Did the Supreme Court Make it Unconstitutional to Repeal Medicaid?

In what appears to be an unprecedented interpretation of the Spending Clause, Justice Roberts held that if the federal government makes a significant change in who is eligible to participate in a program, the states receiving funding for the original program cannot constitutionally be required to either accept the changes or end their participation - they must also be able to maintain the status quo.

Roberts introduced an analysis that derives from contract law: Medicaid is a contract between the federal government and the states and, while the federal government reserves the right to modify that contract, it is possible for a modification to be so dramatic that it transforms the program into something other than what was accepted by the states. As in Roberts' view the changes implemented by the ACA reach that point, Congress must allow states to continue the present contract, rather than forcing them to choose either to accept the expanded program or to opt out entirely.

To look at it another way, Roberts appears to be declaring that you cannot take the existing Medicaid program, dramatically change the way it works, and say it's the same program merely because you use the same name. He has a point: that would be almost as ridiculous as turning Medicare into a voucher program and pretending that you're not ending Medicare as we know it. (Cough.)

If the change to Medicaid is as drastic as Roberts suggests, you could take the position that it's not an amendment of the existing program. You could regard it as the repeal of the existing program and its replacement with a new program that simply uses the same name. Would Roberts argue that an explicit termination of Medicaid, and its explicit replacement with "Medicaid II" would be unconstitutional? If not, and Congress has the right to terminate the Medicaid program, how can the "threatened loss of over 10 percent of a State's overall budget" - the exact same loss that would result from the program's perfectly lawful repeal - prevent the federal government from asking states to accept or reject the amended program?

Fixing the Mortgage Mess

An opinion column in the Times is skeptical that the mortgage documentation mess can be fixed with legislation:

The banks and other players in the securitization industry now seem to be looking to Congress to snap its fingers to make the whole problem go away, preferably with a law that relieves them of liability for their bad behavior. But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code. A challenge on constitutional grounds would be inevitable.

Asking for Congress’s help would also require the banks to tacitly admit that they routinely broke their own contracts and made misrepresentations to investors in their Securities and Exchange Commission filings. Would Congress dare shield them from well-deserved litigation when the banks themselves use every minor customer deviation from incomprehensible contracts as an excuse to charge a fee?

It may well be inevitable that some lawyers would attempt to challenge a federal law, but is there a reason to believe that the litigation would be successful? Federal law can bulldoze state laws - it's called preemption. For the most part, even now, homeowners don't seem particularly inclined to fight the foreclosure process. Legislation would further narrow the pool of people willing to litigate, and banks could redouble their efforts to document those transactions so as to moot their cases.

Perhaps the author is speaking of the potential litigation between the various financial institutions involved - attempts to force buy-backs of mortgages or securities, fraud actions, breach of contract actions.... But the players seem to know the risks associated with that game, which is why they're presently working through their lobbyists as opposed to their law firms.

There are alternatives. One measure that both homeowners and investors in mortgage-backed securities would probably support is a process for major principal modifications for viable borrowers; that is, to forgive a portion of their debt and lower their monthly payments. This could come about through either coordinated state action or a state-federal effort.

The large banks, no doubt, would resist; they would be forced to write down the mortgage exposures they carry on their books, which some banking experts contend would force them back into the Troubled Asset Relief Program. However, allowing significant principal modifications would stem the flood of foreclosures and reduce uncertainty about the housing market and mortgage securities, giving the authorities time to devise approaches to the messy problems of clouded titles and faulty loan conveyance.

Unless the documentation is in order, how do you know you're dealing with the correct party? Or is the author's assumption that, despite the irregularities and fraud in banks' attempt to document mortgages, they banks have it right in the vast majority of cases and eventually the paperwork will catch up?

Also, which is more likely to come out of the next Congress - a law making it easier for financial institutions to overcome deficiencies in their documentation of mortgages, or another bailout of the financial industry? It may be easy to forget now that the astroturfers have redefined the movement, but the Tea Party Movement grew out of popular disgust at the first bailout.

Update: Who could have seen this coming.

The Sanctity of Contracts, Revisited

Recall back in the days when we were being asked to hand out hundreds of millions of taxpayer dollars as bonuses to the incompetents at AIG who helped engineer the economic disaster? How many lectures we received about "the sanctity of contracts", even from an industry notorious for avoiding its contractual obligations?

Every time I hear bankers and financial industry insiders assure us that the current mortgage mess is "no big deal" - that we should shrug off forged documents, the failure to have properly conveyed mortgages, even the inability of a party asking for foreclosure to prove it has any legal right to do so - I am reminded of those earlier assertions. Contracts are sacred when scrupulous adherence will line the pockets of financial and insurance industry insiders. When they might work to the benefit of the little guy, they're "red tape" to be ignored.

Reading the Fine Print

Thinking about buying software to protect your children when they're online?

Parents who install a leading brand of software to monitor their kids' online activities may be unwittingly allowing the company to read their children's chat messages — and sell the marketing data gathered.

Software sold under the Sentry and FamilySafe brands can read private chats conducted through Yahoo, MSN, AOL and other services, and send back data on what kids are saying about such things as movies, music or video games. The information is then offered to businesses seeking ways to tailor their marketing messages to kids.

Apparently you can opt out, but how would you even know you needed to do so?

Edward Liddy Was CEO of Allstate?

That's rich. The former CEO of Allstate lecturing people on contract rights as inviolable?

Allstate ranks as the worst insurer for consumers, according to a comprehensive investigation of thousands of legal documents and financial filings.

The rankings show a distinct pattern of insurance industry greed amongst 10 companies that refuse to pay just claims, employ hardball tactics against policyholders, reward executives with extravagant salaries, and raise premiums while hoarding excessive profits.

"While Allstate publicly touts its 'good hands' approach, it has instead privately instructed its agents to employ a 'boxing gloves' strategy against its policyholders," said American Association for Justice CEO Jon Haber. "Allstate ducks, bobs and weaves to avoid paying claims to increase its profits."

Allstate set the standard for insurance company greed and placing profits over policyholders. Allstate contracted with consulting giant McKinsey & Co. in the mid-1990s to systematically force consumers to accept lowball claims or face its "boxing gloves," an aggressive strategy designed to deny claims at any cost. One Allstate employee reported that supervisors told agents to lie and blame fires on arson, and in turn, were rewarded with portable fridges.

Thousands of court documents, materials uncovered from litigation and discovery, testimony, complaints filed with state insurance departments, SEC and FBI records, and news accounts were reviewed to compile the rankings and statistics.

Hey - I know. Liddy wouldn't have approved the portable fridges as bonuses had he known about them beforehand, but a contract's a contract.

Edward Liddy's Tin Ear

I feel a bit sorry for the man, actually. As he points out, "My annual salary is $1. My only stake is my reputation." But without going too deeply into his superficial analysis of why we must pay bonuses that he concedes aren't merited by the employees receiving them, and that he would not have approved had he been CEO at the time, this conclusion is astonishing:

In America, when you owe people money, you pay them.

Sure, but you pay them with your own money.

If I send Liddy my mortgage bill and say, "Dude, pay this for me," at best he'll ignore me and at worst he'll make an alternate suggestion of where I should put the bill. But there's no chance - zero, zilch, nada - that he won't recognize that I'm asking him to pay my bill with his money.

It's not a difficult concept to grasp.

Andrew Ross Sorkin, Contrarian

Addressing the AIG bonuses, Andrew Ross Sorkin argues that the American taxpayer should bend over and... I'll leave out the middle part, but at least it ends with "get over it" as opposed to "pretend to like it." It's an essay apparently designed to provoke; unfortunately it doesn't do much to persuade. Quoting President Obama, Sorkin states,

“This isn’t just a matter of dollars and cents,” he said. “It’s about our fundamental values.”

On that last issue, lawyers, Wall Street types and compensation consultants agree with the president. But from their point of view, the “fundamental value” in question here is the sanctity of contracts.

The sanctity of contracts? I assume at this point that Sorkin's never had to negotiate with his insurance company over a claim or wrongful denial of benefits. It goes without saying that he's never gone to law school, let alone practiced contract law. I wonder if he takes a similar absolutist position on divorce - marriage is a contract, after all, yet here's the government letting people off the hook, all the time.

The world of AIG revolves around contracts - building contracts that are tightly binding on the other side, but loosely binding on AIG. They have platoons of lawyers that they can turn loose on their contracts to determine ways to deny claims, reinterpret provisions in their favor, revise contracts to take advantage of the latest changes in case law and statute, and otherwise to put the people on the other end of a transaction at contractual disadvantage. When there's a dispute over a contract, those lawyers don't hesitate to argue that the contract should be voided on any number of grounds, including fraud, mutual mistake, and violation of public policy. The only time they talk about the "sanctity of contracts" is when they're on the other side of the argument, and probably then only for the benefit of a jury - I can hardly imagine what a judge with any experience would make of an insurance company arguing that contracts are sacred and inviolable.

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

You mean, like if the government offered things called "courts" where people could go and claim, "I'm in a contract dispute with this other person, and want you to vacate part or all of the contract," and had a person called a "judge" who had the power to in fact do that? Or a special type of court called a "bankruptcy court" where people could erase part or all of their financial obligations? Or where there was an elected "Congress" that would tell a company in financial trouble, "We'll help you - but only if you first tear up your contracts with your labor union"? The horror - thank goodness we don't live in a country like that.

Do you find yourself transported back in time to last November, when Sorkin felt quite differently about contracts?

Bankruptcy would give G.M. enormous leverage with its debt holders — and, perhaps more important, with the U.A.W., whose gold-plated benefits are one reason G.M. is no longer competitive. A bankruptcy filing would also give G.M. the cover to close plants, rid itself of unprofitable brands and shed dealerships.

Wow.... G.M. would need an industrial-strength shredder. And it gets better... Why should auto workers have their salaries slashed and lose their benefits, despite the "sanctity" of their contracts?

Part of the problem is summed up by comments like this one in The Detroit Free Press, made by Kandy O’Neill, 39, an assembler at G.M.’s plant in Lake Orion, Mich., where she builds the Chevy Malibu and Pontiac G6. “I think we’ve given enough,” she said about the cuts to her salary and pension plan.

“Everybody wants to come down hard on the workers,” she said. “Nobody knows what we do inside there but the people who work there. It’s hard. It is not an easy job.”

When you read a line like that you might sympathize with her, but then you realize that nothing can be accomplished without bankruptcy. Ms. O’Neill: your company is asking the taxpayers - many of whom don’t have health care coverage - to pay your salary and health insurance.

And Mr. Sorkin, you're asking the taxpayers, many of whom aren't getting $3 million bonuses this year, to... Oh, why am I still pretending that you intended your argument to do more than give you a lot of media attention for being contrarian. I can't believe you're so obtuse as to not see the contradiction, or have had a transformative experience that has caused you to abandon your earlier anti-contract stance. Do you believe a word you wrote in either article?

Seriously, here we have AIG that is bankrupt - it survives only through the injection of gargantuan amounts of taxpayer money and the implied (or is it express) promise that the U.S. Treasury continues to stand behind its obligations with a blank check. No, it hasn't gone through bankruptcy proceedings, but only because it's the unique and special recipient of an unprecedented bailout. It's perfectly reasonable, and perfectly consistent with contract law, to argue that the bonus contracts requiring a huge outlay of taxpayer money to reward AIG employees violates public policy.

But let's take a step back - Sorkin argued, "imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right." My response so far treated that remark seriously, whereas it's not a serious comment. It's a slippery slope argument - and he admits it ("As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is.") I guess he hasn't studied logic.

My sarcasm should not be used to feed the slippery slope - although the government gives businesses and individuals both tools and opportunity to escape contracts, for the most part the government does seek to uphold contracts, and help others uphold them. Nobody in the business community would look at the AIG bailout, and the billions poured into upholding AIG's poorly considered contractual obligations, and conclude based upon the voiding of an oversized bonus contract, "The U.S. government can't be trusted to uphold contracts." Sorkin has to know that.

(The auto industry unions are facing a similar issue - but the big difference is that there is a negotiation; no one is unilaterally tearing up contracts.)

First, no, it wasn't a negotiation - it was a condition the government imposed as a prerequisite to issuing GM and Chrysler bailout money. The contract was entered through a negotiation, and is being abrogated because the government didn't want bailout money to support a compensation structure people like Sorkin argue is unjust to taxpayers. You know, because UAW members get health benefits. Second, Sorkin himself favored unilaterally tearing up their contracts through a Chapter 11 filing.

But what about the commitment to taxpayers? Here is the second, perhaps more sobering thought: A.I.G. built this bomb, and it may be the only outfit that really knows how to defuse it.

A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave - the buzz on Wall Street is that some have, and more are ready to - they might simply turn around and trade against A.I.G.’s book. Why not? They know how bad it is. They built it.

That's speculative, and although beneficial to AIG is not something I find particularly compelling. I suspect that, had it wished to do so, by now AIG could have brought people into the Financial Products division and got them up to speed, to the point that the people who created this mess could be given their walking papers. Sorkin's argument actually lends weight to the argument that the contracts should be declared void. If in fact their was an implicit threat, "Give us millions and millions of dollars, or we'll finish ruining the company and take down the world economy," it would be unconscionable to reward that behavior. The idea that they could walk away and trade on their inside information to the detriment of AIG and the country? Probably illegal, and certainly something AIG should have covered in its employment contracts.

And how does any of that explain why AIG gave these bonuses to employees outside of the Financial Products division, under the same exceptionally generous terms?

For better or worse — in this case, worse — someone at A.I.G. decided this company needed to sign bonus agreements last year to keep people before the full extent of its problems became clear.

And again the question arises, why? Why these unusual, "bulletproof", anti-employer contracts that guarantee extraordinary bonuses over a two-year period? The only compelling reason I can think of remains that AIG suspected that it would be taken over by the government and wanted to be sure that compensation would not be affected - regardless of performance, losses, or taxpayer subsidy. Liddy's comments support that thesis:

“We cannot attract and retain the best and brightest talent to lead and staff” the company “if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he said.

So this pay structure was created in anticipation that the U.S. Treasury would take over AIG?

Let them leave, you say. Where would they go, given the troubles in the financial industry? But the fact is, the real moneymakers in finance always have a place to go. You can bet that someone would scoop up the talent from A.I.G. and, quite possibly, put it to work - against taxpayers’ interests.

What's that supposed to mean? First, if people are able to be more productive outside of AIG, you create an economic efficiency by having them switch jobs. Second, how are the people at the heart of this disaster "real moneymakers"? You're going to gamble your company on their next scheme? Third, why are we assuming that they, and any other employer they join, would be working against taxpayer interests? Fourth, no small number of the employees getting these bonuses no longer work at AIG - how in the world does it benefit anybody to give them a retention bonus now?

“The word on the street is that A.I.G. employees are being heavily recruited,” Ms. Meyer says.

How does that justify the bonuses, even if we leave aside those paid to employees who have already quit? A retention bonus is only persuasive if it's higher than the next guy's signing bonus. If these guys could get the same or more elsewhere, the bonuses won't keep them at AIG. If they can't, but we're obligated to pay them more than their market value if we keep them on AIG's payroll, then AIG should be searching the job market for their replacements. In contract talk, that's called "increasing efficiency".