Archive for September, 2010
Tuesday, September 28th, 2010
Smeal’s John Liechty appeared on Bloomberg Television yesterday to talk about the Office of Financial Research, a new federal agency he helped create that is charged with identifying systemic risk in the financial sector.
You can view his appearance on YouTube.
Thursday, September 23rd, 2010
Six months after President Obama signed the Affordable Care Act, the first set of reforms take effect today. These consumer protection provisions include, among others, banning insurance companies from excluding children with preexisting conditions or imposing lifetime benefit limits.
Other reforms will take effect in the coming years, and according to Smeal’s Keith Crocker, the biggest change is on its way in 2014. In an interview on Smeal’s Research with Impact website, Crocker explains his belief that the Affordable Care Act will destroy the private insurance market:
The big issue here is that the recent health care reform legislation will eliminate medical underwriting beginning in 2014. This will be implemented through the elimination of the preexisting condition exclusions and the result will be to destroy the individual market for insurance. The argument is that “an insurance company shouldn’t be allowed to reject you just because you’re sick, ” and everyone says, “Oh yeah. They shouldn’t be able to do that.” The problem here is that if you don’t allow insurance companies to tailor the premium to the cost of the risk that they are assuming, then the result will be adverse selection where only the sickest people will buy insurance.
As an example, think about life insurance. Suppose there was a prohibition of preexisting conditions on life insurance, meaning the insurance company had to accept all applicants for the same premium, no matter what they looked like. Well, as it turns out, one preexisting condition is age, so, in this setting, insurers would have to charge everyone the same price for life insurance independently of how old they were. Young folks would find the insurance to be too expensive and would exit the applicant pool, while older folks (for whom the chances of their heirs collecting on the policy are higher) would go ahead and purchase the insurance. As a result, the applicant pool would end up consisting of older high-risk individuals and the premiums would have to increase to reflect that high-risk pool. The only way to get younger folks to buy life insurance would be to charge them a lower premium that reflected their lower actuarial cost. But, then, insurers would be classifying applicants based on a pre-existing condition—their age.
It’s the same with medical insurance. If insurers have to take everybody, then only the sickest people will find it useful to get insurance, so the premiums will have to rise to reflect the costs associated with the sickest people. When the premiums go up, the young and healthy and the smaller businesses will drop out of the insurance market because they cannot afford the premiums, and they will join the ranks of the uninsured.
Prohibiting pre-existing condition exclusions destroys an insurance market because risk classification through medical underwriting is what eliminates adverse selection and adverse selection is the poison that kills insurance markets.
Wednesday, September 15th, 2010
The Wall Street Journal reports today on the role Smeal’s John Liechty had in the creation of the new federal Office of Financial Research, which is part of the recently enacted financial reform bill. Here’s an excerpt:
Pennsylvania State University Prof. John Liechty last week gave an exam to his marketing class. Far from campus, another of his projects faces a much bigger test—and all of Wall Street is watching.
Mr. Liechty, 44 years old, has helped design an electronic safety net to assess systemic financial risk in a bid to prevent another banking calamity. The project—formalized as a new federal office in the financial-regulation act—is called the Office of Financial Research.
… Messrs. Liechty, Reesor and Flood got the idea for the OFR while attending a February 2009 financial-system workshop. Mr. Liechty realized regulators had no ability, or legal framework, to collect and share data on the global financial system and therefore no way to measure system-wide risk.
“Not only is it crazy, it’s dangerous,”‘ Mr. Liechty recalls thinking.
They wrote a seven-page paper proposing a national institute of finance that would operate a data center and then facilitate research and analysis. The proposal said regulators then could assess a financial contagion and perform independent stress tests for banks.
The article goes on to explain how Liechty and his colleagues worked with Congress to draft the legislation, which was signed into law by President Obama on July 21.
Friday, September 10th, 2010
When FASB chair Robert Herz announced that he’s stepping down at the end of this month, the Financial Times reported that his retirement decision was “greeted with dismay by the accounting profession.” Perhaps so, but Smeal’s Ed Ketz is not among the dismayed.
In April 2009, when FASB eased mark-to-market accounting rules under pressure from banks and Congress, Ketz wrote a column entitled “Herz Should Resign.” An excerpt:
I have found Mr. Herz quite intelligent, filled with much knowledge about accounting and finance, well-mannered, articulate, and an avid defender of the accounting profession. Unfortunately, I also find Herz lacking in courage and moral fortitude. Whenever some bully comes on the scene and challenges him and the FASB to a fight, he runs away. When accounting truth is at stake, he compromises and enables corporate managers to use methods and vehicles by which they can cook the books. Shame!
In his latest column, Ketz offers some suggestions to replace Herz:
To begin, I think the appointment of Leslie Seidman as interim chair is a mistake, and I certainly would not make this interim appointment permanent. Even if she is highly credentialed and capable, she is a banker, having worked for JP Morgan. The guilt-by-association eliminates her from consideration.
The [Financial Accounting Foundation] needs to appoint someone who has the necessary accounting and political skills to be chairman. He or she also needs the courage to confront the primary enemies of good financial reporting.
I would also like to see the FAF appoint somebody from the user community, somebody who deeply understands the needs and the recent frustrations of investors and creditors. Names like Jim Chanos and David Einhorn come to mind. They understand accounting thoroughly, having penetrated the deceits foisted upon them. And they won’t take any crap from Wall Street or from Congress.
Considering the composition of the FAF, I expect them to give us the same old same old. But I can dream, can’t I?
Friday, September 3rd, 2010
With the college football season opening last night, Smeal’s Andrew Bergstein, associate director of the Center for Sports Business & Research, comments on Big Ten expansion and what it means for the future of college athletics:
Major League Baseball was “America’s game.” Then the NFL laid claim to that title. The ongoing expansion of college football conferences and talk of “Super Conferences” could lend credence to the claim that, at the very least, college football is now among the big three with the NFL and MLB.
Visionary Big Ten Commissioner Jim Delany and the other academic and athletic leaders of the conference partnered with Fox and created their own cable television programming with the Big Ten Network. Then the Big Ten opened up the nationwide expansion competition—and the door for its own lucrative conference playoff game. Some analysts think this is just beginning of expansion, including the potential for “super conferences” made up of 16 or more universities.
Like the NFL in earlier days, part of the magic money comes from cable giants like ABC-ESPN, CBS and, to some extent, NBC and their corporate advertisers. Old school college football fans might raise their eyebrows, but others think this is just part of the positive evolution of big-time college football. More money means more opportunities, not just for college football, but for other endeavors of super-conference universities, including women’s teams, club and recreational sports, and facilities. Of course this is all just late, late summer reading until the real fun begins tomorrow when the college football season begins in earnest.
Thursday, September 2nd, 2010
Smeal’s Brian Davis weighs in on the economic politics of the day:
I don’t know what has gotten into me. I remember voting for the Libertarian Party when it stood for hands off my wallet and hands off my morality. What a long strange trip it’s been. I can’t say that I am part of the 18 percent of the population (a recent poll) that feels the country is “moving in the right direction.” But I also can’t say that I see a lot of alternatives out there offering anything other than warmed-over nostalgic Reaganism, empty rhetoric without insightful remedy, or anger-laden, child-like tantrums, whining that the economy hasn’t gotten better fast enough.
I recently read an article in The New York Times stating that political donations from Wall Street are shifting from Democrats to Republicans. It made me first laugh, then cry, and lastly become extremely concerned (yes, I am exaggerating). It has been two years since the country voted to make a change from a period in which the GOP, of both moderate and conservative stripes, dominated political-economic policy in the United States. Now, from Glenn Beck’s march on Washington, I hear that, in the past year and a half, America has turned into Stalinist Russia, Nazi Germany and, worst of all, France. Wow! Really? Double Wow! I can’t say, again, that I am happy with everything that has happened over the past 18 months—far from it. But do I really think that John Bohener, Sara Palin or any representative from the Tea Party has anything to offer other than the same economic wisdom, oversight and caretaking ability offered by the powers navigating the ship from 2000 to 2008? Weren’t these the people leading the way back in those halcyon days? But I digress.
Perhaps God and Thomas Jefferson will strike me down for my heresy. I have always felt that the tree of liberty—including economic liberty—should be nourished with the blood of tyrants. I just wonder if we are nourishing the tree with the wrong tyrannical blood. My, we live in interesting times.