Reports From My Nanocosm

FDA sets melamine standard for baby formula – Yahoo! News.

WASHINGTON â?? Less than two months after federal food regulators said they were unable to set a safety threshold for the industrial chemical melamine in baby formula, they announced a standard that allows for higher levels than those found in U.S.-made batches of the product.

Food and Drug Administration officials on Friday set a threshold of 1 part per million of melamine in formula, provided a related chemical isn’t present. They insisted the formulas are safe.

The setting of the standard comes days after The Associated Press reported that FDA tests found traces of melamine in the infant formula of one major U.S. manufacturer and cyanuric acid, a chemical relative, in the formula of a second major maker. The contaminated samples, which both measured at levels below the new standard, were analyzed several weeks ago.

The FDA had stated in early October that it was unable to set a safety contamination level for melamine in infant formula.

If I were a betting guy, I’d put good money down to say courts strike this as “arbitrary and capricious,” which is a standard used by courts when considering adminstrative action taken by a government agency. It means that there is no reasonable basis for making an administrative rule or that the agency did not give the rule proper consideration.

How exactly is it that the FDA refused to issue a rule less than two months ago based on lack of information but, based on the same information, can come out with a rule a couple days after news reports of melamine in U.S. formula? It smells like milk gone bad.

Tags: policy, politics

long baby toes, originally uploaded by dfb.

Poets among us, how about a poem about baby toes?

Tags: Casimir, family, sprout

Tags: Casimir, family, sprout

Tags: Casimir, family, sprout

It is nice to hear Arnie say it how it is.

“It is only the politicians who draw lines and say this is a republican thing or a democrat thing”

Tags: politics, video

Tags: Casimir, family, sprout

In The Know: Should The Government Stop Dumping Money Into A Giant Hole?

Tags: funny, video

Tags: Casimir, family, sprout

SC priest: No communion for Obama supporters – Yahoo News
A South Carolina Roman Catholic priest has told his parishioners that they should refrain from receiving Holy Communion if they voted for Barack Obama because the Democratic president-elect supports abortion, and supporting him “constitutes material cooperation with intrinsic evil.”

The Rev. Jay Scott Newman said in a letter distributed Sunday to parishioners at St. Mary’s Catholic Church in Greenville that they are putting their souls at risk if they take Holy Communion before doing penance for their vote.

Churches are becoming too involved in politics. It is this sort of coersion that should see a church lose its non-profit status. Non-profits are not supposed to get involved in politics in this way. As such, this church should lose its status as a non-profit.

It is fine for the priest to say “this politician is wrong to espouse pro-choice with regard to abortion – abortion is wrong.” But this priest has crossed the line saying a parishioner is going to hell for voting for that person and should not receive the sacraments of the church. He might as well said, vote for John McCain or don’t bother coming to this church any longer. That is the effect of his position.

In addition, it is small-minded and ignores all of the other reasons someone may vote for a candidate. Abortion is just one issue in a haystack of issues. What about all of the other social causes that the Catholic Church and Catholics care about? It would seem to me that Obama aligns himself with a greater number of those causes.

Furthermore, at a time the Catholic church is losing relevance and parishioners (except in immigrant communities), this does nothing to help its cause.

Tags: constitution, obama, politics, religion

I gave a presentation in my tax policy seminar today, scratchy throat and all, based on the topic of a paper I am writing for the class. The U.S. Treasury Department intrigued and scared me with some of the moves it made in September and October so I ended up writing my paper on the actions it is taking. In particular, I focus on one notice of guidance issued by the I.R.S. that essentially waives application of a section of the code – 26 U.S.C. 382(h) – for banks only. This waiver is credited with Wells Fargo snatching up Wachovia, which had already agreed to a sale to Citibank. The drama of it all. I estimate Wells Fargo will save about $26 billion in taxes and enlarge itself to boot.

The slides below are followed by my notes, including for the missing slide. Keep in mind that this presentation greatly simplifies one of the most complex sections of the code. Comments are welcome. Enjoy!

• I am interested in how the tax code is being used to help combat the current financial crises.
• one place Treasury started was 382, which limits the use of losses and gains by a new loss corporation

We will quickly cover …

The treasury department has been active in identifying trouble spots and issing guidance to corporations to help deflect some of the market turmoil.

• it started with the rescue of Fannie Mae and Freddi Mac, which remain publicly traded corporations
• then it was confronted with AIG
• then it decided to help recapitalize corporations so it gave a safe harbor from the law
• The last one is the topic of my paper
  • treasury excuses banks from 382(h) which restricts trafficking in built-in losses
  • we’ll come back to this, but first …382

NOL:

• Occurs when tax-deductible expenses exceed taxable revenues
• carry back: to offset income during the previous two tax years;
  • OR
• carry over for a 20 years before they expire.
• considered a tax asset under GAAP accounting standard and shows as an asset on balance sheets
  • Good example: GM took a $39 billion write-down in September 2007 to realize losses on tax assets that were expiring or it did not expect to redeem.  GM lists â??Other current assets and deferred income taxesâ? in its 10Q. In the August 2008 10Q, it is  $3.58 Billion.Key terminology:

Loss Corporation is entitled to use the loss

• Old loss corporation is the one that generated the loss before the change date
• New loss corporation is the one that can use the NOL after the change date

382(b) â?? places annual limits on NOLs after ownership change

Change in ownership is complex

• Just know it can be triggered by a number of things:
• sale of the corporation, reorganizations, recapitalization, capital injection, stock transfer, IPO.The old and new loss corp can be the same
• Assumption here: corporation acquired all at once

Annual limit

• equal to, or less than, the value of the old loss corporation times the long-term federal tax-exempt bond rate – set by the IRS monthly 4.65%
• Carryforward allowed, carry back prohibited.
• Wachovia example: 24.5 Billion * 4.65% = 1.14 Bill.
• GM example: 3.64 Billion * 4.65% = 169 million

NOLs expire after 20 years.

• If the annual limit is $5 million dollars due to 382, the maximum deductible amount is $100 million dollars.
• Wachovia ex: 1.14 Billion * 20 years = $22.79 Bill.
• GM example: 169 million * 20 years = $3.4 billion – based on market cap on Y! Finance
• These are the  NOLs that can be utilized by the new loss corporation over the 20 year carry forward term.

• 382(h): Limits new loss corporations from using net unrealized built-in gains or losse (I’ll cover losses only)
• Without 382(h), a loss corporation could speed up or slow down recognition of gains or losses.

NUBIL: net unrealized built-in losses

• includes depreciation, amortization, and depletion.
• When built-in loss is recognized, that loss is then added to the pre-change NOL carryovers and limited as such.
• limits are only placed on losses recognized during the five years after the change date.
• Elements
  • must be accrued at the time of the ownership changes
  • the amount must be substantial (>=15% fmv of the assets or $10mill) â?? de minimis rule
  • recognized within a limited period (five years).
  • After year 5, the built-in losses are carried over without limitation.

Burden on the new loss corp. to establish that a loss recognized during the recognition period is not a RBIL.

IRS Notice 2008-83

• Waives application 382(h) for banks
• Applies only to banks
• Has no termination date

Immediately after the merger is complete

• Wells can recognize NUBILs it owns through its acquisition of Wachovia
• apply those losses through carry back mechanism to offset income during the past two tax years.
• gets a refund check from the I.R.S.

Wells expects to eventually write down $74 Billion in value from Wachovia’s loan portfolio – NUBIL.

• once recognized, those $74 billion in losses would be attributed to Wells Fargo, rather than Wachovia.
• immediately be used to offset income
• Any remaining amount can then be carried over as NOL to subsequent tax years, to offset future gains, either as NOLs that are carried forward or that offset income during a given tax year.

Possible scenario for carryback:

• Taxable income â?? 2007: $11.6 Billion
  • annual report: 3.57Bill. tax paid / 30.7% effective tax rate
• Taxable income â?? 2006: $12.7 Billion
  • annual report: $4.23 Billion tax paid / 33.4% effective tax rate

• Unequal treatment creates macroeconomic distortions.
• Generally, similarly situated taxpayers should be treated similarly.
• Others w/ large NUBIL: insurance companies, investment banks, manufacutures, real estate developers or holding companies, and

Similarly situated taxpayers can include both small and large corporations and span across different industries because the corporations follow the same tax laws and regulations. It can also be used more narrowly to only apply to companies large or small or only companies within a particular industry. I think it should apply broadly and inclusively.

argument for providing the banks (under 581) a bypass around 382(h).

• perhaps saving the financial system could trump economic efficiency arguments.
• Counter: Citibank bid for Wachovia without this provision.
  • Citi had the gov’t assume certain risks. Here Wells assumed the risk and paid a premium for Wachovia, versus Citi.
• Counter what about all the other companies part of the finanical system not covered? And other important industries?

distortions are pushing non-bank financial servicers to become banks or bank holding companies

• take advantage of tax breaks and other government assistance that is being provided to banks.
• take advantage of 2008-83.
• GMAC announced on Nov. 5
• Amex on Monday
• Investment banks Goldman Sachs and Morgan Stanley have already received permission to become bank holding companies.
• Will insurance companies be next?

Moral Hazard â?? taxpayer behavior distorted by removing some risk of failure

Missing slide:

Start by asking what is this regulation intended to correct? Does it actually accomplish that goal or are there other intended or unintended consequences

• Seems this guidance is intended to help recapitalize banks.
• If so, compare to other methods to recapitalize banks. Are there better ways? Direct capitalization? Bankruptcy?

Direct capitalization

• Wells: $74 billion write off – Assume 35% tax rate â?? expect $25.9 billion in taxes lost
• Is $25.9 billion in lost tax revenue better used recapitalizing Wachovia?

Bankruptcy or receivership?

• 382 includes a bankruptcy exception that provides what amounts to a waiver of 382.

Creates super bank

• Is Wells taking risks it would not otherwise take (moral hazard)?
• What if Wells Fargo is mistaken about the risks inherent in the bank it acquires or their own portfolios?
• Is it worth the risks to have two banks fail rather than one if there are bigger losses than anticipated in the new loss corporation as a result of the acquisition?

[no notes]

• Notice 2008-83 has received public attention of Senators from both parties
  Charles Schumer (democrat)
  Charles Grassley (republican)
  Both are upset because Congress was not consulted, yet this will cost hundreds of billions of dollars.

Poor tax policy to give only one industry a waiver to 382(h) requirements.

Better choice?

• Apply waiver temporarily to all corps that can show the purpose was not to traffic in NOLs
  • require sale of an operating business & business continuity

• Limits macroeconomic distortions by encouraging investment and recapitalization of all business types
• Ensures the original intent of Congress, to prevent or limit trafficking in NOLs
• More administrable than ad hoc regulation directed to correct market failures in one industry or group of corporations
• Might not be politically acceptable because it will limit Federal revenues and it will

I think it would have also been better for Treasury to insert this into the discussions of the big bailout package since Notice 2008-83 came out while Congress was debating the bailout.

… now for me to finish writing the paper.

Update (12/18/08): I finished the paper. Sources for the information given above is identified in the paper.

Tags: 2008-83, law school, policy, politics, taxes

I should stop reading this stuff …

The Great Untangling – Capital Markets – CFO.com.

Some fear that worse may be yet to come. The failure of another big actor in the market would send dealers and other counterparties scurrying to replace trades, almost certainly at a higher cost. Replacing those struck with Lehman, as spreads widened after its bankruptcy filing, is thought to have cost some dealers upwards of $200m each.

That risk remains, judging by CDRâ??s counterparty-risk index, which measures the health of CDS dealers (see chart 1). The next shock could be the failure of a hedge fund with a big swap book, given the spike in redemptions and margin calls many funds face, thinks Pierre Pourquery of the Boston Consulting Group. Hedge funds wrote almost a third of all credit protection last year (see chart 2).

Sellers of protection will be watching nervously for a wave of corporate defaults as big economies slip into recession. Standard & Poorâ??s expects the default rate on junk-grade debt to leap to 23% by 2010. Sovereign debt is looking wobbly too, especially but not exclusively in emerging markets. The cost of insuring against a default by the United States has quadrupled since January.

The full article is worth reading and not as dire as this section suggests. It is good to see that the market as well as regulators are looking to resolve the transparency issues with regard to credit default swaps. It seems that until transparency is installed, the financial system will remain on the brink.

Tags: economics

Schwarzenegger: $4.4B in tax hikes to end deficit – Yahoo! News.

SACRAMENTO, Calif. â?? Gov. Arnold Schwarzenegger on Thursday proposed $4.4 billion in new taxes and a similar amount in spending cuts to deal with California’s worsening fiscal crisis, saying, “We must stop the bleeding.”

Much of the new revenue would come from a 1.5-percentage-point increase in the sales tax; the Republican governor described the hike as temporary but did not say how long it would last.

“We have a dramatic situation here and it takes dramatic solutions … and immediate action,” Schwarzenegger said as he called the Legislature back into session to deal with the budget shortfall.

The governor said $4.5 billion in cuts will be necessary across all state programs, including education, social services, health care and prisons.

If this goes through, sales taxes in San Jose will be 9.75% (8.25% currently + 1.5%). That might be a bit too much to handle for a lot of people, especially when one of the issues is lower consumption. This also just gives people more incentive to avoid taxes by purchasing through mail order. I think the state government will eventually need to ask for broad pay cuts – yikes – in addition to cuts to services and lay offs.

Tags: policy, politics

I found this bit from the Economist interesting.

Total tax revenue | The Economist.

Tax revenues have risen as a share of GDP across the OECD over the past 30 years. In 2007 Denmarkâ??s government collected nearly half its GDP as taxes, making it the most heavily taxed among all the rich countries. … France, Norway and Italy also have tax revenues of more than 40% of GDP. At the other end of the spectrum, America and South Korea are relatively lightly taxed, with ratios of under 30%

Regardless of who wins the White House tomorrow, we will all pay higher taxes. How else can we afford two wars, bail outs, the Bush tax cuts, and everything under the sun politicians in all levels of government decide on to satisfy their/our fancies.

I should note that the national debt has risen $500 billion dollars since October 2 when it hit $10 trillion. Today, total outstanding public debt is at: $10,574,094,462,968.23.

Tags: economics, politics, random

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Goldman Sachs ready to hand out £7BILLION salary and bonus package… after its £6bn bail-out | Mail Online.

“Goldman Sachs is on course to pay its top City bankers multimillion-pound bonuses – despite asking the U.S. government for an emergency bail-out.

The struggling Wall Street bank has set aside £7billion for salaries and 2008 year-end bonuses, it emerged yesterday.

Each of the firm’s 443 partners is on course to pocket an average Christmas bonus of more than £3million.

The size of the pay pool comfortably dwarfs the £6.1billion lifeline which the U.S. government is throwing to Goldman as part of its £430billion bail-out.

As Washington pours money into the bank, the cash will immediately be channelled to Goldman’s already well-heeled employees.”

The gall of these bankers. The world will not crumble if they get ordinary pay, yet they believe themselves above it all. Talk about inviting regulation, especially if the Democrats sweep and get the magic 60 in the Senate (odds are good they will).

I sent the article to my congresswomen and wrote the following note:

“Goldman Sachs took money from the bailout and will use it to pay bonuses. This is outrageous! You need to do something to stop this waste of our money.

It is irresponsible for businesses to pay such big bonuses, particularly when those same businesses are at such high risk of collapse and losing gobs of money. It is likewise irresponsible for our government to prop companies up that have such irresponsible pay practices.”