Corey K Katir News Finance and Politics

Filed under: Economy

• The Koch Brothers, billionaire owners of the privately-held chemical conglomerate Koch Industries: Through their Americans for Prosperity Foundation, they provided at least $45 million to finance the Tea Party, according to The New Yorker, and they must be thrilled with the power of their money to morph Washington into a machine that can't say no to their agenda. However, given the growing unpopularity of the Tea Party, this may be the Kochs' last hurrah. (As former eBay (EBAY) CEO Meg Whitman learned after spending $142 million of her own money to lose the California governor's race, a willingness to spend vast quantities of your own money is not a guarantee of electoral success.)
• People getting audited by the IRS: They will enjoy a delay in that painful scrutiny, because the IRS will suspend auditing people's returns.

• The Post Office
• Social Security and Medicare beneficiaries
• Air traffic controllers
• Lawmakers
• The Federal Reserve (it doesn't get its funding from Congress)

• The Troops: Members of the military will continue to defend our country and fight its battles, and the government will incur an obligation to pay them -- but they won't get their checks until after a budget is signed;
• Civilian federal workers: Between 800,000 and 1.9 million government employees will be furloughed;
• American investors: It will be open season for anyone wanting to defy the Securities and Exchange Commission, because it will be mostly shut down;
• Tourists: If you are on vacation and want to visit a national park or museum, you won't be able to get through the locked gates; and
• Old-fashioned tax filers waiting for refunds: If you file a paper return and are expecting a refund -- sorry, you'll have to wait. For electronic filers; however, payments will still be forthcoming.
• Consumer-oriented businesses: Companies large and small that rely on average consumers to buy their products and services will see sales slow down as millions of government workers stop drawing salaries and start tightening their belts to ride out the shutdown.

Some of the politicians in Washington may not seem to care much about the repercussions of a shutdown. But they do care about themselves -- and more specifically, how all this will affect their chances of being reelected. In that vein, a new Wall Street Journal/NBC News poll has some interesting results. It suggests that Republicans -- particularly those in the so-called Tea Party wing of the party -- are taking a hit in popularity thanks to the budget battles.

• 44% of the 1,000 Americans polled had a negative attitude towards the Tea Party, and since January, the percent with very negative feelings about it had jumped from 24% to 30%;
• The Tea Party has lost ground among its base. The percentage of those saying they support it has fallen from 30% last November to 25% now; and
• A record 67% of those polled said they don't support the Tea Party.

Why do we have government anyway? It does a good job of running the military, and it has managed to keep payment systems going -- although not as smoothly as I would like. It is also a fairly good protector of consumers from the risks of businesses that might otherwise deliver dangerous products in pursuit of profit. Whether government programs are the best way to pay for health care or retirement expenses isn't clear to me.

But one thing isn't unclear at all: If a government shutdown occurs, it will be a political stunt focused on affecting the 2012 election results. The numbers being battled over will have virtually no impact on reducing America's budget deficit. And if a shutdown lasts for any length of time, it could hurt prospects for solving the biggest problem we face -- getting 13.5 million unemployed Americans back to work.

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Filed under: Economy, Health Care

The U.S. faces a record $1.5 trillion budget deficit for 2011, and this week, there's a chance that House Republicans will shut down the government in an attempt to use the pain that would cause to achieve their political objectives.

On a deeper level, Republicans want to do everything in their power to make sure Barack Obama is a one-term president. In that mission, anything they can do to slow down economic growth will help their cause, because -- according to the uncannily accurate predictions of Yale economics professor Ray Fair -- if U.S. GDP grows at 3.7% in 2012, Obama will win nearly 56% of the popular vote.

But if anyone in Washington was serious about reducing the budget deficit, they'd follow the script laid out by Bill Clinton after he faced down the Republicans in 1995 and early 1996. In that scenario, the federal government would raise taxes to balance the budget. After all, Clinton was the only president in recent memory who really got the economy performing at its peak: He left office after having presided over the creation of 22.2 million jobs and a $211 billion budget surplus.

Clinton was fortunate that the Internet took off while he was in office. But Treasury Secretary Robert Rubin also pushed a policy of balancing the budget as a way to tamp down inflationary expectations so investors would feel confident. That confidence created a climate of low interest rates and a boom in venture capital and initial public offerings that fueled many of the startups that helped create all those jobs.

Do Republicans Want Higher Taxes or a Higher National Debt?

In some ways, we're back where we were in 1995, but the game today is different. Republicans, following the leadership of Rep. Paul Ryan (R-Wisc.), is proposing to privatize Medicare and Medicaid, the government health plans for the elderly and the poor, among other changes. But according to The Wall Street Journal, Budget Committee Chairman Ryan's proposal is vague on paying down the debt, and it can only balance the budget if taxes rise. The Journal cites three reasons:

• It delays balancing the budget, requiring higher debt ceilings. Since Ryan's proposal doesn't balance the budget until about 2030, the only way for the government to keep operating without tax increases would be to raise the debt ceiling every year until 2030.
• It delays Medicare cuts, thus doing nothing to lower deficit for decades. Ryan's "most far-reaching change" cuts government spending for Medicare beneficiaries' health care. But current retirees would remain under the current plan which means that Ryan's proposal won't save the government money for decades.
• Despite a lack of detail in Ryan's plan, the cuts that would make a difference are too severe. To make a serious dent in the deficit would require draconian budget cuts, and the political will for such cuts appears scarce.

The reality is that Congress must choose at least one of two options: raising taxes or lifting the national debt ceiling. From a political standpoint, this choice nicely cleaves the factions of the Republican party. The small-government wing of the GOP supports Ryan's combination of tax cuts and budget cuts, while the anti-national debt, end-the-fed wing passionately opposes raising the national debt.

If sufficient political will existed to make the choices required to balance the budget, there are plenty of ways to increase tax revenues and reduce spending. For example, companies paid far less than the average 35% corporate tax rate on their $1.68 trillion in 2010 profits: Just closing all the loopholes that allowed GE to pay no taxes on its $5.1 billion in U.S. profits would reduce the deficit by as much as $600 billion (based on the reasonable assumption that other U.S. companies are using similar methods to avoid paying taxes). If you then raised taxes on families earning more than $250,000 from 35% up to the 39.6% rate where they were during the booming Clinton years, and got the U.S. out of its wars, you could make a real dent in that deficit.

Clinton Proved That Deficits Matter

There's a long history of division in Washington over the significance of deficits. In 2002, then-Vice President Dick Cheney famously told then-Treasury Secretary Paul O'Neill, "Ronald Reagan proved that deficits don't matter." But Cheney was simply rebutting the George H.W. Bush wing of the Republican party: The senior Bush famously pointed out during his 1980 primary debate with Reagan that cutting taxes while increasing defense spending and expecting to achieve a balanced budget was "voodoo economics."

The first President Bush helped set the U.S. on a path to economic strength by raising taxes. Back in 1990, he wanted to boost the economy but Fed Chair Alan Greenspan said he would only lower interest rates if Bush cut the deficit. So Bush back-tracked on his "read my lips, no new taxes" pledge, and in August 1990 submitted a budget that satisfied Greenspan.

According to the Fiscal Times, Bush's final deal "cut spending by $324 billion over five years and raised revenues by $159 billion." Congressional Republicans were outraged by Bush's decision to raise the top income tax rate from 28% to 31%.
But Bush's sense of fiscal responsibility helped set the stage for Bill Clinton, who exploited the resulting economic strength to preside over the best economy in recent memory.

If the interests of the middle class were being considered in this debate, the focus would be on creating jobs rather than cutting taxes for corporations and the wealthy while asking the middle class to pay more for essential services. And unlike 21 years ago, high interest rates are not impeding economic growth. This time, the budget standoff is a sideshow being trumped up for political purposes.

From the perspective of the average American, what matters is whether the budget impasse can be resolved without interrupting the trajectory of rising economic growth. If that happens, Obama will ride the wave of recovery to reelection.

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Filed under: Company News, Columns, Southwest Airlines, Boeing, Retail

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Filed under: Columns, Economy, People

• Hedge fund managers: $883 million average annual income. Back in 2007, the top 25 hedge fund managers made a total of $22.29 billion, according to Alpha Magazine, in 2010, the top 25 made $22.07 billion, according to AR Magazine. This is down 1% from 2007, but still enough to get by,
• Corporations: Up 12% to record highs. In 2007, companies made $1.5 trillion in profits, in 2010, they booked a record $1.68 trillion worth, according to the Commerce Department;
• Owners of commodities: Way up. Gold is up 113% from $670 an ounce four years ago to $1,430; corn spiked 87% from $4.00 to $7.48 a bushel, oil is up 63% from $64 to $108 a barrel, and cotton is up 80% from $0.58 to $1.91 per pound. This is great news for those who own commodities and bad news for people who have to pay for them.

• Median family income: Down 8.1% in the last decade. The median family income has been falling steadily since 2000 from $60,746 in 2000 to $55,821 in 2009. More recent data are unavailable, but the latest productivity report suggests that the figure has declined since unit labor costs fell 1.5% in 2010. And with 13.5 million people out of work, the pressure to push wages lower remains strong.
• Stock market investors: Down 8%. Since the first week of April 2007, the S&P 500 is down 8%. But since Obama took office, stocks have skyrocketed an average of 26.5% a year. As I've posted, for families that have suffered a loss of net worth, making up the difference depends on shifting cash from money market funds to stocks,
• Homeowners: Values are down 30%. The S&P/Case Shiller 20 City Home Price index has fallen from 200 in April 2007 to 141 in January 2011. This 30% bath is terrible news -- particularly for families that borrowed too much money to buy those houses.
• Wall Street: Average cash bonus is down 37% to $128,530. It may shock you to learn that Wall Street has lost ground in the last four years. But by one measure, it has. Wall Street's cash bonuses in 2007 were $33.2 billion, according to the New York State controller, while in 2010, they totaled $20.8 billion. But those finance industry players shouldn't feel too bad, since they got a bigger portion of their bonuses in stock in 2010. This should be good for Wall Street's long-term survival, because it links banker pay to shareholder performance.

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Filed under: Company News, Columns, People, Berkshire Hathaway, Investment

If you thought David Sokol, Warren Buffett's former top candidate to succeed him as CEO of Berkshire Hathaway (BRK.A), was wrongly forced out, think again. On Wednesday, Sokol resigned from Berkshire under a cloud of possible insider trading charges. But these recent ethical lapses are hardly the worst of Sokol's business transgressions.

Almost exactly a year ago, an Omaha, Neb., court forced Sokol's MidAmerican Energy to pay $32 million to a group of shareholders for cooking a project's books. The judge ruled that Sokol had "willfully and intentionally" falsified profit calculations to eliminate a group of minority shareholders -- including the San Lorenzo Ruiz Builders & Developers Group -- in a project in the Philippines, according to the Omaha World-Herald.

And back in 2003, Sokol settled a lawsuit alleging he cheated shareholders when he sold his company to Buffett. Sokol joined the Berkshire family in 1999 when Buffett paid $2.1 billion to buy his MidAmerican Holdings.

How to Drive Out a Business Partner

The project in the Philippines was a hydroelectric power and irrigation system on the island of Luzon. In 1993, when it began, Sokol headed CalEnergy, now part of MidAmerican. CalEnergy built the system, and it began operating in 2001, collecting water from two rivers and producing roughly 150 megawatts of electricity.

In 1998, San Lorenzo Ruiz sold its interest in the project to CalEnergy, but with a right to repurchase. Four years later, CalEnergy generated financial statements that on their face wiped out San Lorenzo Ruiz's interests. A year later, San Lorenzo Ruiz told MidAmerican it was exercising its option to buy back its shares in the project, but MidAmerican went to court to block the move.

On April 2, 2010, the Omaha court concluded that MidAmerican had faked the project's financial statements so it could wipe out the rights of its minority shareholders. Specifically, according to Manila's Standard Today, it found that when it came to calculating San Lorenzo Ruiz's interest, MidAmerican "wrongfully and contrary to the agreement of the parties did not use information that reflected 'actual project economics'"

The Omaha court concluded that MidAmerican was doing this for a nefarious purpose -- to appropriate San Lorenzo Ruiz's rights. Standard Today reported that MidAmerican cooked the project's books "knowingly, deliberately and with the intention, precisely, to reduce San Lorenzo Ruiz's interest to zero and thereby prevent San Lorenzo Ruiz from exercising its rightful option to buy back its shares in the project company."

MidAmerican was ordered to pay $32 million to San Lorenzo Ruiz, and to fork over 15,000 shares in the project that between 2010 and 2021 could pay more than $140 million at a rate of about $12 million a year.

Did Sokol Sell MidAmerican at a $140 Million Discount?

Not surprisingly, the San Lorenzo Ruiz scam was not the first time Sokol had been accused of ripping off those in a weaker position than himself. When Buffett acquired MidAmerican in 1999, Sokol was sued by MidAmerican shareholders because, as the Sioux-City Journal reported, Sokol "tricked company directors into approving the 1999 sale of the company to Berkshire Hathaway."

The lawsuit claimed shareholders were cheated to the tune of $140 million when Sokol "used personal relationships, fraud and deceit to manipulate the board's decision." The plaintiffs claimed that MidAmerican was worth $37.37 a share, but Sokol sold it for a mere $35.05. On August 3, 2003, Sokol agreed to settle the lawsuit for $7.5 million.

As the CEO on the other side of the deal, there's no way Buffett could have failed to know about this. So why is he still Saint Warren? It's not just because he's the world's third richest individual. After all, the world's wealthiest man -- Mexico's Carlos Slim -- does not enjoy Buffett's lustrous reputation. My take is that Buffett has lulled the media by hiring a Fortune columnist to write his annual reports, and by giving captivating background briefings to influential reporters.

Buffett's support of Sokol is at odds with his saintly image. However, since none of these examples of Sokol's chiseling are secret, the only reason I can imagine for the media to ignore them is that they don't fit the Buffett/Berkshire narrative.

Perhaps Buffett's shareholders should consider this bursting of the Saint Warren bubble as a chance to take their profits before more bad news emerges.

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