Coyote Blog

I am left to wonder today how much of Earthlink's remaining income is from zombie accounts.  I generally hate the hassle of dealing with a changed credit card number, but one advantage is that I discover some zombie accounts that I have forgotten about and keep charging my card every month.

Today I had an amazing one -- from my old Earthlink dial-up account.  I had thought I cancelled Earthlink something like 8 years ago (I certainly have not used it since about 2003).  That is several credit cards ago and so I have absolutely no idea how they were able to continue to bill me, but they were, right up to this month when my corporate card number changed due to a fraud alert.  It is kind of depressing that I spent well north of a thousand dollars over the years on a service that I would never even consider using again, but that is the danger that comes as a company gets larger and one can't personally inspect every bill that gets paid.

Of course, despite evidence that I never used the account, they would not waive the final month's billing and threatened collections, etc.  They wanted my credit card for one last charge, and then they would cancel.  Which made me suspicious that this is how they got my credit card for the last five years - by asking for it for one last charge and then continuing to bill for 5 years.  So I told them I did not trust them with my new credit card number and to send me a paper bill that I would pay by check.  As a final insult, they said they had to charge me an extra dollar for the paper bill.

If I had time, I would challenge them and give them grief, but sometimes one has to put one's ego away and just move on with the loss.

During the call, it was very, very clear that trying to collect money on zombie accounts that people had forgotten about was very, very typical for their customer service folks.  Leading me to wonder just how much of Earthlink's revenue comes from such zombie accounts.  As a funny side note, they were perfectly fine taking money from me without any identification, but would not cancel the account without an extensive account verification, a verification that is rather hard if one has not used the account in about 8 years.

Matt Yglesias and I certainly do read history differently.  He writes recently in a Salon article:

The basic economic foundations of industrial capitalism as we've known them for the past 150 years or so have an activist state at their core. Building political institutions capable of doing these things properly is really difficult, and one of the main things that separates more prosperous places from less prosperous ones is that the more prosperous places have done a better job of building said institutions. There's also the minor matter of creating effective and non-corrupt law enforcement and judicial agencies that can protect people's property rights and enforce contracts.

The point is, it takes an awful lot of politics to get an advanced capitalist economy up and running and generating wealth. A lot of active political decisions need to be made to grow that pie. So why would you want to do all that? Presumably because pie is delicious. But if you build a bunch of political institutions with the intention of creating large quantities of pie, it's obviously important that people actually get their hands on some pie. In other words, you go through the trouble of creating advanced industrial capitalism because that's a good way to create a lot of goods and services. But the creation of goods and services would be pointless unless it served the larger cause of human welfare. Collecting taxes and giving stuff to people is every bit as much a part of advancing that cause as creating the set of institutions that allows for the wealth-creation in the first place.

Proponents of Obamacare and other aggressive government health care interventions often argue that government health insurance will be less expensive than private health insurance.  Ignoring the whole history of government provided services (which you have to do to accept this argument), it is entertaining to press them on what costs will go away.

First, they will argue "profits."  Health insurers "obviously" make a lot of profit, so doing away with that will amount to a lot of savings.  Several years ago, when Obama was actively demagoguing** the health insurance business, the profit margins of health insurers were all around 3-4% or less.  Which means in exchange for eliminating all private profit incentives towards efficiency and productivity, we get a 3% one time cost reduction.  Not very promising.

After profits, Obamacare supporters will point to administrative costs.  Their philosophy that private insurance administrative costs drive health inflation is built into Obamacare, which places a cap on non-care related costs as a percentage of premiums.  I would argue a lot of this cost is claims management and fraud detection that government programs like Medicare don't have, to their detriment, but let's leave that aside.  I think most Obamacare opponents are convinced that there are billions in marketing costs that could be eliminated.  This has always been their bete noir in pharmaceuticals, that drug companies spend too much marketing.

I have said for years that to a large extent, what outsiders call "marketing" in health insurance is actually customer service and information, in particular agents who go out to companies and help people understand and make their insurance choices.

Well, it turns out that when the shoe is on the other foot, Obamacare supporters suddenly are A-OK with massive health insurance marketing costs, even when what is being marketed is essentially a monopoly:

[California] will also spend $250 million on a two-year marketing campaign [for its health insurance exchange]. By comparison California Senator Barbara Boxer spent $28 million on her 2010 statewide reelection campaign while her challenger spent another $22 million.

The most recent installment of the $910 million in federal money was a $674 million grant. The exchange's executive director noted that was less than the $706 million he had asked for. "The feds reduced the 2014 potential payment for outreach and enrollment by about $30 million," he said. "But we think we have enough resources on hand to do the biggest outreach that I have ever seen." ...

The California Exchange officials also say they need 20,000 part time enrollers to get everybody signed up––paying them $58 for each application. Having that many people out in the market creates quality control issues particularly when these people will be handling personal information like address, birth date, and social security number. California Blue Shield, by comparison has 5,000 employees serving 3.5 million members.

New York is off to a similar start. New York has received two grants totaling $340 million again just to set up an enrollment and eligibility process.

** Don't be fooled by the demagoguery.  This is standard Obama practice.  In exchange for eating sh*t from Obama in public, private companies get all kinds of crony favors in private.  Remember, health insurers got the US government to mandate that everyone in the country buy their products, and got the Feds to establish trillions in subsidies to help people do so.  This may be the greatest crony giveaway of all time, and to cover for it, like a magician distracting your eye from the sleight of hand, Obama made it appear in public as if he were health insurers' greatest enemy, rather than their sugar daddy.

Via the WSJ today:

Can a drug company be held liable for damages caused by generic drugs it didn't produce? That's the expansive new theory of "innovator liability" on parade in Alabama, where a recent ruling by the state Supreme Court could do damage throughout the U.S. economy.

In Wyeth Inc. et al., v. Danny Weeks et al., Mr. Weeks says he suffered from side effects from taking the generic version of an acid-reflux drug called Reglan. He sued Wyeth for fraud and misrepresentation, though the company didn't make the drug he took and had exited the Reglan market in 2002, five years before he took it. The court ruled 8-1 that Wyeth could be held liable for injuries because the generic manufacturer couldn't change the warnings on the product it copied.

First, this is nuts -- being held liable for problems with a product you did not make, simply because you invented it years before.   Are we going to start suing the estate of Thomas Edison every time someone buys a bad lightbulb?

But second, note how helpless Wyeth is now.  Drug makers are used to insane law suits that drain all the profit from helping millions of people to pay off a few folks who had adverse side effects (this same process literally destroyed the vaccination business until the government gave them special liability protection).

But let's accept the court victory - perhaps the drug really has a problem that has been discovered.  If the maker was being sued, he could just pull the drug from the market (as has happened any number of times after adverse suits) either forever or until the FDA will approve new warning language.

But in this case, Wyeth can't do this.  The generic drug makers will keep on selling the product - after all, they are not getting sued, and Wyeth will keep paying.  Wyeth does not even have standing to try to get the FDA to change the warnings on the drug.  If Wyeth tries to buy out the generic maker and shut it down, and new seller will simply takes its place.    If this case stands, Wyeth can be steadily bled to death and there is nothing they can do to stop it.

Finally, I don't want to get away without a mention of just how broken the FDA drug regulation regime is.  The original Supreme Court decision that led to the generic maker being immune to suits really turned on the impossibility of getting the FDA to change even one word on a drug's warning label.

Steven Rattner, investment banker and former member of the Obama Administration,  is terrified that under a proposed law companies will be able to raise money without investment bankers.

Most troublesome is the legalization of “crowd funding,” the ability of start-up companies to raise capital from small investors on the Internet. While such lightly regulated capital raising has existed for years, until now, “investors” could receive only trinkets and other items of small value, similar to the way public television raises funds. As soon as regulations required to implement the new rules are completed, people who invest money in start-ups through sites similar to Kickstarter will be able to receive a financial interest in the soliciting company, much like buying shares on the stock exchange. But the enterprises soliciting these funds will hardly be big corporations like Wal-Mart or Exxon; they will be small start-ups with no track records.

This is absolutely, classically representative of the technocratic arrogance of the Obama Administration and the investment bankers that inhabit it.  I have three quick thoughts:

1. Rattner's concern for individual investors comes rather late.  After all, he was the primary architect of the extra-legal screwing of GM and Chrysler secured creditors in favor of the UAW and other Obama supporters.
2. God forbid investors get actual, you know, ownership in a company for their capital rather than just trinkets.  This is so bizarrely patronizing that I had to read it twice just to make sure I wasn't missing something.  But no, he is explicitly preferring that you and I get trinkets rather than ownership  (ownership, apparently, to be reserved for millionaire insiders like himself).
3. We have truly entered the corporate state when leftish opinion makers argue that large corporations like Exxon and Wal-Mart get preferential access to capital and that smaller startups that might compete with them be shut out of the market.

I predict that over that Internet entrepreneurs running such crowd-sourcing sites would develop reputation management and review tools for investors (similar to those at Amazon and eBay).  Over time, it may be that these become far more trustworthy than current credit agency reports or investment bank recommendations.  After all, which do you trust more -- a 5-star Amazon review with 35 responses or a Goldman Sachs "buy" recommendation on an IPO like Facebook or Groupon?  Besides, it would take a very long time, like eternity, for fraud losses in a crowd-sourcing site to equal 1/100 of the investor losses to heavily regulated Bernie Madoff.

The Ecuadoran $18 billion court decision is turning out to be a monumental case of environmental fraud.  I am willing to believe that early critics of Texaco (now Chevron) had legitimate beefs about the company's stewardship in its drilling operations in the 1970's in the Amazon.  However, all semblance of principle has gone right out the window in a gigantic money grab.

A while back, it was reported that environmentalists (featured in the movie "Crude" were captured in the outtakes of the movie discussing how they lied about the science to the courts in order to score a big payday (bonus points for Obama appointing one of the fraudsters to the National Academy of Sciences).  See the link for the video evidence.

Past fraud revelations have cast doubt on the key scientific report submitted to the court as part of the proceedings, a report that is now known to have been ghost-written by the plaintiffs.  However, supporters of the judgement against Chevron have argued that the judge has always claimed that this study did not sway his decision in the case.  Now we know what did sway his decision:

Today new allegations of deceit and wrongdoing were leveled against the plaintiffs' lawyers bringing the already deeply troubled environmental suit against Chevron in Lago Agrio, Ecuador, which stems from Texaco's oil drilling in the Ecuadorian Amazon between 1964 and 1992. (Texaco was acquired by Chevron in 2001.)

In Manhattan federal district court this morning, Chevron filed the declaration of a former Ecuadorian judge, Alberto Guerra, who describes how he and a second former judge, Nicolás Zambrano, allegedly allowed the plaintiffs lawyers to ghostwrite their entire 188-page, $18.2 billion judgment against Chevron in exchange for a promise of $500,000 from the anticipated recovery.

Several sites have reposted this Craigslist ad, gasping in shock at it as evidence of massive foreclosure fraud

We are a collection agency/debt buyer. What we are looking for is a part time attorney to work for us as our corporate counsel, on our payroll, about 5 to 6 hours a week. This is a short term employment arrangement, no longer than 90 to 120 days.

Your job will be to sign pleadings, praecipe for entry of appearances, praecipe for writ of execution, and garnishment orders. Our paralegal will prepare all paperwork for your signature. This is very standard stuff for us.

If you are an attorney looking for challenging legal work, this is not for you. WE DO NOT NEED F LEE BAILEY- we are fee shopping. If you passed your boards with a D+, and you can sign your name, you possess all the credentials required for this job. If this opportunity interests you, please feel free to reply to this email with a brief description of who you are, when you got your law license, and what you will be needing from us in the way of compensation.

I would instead offer it as a lesson in the stupidity of state-enforced professional licensing arrangements.  Let me rewrite it:

We have all the legal knowlege we need.  We know exactly what the forms look like and mean.  We have written all the documents and tested them over time during our long presence in this business and we know them to meet our legal needs.   We have no need, in other words, for legal help.

However, attorneys have gotten together and created an attorneys guild, and, what's more, have convinced the government to pass laws that require membership in the guild to perform certain gate-keeping functions.  In our case, we need a member of the guild to sign some forms to make them legal, both because the guild has strong influence and because certain folks have convinced everyone that all mortgage pain in this country came from having a machine perform this signature function rather than a flesh and blood hand.  So we need a flesh and blood hand rather than a machine to sign foreclosure documents.  Unfortunately, that hand has to be attached to a brain that has passed the bar exam, and because the guild is pretty good at limiting its membership, we expect to have to pay an absurd amount of money for this trivial function that could be duplicated by a six-year-old (and used to be performed by a simple $100 machine).

Don't get us wrong -- if we were on trial for our lives or facing a nasty, complicated lawsuit or wanted to draft a custom contract to protect our interests, we would be very happy to consider the opinion of third party licensing groups as to the merit of a particular attorney.  Ironically, though, even then current licensing would be absurd, for in this case it would not greatly exceed our quality requirements (as it does for signing our foreclosure paperwork) but it would vastly undershoot our need due diligence needs.   Perhaps there is some legal function for which attending an ABA-accredited school and passing the bar exam is the perfect level of quality assurance, but we have not found it yet.

Rolling Stone Magazine has an good story on the conviction of a number of banks and brokers on charges of bid-rigging, specifically on contracts for short-to-medium term management of municipal bond cash accounts.  Apparently brokers were paid by certain banks to be given a look at all the other bids before they made their final bid.  The article focuses mainly on the ability of winning bidders not to bid any higher than necessary, though I would suppose there were also times when, given this peek, the winning bidder actually raised its bid higher than it might have to ace out other bidders.

This is classic government contracting fraud and it's great to see this being rooted out.  I am not wildly confident it is going to go away, but any prosecutorial attention is welcome.

But I am left with a few questions:

• It seems that government contracting is more susceptible to this kind of manipulation.  Similar stories have existed for years in state highway contracting, and the municipal bond world has had accusations of kick-backs for years.  Is this a correct perception, or is the rate of fraud between public and private contracting the same but we just notice more with the government because the numbers are larger, the press coverage is greater, and the prosecutorial resources are more robust?
• If government contracting of this sort is more susceptible to fraud, why, and how do we fix it?

The latter is not an academic question for me.  I run a company that privately operates public recreation areas.  I bid on and manage government contracts.  Frequently, a major argument used against the expansion of such privatization initiatives is that past government outsourcing and contracting efforts have been characterized by fraud and mismanagement.  The argument boils down to "the government has so many management problems that it can't be trusted with contracting for certain services so it needs to operate those services itself."

The only way to reconcile this view is to assume that private actors are more likely to act fraudulently and be dishonest than public employees.  If this were true, then the public would be safer if a public management process of questionable ability were applied towards public employees rather than outside private contractors, because those who were being managed would be less likely to take advantage.  And certainly there are plenty of folks with deep skepticism of private enterprise that believe this.

However, I would offer that only by adopting an asymmetric view of what constitutes fraud would we get to this conclusion.  Clearly, banks colluding to shave a few basis points off municipal asset returns is fraud.     As the author of the Rolling Stone piece puts it several times, the crime here is that the public did not get the best market rate.  So why is, say, elected officials colluding with public employees unions to artificially raise wages, benefits, and staffing levels above market rates not fraud as well?  In both cases insiders are manipulating the government's procurement and political processes to pay more than the market rates for certain services.

This is Bastiat's "seen and unseen" of the privatization debate.   Yes, the world is unfortunately littered with examples of government procurement fraud.  This is often cited as a reason for maintaining the status quo of continued government management of a diverse range of services.  But what we miss, what is unseen, is that these government services are often run with staffing levels, work rules, productivity expectations, and pay rates that would constitute a scandal if uncovered in a division of a corporation, particularly if the workers were spending a lot of money to make sure the manager handing them this largess was able to keep his job.

Yes, the public lost several basis points on its investments when it did not get the market rate of return from cheating bankers.  But it loses as much as 50% of every tax dollar sent to many state agencies because it does not get market rates (and practices) for state labor.

Whether crimes were involved in the failures of Enron, Lehman, & Bear Stearns is still being debated.  All three essentially died in the same way (borrowing short and investing long, with a liquidity crisis emerging when questions about the quality of their long-term investments caused them not to be able to roll over their short term debt).  Just making bad business decisions isn't illegal (or shouldn't be), but there are questions at all three whether management lied to (essentially defrauded) investors by hiding emerging problems and risks.

All that being said, MF Global strikes me as an order of magnitude worse.  They had roughly the same problem - they were unable to make what can be thought of as margin calls on leveraged investments that were going bad.  However, before they went bankrupt, it is pretty clear that they stole over a billion dollars of their customers' money.  Now, in criticizing Wall Street, people are pretty sloppy in over-using the word "stole."  But in this case it applies.  Everyone agrees that customer brokerage accounts are sacrosanct.  No matter what other fraud was or was not committed in these other cases, nothing remotely similar occurred in these other bankruptcies.

A few folks are talking civil actions against MF Global, but why isn't anyone up for criminal charges?  Someone, probably Corzine, committed a crime far worse than anything Jeff Skilling or Ken Lay were even accused of, much less convicted.   This happens time and again in the financial system.  People whine that we don't have enough regulations, but the most fundamental laws we have in place already are not enforced.

I have been reading of late some histories of Germany in the 1930's, with a particular emphasis on racial laws and policy.   Over time the expanding bans on Jewish participation in the economy and society as well as preferences given to non-Jews for government jobs led to some practical problems, including:

• What percentage of Jewish blood made one Jewish?  The Nazis messed around with this problem a long time, in part because of Hitler's absolute reluctance to get involved in such details.  Was it one grandparent?  Three grandparents?
• How does one test for such things?  In the thirties, there was an boom in geneology research in Germany, as everyone raced around trying to figure out what evidence was sufficient to establish someone's race

It would be nice to think we put this kind of thing to bed, but here we are in the 21st century running around trying to answer the exact same questions

• Does 1/32 Cherokee blood make Elizabeth Warren the member of a protected group?  Does 1/8 black blood mean George Zimmerman is not a racist?
• We are building infrastructures to make rulings on race.  I found this story amazing

This story reminded me of the 1980s case of the twin red-haired Boston firefighters who claimed to be black, based on a photo of a great-grandmother and alleged oral history. While I remembered that they had gotten fired for their alleged fraud, I didn’t remember this detail:

Under current rules, said [general counsel to the state personnel office] Ms. Dale, candidates who say they are members of minority groups are judged by appearance, documented personal history and identification with a minority community. Disputes over claims of minority status are resolved by the Department of Personnel Administration.

 And indeed, there eventually was a two-day administrative hearing, in which the hearing officer determined that the twins failed all three criteria, and thus were not black. A judge upheld the ruling, finding that the twins had claimed minority status in bad faith.I have to admit being under the impression until now that as a legal matter, minority status was an in issue of self-reporting. But at least in the Massachusetts Civil Service system, one can get fired for “racial fraud.”

• Every year, in the name of some sort of racial harmony, I have to sit down and report to the government on the race of each of my employees.  For 364 days a year I can ignore the race of my employees, but one day a year the government makes me wallow in it.  Here are part of the instructions:

Self-identification is the preferred method of identifying the race and ethnic information necessary for the EEO-1 report. Employers are required to attempt to allow employees to use self-identification to complete the EEO-1 report. If an employee declines to self-identify, employment records or observer identification may be used.

Where records are maintained, it is recommended that they be kept separately from the employees basic personnel file or other records available to those responsible for personnel decisions.

Race and ethnic designations as used by the Equal Employment Opportunity Commission do not denote scientific definitions of anthropological origins.

I am told we are trying to create a society free of racism, but the results sure look a lot like racism to me.

I am exhausted with folks who have never tried to shop for health care telling me that it can't be done, despite the fact that I do it all the time and achieve substantial savings.  This is a meme developped and maintained solely to support government power by declaring that there is a market failure in the pricing mechanics in the health care industry that can only  be solved through regulation and price controls.  I wrote in response

I agree that the pricing in health care is often arbitrary and capricious.  Of course some suppliers are going to try to soak third party payers.  But I don't think simply changing the payer (from private to public) or having a government bureaucracy set prices for  millions of line items is the solution.  My diagnosis is that health care lacks the one thing we have for most every other product or service:  shopping.

Now, you try to head off this argument with a few folks who claim shopping is impossible in health care.  But that is absurd.  There is a large and growing community of us who have real health insurance, rather than pre-paid medical plans, which means we have high deductibles.  We pay all of our regular expenses out of pocket, and maintain health insurance for large, unpredictable, potentially bankrupting expenses.

I must admit that shopping for health care seemed odd and a bit intimidating at first, having lived for years in the world of gold-plated, pay-for-everything corporate health care accounts.  But it really is not that hard.  I have consistently knocked down the cost of everything from x-rays for my kids' fractures to colonoscopies by a half to two-thirds.  I am now used to doctors and providers having that second price book under the counter they go to if they know you don't have a third-party payer they can soak.  We always research and ask for generics.  We think twice before accepting the need for an expensive test, like a MRI, and price shop it if we have to have one.  I push back on my dentist who tries to x-ray my teeth every few months.  I have many friends that saved a ton of money on oncology treatments by just doing a little shopping.

I am exhausted with academics and writers who have never tried to shop for health care telling me it is impossible.  Many of us do it, and there are more and more resources out there for us.  Sure, there are certain things I am not going to have the time or ability to price shop -- if I am lying on my back having a heart attack, my wife (hopefully) is not going to check rates at the hospitals.  But it is a fraud to extrapolate from this minority of health care situations to all health care expenditures.

The other argument is used is that at the beginning of a health care interaction we may not know exactly what care is needed.  So what?  The same is true of auto repair, but I don't blithely allow the repairs to proceed at any cost just because I didn't know up front what the diagnosis would be.  I get an estimate when each new problem is found, and I have on several occasions interrupted a car repair, told them their price was too high on certain repairs, and went elsewhere for the repair or deferred it entirely.

Let's suppose there is some sort of market failure for 10-20% of health care charges where price shopping is impossible.  Then let's discuss government regulatory approaches for those situations.  But for the other 80-90%, we should be structuring a health care system where consumers provide the price regulation, as they do in nearly every other industry, by shopping.

As a note, some people are exhausted by the idea of shopping.  My first response is, so what?  Get over it.  We are not going to take over a whole industry just to free you from a bit of hassle.  The second response is that research shows that only a small percentage of buyers need to be price shoppers to enforce price discipline.  I generally trust that Amazon has low prices and don't always check them, because I know there are much, much more rabid people who do care and do check.

Over time, I have found physicians who are both sympathetic and cooperative with this approach and actively help us minimize the cost of our care.  Its just amazing -- somehow we accept this image as a doctor being above all this cost stuff, in fact with considerations of price and cost being corrupting to their mission of keeping us healthy.  Imagine a car mechanic that took that attitude -- "I'm the expert here and you will pay whatever it costs to do what I say you need to do."  Would you fire the mechanic and find a better and cheaper one, or would you suggest that what we really need is a massive new government bureaucracy to set prices for every imaginable repair a car might need.

Sometimes I suspect much of the support for government health care is from people who see shopping and taking responsibility for their own care as too much of a hassle.

Breaking news from California:

The Workers' Compensation Insurance Rating Bureau (WCIRB) made it official and submitted a mid-year filing for a 9.1% increase in the pure premium advisory rate that Insurance Commissioner Dave Jones approved less than six months ago. The proposed July 1 increase follows the 37% increase that Jones approved for January 1 that was hidden by the change in benchmarks for pure premium rates that was made at his request....

The Bureau insists that an increase of this magnitude is necessary to combat the continued deterioration in the claims experience, as well as an uptick in claim frequency in the 2010 accident year. Much of the increase will also go to pay for the higher loss adjustment expenses carriers are incurring fighting liens and litigating permanent disability claims. Projected ALAE costs are up to $11,403 per indemnity claim for the 2011 accident year compared to $10,698 the year before.

A 9.1% increase a half year after a 37% increase is just crazy.  This tends to confirm three issues I have written about before:

1. People are filing workers comp claims as a substitute for or a supplement to unemployment.  Our company has seen a significant increase in people "coincidentally" suffering an injury on one of the last few days, and particularly the very last day, before they are to be laid off.  Only such fraud explains an increase in claims when economic activity is way down, particularly when more dangerous professions like construction employment fell much more than office employment in the recession.  We have also seen, by the way, an increase in frivolous labor lawsuits in CA coincident with the economic decline.  A year ago I had an employee in CA tell me that she had attended a brainstorming session the night before among several of my ex-employees trying to generate ideas for ways to sue our company.  I can't wait for an improvement in the economy when the returns of working are higher than the returns of brainstorming ways to extract money from our company via the legal system.
2. California in general does a bad job of policing workers comp. fraud.  Woe to the employer that actually attempts to question an outrageously suspicious claim.  Last time I tried to do so in CA I got slapped with a lawsuit.
3. All states do a terrible job policing permanent disability claims.  I hire a lot of older workers.  I can't tell you how many people show up at my door trying to be paid under the table because they don't want to endanger their permanent disability by having a record of getting paid for doing very physical outdoor work for us.  They assure me they are 100% capable to do heavy physical labor.  Since I don't pay anyone off the books, they end up finding work elsewhere.   Many of you may not believe such people exist, but I have met a number of folks who consider getting a permanent disability, or at least something a doctor will testify is a permanent disability, the equivalent of hitting the lotto.  I have even been sued by a woman for submitting testimony to the social security administration that might have harmed her chances of getting a permanent disability ruling.  The lawsuit stated that if she was denied the disability payment after I testified that I had seen no evidence of any limitations in what she could do on the job,  that I should be liable for paying her the lifetime amount she would have gotten.  So I wimped out and withdrew my testimony and let the taxpayers pay her rather than farting around with a lawsuit.

Best Buy is apparently increasing its customer return window from 14 days to 30 days.

Why?  This certainly costs them money, not just from lost revenue but from the cost of restocking and returning to the manufacture (not to mention fraud).

Are they doing this because they are good guys?  Hah.  Do you really expect goodwill out of an electronic retailer?

They did it because they felt they had to.  As the top dog in dedicated electronics stores, they are constantly under competitive assault.  They are the reference point competitors start from.  Wal-mart attacks them on price.  Amazon.com attacks them on price and convenience.  Smaller retailers attack them on knowledge and integration services.  Everyone attacks them on the niche details like return policies.

Best Buy did this not because they wanted to, but because they felt they had to under competitive pressure.  The accountability enforced by the market works faster, on more relevant variables, and far more powerfully than government regulation.

When the government does regulate variables such as this, such regulation often actually blunts the full accountability of the market.  Retail laws in many European countries set maximum hours and discount levels, protecting large retailers like Best Buy from upstarts trying to provide a better of different service.

This seems to represent the general MSM reaction to Peter Gleick's fraud in obtaining Heartland documents:

Peter Gleick violated a principle rule of the global-warming debate: Climate scientists must be better than their opponents....

It’s very tempting for scientists and their allies to employ to tactics of their over-aggressive critics. Yet the global warming camp must make an affirmative case for ambitious action on carbon emissions. Critics need only poke holes in the scientists’ arguments, or, as is so often the case in global warming debates, merely insist they’ve done so. Manipulation and perfidy work much better for the deniers.

Whatever the misdeeds of those who attack climate research, however braindead the opposition to climate scientists appears to be, advocates degrade themselves when they allow their frustrations to get the better of their ethical responsibilities. They lend credence to the (wrong) impression that both sides of the debate are equally worthy of criticism, that global warming is another ideological war that both sides fight deceitfully. In that context, those who want to spend lots of money to green the economy lose, and those who want to do nothing win. As Rick Santorum tours the country accusing climate activists of treachery and conspiracy, this should be only more obvious.

In other words, shame on Gleick for stooping to the level of those corrupt and evil skeptics.  A sentence or two of denunciation of Gleick for an actual crime, accompanied by 500 words of unsubstantiated ad hominem attacks on skeptics.  Nice.  I try to have a "let's play nice" response and this is what comes back in return?  Very frustrating.

I am always fascinated by folks who fear private power but support continuing increases in public / government power.  For me there is no contest - public power is far more threatening.  This is not because I necesarily trust private corporations like Goldman Sachs or Exxon or Google more than I do public officials.  Its because I have much more avenues of redress to escape the clutches of private companies and/or to enforce accountability on them.  I trust the incentives faced by private actors and the accountability mechanisms in the marketplace far more than I trust those that apply to government.

Here is a good example.  First, Kevin Drum laments the end of privacy because Google has proposed a more intrusive privacy policy.  I am not particularly happy about the changes, but at the end of the day, I am comforted by two things.  One:  I can stop using Google services.  Sure, I use them a lot now, but I don't have to.  After all, I used to be a customer or user of AOL, Compuserve, the Source, Earthlink, and Netscape and managed to move on from those guys.  Second:  At the end of the day, the worst they are tying to do to me is sell me stuff.  You mean, instead of being bombarded by irrelevant ads I will be bombarded by slightly more relevant ads?  Short of attempts of outright fraud like identity theft, the legal uses of this data are limited.

Kevin Drum, who consistently has more faith in the state than in private actors, actually gets at the real problem in passing (my emphasis added)

And yet…I'm just not there yet. It's bad enough that Google can build up a massive and—if we're honest, slightly scary—profile of my activities, but it will be a lot worse when Google and Facebook and Procter & Gamble all get together to merge these profiles into a single uber-database and then sell it off for a fee to anyone with a product to hawk. Or any government agency that thinks this kind of information might be pretty handy.

The last part is key.  Because the worst P&G will do is try to sell you some Charmin.  The government, however, can throw you and jail and take all your property.  Time and again I see people complaining about private power, but at its core their argument really depends on the power of the state to inspire fear.  Michael Moore criticizes private enterprise in Capitalism:  A Love Story, but most of his vignettes actually boil down to private individuals manipulating state power.  In true free market capitalism, his negative examples couldn't occur.  Crony capitalism isn't a problem of private enterprise, its a problem of the increasingly powerful state.  Ditto with Google:  Sure I don't like having my data get sold to marketers, and at some point I may leave Google over it.  But the point is that I can leave Google .... try leaving your government-enforced monopoly utility provider.  Or go find an alternative to the DMV.

A great example of this contrast comes to us from Hawaii:

There may be some trouble brewing in paradise, thanks to a seemingly draconian law currently under consideration in Hawaii's state legislature. If passed, H.B. 2288 would require all ISPs within the state to track and store information on their customers, including details on every website they visit, as well as their own names and addresses. The measure, introduced on Friday, also calls for this information to be recorded on each customer's digital file and stored for a full two years. Perhaps most troubling is the fact that the bill includes virtually no restrictions on how ISPs can use (read: "sell") this information, nor does it specify whether law enforcement authorities would need a court order to obtain a user's dossier from an ISP. And, because it applies to any firm that "provides access to the Internet," the law could conceivably be expanded to include not just service providers, but internet cafes, hotels or other businesses.

Americans fed up with Google's nosiness can simply switch email providers.  But if they live in Hawaii, they will have no escape from the government's intrusiveness.

That is the purposely inflammatory title of my article this week at Forbes.com, finding the roots of crony capitalism not in capitalism itself, but in progressive legislation.  An excerpt:

The core of capitalism has nothing to do with, and is in fact inherently corrupted by, the exercise of state power.  At its heart, capitalism is one simple proposition -- free exchange between individuals based on mutual self-interest.  There is no room in this definition for subsidies or special government preferences or bailouts.  The meat and potatoes activities of crony capitalism are corruptions rather than features of free markets.  Where state power to intervene in economic activity does not exist, neither does cronyism.

Believe it or not, the Occupy movement reminds me of nothing so much as 1832.  Flash back to that year, and you will find Federal officials with almost no power to help or hinder commerce... with one exception: the Second Bank of the United States, a powerful quasi-public institution that used its monopoly on government deposits as a source of funds for private lending.  The bank was accused of using its immense reserves of government cash to influence elections, enrich the favored, and lend based on political rather than economic formulae (any of this sound familiar?).  Andrew Jackson and his supporters, the raucous occupiers of their day, came into office campaigning against the fraud and cronyism at the Bank.

Jackson, much like the current OWS folks, was a strange blend of sometimes frontier anarchist and sometimes tyrannical authoritarian.  But in the case of the Second Bank, the OWS movement could well learn from Jackson.  He didn't propose new and greater powers for government officials to help check abuses of the existing powers -- he proposed to kill the Bank entirely.  Eliminate the source of power, and men can no longer tap it for their own enrichment.

Unfortunately, the progressive Left which makes up most of the OWS movement has taken exactly the opposite approach over the last century or so, expanding government powers and economic institutions (such that today the scope of the second bank seems quaintly limited) and thus the opportunity for cronyism.   In fact, most of the interventions that make crony capitalism possible are facilitated and enabled by the very progressive legislation that the progressive Left and the OWS protesters tend to favor.  Consider some examples...

Local Conservative Greg Patterson blames the death of several sex workers in Detroit on the Backpage, because the killer may have targeted them based on their ads in that periodical.

The killers are the ones who should be held responsible, but what about parties whose negligent actions facilitate the killing?  How about the example of a school with poor lighting, or the business with lots of bushes in which bad guys can hide?  There are plenty of cases that show the property owner would be liable for the intentional torts of others.

So New Times knows that Adult ads are used by bad guys...even to the point of murder.  Craigslist stopped accepting these ads after a similar incident and New Times picked up the business...at a considrable profit.  So can they be held accountable for the deaths in Detroit?  I would argue that they can be.  What about future deaths?  What happens if New Times continues to accept adult advertising and someone else gets killed?  Actionable?  I would say yes.

This is exactly the sort of spurious liability logic Conservatives tend to mock, except of course when it involves a target it does not like.  In this case free market Conservatives really hate Backpage for accepting freely placed ads for free exchange involving consensual sex.  I responded in the comments:

Why do you cast so far afield for an analogy in your third to last paragraph [the one above about schools with poor lighting]? Why not take a directly parallel example - what if some killer were stalking Starbucks barristas whose work places he identified through ads in the Republic or via Google Maps? Would you really run around in circles blaming Google? This is like saying that a serial killer is facilitated by the phone companies because they publish the phone book the killer used.

We are talking about ads placed via free exchange for consensual sex. Yes, in our bizarre society, Conservatives who nominally support all other types of free exchange have had this one sort banned. But it is ironically the very fact that this sort of consensual commerce is illegal that makes this work so dangerous. Escorts/hookers are vulnerable to abuse, crime, fraud etc. precisely because they have less ability to access the legal system for redress.

If you want to discuss who facilitated the death of these women, let's talk about those who drove their profession underground.

This is one of the most incredible things I have seen in a while.  I will describe the video, but it is only a bit over a minute long and you should definitely watch it.

The clip below is an outtake from the environmentalist movie "Crude", which purported to document the environmentalist's case against Chevron in Ecuador.  Apparently, between takes of earnest and un-selfinterested environmentalists saving the world from greedy corporations, these self-same environmentalists discussed lying about the science and duping the courts in order to score a big payday for themselves.

The video is doubly interesting because, as Anthony Watts explains, the woman in the video taking money to make up untrue findings was recently confirmed to the NAS, where there is a good bet that we will see her as the source for "evidence" that fracking is contaminating groundwater.  These three folks are all the subject of a civil suit from Chevron but all three should be subject to criminal charges for fraud and conspiracy.

Investors everywhere were shocked to see that MF Global seems to have lost over a billion dollars of their customers capital.  In most cases, this capital was cash customers thought was sequestered as collateral for their trading accounts.  MF Global took its customers money and used that money as collateral in making risky, leveraged bets on European sovereign debt, bets that fell apart as debt prices fell and MF Global faced margin calls on its bets that it did not have the liquidity to cover.

Certainly it strikes most folks as unethical to lose the assets in your customers' brokerage accounts making bets for the house.  But it turns out, it may have been entirely legal.  This article is quite good, and helps explain what was going on, what this "hypothecation" thing is (basically a fancy term for leveraging up assets by using them as collateral on loans), and why it may have been legal.

In short, the article discusses two regulatory changes that seemed to be important.  The first was a 2000 (ie Clinton era, for those who still think these regulatory screwups are attributable to a single Party) relaxation in how brokerages could invest customers' collateral in their trading accounts.  The second was a loophole where brokerages created subsidiaries in countries with no controls on how client money was re-used (in this case mostly the UK) and used those subsidiaries to reinvest money even in US brokerage accounts.

The increase in leverage was staggering.  Already, cash in most commodities trading accounts is leveraged - customers might have only 30% of the value of their trading positions as collateral on their margin account.  Then the brokerage houses took this collateral and used it as collateral on new loans.  Those receiving the collateral on the other end often did the same.

MF Global would be bad if it were fraud.  But it is even worse if MF Global is doing legally what every other brokerage house is still doing.

Here is the minimum one should do:  Diversify brokerage accounts.  We diversify between bonds and stocks and other investments, but many people have everything in one account with one company.  I am not sure anyone can be trusted any more.  My mutual funds are now spread across three firms and, if I grow my brokerage account for individual stocks and investments (right now it is tiny) I will split that as well.

Good advice from Popehat

Hence, the government’s chickenshit false statement trap works — even though the government agents set it up from the start. Now, however weak or strong their evidence is of the issue they are investigating, they’ve got you on a Section 1001 charge — a federal felony. In effect, they are manufacturing felonies in the course of investigations.

You think this is an improbable scenario? You think I’m talking about rare and extreme cases to color the entirety of federal law enforcement? To the contrary, as a federal defense attorney, I’m encountering this more and more often. Not to sound like an old fart, but we never indulged in such bullshit when I was a federal prosecutor (cue the scoffing from many defense attorneys). But in the last 12 years, I’ve seen it in a dozen cases, and heard about it from colleagues across the country. It’s now routine for federal agents to close out an investigation with a false-statement-trap interview of a target in an effort to add a Section 1001 cherry to the top of the cake.

The lesson — other than that criminal justice often has little to do with actual justice — is this: for God’s sake shut up. Law enforcement agents seeking to interview you are not your friends. You cannot count on “just clearing this one thing up.” Demand to talk to a lawyer before talking to the cops. Every time.

Read it all.  He explains how easy it is to fall into this trap, and how even non-material statements get spun as felonies.   Remember, Martha Stewart went to the slammer for lying to investigators, not for stock fraud or insider trading.

This Newsweek article reviews the amazing coincidence that so many Obama DOE loans and subsidies benefited heavy-duty Obama campaign supporters.  The author seems surprised:

...these were highly competitive grant and loan programs—not usually a hallmark of cronyism. Often fewer than 10 percent of applicants were deemed worthy.

Nevertheless, a large proportion of the winners were companies with Obama-campaign connections. Indeed, at least 10 members of Obama’s finance committee and more than a dozen of his campaign bundlers were big winners in getting your money.

While nominally about the Gibson Guitar raid, this article is actually a great primer on abusive prosecutorial tactics businesses are increasingly facing

Prosecutors who are looking for an easy “win” know that businesses roll over. A public raid on its offices, or an indictment of its officers, can destroy a business’s reputation and viability. That makes the owners easy to intimidate into a plea bargain.

If they choose to fight, they face the full wrath and fury of the feds. In the Gibson raids, the SWAT teams were deployed even though Gibson had offered its full cooperation to investigators. Such raids are increasingly used to intimidate citizens under suspicion. The orchid importer, a 65-year-old with Parkinson’s, was shoved against a wall by armed officers in flak jackets, frisked, and forced into a chair without explanation while his home was searched

The government also attempts to get low-level employees to “finger” their bosses. For example, the feds threatened Gibson employees with long prison sentences. This is not a search for truth, but an immoral attempt at extortion to win convictions. Investigators examine the lives of “little fish” and use minor, unrelated violations (smoking a joint, or exaggerating income on a loan application) to pressure them to back the government’s case against their employers. Mobsters have experience with threats like this, but a secretary or an accountant is scared to death by the threat of prosecution.

A favorite ploy of prosecutors in these cases is to charge defendants with false statements based on their answers to the investigators. The sentence for this can be five years in prison. No recording is made of the interviews — in fact, the feds prohibit taping the interviews — and the agents are not stenographers. They cannot possibly recall the exact wording of the questions and the answers. Yet after the interview, they will produce a “transcript” replete with quotes throughout. And if a witness says he did not actually say what the agent put in quotes, it is the witness’s word against a fine, upstanding federal agent’s. Staring at a five-year sentence will get most people to say whatever the government wants them to.

The feds also pile up charges. According to Juszkiewicz, the Justice Department warned Gibson that each instance of shipping a guitar from its facility would bring an added charge of obstruction of justice. Prosecutors routinely add extra counts to stack potential prison sentences higher. For instance, faxing invoices for the wood would be charged as wire fraud. Depositing the check for the sale of the guitars would be money laundering. The CEO’s telling the press he is innocent would bring charges of fraud or stock manipulation. The intent is to threaten such long sentences that the targets plead guilty rather than risk decades in prison.

Prosecutors further tighten the screws by seizing the assets of the company, a tactic once used against pirates and drug lords but now routinely used to prosecute white-collar crimes. The federal agents seized six guitars and several pallets of ebony during their initial 2009 raid against Gibson. Federal law allows assets to be seized not just from convicted criminals, but also from those never charged. Owners must prove that the forfeited property was obtained legally; otherwise, the government can keep it. That gives the government incredible leverage, because without the seized inventory and bank accounts, the business will most likely go under. How can Gibson make guitars if the wood is being held by the government? How can it service customers when the government took its computers as evidence? How can it pay lawyers when its bank accounts were seized? Asset forfeitures bring to mind a similar twist on the law uttered by the Queen of Hearts in Alice in Wonderland: “Sentence first, verdict afterwards.”

I have argued many times that private investors, over the long haul, will make better investment choices than the government, in part because they have better incentives and information to guide their decision-making.  The straw-man argument against this is to point out anecdotes of failed private investments.  Heck, I can do that.  Pets.com famously blew through $300 million of private capital with a corporate strategy that never made much sense to people.

The Pets.com investors were chagrined, and probably learned a lesson from their mistake.  Certainly most of us thought the blame, if blame existed, for the debacle rested on the investors for pouring money into a bad proposition.  Certainly no one accused the management of fraud -- I am sure they were diligently, honestly trying to make the company a success, even if they were misguided as to where that success lay.

As it turned out, everyone, not just the Pets.com investors, learned from the mistake.  The failure was an important driver in an industry-wide rethink as to what a successful Internet business model might look like.  This benefit only came because people were willing to acknowledge not just that the Pets.com investment was flawed, but that it represented a systematic mistake that was being made vis a vis Internet startup investments.

Now, consider solar manufacturer Solyndra.  It failed this week, likely taking with it most of $535 million in taxpayer money that the Obama Administration was so eager to give them that it short-cutted its internal processes to fork over the cash more quickly.

Many of us on the outside would love to see the government rethink such investments in a systematic way, and reconsider if it is even possible for the government to make such investments, and in particular whether "green jobs" investments make any sense at all.

But the likelihood of that kind of introspection happening in the public world is about zero, and my bet is that Obama is going to propose more of the same tonight in his speech.

In fact, the Department of Energy (the source of the loan) and the FBI have today sent armed agents into Solyndra looking for evidence of fraud.   While Zero Hedge argues that fraud would be bad for Obama, in fact I think it would probably be the best possible outcome and one he is hoping for.  If he can say, "wow, you and I both got tricked here by some evil folks we are going to put in jail" it deflects attention from the fact that he put a half billion dollars of taxpayer money into a business plan that never made a lick of sense.

Another me-too solar manufacturer with a factory in California of all places was never going to compete in a global commodity market.  This company's plan was always to sell dollars for 50 cents and to make it up on volume.  I don't see how any investor thought this was going to work.  My guess is that the private investors didn't know much about solar and invested because it had a certain hip-ness to it, or less charitably, they knew it never made sense but hoped that Uncle Sam, once it was already in for a half billion, would keep more money flowing or perhaps agree to buy out their production at above market prices.

There may have indeed been fraud, but as in the case of Pets.com, it is perfectly possible no real internal fraud existed and they ran through a ton of money against a stupid business plan that should never have been funded.  Obama would greatly prefer to call it fraud rather than his own failure of judgement.  As an aside, Fannie and Freddie are pursuing exactly the same course in suing banks, arguing that they were defrauded by the banks in buying mortgages, a fairly laughable proposition in the great scheme of things when one considers Fannie and Freddie were at the forefront of the industry in driving down lending standards and promoting the expansion of the mortgage market.

Most of you will know that the California solar company Solyndra has failed, burning through in less than two years nearly $535 million in taxpayer money.

I wrote in Forbes yesterday that it was a headscratcher why anyone thought this a sound investment

Obama’s investment of taxpayer money into Solyndra is a great example.  It is clear little due diligence was completed before the loan guarantees to Solyndrawere rushed out the door in 2009 in time to meet Energy Secretary StevenChu’s artificial target date for the first loan of Obama’s green jobs program.  A good, well-timed sound bite on the evening news was more important that the actual details of the investment.

But, in fact, little due diligence should have been necessary.  Already in 2009 it was clear that the solar panel industry had commoditized, and low-cost manufacturing would be the key to succefully competing in the market.  Further, European countries whose subsidies and high feed-in tariffs for solar were driving most of the market growth were already in the process of dialing back those incentives.

Surely any reasonable investor would have been leary about entering such a market with an under-scale startup, much less one which chose California of all places to build their plant.  Most rational investors would cite California as a huge liability in a falling-price commodity market, but it was an asset for a company trying to compete in capturing taxpayer dollars, being the home of many of the most powerful politicians most likely to buy into the green jobs boondoggle (of course it did not hurt that Solyndra’s largest investor is a major Obama campaign contributor).

It turns out that the numbers were worse than I imagined, and reading ZeroHedge, it seems like some outright fraud may be involved (hat tip to a reader who I cannot never figure out if he wants to have his name mentioned or not)

What was in the prospectus was, no doubt, the real reason that investor chose to take a ‘pass’ on the deal. There were revenue/expense numbers for the nine months preceding the proposed deal:

Revenue: $58.8mm

Cost of Goods Sold: $108.0mm

That is an absolute complete disaster. This is a low margin business to begin with. At Solyndra they were losing 84 cents for every dollar of sales. Adding in SG&A and CapEx the losses and cash drain had to be very heavy.

Wow, that is really a fail.  Even in the worst run late 90's Internet company I ever encountered, they were not selling dollars for 50 cents.  One wonders what numbers Steven Chu and company saw before they funded this dog, and whether from the very beginning these guys were counting on a steady stream of 9-figure government subsidy checks.

From Robert Powel at Yahoo Finance

On the contrary, Landis noted that disability claims are up, as are SSI public assistance claims. And to some, including John Laitner, the director of the University of Michigan Retirement Research Center, that spells trouble.

The Old Age Survivors Insurance (OASI) fund, from which retirement benefits are paid, continues to grow modestly, Laitner said. The OASI fund is expected to grow from $2.4 trillion in 2010 to an estimated $2.5 trillion in 2011. (See page 3 of Facts & Figures.) But the Disability Insurance (DI) trust fund is shrinking, and has reached a very low level. The DI fund is expected to fall from $180 billion in 2010 to an estimated $154 billion in 2011.

What's more, disability awards have grown faster since 1970 than those for retirees, Laitner said. The annual number of awards to disabled retired workers rose from 1.3 million in 1970 to 2.6 million in 2010, while for disabled workers it increased from 350,000 in 1970 to 1 million in 2010. And if that wasn't bad enough, the average age of retired beneficiaries has risen slightly since 1960, but the average age of disabled beneficiaries has fallen.

According to Facts & Figures: "The average age of disabled-worker beneficiaries in current-payment status has declined substantially since 1960, when DI benefits first became available to persons younger than age 50. In that year, the average age of a disabled worker was 57.2 years. The rapid drop in average age in the following years reflects a growing number of awards to workers under 50. By 1995, the average age had fallen to a low of 49.8, and by 2010, it had risen to 52.8. By contrast, the average age of retired workers has changed little over time, rising from 72.4 in 1960 to 73.7 in 2010." (See page 17.)

Said Laitner: "In my opinion, long-run concerns about the financial solvency of both OASI and DI are warranted, but between the two, DI seems to raise the most immediate alarm."

I only have anecdotal evidence, and that can be dangerous, but I cannot tell you how many fully able-bodied people come to our company and say "I have a lifetime full disability payment but I am fully able to do any work.  I can't show any income because I would lose my disability... can you pay me under the table somehow? [of course we cannot]."  My strong suspicion from observing the disability process from the outside is that there is a ton of fraud.

I have met people whose lifetime dream and goal is to get a disability designation.  I once had a worker who was applying for a full disability.  Asked by someone in the process about my assessment of her ability, I submitted some material about her job requirements and the types of things she seemed able to do.  She actually hired a lawyer who threatened to sue me if I in any way interfered with the process of her getting her disability designation.  It may not seem like a fortune to you or I, but I have met a number of folks who treat a lifetime disability designation as equivalent to hitting the lottery.

Of course, reform here will be nearly impossible.  You only have to look at some of the public employees groups that have lucrative disability programs where union-vetted doctors routinely handout disability designations to nearly every retiree.  Any attempt at reform will merely be met with heart-rending stories in the media about folks with true disabilities needing help, ignoring the fact that any effort to cut down on fraud is actually to help these folks by insuring the financial solvency of the fund that pays them.