Author: Daniel Indiviglio

Yesterday, the Obama administration announced its plans to guarantee an $8.3 billion loan to build the first nuclear reactors in three decades. The new initiative is not without its opponents. I think the move is a smart one and defended the effort on a few tv/radio shows since the announcement. Opponents have three common arguments that I think are worth examining, because I don’t think they hold up.

50% Probability Of Default

Possibly the strongest-sounding argument against the government guaranteeing nuclear reactor loans comes from a Congressional Budget Office report (.pdf) from back in 2003. It found a 50% probability of default from such loans. Nuclear energy opponents love this finding. After all, a bipartisan Congressional budget authority says it’s a bad bet! But it helps to actually read the report and not consider the statistic in a vacuum.

If you do, then you find out there are two reasons why that probability is so high. The first is the regulatory barriers that exist for building nuclear reactors. But in this case, that obstacle should be much easier to overcome: if the government is really serious about more reactors, it can work with regulators and the utility companies to succeed. And by the way, if the regulators never sign off, there won’t be any guarantees anyway, so taxpayers won’t lose anything.

Second, there’s a very high initial cost in building these reactors, and current energy prices show the break-even a long ways off. But as fossil fuels become scarcer, energy will only get more expensive. And considering that the U.S. will eventually adopt a carbon pricing scheme, the economics change significantly, since nuclear emits no carbon. When nuclear reactor production begins again, costs will also decline over time, just like with all technology.

Finally, even if these loans do “default,” it won’t be as bad as it sounds. According to that same CBO report, the subsidy (loss) rate on the loans would probably be about 30%, since the reactors will get built and eventually provide some revenue. While less-than-ideal, if a $2.5 billion investment jumpstarts the nuclear energy industry again in the U.S., then I’d argue this money was well-spent.

Wall Street Hates It

Another argument is that Wall Street won’t fund it, so why should the U.S. government? It’s usually those very far to the left ideologically who rally against nuclear energy, so it’s always amusing to hear them use Wall Street bankers — who they generally decry as greedy criminals — as their foundation for an argument. But the reality is that this is precisely the sort of investment that Wall Street hates and the government should be involved in.

One of the central reasons why bankers hate nuclear investment is because of the regulatory struggles I mentioned earlier. They create great uncertainty. But again, if the government assists with this, then this barrier becomes much more manageable.

But the bigger problem with nuclear for bankers is the style of investment it requires. It’s very capital intensive at the front-end, and it takes many years to break even. As a result, it doesn’t generally satisfy Wall Street’s get-rich-quick philosophy. Private equity firms, for example, don’t hope to be involved in a firm 30 years down the road. They want to get in, make a profit, and get out, as quickly as possible. The government, on the other hand, has the time and patience for a long-term investment to pay off — especially if it significantly benefits the energy prospects of the nation.

Nuclear Is Still Dangerous

This is a common misconception. In fact, nuclear energy has proven over the years to be very, very safe. The most serious accident we’ve seen was the well-known Three Mile Island incident. While regrettable, there were no official deaths reported, and most studies agree that there was no perceptible effect of increased cancer cases for people who lived near the plant. In the end, the threat was contained. I should note, however, that there are some who dispute this.

And that was way back in 1979. Technology has come a long, long way since then. Imagine how much safer and more efficient new reactors would be that could better utilize new computing power and scientific advances. Three Mile Island, for example, was caused in large-part by human error, which better technology could help to correct.

Then there’s the worry of a terrorist threat. What if someone flies a plane into a nuclear reactor? Thousands could die. Well, what if someone flies a plane into a giant building? Thousands could die. Should we not build them either?

Nuclear waste is obviously undesirable, but if it’s carefully buried deep underground, it becomes harmless. And as Greenpeace co-founder Patrick Moore* (see note below — Greenpeace disputes this) said a few years ago in a Washington Post op-ed arguing in favor of nuclear power, after 40-years the waste’s potency is about one-thousandth what it was initially. New technology in nuclear waste recycling (used in France) also appears a promising way to get more power out of the same amount of nuclear material, reducing waste.

Nuclear energy is not the answer to future of energy in the U.S., but it must be a part of the solution. Wind and solar are important, and will have their place, but they can’t do it alone, due to their unpredictability. Nuclear power can be used as a substitute for coal and oil in big power plants that must constantly produce power. There are obstacles, but we should work to overcome them, not use them as excuse to not bother trying to utilize a promising energy source.

—
A quick note on Chernobyl: A few commenters have brought this up. I didn’t mention it because I meant the U.S. when I said “the most serious accident we’ve seen.” I don’t think it’s fair to use Chernobyl as an argument against nuclear power in the U.S. for the same reason that an awful rocket failure with the Soviet space program wouldn’t be a good reason to argue against the U.S. space program. That reactor was poorly designed, and we’ve certainly learned a lot about nuclear engineering since then to avoid those same mistakes.

* Greenpeace writes me to dispute that Patrick Moore was a co-founder of Greenpeace. Apparently, he must have had (and still has) the Washington Post fooled too, who still (3 years later) lists him as a Greenpeace co-founder beneath the op-ed I linked to above. His online profile at Greenspirit makes this claim, and indicates that he was an early member who served as Canada’s Greenpeace president for nine years, and as an international director for the organization for another seven. Greenpeace doesn’t dispute that, but does dispute that he was a founding influence. Ultimately, he had disagreements with the group and is no longer affiliated with the organization. To be clear, Greenpeace AGAINST nuclear energy. As Moore’s op-ed indicates, he was too initially, but after 30 years, changed his mind.

This week, Microsoft showcased its new Windows Phone 7 platform at the World Mobile Conference in Barcelona. One part of its announcement that hasn’t gotten enough attention is its decision to name AT&T its “premier partner” in the U.S. I think this is hugely significant for two reasons: it shows AT&T isn’t content with just Apple and further develops alliances in the wireless industry.

Over at PC World, Tony Bradley notes how big a win this is for AT&T:

One of the most interesting things about the unveiling of the new Windows Phone 7 platform by Microsoft at the World Mobile Conference was the announcement that AT&T will be Microsoft’s “premier partner” in the United States. As much flack as AT&T takes from customers and media, it is still the “chosen one” for premier smartphone platforms.

I would add that it’s also impressive from a diversity of partners point of view. Not many in the tech industry can brag about holding hands with both Apple and Microsoft simultaneously. That makes up a huge portion of the mobile platform market, with the most notable competition now just phones running the Google Android platform (it already has a significant Blackberry offering). But AT&T also recently announced that it was planning on introducing some Android-based phones as well, so that might not be much of a probably either.

If you assumed that Apple was dropping AT&T, then it might make sense for the carrier to make a deal with Microsoft — to make sure the service provider isn’t left without a strong partner. But as I recently noted, Apple’s choice of keeping AT&T as the iPad data provider shows that the AT&T-Apple partnership doesn’t appear to be weakening. Assuming that Apple does stick with AT&T, the wireless company will be in a very strong position.

This decision by Microsoft also further delineates the alliances in the wireless industry. Now you’ve sort of got Verizon-Google versus AT&T-Apple-Microsoft. Of course, even then there will inevitably be some Verizon phones that run Microsoft’s Windows Phone 7 and some AT&T phones than run Google’s Android. But it’s clear that the Verizon-Google and AT&T-Windows relationships will be stronger. Other service providers like Sprint and T-mobile aren’t beaten yet, but they haven’t managed to grab the attention of these big name software companies like Verizon and AT&T.

This all makes for a mobile phone market that should keep evolving quickly, due to the intense competition we’re seeing between these big service providers. Just yesterday, I mentioned that Verizon has decided to work with Skype, a measure that AT&T will almost certainly feel forced to respond to. Even though the market appears to be gravitating towards a small oligopoly of just a few big names, the competition continues to be fierce.

The New York Federal Reserve reports that manufacturing in New York is growing very quickly. That’s great news. This indicates that companies are either ramping up production or planning to do so soon. Some employment growth in manufacturing should follow.

Here’s the news blurb, via BusinessWeek/Bloomberg:

The Federal Reserve Bank of New York’s general economic index rose to 24.9 this month, higher than anticipated, from 15.9 in January. Readings above zero in the so-called Empire State Index signal growth in the area covering New York and parts of New Jersey and Connecticut.

That’s the fastest pace of growth in four months. This is in response to anticipated demand, as well as stronger exports and better consumer spending. And here’s some more very promising data:

The New York Fed’s gauge of employment increased to 5.6 in February from 4 last month. Measures of the six-month outlook for new orders and shipments increased. The gauge of orders rose to 55.6, the highest since February 2006, from 52. A measure of sales also increased to 55.6, the highest since January 2006.

The inventory index rose to zero from minus 17.3, showing companies have stopped drawing down stockpiles. February marked the first month since August 2008 that companies weren’t depleting inventories.

That last paragraph above is particularly noteworthy. It appears to indicate that manufacturing firms no longer have excess inventories. That means any further demand can only be satisfied through more production. And to make that happen, they’ll need to ramp up hiring.

This is just a regional report, but it’s hard to imagine that the New York area’s manufacturing experience would be vastly different from what firms are seeing in the rest of the U.S. Even if the New York area does, for some reason, lead the rest of the nation in a manufacturing rebound’s timing, then this news is still good: it indicates that manufacturing growth — and eventually hiring — in other regions should soon follow.

Today, Verizon Wireless announced a deal with Skype to allow some of its smartphone customers to use the service to place and receive calls to other Skype users, without using their plan minutes or Verizon’s international calling pricing. Instead, users would pay the much lower rates that Skype charges. This sets an interesting new precedent for wireless service providers, who have traditionally insisted on forcing users to pay their international calling rates. It will definitely put pressure on other service providers to allow their smartphone users the same freedom.

The details of the deal are fascinating:

The two companies have created an exclusive, easy-to-use Skype mobile offering for 3G smartphones. Verizon Wireless 3G smartphone users with data plans can use Skype mobile to:

– make and receive unlimited Skype-to-Skype voice calls to any Skype user around the globe on America’s most reliable wireless network;
– call international phone numbers at competitive Skype Out calling rates;
– send and receive instant messages to other Skype users; and
– remain always connected with the ability to see friends’ online presence.

I’ve already mentioned the significance of the long-distance calling at Skype rates. They’re generally much lower than those dictated by mobile providers like Verizon. But it’s also interesting that Verizon would allow unlimited calling from Skype-to-Skype: that will also let customers who use Skype to talk more without paying for additional minutes.

So does this mean that people can just throw their voice plans out altogether and just pay for data? Not quite. Verizon considers this an enhancement to their voice plan, meaning that you still have to pay for the voice component — no matter how little you ultimately use it, even if you prefer Skype. As a result, this plan likely mostly benefits those who do a lot of international calling or would use more Skype minutes than Verizon’s most minimal voice plan offers.

Also consequential is the fact that the application would be run in the background on these smartphones. Currently, that would not be possible on some other devices, most notably the iPhone. It does not allow users to multitask. As a result, even if AT&T decided to allow Skype, unless the iPhone software is altered to allow this possibility, the service would be far less powerful.

It’s interesting that Verizon has chosen to go the route of working with Skype, rather than fighting the inevitable. Since voice calls are possible through data networks, it was just a matter of time until service providers decided to cave and allow customers to utilize that capability. Verizon must have decided it might as well be the first-mover here. The deal might also be a direct attack on AT&T’s decision not to allow data-based calling through the iPhone.

But as I noted, for now, Verizon is still requiring users to pay for voice. I suspect that will change in the years to come as well, but probably will include usage-based (and/or more expensive) data fees. That way, if you’re using the data network for all of your calling, you’ll pay for those additional megabytes used, instead of more minutes of voice. Indeed, Verizon already appears to be setting the stage for that day.

Former Treasury Secretary Hank Paulson has an op-ed in the New York Times today. In it, he argues that the Obama administration’s proposal to ban banks from proprietary trading should be abandoned. The so-called Volcker rule is already having trouble in the Senate, so Paulson will likely get his wish. But interestingly, it doesn’t look like he’s against the proposal in totality, just the part about banning prop trading. Meanwhile, he favors many of the less-controversial reform measures the House passed.

Here’s the money quote from the op-ed:

The debate recently has centered on big banks and trading risks. I agree that big banks do pose a dangerously large risk to our financial system, and I am troubled that concentration in the industry has only increased since the crisis. But if we are to protect our system from falling into trouble again, we need broad-based reform that covers all types of financial institutions and all forms of potentially risky activities.

For example, the most recent proposal by the Obama administration — to bar big banks from trading driven by other than customer-related activity — would not have prevented the collapse of Fannie Mae, Freddie Mac, Lehman Brothers, American International Group, Washington Mutual, Wachovia or other institutions whose failure contributed to the crisis. Rather than dictating a set of rules that will become out of date as the markets evolve, policy makers should devise legislation that ensures that regulators have the authority to tackle the issue of size and all potential systemic risks.

Paulson is correct. Although prop trading sounds like a risky, scary endeavor to those who don’t understand it, the practice didn’t cause the financial crisis. Some causes of the crisis included poor systemic risk oversight, insufficient capital requirements, and the lack of a non-bank resolution authority. Paulson goes on to argue in favor of all of those. While prop trading might be a fun populist punching bag, it’s really inconsequential insofar as systemic risk is concerned.

And, in fact, Paulson doesn’t appear to object to everything that the Obama administration proposed along with the Volcker rule. As I’ve mentioned in the past, the second part of the administration’s plan is to limit banks’ liability concentrations. I don’t see Paulson objecting to this. And since he appears to worry greatly about systemic risk, I don’t think he would. I also suspect he would agree that a better way of controlling banks from engaging in systemically risky behavior would be to make sure they use less leverage. Then prop trading would be effectively limited, along with other potentially dangerous bets or practices.

I find Paulson’s op-ed utterly reasonable. He doesn’t want the important legislation to get hung up on a controversial rule that won’t do anything to prevent another financial crisis anyway. Instead, he understands that Washington should focus on what it knows can help.

I would add: if Democrats can reach a consensus in favor of something like the Volcker rule, then it should feel free to do so — after the more important priorities have been first put in place. I’m not in favor of it, but if a large portion of lawmakers in Washington are, then that’s their prerogative. I just don’t want them to let it stand in the way of other less controversial, very necessary reforms, which they’ve already taken too long to put in place.

Bank of America announced today that it made 9,500 mortgage modifications permanent in January under the Obama administration’s Making Home Affordable Program (HAMP). That’s approximately three-times the bank’s total of 3,200 prior to that. I have documented the struggles of the HAMP program, and this news does indicate that more troubled homeowners are successfully bringing their temporary modifications permanent at BoA. Should we be impressed with this news? Maybe, but only a little.

The first thing I would point out is that BoA really should be doing better. According to the most recent HAMP monthly report (.pdf), the bank alone accounts for nearly one-quarter of the trial modifications offered, and nearly one-third of the total pool of 60+ delinquent mortgages. And that makes sense: a few years back BoA acquired mortgage giant Countrywide. Given its enormous market share, it should be leading the way.

Yet, as of December, compared to some other big banks, it hasn’t been. Over that period, the ratio of its permanent modifications to its total 60+ delinquent mortgages has been just 0.3%. JPMorgan, while still struggling, was nearly six-times better at 1.7%. Other big names like Citi and Wells Fargo were both over 2%. GMAC was at a whopping 14%. So while BoA’s improvement might seem good, even if there were no additional loans added to its 60+ share over the month (and I’m sure there were), its ratio would still only rise to 1.2% — remaining well below all of those major competitors.

Of course, the big question with all of these modifications also still persists: will they really be permanent? Just because the modifications have received permanent status doesn’t mean the mortgages will perform. Re-defaults will likely be a major problem for many of these altered loans going forward. We won’t know the true success of HAMP for several years, once we’ve seen the actual success rate of the modifications made.

I have long been extremely wary of investment brokers, for much the same reason I don’t go to psychics: I don’t believe anyone has a very accurate crystal ball. I have also never really trusted their motives. Many are just out for their commissions. As a result, I was intrigued by an article today in the New York Times addressing the question of whether brokers should have a fiduciary duty to always have their clients’ best interest in mind. Such a standard might seem obviously good, but I wonder if there’s an even better solution.

Some have argued that the financial overhaul bill should include a provision to require all brokers — whether peddling stocks, bonds, insurance products, etc. — to put their client’s interests before their own. The NY Times article explains:

At issue is whether brokers should be required to put their clients’ interest first — what is known as fiduciary duty. The professionals known as investment advisers already hold to that standard. But brokers at firms like Merrill Lynch and Morgan Stanley Smith Barney, or those who sell variable annuities, are often held to a lesser standard, one that requires them only to steer their clients to investments that are considered “suitable.” Those investments may be lucrative for the broker at the clients’ expense.

Over the years, it has become more difficult for consumers to understand where their advisers’ loyalties lie, especially as the traditional stock-peddling brokers have started to look and act more like financial advisers. The fact that some brokers can wear two hats with the same client — that is, provide advice as a fiduciary in one moment, but recommend only “suitable” investments in the next — only adds to the confusion, experts said.

Indeed, there is a fine line between what is suitable for a client and what’s in his best interest. And I’d imagine that most Americans have no clue what the difference is between those distinctions. After all, can something be suitable, but not in a client’s best interest? Unfortunately, sometimes the answer is “yes.”

So should there be a law that makes this distinction clearer? Perhaps. But I worry about how it’s enforced. For example, there’s a huge spectrum of investment opportunities out there. As long as a broker is sure that an investment is “suitable” for a client, how can she ever be certain that it’s the very best product for her client? There’s a fair amount of subjectivity involved.

And what if a broker really was legitimately working for a client’s best interest, but an investment didn’t do as well as anticipated? We’re talking about predicting the future here. Would more of these customers sue their advisors? If I lose money, couldn’t I argue that it would have been in my best interest to have made money, so my broker failed her fiduciary duty?

I think that gets messy. So I’d prefer a more market-based solution. These investment houses should reward brokers, not based on commission for selling products or getting more trades, but for performance. Specifically, that could be measured in three ways. First, did the client get a positive return? Second, did that performance adhere to the particular goals set forth by that client? Third, is the client satisfied with the broker’s performance?

If I was looking for a broker, but I understood the vast majority of her pay to be structured in that way, it would go a long way in convincing me that she would ultimately care most about what’s best for me. This should also weed out brokers who aren’t out for their client’s best interest — they wouldn’t make very much money or retain their clients. Meanwhile, the firms who have policies like this should benefit greatly, because they would attract those looking for sound investment advice.

But in order to make this effective, legislation that I would unequivocally support is that which would require firms to disclose to clients the basis for its brokers’ pay prior to any investment being sold to that customer.

Today, the Obama administration is expected to announce the start of a new campaign to ramp up nuclear power production in the U.S. after a three-decade lull. It will begin with an $8.3 billion loan guarantee for Southern & Co. to build two new reactors in Georgia. The endeavor seeks to backstop a total of $55 billion in nuclear power plant loans, according to the President’s budget proposal. From what I have read about the project, it sounds like possibly the perfect sort of infrastructure project that the government should be involved in.

Known Quantity

I’ve complained several times about the government making bets on funding business propositions, like electric cars, that have not yet proven their profitability. If the government is going to throw money at something, then the target should be a known quantity. Nuclear power fits that criterion. The U.S. has been successfully using this energy source for a very long time. As a result, we can be fairly certain that such projects will ultimately be profitable and won’t need government life support forever.

Semi-Shovel Ready

As far as the endeavor as a jobs effort, this project also gets a good grade. According to Reuters, it will create as many as 3,500 construction jobs. I also saw White House Office of Energy and Climate Change Policy Director Carol Browner on CNBC this morning explaining that the bulldozers are standing by for the go-ahead from the Nuclear Regulatory Commission’s green light. In other words, those construction jobs shouldn’t take a few years to materialize, but should relatively quickly — assuming that there aren’t significant regulatory hold-ups.

Jobs Now, Jobs Later

And unlike some infrastructure projects like building roads or bridges, this one actually helps job growth in perpetuity. Reuters also reports that it will create 800 permanent jobs in the area. And these aren’t any jobs: they’re stable, high-paying jobs. So this stimulus effort will result in the kind of real permanent job growth that the U.S. needs.

Probably Not Very Costly

It’s also important to note that this isn’t a direct funding — it’s a loan guarantee. So long as the project can earn back its costs, the U.S. government may end up spending nothing. It’s essentially just making banks more willing to take a risk on the power endeavor. While the taxpayers will ultimately be on the hook if the project goes awry, most government jobs efforts cost taxpayers no matter what. As a result, we should get all this job creation for free.

Preparing For Energy’s Future

Finally, as Browner said on CNBC this morning (clip below), this will help continue to expand Americans’ use of clean energy. Wind, solar and other green sources are also being targeted by the Obama administration, but it’s nice to see nuclear energy in the mix. A few months back, I noted how China is in the process of vastly expanding its nuclear power creation. The U.S. would be crazy to ignore this source. It should serve as a major part of its future energy consumption. With as much energy as the U.S. consumes, it must have a broad, diverse plan to ensure it creates sufficient energy in the years to come.

At this point, I can see really see only one negative about the project: why did it take so long? I would have liked to have seen such an announcement about a year ago. The jobs created by this and similar projects would have helped to employ some of the many Americans who have found themselves unemployed over that time period. And given all of the benefits explained above, projects like this are pretty much a no-brainer.

Thursday, I criticized AIG’s new bonus pay plan. Although a ratings-based system can be a great way to ensure that your employees deserve the bonuses they receive, I was less than impressed with AIG’s particular version. But since I like to be constructive, I thought it might be nice to explain an incentive compensation system that could do better.

Preliminary Considerations

Before getting into specifics, let’s go through a few general requirements. First, any good incentive compensation system should pay primarily shares of company stock. That stock should also take several years to vest. That way, the employees have greater reason to target long-term profit: if the stock price plummets in a few years, so does the value of their bonus.

Next, most, or all, of that stock should also be subject to being clawed back if the something goes terribly wrong. The easiest example here is if a trader’s long-term positions go bad. Then, any bonus he received based on earlier gains should be seized to cover those subsequent losses.

The System

Grades

The actual details of the system could vary a bit, but here’s one format that I think would make sense. All employees are graded on a numerical system, 1 through 5:

5: Best score, 10% of employees
4: Very good score, 40% of employees
3: Good score, 40% of employees
2: Needs improvement, 5% of employees
1: Unacceptable (Probation), 5% of employees

In any given year, a firm should probably shed approximately 5% of their worst performing employees. Some companies already do this. Unless all of a firm’s employees are truly incredible, I find it hard to believe there aren’t a handful that are expendable.

Timing

I would do reviews twice each year. That way, anyone scoring a “1” can have the opportunity to improve. If the employee remains at this level for an entire year, then he should be dismissed. This also balances out the grade if considered twice a year, with the grades averaged.

Bonus Pool Distribution

So what about actual pay based on those grades? That can be determined on a firm-by-firm basis. But I would suggest something like:

5: Share 20% of the bonus pool
4: Share 45% of the bonus pool
3: Share 35% of the bonus pool
2: No Bonus, potentially claw back
1: Claw back past bonus

Obviously, this would be more complicated in practice, but you get the general idea. Past performance gone bad would also count. During really bad years, more employees could end up with a “2” or “1” for that reason, if more claw backs are necessary.

Bonus Pool Formation

But what makes up that bonus pool? For example, in a year the firm posts a loss, do employees still get bonuses? It depends. If clawing back employee bonuses who are responsible for that loss can more than cover it, then other employees might receive bonuses. But it is possible that even well-performing employees would suffer due to poor overall firm performance. More on objections to this in the next section.

Covering Losses

Let’s think about the financial crisis. Who profited due all the bad bets that were made on Wall Street? Obviously, the bonuses soaked up some of the profit, but not all of it. Banks also divvied up billions in dividends to shareholders during the housing boom, and some of that money surely came from all of the gains on bets that eventually went bad. So I’m not convinced that shareholders should be shielded from claw backs either.

What I’d envision is dividends needing to vest as well. If employees shouldn’t receive profits on bets that go bad, why should investors? All dividends could be subject to claw backs for several years before investors can fully realize those gains. However, even if investors sell the stock between the time the dividends were accrued but before vesting, they would still be entitled to collect once the waiting period is over.

I also think that higher-level management should be graded on a stricter scale than other employees. The buck stops at the CEO, for example. If losses occur under management’s watch, then they should be subject to substantial claw backs.

Benefits

The most obvious advantage to a system like this is that employees would be much more careful to strive for long-term profitability. They could still make gobs of money in the long-run, but not by taking bets that only look good in the short-run.

This system would also have a nice additional consequence: it would help solve the “too big to fail” problem. Let’s say you work in mergers and acquisitions at a bank like Citigroup. You don’t want to worry about a situation where those crazy mortgage bankers overheat the housing market, and you consequently lose your bonus if the bank suffers a loss due to their shenanigans. Instead, you would prefer to work for a smaller, boutique firm that specializes in M&A. That way, there’s a much better chance that your compensation will be based on your performance, instead of irrelevant external factors.

Finally, since shareholder profits would also be held back, and could be seized to cover future losses, this system would also encourage investing based on a longer-term view. In a well-functioning market, you want investors who care about what happens to a company over the course of several years, not several months.

Considering Some Predictable Criticisms

One obvious criticism is that the good performing employees will be penalized for the actions of bad ones. But I already explained why that’s actually a positive above: it will discourage a firm from growing so large that its right hand doesn’t know what its left hand is doing. The leadership of a firm of a manageable size should have a good understanding of what all divisions are doing. As former Treasury Secretary Hank Paulson admitted last year, that’s not always the case in big firms like Goldman Sachs.

Another complaint might be that firms will have to hold an awful lot of money back, and that would be unproductive capital. I have a solution to this. Any money held-in-waiting for distribution could count towards capital requirements. The reason why capital requirements exist in the first place is to pad potential losses. But that’s exactly the function that this held back bonus money is meant to serve. As a result, firms would actually have even more capital they could use for investment, since their deferred compensation pools would constitute a large portion of their capital.

I would not, however, advocate the government require such bonus plans. I’m not a fan of regulation that heavy handed. As a result, I see getting most firms to agree to adopt incentive compensation systems like this as the biggest obstacle. If entire industries don’t develop plans like this, then talent could just flee to the firms where they can get their money immediately, rather than wait patiently for their shares to vest and worry about long-term profitability.

But that’s where I think shareholders and boards of directors should come in. A system like this would be prudent. It should ensure that big, catastrophic losses are rare. And when they do occur, the firm could handle the blow by clawing back previously promised compensation. That’s why I think it would take shareholders to demand a system like this put in place. And if some firms did adopt such practices, I think investors would find their equity far more attractive than that of others that continue to allow wild short-term profits that endanger long-term viability.

So there’s my thought experiment on incentive compensation. Feel free to share your thoughts or comments below!

When you lose your job, the last thing you need is for your expenses to increase. Yet, at some banks, that’s exactly what can happen with your checking account. A friend of mine recently learned this lesson the hard way with Bank of America. I thought her experience might be worth sharing.

Several years ago, my friend signed up for a free checking account at Bank of America. But this month, she realized the bank had begun charging her an $8.95 maintenance fee. When she talked the bank representative about the new fee, he informed her that the bank began charging her because she no longer had at least one direct deposit payment coming into her checking account each month. She has been unemployed for several months, and she hadn’t noticed that she was being charged the fee until her most recent statement.

Don’t get me wrong: it was her responsibility to know the terms of her account, and she didn’t dispute that she should be paying the fees. But the bank representative also informed her that, since she had more than $750 in her account, she could switch it to a “Regular” checking account (instead of her “MyAccess” checking account) and escape the monthly service fee as long as she maintained that minimum balance. The “Regular” account also had exactly the same features as the “MyAccess” account.

So the obvious solution was that she would change the account type. But I have to wonder: why should she need to pay a maintenance fee when her account would have qualified for free checking if it went by a different name? Bank of America squeezed a few months of maintenance fees out of her because she was unemployed and hadn’t realized her account was only free due to direct deposit.

And I don’t mean to single out Bank of America: other banks do this as well. How about Chase? The “Chase Checking” account also waives their $6 monthly fee if you have direct deposit. In this case, you can also avoid the fee with five debit card purchases per month, but if you didn’t realize that, then losing your job will cost you here as well.

I’m sure other banks have similar deals when it comes to free checking through direct deposit. And I get that: if you’re a bank, you like it when your checking customers have a steady stream of income. But it does seem a tad morally repugnant to begin charging someone more for their checking account once they become unemployed — particularly if there are ways that they could avoid that fee, through a minimum balance requirement or several debit purchases.

Again, however, this boils down to banks just not caring much about customers these days. My friend intends to leave Bank of America as soon as she gets a new job. If the bank had worked a little harder on their customer service, then she might have stayed. For example, the bank could have a mechanism in place that alerted them when a direct deposit stopped. Then, a bank representative could call that customers and inform her that her account will be subject to a fee. The rep could also provide options for switching to a different account type with other requirements that might help her avoid the fee. But in this day of lackluster customer service, that’s probably too much to ask.

I’ve expressed my doubts before about whether hybrid electric cars are really the future of autos. I’m also a little pessimistic about how quickly Americans will accept these vehicles as their cars of choice. But my skepticism pales in comparison to that of General Motors’ vice chairman Bob Lutz. I was actually kind of shocked how upfront he was about the tough road ahead for hybrid vehicles.

Dow Jones Newswires reports:

A General Motors Co. executive on Friday said hybrid vehicles will probably never be profitable and are unlikely to ever comprise more than 10% of the U.S. auto market.

Bob Lutz, GM vice chairman, said the company expects to lose money on future hybrid sales and will pass those costs onto other cars and trucks in the auto maker’s lineup to support the development of new vehicles.

Hybrids are generally too expensive to produce, given what customers are willing to pay, for the vehicles to ever be profitable, Lutz said.

So if these cars are doomed to lose money, then can someone explain to me why the U.S. government is investing so much money in making sure they succeed? It’s one thing to say that these vehicles will be too expensive for most Americans in the short-run, but Lutz appears to indicate that he doesn’t believe they’ll ever be profitable.

And consequently, for just a minute, I need to defend hybrids. Even though I too am highly skeptical that they’ll ever be profitable, there’s certainly a chance they could be. The world’s oil reserves are finite. So gas will ultimately get more expensive. That will make the relative cost of owning and operating hybrids cheaper versus cars that rely solely on gasoline. As a result, even if the components for making hybrids are more expensive, theoretically, gas prices should eventually increase enough to make them more economically sensible to purchase.

That’s not to say that plug-in hybrids are necessarily the best technology. The winner could instead be hydrogen, bio-fuels or something completely different. It’s hard to know which technology may one day be the cheapest to produce and operate. But it’s certainly within the realm of possibility that plug-in hybrids could at least be profitable. And if that happens, while other technologies turn out to be duds, then they could very well comprise a large portion of the auto market. Of course, even if that happens, it won’t be any time soon.

Wouldn’t it be deliciously ironic if one of the chief bailout recipients that had a hand in causing the financial crisis designed a derivative that paid out in the event of another financial crisis? I think so, but I wonder if Citigroup appreciates the irony: the giant bank that almost lost its footing during the crisis is considering doing precisely that. Somehow I missed this story last week, but I thought it was still worth writing about, because it’s nearly as amusing as it is perplexing.

Here’s the news blurb from risk.net:

Credit specialists at Citi are considering launching the first derivatives intended to pay out in the event of a financial crisis. The firm has drawn up plans for a tradable liquidity index, known as the CLX, on which products could be structured that allow buyers to hedge a spike in funding costs.

And here’s the index’s architect from Citi, Terry Benzschawel, explaining:

“The great thing about the index is that it hedges your funding costs while being very simple to trade. I believe it will reduce the systemic risk in the industry, akin to how the advent of swaps means people don’t worry about interest-rate exposures any more – they just pay a fee to hedge it,” he says.

Sounds great, right? Worried about the next financial crisis? Just buy this derivative, and it will hedge your potential losses. Then you’ll have nothing to worry about.

Maybe I’m crazy, but that sounds an awful like what credit-default swaps hoped to do on a smaller scale. And if my memory serves me correctly, that didn’t go so well. There was that whole mess with AIG where it wrote more of these derivatives than it could afford to be exposed to when things went bad. As a result the government had to come in and bail it out to the tune of something like $180 billion.

So this begs the question: if there’s a financial crisis, who will be able to make good on these derivatives and pay the counterparties who wanted to hedge that risk? Pardon my skepticism, I’m just a little skewed by empirical observation. But as it turns out, I’m not the only one with this worry. The article continues:

However, there is concern from academic circles that the counterparty risks involved in such a product could create moral hazard. Chris Rogers, chair of statistical science at Cambridge University, said the only participants able to sell CLX-based products would probably be those who are too big to fail.

“This is basically a kind of insurance product. The main issue is: how good is the party issuing it? If it’s going to be paying out huge numbers in the event of a crisis, will it be able to meet it obligations? Insurers can buy reinsurance for their liabilities, but the buck has to stop somewhere – there’s a limit to how much a private insurer can pay out. Only the government can cover unlimited losses,” he says.

Precisely. Who other than the government could provide a hedge for unforeseen systemic risk? Isn’t the whole point that you don’t know who, when or how that risk is going to hit? That means there’s no counterparty that could be sure that it could handle the exposure. The only reason the government can is because its ability to print or borrow money is almost limitless.

I’ll be curious to see how this derivative does. I know I wouldn’t buy the thing, because if you buy it, then you’re essentially taking a bet that whoever the counterparty is will be able to cover their exposure in the event of a financial crisis. So you are essentially betting on the ability of that financial institution to withstand the crisis. And you can’t be too confident of that without the firm having an explicit backstop by the federal government.

Yesterday, government mortgage agencies Fannie Mae and Freddie Mac announced that they would purchase $200 billion in delinquent mortgages that they had guaranteed. The agencies think this will ultimately be a better for accounting treatment. But the move will hardly be done in a vacuum. By buying up these home loans, the mortgage-backed securities that they’re packed up in will provide investors with early principal payments. What will they do with all that cash?

First, for those who don’t understand what I’m talking about, let me explain. Certain mortgages qualify for a guarantee from Fannie and Freddie. They’re then packaged into “agency” mortgage-backed securities, and investors buy the bonds that result. So when the homeowners pay principal and interest, the investors get that money. But if the bonds incur losses, then the agencies cover them so investors don’t lose money on principal.

Ever since the government made its backing of Fannie and Freddie explicit, the market has been even more comfortable with agency bonds. In fact, it was reported today that the spread between the yields of agency mortgage-bonds and Treasury bonds is the lowest it’s been in 17 years, now approaching zero. And why not: if the U.S. government will stand behind agency debt, then investors shouldn’t demand a much greater return than they would from other U.S. debt.

But back to the $200 billion. Since these bonds are taken to be so safe, they’re often traded at a premium. In other words, a bond worth $100 in principal might be trading for $106, since the bondholder will also get interest payments in addition to that guaranteed principal. So the first problem is that these bonds will be redeemed at par — meaning that anything trading at a premium will cause a loss to investors. In the example above, the investor would only get $100 for a bond worth $106, a loss of $6. As you might imagine, those investors won’t be thrilled.

There’s also another interesting consequence: despite these losses, investors will be flush with cash. Many of these bonds weren’t set to mature for decades. And until then the principal would have slowly rolled in each month, as homeowners made their mortgage payments. But when the agencies buy these mortgages up, that principal will all come at once like a tidal wave. What does this mean for the market?

It could actually be good, depending on investors’ view of the world. If they believe that the economy is, indeed, on the way back up, then they’ll be eager to invest it. What they will buy with it, however, is unclear. If they think stocks are the safest bet right now, then they may put it there. Another option is unsecured corporate bonds. But if they think the housing market is relatively safe, then they could take over the role the Fed had been providing for the past year and begin purchasing mortgage-backed securities again.

I had been pessimistic about the MBS market picking back up after the Fed’s exit, but this development with Fannie and Freddie could actually change that. If investors want to keep their diversity profile intact, then they’ll still want that money to go towards real estate exposure. And $200 billion is an awful lot of money to get soaked up by just the secondary market. As a result, you could see some new activity in MBS stemming from this development after all. This could keep mortgage rates from exploding after the Fed ends its buying.

Of course, that’s all assuming that investors are comfortable taking risks on the economy. If they aren’t, then they may just hold this cash or used it to buy Treasuries for the time being, until they’re convinced that the recovery has taken hold.

A couple of data releases today continue to solidify the claim that the U.S. economy is in recovery. First, retail sales in January beat expectations, increasing by 0.5% month-over-month. Second, inventories declined in December by 0.2%. Taken together, this news is quite positive.

Let’s start with the sales news. Reuters reports:

The Commerce Department said on Friday total retail sales increased 0.5 percent. In addition, December and November were both revised to show stronger spending.

December sales were revised to down only 0.1 percent, compared with the previously reported fall of 0.3 percent, while November sales were revised to up 2 percent from up 1.8 percent.

Analysts polled by Reuters had forecast retail sales increasing 0.3 percent last month. Compared to January last year, sales were up 4.7 percent.

Actually, the December retail sales news pairs well with the inventory news. If sales actually declined by 0.1% in December, but inventories were still reduced, then that should spell an even larger reduction to inventories in January, when sales were up 0.5%.

It’s very important that firms reduce their inventories for the recovery to get some traction. Only when more production is needed will companies begin hiring again. This data indicates job growth could be on the way.

And the year-over-year sales increase above is extremely impressive. A nearly 5% increase is hardly negligible. This implies that consumers are far more comfortable spending than they were last year. We should watch, however, to see if this positive trend continues.

So while it’s pretty clear that the economy is on the mend, there’s still some question about whether the recovery will effectively create enough new jobs to put a big dent into the extremely high level of unemployment. As I mentioned yesterday, any additional retail demand we’re seeing is likely from consumers with jobs who no longer fear getting laid off. The 18% of Americans who are still struggling to find full-time employment won’t be spending freely until they’re employed. Retail sales growth will likely be constrained until employment improves.

Much to the dismay of global investors, China has decided to tighten its monetary supply further by raising reserve requirements for the second time in as many months. After raising banks’ reserve requirements 50 basis points to 16% in January, it does so again this month with another 50 basis points rise to 16.5%. Is the Asian superpower acting a little too hawkish? Not yet.

Last month, I addressed China’s need to tighten its monetary supply. It is likely in the midst of a dangerous real estate bubble, so curbing lending and credit makes a lot of sense. But Reuters reports:

Although investors had been expecting the People’s Bank of China to push the reserve requirement ratio higher after an increase last month, few thought the second rise would come so soon.

Markets were rattled by fears that monetary tightening in the world’s third-largest economy would be more aggressive than had been reckoned on, potentially denting global growth.

If there’s anything you can generally count on, it’s investors being unhappy about central banks tightening monetary supply. Higher rates mean lower returns. And in a bubble economy, that usually means that the party is over.

But as we should know all too well by now, bubbles are bad. The bigger they grow, the worse the fallout of their pop. China doesn’t want to deal with extreme loan quality deterioration or the inflation that could result from too much lending.

Could Chinese authorities get a little too carried away? Perhaps, but they haven’t yet. A 1% rise in the reserve requirement over two months to begin a much-needed tightening campaign isn’t too drastic. So even though investors might not be happy, at this point, it appears that its central bank’s reining in of credit is for the best.

Stephen A. Schwartzman, CEO of private equity giant the Blackstone Group, has an op-ed in the Washington Post today arguing that lawmakers should go easier on the banks. He worries that their attitudes and intended regulation have already begun to harm lending and ultimately could prevent a swift recovery. While I agree with some of the points that Schwartzman makes, I disagree with his general assessment.

Uncertainty Is A Problem

Schwartzman begins by listing a bunch of uncertainties banks now face, due to potential regulatory proposals floating around Washington. He then says:

These uncertainties have severely hampered banking executives’ ability to plan how to run their businesses or even know what their businesses may include. Predictably, bankers are reacting to this unprecedented uncertainty by becoming conservative and cautious. The result is that there is less lending and less credit available.

This is an interesting assertion, because it’s not the claim that banks shouldn’t be regulated. It instead contends that uncertainty is bad. So if tomorrow Congress passed a sweeping regulatory bill and the President signed, then Schwartzman’s worry here would be eliminated. That would end the uncertainty. So if he’s arguing that uncertainty is bad and lawmakers need to act decisively, then I agree.

Regulatory Worries Stifling Lending?

But does uncertainty cause banks to lend less? Some of the regulatory aspects being discussed that Schwartzman argues are reducing lending include: capital requirements, reserve requirements, taxes and compensation. Yet, as far as I can see, none of those should constrain lending.

Take capital and reserve requirements, for example. No one is talking about suddenly requiring banks to drastically ramp up capital at a moment’s notice. Any new requirements would be instituted over a reasonable period of months or years, so that banks have time to comply. As a result, current lending shouldn’t be affected — banks will have time to raise additional capital when necessary.

Taxes and compensation are also odd worries for lending. Why would banks curb lending just because they might be taxed more or paid less? If anything, shouldn’t that encourage them to lend and profit even more, so to counteract those potential changes?

Political uncertainty, while bad, shouldn’t really constrain lending in this case. Bankers may blame regulatory reform as their reason for not lending, but general market uncertainty should have a lot more to do with it.

Banking Singled Out

Schwartzman then says banking shouldn’t be singled out. He says the actors that caused the financial crisis were many. They included Fannie/Freddie, the Fed, bad regulators, the rating agencies, investors, mortgage brokers, etc. He’s right.

And maybe I just spend too much time in the blogosphere, but all of those parties have been heavily criticized, at least by me and other journalists. And some of them are also included in Washington’s regulatory effort. But I would argue that you have to start somewhere, and since financial institutions were at the heart of the crisis, needing billions of dollars in bailouts, they seem a logical place to start.

But I do agree with Schwartzman that the conversation should be constructive and efforts not punitive. While banks made mistakes, our economy needs their services and expertise. That’s why I agree with Schwartzman that regulatory reform is necessary, but could be handled much better than it has been by Washington. The market needs certainty more quickly, and the regulatory measures should be designed to quell systemic risk not populist outrage.

Another reason why companies aren’t hiring: they’re too busy hoarding cash. Companies continue to prefer cutting their spending and holding onto extra earnings instead of taking on more workers. While this behavior is common during a recession, now that the U.S. is technically in recovery, will this soon change?

Bloomberg reports:

A majority of companies in the Standard & Poor’s 500 stock index increased cash to a combined $1.19 trillion while simultaneously reducing spending, keeping a jobs recovery on hold.

Caterpillar Inc., Eaton Corp., Walgreen Co. and General Electric Co. are among 260 companies that ended last quarter with $522 billion more than a year earlier after cutting capital spending by 42 percent. Economists say the dearth of investment is keeping the jobless rate at about 10 percent as the U.S. emerges from its worst recession since the 1930s.

Technically, the recession ended in the third quarter, but big companies accumulating cash instead of new workers did not. Given that it’s so hard to be sure if the economy is fully on the mend, that’s a pretty logical response. And since in the fourth quarter, companies were still draining their inventories, there’s no reason to think that they would have begun hiring yet.

So should we expect companies to stop cutting costs and start hiring now that inventories are lower? Maybe, maybe not. If companies are convinced that demand will increase significantly enough to warrant that hiring, then they may need more staff to ramp up production. But since they’re more cautious than ever, they’ll probably wait until they actually experience that demand, rather than try to anticipate it. In the meantime, they’ll just rely on higher productivity from their current employees to pick up the slack.

Troubled taxpayer-owned insurer AIG has announced that it has a new approach to bonus compensation. It will now grade all employees on their performance. The firm will then use those grades to figure out how much to distribute in bonuses to those employees. My first reaction is — does this mean AIG is admitting that bonuses weren’t based on performance before?

The NY Times reports:

The new plan is meant to quell criticism that financial firms routinely overpay their employees, even if the institutions perform poorly.

And here’s how it would work:

Under the new system, employees will be ranked on a numerical scale from 1 to 4. Those ranked 1, a group expected to be no larger than 10 percent, will receive much more in annual bonus payments than their peers, according to an A.I.G. spokeswoman.

Those ranked 2 or 3 — together about 70 percent of A.I.G. employees — will be considered as having performed above or in line with expectations. Those ranked 4 will receive lower incentive pay. Unlike with previous plans at G.E., they will not be immediately pushed to leave the firm.

From what I can see, this fails to imply that AIG will no longer ‘overpay their employees, even if the institution performs poorly.’ It will just justify that pay with grades. Nothing about the new system implies that if the firm — or even a group within the firm — posts a loss, those bonuses would approach zero.

I’ve never worked for AIG, so I don’t know how they paid out bonuses up to now. But I have worked at two other financial services firms, and they both had very well-developed performance ratings systems that were also based on numerical scores, 1 through 5. And they also provided employees bonuses, which had a strong correlation to those scores.

So such a grading system is hardly novel. I would be pretty surprised if there wasn’t some sort of similar performance rating system in place at AIG already. So what I suspect this announcement amounts to is a PR move on the part of AIG.

At least, I hope it is. Otherwise, the obvious implication is that AIG hasn’t been rating their employees and paying them accordingly. And that would be a shock. It definitely made some big mistakes in the past, but I find it unbelievable that AIG could be so dysfunctional an organization to not engage in as basic a management practice as to hold performance reviews. And if those results didn’t reflect pay, then what was their purpose?

I’m also pretty unmoved by the description above about how these grades will affect pay. Clearly, AIG is grading on a curve: even if you get the worst grade, you’ll still get a bonus — just a smaller one. Again, I just don’t understand why they bother even calling such pay bonuses, if they’re paid out no matter how poorly someone performs. Instead, they should just give these employees a higher salary and actually base incentive pay on incentive.

But the idea of a strict grading system for determining bonus pay isn’t bad. AIG’s system just isn’t a very good one. I’m going to give this some thought and post what I believe would be a reasonable incentive compensation system sometime in the next few days.

Foreclosure tracking website RealtyTrac released its January statistics today. It reports foreclosures declined by 10% in January compared to December. That sounds like great news, if it indicates the start of a new trend. It probably doesn’t.

RealtyTrac saw 315,716 foreclosure filings on U.S. properties in January. As mentioned, this is 10% fewer than in December, but still 15% more than in January 2009. Not great year-over-year, but the month-over-month decline is reason for optimism, right? Not so fast says RealtyTrac’s CEO:

“January foreclosure numbers are exhibiting a pattern very similar to a year ago: a double-digit percentage jump in December foreclosure activity followed by a 10 percent drop in January,” said James J. Saccacio, chief executive officer of RealtyTrac “If history repeats itself we will see a surge in the numbers over the next few months as lenders foreclose on delinquent loans where neither the existing loan modification programs or the new short sale and deed-in-lieu of foreclosure alternatives works.”

So this probably isn’t the beginning of a trend, but more a seasonal variance. I suppose there’s a hope that history won’t repeat itself, but since I haven’t seen any other indicators that the housing market has made a sudden turn for the better, I suspect Saccacio is right.

Here are a few other noteworthy stats from the report:

– Nevada remains the foreclosure capital with the highest ratio of foreclosures per housing unit for the 37th straight month.
– Arizona was 2nd highest, with its foreclosures increasing by 4% month-over-month.
– Foreclosures declined by double digits percentages in California and Florida month-over-month, but the states still remain in the top-three for total foreclosures in January.
– California, Florida and Arizona accounted 44% of all foreclosures nationwide.
– Those three plus Illinois, Michigan and Texas account for 60% of all foreclosures.
– Phoenix was the only top-10 metro area to experience an increase in foreclosures month-over-month.
– Las Vegas was still the worst metro area for foreclosures, with one in every 82 housing units filing.

Senate Banking Committee Chairman Christopher Dodd (D-CT) sent out another press release today on the status of financial reform. Just last week, he made an extremely pessimistic statement indicating that he had abandoned a bipartisan bill. I indicated that could mean the death of financial reform. But today, we learn that a Republican Senator on the committee, Bob Corker (R-TN), is willing to work with Dodd on the bill. Could this lead to a bill passing in the Senate after all?

First, here’s Dodd’s brief statement, in case you want to see exactly what he said:

WASHINGTON – Today, Senate Banking Committee Chairman Chris Dodd (D-CT) issued the following statement on developments in financial reform negotiations.

“For over a year, the Senate Banking Committee has been grappling with how best to address the many problems that led to the financial crisis.”

“In that time Senator Corker has proved to be a serious thinker and a valuable asset to this committee. For that reason, I called him Tuesday night and asked him to negotiate the financial reform bill with me. We met in my office on Wednesday and given the importance of these issues he agreed.”

“While many difficult questions remain, financial reform is in a strong position due to the good work done by Banking Committee members, both Democrats and Republicans, to work out this bill.”

“I am more optimistic than I have been in several weeks that we can develop a consensus bill to bring about the reforms the financial sector so desperately needs to prevent another economic crisis.”

It’s definitely a significant development that even one Republican is willing to work with Dodd. After all, if they all stubbornly refused to vote for the bill, then they could easily block it, with their 41 votes. And if all Democrats go along, one Republican vote is all it would take.

But therein lies the first question: will all Democrats go along? I’m not so sure. I recently mentioned that the banking lobby is flexing its muscles. Banks have made it clear that they’re unhappy with Democrats, and during a mid-term election year, some Democrats must be listening.

I also wonder what this bipartisan bill will look like. Dodd will have to compromise to get even Corker on board. What proposals will be lost or substantially changed? Will the consumer financial protection agency survive? How about the Volcker Plan? Will they ruin the non-bank resolution authority?

I wonder if what’s really going on here is just politics. Maybe Dodd could have made essentially the same compromises with the committee’s ranking member, Senator Richard Shelby (R-AL), but wanted to punish him for being so difficult, and work with a different Republican instead. Either way, I think that, if you get a bill that succeeds, it will be a very watered-down version of the legislation the House passed in December.