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Russia swore off our chicken legs. But not to worry.

Thu, 2014-08-07 13:51

Russia is hitting back against U.S. and European economic sanctions with some of its own.

Russian Prime Minister Dmitry Medvedev said today that Russia will ban the import of food and agricultural products – including pig meat, cow meat, chicken meat, fruit, vegetables and dairy products – from the U.S., EU, Canada, Norway and Australia.

This is not the first Russian ban on U.S. foods. Last February, Russia closed its door to American beef and pork, citing a zero-tolerance policy to additives that are fed to U.S. cattle and hogs. U.S. beef exports didn't suffer significantly. 

"Even with Russia out of the picture, our beef exports set a record last year of more than $6 billion," said Joe Schuele, communications director with the U.S. Meat Export Federation.

Beef exports to Russia may have halted, but the American poultry industry exported $129 million worth of chicken, mostly chicken legs, to Russia in the first half of this year. Still, Russia is only about 7 percent of the U.S. export market, down from as much as 40 percent in recent years. 

"If this would have happened 10 years ago, it would have been catastrophic," said Jim Sumner, president of the USA Poultry and Egg Export Council. "But fortunately our industry is far less dependent on Russia as one of our key markets."

In 2013, the U.S. exported a little over $1 billion worth of foodstuffs to Russia, while the EU exported $16 billion. However, some Russia watchers think it may be Russians who bear the brunt of the ban.  

"At a minimum, Russian consumers are going to see a large number of products disappear, and in replacing them they're likely to see an increase in food prices," said Steven Pifer, a senior fellow at the Brookings Institution.

Bank of America settles: So we're all good now, right?

Thu, 2014-08-07 13:43

Bank of America is reportedly ready to pay up to $17 billion to atone for selling lousy mortgage investments in the run-up to the financial crisis. Overall, big American banks are paying more than $100 billion in settlements like this.

For the banks, paying settlement costs is a way to move past the darkest days of the meltdown. But many financial observers still point to enduring problems on Wall Street. Chief among them is the issue of risk and reward.

Bankers didn’t create and sell dicey mortgage investments because they wanted to decimate the world’s economy. They did it because their bank bonus structures paid them handsomely for doing so. They were incentivized to keep going, long after red flags popped up.

“No one slammed on the brakes,” says Charles Kenji Whitehead, a Cornell Law School professor and former high-level banking attorney. “Have we actually done anything to address that problem? Not really.”

Whitehead thinks recent changes on compensation and risk don’t do enough. Banks say going further would damage their business, maybe even make it more expensive for small businesses and regular people to bank.

And as far as all those multi-billion dollar settlements, don’t forget who really pays the tab.

“We've seen only punishments of shareholders,” says Jim Sinegal, Morningstar’s lead bank analyst. “A lot of the executives, a lot of the people making money -- making the most money in some cases -- are not getting punished at all.”

Dennis Kelleher runs the nonprofit Better Markets. A critic of Wall Street, he takes a dim view of recent bank settlements, saying they should be bigger and more transparent.

But at the same time, he is optimistic about moves being made related to the problem of Too Big to Fail, the worry that taxpayers will get stuck bailing out banks. He appreciated regulators telling banks this week that their disaster planning doesn't cut it.

“Rejecting these plans was a tremendous stride on behalf of the American people to get financial reform in place,” Kelleher says.

But of course, the rejection of those Too Big to Fail plans means there still aren't acceptable ones.

Mark Garrison: When bank settlements get announced, Charles Kenji Whitehead zeroes in on one thing.

Charles Kenji Whitehead: If you read the statement of facts that get issued, your jaw drops at just how lax some of the internal controls were at these banks.

He’s a Cornell law professor and former high-level banking attorney. Bankers made and sold dicey mortgage investments because their bank bonus structures rewarded them for it. And as a result, even when red flags went up. . .

Whitehead: No one slammed on the brakes. Have we actually done anything to address that problem? Not really.

Whitehead thinks recent changes on compensation and risk don’t do enough. Banks say going further would damage their business, maybe even make it more expensive for regular people to bank. And as far as all those multi-billion dollar settlements, don’t forget who really pays the tab.

Jim Sinegal: We’ve seen only punishments of shareholders.

Jim Sinegal is Morningstar’s lead bank analyst.

Sinegal: A lot of the executives, a lot of the people making money, making the most money in some cases, are not getting punished at all.

Then there’s the problem of Too Big to Fail, that taxpayers will get stuck bailing out banks. Dennis Kelleher runs the nonprofit Better Markets, a Wall Street critic. He takes a dim view of the bank settlements, saying they should be bigger and more transparent. But at the same time, he’s glad regulators told banks this week that their disaster planning doesn’t cut it.

Dennis Kelleher: Rejecting these plans was a tremendous stride on behalf of the American people to get financial reform in place.

But of course, rejecting those plans means there still aren’t acceptable ones. In New York, I'm Mark Garrison, for Marketplace.

The slick business behind 'Sharknado(es)'

Thu, 2014-08-07 10:54

The movie industry is suffering from a poor year at the box office, but one production company is doing better than ever.

The Asylum is an L.A.-based film company that made cinematic gems like "The Terminators", "Titanic II" and "Transmorphers."  If these titles sound familiar, that’s because they were inspired by actual blockbuster hits. These "mockbusters," as they're called, were made to ride the coattails of their namesakes.

Co-founder David Michael Latt is now the head of production. He says bigger movie studios use their strategy all the time.

“They just call it 'drafting'. It’s like having 'Volcano' and 'Dante’s Peak' at the same time. When you find out somebody’s making a film about transforming robots, basically, the appetite out there... is that people want more about transforming robots. So we’re gonna go create a film that kind of takes advantage of the awareness.”

Since The Asylum’s launch in 1997, it has made over 200 movies and none of them have lost money. Their most recent film is "Sharknado 2: The Second One", which was seen by almost four million people – the largest audience the SyFy channel has ever had.

Latt says his company is lucky to have lasted this long in the business.

“We don’t have outside investors. We are a cash flow company. The reason why we make so many movies is because we need to keep this dog and pony show up and running –because the film we make today is the film that’s gonna fund the film five months from now.”

If The Asylum's success continues, Latt says he’d be happy to field offers from bigger studio interested in buying them out. For now, he's having plenty of fun.

Listen to one of The Asylum's partners Paul Bales read a letter from some less than friendly "fan" mail and offer his response...

...and listen to the full conversation in the audio player above.

Film by Preditorial.

Music: [include the linked Attribution 3.0]

"The Descent" Kevin MacLeod (

Licensed under Creative Commons: By Attribution 3.0

"Say Yeah" Topher Mohr and Alex Elena
Licensed under Creative Commons: By Attribution 3.0 

"Wah Game Loop" Kevin MacLeod (

Licensed under Creative Commons: By Attribution 3.0

"Rollin at 5" Kevin MacLeod (

Licensed under Creative Commons: By Attribution 3.0

"Mandeville" Kevin MacLeod (

Licensed under Creative Commons: By Attribution 3.0

"Monkeys Spinning Monkeys" Kevin MacLeod (

Licensed under Creative Commons: By Attribution 3.0

"Feelin Good" Kevin MacLeod (

Licensed under Creative Commons: By Attribution 3.0

How Texas can live with lower carbon emissions

Thu, 2014-08-07 07:49

When the Environmental Protection Agency released its Clean Power Plan, its proposal for regulating carbon emissions from existing power plants, every state got its own target for reducing emissions. The EPA's plan creates some challenges for Texas, but it also creates major opportunities for the second-biggest state.

The biggest challenge, before and after the EPA's plan: air conditioning.  Texas summers are murder without it, and the state’s grid has to be ready for demand to spike quickly on hot days.

On a summer day, eight technicians manage that challenge from a huge, dim room near Austin. The silence is deafening, and the visual stimulus is overwhelming, with most of the light coming from computer monitors — 10 or so on each desk, plus the big board — 50 feet wide, with maps, charts, weather projections, all shifting in real time.  

This is the control room at the Electric Reliability Council of Texas — ERCOT for short. It looks a little like something out of the TV show “24,” but a lot quieter. "It’s not as crazy, if you will, as what you would see on an episode of '24,'" says Dan Woodfin, ERCOT's operations director.  "Even when things get a little hectic, you d0n't hear a lot of voices raised." When managing an electric grid that serves about 24 million people, he says, it helps to keep a cool head.

ERCOT sends signals to different power sources — coal, gas, wind and nuclear — to turn on and off at just the right time to keep the air conditioning running for those 24 million people. Each source costs a different amount to run and takes a different amount of time to turn on and off.

Near Houston, Steve Hedge watches ERCOT’s signals at a giant power plant he manages for NRG Energy. The plant has three different types of generators.  

First, coal: "The coal units are low-cost generation," Hedge says. "They run all the time, 24 hours a day."

Next come some big natural gas generators. "Gas is a lot more expensive fuel than coal, right now, so it costs more to make that power," says Hedge. "Those units start and stop every day during the summertime."

But they don’t start on a dime. Three hours, minimum. So what if the temperature suddenly spikes?

That’s where another kind of natural gas generator comes in — a peaker.  "This unit can respond to those short peaks," says Hedge. "Start real quick, provide the power, and then shut off." It’s less efficient and more expensive to run, but it comes in handy on hot days.

So, Steve Hedge, his counterparts at other plants and ERCOT are all working with two variables: Cost and timing.

EPA’s Clean Power Plan introduces a third: Carbon emissions. The coal generators are cheap to run because coal is cheap, but they emit more carbon dioxide. 

One way or another reducing emissions will raise electricity prices, probably by some switching from coal to less-cheap gas. "About a billion dollars a year in increased costs for energy," says John Larsen, an analyst with the Rhodium Group, which issued a study on the Clean Power Plan in July. He says that billion-dollar bill, spread across Texas and three next-door states, comes with a big upside for the region: "Anywhere from two or three billion dollars a year, up to 16 or 17."

Those billions will come from pumping more natural gas, because lots of states — not just Texas — will have to do some switching from coal to gas. "That increases demand for natural gas, so parts of the country that produce natural gas do quite well," says Larsen. "In fact, Texas is one of the largest gas-producing states in the country." Meaning that Texas will see more upside than most.  

A construction project behind one of Hedge’s coal generators could point to a second big advantage for Texas under the EPA's proposal. NRG is starting to build a system to capture the carbon dioxide. "We’re going to take that CO2, we’re going to put it in a pipeline, and inject it in an oilfield south of the plant," says Hedge.

The project, called Petra Nova, combines two things:  First, carbon capture, the part happening here. That's technology the EPA would like to see used more, but it’s expensive.

The second part pays the bill, by putting that carbon to lucrative use in the oilfield. Pump carbon into a low-performing oilfield, and it will pump out more oil, a technique called "enhanced oilfield recovery." Arun Banskota, president of NRG subsidiary Petra Nova, says the oilfield produces about 500 barrels daily right now. "Once we get carbon into that same field," he says, "we will be producing about 15,000 barrels a day." That's 30 times as much.

Banskota hopes to repeat the process elsewhere. He says there are lots of Texas oilfields where carbon dioxide could help.  To hit all of them, he says, "You need approximately one hundred projects of the type we’re doing right now. The potential is huge, and the opportunity is huge."

It's an opportunity, however, that most states don't have access to. Kentucky, for example, has lots of carbon dioxide from burning coal, but not so many oilfields.

Google announces it will reward secure websites

Thu, 2014-08-07 07:00

Google has announced a move it hopes will push websites to become more secure in the wake of headlines about a Russian crime ring collecting more than 1 billion internet passwords, not to mention ongoing revelations about the National Security Agency’s secret surveillance of some online activities.

The company said Wednesday it will start rewarding websites that use encryption by giving them slightly higher search rankings.

If you don’t know what an encrypted website looks like already, try the following: go to the top of your web browser where the url address is displayed, and look for a picture of a little padlock.

If you see a padlock (and/or the letters “https” in front of the “www”), that means the website you are on is secure and encrypted. If you don't see those signs, the site is probably not encrypted.

Most e-commerce sites already have the little padlock.

“But any of the sites that are just content sites -- that you don't have to log in to, that you just read -- most of those sites probably do not,” says Barry Schwartz, of Search Engine Land, a website about internet search.

In fact, Schwartz's own website does not currently have that little padlock. Neither does Marketplace, the New York Times (with the exception of pages devoted to subscriber account information), or for that matter, my woefully out-of-date personal wordpress site.

It’s not that hard for a web developer to convert an unencrypted site into an encrypted one, says Schwartz. But it can take time and money to make sure the process is done right, especially for sites with a lot of existing content.

Google's decision to boost search results for sites that take these steps adds a bit more incentive.

That’s a good thing, says Roger Kay of tech research firm Endpoint Technologies, because even if you are just browsing content, an unsecure link can leave your computer more vulnerable to hackers.

“They can take it over, they can turn it in to part of bot net, they can fish around in it for passwords and things that lead to money,” Kay says.

Even an https website that has that little padlock can never be 100 percent secure, he says. But encryption measures definitely help.



Wall Street tobacco deals left states in billions of debt

Thu, 2014-08-07 05:00

(This story was produced by and co-published with ProPublica, an independent, non-profit newsroom in New York City that produces investigative journalism in the public interest.)

In November 1998, attorneys general from across the country sealed a historic deal with the tobacco industry to pay for the health care costs of smoking. Going forward, nearly every cigarette sold would provide money to the states, territories and other governments involved — more than $200 billion in just the first 25 years of a legal settlement that required payments to be made in perpetuity.

Then, Wall Street came knocking with an offer many state and local politicians found irresistible: Cash upfront for those governments willing to trade investors the right to some or all of their tobacco payments. State after state struck deals that critics derided as “payday loans’’ but proponents deemed only prudent. As designed, private investors – not the taxpayers – would take the hit if people smoked less and the tobacco money fell short.

Things haven’t exactly worked out as planned.

A ProPublica analysis of more than 100 tobacco deals since the settlement found that they are creating new fiscal headaches for states, driving some into bailouts or threatening to increase the cost of borrowing in the future.

One source of the pain is a little-known feature found in many of the deals: high-risk debt that squeezed out a few extra dollars for the governments but promised massive balloon payments, some in the billions, down the road.

These securities, called capital appreciation bonds, or CABs, have since turned toxic. They amount to only a $3 billion sliver of the approximately $36 billion in tobacco bonds outstanding, according to a review of bond documents and Thomson Reuters data. But the nine states, three territories, District of Columbia and several counties that issued them have promised a whopping $64 billion to pay them off.

Under the deals, the debts must be repaid with settlement money and not tax dollars. Still, taxpayers lose out when tobacco income that could be spent on other government services is diverted to paying off CABs. And states can’t simply walk away from the debt – bondholders have a right to further tobacco payments even after a default.

“It’s going to cost taxpayers, either directly or indirectly,” said Craig Johnson, an associate professor of public finance at Indiana University in Bloomington who has studied tobacco bonds and CABs. “I don’t doubt that at all.”

ProPublica’s analysis is the first to measure the magnitude of the high-risk debt involved in the tobacco deals and to calculate how much Wall Street’s dealmakers earned. It also shows how much of the tobacco money has been securitized – that is, turned into payments that go to investors. As of this year, at least one out of every three dollars coming in under the settlement is pledged to investors, according to bond disclosures and payment data from the National Association of Attorneys General, which tracks the flow of funds.

The sure winners so far: Investment bankers from Citigroup, the now defunct Bear Stearns and others who, along with consultants and lawyers, have pocketed more than $500 million in fees for their financial engineering, ProPublica estimates. They now stand to make more as the governments look to rework old deals and try to get even more tobacco cash upfront.

In part, the troubles in the tobacco bonds arise from the same kind of miscalculation that led to the housing bubble.

Just as mortgage lenders bet that home prices would keep rising, the tobacco deals relied on optimistic predictions of how much Americans would smoke. Forecasters rightly saw that cigarette sales would continue to decline, but now the yearly drop – about 3 to 3.5 percent – is nearly double what was cooked into the deals.

Because the bonds sold to investors can stretch 40 years or more, the outdated estimates mean an ever-widening gap between what states expected to collect under the settlement and the payments they promised investors.

The CABs promise gigantic payouts – as high as 76 times what’s borrowed – because nothing is due on them for decades. Meantime, interest compounds on both the principal and accumulating balance.

Defaults by state and local governments are rare, but rating agencies have been warning that tobacco bonds in general could go under en masse. Moody’s said in May that up to 80 percent of the tobacco issues it tracks are likely to default.

For CABs, defaults appear certain.

“They’re doomed,” said Jim Estes, a finance professor at the California State University, San Bernardino, who helped ProPublica analyze the bond documents. “It’s not a question of whether or not, it’s a question of when.”

Wall Street firms are already pitching their services to help unwind deals they helped create.

See the full interactive at ProPublica.

The first state to act was financially strapped New Jersey. In March, it rescued two CABs that were part of a larger 2007 deal. The CABs promised to repay $1.3 billion in 2041. To pay off that giant tab before it comes due, the state agreed to hand over $406 million of its remaining tobacco proceeds beginning in 2017, money that otherwise would have gone into state coffers.

Barclays handled the transaction for New Jersey and earned $4.5 million. The state also got $92 million in upfront cash out of the deal to help Gov. Chris Christie and lawmakers plug a budget deficit. Still, rating agencies weren’t impressed: They downgraded the state anyway, making it costlier for New Jersey to borrow.

In late July, Rhode Island announced a plan to buy out some holders of $197 million of CABs it sold in 2007. The deal would shave $700 million off a $2.8 billion tab due on the bonds in 2052 and let the state refinance some of its older tobacco bonds at more attractive interest rates. Now, some bondholders are suing to block the deal.

Most of the deals involving CABs sold right before the 2008 financial crisis, ProPublica found. As the horizon darkened, the market for them began falling apart, with one lone buyer keeping Wall Street’s CAB machine going. Pitch documents show that bankers pressed the states to act fast before the window shut.

“We are confident that we can stimulate demand,” Bear Stearns bankers told Ohio prior to a $5.5 billion tobacco bond package championed in 2007 by then state Treasurer Richard Cordray, who these days heads the U.S. Consumer Financial Protection Bureau.

Ohio’s tobacco deal was the largest ever. It included CABs that brought in $319 million in return for an eventual $6.6 billion balloon payment – a nickel on the dollar. Bear Stearns, Citigroup and other Wall Street firms made about $23 million in fees on the transaction, according to the bond offering document.

Then there is Puerto Rico, a government with a long history of financial woes.

In April 2008, as Bear Stearns was collapsing, it closed a $196 million tobacco bond sale that saddled the Puerto Rico Children’s Trust, a fund set up to benefit island families, with an eventual $8.6 billion balloon payout. Bear Stearns and Citigroup made $1.4 million in fees.

This year, Puerto Rico’s tobacco settlement receipts fell 13 percent below what was forecast when the deal was done. The commonwealth is also struggling to prevent default on a mountain of other debt. Officials there did not respond to written questions, phone calls or interview requests.

Critics have repeatedly lambasted the states and other jurisdictions for violating the intent of the tobacco settlement by spending the money on uses other than anti-smoking programs and health care.

“The securitization scheme not only accelerated the expiration of the usefulness of that money, but basically guaranteed that it would never be used for its conceived purpose,” said Dave Dobbins, an executive with the American Legacy Foundation, a nonprofit created under the settlement to fund smoking-prevention programs.

“Now the money’s gone, the securitization scheme is sort of coming home to roost for some people . . . and the tobacco problem is still there: 480,000 people [are] expected to die this year due to tobacco-related disease,” Dobbins said.

“It’s a grim story.”

“Turbo” tobacco cash

Whenever governments get access to a stream of money, Wall Street bankers pitch deals to turn it into a one-time payment. Bonds are sold to investors, who give the governments cash in exchange for the income stream, similar to a loan. Bankers earn fees based on a deal’s size, giving them every incentive to maximize the value.

The 1998 tobacco settlement was no ordinary revenue stream: It was the biggest financial settlement in legal history, projected to net states and other governments $206 billion just through 2025. “The money is huge,” Iowa Attorney General Tom Miller said at the time.

A cottage industry immediately sprouted up on Wall Street. The goal: Convince states to pawn the revenues.

Citigroup, JPMorgan, UBS, Goldman Sachs, Morgan Stanley and now-defunct firms like Bear Stearns, Lehman Brothers and Merrill Lynch all dedicated bankers to the cause, pitch documents show. Bear Stearns even had its own, 21-strong “Tobacco Securitization Group” devoted to monetizing the settlement.

“The ink on the document was barely dry before these folks started coming at us, suggesting the idea of securitization,” said Christine Gregoire, who as Washington’s attorney general helped lead the tobacco settlement talks and later, as governor, opposed securitization.

“I was just like, ‘Wow, I can’t believe that they have immediately thought about how to get one-time money and be indebted to the revenue stream.’ And I remember from the very beginning being offended at the idea,” she said.

Part of Gregoire’s objection is the same reason it doesn’t make sense to buy groceries on credit: You end up spending more – and getting less – by paying interest over time on goods you quickly consume.

“It’s not good fiscal management of public money to give away 75 cents on a dollar of income,” she warned in 2002, when her state debated raising $450 million to fill a budget hole by cashing out tobacco income.

Washington lawmakers pushed ahead anyway. The plan securitized 29.2 percent of the state’s expected tobacco cash, the equivalent of $40 million to $50 million a year. Investors were promised that money until the debt was fully repaid, sometime around 2025.

Kym Arnone, Bear Stearns’ senior tobacco banker, advised the state against using CABs.

“At the present time, no market has emerged for tobacco CABs since investors are unwilling to defer all of their income until the final maturity of a bond when there is significant chance of payment interruption or payment delay,” a 2002 pitch document signed by Arnone states.

The state followed that advice. By issuing traditional bonds that regularly pay interest and principal, Washington sold what turned out to be one of the less-costly deals crafted by Bear Stearns. Through last year, when the state was able to refinance on favorable terms, investors were paid $848 million from tobacco settlement money, a little under twice the $450 million the state got.

But Washington was one of the early deals. As the securitization trend continued – with Bear Stearns alone leading $23 billion of transactions from 2000 through 2007, according to Thomson Reuters data – bankers reached for ways to fatten the deals and their fees.

Chief among these was the CAB. By 2005, investment bankers had found willing buyers for this type of bond, thanks in part to a repayment structure first suggested by Goldman Sachs: the “turbo” bond.

With a turbo bond, governments agreed to make earlier payments if they had surplus cash from the tobacco settlement. The prepayments were not an ironclad promise — they could be skipped without triggering default. Turbos were already being built into regular bonds like those sold by Washington, and they appealed to CAB investors who might want some money before a final payoff decades away.

“That’s why they call them turbos — because they pay down faster,” said John Lampasona, an analyst at Standard & Poor’s who rates tobacco bonds.

Reassuring forecasts of cigarette sales also aided the market for CABs.

IHS Global Insight, a consulting firm, earned millions of dollars providing its forecast on almost every deal done in the sector. The projections persuaded investors there would be extra cash available to prepay CABs. Since then, smoking bans and hefty tax increases have nearly doubled IHS’s projected rate of decline in cigarette sales.

“I take all the credit and take all the blame,” James Diffley, IHS’s lead forecaster for cigarette sales told ProPublica. “It’s a forecasting exercise. The world will not turn out exactly like anybody imagined.”

A 2005 deal involving Puerto Rico was the first CAB sale, according to the bank that arranged it. That year, Merrill Lynch convinced the Puerto Rico Children’s Trust to issue $108 million of CABs that wouldn’t come due until 2045 and 2050 – when many of the officials deciding to sell the debt might well be dead and a $2.5 billion payment would be owed.

Merrill Lynch estimated that Puerto Rico could pay off the debt early, however, by shelling out some $372 million in turbo repayments from 2024 to 2028. That prediction, tucked inside the 2005 bond offering, was based on industry payments coming in line with IHS’s basic expectation of cigarette sales.

Mutual fund managers Oppenheimer Funds, BlackRock, Eaton Vance, Dreyfus, Nuveen and Goldman Sachs Asset Management all bought Puerto Rico’s turbo CABs, according to a Merrill Lynch pitch document. A spokesman for Merrill Lynch, now part of Bank of America, declined comment for this article.

After that deal, bankers started layering CABs into many tobacco issues. In all, ProPublica identified 92 CABs that incorporated turbo repayments, raising nearly $3 billion between 2005 and 2008. (See the states and other governments that did the deals and how much they owe.)

The $64 billion payoff for these bonds is about 21 times the amount borrowed. Even in the unlikely scenario that all of them get repaid early, the payoff would be about five times, ProPublica estimates. By comparison, traditional bonds like those Washington sold typically repay about three times what’s borrowed, said Estes, the finance professor.

Steep repayment terms have made CABs controversial in other arenas. In the mid-1990s, for instance, Michigan limited the ability of school districts to sell CABs precisely because they can create giant debt burdens far into the future.

Nevertheless, in 2006, Michigan sold a $55 million CAB that Bear Stearns tucked into a larger, $490 million tobacco issue. The CAB promised to repay $1.5 billion, or 27 times the amount borrowed, in 40 years.

Asked about the transaction, Michigan treasury spokesman Terry Stanton said, “CABs can be a useful structuring tool when the risks and costs are properly understood and analyzed.” The state sold the bonds, he said, because there were investors interested in buying them.

As Wall Street manufactured more turbo CABs, a dominant buyer emerged: Oppenheimer Funds, the Rochester, New York, mutual fund manager. The firm gobbled up hundreds of millions of dollars in CABs, sometimes buying entire issues in one gulp and sprinkling the debt throughout at least 17 of its municipal bond funds, according to data from Lipper, which tracks mutual fund holdings.

Oppenheimer Funds declined to comment for this story. But in May, Michael Camarella, senior portfolio manager for the firm’s municipal team, told Bloomberg News the tobacco sector presented a buying opportunity for investors willing to hold on to the debt. “We’ve been willing to take those risks,” he said. “Tobacco and Puerto Rico are the two cheapest sectors right now.”

Oppenheimer Funds declined to make Camarella available for an interview.

As of May, the firm was the largest owner of turbo CABs, according to Lipper data. The holdings were large enough that, were they all to pay off in full at maturity, Oppenheimer Funds would collect some $40 billion. With the 1998 settlement proceeds declining, however, that appears highly unlikely. In May, the firm valued these CABs at only about $700 million, or about 1.8 cents on the dollar, according to Lipper.

“I have yet to see a capital appreciation bond that I think is going to get paid,” said Dick Larkin, credit analyst at brokerage firm Herbert J. Sims & Co. in Florida, who has been warning for a decade that tobacco bonds are headed for trouble.

Some of the early investors have come to the same conclusion.

“We don’t want to have any bonds in this sector overall,” said Tom Metzold, senior portfolio adviser for Eaton Vance, one of the mutual funds to buy into the Puerto Rico CABs sold by Merrill Lynch. A $6.6 million chunk of that 2005 deal was the last CAB standing in one of the firm’s funds as of May, according to Lipper.

But as investors like Metzold cut their losses, hedge funds are stepping in. By scooping up the debt at distressed prices, they may still be able to make money. Tobacco bonds of all stripes have been a favorite playground for speculators this year, returning 10.83 percent and making it one of the top performing sectors of the municipal bond market, according to S&P Dow Jones Indices.

The “max out” strategy

Analysts say states agreed to the CABs’ steep repayment terms to squeeze the tobacco settlement money for all it was worth. “They were designed to milk every last dime,” said Dean Lewallen, a senior research analyst at investment manager AllianceBernstein in New York.

By layering in CABs, states got more upfront cash than they otherwise would. Once standard 30-year bonds were paid off, it would free up tobacco money to cover any CABs included in the package. They could then be prepaid before the big balloon payments came due at maturity.

The scenario assumed that settlement revenues would come in as predicted. But when many of the securitizations sold in 2007, the bankers and politicians were more concerned about another aspect of the deals: their size.

In February of that year, soon after he took office, Richard Cordray, Ohio’s newly elected treasurer, began trumpeting the idea of securitizing the state’s tobacco money, according to news reports from the time.

Ohio’s then-governor, Ted Strickland, backed the idea, and it sailed through the legislature that June. The plan was to sell all of Ohio’s tobacco money to finance new school buildings and cover tax cuts for the elderly.

By July, Cordray and then-Budget Director Pari Sabety had the sale process in full swing. In public statements promoting the deal, Cordray said it made sense because tobacco payments might shrink in the future.

“Five years from now, 10 years from now, smoking bans are kicking in, taxes may change, maybe court decisions. If the tobacco companies are not profitable, Ohio would be out its money. But if we cash in now, we will have our money and we will shed the risk,” Cordray was quoted saying in a July 2007 report by The Associated Press.

The state requested proposals from investment banks on how to generate $5.05 billion from a bond sale – including “CABs, subordinate CABs, or any other proposed element.”

“Bear Stearns is pleased to present its qualifications,” opened a letter from Arnone, who by then had done 26 tobacco deals worth $25.3 billion, according to the document.

Bear Stearns warned that it was getting pricier to sell CABs. The bank said Puerto Rico halted a CAB sale that Bear was leading because of “sticker shock” at the “dramatically higher” interest rates needed to get the deal done. But Bear put CABs into its recommended Ohio deal structure anyway.

“CABs are increasingly difficult and costly to sell,” JPMorgan chimed in. Yet it, too, proposed them as part of a “max out” strategy for Ohio to raise about $5.4 billion – and added that it now had a “leading tobacco bond résumé” because it had hired away executives from UBS, Goldman Sachs and Merrill Lynch to work on its team.

The major purchasers of CABs – including Oppenheimer Funds – had their portfolios “relatively full” of the debt, Morgan Stanley warned, but added that it could use its “unique insight” to sell the bonds anyway, a pitch document states.

Eventually, Ohio chose Bear Stearns and Citigroup to lead the sale. The firms packed $319 million of CABs into the overall $5.53 billion deal. The state received $5.05 billion after fees and setting aside reserves.

The CABs were costly. They accrue interest at even higher rates, 7.25 and 7.5 percent, than the “sticker shock” rate of 6.5 percent that had caused Puerto Rico to pull its CAB sale. At their respective maturities in 2047 and 2052, $6.6 billion will come due on them. Absent any turbo payments that might pay off the debt early, that’s a final repayment ratio of about 21 times the amount borrowed.

Interest rates on the other, less-risky, Ohio tobacco debt ranged from a low of 4 percent to 6.5 percent.

Just a few months after the deal closed, Bear Stearns went under, foreshadowing the financial crisis ahead. Shortly after, Arnone moved to Lehman, which filed for bankruptcy in September 2008 and had its North American operations bought out by Barclays Capital.

Two weeks later, Arnone was pitching another tobacco deal: “Individuals make the difference — not firms, which have unfortunately proven to be transient in this environment,” she wrote to Iowa officials on Barclays’ letterhead.

By then the run had finally stalled. Oppenheimer Funds – which had been the “sole source” of liquidity in the CAB market – was no longer buying in the wake of the Lehman collapse. Arnone recommended the state not use CABs. Unable to hit its target amount, Iowa pulled the deal.

Citigroup, Morgan Stanley and JPMorgan declined to comment for this story. Arnone and Barclays also did not respond to requests for comment or to a list of specific questions.

Asked about the wisdom of Ohio’s transaction, the state’s Office of Management and Budget said in a statement, “The decision to move forward with the transaction was made by Ohio’s leadership in 2007. We can’t speak to their thinking at the time.”

Strickland did not respond to a request for comment, but Cordray told ProPublica the state made the right decision. The decline in tobacco payments means they were riskier than believed, he said, and CABs helped the state maximize its proceeds. If payments decline further, he said, investors should pay the price, not Ohio.

“Obviously, they are always going to want to come back, cup in hand, saying to the state, ‘Put some money in it,’” Cordray said. “But it’s not necessary; it’s not legally required and in fact was the whole purpose of this deal.”

“We basically burned it all”

By using the tobacco bond money to build schools, Ohio didn’t have to sell general obligation bonds, which are repaid with taxes, to cover construction costs. But not all states used tobacco debt for such long-term investments.

New Jersey stands as the prime example. The state first issued tobacco bonds in 2002 and 2003, spackling holes in the state budget with the $3.5 billion they raised. “We basically burned it all in two years,” said David Rousseau, a deputy treasurer at the time who became state treasurer from 2008 to 2010. “It was not one of New Jersey’s better financial moves.”

In 2007, the state raised another $3.6 billion to repay those bonds. The deal, brokered by Arnone’s Bear Stearns team, had one silver lining: It let New Jersey keep about 24 percent of its tobacco payments, as opposed to the 100 percent it had given up in the earlier deal. That left up $50 million to $60 million a year in payments for the state instead of investors.

But not for long.

Staring at another $800 million budget gap this year, state officials again turned to Arnone. The two CABs issued in 2007 and their $1.3 billion payoff were now a concern, too. The solution was to sign over the untapped tobacco money expected from 2017 to 2023 — an estimated $406 million— to repay the debt early and get some new cash from investors in exchange.

The state said it came out ahead in the deal, largely because it also brought in $92 million for the budget. Still, Standard & Poor’s downgraded New Jersey’s taxpayer-backed debt a notch, citing the state’s “reliance on one-time measures that are contributing to additional pressure on future budgets.” The Moody’s and Fitch rating agencies followed suit, citing the same concern.

The downgrade shows how CABs can do damage despite legalities designed to shield the state and taxpayers.

Like most states that sold tobacco bonds, New Jersey did so through a shell entity. The New Jersey Tobacco Settlement Financing Corp. exists “in, but not of” the state’s treasury, its authorizing legislation states. The corporation’s only assets are the tobacco revenues the state signed over to pay back its debts.

“It’s only those monies, and no other monies, that the bondholders have a claim on,” said David Narefsky, a municipal bond lawyer at law firm Mayer Brown in Chicago.

But if the CABs aren’t paid back in time, they don’t go away. Barclays told the state that in a default, the bondholders would still be in line ahead of taxpayers for subsequent tobacco income. The bonds would continue to earn interest and would have to be paid back at an even higher cost – $1.6 billion from 2041 through 2049.  

 In a statement explaining the March deal, New Jersey made clear the CAB bondholders couldn’t be ignored.

The statement said that while New Jersey is “not legally compelled” to prevent a default, it did not want the corporation’s financial troubles to flow onto its books – or upset its creditors: “The State sees an advantage in maintaining good relations with the tobacco bond investors, as they are likely to invest in other bonds of the State.”

Rhode Island also decided it couldn’t simply ignore its CABs. The state wants to refinance its 2002 tobacco settlement bonds to take advantage of lower interest rates. But the deal, which involves selling $594 million in new tobacco bonds to pay off the old ones, can’t go forward without the approval from the owners of its 2007 CABs.

As a result, Rhode Island proposes to spend more than $60 million to buy them out and get their permission. “All of the CAB bondholders are getting something,” according to a person familiar with the transaction.

Rhode Island had hoped to collect at least $20 million out of the transaction for its budget. But the deal is on hold after Oppenheimer Funds, which holds some of the tobacco debt, filed a lawsuit this week alleging that it would “siphon off” money from bondholders to the state.  

Money ‘out of heaven’

As CAB debt piles up on state balance sheets, hopes of repayment – turbo or otherwise – are fading.

Of the four jurisdictions with scheduled CAB turbo prepayments so far, only one has made them, ProPublica found: Placer County, California, which has a relatively small, $14.3 million issue promising a $68 million payoff. The other three, pooled tobacco CABs sold by New York counties, have not.

Even on traditional bonds, making those turbo prepayments has proven difficult. Ohio has fallen about $70 million behind on prepayments toward its regular tobacco bonds, which must be paid off before any money goes to the CABs. Kurt Kauffman, the state’s debt manager, said it’s too early to tell how Ohio’s CABs might be repaid.

“We just don’t know,” he said. “That’s going to be up to kind of the future leaders.”

Others are watching to see how their peers deal with the problem.

In California, which has promised to repay nearly $3.7 billion on $350.5 million of CABs sold by its Golden State Tobacco Securitization Corp. in 2007, the entity’s debts are a concern. The corporation is behind schedule on early turbo repayments for the 2007 bonds. “Hopefully it doesn’t come to the point of default because this office would be concerned about a negative fallout in the market,” said Tom Dresslar, spokesman for Treasurer Bill Lockyer.

Lockyer in the past has referred to CABs used by school districts as the equivalent of “payday loans” because of their ability to pile up future debts. Asked why California sold tobacco CABs under his tenure, Dresslar said Lockyer had just entered office in 2007 and the bond deal already was in the works.

The debt is much easier to manage in states that avoided CABs. Last October, Washington refinanced the tobacco bonds it sold in 2002, selling $334.7 million of new, lower-cost debt. Arnone led that deal as well, which netted $2 million in fees for Barclays and other firms. As before, the state avoided CABs.

Washington now expects to repay its tobacco debt two years earlier, by 2023. At that point, 100 percent of its tobacco dollars will again flow to taxpayers instead of investors.

“The money from the tobacco settlement was supposed to go into research and education to prevent people from getting into smoking and, of course, we want that to happen,” said Kim Herman, who heads the state’s tobacco securitization authority.

Smoking’s toll, after all, was the reason states fought Big Tobacco for the money in the first place. But when the final legal settlement was signed in 1998, it did not require states to spend at least some money on smoking prevention.

“That was a mistake,” said Iowa Attorney General Tom Miller, who helped lead the settlement negotiations and is still in office. Miller said he did not oppose securitizing a large slice of Iowa’s proceeds, 78 percent, as long as it still left a portion remaining for tobacco prevention programs.

But Michael Moore, who as Mississippi’s attorney general filed the initial lawsuit that led to the settlement, says the states that securitized made a “sucker bet” that diverted the winnings of the fight away from their intended purpose.

“The people making the decisions think that this money fell out of heaven,” Moore said. “No. This money was related to a public health battle, probably the biggest public health battle in our nation’s history, trying to combat the No. 1 cause of death and disease.”

The Centers for Disease Control and Prevention estimates that to make a real dent in smoking states should collectively be spending $3.3 billion a year on anti-tobacco programs.

The Campaign for Tobacco Free Kids, a smoking-prevention group, said tobacco companies spend $8.8 billion a year on marketing. By comparison, states together spent $481 million on prevention in their most recent fiscal years, the campaign’s latest report said.

The state that spent the least?

New Jersey.


President Obama is about 35 hours behind schedule

Thu, 2014-08-07 04:59

So, somebody at the Washington Post clearly has too much time on their hands.

Perhaps he or she was waiting for President Barack Obama. After President Obama was more than an hour late to a news conference yesterday, they went to official White House records and added up how late the President's been all year.

On average, he’s 11 minutes late to scheduled events. The cumulative total: 

2,121 minutes.

That's 35 hours and 21 minutes.

Or, about a day and a half. 

Obama has been a cumulative 35 hours, 21 min late to events this year.

— Rubina Madan Fillion (@rubinafillion) August 7, 2014

PODCAST: Big money from BofA

Thu, 2014-08-07 03:00

Two published reports today suggest that Bank of America could pay something in the range of $16 billion dollars to settle with the government for alleged misconduct in the run up to the 2008 financial crisis. More on the how the situation might play out. Plus, President Obama is expected to sign legislation that would pump just under $17 billion dollars into the Department of Veterans Affairs' struggling healthcare system. The agency came under fire for sometimes fatal delays for treatment and staff manipulating waiting lists. The money will go towards hiring more nurses and doctors - and to allow some veterans to get care outside the VA system. Also, one of the biggest business and policy stories of the decade is emerging from Mexico, where the Senate there has approved the centerpiece of a new plan for the country's oil industry.  The decision ends the 75-year long monopoly held by the state-owned company Pemex.  Privatization is on the way.

Mexico ends Pemex's 75-year monopoly on oil

Thu, 2014-08-07 02:00

One of the biggest business and policy stories of the decade is emerging from Mexico, where the Senate there has approved the centerpiece of a new plan for the country's oil industry. The decision ends the 75-year long monopoly held by the state-owned company Pemex. In other words, privatization is on the way. León Krauze, anchor and longtime correspondent for Univision News, has been looking into the radical change for one of Mexico's most powerful institutions.

Click the audio player above to hear León Krauze in conversation with Marketplace Morning Report host David Brancaccio.

Will the cash from the VA healthcare overhaul help?

Thu, 2014-08-07 02:00

President Barack Obama is expected to sign legislation that would pump just under $17 billion into the Department of Veterans Affairs’ struggling healthcare system.

The agency came under fire earlier this year over unacceptable treatment delays and after staff manipulated patient wait lists. The money from this legislation would go toward hiring staff — nurses and doctors — and to allow some veterans to get care outside the VA system.

It's a sign Congress wants veterans to get care, pronto.

That’s why the feds will cover private doctor visits for veterans who either live 40 miles from a VA medical center or have waited more than 30 days for a visit. But Disabled American Veterans Executive Director Garry Augustine says vets, by and large, like what they get at the VA.

“The VA knows how to treat the post-traumatic stress. The different type of spinal cord injuries. Those are done better in the VA than any place else,” he says.

Surveys dating back a decade concur. They show vets are more satisfied with the care they receive at the VA than patients are with what they get in private sector hospitals.

Former VA administrator Dr. William Duncan says the challenge is providing timely care and keeping vets tethered to the VA. He knows peeling people away – even temporarily – means connecting them to other providers who may even be less functional.

“There’s a lot of doctor’s offices that are not electronic. It depends on paper. Paper gets lost. It’s a mess,” he says.

Duncan hopes the money to hire more doctors and nurses will add capacity to the VA, but he warns this money will only be well spent if the VA can build smart systems to track and treat their patients, too.

Why, for many, the price of homes is too damn high

Thu, 2014-08-07 02:00

A new report shows homes in a third of the country are getting harder to purchase for many Americans. Thursday’s RealtyTrac report looks county by county at income and housing prices to find out how affordable homes are. While they’re still affordable in much of the U.S., many people in certain areas are increasingly finding it hard to own.

“Prices are getting out of touch with what folks can actually afford in those markets,” explains RealtyTrac vice president Daren Blomquist.

In these areas, home prices are rising faster than income. This affordability problem is not so much because of a hot housing market, but rather a frosty job market. Many of those new jobs we hear about in monthly labor reports just don’t pay well enough.

“It’s particularly key in terms of first-time homebuyers that even though the rate of employment growth has gone up, the rate of wage growth hasn’t really gone up much,” says housing economist Michael Carliner.

Mortgage rates aren't likely to get much lower, so something’s got to give. Either the job market improves or home prices will hit the brakes.

Mark Garrison: The RealtyTrac report looks county by county at income and housing prices to find out how affordable homes are. They’re still affordable in much of the country, but many people in certain areas are increasingly finding it hard to buy.

Daren Blomquist: Prices are getting out of touch with what folks can actually afford in those markets.

RealtyTrac VP Daren Blomquist says in those areas, home prices are rising faster than income. This affordability problem is not so much a hot housing market. It’s a frosty job market. Housing economist Michael Carliner says all these new jobs we hear about don’t pay well enough.

Michael Carliner: I think that is key. It’s particularly key in terms of first-time homebuyers that even though the rate of employment growth has gone up, the rate of wage growth hasn’t really gone up much.

Mortgage rates aren’t likely to get any lower, so something’s gotta give. Either the job market improves or home prices will hit the brakes. In New York, I'm Mark Garrison, for Marketplace.

Password breach renews focus on authentication

Thu, 2014-08-07 02:00

In one of the largest cyber thefts in history, a Russian crime ring has stolen more than a billion internet usernames and passwords. While it’s still not clear which businesses and individuals are affected, it is clear that many businesses are threatened.

 We spoke to Cyrus Farivar, Senior Business Editor at Ars Technica, to talk keeping passwords secure. Here were his insights:

One potential solution to the problem of easy to remember/hard to hack passwords is a password manager, but even this requires remembering a master password to the manager.

Non-password based solutions such as eye scanners and fingerprint scanners are not yet in the consumer space (save the current iPhone), but they are in high security areas like banks and military installations.

Even so, the best advice going forward for consumers, according to Farivar, is the same it has always been: don’t use the same password for too many accounts, especially if one is substantially more important than others. 

A future we haven't imagined, but might forget

Thu, 2014-08-07 01:00

We've been covering the European top court ruling and subsequent battles over the "Right to be forgotten" for some months now. At this point, the motivations of the key players seem clear.

Google wants to organize all of the Internet's information without it saying "redacted" all over it.

A guy who had some debts but paid them -- and apparently 70 thousand other people -- felt like the top result when people search for his name infringes on his right to have that material wiped from the Internet record.

Government officials want to protect citizens and introduce some order to an environment that seems chaotic.

Each kind of party involved has gloomy predictions about the future if the right precautions aren't taken. And while I've envisioned all of those predictions as possible, there's one potential future I didn't imagine: What if only a small number of people request takedowns, but they're all the worst kind of people?

This is what dawned on me while I was reading the news about Wikipedia's first transparency report, which includes information about granted rtbf requests. Among the five Wikipedia entries and 50 links affected: One on an Italian criminal with four life sentences, an Irish bank robber, a musician, a chess player, and an Italian gang (Italy gets two!).

Wikipedia has discouraged us from assuming the anonymous requesters are always the same people whose entries are being impacted. But I feel like it's safe to say these do not seem like hugely important entries. So who is requesting the search results for them be changed? 

I worry that the new European policy will be manipulated not by waves and waves of people who want that awkward photo taken down, like tech companies would have us believe. Nor by people who have legitimate arguments (and we should be cognizant of the importance of second chances).

Instead the policy might be used by a very select few. People who have too much time on their hands (OK maybe not the end of the world). But perhaps also organizations and people that benefit directly from keeping the truth hidden or at least blurred. Even on a small scale, that kind of selective editing can be annoying, and even dangerous.

Tesla teases Reno with a Gigafactory

Wed, 2014-08-06 13:41

Electric car manufacturer Tesla has started work on a huge new battery factory in Reno, Nevada, but don’t let that fool you. Reno may not end up with the factory and the 6,500 jobs it is expected to create.  

Tesla started building in Reno, even though its new “Gigafactory” may not actually be completed there.

On a recent earnings call, CEO Elon Musk said he might start similar construction on one or two other sites. The company is also looking at locations in Arizona, California, New Mexico and Texas.

“Before we actually go to the next stage of pouring a lot of concrete though, we want to make sure we have things sorted out at the sort of state level, that the incentives are there that makes sense,” Musk said, adding “on the Nevada side, at this point the ball is on the court of the governor and the state legislature.”

Tesla wants the eventual host state to chip in 10 percent of the factory’s $4-to-$5 billion price tag. While it negotiates, the car maker says it’s worth construction costs to get the factory up and running as soon as possible.

"Any potentially duplicative investments are minor compared to the revenue that could be lost if the launch of Model 3 were affected by any delays at our primary Gigafactory site," the company wrote in its recent investor letter.

“It’s pretty unusual for them to be actually starting construction on a site,” says Tim Bartik, an economist for the W.E. Upjohn Institute for Employment Research, though he says shopping around for a good deal from states is common.

Still, states should approach these types of deals with caution.

“People should realize that incentives are not a free lunch,” says Bartik. “They do involve costly resources.”

Local officials need to analyze what kind of wages the company will pay or the types of suppliers it might work with.

“Until recently, most states weren’t doing this kind of analysis,” says Josh Goodman, with the Pew Charitable Trusts Economic Development Tax Incentives Project. “Sometimes, they might do the analysis on a program that was getting attention because there was a lot of problems there.”

But many of states are wising up, Goodman says, passing laws and requiring periodic reviews of their incentives to be sure they are actually good deals for the state.

Graphic by Shea Huffman/Marketplace

Why Walgreens stepped back from the inversion brink

Wed, 2014-08-06 13:40

Pharmacy company Walgreens announced it is not going to invert after all. 

Corporate inversion is the practice of one company merging with another that's based abroad to avoid taxes or gain access to assets held abroad. At least 47 U.S. corporations have reincorporated overseas in the past decade, more than during the past 20 years combined, according to the Congressional Research Service.

Walgreens first began to buy up British firm Alliance Boots two years ago, purchasing a 45 percent stake in the company and laying out plans to purchase the remaining 55 percent in 2015. At some point, Walgreens considered the possibility of converting the deal to buy Alliance Boots into a deal to invert via Alliance Boots.

“We had to look at whether the structure of the deal would allow for an inversion,” says spokesman Michael Polzin, and that structure proved unworkable. “We’d have to rip up that deal and come up with a new deal.”

There’s a special provision in U.S. tax law that says the inversion doesn’t count – that is, the newly formed company won’t be considered a foreign company, and won’t get tax benefits – if the shareholders from the U.S. side of the inversion own 80 percent or more of the newly formed company’s shares going forward.

“Walgreens would’ve had to renegotiate the deal with Boots in order to make sure that Boots’s shareholders ended up with at least 20 percent of the combined merged entity’s stock and that would’ve been difficult to accomplish,” says Dick Harvey, distinguished professor of practice at Villanova School of Law and Graduate Tax Program.

Walgreens is also different from many other companies in that people know it well, and its brand has accumulated significant consumer good will.

“This is a 100-year-old pharmacy in the United States, with a very long and storied legacy and it’s something the consumer is familiar with,” says Ross Muken, senior managing director and partner at ISI Group. “If [pharmaceutical and medical device companies] AbbVie or Covidien leave the United States, no one knows those brands as a consumer. But most people will know Walgreens.”

Consumers could be turned off if the Walgreens they knew skipped town for tax reasons. If consumers didn’t make the connection, an aggressive ad campaign by a competitor could easily help convince them.

There are about eight corporate inversions pending, Harvey says, but he estimates there could be 50 to 100 more in the next year or two. Politicians and government officials are already taking aim at corporate inverters.

“My attitude is, I don’t care if it’s legal, it’s wrong,” President Barack Obama told an audience at Los Angeles Trade-Technical College in a speech July 24. “I propose closing this unpatriotic tax loophole for good."

Uncle Sam is a customer Walgreens would rather not antagonize — it gets between a quarter and a third of its business from the government through Medicare and Medicaid, says Muken. But most companies considering an inversion don’t have these concerns.

While many businesses wait for comprehensive tax reform, which may or may not materialize, the treasury department announced it would try to close some inversion loop holes on its own. Harvey says this is unlikely to deter many firms.

“There are two or three main benefits from an inversion – and treasury might be able to address one or two of them but there will be other benefits, that could result in businesses inverting even if treasury takes action," Harvey says.

Those benefits include gaining access to assets held abroad, and stripping out earnings from the United States. 

For most firms considering an inversion, he says, those temptations are too good to resist.

Can a rebuilt Gaza build an economy?

Wed, 2014-08-06 13:37

Wednesday is day two of a three-day ceasefire between the Israeli Army and Palestinian fighters in Gaza. In Egypt, indirect talks have proceeded between Israeli and Palestinian officials, aimed at extending the ceasefire and opening up Gaza's borders to trade and people.

Israel has largely sealed the borders it shares with Gaza since 2007, when Hamas took over. Recently, the military-led government in Egypt severely restricted its border with Gaza, shutting down the smuggling of goods, people and weapons through a large network of tunnels there.

As the ceasefire began on Tuesday, Palestinian deputy economy minister Taysir Amro estimated the direct damage from Israeli bombing and ground incursions at $4 billion to $6 billion. At least 10,000 homes and 140 schools are believed to be destroyed or damaged; Gaza’s power plant is heavily damaged, as is water treatment and other public infrastructure. Norway is reportedly organizing an international donor’s conference in September to begin the process of raising funds to restore services and rebuild.

“Even if you bring in $5 billion, $6 billion, $8 billion or $9 billion, all that will do is replace what they had, put them where they were,” said Shibley Telhami, a political scientist at the University of Maryland and author of “The World Through Arab Eyes.”

“We know that where they were was an awful place," he says. "Some people were calling it an ‘open prison.’”

"There's no economy in Gaza"

Since 2007, when Hamas seized power from the Palestinian Authority in Gaza after winning an election there, Israel has kept all but a trickle of humanitarian supplies and people from crossing the border. Except for what has been smuggled through tunnels from Egypt, virtually no building supplies are allowed in by Israel for Gazans to use — Israel says these could be used for military purposes. And virtually no produce or furniture or other goods go out to sell in the West Bank, Israel, or farther afield.

“There’s no economy in Gaza — you can’t export from the Gaza strip,” said Khaled Elgindy, senior fellow at the Center for Middle East Policy at the Brookings Institution, who has served as an adviser to Palestinian negotiators in Ramallah.

Elgindy says there is little in the way of industry, agriculture or services in Gaza that could bring capital into the economy. So most development — in fact most consumption — comes from international aid, which 70 percent of residents receive. The unemployment rate is at least 40 percent, according to the World Bank. GDP has been falling in recent years.

Gaza’s "real" GDP growth, according to World Bank. (Source: World Bank)

What would have to happen to get economic development going in Gaza? The experts interviewed for this story said the first prerequisite is more open borders — for supplies coming in, goods for export going out and people (foreign visitors, expatriate family members and workers) going in both directions.

Second, they said Palestinians need more control of key infrastructure and economic relationships with immediate neighbors and potential trading partners.

“It would make a huge difference, in terms of normalizing Gaza, to have a seaport,” said Elgindy. The airport should also be rebuilt and opened to international flights, he said.

Telhami said if Palestinians controlled their own seacoast and airspace, and could clean up the beaches: “Gaza does have a waterfront. In good times, if they ever come, it could be turned into a relatively inexpensive vacation spot.”

Fishing has been severely limited by Israel, which controls the waters off the coast; Telhami said that industry could expand as well, supplying fish to the West Bank.

Leila Hilal, senior fellow at the New America Foundation, said Gaza has human capital that could drive economic development.

“Gazans are very enterprising, they’ve been surviving under total isolation,” said Hilal, adding that the population of Gaza is young, educated and urban. She said the Palestinian diaspora could potentially help — providing expertise, export markets and investment dollars.

But, she said, a political opening in the peace process with Israel, and significant progress in opening borders and normalizing the ability of Gazans to travel and trade freely, would have to come first.

It's all monkey business for Wikimedia

Wed, 2014-08-06 13:35

Remember that picture that was floating around the internet a while ago?

The one a monkey had taken of herself using a camera it had liberated from a British wildlife photographer. It was basically a monkey-selfie.

Anyway, The Telegraph reported today that Wikipedia has declined the photographer's requests to stop distributing the picture without his permission because the site says the monkey pushed the shutter button and so it owns the copyright.

The NCAA's top conferences break out

Wed, 2014-08-06 10:13

A new proposal that grants the country’s top college athletics programs more money for their athletes and loosens NCAA restrictions is expected to be approved Thursday.

"The move comes amid vigorous public debate about the proper role of sports in higher education, and whether college athletes should be compensated for the billions of dollars they help generate," says Marc Tracy, college sports reporter for The New York Times.

This proposal will make the Big 5 conferences' first-class status official, but it might not be good news for the smaller programs. Non-Big 5 athletic programs could possibly lose their funding or be shut down.

"If you’re a non-Big 5 school that nonetheless feels it needs to compete with Big 5 schools and offer more to students, say in football, then you might need to cut costs elsewhere," says Tracy. "Will that actually be something that happens? I don’t know, but it’s certainly possible."

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