Government Action

Will the $10 Billion Business Tax Refund in Unemployment Bill Help Save Retail Jobs

With the passage of the $10 billion business tax refund bill help retailers leading up to the holiday season? One entity thinks so. The National Retail Federation welcomed the passage of legislation that will bring recession-plagued retailers and other businesses more than $10 billion in badly needed cash by lengthening the period during which they can “carry back” current losses to claim a tax refund from previous years when they made a profit.

“This legislation will provide retailers with an important source of capital to finance their operations and keep employees on the payroll,” NRF Vice President and Tax Counsel Rachelle Bernstein said. “Because retail sales have fallen so dramatically over the past year and access to capital has been so limited, retailers are experiencing severe challenges in finding the cash they need to operate their businesses as the economy moves toward recovery.”

“Today’s vote comes at a crucial time because most retailers see between a quarter and half of their annual sales during the final quarter of the year as consumers buy gifts for the holidays,” Bernstein said. “If retailers can’t find a way finance inventories for the 2009 holiday season, many could be forced to close stores, lay off workers or even go out of business. This will help keep that from happening.”

The House voted 403-12 today to approve Senate amendments to H.R. 3548, the Unemployment Compensation Extension Act of 2009, and sent the measure to President Obama for his signature. The bill extends unemployment insurance benefits but also includes a provision added in the Senate that will expand businesses’ ability to “carry back” net operating losses suffered during the current recession in order to claim a refund from taxes paid in previous years.

Existing law allows companies to carry back a loss for up to two years. Economic stimulus legislation enacted in February expanded the period to five years for companies with up to $15 million in annual gross receipts, but larger businesses were still restricted to two years. The provision included in the unemployment bill will expand the five-year period to include all businesses that suffer a loss regardless of size, and will give companies the choice of using the carryback for losses from either 2008 or 2009 rather than just 2008 as provided in the stimulus bill. In the fifth year, the carryback will be limited to 50 percent of a company’s taxable income for that year, but any loss not utilized can be “carried forward.” Small companies that took a five-year carryback under the stimulus bill will be able to carry back 2009 losses as well. The proposal is estimated to provide $10.4 billion in tax relief over 10 years.

The provision was added to the bill by Senate Majority Leader Harry Reid, D-Nev., and Senate Finance Committee Chairman Max Baucus, D-Mont., but was based on legislation sponsored in the Senate by Baucus and fellow Finance Committee member Senator Olympia Snowe, R-Maine, and in the House by Select Revenue Measures Subcommittee Chairman Richard Neal, D-Mass., and Ranking Member Patrick Tiberi, R-Ohio.

“The sponsors of these bills have been telling their fellow members of Congress for months that this is about saving and creating jobs, and if it wasn’t enacted soon more jobs would be lost,” Bernstein said. “That message has been heard, and the work that has been done is going to help tens of thousands of retail workers keep their jobs at a time when jobs are hard to find.”

16% of the Economy

That’s what health care costs represent. Early in the debate about the dramatic changes being considered, Pres. Obama changed the title from “health care reform” to “health insurance reform.” I guess he didn’t want to suggest that doctors weren’t properly caring for their patients, and thought by villifying the insurance companies America would get behind him.

This has not really happened. Mostly because people cannot support something they just don’t understand. Multiple bills are flying all aroud. The latest one from Sen. Reid, which he hopes to pass including the so-called “public option,” is not even available until the Congressional Budget Office tells us what the cost will be, after which the Senate leaders probably will say the CBO was wrong. Forget that during the Bush Administration they constantly relied on the CBO to bash the then President’s plans.

I don’t know how I feel about all this. But I do know I’d like to have some time to have smart people outside of politics look at the proposed bill and tell us objectively what it contains, and, more importantly, what the implications are of what it contains. Insuring uninsured children is a good idea. Getting coverage regardless of your history is a good idea. Penalties if you refuse to buy health insurance? Not so sure. Obama says, well, we require everyone to have auto insurance, why not this? My response: you can choose not to have a car. And I am very, very concerned about the cost. I am also very, very concerned about the slippery slope it might put us on to full on socialized medicine, which in the past Obama says he supports (the so-called “single payor system”).

But I can’t really say anything until we see the whole enchilada. What do you think?

Is Wall Street Evil?

Pres. Obama is in New York right now for a couple of fundraisers. Last night in front of an audience that included some folks in the world of finance, he chided them to join him in his effort to implement financial industry reform rather than fight his efforts to do so, as many have been doing.

Ever since the first bailouts of Wall Street firms with billions of dollars in loans, the world of finance has been in the sights of the Obama administration. The alleged greed of these folks is a big part of what caused all the problems we are now facing, in particular with regard to predatory lending practices convincing people to buy houses with mortgages they could not afford whose interest rates reset to much higher levels. Ignore that it all started with the Clinton administration’s effort to dramatically lower the lending standards at Fannie and Freddie back in 1998, and that the Bush administration continued to support and fan this. It’s just this idea that everyone should have a home went a little too far.

But yes, some people took advantage. Yes some lenders were predatory. But does this mean that the head of Goldman Sachs shouldn’t have a nice pay package? It’s a bit of a stretch I think. There is, of course, a much broader question of executive compensation in general in the US, which is dramatically higher, as a percentage of profit, than in just about any other country.

But the market forces are what they are. It takes what it takes to get great talent to join a company at a senior level. Would it be better if execs took a hit when things are bad more than they usually do? Probably. But how to fix that? The good old democratic way. If shareholders think a board is not exercising proper judgment in pay packages, it can simply throw the board out. Is that not easy? It’s not. But it can be done.

Why just pick Wall Street? Aren’t there a bunch of bad people in a lot of industries (real estate, construction, entertainment just to name a few)? But don’t those same industries have lots of good people? For most people business is about making money, and that is the core of our capitalist system. Let’s hope the regulators don’t tweak it too much.

Madoff Victims Sue the SEC…Can They?

There’s a very old legal maxim that we Yankees adopted from the British. It’s so old it even has a Latin name: Rex non potest peccare. It means “the King can do no wrong.” This concept of sovereign immunity remains and it is nearly impossible to sue the government for something. Must have been fun for the old British monarchs. Some former US Presidents thought they were immune too. That didn’t work out too well. In any event, there’s an exception. If, for example, the guy waxing the floor at the Pentagon doesn’t warn people and someone slips and falls and breaks their collar bone, you can sue the government for that. So if they are negligent in carrying our their function, you can sue. But you cannot sue them for making policy, declaring war, things like that.

So sure enough two victims of the Bernard Madoff $65 billion Ponzi scheme (as an aside, prosecutors now estimate losses much lower, at around $13 billion, though of course still huge!), Phyllis Molchatsky and Steven Schneider, are suing the SEC for negligence and asking for $2.4 million that they lost. They say the SEC missed countless opportunities (including at least 6 formal complaints) that they should have followed up on to get this guy. They cite an internal SEC report that essentially admits this. The SEC says it’s a meritless case. Everyone acknowledges that mistakes were made on this one. But merely as a legal observer it will be interesting to see whether the court lets this go forward. Was the decision not to follow-up essentially a policy decision of some sort, or was it merely implementing an existing policy? I’ll keep an eye on this one for you guys.

Skilling Gets His Day in (Supreme) Court

The Wall Street Journal just reported that the US Supreme Court has agreed to hear an appeal from Enron Corp.’s former CEO, Jeffrey Skilling. Skilling was convicted of fraud and a bunch of other stuff in 2006 and sentenced to 24 years in prison and fines of $45 million following what  the Journal called the “spectacular collapse” of Enron following the discovery of widespread accounting deception at the huge energy company.

The prosecution based its case on a novel theory that he committed fraud because the company was denied his “honest services.” Skilling points out that at no time did the government suggest that he did anything for personal gain. It appears the Supremes want to rule on whether the “honest services” theory holds up. An appeals court has already confirmed Skilling’s conviction but did say that his sentence was not correct and needed to be recalculated.

The Enron scandal, followed by a similar set of problems at WorldCom, Adelphia and others led to the sweeping securities law reform in the Sarbanes-Oxley Act of 2002. It showed that big frauds can happen in big companies, even when the best auditors in the country are on the job. The Enron scandal even resulted in the collapse of Arthur Andersen, one of the five biggest worldwide accounting firms.

Why do we care what happens to the guy whose apparent misdeeds killed a company and many thousands of jobs now 7 years after the scandal? For quite awhile he was the fall guy, with many feeling sorry for the out of touch “outside man” Chairman Ken Lay, who died of a heart attack waiting for his sentencing awhile back.

Were the “off balance sheet” arrangements arranged with Skilling’s blessing, in which underperforming assets were moved to “hidden” outside entities, truly horrible? Was the failure to disclose these arrangements in fact illegal or fraudulent? Now it would be, as Sarbanes closed the loop and now requires all such arrangements to be disclosed. Was Skilling railroaded into a conviction with a tainted Houston jury and a lynch mob mentality throughout the nation at the time?

Hopefully you know me by now, faithful blogees. I do not have the answers to these questions. Just hope to get you to think about it a little. Skilling must have known that failure to disclose these arrangements was not very nice, but illegal at the time? Just not clear, which probably explains the difficulty the prosecution had in fashioning a proper cause of action against him.

California Dreamin’

For those of us old enough to remember (I am almost not quite), one of the greatest rock songs ever, “California’ Dreamin,” was written by the Mamas and the Papas in 1963 and released in 1965 (well I was in kindergarten). The classic has been covered a million times by the Beach Boys and many others.

John and Michelle Phillips of the group were living in NY at the time and thinking about the sunshine here in LA, where I am now for business meetings the next few days.

Some things about California stay the same. It is still the source of many new trends, including my perennial favorite cobb salad. Little kids with their yoga instructors on Muscle Beach. Apparently it’s all the rage here to like some obscure band called the Beatles. A “doctor” has set up his “office” right on Venice Beach where you can get a card entitling you to medical marijuana for a year as long as you have (or claim you have) certain medical issues (anxiety will do it). Fires and small tremors seem to remain a sometimes frustrating way of life. And the sun still loves to shine.

But times are tough. And they seem tougher here than in most. Real estate has fallen apart (though some signs of life have commenced). There is a sense of everything toned down conspicuous consumption wise. The infrastructure, from my non-scientific observation, is in bad shape. The government is running on a shoe-string. There is talk of legalizing marijuana mainly to raise taxes.

Will they make it? Yes. While New York wakes up a little faster thanks to reinvigorated Wall Street firms, when will private equity, venture capital, and the entertainment businesses, all central to the Cah-lee-fawnia (as Gov. Schwarzenneger loves to call it) economy, wake up? It’s slow for all. The film business is not bad though. It seems like Haagen Dazs we have continued to allow ourselves small luxuries like going to the movies. Or maybe we just need the escape. Maybe both.

My next trip is back to China in November, where things will certainly be in contrast to here in CA. I have a number of clients and important contacts here, so I’m pulling for the left coast. And not too shabby Dodgers and Angels!

Markets Steam Ahead, Hiccup Notwithstanding

We just finished the best quarter in the market since 1998, and the best two quarters in a row since we came out of the 1987 market crash in a mere six months, according to The Wall Street Journal online. Granted there’s a lot to make up for – the market is still 31% off its October 2007 highs. But we’re up 48% from the March lows, 11% for the year, all in all beats the alternative. The last few days went down a bit, but every rally has its profit-taking moments. We had one in early July and then bounced right back. Let’s hope that’s all this is.

We are still going to have some bad economic news (like the unemployment data last week) and must accept that this recovery will be slowish. But in many ways, as I have said many times here, it’s up to us. Expectations drive a huge portion of the economy. If we get positive about the future, that will make the future more positive. Not to get all Tony Robbins on y’all, but it’s what they taught us in biz school. The next boost for confidence will probably be the arrival in the next few weeks of everyone’s quarterly 401(k) statements showing, hopefully, a solid increase in their retirement money. With the IPO market waking up, housing starts staying pretty strong, yes the stimulus money having some effect and the markets continuing their upward trend, I’m glad I renamed our site! Let’s just hope our government spending now gets into control so we don’t get hit in a year or two with…well, you know what…

Yes Mr. O, the Olympics Are Important

As you may have noticed here, I try to provide a balanced view of the issues of the day. Apparently the right wing have gone all a-twitter (can we even use that word anymore?) because the President is taking 18 hours to go to Copenhagen to pitch Chicago for the 2016 Olympics. His wife, “the closer,” has been there already charming the folks with her bare arms.

We are competing against Rio di Janiero (there has never been an Olympics in South America) and other cities. The conservatives say he should not waste his time on this and that there are bigger problems to solve. The President says, look, I’m going to sleep on the plane, land and give a speech. He does have that nice bedroom on his jumbo. Whether some of his wife’s hometown supporters exerted some pressure on Obama given their history, etc., does not matter. There are big problems in Chicago, but one can say that about probably any major US city.

Why does this matter to the economy? The last few Olympics held in the States all made money. But they have also engendered American pride. And the President can walk and chew gum at the same time. Yes some have rightly criticized him for trying to do too many big things at once. But this is a relatively small thing, and I can’t blame him for giving back to the city that literally made him. So let’s support him and hope we can get the Olympics back. Go BO!

Thoughts as the UN Traffic Recedes

Those of us who live or work in Manhattan secretly dread it. UN Week. Every year around this time an amazing thing happens as the leaders of virtually every world country descend on the Big Apple. The good, the bad, the ugly, everyone from the residents of the axis of evil to mild-mannered Luxembourg, from the snappiest of three-piece suits to the silkiest of robes and turbans. And of course the US President. Amazing yes, but the traffic. As my grandmother, rest her soul, used to say, “Oy!” I give the NYPD tremendous credit for how they handle it. They set up special lanes for the motorcades that have semi-minimal impact as they go through. But there are times you just sit there. For 45 minutes. For the President to pass through. Mr. Obama apologized to the residents of New York for the difficulties. Whatever your political leanings, this guy likes New York, and that’s good and bad. He’s been here for several days. George Bush? He would jet in and out same day. It was a big deal for the guy to stay over. But enough about traffic.

The intractable Mideast crisis was center stage this week, as it usually is during UN Week. Qaddafi annoying everyone by talking 90 minutes instead of his alloted 15, having the nerve to interfere with lunch. Some called it rambling and eccentric, others said it was detailed and in-depth.  Iranian President Mahmoud Ahmadinejad slightly softening his rhetoric and deciding not to mention his repeated assertion that the Holocaust did not happen and, oh yeah, Israel should be wiped off the map if at all possible, and oh yeah, we’re building nukes whether the rest of you guys like it or not. Israeli Prime Minister Netanyahu telling the delegates they should be ashamed for letting the other two guys in at all.

Where the Mideast problem goes a big chunk of the world economy goes. It’s mostly, well maybe almost all, about oil, for those of you who’ve been living under a rock. And yes, kind of a little about religion and ideology. A bunch of US Presidents have tried and failed to solve it, despite a few notable breakthroughs.  The moderate Arab states secretly are OK with Israel existing if both sides would just leave each other alone. But they do it secretly cause their whole oil cartel would fall apart if they upset the radical Arab states. And the moderates also know that any violence or nuking by the radicals also would destroy their trillion dollar enterprise because we would stop doing business with them and, well, maybe nuke them back.

So the good news is that no one has nuked each other, and the violence so far has been mostly limited to Israel and the Palestinians, not counting Iraq and Afghanistan for this purpose, although one can argue there is a connection. I am not an expert on this scene, I admit. But it seems to me that if Israel and Hamas can acknowledge each other’s right to exist in peace, and allow passage so that people of all faiths can visit their sacred sites, can’t that work? Israel should be able to defend its borders, and it’s not at all clear why they are required to give back land they rightfully possess. But if that’s what it takes to have a true, lasting peace, they should do it – the problem of course being once you give the land back, if things don’t work out violence continues and yet the land is gone. Unfortunately the Palestinians benefit in a way from the continued violence. Their Arab patrons keep giving them money and they can control their people more forcefully “in time of war.” Israel really does not benefit. Maybe we are close. Unfortunately I don’t think so, and the instability damages not only our psyche, but our ability to conduct commerce.

One Hot Area of Opportunity for Lawyers: Government

Some feel President Obama believes that only “big government” can solve the nation’s problems. Others think he’s only temporarily increasing its size to help the economy, and after all, George W. Bush is the one who sent the deficit above $1 trillion. And everything in between.

When I was in Washington in early February I saw it already. With the economy elsewhere in tatters, a ton of new construction was going on and there was clearly a feeling of economic revival of sorts. This is good for lots of people, but in particular lawyers. According to the ABA Journal online, the government needs to hire 270,000 lawyers. That’s a whole lot! The report also indicates that there are five other “mission critical” areas where a lot of hiring is coming, including the medical, law enforcement and technology fields. It’s not all about the stimulus, in many cases there is simply an aging government worker population and many are beginning to retire.

Even with so many lawyers out of work, the report suggests it may still be difficult for the government to lure lawyers away from much higher-paying private sector jobs. Given the resumes I see from talented attorneys without jobs, I think this may be the best hiring moment for the government in a long time.

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