Blue Mass Group

Reality-based commentary on politics.

You Can’t Have It Both Ways

By

When the financial crisis first broke a week ago, I mentioned that part of the Fannie Mae/Freddie Mac problem stemmed from Con. Barney Frank, ranking member of the Financial Services Committee in 2003, opposing a call by George Bush to provide more oversight and regulation of these quasi-governmental agencies.  No, impossible!  The Rethuglicans controlled Congress in 2003!  Frank was a mere backbencher, unable to stop such legislation.

Flash forward.  Now, the minority Republicans bear full responsibility for the breakdown of the bailout talks, instead of the Democrats in the majority? How does THIS minority stop something, when 5 years ago it was impossible?

Perhaps now it can be said that there are five parts to this, all suspicious of one another, and loathe to cooperate.

I watched a Democrat acting as spokesman last night on ‘On the Record’, as Van Sustern asked what happened in the two hour meeting – how could Frank and Dodd announce a done deal, and walk out two hours later in shambles?  The spokesman (I cannot find his name on the web site, and didn’t catch it at the time) said – there WAS an agreement in principle.  The Senate Democrats and Republicans had agreed, and the Democratic members of the Committee and the House were on board, too.  From his point of view, I can see why they thought it was locked up – they had agreement from ¾ of the parties, so why talk to the conservative Republicans, rather than just out-vote them?

Except they didn’t have the votes they thought.  And the House Republicans were furious at being left out of negotiations.  Frank made another gaffe by airily acting as if he didn’t need them and didn’t much care what they thought anyway.  Consider this – one of the opponents was Cong. Mike Pence of Indiana.  Pence is the guy who started the ‘Guerilla Congress’, refusing to leave the House Floor when Pelosi refused to allow a vote on off-shore drilling, and turned out the lights and stopped C-Span from covering them.  They didn’t just fade away, but kept up their activities for weeks – and now, Congress has quietly allowed the drilling ban to expire, opening up our shores for drilling.  Do you really think you can just ignore a persistent fighter like Pence just because he’s from some dorky town in Indiana you you’re from Newton?  You don’t even have to LISTEN to what he has to say?

The Democrats were blindsided because they couldn’t be bothered to listen – heck, you haven’t been able to avoid Newt Gingrich and his warnings that there was active opposition for weeks!

And about the fifth party – can we now finally put to rest the assertion that ANYBODY ‘voted with George Bush 90% of the time’?  George Bush has no vote, and he doesn’t control Congressional Republicans – now or then.  Just ask Harriett Miers.

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  1. Ezra:

    The Republican Study Group says it will “encourag[e] corporations to sell unwanted assets.” As Justin Fox explains, this has got to be a joke. “The toxic mortgage securities clogging up bank balance sheets are worth less now than when they were acquired. Meaning that no capital gains tax would be owed on them anyway. If you repealed the tax, banks would have even less incentive to sell them because they wouldn’t be able use the losses to offset capital gains elsewhere. Seriously, where do these people come up with this stuff?…

    … Say it again: This is not a competing proposal. It is nonsense…

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    p>”The Democrats were blindsided because they couldn’t be bothered to listen”  They blindsided their own party’s leadership as well as the White House.  You aren’t seriously suggesting that the Democratic party leadership should know more about whats going on in the ranks of the GOP than the GOP or the White House, are you?  Quite a stretch their, but I guess whatever it takes to make political hey then.

    • “The toxic mortgage securities clogging up bank balance sheets are worth less now than when they were acquired. Meaning that no capital gains tax would be owed on them anyway. If you repealed the tax, banks would have even less incentive to sell them because they wouldn’t be able use the losses to offset capital gains elsewhere.

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      p>Except for the small fact that Ezra doesn’t know what he’s talking about.  He figures that capital gains tax is the same for banks and dealers as me and you and the corporation down the street.  

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      p>It’s not.

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      p>Section 475 of the IRC and regs thereunder require that the dealers in these securities (dealers is broadly defined in 475(c)(1)) mark these securities to market at year end.

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      p>That is, if they’re worth less now than acquired, then the banks marked them down, and now, to sell them at anything over valuation would trigger a capital gain, and therefore a motivation to hold, not sell.

        • Show him more? Funny, Ezra makes a bold claim with no substantiation, yet others ask me for added information when criticized.  Seems burden of proof ought go to the person making the claim.

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          p>Anyway, below’s a less technical link.   Note the final sentence of the quoted material.

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          p>If the person replying to the thread paid reasonable attention to this area as he claims, yet doesn’t intuitively recognize that tax ‘mark to market’ establishes new cost basis, then he has a rather shallow understanding of the logic of the tax code.  No crime mine you.  It is a bit technical, but it’s not so technical that it should be ignored when making such bold criticisms about a legislative proposal.

          <

          p>

          According to the IRS: “A trader in securities or commodities may elect under section 475(f) to use the mark-to-market method to account for securities or commodities held in connection with a trading business. Under this method of accounting, any security or commodity held at the end of the tax year is treated as sold (and re-acquired) at its fair market value (FMV) on the last business day of that year.”

          What this basically means is that all open positions at year end are “marked to market” or priced to year end market prices to close out the position on paper.  Your open positions are still open, but now the the year end prices become the cost basis of these going into next tax year.

          link

      • They are still going down in value. Mark them to market every day — and BTW, that was the brilliant system that allowed Enron to commit its crimes, so let’s not put too much trust in mark to market — they’ll still go down. Mark them to zero, and perhaps there will be some capital gains implication.

        • 1:  That Ezra is right and I’m mistaken about the tax code?

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          p>2:  That Ezra is wrong and you’re shilling for him that his error doesn’t matter for other reasons?

          <

          p>3:  That the valuations on the Bank’s books are wrong, and you, owning right answers, know the derivative valuations are zero.  Do tell?  

          <

          p>4:  Mark to market is evil.  Tell it to the FASB and Congress.  It’ their accounting rules and tax code, respectively.

          <

          p>5:  Booga, booga, Enron, Enron…out damn spot.

          <

          p>

        • Bob, Enron wasn’t really using mark-to-market accounting. Mark-to-market accounting is, in my view, a good thing, particularly for financial firms that hold publicly traded securities, because it forces companies to write down assets when the market price for the assets falls, and (in the simplest cases) allows them to reflect increased asset prices on their books only when those prices are supported by objective considerations, e.g., the market price. We can argue about the usefulness of mark-to-market accounting in the case of hard-to-value assets.

          <

          p>But Enron was doing something else altogether–it was booking the profit on multi-year contracts in the first year, using its own estimates of future profits. I’m not an accountant, but this seems financially illiterate to me, even though Enron tried to spruce it up by calling it “mark-to-market.”

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          p>Kurt Eichenwald’s book, Conspiracy of Fools, has a good description of this, which I found quoted on the web at length.

          <

          p>

          A passage from Kurt Eichenwald’s Conspiracy of Fools provides an inside view of Enron’s “mark-to-market” accounting methods:

          “This is the stupidest accounting I’ve ever heart of. It’s just crazy.”

          As he spoke, David Woytek stared across a conference table at Jack Tompkins, Enron’s chief financial officer. It was June 1991, and Woytek, the accountant…was attending a monthly meeting of Enron’s top financial executives. Now chief financial officer of Enron’s liquid-fuels division, Woytek had just heard George Posey, Skilling’s finance chief, explain the new accounting his team was pushing.

          “Mark-to-market makes much more sense for what we’re doing,” Posey replied.

          “Mark-to-market is all fine and good, but that’s not what you’re describing,” Woytek shot back.

          “We’re describing mark-to-market.”

          “No, you’re not. You’re saying you want to recognize revenues from twenty-year contracts in the first year. I don’t know what that is, but that’s not mark-to-market.”

          Posey held up a hand. “We’re talking mark-to-market,” he said. “It’s the accounting the investment banks use.”

          That wasn’t the same thing, Woytek argued. Those institutions were valuing their portfolios based on current, actively traded markets. If they owned stock in Exxon and Exxon’s share price rose $2, then the value of their investment went up. There was logic to it; the market was independently assessing the value. If an investment bank needed cash, the stock could be sold at the price recorded on its books. But this was different, he said. They were making estimates about the total revenue a contract would produce, and then reporting the whole thing right away. There was no independent judgment involved. It wasn’t mark-to-market; it was mark-to-guess.

          “How can you book twenty years of revenue in the first year?” Woytek asked. “That goes against everything I was ever taught in accounting. You never recognize revenue in advance, only when title passes from own owner to the next. And title doesn’t pass on this until you deliver the gas, over the next twenty years.”…

          As far as the executives at Enron were concerned, they had no choice. They needed the profits they would gain from collapsing the estimated lifetime revenues of their gas contracts into a single year. Without them, under traditional accounting, the company could miss the earnings targets Wall Street was projecting for the year just ended.

          …There were other reasons to use this accounting idea that nobody was mentioning. Woytek had already heard that as part of his compensation, Skilling received an ownership stake in his division. When the division’s earnings went up, the value of that stake would too. If that division started booking twenty years of contracts in a single year, its earning would go through the roof. (p. 55).

          <

          p>TedF

  2. “can we now finally put to rest the assertion that ANYBODY ‘voted with George Bush 90% of the time’?  George Bush has no vote, and he doesn’t control Congressional Republicans – now or then.”

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    p>Right… everyone knows that GWB (or any POTUS) doesn’t have any opinion on legislation until it passes his desk?…

    <

    p>er…

    <

    p>But everyone knows that if he does have opinions, he never makes them known!…

    <

    p>er…

    <

    p>But everyone knows that when he makes his opinions on legislation known, those opinions can’t be empirically compared to a senator’s voting record…

    <

    p>er… nevermind.  

    • See the video posted in this thread, PP:

      <

      p>

      “There’s a recent study which showed I voted with the president over 90% of the time…”

      <

      p>So no, we can’t put to rest the assertion that anybody voted with Bush 90% of the time, unless you want to admit that John McCain is a bald-faced liar.

  5. Peter, I lived 10 years in the midwest. I went to college in rural Ohio, grad school in Indiana (IU ’01). Four years in Chicago. My great-uncle Will has had a family farm in Bourbon, IN for probably 50 years. Yeah, he’s a Republican. He’s also not a moron.

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    p>Mike Pence is a doofus because he has no idea what the hell he’s talking about. Pence famously said in early 2007 that Baghdad was like “normal outdoor market in Indiana in the summertime” — dressed, of course, in a flak jacket. Peter, I’ve been to outdoor markets in Indiana in the summertime, and have never yet needed a flak jacket.

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    p>It’s not because Pence was born in Columbus, IN — which is actually known for its forward-looking approach to public art and architecture, if you must know.

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    p>SPARE ME the accusations of regional elitism. It is a joke for someone from the vacation-y Cape to be casting that aspersion on anyone from Greater Boston, anyway. Enough with the utter-BS culture-region baiting. Been there. Bought the t-shirt. Attended the schools. Nice place — so is here.

  6. Why, because it causes sanctimonious shape-shifters like Senator Obama to cringe. Notice he now wears that flag pin EVERRYWHEERE. However, I suspect he deeply resents doing it, which is gratifying. Ditto, having to troll for votes amongst those bitter, bible-thumping,knuckle-dragging, gun-toting, xenophobic rubes he loves so much.  

    • Are like Republicans putting a shotgun in their mouths and pulling the trigger: the only people interested in that war are aging conservatives. If more than 25% of the population under 35 is interested at all in “culture war” issues, I’d be surprised. It’s dating the Party, and it’s going to help drag it down.

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