The Biggest Loser This Week Isn’t Obama — It’s the Health Insurance Industry

Obama health care news conferenceThe President’s administrative decision to ignore another section of the Obamacare legislation for a year does not redeem his promise that “if you like your health plan, you can keep it,” but it’s a significant step in that direction.  It may slow the stampede of Democratic legislators seeking to distance themselves from the President, but it won’t eliminate it.  Yesterday 39 House Democrats voted for a Republican bill that would go slightly farther than the President did yesterday.  Politico reports:

It’s a significant show of disloyalty to the White House, but House Democrats had expected the defections to be far higher before the Obama administration said Thursday that it would pursue an administrative fix to the cancellation problem.

While Obama may have bought himself a little time, let’s pause for a moment to consider the plight of the health insurance industry.  No, really. The Obamafix hurts the insurance companies in three ways.

1. It worsens the problem of adverse selection.  The people who opt for their old plans will disproportionately be those who would have to pay more for coverage under Obamacare.  The whole financial structure of the law is based on convincing young, healthy people to overpay for insurance they don’t need, thereby subsidizing older, sicker people who cost the insurance companies a lot of money.  That’s why there’s an individual mandate to purchase insurance in the first place.

2. It creates crisis conditions for the industry.  Crises cost money, and could lead to bad decisions.  As insurance consultant Bob Laszewski writes (h/t: Megan McArdle):

The Obama administration may not be ready for Obamacare but the insurance industry is. The health insurance companies spent the last many months rolling their old policies off the books and replacing them with the 2014 Obamacare compliant products––Bronze, Silver, Gold, and Platinum.

Cancellation letters have been sent. Their computer systems took months to program in order to be able to send the letters out and set up the terminations on their systems. Even post-Obamacare, the states regulate the insurance market. The old products are no longer filed for sale and rates are not approved. I suppose it might be possible to get insurance commissioners to waive their requirements but even if they did how could the insurance industry reprogram systems in less than a month that took months to program in the first place, contact the millions impacted, explain their new options (they could still try to get one of the new policies with a subsidy), and get their approval?

Plus, there will be increased ongoing costs for administering both sets of plans throughout 2014.

3. It sets the insurance companies up as the villains. Insurance companies have to decide very quickly whether to play along with Obama’s desperate gambit.  Playing along is very much not in their financial interest in the short term… but how much latitude do they have to make a prudent business decision and stand by the cancellations?   Remember, this is the president who, in the auto industry crisis, summarily fired the head of GM, forced Chrysler to begin selling itself to Fiat, and summoned the auto executives to the White House to tell them, “My administration is the only thing between you and the pitchforks.”

The president’s action is going to cost the health insurers a lot of money, and the only way for them to recoup that money will be by raising premiums in future years. Yes, I know that many consider Obamacare to be a giveaway to the health insurers, by forcing everyone to buy their products.  But I don’t think the industry is particularly grateful for Obamacare this week.

Meanwhile, whitehouse.gov still says ” If you like your plan you can keep it and you don’t have to change a thing due to the health care law” — now a full week after Politico pointed out that the falsehood is still there.  The phrase has been indefensible for longer than a week, of course, but I count the Politico story as the event that destroyed the fig leaf of a possible excuse that it’s just old website content that hasn’t been updated.

You know you’re in trouble when utter incompetence is your only defense against a charge of lying.

(Photo of Obama news conference from whitehouse.gov)

Revisiting Cash for Clunkers

CashForClunkers-narrowThe Wall Street Journal has just labeled the Cash for Clunkers program “one of Washington’s all-time dumb ideas.”  (Hyperbole, of course — no program costing a “mere” $3 billion could possibly qualify for the all-time dumb list.)  Here’s their reasoning:

Last week U.S. automakers reported that new car sales for September, the first month since the clunker program expired, sank by 25% from a year earlier. Sales at GM and Chrysler fell by 45% and 42%, respectively. Ford was down about 5%. Some 700,000 cars were sold in the summer under the program as buyers received up to $4,500 to buy a new car they would probably have purchased anyway, so all the program seems to have done is steal those sales from the future. Exactly as critics predicted.

Okay.  I’d want to see a few more months of statistics before concluding that most C4C buyers bought cars “they would probably have purchased anyway,” although that’s undoubtedly true in many cases.  Also, how does the September report compare with year-ago comparisons for the months just before C4C went into effect?  (I spent a frustrating 10 minutes looking for raw statistics before realizing I just didn’t care enough to spend 11 minutes.  But why don’t news reports provide links to data sources the way blog posts do?) Since September marked the start of the financial meltdown I suspect that might have been the last relatively strong month for car sales, which would skew the year-earlier comparison.

I’m still largely opposed to the very idea of artificial spending programs in the name of stimulating the economy, and I’m ferociously opposed to the wasteful and dishonest porkulus bill.  But if there was going to be a fiscal stimulus plan — and the political realities of the spring left no doubt about that — then I still think C4C was as good a stimulus as any.  And Larry Kudlow agrees with me!

Kudlow Supports A.T.I.N. on Clunkers

kudlow_Bio.standard

Kudlow's with me!

For days after conveying the coveted All That Is Necessary Seal of Approval on the Cash for Clunkers program, I’ve watched a parade of conservative commentators weigh in against it.  Some of the critics were straining too hard to find a way to bash a Democratic initiative, but there were enough substantive concerns that I began to worry about having my conservative decoder ring revoked.

So I was relieved when prominent conservative economist and columnist Lawrence Kudlow came out in support of my position.  (Disclaimer: Kudlow did not actually consult with me, and may not have been aware that he was backing my play.)

At this moment in history, if we’re going to use fiscal stimulus as Washington insists, I favor extending the cash-for-clunkers car-rebate program.

In virtually no time, the clunker program has become a national pastime. It has captured the public’s imagination in a way that no other federal stimulus has. Everyone is talking about it. And I truly believe that consumer spirits have been buoyed by the prospect of going out and buying a new car — even with federal assistance, and even under the duress of federal mileage standards.

Note that Larry and I are not advocating government giveaways to stimulate the economy.  (I call him Larry ’cause he agrees with me.)  We’re just saying that IF the government is going to dump tax money into a stimulus scheme, Cash for Clunkers is a particularly good way to do it.  It’s an artificial and ultimately unsustainable feel-good program — but if that’s what Dr. Congress has prescribed, at least it takes advantage of the fact that economic recovery and improved consumer sentiment go hand in hand.

“Porkulus” Was a Travesty, but “Cash for Clunkers” is Kosher

CashForClunkersI wasn’t aware of the “Cash for Clunkers” program until today, when they started talking about ending it prematurely because it was running out of money.  I’m not in a position to take advantage of the program  personally, but I’m glad that it looks like Congress will add more money to it.  I think the concept is brilliant — if the rest of the bloated and dishonest “stimulus” legislation had been more like this, I’d stop calling it the Porkulus bill.

Many conservatives argue that there should not have been a stimulus bill at all.  I tend to agree, and I certainly respect the principles on which that argument is made.  However, the simple political reality is that there was zero chance that the government would refrain from using stimulus spending in an attempt to revitalize the economy.

But while I think any stimulus spending may have been misguided, I’d be done talking about it if the legislation had been a pure stimulus package.  The thing I find infuriating is the uncontestable fact that much of the money will not be spent until 2011 or later.  It is fundamentally dishonest to pretend that the purpose of such spending is to stimulate the economy now.

That’s why I love the Cash for Clunkers program.  People commit to spending money right now, then they wait for the rebate.  It gives a boost to the auto industry (and remember, you and I now OWN a significant chunk of that industry).  It gets older, less efficient vehicles off the road in favor of more fuel-efficient models.  Perhaps best of all, it lets individual citizens decide whether they personally want to participate in the program. Win, win, win, win.

Of course, some conservatives see it differently.  On Planet Gore, National Review Online’s anti-environmentalist blog, Henry Payne weighs in:

Worse, Democratic demands that the guzzlers be permanently shredded means that already hurting used-car and -parts businesses will suffer. By insisting that the cars not only be crushed — but also that their engines be disabled — Congress’s decree will penalize the industry at time when a dozen U.S. parts suppliers have filed for bankruptcy this year. […]

The victims will be lower-income Americans who typically buy only used parts and vehicles. “Now you’re removing cars people could afford, and they’re not available anymore,” says Norm Wright, a Denver recycler. “There will be fewer cars to pull from, so the price of parts will go up.

Pish and tosh.  This strikes me as Obama Derangement Syndrome, or maybe Government Derangement Syndrome — the idea that any initiative by one’s political “enemies” must be not just opposed, but also attacked and belittled.  Once it becomes inevitable that there is going to be an attempt to stimulate through government spending, Cash for Clunkers is about as good as it gets.

The original program included  “only” $1 billion for rebates.  Now the House has voted to add $2 billion.  Those amounts alone have no meaningful stimulative effect.  But surely other sensible stimulative initiatives could have been devised.

At the risk of sounding like a Republican,  the most effective way to stimulate the economy would have been… wait for it… a tax cut.  No, not a “tax cut for the rich” — a tax cut aimed directly at middle-class and lower-middle-class wage earners and business owners.  I’m talking about cutting Social Security taxes — the most regressive form of taxation there is.

I don’t recall where I first heard this idea — probably one of the political podcasts I listen to on the treadmill.  But the more I think through the implications, the more I like the concept.  The Social Security portion of FICA — currently 6.2% on the first $106,800 of annual wages earned — is more regressive even than the sales tax, because there’s no cap on the sales tax.

slow_d16It’s too late now — the Democrats already rammed through their Christmas-tree porkulus package, and the president put the lie to the idea that it had to be passed now now now now now by waiting days to sign it.  But if the main point is to pump money into the economy, why not temporarily reduce that tax by, say, 1 point?  Sure that creates a greater Social Security deficit in the future… but Porkulus increases a different deficit, and it’s not as efficient in creating short-term spending.

A Social Security tax cut could have become effective as quickly as employers could adjust their payroll calculations.  Because of the very nature of the tax, it benefits lower-income people more than it benefits the “rich.”  If the only way to get Democratic support to pass such a bill were to make sure none of the filthy, immoral, $106,801-earning Plutocrats got a single dime of benefit, you could even phase out the temporary tax cut at higher income levels.  Of course, you could also couple such a tax cut with a much smaller, better designed spending program.

Would some people undermine the stimulation by saving the extra bucks rather than spending them?  Sure.  But a LOT of the money would get spent… and the part that is “wasted” by being saved would at least be going into the savings accounts of individuals, who could make their own eventual decisions on how to spend it.

I’m not recommending this now — I’m opposed with every fiber of my being to any additional “stimulus” effort before what we’ve already done has a chance to filter through the economy.

But am I missing something?  Why would this not have been a better idea?

(Illustration by the Web Goddess)

Wanna Buy GM Stock? Better Hurry, the Price is Rising!

gm_stock_6-7-09_-_2

As you may have heard, General Motors, once the world’s largest company by market capitalization,  is bankrupt. You and I, along with 300 million of our closest friends, are going to end up owning about 70% of a much-smaller General Motors.  Congratulations.

In this morning’s Washington Post, George Will has a good column worrying about all the different ways the government bailout could go badly, now that GM will be benefiting from the same ownership that has made Amtrak such a paragon of efficiency for nearly four decades.  The most obvious problem is that GM needs to close hundreds of dealerships — every one of which is in somebody’s Congressional district.

At the end of the column he mocks the idea that General Motors is “too big to fail”:

Big? GM’s market capitalization, $375.8 million on Wednesday, is about the size of California Pizza Kitchen’s ($340 million) — is it too big to fail? — and one-eleventh that of Harley-Davidson ($4.3 billion). Fail? If GM has not already failed, New Coke was a success.

California Pizza Kitchen is a nice parallel — they make mango tandoori chicken pizzas, GM makes the Chevy Cobalt.  But I was more interested in the fact he was quoting Wednesday’s market cap in Sunday’s paper.

I went looking for fresher stock prices, and found that GM had been delisted by the New York Stock Exchange, but was still trading over the counter, in the so-called “pink sheets.”  And looky there, the stock price was up almost 16% on Friday alone! More than 100 million shares traded hands Friday, with the day’s last trade at 86.5 cents, driving the market cap up to $528 million.

Now, investing can be a risky business, but some things are risk-free.  Here’s one: there is no risk that GM stock will not go to zero.  And yet on Friday, people collectively spent tens of millions of dollars purchasing GM stock at a price above zero.  This kind of trading happens in most major bankruptcies, and I’ve never understood it.  If you still have the 100 shares of GM that your grandparents gave you as a kid, I could see wanting to get whatever you can at this point.  But why the heck would anyone take the other side of that trade?  The rules of bankruptcy are well defined, and stockholders get nothing unless bondholders, creditors, employees and everyone else with a stake has been paid first.

Except… about those “well-defined” bankruptcy rules

Obama’s Intimidation Trumps Fiduciary Duty

The group of secured lenders who were holding out for fair treatment in the Chrysler bankruptcy has disbanded, after two more defections in the face of pressure from the Arm-Twister in Chief.

“After a great deal of soul-searching and quite frankly agony, Chrysler’s non-TARP lenders concluded they just don’t have the critical mass to withstand the enormous pressure and machinery of the US government,” [said] Thomas E. Lauria, … the lead lawyer for the group. “As a result, they have collectively withdrawn their participation in the court case.”

Welcome to our new, nationalized banking industry.  Think twice before relying on contractual guarantees or the rule of law, especially if you’re doing business with a Democratic constituency like the UAW.

When Obama Says “Hedge Fund,” Think “Widows and Orphans”

chrysler-winged-badgeAt least one of Chrysler’s “secured” lenders is vowing to stand fast against President Obama’s efforts to bully the lenders into abdicating their fiduciary responsibility.

NEW YORK (Reuters) – Plans for a quick sale of Chrysler to a new company majority-owned by a union-aligned trust is “patently illegal” and will be fought in bankruptcy court, one of the holders of the automaker’s secured debt said on Thursday.

“We don’t succumb to pressure and don’t agree to unfair and illegal payment schemes,” said George J. Schultze, the managing member of Schultze Asset Management. “We’re not conflicted by TARP money or active stress tests.”

Good for him.  I just hope he has bodyguards.

Obama is all too willing to stir populist anger in support of his favored constituencies.  It’s important to understand just how perversely Obama is framing the debate — and why his cram-down tactics make it less likely that future troubled borrowers will be able to raise the capital they need.

In criticizing the “hedge funds” that refused the terms that might temporarily have kept Chrysler out of bankruptcy court,  he said:

I don’t stand with them.  I stand with Chrysler’s employees and their families and communities.  I stand with Chrysler’s management, its dealers, and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars.  I don’t stand with those who held out when everybody else is making sacrifices.

OK, Mr. President, I got it: hedge funds = bad, families and communities = good.  But at Pajamas Media, Tom Blumer reminds us that hedge funds manage money not just on behalf of rich people, but also on behalf of retirement funds, pensioners, college endowments and other constituencies that are every bit as much a part of the fabric of America as the UAW is.

He also describes the legal duty these secured lenders owe to the ultimate owners of the securities.

The Employee Retirement Income Security Act (ERISA), passed in 1974 with strong bipartisan support, subjects retirement plans to a very strict standard of fiduciary duty, specifically:

(1) … a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and —

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan

There is nothing ambiguous about this requirement and nothing about the word “solely” or the term “exclusive purpose” to misunderstand.

Mr. Schultze and the secured lenders are trying to protect their investors by enforcing the agreement that was made when the capital was supplied to Chrysler.  In a bankruptcy, secured creditors are entitled to recover 100% of their money before unsecured creditors receive a penny.  That’s the deal they signed up for, and that “security” is why they were willing to supply capital to a basket-case company.  That protection was baked into the terms of the funding agreements.

In Chrysler’s case, as in many bankruptcies, the secured lenders were willing to settle for less than 100%, even while letting the unsecured lenders share in the settlement, for the purpose of trying to nurse the company back to health.  Blumer explains:

In a normal bankruptcy, first-lien creditors get paid what they are owed before anyone else. Since assets rarely fetch their ongoing-use value in liquidation, it appears reasonable that Lauria’s group [the secured creditors] would have come down in negotiations from 100% to 65%, and then to 50%, in the interest of avoiding bankruptcy. Presumably, 50% is a reasonable estimate of what might be realized in liquidation.

But if the secured creditors think they can recover more money for their investors by forcing a liquidation, they have a fiduciary duty to do so.  If they don’t get a higher payout than the unsecured creditors, they are betraying their investors, and making it less likely that troubled companies will be able to raise capital in the future.   That’s what Obama is trying to force by demonizing the holdout creditors.

The big TARP-program banks that agreed to the Chrysler deal had already had their turn at being beaten into submission less than a month earlier, when Obama told their CEOs “my administration is the only thing between you and the pitchforks.”   In the face of that fairly explicit threat from the most powerful man in the world, it’s unsurprising that they would fall into line the next time push came to shove.  I’m just glad that at least one smaller, less conficted creditor is willing to stand up for the rule of law.

Why Would Anyone Invest In Chrysler Now?

President Obama’s ham-handed ultimatum to Chrysler’s “secured” creditors promises to have adverse consequences beyond just rewarding the UAW for helping to drive the company into the ground.   At Real Clear Markets, Bill Frezza asks some excellent questions:

Why would anyone lend money to heavily unionized companies knowing that if things went wrong, the president and his men could trash their security interests by executive decree, hold them up to public vilification, and subject them to future retribution by regulators?

Why would anyone buy the shares of TARP-backed banks or invest alongside them knowing that their executives have proven their willingness to sacrifice shareholders’ interests and throw co-investors under the bus any time the president snaps his fingers?

Why would foreigners buy the distressed debt of American companies knowing that this debt cannot be secured by law but only by political clout? …

The fate of Chrysler and its workers pale in comparison to the wrecking ball that would be taken to economic order if bankruptcy judge Arthur Gonzalez approves the administration’s plan to give Chrysler’s secured creditors the shaft. And what prize will we-the-people get in return? A doomed third-rate car company majority owned by its militant union run by Italian management building congressionally designed “green” cars no one wants to buy financed by taxpayers into perpetuity because no private investor in their right mind will touch the company with a ten foot pole. Is this supposed to be economic policy or comic opera?

Hat tip: Neo.

Chrysler’s New Majority Owner Will Be The UAW. Yeah, That’ll Work.

I’ve been arguing for months that the government should not throw more bailout money at GM and Chrysler, but rather let them work out their problems in bankruptcy court.  Filing for Chapter 11 bankruptcy protection would give the companies more leverage to modify gold-plated benefits and ruinous work rules that add approximately $2,000 in costs per car, compared with foreign automakers.

chrysler-logoChrysler filed for Chapter 11 today.  The government apparently has worked out a deal where the eventual result will be the UAW owns 55%, Fiat owns 35%, with the remaining 10% owned by some combination of the U.S. government and “secured” lenders.  Neither the UAW nor Fiat are putting any new capital into the deal, but the U.S. government is committing up to $8 billion in additional financing, on top of the $4 billion the U.S. already has loaned Chrysler.

So for up to $12 billion, some of which theoretically may be repaid, the government gets some portion of 10% of America’s least healthy automaker.  The eventual value of the government stake is anybody’s guess, but since it’s easy to mix up million-billion-trillion-zillion, let’s do an order of magnitude comparison. As of mid-day today, the stock market values Ford — America’s healthiest automaker, far larger than Chrysler, and the only one of the Big Three that has not taken government bailout money — at about $14 billion, for 100% of the company.

Meanwhile, the UAW, whose members have enjoyed unsustainably high wages and benefits for decades, will own 55% of the reorganized Chrysler.  Chrysler effectively will be a subsidiary of the UAW, which will sit on both sides of the table during future contract negotiations.

Mickey Kaus argues that this may be a good thing (he’s talking about GM, but the principal holds for Chrysler as well):

The union’s ownership so does not seem a problem. It seems a virtue. Let the UAW, as new owner of GM, pay the price for the overgrown work rules of its locals. Let the UAW demand above-market raises from itself. Let the UAW try to raise money from new lenders after the previous round of lenders has been royally screwed (thanks, in part, to the UAW). And then let the UAW try to sell the cars that result.

The most efficient way to balance competing interests, as Michael Kinsley noted years ago, isn’t an adverserial system where various singleminded interests duke it out–either in court or on picket lines–but in the head of a decisionmaker who will feel the relevant consequences. As long as the government steps out of the financing picture, the UAW will feel the consequences of its own excesses. Just don’t bail them out again!

That last sentence is where Mickey’s theory breaks down, I’m afraid.  (I call him Mickey because he linked to me once.) He mocks a column by the Wall Street Journal‘s Holman Jenkins, but I think Jenkins (who has never linked to me) has the better argument:

In a real bankruptcy, which is the natural fate of companies unable to meet their obligations, Chrysler and GM would be run (or liquidated) for the benefit of their creditors, not their workers. But, here, “pattern bargaining” will remain the law of the Detroit jungle. The UAW will continue to use its unnaturally augmented clout to extract uncompetitive pay and benefits (it can do no other given its internal incentives). As it has for 40 years, Washington will pitch in with one improvisation after another, disguised as energy policy, trade policy, health-care policy or environmental policy, to stop the rivets from popping off. Politics, especially Democratic electoral politics, will play a more dominant role than ever.

What about those creditors, who would be first in line in a “real bankruptcy”?  The big bondholders were all on  board, but some of Chrysler’s smaller “secured” creditors refused to accept a deal that would have kept the automaker out of bankruptcy court.   Theoretically, the “secured” creditors could hold out for a liquidation of Chrysler, which might be a better deal for those creditors.  The Automaker-in-Chief is aware of this, and Obama had this to say today:

While Obama voiced his support for Chrysler and the deal with Fiat, he was pointed in his criticism of the investors who did not agree to this deal.

“I don’t stand with them. I stand with Chrysler’s employees and their families and communities,” the president said. “I don’t stand with those who held out when everybody else is making sacrifices. That’s why I’m supporting Chrysler’s plans to use our bankruptcy laws to clear away its remaining obligations.”

Gulp.  This is why I use scare quotes around “secured” creditors.  Somehow I think the reluctant creditors will come around to seeing things Obama’s way.

Obama’s Not-So-Invisible Hand

Now that the Automaker-in-Chief has fired the CEO of General Motors and instructed Chrysler to sell itself to Fiat by the end of April,  he’s turning his attention to a variety of other essential American industries, from blue jeans (“Levis yes; Wrangler no”) to toothpaste to ballpoint pens.  President Obama also graciously acknowledged the important consultative role played by former President Clinton.

(Ed. note: alas, the Saturday Night Live video clip originally displayed here is no longer posted anywhere I can find.  But here’s a transcript of the skit.)

Here’s hoping that the president’s next step will be to instruct corporate America to make greater use of independent consulting services.