Banks not paying back AIG money

I saw the Johnny Depp movie “Public Enemy” about John Dillinger just days after learning that the average wage this year at Goldman Sachs will be $700,000. What made Dillinger a popular folk hero during the height of the Great Depression was that he robbed what people thought of as the culprit causing the nation’s malaise.

Nobody today would think that robbing banks would be a good idea, but it sure makes sense to do a better job of controlling them until every speck of government money is repaid with interest.

With respect to Goldman Sachs, they may have repaid the $6 billion we lent them to keep them afloat, but they have not paid a cent of the $18 billion they effectively received from AIG to insure their ridiculous bets. No one can explain to me why that money has just dropped into a black hole. We’re pretending that a bankrupt AIG is the only party we can turn to for getting our government money back.

To me, it’s no different from the “claw-back” provisions that will plague Bernie Madoff investors who took their profits out at the expense of others. Until Goldman pays the government the entire $18 billion of AIG money that reputedly disappeared into the Goldman maw, it would appear to me that those $700,000 average annual salaries should be more like $100,000 — or less. This is a huge rip-off of public money.

If we taxpayers had not made that money available to all the banks that were benefiting from AIG’s insurance, they would all be history today. Why are we pretending that the bank’s obligation ends with the amount we loaned them directly?

As financial writer and former bond trader Michael Lewis writes in Vanity Fair magazine, it has been a full year and nobody from the government has bothered to go to Connecticut yet to ferret out the workings of AIG trading department that threatened the world financial system.

All we know is that we loaned them a huge amount of money primarily to protect the institutions that had benefited from the AIG charade. AIG is history. Liquidating what’s left will never make up for $187 billion we are owed. We need a Melvin Purvis (the FBI agent that tracked down and killed Dillinger) to go to Connecticut and claw back that money from firms that were saved by our tax dollars.

Meanwhile, lurking right in the administration is a nest of investment bank sympathizers. We can start with administration official Larry Summers, who gamely tried to make the case that paying secret bonuses to AIG executives was acceptable because “we were contractually obligated.”

Apparently no legal mind was handy to tell him that there are all sorts of legal options for breaking contracts under extenuating circumstances — such as a collapse of the world financial system. A recent New York Times editorial, “Sharks Circle in Congress” pointed out the dismal failure of regulators to apply the laws they had at their disposal. These are the people testifying to the effect that current regulatory bodies are just fine.

Those of us saving for retirement deserve better treatment and more protection. We need an army of Melvin Purvis types who are true public servants. No misplaced hero worship should be lost on today’s John Dillingers, because that’s our money in the financial system they are looting.

October turnaround in the cards

Cheer up. The depth of our despair, from an economic standpoint, is scheduled to take place on or about October of this year.

The balance of the summer will be rough with lots of bad news on the economic front, but behind the obfuscating veil created by the news media, things are already looking better. How do I know this? Because I spend most of what I earn from writing this column to access monthly information from the Institute for Trend Research — the latter being a think tank of economists located in a backwater of New Hampshire. Headed by twin brothers, Alan and Brian Beaulieu, the institute publishes charts and graphs and distills them into a computerized brew that has been remarkably accurate at predicting future economic events over many years.

In a recent speech in San Francisco, Alan Beaulieu pointed out that we were approaching the economy’s nadir, as the financial services sector, the first of several leading indicators, was starting to show signs of a turnaround. It doesn’t take a genius to recognize that the stock market is making a comeback, and the bond markets are firming up as well. Traditionally, financial markets lead the economy by about six months — and small companies lead the overall market by an additional three months. Both are right on schedule to predict an October turnaround.

The second of eight major benchmarks is housing, and that market appears to have hit some version of a bottom. For every homeowner sadly walking away from a foreclosure, there is someone else now ecstatic at being able to find an affordable home.

Retail sales are still falling and have yet to hit bottom, as is also true with the level of new orders and production of goods. This is why October is the still the earliest we can safely say that the economy will have entered its recovery stage. Retail sales need to start an upward trajectory before we have any serious resurgence, and this category generally lags the housing and financial indicators by several months. Prices will continue to fall for several more months, and then start rising sometime in mid-2010. The consensus is that the real force of the recovery will be felt in 2010, but the seeds will be planted as early as October of this year. We might as well start crossing off the days on our calendar.

Meanwhile, the trend research indicates that the stock market, for example, will not achieve its 2007 high water mark until as late as 2020. That’s not to say that retirement savers won’t make money between now and then. There will be dividends reinvested during the next 10 years and there will be market declines offering opportunities to dollar cost average. The latter reduce the average price of all shares by buying at least some on a regular basis while the market implodes. Anyone curious about inflation might be interested to know that it will be 1.5 percent in 2009; 3-4 percent in 2010; and 8 percent in 2011.

And that’s not all. So far, only $125 billion of the $480 billion earmarked for the stimulus has been spent. The balance when disbursed will further strengthen 2010’s economy. About the time the rest of the stimulus is paid out, the banks will be paying back the money we lent them. Is this a great country or what?

Health care reform needs common sense

On a seven-mile hike up Flat Top mountain in North Carolina with my nephew, a young family physician, he shared what his experience is like in an emergency room practice in a medium-sized southern town.

He and his partners staff the hospital and serve a patient population that is one-third insured, one-third on Medicare and one-third uninsured. With the few exceptions of those who can afford to pay at least something before pleading bankruptcy, the cost of treatment for the uninsured has to be built into what is charged for the insured people. This is what everyone has been saying all along, but my nephew just confirmed that it wasn’t some urban myth.

So, if we manage to insure all those uninsured people through some form of payroll tax or mandatory coverage, then the cost should remain the same. We’re already paying for them with costs that are built into the existing premium structure. We can be assured that somebody is paying for the uninsured, or my nephew, with three small children, would not be working as a doctor.

The government will have to adopt a payment format (taxes or mandatory premiums) to cover the currently uninsured, and the rest of us should see our health insurance premiums drop as our taxes go up to cover the cost of the program — like taking a bucket of water from the shallow end of the pool and pouring it into the deep end. Ultimately, it becomes a “wash” transaction but with the advantage that everyone, technically, can say they are insured. Uninsured or partially-insured health problems will no longer be the nation’s No. 1 cause of personal bankruptcy.

Reducing costs overall should easily start with the cost of drugs. There are three drug industry lobbyists for every congressman today, and the industry spent $100 million to successfully ban the right of Medicare to negotiate for the price of drugs they provide.

I wish it were legal to point out to the drug industry that, for example, those eye drops that cost $15 per bottle amount to nothing more than 99 percent water and 1 percent diluted Vaseline. According to a retired patent attorney who knows these things, the cost of the eye drop product is approximately.001 percent of its retail cost. Doing the math illustrates that the cost of what’s actually in the bottle has been marked up by 1.5 million times its cost.

Overall, the ability to negotiate drug prices in behalf of the nation’s Medicare patients would have a huge impact on cost reductions. Those $15 eye drops might reasonably cost just $1.50 for packaging and shelf space. All over the world, starting with Canada, negotiating prices is the norm, but the toxic mix of campaign finance practices and career politicians makes it impossible in the United States.

Why on earth do we now allow full page ads aimed at consumers that promote prescription drugs? It used to be illegal to advertise anything beyond over-the-counter medicine. Now, all these ads are creating a nation of obnoxious hypochondriacs (the “worried well”) who are equipped to start telling their doctors what they think they need. With the cost of advertising built into the price of drugs, some of us, for example, are actually paying to be continually reminded that Levitra, Cialis and Viagra can improve quality control? It’s just nuts.

Bonding could protect investors

The Bernie Madoff fiasco prompts me to wonder if the ubiquitous “Member of the Security Investors Protection Corporation” (SIPC) means very much right now for those of us who were never given the chance to invest with Bernie.

Could it be that the $164 million paid out to Madoff victims thus far is just the beginning of the tsunami that will wipe out SIPC’s coffers? How on earth will the brokerage industry’s self-styled umbrella of protection round up enough money to replace tens of billions in stolen assets?

Why does SIPC even need to exist? Why wouldn’t just routine bonding insurance protect against theft? Answer: Because when you allow your stocks to be owned “in street name” at your brokerage firm instead of having certificates actually delivered to you for safe keeping, the brokerage firm can borrow for its own account using those assets as collateral. That’s not theft. It’s just risk that bonding can’t cover.

Brokerage companies can borrow as much as 15 times the value of your shares. Read the fine print of the contract you actually signed when you set up your account. On the firms’ own money — actual profits that they have made over the years and that remain as retained earnings — the brokerage industry (since 2004) has been allowed to borrow as much as 30 times their net worth.

Like a needle in the arm, we now know that with the narcotic of this much leverage, brokerage firms like Merrill Lynch and Lehman Brothers can go right down the tubes, and our money can go with them.

What may have been only an academic interest in the small-print reference to SIPC membership at the bottom of our brokers’ correspondence suddenly takes on new meaning.

SIPC protects basically small investors up to a maximum of $500,000. It has been rare for any brokerage firm to go out of business. If your money is in mutual funds, you can relax because the fund companies know what they’re doing. They write their own agreements with the brokerage industry that protect fund assets from possible exposure.

To illustrate how extensive and creative are the mysteries behind the veil of the brokerage industry, I recall reading not long ago that an estimated 25 percent of Charles Schwab profits were derived from interest earned on loans of customer securities for short sale purposes. This is probably true industrywide.

The next few months will determine whether or not our SIPC protection is worth anything. It’s to their credit that SIPC has paid out as much as they have so far.

It may be reassuring to know that we have at least $500,000 worth of safety net, but the question to ask is why we tolerate a system that requires it at all. We must be slow learners. During the Reagan-era deregulation of savings and loans, greed-fueled institutions failed when wild bets on real estate went bad. Fortune magazine ran an article at the time that pictured about 350 S&L executives that had been sent to jail — a two-page spread of tiny portraits that resembled those insurance ads picturing the year’s leading salesmen. Jail sentences may be satisfying at some level, but they are too little too late.

In the end, we’re alone with our money. Read the fine print and avoid anything that looks too good to be true.