Kevin Drum

Cutting Costs the WellPoint Way

| Thu Apr. 22, 2010 3:03 PM EDT

Cancer survivor Murray Waas files a dispatch for Reuters about WellPoint's treatment of women who contracted breast cancer:

The women all paid their premiums on time. Before they fell ill, none had any problems with their insurance. Initially, they believed their policies had been canceled by mistake.

They had no idea that WellPoint was using a computer algorithm that automatically targeted them and every other policyholder recently diagnosed with breast cancer. The software triggered an immediate fraud investigation, as the company searched for some pretext to drop their policies, according to government regulators and investigators.

Once the women were singled out, they say, the insurer then canceled their policies based on either erroneous or flimsy information.

The whole story is here.

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Popping the Tea Party Bubble

| Thu Apr. 22, 2010 2:17 PM EDT

In Politico today, Jonathan Martin and Ben Smith write that the mainstream media, after being caught off guard by the rise of the tea parties, now seems determined to make up for that by manically overcovering them:

Part of the reason is the timeless truth in media that nothing succeeds like excess. But part of the reason is a convergence of incentives for journalists and activists on left and right alike to exaggerate both the influence and exotic traits of the tea-party movement. In fact, there is a word for what poll after poll depicts as a group of largely white, middle-class, middle-aged voters who are aggrieved: Republicans.

But just read the succession of New York Times stories, profiling newly energized activists who are “bracing for tyranny.” Or follow the dispatches of the CNN crews who went along with two national Tea Party Express bus tours. Or delve into the crosstabs of polls conducted in the past few weeks by the Times, CNN, and POLITICO about the opinions and demographic characteristics of tea partiers. Or check out the blogger the Washington Post hired to chronicle their movement....Indifference has given way to curiosity, and — in recent weeks especially — to a nearly manic obsession that sometimes seems to place the tea partiers somewhere near the suffragettes and the America-Firsters in the historical ranking of mass political movements.

....The tea parties’ main expression has been public gatherings. But last week’s Tax Day crowds were not representative of a force that is purportedly shaping the country’s politics. About a thousand people showed up in state capitals like Des Moines, Montgomery and Baton Rouge — and even fewer in large cities like Philadelphia, Boston and Milwaukee. In some cases, turnout was less than the original protests spurred by the stimulus, bailouts, financial crisis and new Democratic president last April 15th.

....What’s more, the eruption of protest after a president of a new party takes the country in a new direction is a standard feature of modern American politics. Ronald Reagan’s election produced record-breaking rallies for the now-forgotten Nuclear Freeze movement. The right, with rhetoric and occasional excesses that are almost identical to those of today, rose up angrily against Bill Clinton in the mid-1990s.

Look: this is right. It just is. The tea parties ought to be covered, and liberals should fight back against them. But treating them as some kind of massive new movement misses the point. These people have been around forever, and they're always upset when liberals take over. In fact, if there's anything new about the tea partiers it's that the movement is smaller, less organized, and less influential than either the Birchers of the 60s or the anti-Clinton wingnuts of the 90s. That is, the power of populist conservatism has actually declined over time. The real driver behind all the press attention was pointed out by the friend who emailed the Politico piece to me:

The subtext here, though, is the power of conservative media over other MSM outlets. Unaddressed is how the Tea Party elements came to prominence in such a way that other media outlets were compelled to play catch up. The answer of course is Fox.

Politico itself, of course, has been second only to Fox in its obsession with the tea parties, something that Martin and Smith briefly allude to but then drop. As my friend cynically notes, "Perhaps their page views are slowing down on those stories, enabling them to try a 'let's move on' approach. More likely, this is just another Tea Party story to continue the page view diet they seem addicted to."

Well, maybe. I guess I'm a little more charitable. I don't want the media to stop covering the tea partiers, but they really need to dial it down a notch and give it only the attention it deserves. Which is to say: not that much, really. Remove Fox and FreedomWorks from the equation and there probably wouldn't be much left of the whole movement. So whether they're doing it for pageviews or not, bravo to Politico for pointing this out.

Healthcare Reform After a Month

| Thu Apr. 22, 2010 1:20 PM EDT

So how is public opinion on healthcare reform coming along? Here's the top line from a Kaiser Family Foundation poll taken last week:

Democrats outnumber Republicans, so overall 46% of the country favors the bill vs. 40% who don't. Still, independents remain skeptical: 46% are unfavorable vs. 36% who are favorable.

That's going to take some work to overcome. On that score, there's some good news and some bad news. The good news is that Kaiser also polled some of the specific provisions of the healthcare bill that take effect quickly, and virtually all of them were extremely popular. Every single one polled over 50% and virtually all of them were favored by more than two-thirds of the respondents. Even Republicans approved of most of them.

So that's something to work with. And the bad news? People are pretty savvy about who the bill will help: the poor, the uninsured, and those with preexisting conditions. However, only 31% think it will help them, and broadly speaking, they're probably right about that in the short term. For most voters, then, we're going to have to appeal to the better angels of their nature, and that's always a crap shoot.

This all comes via Austin Frakt, who points to another part of the poll that says 26% of the country got at least some of their information about healthcare reform via blogs and non-media websites. Not bad! Only 6% said it was their most important source, but that doesn't strike me as surprising. After all, even for me I'd have to say that it's a close call whether blogs or traditional news media were my most important source of information about healthcare reform. Being a healthy part of the mix is probably about as much as we can hope for.

Obama on Financial Reform

| Thu Apr. 22, 2010 12:54 PM EDT

President Obama's big speech on financial reform is here. After hearing it, I don't feel so bad about being unable to make the subject fascinating. If even Obama can't make it sound interesting, what chance do I have? Here's the Reader's Digest version:

First, the bill being considered in the Senate would create what we did not have before: a way to protect the financial system, the broader economy, and American taxpayers in the event that a large financial firm begins to fail....Second, reform would bring new transparency to many financial markets....Third, this plan would enact the strongest consumer financial protections ever.

So: resolution authority, derivatives clearing, and the CFPA. All good stuff. Important stuff. Better than nothing. But in the great battle between those who want to bust up the big banks and those (like me) who want to implement serious, wide ranging limits on leverage — well, guess what? We're both losers. Structurally, Wall Street just isn't going to change much after all this stuff is passed.

Basel I, II, III

| Thu Apr. 22, 2010 12:15 PM EDT

After my lunch with Felix Salmon a few weeks ago I demanded better coverage of international negotiations over capital standards in the banking industry. Why? Because "international negotiations over capital standards in the banking industry" is possibly the most boring sounding topic of all time; the talks all happen behind closed doors; and it's supremely important.

A higher capital standard is sort of like requiring a higher down payment on a house: not only does it mean you're borrowing less, but it also means you have a bigger equity cushion in case the value of the house drops. It makes it harder to overextend yourself on a house you can't afford and it means you won't be wiped out by a small drop in the house's value. In a nutshell, this is what we want to do to banks: force them to buy less house and maintain better reserves against the possibility of disaster. It will make them less profitable, but it will also make them safer.

Now, we've been through all this before. The original Basel standards for capital adequacy were OK but not great. But the Basel II standards were a disaster. Partly this was because every country has different financial customs and different sectors where it's stronger or weaker, and every country wanted to protect both its own customs and its own strongest sectors. The result was lots of flexibility. Too much flexibility.

But that was then. After a global financial meltdown we're all going to suck it up and get serious, right? Guess again:

Countries involved in the negotiations agree banks should maintain larger capital reserves, but disagree on key details, including definitions of core terms. Officials are instead moving to protect the interests of their own banking industries while penalizing others elsewhere.

....In the talks, some U.S. government officials are fighting what they view as an anti-American proposal that would prevent banks from counting as part of their capital cushion a specific type of security favored by U.S. banks known as a trust-preferred security.

Several other governments are pushing to change the way tax credits are counted as capital, amid arguments that the rules help banks in certain countries but hurt others. French officials are lobbying against rules that could force some of their banks to divest themselves of insurance subsidiaries or face major blows to their capital. The Japanese are also opposed to elements of the new rules.

Meanwhile, U.K. and U.S. officials have clashed over British attempts to require foreign banks to stash more cash in their U.K. subsidiaries. A top official with the U.K.'s Financial Services Authority, Britain's top regulator, says the policy is a response to the U.K. getting burned by the collapse of Lehman Brothers, which taught the agency "to be cautious about relying on other regulators."

Yuck. This is a big part of what made Basel II so toothless. But it's important stuff, because it's one of the keys to a safer banking sector. The United States can, if we want, implement tough rules on our own — and I think we should — but banks are too globally interconnected to make this the best solution. A safe American banking sector doesn't do anyone much good if the riskiest practices just move to Frankfurt or Tokyo. So boring or not, keep your eyes on this.

Blank Stares

| Thu Apr. 22, 2010 11:22 AM EDT

Sen Chris Dodd (D–Conn.), chairman of the Senate Banking Committee, on the financial meltdown:

The first week in February, we had our first hearing on the crisis of 2007, and it was on the mortgage crisis. We had witnesses who laid out exactly what was going to happen; in fact, they underestimated what would happen, and they were ridiculed for estimating what they did! And all that spring we went back and forth had meetings, we had a big gathering at the Banking Committee room with all the major players on mortgages. We had an awful time getting Hank Paulson to recognize anything. And Ben Bernanke, too. They'd come to meetings and they'd kind of have this blank stare, all during that spring, through that summer, into the fall.

Blank stares? Really? I can almost buy that with Paulson, but Bernanke? He obviously didn't see the housing bubble in time, but whatever else you might think of the guy, he doesn't really strike me as the blank stare type.

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Next Stop: Kandahar

| Wed Apr. 21, 2010 4:33 PM EDT

Michael Cohen is feeling pretty pessimistic about the next stage of the war in Afghanistan:

All the warning signs about operations in Kandahar are blinking red. We have a civilian population that fears NATO intervention and is broadly sympathetic with the Taliban; we have a US military untrained in the ways of counter-insurgency and chafing at restrictive ROEs; we have an Afghan government that is hardly supportive of the mission and with Karzai's drug-dealing brother in charge of Kandahar not terribly interested in good governance and ending corruption; and of course we have a vicious insurgent force more than happy to up the ante by murdering innocent civilians and using mosques as execution chambers.

Read the whole thing for the details that provoked this conclusion. I hope that Cohen and I are both wrong, but I sure have found it difficult to find anything lately that makes me hopeful about the possibility of success in Afghanistan. I won't be at all surprised if the headlines coming out of there ten years from now look pretty much the same as they do today.

Good News on Financial Reform

| Wed Apr. 21, 2010 1:47 PM EDT

Blanche Lincoln's legislation to rein in derivatives trading passed its first hurdle today:

The Senate Agriculture Committee on Wednesday approved legislation to tighten regulation of derivatives trading, with a single Republican, Senator Charles E. Grassley of Iowa, joining Democrats in supporting the measure. The vote was 13 to 8.

The defection of Mr. Grassley, who is the senior Republican on the Finance Committee and is up for re-election, illustrated the increasingly difficult political position for Republicans in opposing the legislation....His vote to support the measure underscored the potential political peril in opposing tighter rules for Wall Street, at a time of public frustration over the return of huge earnings and blockbuster bonuses even as unemployment remains high and the economy struggles to recover in much of the country.

Like I said yesterday, originally I didn't take Lincoln's proposal seriously. It seemed like it was just a stalking horse, a way for her to look tough and get some good hometown headlines even while knowing that it would quickly get watered down. And that might still happen, of course. Her derivatives language still has to survive a merger with the Banking Committee bill, a vote on the Senate floor, and then the conference report. The odds of coming through all that unscathed are pretty remote.

But....you never know. Republicans are obviously feeling some heat on this, and it's not as though anyone outside of Wall Street has any sympathy for the derivatives industry. For now, this remains a possible bright spot on the financial reform horizon.

The McConnell Line

| Wed Apr. 21, 2010 12:49 PM EDT

From a conversation on Twitter yesterday about financial reform:

Brian Beutler: Corker warns that the GOP is screwing up by lying about reg reform: http://bit.ly/d9HXyw

Matt Yglesias: Has "lie like crazy" ever failed as a political strategy?

Bizarrely enough, it looks like the answer might be yes. GOP wordmeister Frank Luntz famously advised Republicans a couple of months ago to attack any financial reform bill as a "bailout" regardless of what was actually in it, and Senate Minority Leader Mitch McConnell took that to heart and has been doing exactly that ever since.

Unfortunately for McConnell, it turns out there really is a limit to just how baldly you can lie and get away with it. The Senate reform bill quite plainly bans bailouts, and McConnell found himself under attack from all corners. President Obama called him out on this, PolitiFact labeled his statements flatly false, fellow Republican Bob Corker told reporters McConnell was wrong, and even Mark Halperin refused to dredge up some unlikely way to defend him. And guess what? It might actually be working:

After a week of attacking the pending legislation as a ticket to new taxpayer "bailouts," McConnell is striking a different tone. Monday on the Senate floor, he called for lawmakers to move beyond "personal attacks and questioning each others' motives" to "fixing the problems in this bill."

And McConnell conceded, after being chastised by no less than President Obama in his weekly radio address, that "both parties agree on this point: no bailouts. In my view, that's a pretty good start."

...."I'm happy to hear my counterpart, my friend, Senator McConnell talk about the need for more negotiations," said Senate Majority Leader Harry Reid (Nev.), in remarks on the floor following McConnell's speech Tuesday. "We don't stand in the way of that."

Granted, McConnell might just be changing tactics. And his change of heart may be motivated more by politics than the pummelling he took over this. After all, the bailout lie wasn't really any worse than the death panel lie. The big difference is that healthcare reform was unanimously opposed by conservatives, so nobody minded the lie. Financial reform is a little different, and relentless hostility could pretty easily backfire. That makes lies a little more costly.

Still, we seem to have reached a limit of some kind, and McConnell crossed it. Maybe we should name this the McConnell Line or something so that we know when future politicians have crossed it.

The Treasury Play

| Wed Apr. 21, 2010 12:05 PM EDT

I've heard one version or another of this story about a million times now. Here is William Cohan's take on why Wall Street is so damn profitable right now:

Mostly [] Wall Street is making money by taking advantage of its rock-bottom cost of capital, provided courtesy of the Federal Reserve — now that the big Wall Street firms are all bank holding companies — and then turning around and lending it at much higher rates.

The easiest and most profitable risk-adjusted trade available for the banks is to borrow billions from the Fed — at a cost of around half a percentage point — and then to lend the money back to the U.S. Treasury at yields of around 3 percent, or higher, a moment later. The imbedded profit — of some 2.5 percentage points — is an outright and ongoing gift from American taxpayers to Wall Street.

I guess I'm demonstrating hopeless naivete by asking this, but huh? The market for U.S. treasury bonds is huge and extremely competitive, and the risk of holding treasurys is approximately zero. So if banks have access to giant pools of cash that cost them 0.5%, they should start bidding down the treasury rate until this particular arbitrage play is only barely positive. Treasury yields would very quickly end up around 0.6%, not 3%.

And yet, like I said, I've heard this same basic story over and over and over. Can someone with some serious financial sophistication explain it to us hicks? Are big banks, big as they are, not big enough players to really affect Treasury prices, so they're just free riding on a price set by the rest of the market? What's really going on here?

UPDATE: So far, the consensus in comments is that this whole story is wrong. Banks can borrow from the Fed at low rates, but those are overnight loans. They can buy treasurys at high yields, but those are ten-year notes. Chart here. As The Lounsbury puts it: "One does not finance a 10yr note off of a 24 hour repo. Of course buying and reselling (trading desk) using the overnight funding is possible, although the spread is not what he implies."