Random Thoughts    
Financial and Healthcare Debacles
by Gaurang Bhatt, MD 

1) Savings & Loan

Savings Banks had a restricted mandate. They paid a small interest rate to savers for short term deposits and were restricted to lending to home buyers for 15 or thirty year mortgage loans at higher interest rates. They made their profits on the interest rate margin. As anyone who knows about the great depression and the old Jimmy Stewart movie, when depositors panicked from the worry of bank failure and withdrew their money, the business model of borrowing short term and lending long term failed. The Federal Deposit Insurance Corporation and the Federal Savings & Loan Insurance Corporation were created after the depression to prevent bank failures. In the case of a run on the bank, the FDIC and FSLIC would step in as the lender of last resort. The Glass Steagall Act separated commercial banks from investment banks which underwrite, speculate and trade in securities and derivatives. Only the commercial banks had access to funds from FDIC and the Federal Reserve and were supposed to be regulated by them The same problem led to the failure of Bear Stearns, Lehman Brothers and CIT recently. These three were not commercial banks but fell into the trap of borrowing short and lending long and had no money access from the FDIC and the Federal Reserve.

As inflation rose in the seventies and Volcker raised interest rates to 20%, the savings and loan banks were in the same situation that home owners are now in. Homeowners owe more on their mortgage than their homes are worth. At that time the savings banks mortgage loans were valued lower due to rising interest rates, than what the banks owed their depositors. The banks were compelled to pay higher rates to their depositors and had no borrowers who could afford higher mortgage rates. Loans for residential construction started to go into default. Reagan with his intellectual deficits and rabid deregulation biases, eliminated the restrictions for the savings banks. They were allowed to lend for commercial projects, speculate in the markets and make outsized risky bets on whatever the officers and board wanted. The savings bank were hemorrhaging losses and many of them chose to gamble with their deposits in a last bet to become profitable. They had nothing to lose because their depositors were covered by the FSLIC leaving the federal government on the hook.

If their bets won the bank would be saved and they could get huge bonuses. It was heads I win and tails you lose. They had no skin in the game. This is typically what happens with lax or self-regulation. The same thing happened with Lehman Brothers and Bear Stearns. Before their bets went sour the executives got huge bonuses. They received no government support and had to be liquidated. Morgan Stanley and Goldman Sachs converted themselves into commercial banks to feed at the public trough and Goldman has resumed its risky bets while having the government guarantee its loans. It is going to pay 700,000 dollars average to each employee. Obama, the congress and cabinet are so beholden to their financier banks that they took our money to make them whole and burdened our progeny with debt. Earlier the 537 whores of Washington DC had repealed the Glass Steagall Act under Clinton, Summers, Rubin, Greenspan etc. (see Simon Johnson’s article in The Atlantic) with total amnesia of the depression and savings and loan debacle.

2) Commercial & Investment Banks, Insurance Companies

Lehman and Bear Stearns failure sent seismic shock waves in the capital and financial markets. A London subsidiary of AIG had been making crazy bets to garner short term profit and long term disaster. It was selling credit default swaps (a form of insurance guaranteeing payment of company debt in case of default or bankruptcy) while charging absurdly inadequate premiums like two billion dollars a year for ten or twenty years to insure many hundreds of billions of dollars. One of its counter parties for thirteen billion dollars was Goldman Sachs. The executives of the AIG subsidiary in London knew when they sold the insurance that in the next few years nothing untoward was likely to happen. They then collected hundreds of millions of dollars in performance bonuses each year. They had no skin in the game and didn’t care if the bets bankrupted AIG in the future. The 537 whores and the cabinet and high officials had lot of connections with Goldman. To make sure that Goldman would not lose thirteen billion dollars, sundry officials screamed that the sky was falling and urgent measures were needed. AIG was bailed out and 700 billion dollars of taxpayer money was used to make the big boys and banks whole.

3) Mortgage Brokers & Insurers

Heads I win, tails you lose was the modus operandi in the mortgage crisis. Mortgage loan officers were paid not for due diligence but based on the dollar volume of loans. The banks got their cut by securitizing and selling them. The rating agencies were paid to put lipstick on the pig by stamping them AAA. Pension funds, insurance agencies were investing somebody else’s money and immune from blame as long as the securities were triple ”A”. The persons buying the homes had to put no money down and were buying to flip the homes at a higher price in a market going ballistically up due to monetary inflation by the FED asleep at the controls. Mortgage insurance companies and municipal bond insurers did not perform due diligence and wrote insurance for inadequate premiums not commensurate with risk (MGIC, PMI, Radian, Fitch, S&P, Moody’s, MBIA etc.) The loans were non-recourse, so at worst the borrowing homeowner could mail the keys back to the bank and stay in it rent free till foreclosure, months later. No party had skin in the game and as Prince said as long as the music is playing we gotta dance. Citibank, and Bank of America are zombies on government respirators, partly victims of the repeal of Glass Steagall.

4) Airlines & Auto Companies

The same problem affects the airlines and automobile companies. The airlines competed for fairs without considering that they needed adequate free cash flows to replace their expensive aircraft fleet in the future. They underfunded employee pensions, gave undeserving bonuses to executives. 9-11 reduced air traffic and last year jet fuel prices soared. This is the cause of recurring airline bankruptcies, abrogation of employee pension commitments, skipping maintenance, layoffs and severe salary reductions. The 537 whores in Washington allowed impossible actuarial return assumptions and delays in funding pension fund obligations while ignoring undeserved bonuses for airline executives and destructive deregulation. None of them had skin in the game. The automobile companies gave undeserved bonuses to executives, failed to improve product quality and banked on cheap financing. They were generous in employee salaries and benefits, as these were future liabilities likely to come due long after the executives departed with their bonuses and golden parachutes. Better quality competition from Japanese, Korean and German car makers, the rise of gasoline prices and Detroit’s inability to offer nothing besides gas guzzlers sounded its death-knell.

5) Health Insurance

Once again we have the same problem. Doctors are paid more for tests than time or acumen. The sword of Damocles of potential malpractice suits encourages unnecessary and excessive costly diagnostic tests. Patients with insurance coverage have little or no out of pocket expenses and are mortally afraid of dying prematurely. They have no ability to judge the value, usefulness or cost benefit of tests and will be guided by physicians whose interests may be skewed by economics or defense. Insurance companies make money by denial, rationing or dropping expensive patients. The very idea of health being a privilege exploitable for profit, rather than a right of citizens of all nations (particularly civilized, rich and developed ones) shows the perverse thinking of the nation and its 537 whores in Washington DC. Employers were until recently mostly willing to pay for employee health insurance, a tax deductible expense. It is the cheap labor of newly industrializing developing nations and the need to compete with their cheaper products that have made them rebel. Lastly improving science and technology is bound to lead to more costly and at times more effective treatments for many diseases. The increasing population life-span necessarily means more and chronic illnesses.

It is a no- brainer for any thinking sensible fair individual that some form of rationing by price and age will be absolutely necessary to cover everyone. There is nothing cruel and unfair about it, if it is done with deliberation, debate, expertise and consensus. Nearly 50,000 die on our roads. We could eliminate this by the government giving every driver an M1 Abrams tank from the government at a cost of five million dollars per driver. We could build every house to be fireproof at an additional government cost of a million dollars per house, but we accept the deaths by fire. We could give free bullet-proof vests to every American to decrease death by murder to half. Basic healthcare for all Americans should include consultation with physicians for all, child and prenatal care and a proper cookbook for diagnostic tests, surgery and medications with restrictions by age, disease and price ceilings. Those able or willing can buy extra insurance for bells and whistles. We already have disparities in quality of education and living conditions based on income and neighborhood, but the basics should be available to all. Don’t listen to the hypocrisy and lies of the 537 whores in Washington DC who voted themselves a gold-plated healthcare benefit and are in bed with their insurance company Johns.     

July 19,  2009

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