Saturday, December 31, 2011

Why We Lose Billions (Trillions!) In Defense Spending Without A Thought

Having worked in the defense industry (aerospace, mainly) for over 25 years, this is a tale I used to bemoan publicly. Probably to my current inability to ever gain professional employment (with or without benefits) again. (I also used to joke about the F-22 and the coming B2 Stealth bomber. Ha Ha on me, huh?)

Loren Thompson
Loren Thompson, Contributor

I write about national security, especially its business dimensions.

How To Waste $100 Billion: Weapons That Didn't Work Out

One of the most unsettling facets of federal finance is the way the government devalues past investments.  The political system is so focused on the next budget — and the next election — that it ignores sunk costs.  Thus, every program termination is considered “savings,” without regard to the money that was spent to get the project in question to its current state.

This fiscal myopia is especially pronounced in the defense budget, where the government makes most of its capital investments.  Cancellation of weapons systems that have been in development for a decade or longer is typically greeted as evidence that policymakers have made “hard choices” and had the courage to stand up to the “military-industrial complex.”  The fact that previous administrations may have spent billions of dollars trying to satisfy a valid military requirement is barely mentioned — as is the fact that future administrations will have to spend additional money starting over on a replacement project.

The Army has been the biggest offender in recent times, probably because it was awash in money appropriated for fighting ground wars in Asia.  It walked away from a mobile cannon called Crusader in 2002 after spending $2 billion on developing it because Army leaders decided it was too heavy to fit with their plans for a more mobile force.  Eight years later it canceled a potential successor system after spending $1.2 billion.  In 2004 it killed the Comanche next-generation “armed reconnaissance” helicopter, squandering $7 billion in sunk costs, then a few years later it canceled the proposed replacement — incurring hundreds of millions of dollars in additional losses.
It also has moved to terminate both of its next-generation air defense systems because threats “didn’t evolve as expected,” and now seems to be getting cold feet about its second try at buying a plane that can identify hostile radio emitters on the battlefield.

The Army’s biggest budgetary mis-step was a family of networked air and ground vehicles collectively called the Future Combat System.  Although prime contractor Boeing managed to keep the program on schedule and on budget through a series of restructures, Secretary of Defense Robert Gates decided in 2009 that the project wasn’t ready for prime-time and canceled it after a staggering $19 billion had already been spent.  Bloomberg Business News subsequently reported that the service had wasted $32 billion on doomed weapons projects since 1995.

The Army is not unique in its capacity to waste taxpayer dollars.  The Air Force has squandered vast sums of money over the last dozen years on cutting-edge technology projects that ended up being canceled or curtailed, due mainly to the poor judgment of political appointees outside the service. For instance, both of the Bush Administration’s big space initiatives — a constellation of orbital radars for tracking moving ground targets and a super-capable communications satellite — ended up being canceled after billions had been spent.
Before going down, though, they caused dislocations and delays in other programs designed for similar missions that added to the collateral damage.

As for Air Force planes and rotorcraft, the last ten years may have been the most wasteful period in the service’s postwar history, because so many projects were killed before coming to fruition after going through costly gestations.  A promising Airborne Laser project for shooting down hostile ballistic missiles at the speed of light was effectively terminated by Secretary Gates in 2009 after 13 years and billions of dollars in development outlays.
A much-needed replacement for aged search-and rescue helicopters was killed too, as was the F-22 fighter.
The fighter program at least delivered 187 very capable aircraft before biting the dust — half of the service’s operational requirement — but as with other canceled programs, failure to agree on requirements and stick to a plan resulted in money being spent wastefully.

Then there is the Navy Department, home of sailors and marines.  Two of the three new surface combatants that the Navy announced in 2001 have been canceled, and the third is still a long way from proving its warfighting utility.  One of the canceled ships was, or is, a next-generation destroyer capable of defending the fleet against air and surface attacks while supporting marines ashore with long-range guns. It is easily the most capable surface combatant ever conceived, but when the Navy saw the price-tag for the finished product it decided to buy only three rather than the 32 planned, meaning it spent billions of dollars to get to a point where it could build a mere handful of vessels.
The second canceled warship was a cruiser based on the same hull that could be optimized for defeating ballistic missiles, but the Navy gave up on that project after spending “only” a few hundred million dollars.

It also ganged up on the Marine Corps with Secretary Gates to kill a desperately needed Expeditionary Fighting Vehicle that would have delivered warfighters through the surf onto hostile beaches.  After spending $3 billion and nearly two decades perfecting the system, political appointees decided it cost too much per vehicle and terminated it — even though that would keep Marines in slow, vulnerable vehicles for many years to come and there was no proof that whatever followed the canceled vehicle would be cheaper or better.  This particular termination starkly illustrates how killing programs to “save” money often means risking the lives of warfighters.

No chronicle of wasteful weapons spending would be complete without a mention of defense agencies — the vast bureaucracies outside the military services that supposedly save money by consolidating management of joint activities.  The big culprit there is the Missile Defense Agency, which relative to its size has probably wasted more money on canceled technology projects than any other federal organization in modern times.  In recent years it has cut back or killed everything from a European missile-defense site to the fast-reacting Kinetic Energy Interceptor, squandering huge amounts of money in the process.  Its biggest success — the sea-based Aegis combat system — can trace its longevity mainly to the fact that the Navy was in charge rather than missile-defense proponents.

If you add up all the money spent on military systems that got funded but not fielded since the Cold War ended, it probably tops $100 billion. We’ll never know the full amount, because some of the biggest projects are hidden in secret spy-agency accounts. Defense contractors are reflexively blamed for the waste because politicians and policymakers are even less interested in accountability than they are in precise accounting.

What the record shows, though, is that weapons makers aren’t the real cause of the waste.  They only have one customer — the government — so they will do pretty much whatever that customer pays them to do. The real problem lies with the limited attention span of a political system that barely notices the sacrifices and assumptions of past administrations and cares only about the fiscal run-up to the next election.  Because the system is so indifferent to expenditures it cannot control, it devalues past investments and squanders billions of dollars every year in the guise of pursuing “savings.”


Friday, December 30, 2011

Happy New Year! (I'm Hoping For A Truly "New" Year)

What do you think?

Is it even possible to hope for a truly New Year in politics?

My dream is for one in which true champions of the middle class, who have triumphed after the bloody election of 2012, constantly campaign on and promulgate the need for financial re-regulation (the reestablishment of Glass-Steagall as a law of the land), rebuilding industry and creating good, well-paying jobs that benefit our devastated country.

You may believe I'm overly pessimistic about the USA's future, but I believe the economists (I could list them, but it's just about everyone including the right's centrist Alan Blinder) who tell us that at least 10 years (if not 20) will pass before our country regains its financial stability (and productive, well-paid jobs) in a rapidly changing and evolving world environment where Brazil, India and CHINA(!) reign supreme.

And speaking of the future, does anyone believe that increasingly unpopular (with his own base - Thanks, Rahmbo!) Obama will replace Joe Biden with Hillary Clinton?

No? Give our friend at Down With Tyranny a listen to and then tell me that it makes absolutely no sense. (Right. That's what I think, but hey, what do I know? I like her even less.)

Thursday, December 29, 2011

The Dummies Want You To Think That It's the SIZE of Government That Matters, Not Who Controls It (And How Continuation of Bonuses RULES!!!)

What do you think is the most pressing issue of our time?

Better take a gander at the facts first.

And leave the rightwingnut fictions behind.

(Warren Buffett wasn't kidding about his paying a lower tax rate than his clerks.)

Robert Reich's Blog 

Robert Reich is Chancellor's Professor of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written thirteen books, including The Work of Nations, Locked in the Cabinet, Supercapitalism, and his most recent book, Aftershock.

Ever wondered why the banksters fought so hard against the capitalization requirement?

Right. You should have known all along it was the $$$$$$$$$$$$$ (bonuses).

Real Reasons Bankers Don’t Like Basel’s Rules: Clive Crook – Bloomberg. Why bankers’ whining about higher equity requirements is just that:

A much-cited paper
by Stanford’s Anat Admati and colleagues — “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity Is Not Expensive” — should have ended this debate once and for all. It dismantles the banks’ position step by painstaking step.

The study makes the crucial distinction between the interests of bank managers, bank shareholders and the public at large. Managers are being disingenuous. They do have reasons, valid after a fashion, for opposing higher capital requirements, just not reasons they can admit. The one they emphasize — cost of funding and its effect on future lending — is fit for public use, but bogus.

What might their real reasons be? If banks sell more shares, it’s true that the return on equity will fall. If managers’ pay is tied to return on equity (as it often is), they will be worse off. Shareholders, on the other hand, shouldn’t mind, because the risk of their investment is reduced in proportion.

of course, would be better off — less likely to be stuck at some point with the cost of bailing out the bank.
The paper is here.

Cross-posted at Angry Bear

Saturday, December 24, 2011

Happy Christmas!

For all time.

Wednesday, December 21, 2011

Draft JEB! Movement Takes Off (I Told You So!)

I hate to say it (nah, not really), but I told you so.

The reinstallation of the Bush Dynasty has been the sole reason for the clown circus, featuring the truly unqualified Rethugs. Calling all newts, hermanators, im-palins, mittens, and other known fools (even the truly ignorant who are still running TV commercials after their elimination from any type of consideration) to trot back into the shadows and receive your payoffs and Koch-funded professorships.

[Please accept my heartfelt thanks for the support you've given to my blog this year (or any other). It's been a particularly difficult economic time in my life, and I want to thank my friends for any and all contributions you may have made to me personally and/or the well being of this political blogspout. From my heart, I send you my sincere gratitude and joyous wishes for a much better new year.]

Draft Jeb!

He was the golden child, if there can be said to be a golden child in a brood that included one son who was an S&L swindler who later went on to a career of being surprised when Thai hookers showed up unannounced at his hotel room door, another who was the worst president in the history of this or any other Republic (banana-style included), and a largely invisible baby sister. He was supposed to be the savvy one, the presidential one, not that dolt of a brother who ducked his National Guard duty, ran several businesses into the dust of west Texas, got drunk and challenged the Auld Fella to a fistfight, and kept driving his car into the bushes. But the dolt got Daddy's money and Daddy's lawyers behind him and got installed as president, where he did his utmost to lodge the family brand somewhere between those enjoyed by Corvair and leprosy. Meanwhile, the golden child got to be governor of Florida for a while longer.

And now, in the widening gyre, slouching toward Manchester to be born, our moment of... Jeb (!)

Make no mistake. You don't write an op-ed for the Wall Street Journal at this point in the Republican primary process unless somebody, somewhere wants to make people think you're an legitimate option. You certainly don't write one as stuffed full of free-market banana-oil as this one unless somebody, somewhere wants to raise enough money to make the world think you're a legitimate option. There was enough Jeb (!) buzz over the weekend that it's becoming plain that some very important someone's have looked over the current Republican field and decided that, by god, it's just bad enough that there's room in there to bring back the most discredited surname in American politics. The slogan writes itself:

"Jeb! This time, let's try the smart one."

(Can we pause for a moment here and point out that the interpersonal dynamics of the Bush family likely would make Euripides read like a Judy Blume novel? Thank you. We continue.)

The op-ed is appalling on its face, and that's not even to mention Jeb (!)'s affection for zombie-eyed granny starver Paul Ryan. Jeb! shows himself to be brave enough to assert that predatory capitalism is not merely an unalloyed good for the country, but also something of an inalienable right in and of itself. Not so? Then what does this mean?

That is what economic freedom looks like. Freedom to succeed as well as to fail, freedom to do something or nothing. People understand this. Freedom of speech, for example, means that we put up with a lot of verbal and visual garbage in order to make sure that individuals have the right to say what needs to be said, even when it is inconvenient or unpopular. We forgive the sacrifices of free speech because we value its blessings.

But when it comes to economic freedom, we are less forgiving of the cycles of growth and loss, of trial and error, and of failure and success that are part of the realities of the marketplace and life itself.

In 1944, when FDR announced his Second Bill Of Rights, he asked for, in order:

The right to a useful and remunerative job in the industries or shops or farms or mines of the nation; the right to earn enough to provide adequate food and clothing and recreation; the right of every farmer to raise and sell his products at a return which will give him and his family a decent living; the right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad; the right of every family to a decent home; the right to adequate medical care and the opportunity to achieve and enjoy good health; the right to adequate protection from the economic fears of old age, sickness, accident, and unemployment; the right to a good education.
Now here comes Jeb (!), declaring that wealthy individuals are being "punished with ruinous taxation." Name three. And also:

Congressman Paul Ryan recently coined a smart phrase to describe the core concept of economic freedom: "The right to rise." Think about it. We talk about the right to free speech, the right to bear arms, the right to assembly. The right to rise doesn't seem like something we should have to protect.But we do. We have to make it easier for people to do the things that allow them to rise. We have to let them compete. We need to let people fight for business. We need to let people take risks. We need to let people fail. We need to let people suffer the consequences of bad decisions.

I've thought about it, Jeb (!). Paul Ryan is a fake, selling snake oil to the rubes while simultaneously running the ball for people who have gotten rich by stifling the right to rise and by making sure that the right to rise never rises again. And, you may have missed it, but the current economic state of the country is not because we failed to let people "suffer the consequences of bad decisions." The current economic state of the country is the result of how the rest of us have had to "suffer the consequences" of "bad decisions"(and outright crimes) committed by the very people whom you'd like to free from even the minimal regulations that have been placed on them as a result of their having damned near blown up the world.

And he's the smart one. Remember that. 

But the part that's truly hilarious, especially if you remember Governor Jeb (!), is this part,

As Florida's governor for eight years, I was asked to "do something" almost every day. Many times I resisted through vetoes but many times I succumbed.

I remember one time you "succumbed," foof. Two words.

Terri Schiavo.

Jeb (!) played right along when wingnut fanatics took a personal family issue and turned it into an international media circus. He brought unconscionable pressure down on people at a hospice who'd never done anything to him. He put an unforgivable amount of pressure on a great, brave woman named Annie Santa Maria, whom I would like to lock in a room with him one day and see who comes out alive. (My money's on Annie, by the way.)

He came dangerously close to initiating hostilities between the local authorities in Pinellas Park and the Florida state patrol. On October 21, 2003, he issued an order for Terri Schiavo's feeding tube, which had been disconnected by order of a court six days earlier. He did this by ramming an ad hoc bill through his pet legislature that allowed him to "overrule" a court's decision in this regard. (And people think Newt Gingrich is the only authoriarian yahoo in the race. He may yet have some competition there.) He made life a living hell for Michael Schiavo, and for the judges who ultimately had to deal with this mess. He allied himself with the worst elements of the lunatic Right, some of whom were threatening Michael and some of whom were threatening the judges.

And when the cruel hash he helped make out of events finally came to an end, and when an autopsy showed that Terri Schiavo had been every bit as actually dead as her husband had been saying all along, Jeb (!) still wasn't satisfied. He demanded — and got — a state investigation into possible "crimes" committed in the case of this poor woman — including, most foully, whether or not Michael had been responsible for her condition in the first place — and that didn't end until the Florida attorney general finally told him to shut up about it.

That's our Jeb (!) Bankers should be free to steal your pension, but husbands should not be free to decide end-of-life care for their wives.

By all means, roll him out there with the rest of the clowns. He'll fit right in.

(Photo Credit: Joe Raedle/Getty)

Always room for more clowns!

Bring Them ON!!!

Newt Gingrich Being Exposed As FOOL Once Again

Or can you?

[Please accept my heartfelt thanks for the support you've given to my blog this year (or any other). It's been a particularly difficult economic time in my life, and I want to thank my friends for any and all contributions you may have made to me personally and/or the well being of this political blogspout. From my heart, I send you my sincere gratitude and joyous wishes for a much better new year.]

You Can Be A Historian, Too

December 18, 2011

Professor Gingrich was at it again last week flashing his Official Historian's Membership Badge, this time to explain why President Historian Gingrich, "just like Jefferson, Jackson, Lincoln, and FDR,"  would "take on the judiciary."

Before examining the professor's historical analogies, could I point out that unlike, say, being a chemist, physician, lawyer, engineer, accountant, plumber, tree surgeon, piano tuner, or barber, being a "historian" means absolutely nothing in terms of professional qualifications or special expertise?

The leading GOP candidate keeps brandishing the title "historian" as if this uniquely qualifies him to hold forth with authority about the American political system. ("I would suggest to you actually, as a historian, I may understand this better than lawyers," he told reporters last week in reference to his pronouncement of the invalidity of two hundred years of legal precedent establishing the power of courts to consider the constitutionality of laws.)

Well, as someone who has slung history with the best of them, I can reveal a little secret: anyone who can read can be a historian. In fact, the more you read, the better a historian you can be. Which is where Professor Gingrich runs into trouble.

Gingrich, who explained that he was outraged by activist liberal elitist judges imposing their secular values on America (and more generally by "lawyers" who have come "to think that they can dictate to the rest of us"), declared that as president he would simply ignore Supreme Court decisions he didn't like, abolish Federal appeals courts whose "anti-American" judges ruled in ways he didn't like, and encourage Congress to subpoena judges to explain their decisions.

He claimed that Lincoln had similarly "just ignored" the Dred Scott decision, when he issued his Emancipation Proclamation; he said that Jefferson had similarly abolished Federal circuit courts whose judges he opposed; and he asserted that Jackson and FDR had also taken stances against what he declared to be the spurious doctrine of "judicial supremacy" — that the courts can pass judgment on the constitutionality of presidential actions or acts of Congress.

He insisted that the Supreme Court's 2008 decision on detainees at Guantanamo could be declared "null and void" by the president "because it infringes on my duties as commander in chief to protect the country."

He wrapped up his case by invoking those infallible and all-seeing guides, the Founding Fathers, who he said "were very distrustful of judges, saw them as an elite instrument of government designed to oppress people. And, as a result, consciously made the judicial branch the third branch and the weakest branch."

Gingrich's buffoonery is easy to mock (I know, I've tried); but at a certain point it becomes frightening enough that it's worth taking seriously. So forgive me for a moment if I do.

First, the good professor is wrong on almost every example he cited of presidents' ignoring court decisions.

1. In the 1857 Dred Scott case, the court ruled that a Negro slave, or descendant of a slave, could never be a citizen of the United States, and that Congress had no power to ban slavery in the territories since slaves were property whose owners could not be deprived thereof without violating the protection of property rights guaranteed by the Fifth Amendment.

Lincoln and others who opposed the expansion of slavery certainly did believe the case was wrongly decided. But as president Lincoln did not take any action to oppose the decision. In fact, Lincoln's entire career was one marked by a respect for the law bordering on reverence. The Emancipation Proclamation, far from being an instance of flouting the law, was testament to Lincoln's belief that no matter how just or right the cause he had to proceed within a constitutional framework.

Indeed, the proclamation did nothing to grant rights of citizenship to slaves freed; it implicitly embraced the legalistic argument that slaves were property, as had the court in Dred Scott; and the very reason Lincoln insisted that he could only order the emancipation of slaves in areas of the country in a state of actual rebellion was based on their legal status as property and thus as contraband of war.

The proclamation did not alter by one iota the law in the states that had remained in the Union, or even in the areas of rebel states then under Union control (Lincoln even countermanded a military order by Union general John Frémont in Missouri freeing slaves there, on the grounds that it exceeded legal authority). "Can it be pretended that it is any longer a government of Constitution and laws, wherein a General, or a President, may make permament rules of property by proclamation?" Lincoln said.

It was not by a president's "simply ignoring" a Supreme Court order that the issue of the legal rights and status of African Americans was ultimately resolved: recognizing that neither the president nor Congress had the power to ignore the law, Congress did what the Founding Fathers intended in such cases and amended the Constitution. The Fourteenth Amendment, as the court later recognized, was what reversed the effect of Dred Scott and granted full citizenship to freed slaves.

And by the way, Lincoln (at least as a political point) took the Dred Scott decision and its implications seriously enough that it was the crux of his debates with Stephen Douglas in 1858 in the race for the United States Senate seat in Illinois; it was Douglas who tried to fudge the matter by suggesting that the court's finding was not really a binding legal decision, Lincoln who took the view that it was, that it would of necessity be enforced, and that its clear legal implications (eliminating the right of any state to outlaw slavery) proved his point that the nation could not ultimately survive half slave and half free.

2. On Jackson, Gingrich apparently believes the long-debunked chestnut about Jackson refusing to enforce the Supreme Court's decision in favor of the Cherokee Indians in their suit against the state of Georgia, which was seeking to dispossess the tribe of its lands. In fact, the court's complex decision in that case did not impose any duties upon the president or federal government requiring action at all. (The case involved a Georgia law that tried to prevent northern missionaries from visiting and assisting the tribe in their legal case: the court ordered a missionary who had been arrested under the law to be freed. The famous words Jackson were said to have uttered, "John Marshall has made his decision; now let him enforce it!" are actually fictitious, a later historian's paraphrase. What the president actually observed, in a private letter, was "the decision of the Supreme Court has fell still born, and they find that they cannot coerce Georgia to yield to its mandate." Even that proved wrong: Georgia did obey the court's order, ultimately.) Of course, even if Gingrich had the facts right the conclusion he is attempting to draw is appalling. Is he really suggesting that it would have been a good thing for a president to ignore a Supreme Court ruling defending the rights of a peaceable Indian tribe not to have its land stolen from it and to be driven to a reservation halfway across the country??

3. If by his reference to FDR, Gingrich referred to Roosevelt's misbegotten plan to add additional justices to outvote the Supreme Court majority that had overturned key New Deal legislation, boy is that a rotten example, too. The move was a political debacle for FDR, who quickly backed down. Yes, he thought the court was wrong, and was willing to challenge them. Did he "simply ignore" any of the court's decisions, or even hint he had the power as president not to obey the law? Never.

4. The Jefferson incident is a particular favorite of Gingrich's, which he constantly invokes as a precedent for his proposal to get rid of the Ninth Circuit court, which he dislikes because it is full of those elitist liberal judges who try to enforce things like the First Amendment. But it too is an odd precedent for him to try to invoke. If there is a real lesson from the battle over federal judiciary in 1801 and 1802 it was exactly the dangers of injecting partisan politics into the judiciary.

The new Federal circuit courts had been created by the lame duck Federalist-controlled Congress just three weeks before the end of its session in 1801; President Adams, just before leaving the White House, quickly filled the new positions with his political allies. It was, as historian Gordon Wood notes, a rather blatant attempt by the Federalists to keep hold of power they had lost in the presidential and congressional elections.

The new Democratic-Republican Congress promptly abolished the courts,  pure political payback. But even many Republicans grew uneasy about the assault on the independence of the judiciary after a highly partisan impeachment action was brought against a strongly Federalist justice, Samuel Chase.

This one, too, is a perfect illustration of the simplemindedness of the Gingrich method of history. You can find some precedent for almost anything. What's worth asking is whether it was a good precedent. In fact, this was the only time in U.S. history that Congress revoked the tenure of sitting Federal judges. Most historians of constitutional law would agree it was a very bad precedent — and has been recognized as such for the two hundred years since.

Gingrich's claims that the FF's were "very distrustful of judges" is another cartoonish travesty of history.
The colonists were certainly distrustful of courts and saw those ermine-robed representatives of the crown as an instrument of elitist repression. But a revolution in attitudes had taken place in the 1780s, in the decade following the Declaration of Independence, and as the direct result of the incompetence, excess democracy, and feckless legislating of the state legislatures—which abrogated contracts to pay off special interests, passed and rescinded laws in rapid succession, and sowed legal chaos and confusion.

By the time of the constitutional convention, as Wood notes, "a remarkable transformation" in attitudes had taken place; the delegates had no difficulty in readily agreeing to an independent Federal judiciary that would be insulated from political influence by having guaranteed salaries and lifetime tenure.

I think we might all agree that George Washington was a founding father. Here's what he thought: that the independent administration of justice by the courts was "the strongest cement of good government."

Finally, as for judicial review: It's true that Jefferson and Madison to their dying day thought that the courts had no power to declare a law unconstitutional. It's also true that by 1790s most Americans had come to think otherwise.

There were two reasons for this. One was that judicial review was an inevitable consequence of the revolutionary idea of a written constitution. No nation before had ever reduced its fundamental laws to writing. If the Constitution was a document with actual legal meaning, as opposed to simply a vague enunciation of political ideals, then it was inescapable that courts would be faced with situations where laws enacted by legislatures or the common law conflicted with the Constitution.

Despite all the guff from the right these days about "judicial supremacy" and "activist judges," courts still have no power simply to issue pronouncements in the abstract about the validity of legislation or presidential acts; they decide actual controversies that come before them, when one party sues another. For centuries, English jurisprudence had evolved principles of necessity for judges to interpret statutes that were ambiguous, badly worded, or contradicting other statutes: that was nothing new in that at all. The only new question was whether the Constitution was a law judges had to follow in deciding cases. Most Americans would say that's a good thing that they do—otherwise the Constitution would be nothing but ceremonial window-dressing (or "a solemn mockery," as Justice Marshall put it).

The other reason for the broad acceptance of judicial review was that the courts themselves changed their behavior. Judges in the early republic had continued to exercise an often highly political role as they had previously. But the very fact that the courts were evolving into a truly independent third branch with this important function as arbiters of constitutional law made judges far more circumspect; it was their renunciation of overt political activity, their embrace of professionalism and nonpartisanship, that proved pivotal in assuaging public concern over the emerging doctrine of judicial review.

Even an originalist like Mr. Injustice Scalia has not proposed renouncing two centuries of post-Founding Fathers legal precedent and abandoning the power of courts to rule on the constitutionality of legislative and executive acts. (Though, it's worth noting that if anyone is ignoring history it is not those liberal elitist activists but the right wing on the Supreme Court today. One of the key steps the Supreme Court of the early 1800s took to legitimize its role and to emphasize the nonpartisan professionalism of the law was to steer clear of politically charged cases. In the last few weeks the Roberts court announced it would take up three politically explosive cases in an election year: redistricting in Texas, the health care law, and the Arizona immigration law. There was also that little matter of deciding the presidential election in 2000.)

Separating law from politics was a huge historical accomplishment; while needless to say it was far from perfect it made America a beacon to the world for its respect for the rule of law and its adherence to the principle that no man, the president included, is above the law.

(By the way, about this right-wing-bordering-on-fascist view that the president's role as commander-in-chief means he can do whatever he wants in the name of national security: that would really appall the Founding Fathers, who were fearful of the military's despotic potential in the hands of a powerful executive.
The Constitution grants to Congress among its enumerated powers the power to set regulations for the army and navy and to decide when, how, and if military force is used. Being commander-in-chief means the military has to obey the president's legal orders: it does not mean the president gets to make up what the law is, any more than the president could be a law unto himself in executing any of his other duties.)

Notably, it was disgust with petty politics, special interests, and partisan maneuvering that helped make the professionalism of the courts and the rule of law possible.

It shows no historical understanding whatsoever to propose that what the judiciary system really needs now is a hefty dose of Mr. Gingrich's politics and partisan pandering.

And I hear that the Newt has already blown up (!!) in Iowa.

Surprise. Surprise.

Tuesday, December 20, 2011

BOA Out of Luck? (Bank of America/Citi (Naaah) Deathwatch?) Just Listen! (Read!)

Remember the problems at Bank of America?

No, they are not resolved. And it looks like they will not be without moneyshed (like bloodshed, but worse.) Neil Garfield is my source today.

[On a sidenote, please accept my heartfelt thanks for the support you've given to my blog this year (or any other). It's been a particularly difficult economic time in my life, and I want to thank my friends for any contribution you have made to me personally and/or the well being of this political blogspout. From my heart, I send you my sincere gratitude and joyous wishes for a better new year.]

BOA Selling at 60% Off Stated Book Value

EDITOR'S NOTE: for those of you who have read my incessant posts that the mega banks are broke, especially, BOA, the article below spells it out in simple arithmetic terms. BOA is selling at 40% of what it SAYS it has in book value. Citi is at 50%, Morgan Stanley, 60% etc. See for yourself.
Normally finding a stock whose value in the stock market is below book value is a possible signal to buy, but it also  can be a red flag. In this case it is giant red flags with trumpets blaring. My prediction is that BOA and Citi for sure are going to bite the dust shortly. They simply cannot sustain themselves because their assets are overstated and their liabilities are understated. Market analysts obviously agree since few, if any, have put out the word for people to buy these stocks.
The outcome seems inevitable from my point of view. BOA and Citi will collapse and be sold off in pieces. Notwithstanding the whole Too Big To Fail Hypothesis, the financial markets will probably react favorably when this happens. It is obvious that nobody believes the balance sheet at BOA and Citi and that the stock has already been discounted for the inevitable result.
The reason this is relevant to homeowners is that BOA and Citi account for a large percentage of all foreclosures. The overstated "assets" are actually derivatives that supposedly derive their value from home mortgages - which the bank neither owns nor has any other interest. As these facts seep out into our collective consciousness, it will be apparent that most BOA foreclosures are exercises in generating fees rather than collecting the balance due on loans that are unpaid. If the regulators do their job right, it will be apparent that the foreclosures were faked.
My advice is to keep your eye on these banks and see what comes out. Make requests under Freedom of Information and discovery that are directed at how they are accounting for loans they say they own, and for details of the transaction on each particular loan. You will most likely find that the bank has no loan receivable on that home loan you are researching. Armed with that information, if you get it, you can clearly make the argument that there was no transaction in which BOA became the owner of the loan, despite the appearance of paperwork to the contrary. When you drill down, you will see that BOA never bought those loans, never paid for them, and that the transfer documents and other documents are all fabrications behind which there is no actual transaction.

Why 2011 Was So Brutal for Big Banks

December 17, 2011
As we approach the end of a tumultuous 2011, it's time to look back on the year that was.
Few, if any, industries had a worse 2011 than the big banks. Check out the carnage (and remember that the S&P 500 was basically flat after factoring in dividends).
Bank Name
2011 Return
Price-to-Tangible Book Value
US Bancorp (NYSE: USB  ) (2.1%) 2.4
Wells Fargo (NYSE: WFC  ) (14.7%) 1.5
JPMorgan Chase (NYSE: JPM  ) (23.2%) 1.0
Morgan Stanley (NYSE: MS  ) (44.5%) 0.6
Citigroup (NYSE: C  ) (44.9%) 0.5
Goldman Sachs (NYSE: GS  ) (45.8%) 0.7
Bank of America (NYSE: BAC  ) (60.8%) 0.4

Source: S&P Capital IQ. Return includes dividends.
None of these seven largest U.S. banks is leaving 2011 unscathed. US Bancorp and Wells Fargo, the two least Wall Street-y banks, came closest.
To recap the news this year, pretty much every negative macroeconomic event batters the banking stocks because they're players in so much of the economy, both domestic and foreign:
  • They're all still recovering from the housing-bubble burst. When we hear about subprime lending, liar loans, derivatives run amok, poor documentation, and the need for better regulation, it's largely this group.
  • In August, the U.S. lost its AAA debt rating while Congress played politics instead of fixing the budget. If you look at the stock charts for these banks, you can see the effect of this added friction and uncertainty.
  • European sovereign-debt problems become problems for U.S. banking stocks because (1) the global financial system is increasingly tied together and (2) investors are having a hard time determining exactly how much direct European exposure the largest banks have.
  • To expand on that last point, the U.S. financial crisis highlighted how opaque bank balance sheets can be (and how much stuff banks can hide off the balance sheet). This forces investors to assume the worst.
On the plus side, all the banks except Bank of America have been able to profit off cheap interest rates (thanks to the Fed) and high trading volume. That's why you see some low P/E ratios in this group. But much of that profitability is fleeting, especially if regulations cramp their style.
But this is more a balance-sheet tale than an income-statement tale.
When you go down the table from best-performing to worst-performing, you see a rough order of the likelihood of exposure to shaky lending and derivatives. US Bank and Wells Fargo are mostly regular old banks. JPMorgan is a hybrid Main Street and Wall Street bank that weathered the crisis better than the remaining four largely because of the leadership of Jamie Dimon.
Bank of America and Citigroup are also hybrids, but they've been proving to be the weakest of the herd. Citi did it organically, while Bank of America had help with its Countrywide acquisition. You can see the fear in their tiny price-to-tangible-book values, both half what JPMorgan gets.
Meanwhile, Goldman and Morgan Stanley are the only two full-fledged Wall Street megabanks left.
I see value in this uncertainty. The market is definitely valuing these banks on fear. And a lot of it is justified. Investing in these banks (especially as you go down the list) takes a leap of faith that the balance sheets can't be that bad. It may even require some faith that the government would bail them out again without destroying common shareholders if need be.
Investing in the largest banks isn't for the faint of heart. Fortunately, there is an alternative if you like bank stocks. Smaller regional banks are generally a lot simpler. Like US Bank and Wells Fargo, they mostly stick to taking in deposits and lending. Smaller bank stocks are by no means easy to decipher, but they're a heck of a lot more transparent than the Wall Street banks.
Neil Garfield
December 20, 2011