Jan 2 13

A Leadership Moment

by Bruce Judson

President Obama campaigned on the promise that in his second term he would bring leadership to our polarized nation.


The President’s first term was, in part, stymied by a polarized Congress. At the same time, many astute observers contended that the President lacked the grit to fight for the values he espoused and the policies he promised in his campaign.


In the moments before the Senate opens it’s new session on January 3, President Obama will have a once-in-two-years moment to show that he has every intention of taking a far tougher, far less conciliatory attitude with the new 113th Congress.


When the gavel drops on January 3 to end the 112th session of Congress in the Senate, Obama will have — as far as I understand existing precedent — a rare opportunity to make recess appointments. Right now, one analysis of the White House Web site shows 170 nominations pending before the Senate. Under the recess appointment power provided by the Constitution to the President he could, if he chose, install all of these individuals in office for the next two years.


There are a variety of interpretations of the reason for the recess appointment power of the President. My analysis is that the overarching purpose of the provision is to ensure that the govern can function by allowing the President to fill open positions where the Senate has failed to act.


In addition to ensuring that his Administration can function, and that much needed members of the Judiciary are added to the Bench, a sweeping set of appointments by the President would have extraordinary symbolic value.


According to the Congressional Research Service, President Bill Clinton made 139 recess appointments. President George W. Bush made 171 recess appointments, and as of January 5, 2012, President Barack Obama had made 32 recess appointments. In essence, Obama has used this power far less than his predecessors from both sides of the aisle. By demonstrating that he now intends to use the full powers of his Office, President Obama would send an important message to the Congress and citizenry. He would demonstrate the he intends to lead–with all of the powers at his disposal.


Teddy Roosevelt provides the historical precedent for such appointments. As noted by The Washington Post,

“At high noon on Dec. 7 1903,” Senate associate historian Betty K. Koed has written, the Senate president pro tem brought down the gavel to end one session of the Senate and then said “the Senate will now come to order.”


“In that moment between sessions,” Koed wrote, “during that split-second of time it took . . . to wield the gavel, President Theodore Roosevelt made 193 recess appointments.”


“There was but one fall of the gavel,” a newspaper reported, “but one stroke, but one sound.” Even senators in the chamber didn’t know there’d been a recess or, as Roosevelt most creatively put it, a “constructive recess.”


The Washington Post also notes that at the time there was considerable controversy over TR’s actions, and the amibiguity remains to this day:

Senators of both parties were furious and launched an investigation into what, under the Constitution, constitutes a recess.


We’re told the answer remains most ambiguous to this day. The more recent consensus is that, to be in recess, the Senate is gone for more than three days. But that’s only based on a 1993 Justice Department analysis in a lawsuit — not a law or Supreme Court ruling.


TR’s appointments were never invalidated, and that is, in effect, a far more powerful historical precedent than any Justice Department Opinion.


Some of our most distinguished public servants initially assumed office through recess appointments. They include Supreme Court Justice Earl Warren, Justices Brennan and Potter Stewart (all of whom were installed through Eisenhower recess appointments).


In the diplomatic arena, Eisenhower appointed Charles W. Yost, as Amabassador to Syria through a recess appointment. Yost would later serve as US Ambassador to the United Nations. While President George H . W. Bush, appointed Laurence Eagleburger Secretary of State in a 1992 recess appointment. In 1995, President Bush similarly used his recess appointment power to name John Bolton U.S. Ambassador to the United Nations.


Moreover, the real and symbolic value of such a bold gesture is high. A central message of the now-popular movie Lincoln is that in turbulent times President’s realize notable achievements both by adhering to a clear vision and by using every power the Constitution bestows upon them.


A great deal has been written about the need for leadership in Washington. President Obama now has a rare chance to demonstrate to Congress and the nation that he intends to be a far stronger leader in pursuit of his goals–using all of the power at his disposal. Few leaders ever have such a chance to reboot the perceptions held by Congress or the people of how they approach their task. This opportunity will not come again. Let’s hope it is not lost.

Aug 17 12

Romney’s Ryan Timing: A Taxing Matter?

by Bruce Judson

Ann Romney, presumably acting as a surrogate for Mitt, is now announcing that no additional tax returns will be released to the public before the election.

As friends and foes have dissected the Ryan choice, one question has received little serious attention: Why did Mitt Romney destroy any excitement associated with the convention by announcing his choice of Paul Ryan early? What motivated this decision?

Here’s one explanation: The timing of Ryan’s pick was an effort to deflect increased attention on Romney’s tax payments, or lack thereof, before he becomes the official Republican nominee.

Several weeks ago, I wrote in “My $10,000 Bet” that Romney would not release any additional information on his tax returns before he becomes the official nominee. As a result, no matter what the tax returns include, Republicans will be forced to support Romney. If necessary, they will defend the indefensible.

Over the past few weeks, the stakes related to Romney’s lack of disclosure have heightened tremendously. Senate Majority Leader Harry Reid asserted that Romney has effectively paid no taxes over the past ten years; and leading private equity magnates have been unable to explain with any certainty how Romney could lawfully build his “magical IRA”, to a value of $21 million to $102 million. Finally, Romney has flatly stated that he has paid taxes, with at least a 13% tax rate each year, over the past ten years, while providing no proof of any kind.

With regard to tax disclosures, Romney has recognized that the best defense is a good offense.

First, rather than prove Reid was wrong, Romney responded by questioning the name of Reid’s source at Bain Capital, with the aggressive phrase “It’s time for Harry to put up or shut up.” Let’s be clear about one thing: Romney’s response to Reid was meaningless. It was a question designed to deflect the central issue. The real question is whether Romney did indeed pay taxes.

Unfortunately, the press and pundits fell victim to Romney’s punching defense, rather than maintaining their focus on the real issue. The New York Times said the “cantankerous” Reid “hurl[ed] a taunting, unsubstantiated accusation” , and Mark Halperin wrote in Time magazine that these were “charges so reckless, they recalled Joe McCarthy and the birthers.” How does Halperin know if Reid is right or wrong? The only people that know the truth have done everything possible to avoid addressing it.

At this point, Romney’s double offensive: Build a focus on other issues by naming Ryan, and declare his own version of his tax record could put Democrats and advocates of disclosure on the defensive. He has skillfully maneuvered them into asking for disclosure because they don’t trust him. In effect, he is forcing his opponents to risk calling him a liar.

Moreover, if Romney has in fact paid taxes at a 13% or higher rate, and does release his earlier returns, the means he used to build his “magical IRA” and overall wealth however questionable, will be drowned out by the chorus of Republicans repeatedly saying “He told the truth… His tax rate was above 13%…Harry Reid never had a valid source.”

Nonetheless, the Republican party and the American people do have a right to know whether the potential Republican party nominee is, in fact, a liar, or has engaged in questionable financial dealings. Romney’s unverified statements about his taxes, his seemingly unexplainable accumulation of wealth in his IRA, the continuing suspicion that he is hiding something, and the placement of large portions of his wealth in notorious tax havens outside the jurisdiction of the United States (hardly a patriotic act) all create questions about the candidate’s ethics that transcend the minimum disclosure required by law.

How can Americans possibly elect a President who has not dispelled the lingering suspicion that he may be a liar, may be hiding some highly questionable financial activities or may even be a crook?

Here are four lessons from U.S. history and Romney’s personal history that show why Romney must release his tax returns.

First, it’s widely known that Mitt’s father, George Romney, released 12 years of tax returns prior to his Presidential bid. What is not widely repeated is his rationale. To write a biography of George Romney (Mitt’s Dad) published in 1967, George Harris, a senior editor for Look magazine, took a five month leave of absence, When the biography, Romney’s Way: A Man and an Idea, was released, Harris wrote an article on his interactions with George Romney for Look magazine, dated December 12, 1967.

2012-08-16-Look.jpg

In the article, Harris writes:

“He balked when I badgered him for a copy of his latest Form 1040, the Federal Individual Income Tax Return. Release of the document, while it might serve a political purpose, would not prove very much, he argued. One year could be a fluke, perhaps done for show, and what mattered in personal finance was how a man conducted himself over the long haul.

Stumped by this argument, I was not prepared for the move that it eventually led him to make: He ordered up all the Form 1040’s that he and Mrs. Romney had filed over the past twelve years–including those profitable ones when he saved American Motors Corporation from bankruptcy and became a millionaire on the company’s stock options.”

In the published biography, Harris also writes that in examining the tax returns:

“Auditors notice two unusual facts in these returns. First, the Romney’s have never made much use of tax loopholes, such as depletion allowances, that are taken for granted by most people who reach their bracket. Second, over the 12-year period, they have donated an average of 19 percent of each year’s adjusted gross income to their church.”

In the August 9th issue of Business Week, Romney asserts that he will be a successful president, because he is a successful executive who learned about leadership from his father. He says, in part,

“Well, I had the privilege of growing up in a home with a Dad that was a leader…So I learned something about leadership from a man who was an extraordinary leader.”

Unfortunately, it’s clear that Mitt missed one central leadership lesson from his Dad: The need to build the trust of his constituents. As Mitt’s Dad noted, tax returns over a short period can be manipulated. By failing to provide verification of any kind, Mitt is failing to create trust among the electorate that he will ultimately need to govern, if he is elected.

Dad also believed that a man’s past financial history, and what it showed about his character, were important indicators of how he would perform as President. Here, the American people have no idea how Mitt stacks up. However, Mitt’s extensive use of tax shelters and off-shore tax havens, in direct contrast to the way his father, George Romney, conducted his affairs, is not a positive sign.

Second, Romney has repeatedly expressed his admiration for Teddy Roosevelt, saying in one interview, “I love Teddy Roosevelt. I read everything I can get my hands on about Teddy Roosevelt.” Romney must have glossed over the many histories that discuss TR’s belief that leadership without a commitment to moral purpose was meaningless and, in fact, dangerous. In one well known statement in 1901 Theodore Roosevelt declared:

“If courage and strength and intellect are unaccompanied by the moral purpose, the moral sense, they become merely forms of expression for unscrupulous force and unscrupulous cunning. If the strong man has not in him the lift toward lofty things his strength makes him only a curse to himself and to his neighbor. All this is true in private life, and it is no less true in public life.”

There is no doubt that Theodore Roosevelt would assert that merely adhering to the requirements of the law, while failing to serve as a moral example, is well below the essential activities for a positive public leader. Indeed, a good test of whether someone has acted as a moral example is this: Does the nation benefit if every man, woman and child follows the leader’s example. Hence, we must assume that as President Romney would, echoing Theodore Roosevelt’s most famous phrase, be “delighted!” if every American placed their funds in the Cayman Islands and Switzerland.

Leadership, as recognized by Theodore Roosevelt, is not satisfying the minimum required by law. It is going above and beyond the requirements to provide a worthy example to others and to benefit the community. George Romney recognized the need for such moral vision in our leaders, Mitt Romney does not.

Third, it is doubtful, but not impossible, that Mitt Romney’s tax returns contain a campaign-ending, untenable secret. We all remember that President Nixon famously declared “I am not a crook.” Until I viewed the clip below, I had forgotten that as part of this statement Nixon also said, “I welcome this kind of examination, because people have got to know whether or not their President is a crook.” Yes Mitt, Americans “have got to know” that the Republican Presidential nominee, and possible next President, has complied with the laws of the land.

Finally, former president Reagan, perhaps the most admired icon of today’s Republicans, may have made the most compelling argument for disclosure. In matters of importance, he proclaimed “trust but verify.”

Mitt, it’s time for you to put up or shut up.

Jul 22 12

The Romney Stall: My $10,000 Bet

by Bruce Judson

Here’s a $10,000 bet: Mitt Romney will stall and stall before opening his tax returns. His strategy is to open the returns after he is officially nominated at the Republican National Convention in August.

Earlier in my career, I negotiated large, complex contracts. The first rule of every negotiator is to have a strategy. One effective strategy is to put off addressing the most difficult issues until the end of all other discussions. Then, after all of the deal participants have spent untold hours on other details, are tired, and can envision a successful outcome, it’s far easier to tackle the hardest issues. At this point, everyone wants to be done so badly that inevitably some compromise is reached.

Mitt Romney is now pursuing precisely this type of negotiating strategy with the Republican Party. Unfortunately, the Republican Party is either unable or unwilling to recognize what’s happening.

There seems to be little doubt that Romney is hiding something. Indeed, even a critical piece of his 2010 returns has still not been opened to public view. The only questions is what Romney is hiding. Speculation has ranged from questionable practices related to his “magical IRA” with the seemingly impossible value between $21 million and $102 million, to the creation of a “blocker corporation” which would have lawfully enabled tax avoidance (effectively invalidating Romney’s claim that his foreign holding had no impact on his U.S. taxes), to the possibility that he paid no federal taxes in 2009 because of large capital losses (a legal but politically deadly possibility).

In effect, there are now two potential realities. The first is that Romney’s off-shore activities don’t reveal any outright illegality but show a host of questionable or politically unpalatable practices. My money’s on this one.

In this case, Romney’s strategy is to force Republicans, willingly or not, to line up and uniformly defend whatever his tax returns ultimately demonstrate. Indeed, once Romney is the nominee the Republican Party potentially will face a Hobbesian choice: Either vigorously defend practices which would otherwise be indefensible (and characterize them as good and virtuous) or somehow remove Romney from the ticket, which would almost certainly hand the election to Obama. Once Romney is the official nominee, it would be a disaster for the Republicans if he were forced off the ticket. Romney is calculating that Republicans will join ranks and vigorously defend whatever indefensible behavior he is now hiding.

The tactical (but destructive),  potential brilliance of this strategy is already apparent. An article in The Hill recently noted that Republican Speaker of the House John Boehner “jumped to the podium” at a news conference to say:

“Listen, listen, Americans are asking, where are the jobs? They’re not asking where in the hell the tax returns are.” he said. “This is another sideshow intended to draw the American people’s attention away from the real issue, and the real issue is that the president’s economic policies have failed. They’ve actually made things worse. And as a result, he can’t run on his record. He’s got to run on something else. And so, whether it’s the tax returns, whether it’s Bain Capital, you’ll see every distraction known to man because the president can’t run on his record.”

Does anyone believe Speaker Boehner would take this position is he were a Democrat?

The second possibility is even more troubling. One doubtful, but possible, explanation is that Romney is part of the super-confidential IRS amnesty program for tax evaders with Swiss bank accounts who came forward voluntarily to pay limited penalties. This is only plausible if, as has also been reported, Romney never intended to release his returns. Otherwise the American people would hear the faint echoes of Richard Nixon’s famous statement, “I am not a crook.”

In either case, Romney’s lack of transparency is a betrayal to America and to the two-party system. The American system depends on trust. Our success as a nation requires that we trust our leaders, our institutions and one another. Romney’s behavior is further destroying this trust and corroding our democracy.

It is a truism in American politics that Presidential candidates effectively give up all rights to their privacy. The American people have come to expect that otherwise personal records, including health and finances, will be available to them as they decide on who should be the leader of the free world. Romney’s finances are one indicator of his character and how he regards his responsibilities to the nation. I strongly suspect that the vast majority of voters who supported Romney in the primaries assumed that he would demonstrate he was worthy of their trust with an appropriate opening of his records. Now, he is betraying this faith.

At this moment, we need leaders who are working to rebuild the vital trust we have lost over the past decade. Yes, it’s the economy stupid. But, more jobs and any economic recovery will inevitably require compromises. In the absence of trust, these will never be achieved, either in the court of public opinion or in our system of governance.

Historically, Americans have been characterized by their unbounded optimism, which was seen as a central aspect of our success as a nation. Now, we face a growing cynicism and mistrust throughout the society. By failing to open his returns now, Romney adds to the cynical and mistrustful character of the nation. These are the opposite of what made America a great nation, or will restore our economic and societal prosperity.

Jun 27 12

What A Bank Is Supposed To Do?

by Bruce Judson
Banks in a capitalist society are meant to create wealth and decrease risk. JPMorgan and its kind do the opposite.

As reports of JPMorgan Chase’s potential losses on the trading debacle reach $9 billion, it’s critical that our nation understand what activities do, and do not, represent acceptable behavior for a bank in our capitalist economy.

In his testimony before a congressional panel on the recent Swiss trading debacle, Jamie Dimon, CEO of JPMorgan Chase, said, “We’re doing what a bank is supposed to do.”

Was Dimon correct? In a capitalist economy, was Chase doing “what a bank is supposed to do”?

The answer is assuredly no. A bank is not supposed to do what JPMorgan Chase and its fellow too-big-to-fail compatriots do every day. They are practicing something other than actual capitalism. As this column has consistently stated, capitalism is not a vague idea. It is an economic system with  well-defined principles designed to create wealth for society. These principles have powered the creation of wealth in America since the nation’s founding and empowered our country with an extraordinary resilience.

But importantly, wealth does not mean profits. Wealth is anything that can be experienced or physically used. Profits are an accounting proxy for the wealth that an entity generates. Like most proxies, the idea of profits as a measure of the wealth created for society may often be a good indicator, but as I have written previously, this proxy has failed spectacularly in the financial sector. The profits generated by today’s financial institutions bear little resemblance to the (lack of) wealth they have created for our society.

Capitalism also means there is no such thing as a “free market.” All markets require rules in order to operate fairly. The word “regulation” is really just another term for the rules that govern how participants in a market must behave. Indeed, one modern example of a free market economy may have been the period of economic chaos in Russia that followed the collapse of the Soviet Union, when the absence of rules led in part to devastating results.

Now let’s turn to the purpose of banks in a capitalist economy. Finance is an intermediary good: You cannot eat it, experience it, or physically use it. The purpose of finance is to support other activities in the economy. Banks are meant to allocate capital (funds) to the best possible use. In a capitalist economy, this means allocating money to the people or entities that will create the greatest wealth for the overall society. At the same time, risk management is supposedly a primary skill for bankers. When capital is allocated well and available to wealth creating entities, societies flourish. When capital is poorly allocated, economies can collapse.

Speaking broadly, banks allocate capital in two ways: through loans and by facilitating investments. Indeed, as we read breathless news reports on the first-day performance of IPOs, it’s easy to forget that the central purpose of an initial public offering (IPO) is to channel investment money into an enterprise that will hopefully create wealth for our entire society.

In light of today’s overly complex, overly concentrated, and overly influential financial sector, the above description may seem far too simplistic. But it’s not. In Judaism, there is a well-known story of the famous Rabbi Hillel describing the essence of Judaism in a simple statement, and then saying “the rest is commentary.” The same holds true in today’s financial sector. All of finance is meant to allocate capital to the best use, the rest is commentary.

Since capitalism is a system designed to create wealth for society, gambling is antithetical not for moral reasons but because no wealth is created. Gambling is a zero-sum game. In a heads I win, tails you lose transaction, it’s impossible to create wealth.

Now, let’s return to Jamie Dimon’s statement before Congress and reframe it. Was Chase “doing what banks are supposed to do”?

First, as numerous commentators have pointed out, Chase was trading to increase its profits. This type of trading is simply gambling by another name. The outcome has no impact on the larger wealth of our society. It had nothing to do with the purpose of banks in the economy. At the same time, many of the so-called brilliant financial innovations of the recent era are, in themselves, nothing more than hidden forms ofgambling.

Second, Chase was increasing rather than decreasing the risk associated with its banking functions. It has become blindingly obvious that in trading and creating complex financial instruments (also called weapons of mass destruction) our Masters of the Universe never fully understand the risks they are creating for their own institutions or our larger society.

Mr. Dimon’s idea of what banks are supposed to do does not exist within the principles that makes a capitalist economy function.

I do, however, have one question for him. I strongly suspect he would argue that the purpose of management decisions is to increase shareholder value. In 2011, the value of JPMorgan Chase’s stock price decreased by 20 percent, yet he was paid $23 million. Is this also what a bank is supposed to do?

Jun 18 12

The Coming Train Wreck

by Bruce Judson

The U.S. housing market and any economic recovery are confronting a brick wall, and no one is discussing it. Like a speeding train, the housing market and our economy are heading over a cliff with no bridge. Yet, no one in Washington wants to discuss this very real and approaching danger.

Recently, Salon ran an article on the conflicting, confusing, and ineffective nature of housing policy to date. The article traced the conflicting narratives and debate associated with principal reduction and the Obama Administration’s efforts in this arena.

Andrew Leonard, the author of the article, interviewed me as he was trying to sort out the different issues, and the article correctly states, that I believe there is a “night-mare scenario” in which Congress fails to extend essential legislation before it expires at the end of this year. If Congress does not act, we will almost inevitably see a further collapse in the housing market, with a ripple effect that has the potential to destroy vital consumer confidence, stop any economic recovery, or even cause an economic catastrophe.

There’s even a nightmare scenario in which the entire fight over principal reduction becomes, in Judson’s words, “irrelevant.”

Here’s why:

That’s because, says Judson, tax law historically treats principal reduction as income to the homeowner who gets it. In other words, if you have a $300,000 mortgage on a house that is now only worth $200,000, and your bank gives you a $100,000 break to bring the mortgage and the home value in line with each other, the IRS will consider that $100,000 break taxable income.

Congress recognized this obvious insanity in 2007 and passed a provision that gave homeowners a waiver from that liability, but the waiver will expire on Jan. 1. Not only would the change in tax law mean that getting a principal reduction would make no sense for a beleaguered homeowner, but it would also destroy the market for “short sales” — in which banks allow homeowners to get out of their mortgage by selling their property for less than the mortgage is worth. Judson believes some 30 percent of home sales are currently short sales. Knock the legs out of that market, and you’re asking for serious trouble.

“If we hit a train-wreck on Jan. 1,” says Judson, “it will take the housing market and any economic recovery down with it.”

At present there seems to be almost no discussion of extending the income tax exclusion, either emanating from the Executive Branch of from Congress.

Let’s look the current housing market. In January of 2012, short sales comprised 24% of all home sales, as compared to 20% for bank foreclosure sales. Moreover, there’s a seemingly uniform belief that the number of short sales as a percentage of total home sales has been rising since January, and will continue to rise. So, any housing recovery or price stabilization we are witnessing reflects, in large measure, the rise of short sales. My best estimate is that right now short sales do, in fact, represent about 30% of all home sales.

How many of the recent short sales would have taken take place if the homeowner selling were then forced to pay income tax on the debt forgiven? To my knowledge, no one has analyzed the size of the tax debts that would be incurred. But, here’s my hypothesis: In this era of high unemployment, little if any wage growth, and a reduction in the median American family’s net worth to 1992 levels, the answer is not a lot.

Reportedly, Republicans believe that extending the tax exclusion will cost the government $2.7 billion, and oppose it, in large part, based on this estimated cost. This makes no sense.
First, no one has ever released the source for this estimate. It is almost certainly based on an assumption that short sales continue after the exemption is removed, and the government collects the income tax. As discussed below, this reasoning is nothing short of ridiculous.

Second, our nation has spent hundreds of billions of dollars to prevent a collapse of the economy. The idea that we will put at risk the health of the entire housing market, and its spill-over effects on consumer confidence and the economic recovery, to save $2.7 billion is ludicrous.

Does any rational person believe that homeowners who need principal reduction in order to maintain their mortgages will be able to afford the income tax on an additional $100,000 (if that’s the amount forgiven)? Instead, it seems likely these homeowners will do everything possible to tough it out, and start to refuse principal reductions offered by the government or the banks. Suffering American homeowners will be in the impossible situation of refusing assistance because of the short term cost (i.e. the income tax imposed) on this assistance: The one situation every American wants to avoid is a large, unpaid bill from the IRS.

Any housing recovery is almost unquestionably dependent on the continued growth of short sales. If Congress fails to act, short sales will almost certainly return to an anemic level. We are playing fire, and the chances of serious burns are not slim.