as they are for many in today’s system. Medicare beneficiaries would not need to worry about their coverage. On the other hand, if Medicare (and Medicaid) were folded into the program, the taxes currently supporting those programs would be unnecessary, too. The contributions will be set to create a fund large enough to cover the following year’s projected health care costs for everyone. A key feature is that the amount available to be spent on care would be known at the beginning of the year (instead after all the bills are added up at the end). Costs would rise only modestly. And the best part is that all would be covered and costs would rise only modestly. In my next post, I will discuss disbursing the funds and how the rest of the plan could work. Davidson, a Boston University School of Management professor, is author of the forthcoming book, In Urgent Need of Reform: The U. S. Health Care System.

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