AIG Resignation letter - "The rest of the story"

I loved Paul Harvey and will miss his radio segments "The Rest of the Story" where he would share facts that could change your perception of some commonly held belief. I think this letter sent on Tuesday March 24th, 2009 by Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G. would have been a great Paul Harvey segment.It was published in the NY Times on the same day.


DEAR Mr. Liddy,
It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

You and I have never met or spoken to each other, so I’d like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.

I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That’s probably why A.I.G. management assured us on three occasions during that month that the company would “live up to its commitment” to honor the contract guarantees.

That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts “distasteful.”

That may also be why you authorized the balance of the payments on March 13.

At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts — until several hours before your appearance last week before Congress.

I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It’s now apparent that you either misunderstood the agreements that you had made — tacit or otherwise — with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.

You’ve now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.

The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats — even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

So what am I to do? There’s no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less — in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.

This choice is right for me. I wish others at A.I.G.-F.P. luck finding peace with their difficult decision, and only hope their judgment is not clouded by fear.

Mr. Liddy, I wish you success in your commitment to return the money extended by the American government, and luck with the continued unwinding of the company’s diverse businesses — especially those remaining credit default swaps. I’ll continue over the short term to help make sure no balls are dropped, but after what’s happened this past week I can’t remain much longer — there is too much bad blood. I’m not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I’ll leave under my own power and will not need to be “shoved out the door.”

Sincerely,

Jake DeSantis

AIG – The Circus, Government as theatre, and the Keystone Cops

Those are what come to mind regarding all the uproar about the AIG retention bonuses that were recently paid (For those of you not familiar with the Keystone Cops, they were clumsy, foolish, silly, characters in the Black and White silent film era). I watched the House committee interview Mr. Liddy the CEO of AIG which was a joke. Mr. Liddy is someone who has volunteered for $1.00 per year to solve the problems at AIG and help get a return on the taxpayer’s money (a good guy). He was treated as some type of evil villain (bad guy). I have watched television and heard countless “experts” and so called “informed” people share their opinions which range from asking the AIG executives to commit suicide, to it’s a drop in the bucket compared to the big picture. In almost all instances opinions have been shared from people without any material specific knowledge or understanding of this issue.



The people who do have material knowledge including Mr. Obama, Mr. Geithner, Mr. Bernanke, Mr. Dodd, Mr. Frank, and those additional committee members who drafted the stimulus and AIG bail out bills are all saying a hypocritical “I am Shocked” like the clip from Casablanca. Mr. Obama is living up to his philosophy of never letting a good crisis go to waste and by threatening more regulation of compensation on Wall Street which the mere mention of it will delay the economic recovery even longer than his misguided spending bills already have. The Congress passing a punitive 90% tax bill, using taxes as a weapon to attack a group of people they don’t like is the most dangerous development to date.

It seems to me to be like an instance where a hurricane has hit a home (US), damaged the roof (banking system), the floors are flooded (economy), and the electricity is out (financial markets) and rather than prioritize and fix the most important problems first the administration and Democrat led congress have been using credit cards to order wallpaper, air freshener, new furniture, and a new room addition to be a greenhouse. One young inexperienced man has been hired to fix the roof and he has no helpers and doesn’t know where to begin. The floors are beginning to dry out, but because the roof still leaks they get wet again.

Hopefully some competent, serious, people will emerge and bring some sense to our government. I took a personal development course in the past and we talked about the idea that there are things that you know and you know that you know them (I know how to ride a bike). There are also things that you know, that you don’t know (I can’t perform surgery). Then there are things that you don’t know, and you don’t know that you don’t know. There are also things that you think you know, but you are just plain wrong. It seems to me that this administration, and the Democrat led congress is in the zone of the latter two.

“No He Can't” - Obama from an Independent Black Womans perspective

Here is an article written by one of my new heroes, Dr. Anne Wortham. Dr. Wortham’s black, voted for Ron Paul, reads Ayn Rand, and holds liberty and objectivism as ideals of the highest order. I had a close friend forward her story to me the day I attended a "tea party" rally in downtown Houston, and the day after attending a luncheon with George Will as guest speaker. It feels like there is a movement being energized to stand-up to the Obama administrations attempted to create a Socialist system here in the US.

“No He Can't”
by Anne Wortham

Fellow Americans,

Please know: I am black; I grew up in the segregated South. I did not vote for Barack Obama; I wrote in Ron Paul's name as my choice for president. Most importantly, I am not race conscious. I do not require a black president to know that I am a person of worth, and that life is worth living. I do not require a black president to love the ideal of America .

I cannot join you in your celebration. I feel no elation. There is no smile on my face. I am not jumping with joy. There are no tears of triumph in my eyes. For such emotions and behavior to come from me, I would have to deny all that I know about the requirements of human flourishing and survival, all that I know about the history of the United States of America, all that I know about American race relations, and all that I know about Barack Obama as a politician. I would have to deny the nature of the "change" that Obama asserts has come to America. Most importantly, I would have to abnegate my certain understanding that you have chosen to sprint down the road to serfdom that we have been on for over a century. I would have to pretend that individual liberty has no value for the success of a human life. I would have to evade your rejection of the slender reed of capitalism on which your success and mine depend. I would have to think it somehow rational that 94 percent of the 12 million blacks in this country voted for a man because he looks like them (that blacks are permitted to play the race card), and that they were joined by self-declared "progressive" whites who voted for him because he doesn't look like them. I would have to wipe mind clean of all that I know about the kind of people who have advised and taught Barack Obama and will fill posts in his administration, political intellectuals like my former colleagues at the Harvard University’s Kennedy School of Government.

I would have to believe that "fairness" is the equivalent of justice. I would have to believe that man who asks me to "go forward in a new spirit of service, in a new service of sacrifice" is speaking in my interest. I would have to accept the premise of a man that economic prosperity comes from the "bottom up," and who arrogantly believes that he can will it into existence by the use of government force. I would have to admire a man who thinks the standard of living of the masses can be improved by destroying the most productive and the generators of wealth.

Finally, Americans, I would have to erase from my consciousness the scene of 125,000 screaming, crying, cheering people in Grant Park, Chicago irrationally chanting "Yes We Can!" Finally, I would have to wipe all memory of all the times I have heard politicians, pundits, journalists, editorialists, bloggers and intellectuals declare that capitalism is dead and no one, including especially Alan Greenspan, objected to their assumption that the particular version of the anti-capitalistic mentality that they want to replace with their own version of anti-capitalism is anything remotely equivalent to capitalism.

So you have made history, Americans. You and your children have elected a black man to the office of the president of the United States, the wounded giant of the world. The battle between John Wayne and Jane Fonda is over and Fonda won. Eugene McCarthy and George McGovern must be very happy men. Jimmy Carter, too. And the Kennedy’s have at last gotten their Kennedy look-a-like. The self-righteous welfare statists in the suburbs can feel warm moments of satisfaction for having elected a black person. So, toast yourselves: 60s countercultural radicals, 80s yuppies and 90s bourgeois bohemians. Toast yourselves, Black America, Shout your glee Harvard, Princeton, Yale, Duke, Stanford, and Berkeley. You have elected not an individual who is qualified to be president, but a black man who, like the pragmatist Franklin Roosevelt, promises to " Do Something"! You now have someone who has picked up the baton of Lyndon Johnson's Great Society. But you have also foolishly traded your freedom and mine, what little there is left , for the chance to feel good. There is nothing in me that can share your happy obliviousness.

Anne Wortham is Black, an Associate Professor of Sociology at Illinois State University and continuing Visiting Scholar at Stanford University’s Hoover Institution. She is a member of the American Sociological Association and the American Philosophical Association. She has been a John M. Olin Foundation Faculty Fellow, and honored as a Distinguished Alumni of the Year by the National Association for Equal Opportunity in Higher Education. In fall 1988 she was one of a select group of intellectuals who were featured in Bill Moyer's television series, "A World of Ideas." The transcript of her conversation with Moyers has been published in his book, A World of Ideas. Dr. Wortham is author of The Other Side of Racism: A Philosophical Study of Black Race Consciousness which analyzes how race consciousness is transformed into political strategies and policy issues. She has published numerous articles on the implications of individual rights for civil rights policy, and is currently writing a book on theories of social and cultural marginality. Recently, she has published articles on the significance of multiculturalism and Afrocentricism in education, the politics of victimization and the social and political impact of political correctness. Shortly after an interview in 2004 she was awarded tenure.

Inauguration Day Headlines - 2005 & 2009

Headlines On This Date 4 Years Ago:

"Republicans spending $42 million on inauguration while troops Die in unarmored Humvees"

"Bush extravagance exceeds any reason during tough economic times"

"Fat cats get their $42 million inauguration party, Ordinary Americans get the shaft"

Headlines Today:

"Historic Obama Inauguration will cost only $120 million"

"Obama Spends $120 million on inauguration; America Needs A Big Party"

"Everyman Obama shows America how to celebrate"

"Citibank executives contribute $8 million to Obama Inauguration"

Bye Bye American Pie........

Well I was too late in finishing the posts with my Top-Ten reasons to vote for McCain/Palin and the contest is obviously over. What has been quite interesting is the giddy response from many Obama supporters claiming that the world is now going to love and admire us again. That may be true in some places, Kenya, Venezula, and Iran come to mind, not in others. In China for example they don’t have many blacks and have a basic distrust as a result. They are also concerned about the trade policies Obama may have in mind. The stories of our standing in the International community that our media promotes are primarily based on the anti-Bush template. Any stories to the contrary rarely get through the editors approval. Here is an example of one………….

The night we waved goodbye to America... our last best hope on Earth
Peter Hitchens
Daily Mail (London)
08th November 2008

Anyone would think we had just elected a hip, skinny and youthful replacement for God, with a plan to modernise Heaven and Hell – or that at the very least John Lennon had come back from the dead.

The swooning frenzy over the choice of Barack Obama as President of the United States must be one of the most absurd waves of self-deception and swirling fantasy ever to sweep through an advanced civilisation. At least Mandela-worship – its nearest equivalent – is focused on a man who actually did something.

I really don’t see how the Obama devotees can ever in future mock the Moonies, the Scientologists or people who claim to have been abducted in flying saucers. This is a cult like the one which grew up around Princess Diana, bereft of reason and hostile to facts.

It already has all the signs of such a thing. The newspapers which recorded Obama’s victory have become valuable relics. You may buy Obama picture books and Obama calendars and if there isn’t yet a children’s picture version of his story, there soon will be.

Proper books, recording his sordid associates, his cowardly voting record, his astonishingly militant commitment to unrestricted abortion and his blundering trip to Africa, are little-read and hard to find.

If you can believe that this undistinguished and conventionally Left-wing machine politician is a sort of secular saviour, then you can believe anything. He plainly doesn’t believe it himself. His cliche-stuffed, PC clunker of an acceptance speech suffered badly from nerves. It was what you would expect from someone who knew he’d promised too much and that from now on the easy bit was over.

He needn’t worry too much. From now on, the rough boys and girls of America’s Democratic Party apparatus, many recycled from Bill Clinton’s stained and crumpled entourage, will crowd round him, to collect the rich spoils of his victory and also tell him what to do, which is what he is used to.

Just look at his sermon by the shores of Lake Michigan. He really did talk about a ‘new dawn’, and a ‘timeless creed’ (which was ‘yes, we can’). He proclaimed that ‘change has come’. He revealed that, despite having edited the Harvard Law Review, he doesn’t know what ‘enormity’ means. He reached depths of oratorical drivel never even plumbed by our own Mr Blair, burbling about putting our hands on the arc of history (or was it the ark of history?) and bending it once more toward the hope of a better day (Don’t try this at home).

I am not making this up. No wonder that awful old hack Jesse Jackson sobbed as he watched. How he must wish he, too, could get away with this sort of stuff.

And it was interesting how the President-elect failed to lift his admiring audience by repeated – but rather hesitant – invocations of the brainless slogan he was forced by his minders to adopt against his will – ‘Yes, we can’. They were supposed to thunder ‘Yes, we can!’ back at him, but they just wouldn’t join in. No wonder. Yes we can what exactly? Go home and keep a close eye on the tax rate, is my advice. He’d have been better off bursting into ‘I’d like to teach the world to sing in perfect harmony’ which contains roughly the same message and might have attracted some valuable commercial sponsorship.

Perhaps, being a Chicago crowd, they knew some of the things that 52.5 per cent of America prefers not to know. They know Obama is the obedient servant of one of the most squalid and unshakeable political machines in America. They know that one of his alarmingly close associates, a state-subsidised slum landlord called Tony Rezko, has been convicted on fraud and corruption charges.

They also know the US is just as segregated as it was before Martin Luther King – in schools, streets, neighbourhoods, holidays, even in its TV-watching habits and its choice of fast-food joint. The difference is that it is now done by unspoken agreement rather than by law.

If Mr Obama’s election had threatened any of that, his feel-good white supporters would have scuttled off and voted for John McCain, or practically anyone. But it doesn’t. Mr Obama, thanks mainly to the now-departed grandmother he alternately praised as a saint and denounced as a racial bigot, has the huge advantages of an expensive private education. He did not have to grow up in the badlands of useless schools, shattered families and gangs which are the lot of so many young black men of his generation.

If the nonsensical claims made for this election were true, then every positive discrimination programme aimed at helping black people into jobs they otherwise wouldn’t get should be abandoned forthwith. Nothing of the kind will happen. On the contrary, there will probably be more of them.

And if those who voted for Obama were all proving their anti-racist nobility, that presumably means that those many millions who didn’t vote for him were proving themselves to be hopeless bigots. This is obviously untrue.

I was in Washington DC the night of the election. America’s beautiful capital has a sad secret. It is perhaps the most racially divided city in the world, with 15th Street – which runs due north from the White House – the unofficial frontier between black and white. But, like so much of America, it also now has a new division, and one which is in many ways much more important. I had attended an election-night party in a smart and liberal white area, but was staying the night less than a mile away on the edge of a suburb where Spanish is spoken as much as English, plus a smattering of tongues from such places as Ethiopia, Somalia and Afghanistan.
As I walked, I crossed another of Washington’s secret frontiers. There had been a few white people blowing car horns and shouting, as the result became clear. But among the Mexicans, Salvadorans and the other Third World nationalities, there was something like ecstasy.
They grasped the real significance of this moment. They knew it meant that America had finally switched sides in a global cultural war. Forget the Cold War, or even the Iraq War. The United States, having for the most part a deeply conservative people, had until now just about stood out against many of the mistakes which have ruined so much of the rest of the world.

Suspicious of welfare addiction, feeble justice and high taxes, totally committed to preserving its own national sovereignty, unabashedly Christian in a world part secular and part Muslim, suspicious of the Great Global Warming panic, it was unique.

These strengths had been fading for some time, mainly due to poorly controlled mass immigration and to the march of political correctness. They had also been weakened by the failure of America’s conservative party – the Republicans – to fight on the cultural and moral fronts.

They preferred to posture on the world stage. Scared of confronting Left-wing teachers and sexual revolutionaries at home, they could order soldiers to be brave on their behalf in far-off deserts. And now the US, like Britain before it, has begun the long slow descent into the Third World. How sad. Where now is our last best hope on Earth?

No Credit? No Down Payment? No Problem -

My Top Ten reasons to vote for McCain/Palin:
Reason #2 Our Current Economic Problems, why? Who is responsible? Could we have avoided them?
By Jay Branson, CFP, ChFC


What happened? Who is responsible for this? Could we have avoided all this? Those are the questions on many people’s minds right now. With the financial markets, consumer confidence, and our economy more or less in a turmoil, David Kelly Chief Market Strategist of J.P. Morgan, characterizes as a Tantrum I think it is important to consider how we arrived here and how do we avoid this type of experience in the future. In short this is an example of Good Intentions = Unintended Results on a colossal scale. The Good Intentions were affordable housing, and you know what the unintended results have been. There was a time recently when a proposal was made that could possibly have avoided the whole mess, but Washington (half of it) killed the attempt to fix it.

Fundamentally, the subprime mortgage bust of last year and the recent liquidity crisis do not represent a failing of capitalism. It does not mean that free markets have failed our country, so beware of anyone trying to make that connection to their own political benefit. Some blame greed for our problems. It makes a nice moralistic argument about the corruptions of modern society, but as it relates to Wall Street, it doesn’t explain their failings. However, immorality does explain the actions of the group that is most culpable for our current economic crisis: the government.

This problem started with Carter, got a big boost from Clinton, and then the current Democrat leadership stopped any efforts to fix the problem 3 years ago. So, the $700 billion Troubled Asset Relief Program (TARP) should be seen not as a bailout of fat cat investors, but instead as the “you broke it you pay for it” except that it is not their money. The underlying cause of the credit crisis stems from last year’s subprime mortgage fiasco, which itself resulted from the bursting of the housing bubble. These events have the government’s fingerprints all over them.

To start with, look at the policies of Washington on housing. Homeownership is the political Holy Grail, and every politician savors the ability to brag to their constituents about voting to help the homeowner. Bonus points if those new homeowners are from minority groups. Consequently, we’ve seen the powerful influence of groups such as the Association of Community Organizations for Reform Now (ACORN) impact the directives and legislation from Capitol Hill.

Chiefly, the government has pushed lenders of all types to make more loans and more credit available to borrowers who would not normally qualify for a loan. When more people had mortgages, there were more prospective homebuyers, which drove up the cost of housing through basic supply and demand. Hence, the government has played a pivotal role in the housing bubble.

One of the most egregious examples is from California and the Sacramento home of Rep. Laura Richardson. The Southern California Democrat bought the house for $535,000 with no money down in January 2007. In addition to 100% financing on the home itself, the woman who sold the house to Richardson also gave Richardson $15,000 toward closing costs. Approximately one year later she let the home go into foreclosure owing Washington Mutual nearly $575,000 and it was sold at auction for $388,000. This is not just an average everyday irresponsible individual trying to game the system and flip a house for a profit. This is a member of Congress, a lawmaker, someone who votes on serious issues that effect the entire country.

Washington’s legislation also had a profound impact on Fannie Mae and Freddie Mac, the mortgage giants recently taken over by the Feds. For the purpose of promoting homeownership among the lower and middle classes, the Department of Housing and Urban Development (HUD) set targets for the percentage of loans Fan and Fred had to make to anyone earning less than an arbitrary amount. Strangely, the same groups that hailed this a way to promote equality are the groups that now grouse about the practice of “predatory lending,” or when banks supposedly make loans to people with poor credit at high rates.

The politicians did not stop there, however. During the Clinton administration, the Community Reinvestment Act (CRA) was given new teeth to encourage banks to promote the “common good.” Effectively, it did to all of Wall Street what the HUD had done to Fan and Fred. Any bank that didn’t jump through hoops to satisfy these demands ran the risk of being sued for redlining or discrimination.

Of course, the idea of a “common good” here ignores the basic capitalist tenant that what is good for the individual benefits society in the long run. The CRA focused on the shortsighted goal of increasing homeownership, which served to fulfill the even shorter term goal of helping politicians win reelection.

As we’ve seen all too much recently, populism has again returned as a viable political strategy in Washington, with the presidential candidates using the “people vs. Wall Street” rhetoric to great impact. You will hear terms from the left like fairness, economic justice, and in simpler terms “spreading the wealth”. This crisis resulted from an effort to be fair, and economically just, and spread the wealth. Worse than the government’s incompetent handling of housing has been their attempts to fix what they often deem to be the free market’s inadequacies — never mind that their meddling caused the problems in the first place.

For example, in September, Senate Majority Leader, Harry Reid casually referred to “A major insurance company — one with a name that everyone knows that’s on the verge of going bankrupt.” While not naming names, Reid’s tremendously irresponsible action encouraged speculation and fear that caused insurance stocks to tank the following day. Similarly, Chuck Schumer suggested earlier this summer that the regional IndyMac Bank “could face collapse.” Predictably, IndyMac collapsed after spooked investors pulled their money out of the bank, a classic 11 day run caused by a loss of confidence.

There are some in Washington who can see things clearly and have the right priorities. The Federal Housing Regulatory Reform Act of 2005 stands as a good example of what is both right and wrong about Washington. The act itself called for a stronger regulator for Fannie and Freddie (right). However, it was killed off by the Democrats in a party line vote (wrong). More importantly, though, are the sponsors names attached to this bill. John McCain cosponsored it, and Barack Obama fell in line with his party and voted against change for the better. Certainly, Republicans do not advocate reckless deregulation. Instead, they just realize the difference between more regulation and more effective regulation.

TARP has become law, and the political class is crowing about how they needed to rescue Wall Street to protect Main Street. And they’re right. Without the bailout, the liquidity crisis would have gotten worse before it got better. Credit has dried up, and even sound companies like General Electric are feeling the squeeze. There’s no denying that something had to be done, and Treasury Secretary Hank Paulson’s plan represented a simple, elegant, but effective solution.

The Relief Program will work, because it will restore investor confidence, and restore banks confidence in each other. Recently, banks went to the Fed, the traditional “lender of last resort,” for a record breaking amount of overnight loans. When banks are afraid of lending to each other, they don’t even think about lending to consumers. And without consumer lending, housing prices continue to fall, and the crisis continues until we reach a painful bottom. TARP will help prevent that.

Recovery now depends on the government’s ability to keep its hands off of Wall Street and let banks do what they know is best for themselves, because what’s good for the banks is good for the economy, and what’s good for the economy is good for the American people. Everyone benefits when the economy grows, because unlike income redistribution schemes that simply chop off future growth to make everyone worse off, capitalism brings up the entire boat.

Finally, capitalism is still our best and only option for a viable economy. Anyone who thinks that patently moronic laws like the Community Reinvestment Act represent a free market environment is far from reality. We need policies that encourage homeownership among those who can afford it and economic growth plans so that anyone who can’t afford a home can work to achieve that goal. As such, we need to embrace lower taxes, a minimal government presence in the private sector, and as voters, responsibility for our elected officials. We need a return to capitalism.

$840.00 cup of coffee?

My Top Ten reasons to vote for McCain/Palin:
Reason #1 Income Taxes (aka $840.00 cup of coffee)
By Jay Branson, CFP, ChFC

There are many reasons why John McCain will be better for our country as President than Barack Obama. I will be sharing 10 of my reasons starting with Income Taxes. Next, will be a simple explanation on what (and who) caused our current economic problems. This is a lengthy document because it is a complex issue. I have tried to simplify it where possible without making it too elementary. The stakes are high in this election. If a Democrat is elected President with a majority in the House and Senate it could take decades to undo the liberal, socialist, policies they would inflict on our country.

Let’s start with their current stated positions. John McCain proposes to extend the Bush tax cuts and make them permanent, basically keep rates where they are today. He also proposes cutting the corporate tax rate from 35% to 25% (we have the 2nd highest corporate tax rate in the world). Barack Obama says he wants to give a tax cut to 95% of tax filers. He has also said he would increase the capital gains tax to 30%, and that he wants to increase the payroll tax (FICA withholding) by 2-4%. McCain’s policies will stimulate the economy, and increase the net revenue to the government. Obama’s policies are misrepresented, unfair, and will harm (not help) our struggling economy.

First, as is illustrated in the table from the IRS below 50% of tax filers pay effectively all (97%) of the Personal Federal Income Tax. His proposal calls for tax “cuts” in the form of checks paid to 95% of tax filers including those who have paid no income tax. These checks are not actually tax cuts, they are welfare checks. This mischaracterizes the truth and substitutes nuance for clarity. If he honestly said that I want to “spread the wealth” to 45% of tax filers who don’t pay tax by sending them a check ($500/$1000) instead of calling it a tax cut he would lose support.

Second, the top 5% of tax filers who he admits wanting to raise taxes on already pay 60% of all Personal Federal Income Taxes. How much is fair and how much is enough? How about this as an example? Barack Obama invites 100 people to a new monthly dinner club, including you. He says it’s not “Dutch Treat” its “Obama Treat” which you have never heard of. You and 4 others have to work so you arrive late after drinks, appetizers, the main course, and desert has been served. You order a cup of coffee. The waiter brings the bill ($2,000) to the table and 50 people excuse themselves to go to the bathroom and never return to the table. 25 people pass the bill around their end of the table and agree that the food wasn’t that good and they should only pay $11.00 each (instead of $20.00 per person) which they slip into the bill and then quietly leave the table. The next 15 people read the bill determine it is $20.00 per person and leave the cash in the bill and thank everyone and say good night and leave. Of the next 10, 9 see the bill realize that the payment is short (one is on the phone) and decide that they will each pay $65.00 and while the last guest is still on the phone they wave good-by and leave. The last guest finally finishes his business phone call (his name is Joe and he is a plumber and has 20 employees) and the waiter arrives picks up the bill with the cash paid and asks the remaining guest if he wants to pay the balance in cash or by credit card. He hands the waiter a credit card and the waiter returns with a charge slip for $840.00. “But I only had a cup of coffee”, sorry says the waiter, that’s the amount due, “Obama Treat”. The man reluctantly signs the charge slip and hands it to the waiter. The waiter says “see you next month”. Sound fair to you? How much is fair? How much is enough?

Third, It has been proven in the 1920’s, 1960’s, 1980’s, and in 2000 that tax cuts stimulate the economy and actually increase net revenue to the government. Conversely tax increases reduce net revenue to the government and cause the economy to slow. Two articles below “Inconvenient Tax Truths” and “The Reagan Tax Cuts: Lessons for Tax Reform” demonstrate this point in detail. Letting the Bush tax cuts expire and increasing taxes on the upper income tax filers will reduce tax revenue and hurt the economy. This idea my seem counter-intuitive, but consider Wal-Mart as an example. They sell at the cheapest prices around and have grown to be the largest retailer in the world. If they were to dramatically increase their prices, what do you think would happen?

From the WSJ Opinion ArchivesOUTSIDE THE BOX

Inconvenient Tax Truths

Charlie Rangel and other liberal leaders want to raise tax rates even if it means lower tax revenues.
by PETE DU PONT Tuesday, October 30, 2007 12:01 A.M. EDT

Nobel Peace laureate Al Gore believes global warming is "an inconvenient truth." Here are some economic truths that America's liberal leadership finds too inconvenient to support.

Tax rate reductions increase tax revenues. This truth has been proved at both state and federal levels, including by President Bush's 2003 tax cuts on income, capital gains and dividends. Those reductions have raised federal tax receipts by $785 billion, the largest four-year revenue increase in U.S. history. In fiscal 2007, which ended last month, the government took in 6.7% more tax revenues than in 2006.

These increases in tax revenue have substantially reduced the federal budget deficits. In 2004 the deficit was $413 billion, or 3.5% of gross domestic product. It narrowed to $318 billion in 2005, $248 billion in 2006 and $163 billion in 2007. That last figure is just 1.2% of GDP, which is half of the average of the past 50 years.

Lower tax rates have be so successful in spurring growth that the percentage of federal income taxes paid by the very wealthy has increased. According to the Treasury Department, the top 1% of income tax filers paid just 19% of income taxes in 1980 (when the top tax rate was 70%), and 36% in 2003, the year the Bush tax cuts took effect (when the top rate became 35%). The top 5% of income taxpayers went from 37% of taxes paid to 56%, and the top 10% from 49% to 68% of taxes paid. And the amount of taxes paid by those earning more than $1 million a year rose to $236 billion in 2005 from $132 billion in 2003, a 78% increase.

Finally, another inconvenient truth is that there have been 49 consecutive months of job growth as a result of the economic expansion induced by President Bush's 2003 tax rate reductions.
One would think that this positive economic performance would inspire Congress to continue the successful policies that caused it. But the liberal establishment takes a negative view of tax rate reductions and embraces the opposite approach: ensure expiration of the Bush tax cuts in 2011 and in the meantime enact substantial tax increases.

Rep. Charles Rangel of New York, chairman of the tax-writing House Ways and Means Committee, last week introduced an estimated $3.5 trillion tax increase that would raise the capital gains tax rate from to 19.6% from 15% and places a surtax of as much as 4.6% on people making more than $150,000 a year. Mr. Rangel applies it not to current taxable income but to adjusted gross income, thus phasing down itemized deductions such as charitable contributions, home mortgage deductions, and state and local tax deductions. Together with the end of the Bush tax cuts, Mr. Rangel's plan would increase the top income tax rate to 44% from 35% for individuals, small-business owners and farmers, who make up about three-fourths of taxpayers in the highest bracket.

While raising taxes on individuals, the Rangel bill would reduce corporate tax rates to 30.5% from 35% and eliminate the alternative minimum tax. That would be "paid for" by increasing taxes on hedge funds and buyout firms by about $48 billion.

Federal tax revenues have been rising between 6.7% and 14.5% in each of the past three years, but the proposed tax increases, by slowing rather than stimulating the economy, would ensure that these percentages decline. Hillary Clinton defines the liberal tax policy as "we are going to take things away from you on behalf of the common good," but in the unlikely event that the tax bill passes Congress next year, President Bush's veto pen will surely take away from the liberal leadership things that will do harm to the common good.

On the other hand, the 2008 elections could lead to a very different outcome, for the Rangel bill shows in which direction tax policy will proceed if there is a Democratic president and Congress in 2009.

A much more interesting approach was introduced in the House three weeks ago by Rep. Paul Ryan, a Wisconsin Republican: elimination of the Alternative Minimum Tax, extension of the 15% capital gains and dividend rates that expire in 2010, and giving taxpayers a choice between filing under the current tax system or a new option with just two income tax brackets, 10% for joint filers with incomes less than $100,000 and 25% for those with higher incomes. It includes a $25,000 standard deduction plus a $3,500-a-person exemption, which comes to $39,000 for a family of four. The new option would be a flat-tax choice, with no other exemptions or loopholes, and the AMT would be gone.

Every taxpayer would be able to make a choice between the current tax system with the AMT burden, tax rates from 10% to 35%, and many complex deduction options, or the Taxpayer Choice Act. Mr. Ryan estimates that the federal government's revenues--excluding AMT revenues, the elimination of which would cost the government only about 2.4% of revenues over 10 years--would be about the same as under the current system, and the top 5% and 1% of taxpayers would pay slightly higher taxes than they do today.

Such a system would stimulate the economy, increase economic growth and job opportunities, and simplify a very complex and frustrating current tax system. But for the liberal establishment a flat tax with lower rates would be a very inconvenient truth. Much better in their view are the substantial Rangel tax increases.
Mr. du Pont, a former governor of Delaware, is chairman of the Dallas-based National Center for Policy Analysis. His column appears once a month.

The Reagan Tax Cuts: Lessons for Tax Reform

During the summer of 1981 the central focus of policy debate was on the Economic Recovery Tax Act (ERTA) of 1981, the Reagan tax cuts. The core of this proposal was a version of the Kemp-Roth bill providing a 25 percent across-the-board cut in personal marginal tax rates. By reducing marginal tax rates and improving economic incentives, ERTA would increase the flow of resources into production, boosting economic growth. Opponents used static revenue projections to argue that ERTA would be a giveaway to the rich because their tax payments would fall.

The criticism that the tax payments of the rich would fall under ERTA was based on a static conception of human behavior. As a 1982 JEC study pointed out,[1] similar across-the-board tax cuts had been implemented in the 1920s as the Mellon tax cuts, and in the 1960s as the Kennedy tax cuts. In both cases the reduction of high marginal tax rates actually increased tax payments by "the rich," also increasing their share of total individual income taxes paid. Unfortunately, estimates of ERTA by the Democrat-controlled CBO continued to show falling tax payment by upper income taxpayers, even after actual IRS data had become available showing a surge of income tax payments by affluent taxpayers.

Given the current interest in tax reform and tax relief, a review of the effects of the Reagan tax cuts on taxpayer behavior and tax burden provides useful information. During the 1980s ERTA had reduced personal tax rates by about 25 percent, while the Tax Reform Act of 1986 chopped them yet again.

Tax Rates and Tax Revenues
High marginal tax rates discourage work effort, saving, and investment, and promote tax avoidance and tax evasion. A reduction in high marginal tax rates would boost long term economic growth, and reduce the attractiveness of tax shelters and other forms of tax avoidance. The economic benefits of ERTA were summarized by President Clinton's Council of Economic Advisers in 1994: "It is undeniable that the sharp reduction in taxes in the early 1980s was a strong impetus to economic growth." Unfortunately, the Council could not bring itself to acknowledge the counterproductive effects high marginal tax rates can have upon taxpayer behavior and tax avoidance activities.

Since 1984 the JEC has provided factual information about the impact of the tax cuts of the 1980s. For example, for many years the JEC has published IRS data on federal tax payments of the top 1 percent, top 5 percent, top 10 percent, and other taxpayers. These data show that after the high marginal tax rates of 1981 were cut, tax payments and the share of the tax burden borne by the top 1 percent climbed sharply. For example, in 1981 the top 1 percent paid 17.6 percent of all personal income taxes, but by 1988 their share had jumped to 27.5 percent, a 10 percentage point increase. The graph below illustrates changes in the tax burden during this period.

The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.
A middle class of taxpayers can be defined as those between the 50th percentile and the 95th percentile (those earning between $18,367 and $72,735 in 1988). Between 1981 and 1988, the income tax burden of the middle class declined from 57.5 percent in 1981 to 48.7 percent in 1988. This 8.8 percentage point decline in middle class tax burden is entirely accounted for by the increase borne by the top one percent.

Several conclusions follow from these data. First of all, reduction in high marginal tax rates can induce taxpayers to lessen their reliance on tax shelters and tax avoidance, and expose more of their income to taxation. The result in this case was a 51 percent increase in real tax payments by the top one percent. Meanwhile, the tax rate reduction reduced the tax payments of middle class and poor taxpayers. The net effect was a marked shift in the tax burden toward the top 1 percent amounting to about 10 percentage points. Lower top marginal tax rates had encouraged these taxpayers to generate more taxable income.

The 1993 Clinton tax increase appears to having the opposite effect on the willingness of wealthy taxpayers to expose income to taxation. According to IRS data, the income generated by the top one percent of income earners actually declined in 1993. This decline is especially significant since the retroactivity of the Clinton tax increase in that year limited the ability of taxpayers to deploy tax avoidance strategies, temporarily resulting in an increase in their tax burden. Moreover, according to the FY 1997 Clinton budget submission, individual income tax revenues as a share of GDP will be lower during the first four years of the Clinton tax increase, which include the effects of the 1990 tax increase, than under the last four years of the Reagan tax changes (FY 1986-89). Furthermore, according to a study published by the National Bureau for Economic Research,[2] the Clinton tax hike is failing to collect over 40 percent of the projected revenue increases.

Incidentally, the claim that unrealistic supply side Reagan Administration revenue projections caused large budget deficits during the 1980s is false. Nonetheless, this false allegation is often used against current tax reform proposals. The official Reagan revenue projections immediately following enactment of ERTA did not assume huge revenue increases, and were actually quite close to the CBO revenue projections. Even the Democrat-controlled CBO projected that deficits would fall after the enactment of the Reagan tax cuts. The real problem was a recession that neither CBO nor OMB could foresee. Even so, individual income tax revenues rose from $244 billion in 1980 to $446 billion in 1989.
Conclusion

The Reagan tax cuts, like similar measures enacted in the 1920s and 1960s, showed that reducing excessive tax rates stimulates growth, reduces tax avoidance, and can increase the amount and share of tax payments generated by the rich. High top tax rates can induce counterproductive behavior and suppress revenues, factors that are usually missed or understated in government static revenue analysis. Furthermore, the key assumption of static revenue analysis that economic growth is not affected by tax changes is di sproved by the experience of previous tax reduction programs. There is little reason to expect static revenue analysis to evaluate the economic or distributional effects of current tax reform proposals much better than it evaluated the Reagan tax program 15 years ago.

Christopher FrenzeChief Economist to the Vice-Chairman

Endnotes:
1. Joint Economic Committee, The Mellon and Kennedy Tax Cuts: A Review and Analysis, 1982.
2. Feldstein, Martin and Daniel Feenberg, The Effect of Increased Tax Rates on Taxable Income and Economic Efficiency: A Preliminary Analysis of the 1993 Tax Rate Increases, NBER, 1995.
Other JEC Reports that deal with this issue:
JEC Annual Report: 1988 through 1994.
Latest Data Show Higher Income Tax Rates Reduce Taxes Paid by the Rich, JEC Report: December 1993.
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