Semi-Daily Journal

http://www.cbpp.org/11-18-03health.htm

Medicare Agreement Could Cause Hardship for Many Poor Seniors and Disabled People and Make Them Worse Off than Under Current Law - 11/18/03

The Medicare conference agreement would leave a substantial number of the 6.4 million dual eligibles -- low-income Medicare beneficiaries who are also eligible for Medicaid -- worse off by requiring them to pay significantly higher co-payments for prescription drugs than they do now and removing access to certain drugs they currently receive.

http://www.nytimes.com/2003/11/14/opinion/14KRUG.html

The Trojan Horse
By PAUL KRUGMAN

What are we going to do about Medicare? That should be the subject of an open national debate. But right now Congressional leaders are trying to settle the question by stealth, with legislation that purports to be doing something else.

An aging population and rising medical costs will eventually require the nation to provide Medicare with more money or to cut benefits, or both. Meanwhile, there are demands for a new benefit: a gradual shift away from hospital treatment and toward the use of drugs has turned the program's failure to cover prescription drugs into a gaping hole.

A Congressional conference is now trying to agree on prescription drug legislation. But beware of politicians bearing gifts — the bill will contain measures that have nothing to do with prescription drugs, and a lot to do with hostility to Medicare as we know it. Indeed, it may turn out to be a Trojan horse that finally allows conservative ideologues, who have unsuccessfully laid siege to Medicare since the days of Barry Goldwater, to breach its political defenses.

Some background: originally, Medicare provided only hospital insurance, paid for with a special tax on wages — and this tax, according to estimates from the trustees, will be enough to cover hospital insurance costs for at least 20 more years. Medicare now also includes additional benefits, but the costs of these benefits have always been covered out of general revenue — that is, money raised by other taxes....

Not that I believe such things should be "left to the market", but did I hear rightly that there have been $22 bln in withdrawals from Putnam since the scandal broke? Somebody's paycheck just got a little smaller.

The Hits Keep On Coming -

http://www.nytimes.com/2003/11/18/opinion/18TUE1.html

A Shortage of Energy

President Bush seems to have been the recipient of poor intelligence again. Last weekend, he claimed that the energy bill approved by Republican leaders would make the country "more secure." Senator John McCain's description of the bill as a "leave no lobbyist behind" barrel of pork for selected industries and campaign contributors was closer to the truth. So was Senator Robert Byrd's unsparing judgment that the bill would "do about as much to improve the nation's energy security as the administration's invasion of Iraq has done to stem the tide of global terrorism."

One can only hope for a similar show of honesty from 39 of their Senate colleagues, 41 being the minimum needed to sustain a filibuster and launch this dreadful bill into the legislative netherworld where it belongs. At that point Congress can start again and give the country an energy strategy worthy of the problems it faces, oil dependency being one, and global warming another.

Both problems require fossil fuel alternatives — not just environmentalists' favorite hobbyhorses, like wind and solar power, but biofuels that can take the place of gasoline. They demand vastly more efficient cars and trucks, as well as more benign forms of coal, the world's most abundant fuel. This bill takes baby steps — a clean-coal demonstration project here, a hydrogen project there — that pale next to the huge tax breaks and generous regulatory rollbacks it gives fossil fuel producers....

http://maxspeak.org/gm/archives/00001593.html#comments

ENERGY POLICY -

"Negotiators sprinkled in dozens of sweeteners sought by home states and congressional districts, ranging from nearly $1 billion in shoreline restoration projects to tax credits for a company that produces fuel by compressing turkey carcasses."

The tax breaks in the energy bill seem to total about 25 billion dollars. Oh Well.

There was no problem. They just happened to get caught with hand in cookie jar.

No. There were and are majors problems: ownership - sharholders - had no check on management; there were the poorest regulatory controls and supervision; there was a tossing aside of ethics in the broadest way.

The problem is that the industry, through the Investment Company Institute, has captured the SEC, as shown in this article:
http://www.nytimes.com/2003/11/16/business/16FUND.html
This has been true for years, going back to the early 80's and Ronald Reagan's appointments to the SEC.

The second part of the problem is the weird free market attitude: don't worry, the market will catch and correct problems. Sure, eventually someone rats out the malefactors of great wealth, but, not to worry, the modes of cooperation are such that no one has to surrender any real money, so who cares?

This foolish notion of market correction of greed and corruption is so prevalent that you could probably get a majority of fund holders today to say that government interference in the free mutual fund market is evil.

The SEC is just another example of the strategy used by Rebublicans in many cases.

They ( in congress) massively underfund the regulatory agencies so they do not have the resources to do their job and have no choice but to resolve cases like they do even if they wanted to take a hard line. It is not only the regulatory agencies that are underfunded like this. For example, in real terms the FAA budget is much smaller than it was 20 years ago. Every time you have to sit on the runway waiting to be assigned a landing slot at your destination airport you are paying a tax with your time for the underfunding of the FAA. Because of the recession this is not such a problem now, but when air traffic was heavy before 9/11 this was a severe problem.

http://www.cbpp.org/11-18-03health2.htm

The conference agreement on the Medicare drug bill would cost an estimated $400 billion over ten years, and much larger amounts in succeeding decades as drug prices continue to rise. Because the legislation is not “paid for,” it would substantially worsen the nation’s long-term fiscal problems, which already threaten to be the most serious in the nation’s history.

This raises a fundamental question: is the legislation sound enough policy to justify substantially worsening an already grim long-term fiscal outlook? Examination of the legislation strongly suggests the answer is no....

Is this an issue that the Democrats can or would use against Bush and other Republicans in 2004? It seems likely that this will be a big part of Eliot Spitzer's probable run for the governorship of New York, but then again, he's had a very active role in these matters.

Couple of comments from an industry insider: the great majority of unethical activities at Putnam and elsewhere weren't illegal and weren't even specifically forbidden by regulations. That's not to say that what happened wasn't wrong - but all of society has a tendency to view laws and regulations as the absolute standard of conduct, when laws and regulations ought to be looked at as minimal standards of conduct.

Btw, I've worked in a lot of other industries outside the investment biz - as a landscaping grunt, draftsman and construction engineer to name a few - and the ethical standards in the investment biz compare pretty favorably to most other sectors I've seen the seamy inside of . . . . . . . . . especially the construction business.

A few thoughts on the mutual fund issue. First, we do not know the exact costs that late trading and market timing are placing on the market. Transaction costs may have increased by the activity, but to what extent? We have no solid measure of this yet; just guesses.

Next, mutual funds like to maintain liquidity. So, these trading activities may force managers to sell assets to maintain their liquidity resulting in capital gains and performance externalities. Again, this must be measured and is not easy to do.

There are plenty of estimates thrown around in the news, but the stats are not given source material. It is usually some guy with a guess.

Money outflows are quoted and they seem really big, but this is a $7+ trillion industry. Putnam says they had outflows of $22 billion and they still manage $256 billion. What will happen to this outflow? Probably just a reallocation to another fund group.

Will there be cost savings by stopping these trading practices? Sure, but how much is not known. Will this result in better performance? Unknown, but debatable. My guess (as long as everyone else is) is that the cost savings resulting from the cessation of these trading activities will be small. Net of the enforcement costs, I'd say we break even on the social level. It is interesting, but probably worn out, to debate the agency theory implications of the mutual fund industry. But, the big and unanswered issue lies in a quantified cost-benefit analysis of the trading activity.

Investors can look to the prospectus to find the costs of a fund. Let's say an investor gets a 10% return from a mutual fund net of costs, the highest return for that peer group. He then learns his fund engaged in market timing trades. Does the investor sell? The majority of investors probably won't sell. The reason being that investors want the highest net return. Of course some will switch, perhaps to another fund class or something. But, in the end, investors want the highest net return, even if that happens to be a fund that allows market timing or after hours trading.

I dunno, Anarchus, I'd say market-timing your own fund when you have an explicit duty to your investors is pretty sleazy. if you have that kind of insight you should be timing your competitors funds on behalf of your investors. timing isn't illegal, after all, and that's precisely the insight for which people thought they were paying when they hired Putnam.

I know full well what goes on in construction (an old roomate was the son of a biggish general contractor), but that doesn't make bending ethical standards in the investment business any prettier. the client just doesn't come first, or even third, for too many investment pros.

Market-timing is really a misnomer for what Justin Scott and Omid Kamshad were doing - I prefer to think of it as "zip trading". Market timing implies timing the market, and JS and OK were taking advantage of the stale prices used to calculate the NAV's of their international mutual funds.

The reason they didn't do it with other company's funds is that they were doing it with their own Putnam 401k funds which could probably only be invested in Putnam funds . . . . . and they couldn't do the strategy for their Putnam clients because there are investment company act prohibitions against mutual funds investing in other mutual funds.

All that said, heck yes it was sleazy.

Sec Chairman Donaldson had an op-ed in the Tuesday Wall Street Journal defending the Putnam settlement. It was a pretty weak read (WSJ subscriber link). Here are the last two paragraphs:

Criticism of the Commission for moving too quickly misses the significance of the Commission's action. While continuing our broader investigation of Putnam, we have reached a fair and far-reaching settlement that establishes substantial governance reforms and compliance controls that are already benefiting Putnam's investors. It is a settlement where the Commission put the interests of investors first.

As the Commission continues to initiate critical and immediate reforms of the mutual-fund industry, and while we investigate a multitude of other cases involving mutual fund abuses, we will continue to seek reforms that provide immediate relief to harmed nvestors.

Donaldson repeats the "immediate relief" point a few times in the column, even though this is really nothing more than getting the company to pledge to do what it was supposed to have been doing all along. He also harps on the fact that the investigation is continuing a few times. What good is the settlement then? Doesn't it just give the impression that the show is over and investors should go ahead and put money back into Putnam when in fact the SEC hasn't bothered to figure out the extent of the problems?

The under-funding of the SEC is a handicap but no excuse for a whitewash. The agency should try to make the most of its limited resources and save some of the more ambitious projects for the future, just as Spitzer has done in NY.

And people, please stop posting unrelated stuff in the comment thread about the energy bill or prescription drugs. It gets in the way of the discussion.

As to the costs of these abuses, there is this article: http://www.nytimes.com/2003/11/16/business/yourmoney/16eric.html
The New York AG is using a Professor Eric Zitzewitz. as an expert. He has written a paper which is discussed in the article, which "quantified the financial damage that some of these trading practices were inflicting on long-term fund investors - damages that he estimated at almost $5 billion a year."

I thought it was not a bad column, but those few gratuitous jabs at the administration makes me wonder if there is a topic Paul Krugman can write about without blaming G. Bush for something. It's almost like a contest. Can you work in a criticism of the administration into an article about, say, prime numbers? Gothic invasions of the Roman Empire?

My retiree health plan (for people 55-65, with drugs program) is now up to $12,500 per year for two. So, how does the net cost of covering a Medicare couple compare with this (throw in the new pill program costs)? My intuition is that private HMO's are not more effective at controlling costs, but I would like to know if anyone has some numbers.

My retiree health plan (for people 55-65, with drugs program) is now up to $12,500 per year for two. So, how does the net cost of covering a Medicare couple compare with this (throw in the new pill program costs)? My intuition is that private HMO's are not more effective at controlling costs, but I would like to know if anyone has some numbers.