Market Manipulators Are Back In Season for The Fed “Septaper” Sequel: “Septighten”

The summer is coming to an end without much success at the movie box office, but one “sequel” has emerged a winner this week although its ultimate fate awaits further developments.

Readers of this blog will recall that questions were raised here in late August last year about the steady drumbeat of financial market expectations that the Federal Reserve Board’s Open Market Committee would announce that it would commence “tapering” its program of bond purchases known as Quantitative Easing III which was intended to stimulate increased economic activity. Speculation that this would happen had begun late in the spring and continued throughout the summer based on a response by then-Fed Chair Ben Bernanke to a question at a Congressional Committee hearing as to whether such tapering would ensue by Labor Day. Bernanke said if the economic conditions improved sufficiently, tapering could be commenced “later in the year.”

In the wake of those comments, interest rates on ten-year Treasury securities spiked upwards rather violently, causing the stock market to swoon down as well. Commentators parsed every word and phrase used by Fed Board members over the summer months, and some commentators even detected that the Fed had actually “said” it would taper in September (Dennis Gartman live on CNBC). This was, as a matter of record, completely untrue, but by then the market was definitely in a “print the legend” mood.

In particular, hedge funds that had in 2013 and 2014 staked out a net short position in both the stock and bond markets (and as a result were carrying massive losing positions for their clients into the summer) were salivating at the prospect of reversing their fortunes thanks to the market perception that the Fed would move quickly to begin to reverse its “highly accommodative,” easy-money policies. Any perception of monetary policy “tightening” was then likely to send both bond and stock markets down as it did, thus bailing out the short hedgies.

Well, it didn’t all work out that way. The Fed in fact took its time to get more and better data before it began tapering; the markets, after the initial September surprise rather than the “expected” (or at least highly promoted) idea of a “Septaper.” That timing was always premature, as anyone who was paying attention to this blog, or more importantly to Chairman Bernanke when he called out the anticipatory run-up in interest rates, caused by those twisting his words on TV for self-serving purposes into a “Septaper” commitment, as distinctly “unwarranted.”  Yet many fools and their money were parted by the wily hedgies, who were sucked in the Cable TV producers anxious to have a crash to cover (or at least call it in advance).

The only clear winners were the hedge funds. Having scared so many into selling in advance of the “Septaper,” which turned out to a be as much a phantasm as the El Nino that never came to spare us the brutal 2014 winter, they were in pole position to scoop up bonds and stocks on the cheap and profit from the inevitable rally that they knew damn well would come when the expected (but in hindsight clearly premature) “Septaper” didn’t happen!

Does all this sound a bit familiar? It should. The hedge fund market players find themselves in the same position as they were last summer: short and wrong. Both stocks and bonds based on ideology or just dogged insistence that both markets are long overdue for a “correction,” as more than one CNBC commentator confidently predicted was on the visible horizon as summer’s end approached. The crises in Iraq, Israel and Ukraine were cited by certain large investors as firm grounds for a severe market crash of up to 60%,  others disagreed, contending the market has more room to run up, despite the international situation. And for a while this September, that view carried the day as markets continued their climb. No doubt, this was much to the chagrin of the short hedge funds, who by now were counting on a literal re-run of the play from just 12 months ago.

But before the market open on Monday September 8, the shorts got a gift that kept on giving right through the week thanks to an overnight Financial Times article suggesting  that the Fed’s standing policy that interest rates would not be increased (“tightening”  policy) for a “considerable time” – generally thought to mean about six months – after the end of QE III would at least “at the September 16-17 meeting, based on conflicting comments some of both the “hawk” and the ‘dove’ rates camps within the Board. The article went on to speculate that a decision to change this policy statement to a more hawkish posture (presumably a less “date-based” fixation and a more purely “data based” giving emphasis to improving economic statistics) was not in fact likely until the late-October meeting.  Market commentators, however, perhaps egged-on by hedge fund shorts who saw a chance to snatch victory from defeat with a last minute “Septaper 2.0” play, ran with the mere possibility and turned it into a virtual certainly of a policy tightening change at the September meeting!

By Friday, the bond market had rung up bond yields to over 2.60 from a level closing in on 2.30 just a couple weeks ago, bailing out bond bears, and the equity markets had turned south with a first losing week in six. Even seasoned and respected CNBC market analysts like Steve Leisman and Art Cashin had jumped on the “Septighten” bandwagon by week’s end. Leisman cited observers who focused on a very recent San Francisco Fed paper calling attention to the gap between Fed member’s collated estimate of a 1.2% overnight money rate by year end 2015 versus the trading market’s expectations are anchored at .76% as evidence of a Fed desire to change its guidance sooner rather than later to tighten up that gap. And Cashin, by week’s end, was telling listeners (including this writer) near the close of trading that markets now “expect’ a policy change at the September meeting.

To be clear: Leisman and Cashin are certainly not manipulators.  They are simply reporting the extent to which the market has talked itself from a “possibility” into a near certainty. And yet others were not so sure, as Barron’s reported, citing a leading analyst to the effect that the Fed may be even more concerned that a guidance change just now might lead markets to get ahead of the Fed in terms of the likely onset and pace of rate tightening. That problem would be harder to fix than the opposite case.

The sense here is that the latter analysis points to a similar result as with “Septaper” expectations in September last. Fed Chair Janet Yellen will wait one more month to be more certain of the overall direction of the job market and the economy and how employers are approaching them in their 2015 planning cycle. She will have September payrolls and the latest read on both Q2 and Q3 GDP, so a “data-based” change would be far more appropriate around Halloween than the Autumnal equinox. Like Margaret Thatcher, “the Lady’s not for turning”, even by the hedge funds!


Recently published by Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

As Long As We’re Talking About 2016, How Will They Manage The Republican Playoff With 20 Candidates?

Hillary Clinton may be getting all the attention, but her path to the Democratic Party nomination for the Presidency in 2016 looks to be virtually clear of any serious opponents at this point. It’s her race to lose and she is starting out alone at pole position with not even a dark horse contender surfacing as yet unless you count Joe Biden, who has yet to make clear whether he will run regardless of what Clinton does. Martin O’Malley of Maryland may persist to the point of announcing a candidacy, but one suspects he hasn’t yet had “the talk” with the Clintons about his “future in politics.” Elizabeth Warren probably should run in 2016 if she is to ever make a race (she’s only four years younger than Clinton), but she continues to actively disown support for her candidacy. So we will presumably get Hillary, “ready” or not.

The Republicans, however, have a field that would crowd the track at the Derby and looks much like the NBA playoffs or even the college year-end tournament.  At last count, there were at least 20 currently “mentionable” potential GOP candidates. With the Party determined to run a short, efficient and, if possible, “lamestream, media-free” series of tightly-controlled “debates” with no tough questions from out of “left field,” it’s hard to see how to accommodate anything other than some sort of literal playoff system. Maybe they can even borrow big-time college football’s special playoff committee to narrow the field down. At least that could keep the field down to 20, since Condi Rice, an otherwise possible GOP contender, is also on the football selection committee!

Let’s take a look at the Republican lineup to face Hillary Clinton and examine in a “nutshell” (excuse the expression) their respective appeal and chance of making the final cut.

Start with the six Governors (GOP folks think we need a “proven executive”):

Rick Perry (Texas): If at first you don’t secede, try try again, at least for the Presidency of the country you want to shrink. A man of indictment but he hopes not of conviction, he’ll focus on the ISIS problem on the Rio Grande (which is certainly no farther from Iowa than Guatemala is from Texas) but is unlikely to again threaten the Federal Reserve Chair with “Texas justice” until he himself finds out what that is, exactly.

Mike Pence (Indiana): A lot closer to Iowa, and a lot closer to the Koch Brothers, whose money may make a real difference in 2014 outcomes thanks to Citizen’s United. But maybe he’s 2016’s Mitch Daniels (the “perfect candidate” who never runs).

John Kasich (Ohio): The ultimate swing state in the Electoral College, and his track record as governor has clearly improved since his early attacks on unions backfired. Plus the nominating convention is in Cleveland. But unless he’s got LBJ (LeBron James) as his running mate, he may prove more like a VP himself.

Scott Walker (Wisconsin): Another ‘border state’ (to Iowa) candidate, and a recent ‘swing state’ as well. The Gov the unions love to hate. But he took the fight to them and won, so folks will try to measure how he might take the same skills to Putin and ISIS. However, his legal troubles may turn out worse than Perry’s.

Chris Christie (New Jersey): Speaking of legal troubles….his candidacy has been “abridged’ in 2014, but he’s still in the hunt and is making a push in the 2014 midterms for candidates outside his home state, probably because his popularity in New Jersey has shrunk in inverse proportion to Jersey’s rising deficit (a dirty word in the GOP). But he has real NY money behind him.

Bobby Jindal (Louisiana): He’s back from one bad speech and a second term focused on campaigning against the “Common Core” K-12 standards, which he wants scrapped in favor of strictly local controls on education, a popular Tea Party issue. But what good did local control do Louisiana?

Now let’s list the four Senators (who all start with handicap weight because that’s where Obama came from):

Ted Cruz (Texas): A noun, a verb and ObamaCare. But he was born in Canada with a foreign father (at least it’s closer than Kenya). Has renounced Canadian citizenship, but would make it up to them with the Keystone pipeline. Will be popular with hard liners for his “no compromise” stance. Helped if Perry implodes again.

Rand Paul (Kentucky):  Inherits his father’s young libertarians, scares neo-cons with his “left-of-Clinton” foreign policy and ambiguity about Israel, plus has harder line on immigration.  All adds up to a “fortress America” candidate which may be attractive after two more years of the wheels coming off in Europe and the Mideast.

Marco Rubio (Florida): Another swing state man with Latin roots, but has turned sour on immigration reform and ultra-hawkish on foreign policy. He and Rand Paul should go one-on-one. But has interesting new ideas on the “safety-net” reform that has to come in the next President’s term. Helped (like Christie) if Jeb Bush doesn’t run.

Bob Portman (Indiana): Again a daily double with Pence from the same state. Could have (should have) been Romney’s running mate. Has done some top tough jobs, maybe too moderate for the Tea Party, but exudes competence and executive presence. Romney without the money. And with a gay son.

Next let’s check the House of Representatives; here there are four:

Paul Ryan (Wisconsin): Yet another double with Walker, but has his own game (the budget) and identity from the VP run. More Ayn Rand than Rand Paul, and can go one-on-one with Obama on the numbers, but Obama’s not running.

Michelle Bachmann (Minnesota): Yes, again, for lack of a better option, (strangely – what about Marsha Blackburn?) the only Tea Party woman thinking about the race.  But does the Tea Party really like any women but Sarah (see below)?

Mike Rogers (House Intelligence Committee Chair): Will embark on a talk-radio career and ride the ISIS horse as long and far as he can; a true alarmist but does not look threatening. Will Rush Limbaugh and Sean Hannity drown him out?

Peter King (New York): Same foreign policy appeal as Rogers, but will have more sway as a sitting member of the House over the next two years. Possible VP if we’re at war.

We’re at fourteen already and haven’t even got through the five “formers:”

Jeb Bush: Ex-governor of Florida and permanent brother of George W. Bush. “Soft on illegals” image kills him with the Tea Party, but the most proven executive if times really troubled.

Rick Santorum: Ex-Senator from Pennsylvania, voted out of office and into permanent Presidential candidacy for the Christian right especially if Huckabee again chooses a pot of money over a shot at history.

Mike Huckabee: Ex-Governor of Arkansas and lead guitarist for Christian radio. Polls well in Iowa, but not well-funded.

Mitt Romney: Speaking of money… we know where he’s from, but not where he’s going. Popular now because he made the right call on Russian trouble-making potential.  But if the economy keeps improving, his business experience stays the liability he made it.

Sarah Palin: Ex-governor of Alaska and reality show hostess; sharp tongue gets attention but not respect. Suspect she doesn’t really want the exposure of a candidacy for some reason. Shouldn’t really be counted except as placeholder for Donald Trump.

And lastly, there is the Herman Cain Memorial List of “Others” candidacies, which includes the aforementioned Trump (who is no longer the “Donald” thanks to the Mr. Sterling, late of the NBA Clippers), and the much more formidable Dr. Benjamin Carter, the neurosurgeon who struck a nerve with the President re: ObamaCare at a prayer breakfast — can anything be more Republican than that? A Fox News favorite, he may last longer than many expect.

How will this extraordinarily large field be sorted out?  Most likely, by limiting the debates to those who meet a gradually ascending minimum in the polls (i.e., 2% in the first, 4% in the second, etc.). This will put an enormous premium on an early start – a fact that most of those listed have already figured out. It’s going to be a long winter, twice!

Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.




























Mobility Math: More Folks Renting = Fewer Mortgages = Lower Deficit and Lower Unemployment

Don’t look now, but renting is in! The mobility revolution isn’t only about the Internet, the I-phone and advertising (although that’s a big part of it). Think for a moment about automobile transportation. Starting with ZIP Cars and now on to Uber and Lyft, we’re witnessing the emergence of successful new business ventures in “just-in-time” rental transportation arrangements. Or in a less down-to-earth mode, look at the emergence of the “jet-rent” industry: as the saying goes in another advertising context, even Warren Buffett’s a fan!

But the “new mobility” is contributing to an even more profound shift in consumer habits in a sector of commerce even more central to the economy than the auto or airline industries – namely, the housing market. But in this case, it’s not a shiny or clever new business model that has captured the attention of millions of consumers. No, in the case of the personal home market, the first “change agent” turns out to be the Great Recession of 2007 to 2009, which itself was triggered by the home mortgage market meltdown and the financial institutions that milked it for all it as worth, and then some.

There is no need to rehash the full history of how the financial system was brought to its knees by the slicing and dicing of mortgage-backed securities to create the illusion that the repayment risk of sub-prime, floating-rate mortgages (i.e., loans that on the face of it could only be repaid if the homeowner could sell the house before the interest rate increase came due). This colossal example of a Ponzi scheme ran out of runway when the Federal Reserve’s interest rate hikes, as the economy fully recovered from the “dot-com” crash at the turn of the century, jacked up mortgage rates generally and floaters in particular, and the markets for both homes and the intricate web of financial instruments based on them suddenly ran out of buyers.

The resulting economic crash, with its bailouts and bankruptcies, led to hundreds of thousand losing their jobs (and their mortgaged homes) every month, and put taxpayers on the hook for billons in loans that kept the economy from completely collapsing in another great Depression. Time, tax cuts and other economic stimulus programs, along with a highly experimental Federal Reserve zero interest rate policy and bond-buying program, has led to a modest but now quite steady general economic recovery. But the ability of millions of unemployed to find new full time work has lagged behind as many have been unable to relocate to “where the new jobs are” because they’ve been literally held literally captive to “underwater’ mortgages for homes they cannot sell or can’t just walk away from without killing their credit ratings.

Enter the solution: the rental housing market. Sell your underwater home to an investor who will either rent it back to you or to somebody else who’s trying to do the same. Or if  you’re lucky enough to be a rising housing market because of local economic recovery, sell while you can and switch to renting because you don’t want to be immobilized by a mortgage again and you’d rather have the flexibility  to go where the jobs are the next time a recession hits. Or if you’re a millennial stuck after college in your parents’ house with student loan debt but can’t find a decent-paying job in their neck of the woods, move out to where the job market craves your generation and skills, and forget about being a “first time home buyer” for a while longer and just rent.

All this adds up. While there was a strong recovery in both new and existing home sales over the past couple of years – driven in large part by all-cash (i.e., no mortgage) investor purchasers and a strong pace of “market clearing” distressed sales – the trend  definitely leveled off  in the first half of 2014 due to a reduction in distressed sales as they ran their course and the difficulty of obtaining mortgages under stricter credit terms particularly  for first-time homebuyers, who have tended to “prime the pump” for the housing market in the past.

Indeed, it has long been US government policy to encourage home buying among young adults, especially by providing favorable tax subsidies for homebuyers in the form of the famous mortgage interest deduction and the substantial amount of forgiveness of capital gains taxes on profits from the sale of primary residences. The interest deduction was originally not a big deal when income tax was first imposed (since only about 3% of citizens actually owed the tax at first (circa 1910). But the rising middle class that emerged during and after World War II increased the number of taxpayers (to 30% and homeowners to 55% in 1945 up from 40% in 1940), and when they pushed the government for tax relief, the mortgage interest deduction was a convenient vehicle. Whether the deduction actually stimulated home ownership is highly debatable, but politicians from the Bushes through the Clintons bought that idea. Democrats liked the idea of the deduction’s tax break for the middle class (even though most of its benefits go to the wealthy) and the GOP thought home ownership would convert liberals to conservatives.

What every budgetary hawk in Congress and think-tanks knows for sure, however, is that the deduction has been a major contributor to the rising national debt. As one of the largest “tax expenditures” of the federal government, it has cost the treasury up to $100 billion in revenue in some past years. But as the economy has recovered from the Great Recession that number has not picked up but has actually gone down to around $70 billion. Congress should be delighted with a $30 billion annual deficit reduction it doesn’t have to vote for!

 The trend away from historical growth patterns of home ownership and mortgages seems solidly established: even the Mortgage Bankers Association has forecast a fall in home sales in the US this year (the first in four years).  Meanwhile, a report by the Joint Center for Housing Studies of Harvard University has found that “recent economic turmoil underscored the many advantages of renting and raised the barriers to home ownership, sparking a surge in demand that has buoyed rental markets across the country.” The report shows increases since the recession in renting across all but the oldest age groups, with families with children now nearly as likely to rent as singles. In the last five years, rental vacancy rates have dropped by nearly 20%, and multifamily housing construction starts have more than doubled!

Could it be that the decline in the unemployment rate from over 10% to now nearly 6% might also be connected to these new renting-instead-of-buying converts’ ability to move to where those new construction jobs are?

Recently published on the Huffington Post.


By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.







Tough Choices Indeed – For Everybody

At the very least, Hillary Clinton came up with a timely book title. Hard choices confront policymakers in the US and abroad in a seemingly overwhelming quantity. Never mind blaming all policy “gridlock” on “maximalist politics.”  There has indeed been a good deal of that in recent years fueled by the realities of on-line fundraising, the Citizens United ruling and talk radio. But that’s not the whole story. Some of the choices are just plain “hard” and that means any official who gets caught actually making a “choice” is going to be pilloried from all sides and his or her “approval rating” – the most pernicious polling device ever invented – will plummet even lower than the rating that prevails while dithering.

Three boxes sit on any policymaker’s desk:  “In,” “Out” And “Too Hard.” Comprehensive immigration reform typifies the kind of issue that inhabits the “Too Hard” box, where it has sat for many years. As is common to the “Too Hard” box, the need for a fix is glaringly obvious. The outlines of a fix, moreover, are also reasonably evident. But those who actually have to decide the set of issues and make a real choice are also deeply convinced that, however low their dreaded “approval rating” is now, it is guaranteed to be lower once a resolution is actually decided. And the longer an item stays in the “Too Hard” box, the more this impression becomes embedded. This is because the “decider” knows that none of the “sides” in the matter will be satisfied with the chosen outcome unless it consists of total victory for themselves.

Policymakers aren’t making this stuff up. History abounds with examples of the “Too Hard” box issues that took not years but decades to resolve. The “Troubles” in Northern Ireland, for one example. Israel/Egypt was another. In both, only an unusual confluence of circumstance and personal leadership created an opportunity to move these issues out from the “safety” of the “box” and into an essentially enduring resolution. Same with the end of Apartheid and transition to a pluralistic rule in South Africa. But the Israeli/Palestinian/Hamas conflict remains an ever more current and confounding “Too Hard” box issue for all the players.

Likewise when someone tries to take an issue out of the box without fully building an enduring consensus among the competing interests, the result can be unsatisfying and politically punitive: think ObamaCare. 

Here the obvious “compromise” fix was to reject the Left’s insistence on a “public option” and rather adapt the Right’s notion of a “market-based” expansion of both insurance pools and coverage underwritten by a “public mandate” on both employers and individuals. But instead of “buy-in’ from both sides, the hard-liners on each side quickly disowned the resolution, leaving the President’s “approval” to sink under the weight of the rage of both “sides” and – more importantly – the unintended transference of the public’s inherent distrust of the private insurance market onto the very government which the public was asking to rein in abusive the insurance practices!

No good deed (no more preexisting conditions, higher prices for women, sick kid kick-offs), as the saying goes, goes unpunished (in the approval polls). Any politician watching what happened to Obama after passage of the Affordable Care Act quickly put a “Too Hard” box on his or her desk if one was not already there.

Judges actually have it easier on this score.  They certainly tend to get the “Hardest Cases,” including ObamaCare, but they generally have life tenure so they don’t need to worry about approval ratings. Moreover, they get to issue “dissents” if they lose and thus at least create the impression of living to fight another day. Yet the Court probably should have kept Bush v. Gore in its own, seldom-used “Too Hard box” (a “political question”). It may be tempted to do so with the coming cases on same-sex marriage (“certiorari improvidently granted”) in view of contemporary analysis questioning the timing wisdom of Roe v. Wade vis-a vis the emerging pace of political change. But is same-sex marriage really a “Too Hard” a case as Bush v. Gore? Why should a Federal Constitutional level freedom and right (however lately perceived) wait upon intricate, complex state constitutional amendment processes for vindication?

The real “Hard Cases” – and their possible solutions –are these:

  • ISIS: if Obama bombs them in Syria, which appears necessary to put them out of business, it will also help the rag-tag rebels who we earlier concluded had no hope of taking it to Assad. We didn’t want to waste equipment on them that would only be lost to ISIS as with the Iraqi Army. But here the way out of the box is pretty straightforward. Assad is evil, but the lesser evil for the US as compared with ISIS, because Assad poses no direct threat to the Homeland. Bomb ISIS: approval rating will go up, and terror threat will go down.
  • Ferguson: if the Missouri Governor appoints a special prosecutor, he will be giving in to what many perceive as a mob, but if he lets a possibly tainted prosecutor stay in place the result (whether an indictment or not) will never be viewed as legitimate by the losing “side”). With a 12-member grand jury only 25% black (at least a better representation than the Ferguson police force), put in a neutral prosecutor, take the short-term heat, but enhance the chances for tamping down the rancor especially if the officer’s conduct is vindicated by a preponderance of eyewitness testimony supporting a genuine perceived threat of grievous bodily hard by a  person out of control. The answer will probably come from more from ballistics analysis rather than conflicting eyewitnesses. (Think Warren Commission – speaking of ‘Too Hard” cases!)
  • Executive Immigration “Amnesty”: if Obama acts on his own with a conditional type of “pardon” before the November election, he risks a backlash among true supporters of comprehensive immigration reform who would rather see permanent legislation as well the obvious outrage from the Tea Party and the GOP. But if he doesn’t, his Hispanic supporters will sense a wimp-out and stay home from the polls. But if he simply announces, before the election, exactly what he will do effective January 1, 2015, and give the lame duck Congress “one last chance” to pass comprehensive reform before year end, he will be following more or less the same pattern that Lincoln used with the Emancipation Proclamation (with a stronger war-powers underpinning to begin with). Lincoln’s action became effective on January 1 after a September 22 “proclamation.” Watch that date – a Monday – for Obama’s decision.

 Recently published on the Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.



Ebola Is Not Spread By Air – But Ebola Panic Is: Just Listen to Rush Limbaugh’s Radio Program

OK, it’s not really surprising to learn that Rush Limbaugh believes that the return of two  US health care volunteer medical personnel from Africa who contracted Ebola is just another Obama plot so that he and  the Democrat Party ‘can lead the compassion train.’. If that’s all the smoke and mirrors Rush can come up with, we could just laugh it off. But Rush is not alone.

Donald Trump, Dr. Ben Carson and Ann Coulter – all prominent conservative commentators and in some cases would-be Presidential candidates – each took to the airwaves or the Twitter-verse to denounce the Administration decision to treat the medical missionaries in the US — and even denounce the missionaries themselves for being so foolish as to volunteer to work in African ‘cesspools.’  

So much for Mother Teresa; never did sainthood (as well as support for the overseas missions of evangelical Christians) go so quickly out of style on the Far Right. That latter misstep by Coulter and others (which did not pass unnoticed among their heretofore allies among born-again Christians) shows just how hysterically motivated the Tea Party types are to somehow spread panic and fear over what they perceive is a disease that can be viscerally linked with the President’s own African heritage.  Who needs Birtherism when you can broadcast fear of an African-borne pandemic? 

Then Limbaugh went out of his way to quote the head of the Centers for Disease Control (CDC) and another US health official, out of context, to the effect that Ebola ‘s spread to US was inevitable and that merely ‘touching’ an Ebola corpse was infective, thereby undermining the notion that Ebola was much easier to spread than the media had been consistently reporting. In context, however, it is clear that the CDC head was talking about victims of Ebola contracted elsewhere  would inevitably travel to the US (including for treatment), and the concern with respect to West African customs of kissing corpses, including the bodies of the deceased Ebola victims.

It is clear as a matter of standard medical understanding that Ebola is simply not spread by airborne germs or aerosols. Only direct bodily contact between humans can transmit this disease.

So the Ebola fear-mongers then moved on to another way to spread panic and distrust of the scientific and governmental response, by linking the Ebola outbreak to their resistance to comprehensive immigration reform and the recent surge in the flow of refugee children into the US. Republican members of the House of Representatives directly raised the prospect that immigrant children could be carrying Ebola into America, without any evidence that Ebola had spread to Central America or any evidence of the disease being discovered in the medical screening of the thousands of children that have come across the border in recent years.

Nevertheless, right wing media commentators including Breitbart, the Drudge Report, and Laura Ingraham  quickly spread the word that Ebola victims had already crossed our borders in droves illegally  as part of an Obama Administration plot to introduce the disease into the US (so that, as Limbaugh has asserted, Obama would have a new ‘crisis’ where he could emerge as hero).

The campaign to convince the public that an introduction of Ebola into the United States was part of government plot also seized on the issue of the ‘super-secret serum,’ as Limbaugh called it, that was being used to treat the two American physicians who had been brought to Atlanta for treatment at Emery University through the efforts of the CDC, among others. First of all, there’s nothing ‘super-secret’ about the experimental Ebola medication. Five bioscience companies are known to working on new Ebola-fighting agents, two of which (Perfectus and Crucell) are directly supported by the National Institutes of Health, and another two (Tekmira and Biocryst) are working under grants from the US Department of Defense Threat Reduction Agency. Incidentally, these facts give the lie to Limbaugh’s assertion that the anti-Ebola efforts have been simply a ‘private enterprise’ matter not involving the government, and Dr. Ben Carson’s assertions that the US agencies concerned are ignoring the terrorism threat posed by Ebola.

Limbaugh went on to intentionally misquote President Obama’s response to a reporter’s question about why the new serum was not being provided in quantity to the African nations currently most affected by the Ebola outbreak.

Here is what Obama actually said: “I think we have to let the science guide us.….[T]he countries affected are the first to admit that what happened here is the public health systems have been overwhelmed. They weren’t able to identify and then isolate cases quickly enough. As a result, it spread more rapidly than has been typical with periodic Ebola outbreaks that occurred previously.” 

Here is how Limbaugh translated (‘paraphrased’ was his word) what  Obama said for his national radio audience: “Even those countries, they’d be the first to tell you they don’t want the serum. They’re not ready for it. Only in advanced cultures are we capable.’  Of course, Obama said no such thing, but the straw man Limbaugh created allowed him to then criticize Obama again when the affected African health departments quite predictably asked that the experimental drugs be made available to their victims.

These tactics by Limbaugh and his fellow Tea Party broadcasters seem intended to use the Ebola outbreak to undermine confidence in the government and to drive a wedge between the President and racial minorities. In that sense they are reminiscent of a similar effort by right wing media in April this year to assert that Obama and the CDC were launching a program to reduce minority ‘births’ in the US whereas the program was really aimed at reducing unintended teenage pregnancies.

None of this minor league game playing would matter a hill of beans but for the fact that in many of America’s rural Congressional districts, a day-long diet of Limbaugh, Sean Hannity, Mike Huckabee, Laura Ingraham et al is the only version of ‘all-news’ radio available on the dial. And we know such districts have elected Tea Party stalwarts who hold the Speaker of the House hostage against any compromise on any issue with the President.

So long as Limbaugh remains the de factor Speaker of the House (which has not passed any legislation Limbaugh opposes in this session of Congress since the Fiscal Cliff fix), his efforts to politicize Ebola over the airwaves require attention, diagnosis and quarantine, just like any other hazardous material.

Recently published on the Huffington Post.


By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University


Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.








Broken News – Is The Crazy Weather Getting To Our Collective Sanity?

Isn’t it strange that the GOP, the political party that has heretofore consistently and vociferously opposed frivolous lawsuits, spurious malpractice claims and the trail lawyers’ lobby, has now decided to spend taxpayer money to hire trial lawyers to bring what is essentially a frivolous malpractice lawsuit against President Obama?

Why ‘frivolous’ you say? Well, the lawsuit accuses the President of illegally waiving, for a year, the very same employer insurance mandate under the Affordable Care Act (ACA) that the GOP itself fought tooth and nail — i.e., they are accusing the President of what might be called ‘malicious compliance’ with the GOP’s own platform. If that isn’t the very definition of frivolous, what is?

Why is it that Democrats can’t stop talking about the possible impeachment of President Obama by a Republican Congress, while Republicans, who are even suing the President for abuse of power, don’t want to discuss the subject (but won’t take it ‘off-the-table” when given the chance by their own captive TV network)? Perhaps the Democrats are not so crazy after all; not because the talk of impeachment obviously is designed to energize their ‘base,’ but more because there may be some reality to the chatter after all notwithstanding the GOP reticence. It could be far more politically tempting to the GOP than it lets on to install VP Joe Biden in the Oval Office just to mess up Hillary Clinton’s march to the Democratic nomination in 2016, since she would have to challenge a sitting President assuming Biden would seek election in his own right.

Nobody else seems to have noticed that knocking off both Obama and Clinton with one blow might be very tempting to the dominant Tea Party wing of the Republican Party if it were to win control of the Senate and gain seats in the House this November. Yet such a spectacle might finally shock the Congress and, it must be said, the US electorate, out of its decline into bitter hyper-partisanship.

Why does a country that has lived for decades with regret for not doing more to provide shelter to Jews fleeing Nazi extermination (even turning away a boat full of helpless men, women and children in the run-up to World War II) now consider passing what can only be called a civil form of ‘ex post facto’ law exterminating the legal rights of child refugees to hearings on their cases for asylum from uncontrolled violence in their home countries? The whole issue of migrant children at the border is replete with absurdities, but also evidence a malign moral bankruptcy.

Let’s start with Governor Rick Perry’s decision to order National Guard troops to the Texas-Mexico border to stop the flow of child migrants. We could put a line of armed soldiers from one end of that border to the other and it would not matter. Because these children are not seeking to elude capture at the crossing but are simply turning themselves in as refugees to the first authorities they see! Surely it’s a waste of military resources to deploy the National Guard as a welcoming committee.

Then there is the ‘not in my back yard’ response of so many states and communities to the prospect of moving these migrant children out of makeshift border shelters to foster care or other temporary housing while their cases are pending. If it’s the expense they are concerned about, they can pressure Congress to pass the emergency budget proposed by the Administration. If it’s more than about money, what is then the concern? Race? Or is it a misperception of where voters stand on this issue? The latest survey, published by the Public Religion Research Institute, shows Americans, by a 7 to 1 margin, support treating the current surge of child migrants as true refugees. Meanwhile, the Drudge Report is raising the specter that the US is being exposed to the deadly African Ebola virus by some of the recent southwest border crossers!

The current topsy-turvy news environment is also reflected in the stock and bond markets. Broadcasters like CNBC’s Rick Santelli constantly attack the Federal Reserve Board’s measured pace of reducing economic stimulus by means of gradually tapering its monthly bond purchases rather than ending them all at once, and intending to maintain accommodatively low interest rates even as unemployment falls and job creation increases. But Santelli and his daily parade of hand-picked ‘puppets’ (his is the best children’s morning show since the Muppets) are talking out of both sides of their mouths on this issue. First, they say interest rates remain low despite tapering because the economy under Obama remains a disaster and any good numbers must be faked or flawed; just watch the same refrain any given morning between 11AM and 12 Noon any day any week. Then in almost the same breath, they claim the Fed is so far behind the curve of the improving economy that they should be raising interest rates right now to head off the threat of inflation from an economic bubble. Which is it, guys?

Such a level of blatant intellectual self-contradiction can only be explained by a desire to help out hedge funds who have wrongly bet on a stock market correction for the past two years, and lost. Only one CNBC commentator – Steve Leisman – the only one who understands the Fed – stands up to this nonsense.

More incoherent nonsense is evident in the stock market’s reaction to the July 29 announcement of the imposition of tougher sanctions on Russia by both the European Community and the United States, the first time they have been in lock-step in terms of efforts to force Putin to retreat from his mischief-making in Ukraine. The market fell from an opening of plus 70 to a closing of minus 70. Yet the market has also experienced similar inter-day downturns whenever the combat news comes in ugly from the Eastern Ukraine zone where the Malaysian commercial airliner was recently shot down. What does the market want – it doesn’t like the war – but it also doesn’t like the best efforts to force an end to the war and a diplomatic solution. Of course there is legitimate concern with a European recession being triggered by either eventuality: more fighting or Russian economic and energy blackmail in response to sanctions. But sanctions are the only way to the outcome the market would find positive – namely, peace on the Russia/Ukraine border.

With all this nutty news, it’s a blessing that professional football training camps are now open for the season, so we can get back to observing the relative sanity of Richard Sherman versus the 49ers!

Recently published on The Huffington Post

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

DC Circuit Decision Isn’t Just About Obamacare Subsidies: It Also Kills The Employer Mandate

There are some real-life occurrences that are so absurd that the phrase ‘you can’t make this stuff up’ comes readily to mind. Yet the July 22 decision of a divided three-judge DC Federal Circuit Court panel invalidating the Affordable Care Act’s (ACA) premium tax credits for anyone purchasing insurance on a Federal Exchange proves that you can ‘just make this stuff up.’ Which is what the two-judge majority did in Halbig v. Burwell.

This case, and the Fourth Circuit’s opposite ruling in King v. Burwell, concerned the IRS rule which made Federal insurance premium subsidies in the form of tax credits available under the Federal Exchanges established by the Department of Health and Human Services (HHS). The ACA provisions required HHS to set up such Exchanges for and in States that did not elect to do so, even though another section of the Act defining how subsidies would be calculated said that subsidies would flow through Exchanges ‘established by the State.’ Essentially, the DC judges decided the only possible interpretation of this apparent conflict was that the Federal Exchanges do not in fact stand in the shoes of the State Exchanges for subsidy purposes because they were not literally ‘established’ by ‘the State.’ The Fourth Circuit held that the IRS was entitled to deference in resolving the ambiguity in the statute the other way, honoring the legal fiction that the Federal Exchanges are the equivalent of State Exchanges in order to allow such subsidies nationwide.

What these two Republican jurists on the DC Circuit invented was a version of the ACA that even their own political party never considered to be reality: namely, a statute that contains its own self-destruct poison pill that would invalidate the very provisions the GOP most detested: the employer mandate, the individual mandate, and the Federal subsidies. By these judges incredible reading of the entire statute, the ACA’s only possible meaning was that:

(1) If all 50 States of the Union simply exercised their right not to establish an insurance Exchange, then no subsidies could be provided to low-and moderate-income individuals mandated to buy insurance. This means that they would likely be eligible for the exclusion from the individual mandate that applies when the premium for the cheapest policy available exceeds 8% of annual family income;
(2) Accordingly, employers with 50 or more employees that would ordinarily be subject to the mandate to provide health insurance meeting Federal standards or pay a significant penalty tax for each uncovered employee would likewise escape the mandate. The mandate is triggered if just one employee buys subsidized insurance on an Exchange – an impossibility under the DC Circuit judges reading on the Act if the only Exchanges turned out to be the Federal version.

The majority on the DC panel made clear that such a broad reading was their intention by specifically observing that under the IRS rule in question ‘the individual and employer mandates’ would have ‘broader effect than they would have if credits were limited to State-established Exchanges’ and that their decision to void the IRS rule would ‘likely have significant consequences…for insurance markets more broadly’ (see Halbig v. Burwell at pp. 8-9 and 41).

Likewise the GOP plaintiff seeking to overturn the IRS rule in King v. Burwell also expressly stated that denial of tax credits for individuals shopping on Federal Exchanges would ‘throw a debilitating wrench’ into the ACA’s ‘internal economic machinery,’ resulting ultimately in an adverse-selection ‘death spiral’ in States with Federally-run Exchanges (see King v. Burwell at p. 33).

But surely under this reading of the ACA, House Republicans would not have needed to conduct 40 votes to repeal in order to show their displeasure. Nor would they have had to try to shut down the entire Government as a ploy to force defunding the ACA. All they would have had to do to cut the heart out of ObamaCare would have been – and still would be — to get 14 more States and DC to dismantle their Exchanges. Game over!

But the GOP never played that game, because they never once thought that was the game. Indeed, the apocalyptic vision of ObamaCare’s massive intrusion into the health care system and the economy as a whole, promulgated by the Republican Party consistently since the ACA’s passage, is the best evidence that the DC Circuit majority opinion in Halbig v. Burwell indeed just made up its version of the Act out of whole cloth, as the dissent observed. If the entire ObamaCare structure was subject to an automatic, self-enforcing veto by the States, it would mean that the ACA’s mandates and subsidies would not be effective right now in 72% of the States and subject to the whim of State legislatures and governors in the other 28% at any time going forward.

Not only did the GOP — the fiercest opponent of ObamaCare — never read the ACA the way the DC Circuit panel majority did, neither did the US insurance industry, their shareholders, nor HHS. Since the DC Circuit reading of the stature did not address or effect the various mandates the ACA imposes on insurers (like no lifetime caps, no pre-existing condition exclusions, no sexually-based premium differentials, etc.), the insurance industry would be stuck with those mandates without the compensating benefits of employer and individual mandates and Federal premium subsidies for their low-and-moderate-income customers.

Had the industry ever understood the statute in that way, their legion of lobbyists would have been up in arms. Harry and Louise of HillaryCare fame would have been back on every screen urging viewers to write to Congress to repeal this awful ACA burden on their friendly neighborhood insurance companies. But that obviously didn’t happen. And likewise equity investors in insurance companies never read the ACA that way either, sending many health-care insurers to all-time highs in the years since the passage of the ACA.

In the same vein, HHS could have saved itself all the bother of the botched launch of the Federal Exchange website and the huge political price paid by the President for that debacle. There would have been no need to launch it or fix it (and Kathleen Sebelius might still be Secretary of HHS), because under the DC Circuit panel decision, the Federal Exchanges contemplated by the ACA to stand in the place of State Exchanges if States elected not to set them up, would have had no power to sell subsidized insurance anyway. Why bother to create a Federal Exchange if it was essentially there only to serve those who could easily afford insurance on their own. Yet this is the version of ObamaCare the DC judges said was so patently clear there can be no other rational interpretation of the statute. Which means, I guess, that the entire Republican Party, the health insurance companies, their equity shareholders, HHS – and even Justices of the US Supreme Court who would have voided the ACA – have been living in delusion for five years now.

As noted above, a unanimous panel of the Fourth Circuit Court of Appeals that ruled on the same day as the DC Court that the Federal Exchange subsidies can stand because deference should be shown to the IRS’s interpretation of statutory language subject to multiple possible interpretations in order to achieve the Act’s central purposes, ruling that it is ‘clear that widely available tax credits are essential to fulfilling the Act’s primary goals and that Congress was aware of this importance when drafting the bill.’ This Court noted that even the dissenters in the only Supreme Court decision on the ACA saw that without the Federal subsidies, individuals would lose the main incentive to purchase insurance. Some insurers may be unwilling to offer insurance inside of exchanges. With fewer buyers and even fewer sellers, the exchanges would not operate as Congress intended and may not operate at all (see King v. Burwell, above at p. 33). No mention there of the putative Congressionally-intended ‘State veto’ the DC Circuit found that somehow eluded Justices Alito, Kennedy, Scalia and Thomas!

The two GOP judges on the DC Circuit have had their fun. Now it’s time to call in the adults on the DC Circuit and reverse this grotesque re-imagination of the purposes, intent and even the very language of the ACA. Insurance companies of America – call your lawyers, because you are the ultimate losers here as well. Thanks to their lobbyists, the chances of a Congressional fix of this ruling, if it stands, might not be so hopeless after all.

Recently published on The Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.