3/1/11…sometimes a great notion

Yesterday’s rally on the spread of ‘Buffett is buying’ theory is spurious at best…Buffett is a value buyer…like Burlington Northern for the 7% dividend…upsetting TB when his client then lost it while Warren kept the dividend for the company’s internal growth…that was not what TB had in mind. But the hot sector yesterday was banks and TB hardly thinks they are on Buffett’s shopping list. Still, the volume was 1.25B shares which is the largest volume – and above average – on an up day in ages. Let’s see if they can carry on again today. TB cannot understate one thing though: despite the weakness of late, we did not break below the 40/50 day moving averages…if and when that happens you can short with impunity. Note that due to being hyped in last week’s Barron’s, MMM rallied sharply and closed within a dollar of its all-time high. In the same issue, Telefonica was plugged…it too rallied…both are off this morning.

…with apologies to Ken Kesey and Paul Newman who directed and starred in the movie. But the operative word was ’notion.’  Ideas sometimes strike and resonate like a timpani drum with us…but like history of leaders over time they become better or worse.

It was while writing yesterday’s 2,000 word diatribe that TB realized what a fool he is…how could he not see what has happened to the U.S.? Especially since he writes it as he sees it…and whether or not you agree it is always honest and heartfelt…trying to make sense of events and to provide you the reader with a different view…never asking for you to agree, but hopefully to make you at least consider another viewpoint.

(Since it has been awhile, TB would like to remind readers of his ‘three dot journalism’ …ellipses before you are forced to write TB…but TB prefers the former as it was used extensively as his trademark by TB’s all-time favorite journalist: Herb Caen. TB wishes he could be HC…but no one can take that place. To TB it is ‘stream of consciousness‘ journalism…more like a conversation – albeit one-sided, so TB hopes you don‘t find it objectionable because it isn‘t going away).

In 1970, while TB was a harbor patrolman at Marina del Rey, California (sometimes he wishes he had stayed there, retired, taken two more civil service jobs and been better off than he is today), he got a call to pick up a man who was ranting on the other side of the marina.

When TB arrived, he was with his 11 year old son, had parked his car as it ran out of gas, and was thoroughly agitated as he had to get to the authorities to warn them of an approaching meteor and he had just figured out how to stop it…it was imperative to the future of mankind. Kindly and gently, TB assisted him into the car and drove him back to base…he wasn’t cuffed so TB kept one eye glued on the rear-view mirror. All the way there, he ranted…trying to convince of the dire event that was about to occur.

Sadly, TB also watched his son, who seemed very well adjusted, never said a word and calmly sat beside his dad with a worried look on his face – what the worry was, the calamity or his dad’s mental health he never learned.

After turning them over to the sheriff’s though, TB started thinking…what if he was right?…and TB had been the one who just eliminated the one chance of saving the world from destruction. Alas, he did not dwell on that point and the world is still going strong 41 years later.

So here is what TB concocted yesterday:

One day in 1974, TB’s late aunt drove to his apartment, in a new Cadillac convertible. She was in tears and said they were going to lose their home due to rising taxes. Stifling the urge to laugh or worse, express anger at her selfless thinking, he cajoled her until she had calmed down. Nevermind that she lived in Mandeville Canyon, one of the wealthiest areas in L.A. or that they were members of Bel-Air Country Club and lived extremely well…they were going to the poorhouse in their new Caddy. This was when people became obsessed with their property taxes in California…and Howard Jarvis played on those fears.

There are those who blame California’s problems on the passage of the Gann Amendment in 1978 (although the chief architect was Howard Jarvis, former reporter turned activist employed by the Bay Area (Santa Monica Bay not SF), Property Owners Association – this is important!

While Paul Gann, a Sacramento-based activist who never met a tax he liked, thus making him the first tea bagger got the name credit (intentionally?) but was Jarvis who penned it. While on the surface it appeared that law was for the benefit of homeowners, that was merely a side effect which allowed passage by 64% of the voters.

TB was opposed to it, but had moved to Nevada at the time. While in principle he liked concept as property taxes were soaring, as a bond man he abhorred it. But passage was guaranteed when three weeks before the election the Los Angeles County assessor sent out the tax bills and in some affluent areas they doubled!

According to Moody’s however, one year after the passage of Prop. 13, Beverly Hills had the highest increase in assessed valuation in its history. Why? Because people knew what their taxes would be. This is the misconception that the media has created: that it was Prop. 13, that destroyed the California economy.

Of course, people moving here grouse about their taxes which are about in line with most the East. To which, TB has always responded, “you didn’t see what happened before and at least now you know what your  taxes will be and can budget for them.” Of course, by 2004 this was out of their mind as they swapped to bigger, more expensive homes, self-inflating their taxes which they complained about…but at the same time stripping equity from their homes which all of America is now paying for…thank you, Wall Street!

Now that you have the background we can move on to the real problem which was an indirect but planned part of Jarvis’ zeal: commercial property taxes.

Despite the windfall caused by the reduction of their property tax (and a maximum increase of 2% per annum thereafter), apartment owners didn’t pass along the savings to their tenants (TB’s grandmother owned a small court and duplex and barely raised rates at all the entire time she bought it in 1950, despite TB’s admonishment and that would soon cost her dearly).

As a result, Jane Fonda’s then husband and state legislator, Tom Hayden, living in a home on the beach in Santa Monica near the Hilton’s and Peter Lawford, and Marion Davies old home build for her by William Randolph Hearst, decided that Santa Monica needed rent control. It was easy to convince the renters who saw the owners keeping the money for themselves, and it eventually was nicknamed ‘the people’s republic of Santa Monica.” If you drive by those rent controlled apartments you will see Porsche’s, BMW’s and other expensive cars…unlike the homeowners they were smart enough to stay put! Berkeley and a few other California cities followed suit.

But here is the biggest unplanned (?) beneficiary of Prop. 13: commercial building owners. This occurred either because virtually all large office buildings and hotels are corporations, therefore the buildings are never sold, only the stock in them, which along with home prices were escalating rapidly.

The Supreme Court has ruled that a corporation is an individual…guaranteed equal by the 13th Amendment to the Constitution…bet they didn’t have that in  mind either, strict constructionists. That means they have the same inalienable rights…and one better: you can’t send a corporation to jail. They also ratified that the sale of a building owned by a corporation was a mere transfer of stock but the corporation still owned it so no increase in taxes. Consider the value of the high rises in Los Angeles and San Francisco and other cities and then picture how much tax revenue has been lost.

Still, all went well so long as real estate prices were rising little attention was paid…however…

…the bubble burst and cities – and the state – became mired in deficits. But more importantly, just like the homeowners, the building had been sold…rather the stock in the corporation owning them had been sold, and the equity distributed…yet the tax base remained the same. Now here is where it gets really interesting:

TB has tried to find updated information but the latest he can find is June 2009 when 13 hotels were in foreclosure and 175 were in default. On San Francisco’s famed Nob Hill, the Huntington Hotel, whose signature restaurant The Big Four is named after the four robber barons, Collis Huntington, Mark Hopkins, Leland Stanford and  Charles Crocker) is for sale…as is the Mark Hopkins, and the Stanford Court has operated at loss for ten years, while the Fairmont is trying to convert to condominium status. We know one thing:  it isn’t the property taxes that caused the problem…but probably increased leverage was.

Down the hill office building owners are turning over the keys to the bankers. Gerald Hines, renowned Houston real estate developer Gerald Hines, who risked his entire net worth on developing Houston’s famed Galleria and later built 101 California in San Francisco, last year turned over the keys of 333 Bush St. to the lender. Why? Because a law firm, Heller Ehrman, an international law firm with 730 attorneys, which leased 250,000 square feet of the building, defaulted and later filled bankruptcy…thus the building which Hines bought in 2007 with Sterling Properties, could not operate at a profit.

But is Hines bankrupt? No more than Donald Trump who lets the bankers pay for his mistakes and goes merrily on his way with an ego bigger than his wealth which is substantial.

Think if those corporations had been paying the proper taxes on those buildings from all the transfers where they took out huge sums of money -subject only to capital gain and after substantial depreciation. Would the state then be in a problem? Probably, because as soon as the state’s budget analyst showed the increase to the legislature they would have spent it…just like they did the revenue from the two founders of Google – a one time event that made the Governator, who’s claim to fame was using bonds to balance the budget, look good.

But what is truly remarkable is that despite the biggest financial debacle of all time, the banks failed, but the bankers did not and are gaining in wealth by the day as they continue to game the system…and the shareholders are happy with the crumbs left behind, as the right has us focused squarely on their straw man: the unions. You can’t imagine how many people tell TB that the police and fire chief compensation is due to the labor unions…get this: they are MANAGEMENT…and therefore EXEMPT! Your ire should be on your very own elected officials and yourself for not paying attention when you were voting!

Do you recall the outrage from the right when people abandoned their homes, sticking the bank with the mortgage…remember that the GOP in the new improved bankruptcy bill managed to get your home back from exempt status and thus could be lost. Why is it OK for Trump and Hines and others to walk away from their bad investments but not for you…many of whom are underwater because of the banks, not their willingness to pay their obligations…to make the same choice? It is inconceivable to call this personal responsibility…you had better look who is making the rules and who never gets hurt while all those around them pick up the pieces.

The people have become insignificant…and even more so due to the Supreme Court’s 5-4 decision to ban any limits on corporate political donations as a violation of their (remember a corporation is an individual) first amendment rights…despite the argument of the minority that it would ‘corrupt democracy.’ It already has…sadly to the benefit of the major corporations and thus the wealthiest individuals.

According to Fortune, of the 400 wealthiest Americans, Bill Gates ranks #1 at $54 billion, Warren Buffett #2 at $45 billion, wile #5 is  a tie between the Koch brothers at $21.5 billion EACH (they also own the second largest private company in America behind Cargill). So? Let’s take a look at these four:

Gates has the worlds’ largest foundation now since Buffett kicked in ,but Buffett put a relatively small amount of money in the foundation…most of it is Berkshire stock which he says he can invest better…but isn’t a foundation supposed to be doing good things? An emphasis of the Gates Foundation is global education yet a friend with a very good but small project was told by them that they weren’t ready to commit money as they had five years of data to analyze and that would take…another five years! This, for something of extreme urgency: educating the people of the world??? So can the private sector really do it better?

Ah, but the focus should be on the two men who give libertarianism a bad name, the bad boy Koch’s. Rather than use at least some of their money to clean up their own businesses which are horrible polluters with abysmal safety records, they choose to pay the fines and pump money into campaign’s like Gov. Walker’s to achieve even more power and control…after all, isn’t that what it is all about?

Regulation in the U.S. today is a dismal failure. As Matt Taibbi suggested in yesterday’s quote, and it was reiterated by Inside Job’s Jeffrie Lurie…why isn’t Wall Street in jail? TB had to laugh at the republican senator who said that without punishment there is no respect for the law…he doesn’t have to look very far to prove that point…right in his own D.C. backyard. A Brit friend offered a suggestion for dealing with the Koch’s. Increase significantly the penalty for each subsequent violation of environmental or safety rules, to the point of forfeiture of the offending business…do a couple of those and the Koch’s won’t be smiling. But do we have the will to do it? Americans are not a mean-spirited people yet to hear the rhetoric these days that is what we have become and the irony is it is the lower middle class members of the tea party that are the most vocal…it is appalling as they continue to play into the hands of the wealthiest people in the country.

This is the America we live in today…where the wealthiest rule (plutocracy) and the rest of us believe it is our government when daily we see evidence that it is not representing the people or either party’s credo. Do you honestly believe we are making a better place for our children and grandchildren?  TB was sent a video produced by one of the non-profits of the Koch brothers claiming that the average municipal worker with benefits earns 46% more than his private sector counterpart. TB doubts the validity of that statement but more importantly it builds the case for collective bargaining based on the ‘de-basing’ of private sector workers pay…since 1980! They had no one to represent them as the labor movement imploded and over that period of time defined benefit retirement plans were replaced with IRA’s, 401(k)’s and for the lucky few where the company instituted a profit sharing plan…that is not the majority of companies and we have watched as the 401(k) became a 201(k). Also, where many companies used to match employee stock purchases only a few continue to do so. Then there are the cases like FedEx who called employees management so they would not have to give them lunch or coffee breaks…trust is a two-way street.

America has become a giant Monopoly board and we all know what happens to people when they play that game which was invented in the Great Depression using street names from Atlantic City.

Both Ivan Boesky and Michael Milken said it is not about the money…money is just a counter of wealth…it is about power…having more than the other guy…but at what cost do we allow them to pay this game and then not even tax them appropriately? Somehow, TB bets the Koch brothers are big supporters, perhaps the instigators of the consumption tax…which years ago would have been labeled a VAT and thus socialist or communist. We are a nation built on consumption…yet when one is a billionaire it is impossible to spend even a fraction fo one’s wealth…yet they want more – at any cost.

Democracy as we know it has only survived once…and we are it…that survival was based on upward mobility. That mobility no longer exists for all but a few. Students graduate from college saddled with massive student loans (especially those at the for-profit universities that through them we all subsidize), and the unlucky poor are huddled in our core city areas…will those cities soon resaemble Los Angeles as it appeared in Blade Runner?

Business is supposed to act responsibly yet here are three events TB learned of just yesterday:

*there is a move to make it a felony to operate as an unlicensed loan modification company – as it should be as it isn’t the amount they are paid for their neglect but the financial cost to those they are ripping off.

*the government has fined  JPMorgan Chase (there’s that name again) and Wells Fargo for illegally charging refinance fees to those in the military on active duty. In  plea agreements JPM agreed to reimburse $2 million of fees and Wells $10 million ($175 per serviceman overcharged). Procedural error?

*MetLife and Prudential among others – the two largest life insurers\have been resisting paying claims on large policies claiming suicide, drunk driving (one wasn’t even driving the car), and drug use (prescription drugs). This was overruling the coroner’s report and police reports…it was harassment and done to break down the beneficiary so they would drop the claims. ERISA protection? No, under it the claimant has to submit to arbitration not lawsuit and no penalties can be attached…these cases take a year or more so there is no interest from the date of death OR punitive damages.

These are just a few examples…some time back TB was told by an informed source that AETNA was rejecting medical claims from senior citizens so that they would have to refile which most did not as they took the  company at its word.

If Governor Walker is successful in destroying collective bargaining further weakening the negotiation process and the other GOP governors do likewise, it will hamper the ability to fund other views in elections. Last night Gov. Chris Christie of New Jersey, when asked about the second poll that by 60% said that Americans do not want to eliminate unions or collective bargaining in government said, “it must have been the way you asked the question.” It is open-mindedness like this that will eventually entrap the GOP.

Those are TB’s views…you decide.

Have a great day!

TB

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