Friday, July 31, 2009

Talk Amongst Yourselves: Body Doubles?

Don'tcha think the economic discussions at the White House must be a ball o laughs these days with these guys around?

Obama really showed his connection with regular American values when he appointed

Dr. Phil Axelrod

and Stephen Peter Colberzag.

Tuesday, July 28, 2009

Follow-Up: If we REALLY wanted to fix healthcare, we'd put the patients in charge, not the government!

If you lived in quaint Europe 100 years ago, it would have taken you most of the day to shop and prepare meals. You'd have to make separate stops at the local butcher, baker, grocer, and so on. If the dairyman had no more butter, you'd just have to live without it. If the local miller sold sub-standard, gravelly flour, you'd just have to eat it that way. And since there was no refrigeration, you had to repeat the whole shopping process every day. Fast forward to today, and you can stop at the Super Wal-mart on the way home from work to pick up an incredibly broad diversity of foods at quality incredibly higher. Strangely, healthcare, the Jurassic Park of industries, hasn't had to go through the same evolution. As a result, its tragically inefficient, with quality tragically uneven, at costs tragically high.

Who could disagree with a new healthcare industry that focuses relentlessly on Efficiency, Transparency, Customer (=patient) Satisfaction, and Objective Effectiveness? The devil, of course, is in the dollars ... but not in the way Congress keeps telling you.

All the hype and sob-stories aside, the bottom line problem with US healthcare is that the consumer doesn't get to choose, and doesn't have to pay. The consumer is not empowered.

This can be seen in, for example, the dysfunctional, polygamo-incestuous oligopoly of employer-subsidized insurance. Lose your job and lose your health insurance? Dumb.

The same issue can also be seen within individual insurance plans. Coverage and treatments are black or white, take it or leave it, as opposed to a menu of shades of grey to better fit individuals' situations, expectations, and desires.

Health law and privacy are similarly all-or-nothing. Even when no other treatment works, experimental or alternative approaches are shunned by doctors simply on the basis of legal or bureaucratic grounds. Despite best intent, and even if the patient is warned of heightened risks, one unforeseen turn for the worse is likely to cost even a stellar a doctor or nurse a career. Why risk it? Doctors are afraid to consult anyone else about tough cases. Privacy? We can't even see our own health records, much less share them with others who might help.

Healthcare reform must be addressed on multiple fronts, but if consumer empowerment is a clear path to mitigating a multitude of our issues, why not fix it first? See what issues resolve themselves when people are informed and empowered. THEN size up the residual problems and start making the tough, expensive choices.

Arranging healthcare for the poor and sick is a good goal. Obama's pet "public option" does improve the lot of a certain subset (the poor, the sick, and inevitably the lazy). Sadly, those unfortunate souls may find that they were better off before the plan. Obama demonstrates his demagoguery by placing the lion's share of the financial burden on "the rich." Surcharge expensive health plans; surcharge businesses; surcharge small business owners; surcharge benevolent folks; surcharge those who earn the most; hell, just surcharge Goldman Sachs directly while you're at it. But what happens when costs overrun budgets, as they have in nearly every other public health plan (Hawaii, Massachusetts, Canada, and the UK just to name a few familiar examples)? Does the government begin to ration care, as in Canada? Cancel the plan, as in Hawaii? Or just flat deny coverage, as in Britain?

Moreover does the public option even empower consumers? Does it ensure patients and doctors decide what treatments are best? Or does it give that power to an unaccountable, appointed board of politically-charged "wise men" in DC? Does it increase competition for better ideas, treatments, and service? Or does it simply tilt the playing field toward one plan, one way of doing things, and one group of administrators who get to play by a different set of rules than the rest? Does it "crowd out" other insurance plans because it's better? Or by the fiat of unfairly preferential treatment, enshrined in Federal law? Do we really want a Fannie and Freddie for healthcare? Or Apple and Google?

My take: the public option erodes choice (and thus empowerment) when it should be fostering it.

As I advocated over a year ago in this blog entry, a better plan would decentralize control to those who have the strongest interest in getting it right: the patients. This would naturally put a burden on their primary health providers to ensure patients were informed with the best facts and recommendations, so they could make the best choices. As I put it in my earlier blog:

There is no measure of supply and demand driving the rates of top doctors up or warning me against going to cheap-o ones. Insurance companies (and Medicare) engage in collective bargaining to drive rates down for some, but it's like squeezing a balloon - the air just moves around inside - there's no net savings. Horrifying though it may be for you to think of being sick and having to bid on some Medical eBay for a spot at the best hospital, this would drive overall costs DOWN by rooting out inefficiency, inappropriate risk, statistically unsuccessful procedures, and bad eggs. It would provide a whole new incentive system which would align the interests and thus the efforts of patients, hospitals, insurers, scientists, technologists, businesspeople, investors and doctors alike.

It would also create a bouquet of different kinds of offerings, at different price points. Health care is the only industry I can think of that still follows Henry Ford's original principle: "Any customer can have a car painted any colour he wants so long as it is black." To see hints of what healthcare could be, look no further than the current world of elective/cosmetic treatments. It should be no mystery why medical tourism is referred to as a "nip-n-tuck tour." That whole industry is built on treatments people want which are not covered by insurance (and on wealthy citizens of countries with sub-standard levels of care). Suddenly, incentives are aligned. Choice and price exist ... and, unsurprisingly, so does a diversity of offerings. The differences are shocking.

Empower the patient, and they'll always opt for the Cadillac treatment, many say. You need faceless insurers and that group of wise men in DC to tell people "no." Hopefully by now, my rebuttal of that is predictable.

  • First, if the whole industry stepped into the 21st century and was forced to improve on all fronts, the overall average cost-per-level-of-service would come down, just like Wall Street brokerage fees after deregulation broke apart that cartel. To use Dubya's words, it would make the whole pie higher (we knew what he meant).
  • Second, if care was properly priced, and if people could choose their level of care (and assoicated price), the whole industry would look a lot different. For proof, look out on the streets today: hundreds of different cars exist with different levels of performance, comfort, and safety, all zipping around together on the freeways.
  • Third, again if pricing and choice were introduced, many people would find out that they pay for a Cadillac today, but only get an old Chevy. These folks could pay less, and keep the exact same level of treatment.
  • Fourth, yes, people who choose cheap-o policies need to be told "no" when they ask for Cadillac service. Canada or Brittain, for all their warts, at least address this point well. You should be courteously re-routed to the appropriate level of care. You don't use an elephant gun to kill an ant. You don't need an ER full of trauma docs and machines that go bing to fix a rash or when your kid swallows a coin. Wait 'till the morning and go see a nursing clinic.
  • And finally, having set aside the impact of those first 4 points, we get down to some residual "tough nuts" to crack. Recently, we've all had our eyes opened to just how bad humanity is at making choices at the margin. We always assume that the unthinkable won't happen to us. Remember, more than half of bankruptcies are triggered by exorbitant, unexpected medical expenses. Avoiding this very difficult, expensive (to the overall economy), and destructive route would give the economy a measurable boost. As a society, it needs to be viewed as foolish and unacceptable to go around without at least a modicum of catastrophic-only insurance. I'd welcome thoughts on how to get there. Like Obama, I'm willing to consider all ideas. I even think we could make it financially viable to socialize this level of care without breaking the system or Uncle Sam's budget. I also think that private solutions could be had.

My blog entry last year highlighted 7 major issues with our healthcare system. To summarize:

  1. Risk-aversion: FDA approval is painfully slow and bureaucratic. Healthcare providers choose the safe treatment to avoid being sued.
  2. Litigation: lawyers keep us all honest, but ambulance-chasing and malpractice insurance have run amok
  3. Stone-age Science: how is it that we STILL have no cure for the common cold, the most frequent killer (heart disease), or the most common ailment (back problems)? Medicine should be a science, not a craft.
  4. Stone-age Technology: Hand-written paper files and prescriptions? Seriously? Find me a successful banker, journalist, engineer, marketer, accountant, grocer, soccer mom, or even a McDonalds worker who hasn't deeply integrated the power of computers and the interwebz into their lives.
  5. Ambiguous Economics: the economics of choice and price are largely absent ... and predictable, unfortunate consequences have ensued.
  6. Reactiveness: As Obama pointed out in this week's press conference, prevention is worth a pound of cure. So pay for it!
  7. Mutated Morality: OK, so here goes. The sticky wicket of healthcare. Nobody likes to admit two things: some people are too sick to live ... and the Bible was not meant to be interpreted literally in the realm of healthcare. Get used to it. Death is a part of life. (Allow me to duck now.)

The "better" plan addresses these things, and more. Through the principle of putting patients in the driver's seat, it:

  • Prevents maladies (and thus lowers long-term cost) by focusing on "wellcare"
  • Abandons all the hype, BS, bureaucracy, and litigiousness in favor of careful cost management and a focus on customer service a'la the HelloHealth clinic in Brooklyn
  • Requires an objectivity about determining what works and and what's most efficient. Then, ensures those things are deployed wide and quick (and that old, inefficient, or ineffective things disappear right quick).
    • Frank Lichetenberg's recent study shows us the way. It should be mandatory reading on this topic.
  • Encourages the creative destruction of new technologies and procedures. (Again, see Lichtenberg for some interesting figures.)
  • Studies the system with the rigor of a physicist, and rebuilds the system with the structure of a systems engineer. (idea courtesy of Dennis Cortese, former Mayo Clinic CEO).
  • Ensures that the consumer is fully informed by aggregating all his medical records, test results, history, etc in a single place. Sorry, privacy nuts: this is one area where a trade-off is required to gain improvements in care

Principles are nice, but concrete, actionable ideas are better. Don't worry, I have those too. Too much for one blog, but stay tuned. I'll be back in a few days with some very detailed conversation-starters!

Sunday, July 26, 2009

Baseless Blames and Bangless Bucks ... oh, and Healthcare

As Jeremy Clarkson snickers weekly, "Some say ..." this blog started as a diarrhea of personal opinion, but has recently drifted down to the gallows of quote regurgitation, spiced with the occasional snarky fart directed at whatever DC's up to at the moment.

'Nuff said. I'm glad we had this talk.
p.s. I love the bumper sticker!

"Some say ..." so many people flock to this blog, there has been a measurable drop in national productivity and employment since it's inception. Piffle. Orszag needs to find someone else to blame his "bangless bucks" predicament on.

And while I'm on the topic: Big ups to Obama on healthcare. By convincing everyone that he's really gonna do something, anything ... maybe even something a little nuts, ya never know ... he has finally scared people into a REAL conversation about what healthcare should be. Brilliant.

I agree with him: something DOES need to be done about health care. I'd even support his plan if it contained no new deficit spending, taxes, fees, surcharges, mandates, wealth redistribution or governmental committees. If he and Congress really want to be non-partisan, deficit-neutral, pro-growth, and generally pro-biotic, they should follow the recent kitch-cuisine trend and deconstruct their plan into its source components. Then, they should whip up a recipe including only those ingredients that meet the tests above.

- Acknowledge that we have problems and that the status quo is unacceptable? Check!
- Improve efficiency? Check!
- Make better use of technology? Check!
- Prevent diseases rather than treating them? Check!
- Use cheaper, generic drugs when they're just as effective as name-brands? Check!
- Allow pharmacies deliver bottles of Advil to hospital bedsides, rather than charging the patient $10 a pill? Check.
- Follow the SEC's lead and require (all but the smallest) healthcare providers to publish uniform, comparable statistics about the customer satisfaction, effectiveness, and cost? Cha-check!
- Give people the option of a low-cost, 24-hour clinic instead of the ER for garden-variety treatments? Check! In fact, authorize ERs to march their dumb untreated butts right out the door and across the street to the clinic.
- Share results of tests among healthcare providers, instead of re-running the same diagnostic multiple times? Double-check!

David Axelrod, himself, said this week there was universal agreement on 80% of their ideas. Sounds like enough for a plan to me. Let's pass it and start to get at least a little relief. Would we delay a heart bypass in the ER until everyone had agreed what to do about the patient's high cholesterol? Of course not.

That is not to suggest we should choose Band-Aid surgery over treating the insidious underlying problems. Its just a sensible triage. Nurse?

Stay tuned for my thoughts on those underlying issues in the next blog entry.

Friday, July 24, 2009

Yeah, what HE Said: History Repeating Itself Edition

What one person receives without working for, another person must work for without receiving.

The government cannot give to anybody anything that the government does not first take from somebody else.

You cannot multiply wealth by dividing it."
- Dr. Adrian Rogers (1932-2005)

The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.

If you destroy a free market, you create a black market.

We must beware of trying to build a society in which nobody counts for anything except for the politician or an official, a society where enterprise gains no reward and thrift no privileges.
- Sir Winston Churchill (1874-1965)

We ask you to be so good as to pass a law requiring the closing of ... all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries [of Candles, Tapers, Lanterns, sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting].
(this from the excellent "Candlemaker's Petition")

Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.
- Frederic Bastiat, French Economist (1801-1850)

Saturday, July 18, 2009

Yeah, What HE Said: Peter Peterson Edition

Pete Peterson is Former Commerce Secretary, CFR Chairman, Founder of Blackstone Group, Former CEO of Lehmann Brothers, Former Chairman of the NY Fed, 150th Richest American, Donor of over $1billion, Founder of the PGP Foundation for fiscal sustainability, Husband of Sesame Street creator Joan Ganz Cooney. Last week, he was on Charlie Rose to remind us we can't just borrow our way out of this mess, personally OR Federally.

My father was a Greek immigrant, comes over at age 17, has a few pennies in his pocket, doesn't know a word of English, 3rd grade education, goes to the middle of Nebraska and takes a job nobody wants, namely washing dishes in the caboose of a railroad. He takes that job in that steaming kitchen. He sleeps there, he eats there, and saves almost everything he had. And then he opens up the inevitable Greek restaurant. 24 hours a day, 7 days a week, 365 days a year for 25 years and when he finally shortened the hours, he had no key to the front door 'cause it had never closed. And he was kinda my model of the workaholic.
And then he addressed our current situation:
Paul Volcker thinks the chances are 75% that there will be a dollar crisis in 5 years ... and what does that mean ... the dollar falls suddenly, interest rates go way up, inflation, recession, housing problems all over again and so forth. And that's the vulnerability and this country's just got to learn to save more, which means the government not dissaving and more personal savings. We just can't continue.
A few months prior, in an EXTREMELY highly recommended op-ed for Newsweek, he explained (emphasis mine):

The moment is overdue for us to become moral and worthy ancestors ... For years, I have been saying that the American government, and America itself, has to change its spending and borrowing policies: the tens of trillions of dollars in unfunded entitlements and promises, the dangerous dependence on foreign capital, our pitiful level of savings, the metastasizing health-care costs, our energy gluttony. These structural deficits are unsustainable ... Underlying these challenges is our broken political system. Our representatives, unlike our Founding Fathers, see politics as a career. As a result, they are focused not on the next generation, but on the next election. When the long-term problems are large and real, they anesthetize us, mislead us, divert us—anything to keep us from giving up something or having to pay for it ... Our problem is not a lack of options. It is a lack of will to do something about them.

Here's one last quote from him, said back in 2004:
I remain a Republican, but the Republicans have become a far more theological, faith-directed party, not troubling with evidence.

Thursday, July 09, 2009

Talk Amongst Yourselves: One Good Turn Deserves Another

Insanity: doing the same thing over and over again and expecting different results.
- Albert Einstein, US (German-born) physicist (1879 - 1955)

U.S. stimulus debate has Democrats scrambling:
the two-year package has had little impact as anxious Americans watch the country's unemployment rate surge to 9.5 percent. Obama is asking for patience and not ruled out a second spending plan.

Obama economist: US should consider second stimulus package
Laura Tyson, a member of President Obama's Economic Advisory Panel, said the current, $787 billion fiscal stimulus package "will have a positive effect, but the real economy is a sicker patient," Bloomberg News reported Tuesday. Tyson added the current stimulus package was "a bit too small."

Wednesday, July 08, 2009

Corporate Newspeak 6: 1984 Edition

Perhaps the clearest and most awful example of corporate culture dumbing down communication (hence the term Newspeak) is this set:

The What: (n) The topic or scope of discussion.

The When: (n) The date range or schedule.

The How: (n) The method.

Usage: "Ok, so we're talking about the potential re-assessment of our medium-term FY11 strategy around the proposed strategy for our 300's. Buying planes... that's the what. 2011, high level, is the when. Let's move on to the how, okay? That's where I'm still murky and I wanna make sure we reach out to the right groups to leverage our enterprise-level past learnings around procurement terms."

I find it painfully sad that most corporate animals operate with so little mental exertion in an arena so unnecessarily complex that they find it necessary to use explicitly call everyone's attention to the fact that a date range is "the when" things happen.

Are the REAL English terms so difficult?

Saturday, July 04, 2009

A Far Better Approach for the Huddled Masses

This week the Obama policy hydra grew another head when they re-invigorated the immigration debate. He began:

"I'm confident if we enter into this with the notion that this is a nation of laws that have to be observed and this is a nation of immigrants, then we're going to create a stronger nation for our children and our grandchildren."
Somewhere in the background, the now-familiar notes of Bad Religion could be heard, but only momentarily. Then he got down to business, launching 2 of his 5 immigration campaign promises:
  • "Remove incentives to enter illegally" (by cracking down on employers who hire illegals)
  • "Bring people out of the shadows" (with his "get to the back of the line" amnesty program)

The other three-fifths of his immigration platform are:

  • "Create secure borders"
  • "Improve our immigration system"
  • and "Work with Mexico"

You can hardly disagree with that. On immigration, he's got his principles mostly right. This is one case where stating the obvious is quite enough. Immigration is a simple supply-and-demand game.

Following his lead, I'll make another self-evident statement: The challenge comes where the rubber meets the road. And this is where he and I disagree. His moves this week were populist. Go after the employers. Blame it on those fat-cat richie-riches whose sin is creating jobs without asking for a bailout. Oh, and PS - his "new" idea is already law in the states receiving the brunt of the immigration influx.

In the spirit of this 4th of July weekend, I feel it's my duty to offer a helping hand.

Step 1 is to provide people with a functional, efficient legal path to enter the country. If we want to avoid the "upside down" demographic nightmare of Japan and Europe, we need a steady supply of new, hungry labor. There will always be richer and poorer countries. People in the latter will always quest for a better future. Unless the US economy goes entirely tits over teakettle from debt or appeasement, people will want in. Without a viable alternative, enforcement is a black hole. It would take Martial law and Big Brother to stop the natural forces of supply and demand.

Sadly, today's legal path is a joke. Bush and Iraq have gotten all the bad press, but in truth, nation's most embarrassing interaction with the rest of the world is the nightmarish gauntlet we put our future fellow citizens through. The Visa process. An ideal process would filter for enterprising, aggressive, ambitious, smart, yet moral people. Instead, that ilk are slowly beaten into bureaucratic submission in favor of the moneyed, the connected and the placidly patient. By the time people get here, they feel betrayed and exhausted. Instead of being welcomed into the promised land of opportunity, they've had to beat their heads against a wall of incompetent, illogical, uncaring, opaque INS bureaucracy, often for years. Along the way, they are subjected to a humiliatingly invasive dressing-down and what, under other circumstances, would be considered a bribe. The backlog of applications is measured in hundreds of thousands. Once the bureaucrats finally get to the application, God forbid there's an oversight or mistake in the application, Those are summarily rejected, and must go to the back of the line. Even upon arriving, they must continue a gauntlet of separation from family, disclosures and an array of prohibitions.

(side note: Washington's typical approach of re-branding the mess with a new acronym has, curiously, not resolved the underlying issues. Who'da thunk it?)

For the truly "hungry" who truly believe in and embody the American Dream, every sign points underground. If they can't hop on the American train on our terms, they must do it on theirs. Tragically, once underground, it's prohibitively hard to re-emerge. We systematically criminalize those we need the most.

Once we've done that, it's impossible to differentiate these people from the truly undesirables (terrorists, criminals, mooches). Enforcement and punishment gets doled out equally on the good and the bad. What a colossal waste!

There IS a better way. Picture this ...

An applicant logs on to the USCIS website. They follow a guided "wizard" which explains the process and then walks them through a sequence of context-sensitive questions (meaning, their response to one question determines what additional questions must be asked) a'la Turbotax. After answering all the questions, the website creates their application file. It allows them to upload all necessary supporting information. It passes their responses through a set of automated checks to ensure that everything is in order. No more reject-and-resubmit. It then confirms that they've completed the application and explains the process to come, mapping out a specific set of "milestones" which, if successfully passed, will lead to their ultimate admittance. Average durations between each milestone should be shown.

The relationship shouldn't end there. The applicant should be given multiple avenues to get more information (forums, emails, instant messaging, phone... just like any bank or airline offers). They should be able to log back onto the site later to check their status. They should be notified when a milestone is reached or if they need to provide any additional or corrected information.

Meanwhile, in the bowels of the USCIS, the application should be received and passed through an automated set of information collection and assessment processes:

  1. Verification of the information provided by the applicant against 3rd party sources. This might include commercial databases (identity verification services, credit bureaus, etc), US government, foreign government, and supra-national organization databases. This technology exists in many industries today.
  2. Scoring to determine the probable accuracy. How sure are we that they are who they say they are? A low score doesn't necessarily mean they're bad. It means more information must be collected before the application process can continue.
  3. Identification of any showstoppers to admittance (international warrant, terrorist connections, etc). Again, this technology is quite mature. Financial institutions have done this for years.
  4. Identification of any red flags to be further investigated. Are they on any watch lists? What does Google say about them? Have they made bad news in the past? Have they been in a foreign government or military? Do they come from a sketchy country? Do they seem to have no reason for coming? Have they been denied or kicked out previously? Again, these are not auto-deny rules. They are designed to catch special cases which require deeper analysis. By separating these out, we ensure that the run-of-the-mill applicants are fast-tracked through the process without getting stuck in the "hopper" behind a tough case.
  5. Red Flag files are automatically routed to a specially-trained team of analysts for review. Where possible, additional information requests are initiated automatically before an analyst starts work on the file. Please note: this is the first time a person has had to intervene at all. At the conclusion, the analyst places the appropriate "tags" on the file and moves it back into the regular process.
  6. Assuming the above have satisfactory results, the next determination is the desirability score of the applicant. This answers a number of questions: How risky would it be to let them in based on their demographics (and any "tags" placed on the file above)? How likely are they to cause trouble? How likely are they to be a net economic gain to the country? Do they help the USCIS toward established targets (diversity of applicants by various categories such as nationality, age, profession, education, religion, etc, etc, etc)? What is their commitment level to the US (are they bringing their whole family? are they just coming for school or a short-term job? do they have financial investments here?) Before you call me a Nazi, please understand that most of these considerations are already in place today at a subjective level.
  7. The desirability score determines their place in line. Top-tier scores are given a green light immediately. Mid-tier scores might mean that the applicant is subject to immigration capacity controls (more below). Low-tier scores would be denied.
  8. The applicant is informed of their approval or denial. They are provided with all the information, requirements, subsequent steps, etc necessary to complete the process or contest the determination.

Capacity controls would replace the current, arbitrary and coarse quota-by-country-with-countless-exceptions system. Under the current system, it is not uncommon for a country's quarterly quota to be filled within hours. Capacity controls are far easier to manage ... there's only one parameter: the total capacity the country (or the immigration process) can take right now.

The country-specific part of the old quota system is integrated into the desirability score, allowing for more nuanced, sophisticated, and flexible control over who comes in. Importantly, since this is but one component of the overall score, it can be balanced against other factors. This ensures that the applicant is looked at holistically, rather than being rejected on a single criterion. Say, for example, the US gets desperate for dentists. A dentist from Chile wants to come here. Chile just so happens to be in the middle of a recession ... maybe even some political turmoil, so there's been a recent surge in Chilean applicants. We should not summarily reject the dentist just because he got in line too late, behind a hodge-podge of skilled and unskilled countrymen.

That's just a start, of course, but it's the right start. Once the basic legal path is in place and efficient, we'll find that the enforcement challenge is much more manageable. Upcoming blogs will take on the various aspects of that puzzle piece: employer enforcement, amnesty, deportation of law-breakers, sensible, contextual limitations on use of public services, walls, national IDs, border patrols ... I'll also dedicate blogs to a better mix of visa flavors: guest workers, students, citizens-to-be, international men of mystery. I'll also give more insight into the "guts" of the scoring algorithms I envision ... In the mean time, I've given plenty of meat to chew on ... GET BUSY GUYS!

Thursday, July 02, 2009

No Funny Business to See Here ... Please Keep Moooving!

At the risk of stating the obvious, money is the raw material of the financial industry. Banks need a constant stream of new money, just as a microchip factory needs silicon. In fact, most banks can't go even a single day without new money (a dangerous strategy that has not gotten the attention it deserves through our recent little trouble). For a period of weeks in late 2008, even good banks couldn't raise money at a rate they would accept.

Enter Uncle Sam, who agreed to do what most other countries have done for years: guarantee bonds issued by banks (called GGBs by most, TLGP-IDIDGP by the Feds). This was a tacit subsidy. It meant banks could issue bonds (=borrow new money) at a much lower interest rate than the panic-driven market rate they could otherwise get. The argument was, with all the turmoil and tumult, nobody could tell the good banks from the truly bad, so they had to throw them ALL a lifeline.

The panic has more or less subsided, but the subsidy has persisted (as Reagan predicted). By now, its clear which banks are bad (Bear, Lehman, WaMu, MS, Citi, GMAC). Absent government guarantee, these zombies were or would be gone in 60 seconds just like Memphis Raines.

Then there are the "Chosen" banks. These banks have carped all along that they're fine, they're healthy, they don't need government help ... but in the interest of a strong, patriotic esprit de corps, they'll take a share of whatever the government doles out to help Uncle Sam's PR campaign.

Suuuuure, dude. Not for nothin' the definitive book about Wall Street is titled Liar's Poker. Bankers are bulldog deal-makers. They're ruthless prestidigitators. They're voracious precision-tuned, profit-hunting machines. They're self-proclaimed Ayn Rand Dollar-worshipping Capitalists ... though I'm not sure Ayn would agree.

Clearly, the Chosen banks saw the meltdown coming last fall and realized that the winning strategy was to get as cozy with the US Government as possible. Led by the ultimate opportunist Jamie Dimon (who had spent 15 years kissing and conniving his way to the helm of JPMorganChase), the Chosen banks played lapdog to the Treasury and the Fed. "See that maimed bank in Seattle, Jamie? See it? See it? GO FETCH!" And he did. Time and again. Tacit, of course, was the agreement that Hank, Ben, and Timmy would make sure his dog food bowl always runneth over and that he got a steady diet of Scooby Snacks.

Which is where the GGBs come in. The Chosen banks don't need the subsidy, but as it tuns out, they're some of the biggest beneficiaries of it. By borrowing at artificially cheap rates, they're able to artificially boost their bottom line. Deals and businesses that would be unprofitable at market rates suddenly look brilliant. Recent headlines tell the tale:

Last week, the quarterly summary was published on these GGBs, the vast majority of which are bank bonds. The numbers are telling...

  • The Zombies and the Chosen continue to gain huge advantage from the GGB program, issuing mountains of the stuff.
  • Uncle Sam is clearly routing the business of creating these GGBs to the Zombies and the "Chosen." The list reads like a junior high BFF list. Each bank's rank in the list is exactly commensurate with the level of coziness they've achieved with the government.
  • The same is happening worldwide. If you want to know the Chosen banks worldwide, look no further than the 5th through 10th ranked bookrunners in this list (see link below). HSBC and Barclays in the UK, BNPP in France, Deutsche in Germany, and Commonwealth in Australia

So much for Geithner's and Obama's promises of government non-interference in the market.

4/1/2009 - 6/25/2009 (US$ MLN) RANK SHARE ISSUES
JP Morgan 13,896.9 1 21.2 10
Citi 13,449.9 2 20.5 13
Morgan Stanley 6,920.6 3 10.5 12
Goldman Sachs & Co 5,113.1 4 7.8 10
Bank of America Merrill Lynch 4,535.9 5 6.9 6
1/1/2009 - 6/25/2009 (US$ MLN) RANK SHARE ISSUES
Citi 46,105.0 1 20.7 33
JP Morgan 38,853.1 2 17.5 30
Bank of America Merrill Lynch 34,737.0 3 15.6 21
Morgan Stanley 29,086.8 4 13.1 29
Goldman Sachs & Co 20,896.0 5 9.4 27
Source: Thomson Reuters