Robert Waldmann

AHIP The health insurance lobby just declared war on the Baucus plan. This is new, since they previously supported health care reform. It is not, however, surprising. AHIP made its condition clear, they would support health care reform provided that all were insured. Basically the individual mandate was the price for their support.

Displaying his usual inverted political genius, Baucus decided to water down the individual mandate so that some people are allowed to go without insurance. He was trying to compromise with Republicans, well in this case, with a Republican -- Olympia Snowe. Thus he violated the terms of a very clear very public agreement with AHIP. It's not as if I didn't warn on September 2 that this is a terrible idea.


Now Baucus has lost AHIP and Snowe remains officially undecided. He dumped AHIP Prsident Karen Ignani in a bid for the Ignavi (I make that plural to refer to the Divine Comedy but pretend it is to include Nelson or Lieberman or someone).

Update: Maybe I was wrong. Maybe Baucus is an even more brilliant 11 dimensional chess player than Obama (a 12 dimensional chess player) and he knew that provoking AHIP was a brilliant strategy. The line from an anonymous "finance committee aide" is that AHIP's attack is good for Baucus. The idea seems to be that Senators are angry with AHIP and don't want to appear to take instructions from AHIP (doesn't mean they don't want to take the instructions, it just means that they don't want it to be obvious as in changing their position the day before the big vote after a very public command).

Of course I assume that "a finance committee aide" would not make a totally bogus claim in support of the view that Sen Baucus is a genius and certainly wouldn't demand anonymity if the claim were totally bogus. Nahhh that's just not the way Washington works.

I'd guess that the bought and paid for insurance industry senators (definitely including Sen Baucus) aren't even capable of being good fiduciaries of insurance company shareholders -- that there obsession with compromising, watering down and settling for half a loaf (and above all pissing of the left wing of the party) lead them to water down the individual mandate which is much more critical to insurance company profits than is the avoidance of a public option.

update 2: Kevin Drum has the same theory as I do, but he writes much more goodly.

update 3: Yves Smith ways in
More comments after the jump.

Interestingly the AHIP broadside is not a press release. It is an A1 article by Ceci Conolly in The Washington Post. I thought the Washington Post was a subsidiary of the test prep industry not the health insurance industry (live and learn).

Dougj notes that The Washington Post publisher invited health industry players to pay for access to Ceci Conolly and writes "There’s a pretty strong prima facie case for pay-to-play here."

Also AHIP didn't just say the Baucus bill is a bad bill which will cause insurance premia to increase. They commissioned a study from PricewaterhouseCoopers to conduct an analysis (it must be an analysis there are lot's of numbers in it) and a frightening possible price tag. PricewaterhouseCoopers clearly explains, in the text of their analysis, that they made extreme and implausible assumptions to make the calculated number as large as possible. AHIP and PwC assume that they know how journamalism works. Journalists don't look at the assumptions or any non headline number so credibility can be bought (although I didn't know that PwC had any left to sell). John Cohn read the fine print so you don't have to.

I'm not sure if the old approach will work now that serious journalists have to worry about geeks who actually read the analysis that interest groups buy. OK I'm pretty sure it will still work.

update: looks the approach of anonymous sources praising their bosses still works.

Ken Houghton's Loyal Reader directed my attention to this WSJ blog entry, commenting on, and attempting to provide cover for, the management and actions of The Old Firm.

I'm sympathetic to the general argument—Ace Greenberg's naming of Jimmy Cayne to succeed him was incredibly bad judgment that had real consequences, but not malice aforethought—but the WSJ's attempt to defend upper management rather goes off the rails.*

Let's look at some of the analytical parts of the article:

Investment banks were certainly imprudent in leveraging themselves 33 to 1; but they also announced it publicly in their quarterly statements.

"Certainly imprudent" is having unprotected sex with someone who clearly has open genital and/or oral herpes sores. 33x is larger even than the Cox-allowed 30x leverage (which was imprudent in the first place). "Thirty times leverage; it's not just imprudent, it's the law."

UPDATE: My Loyal Reader e-mails:

Cohan writes that only at the end of a quarter was Bear around 40:1 and most of the rest of the time it was at 50 or 55:1....JPMorgan Chase at the time of the takeover calculated that out of $300 billion Bear Stearns counted as assets, $220 billion could be considered "toxic".

So even Moore's 33:1 is known to be optimistic. And having more than 73% of your "assets" rated as "toxic" isn't prudent management: it's doubling-down while hitting on 17.

We all know that the Prudent Investor definition has been redefined beyond reality, but it's difficult to believe anyone would consider BSC's practices to compile with reasonable Standards and Practices.

Shareholders, in turn, never complained as long as the banks were making money in 2006 and 2007. It was only when the music stopped and the economy turned bad that shareholders started to blame the banks for shifty dealings.

And it was only when Madoff admitted there were no more assets that "shareholders" complained. Are we supposed to take some affirmative defense from this, or is Heidi Moore just clueless? (You can chose "and" if you want.)

Meanwhile, regulators are said to still be curious about what caused the “bear raids” that took down Bear Stearns and Lehman and threatened Morgan Stanley and Goldman Sachs.

They're welcome to be curious, but the minute Alan Schwartz went on CNBC and said, "We think we're solvent" is the minute anyone with any brains and capital went massively short Bear. And they were late to the party, since anyone in the market with any brains and knowledge of MBS ramifications—think the guy at Solly who called Michael Lewis and said "Buy potatoes" as Chernobyl was happening—knew exactly who was going to be Most Likely to Pay Off if you bought (again, common knowledge) some proverbially-undervalued far OOTM put options.



In fairness, Cohan appears to believe this is a smoking gun. But we've heard those rumours since before the bankruptcy, and Bear Stearns is not Iceland. If Cohan's correct in his assertion on Stewart's show that the people who bought all those OOTM put options were hedge funds that had previously used BSC for their Clearing Agent, then they voted with their feet in the face of reality.

And the rest of the market isn't dumb. They could see who was buying, and what their previous relationship with Bear had been. And they would see Alan Schwartz and realise this is not the man who is going to make it between the Scylla and Charybdis. And they would take that—along with things such as Goldman's immediate affirmation when the rumours starting about Lehmann and Bear that Lehmann would continue to be a respected competitor and trading partner—and be able to add.

As the Beatles said, "One and one and one is three/Got to go short Bear cause he's so hard to see."

But the WSJ wants you to think that going even beyond Christopher "I never saw a regulation I planned to enforce" Cox's SEC-permitted leverage ratios is not a violation of the law, and that hedge funds who see incompetence and near-bankruptcy do not act on that information.

The coolest thing about the Stewart/Cohan interview was when Cohan said "creative destruction" and Stewart immediately came back with Schumpeter by name. Maybe this is why Heidi Moore's piece opens by calling Stewart "our nation’s foremost financial commentator." (Take that, Paul Krugman!) But the attempts to argue that The Old Firm was substantively different from a Ponzi scheme are going to need a better case made than she does.

Capitalism deserves a better defense.


*They specifically miss connecting the dots on where there was clear fraud committed by management—and I suspect Cohan did as well, since no one who talks about the book seems to mention it. UPDATE: I'm now told he did deal with it, but sloughed it off. So expect Yves or Barry or Felix (blogroll update candidate, btw) or Paul (maybe even Mish, who has the mindset for the job)—someone who pays a lot more day-to-day attention to the market than I can right now—to jump on this one in the near future.

Via Dr. Black, we get CNN reporting:

Younger, healthier workers likely wouldn't abandon their company-sponsored plans, said Douglas Holtz-Eakin, McCain's senior economic policy adviser.

"Why would they leave?" said Holtz-Eakin. "What they are getting from their employer is way better than what they could get with the credit."

And why is it better? Because of the tax credit that is going away.

But let's be nice to a man who has, in the past few months, eliminated his credibility to ensure that no ex-GWBush Administration official retains his or her reputation after leaving office.* Let's assume he's telling the truth.

So the young, healthy workers stay with the employer plan (that, miraculously, doesn't go away in a miasma of Moral Hazard**). This leaves the older workers, who no longer get a decent deal from their employer, to find something in the marketplace.

Gosh, guess what happens when your selection group becomes more Adverse? Costs go up.

So let's review what Holtz-Eakin has actually declared, explicitly and by implication:

1. Younger workers will keep the employer-provided health insurance, since it would cost them more to buy on their own
   
2. Older workers won't be provided with insurance, and it will cost them Even More than More to buy health insurance on their own.

Even if we were ignoring that Health Insurance is NOT HEALTH CARE,*** John McCain's proposal, by the admission of his own Economic Advisor, makes the current situation appear Pareto-optimal.

Which leaves us only one question: Why would any economist support it?

*I should probably stipulate positive here. For instance, anyone who followed Condi "I was National Security Advisor on 11 Sep 2001" Rice's prior career wouldn't have expected much from her.

**Using the actual Health Economics definition here, not the generic phrase to describe why we need to give Goldman Sachs and Jamie Dimon $700 Billion.

***Yes, I'm shouting. Claiming to address health care when all you address is health insurance is like claiming to have fixed a smashed-in door by changing the lock on it.

Via Dr. Black, we get CNN reporting:

Younger, healthier workers likely wouldn't abandon their company-sponsored plans, said Douglas Holtz-Eakin, McCain's senior economic policy adviser.

"Why would they leave?" said Holtz-Eakin. "What they are getting from their employer is way better than what they could get with the credit."

And why is it better? Because of the tax credit that is going away.

But let's be nice to a man who has, in the past few months, eliminated his credibility to ensure that no ex-GWBush Administration official retains his or her reputation after leaving office.* Let's assume he's telling the truth.

So the young, healthy workers stay with the employer plan (that, miraculously, doesn't go away in a miasma of Moral Hazard**). This leaves the older workers, who no longer get a decent deal from their employer, to find something in the marketplace.

Gosh, guess what happens when your selection group becomes more Adverse? Costs go up.

So let's review what Holtz-Eakin has actually declared, explicitly and by implication:

1. Younger workers will keep the employer-provided health insurance, since it would cost them more to buy on their own
   
2. Older workers won't be provided with insurance, and it will cost them Even More than More to buy health insurance on their own.

Even if we were ignoring that Health Insurance is NOT HEALTH CARE,*** John McCain's proposal, by the admission of his own Economic Advisor, makes the current situation appear Pareto-optimal.

Which leaves us only one question: Why would any economist support it?

*I should probably stipulate positive here. For instance, anyone who followed Condi "I was National Security Advisor on 11 Sep 2001" Rice's prior career wouldn't have expected much from her.

**Using the actual Health Economics definition here, not the generic phrase to describe why we need to give Goldman Sachs and Jamie Dimon $700 Billion.

***Yes, I'm shouting. Claiming to address health care when all you address is health insurance is like claiming to have fixed a smashed-in door by changing the lock on it.