The Stimulus Bill that took effect on February 17, 2009, put certain COBRA provisions into effect for “assistance eligible individuals."

     The Stimulus Bill defines "assistance eligible individuals" as any COBRA "qualified beneficiary" who meets all of the following conditions:

          • Is eligible for COBRA coverage at any time during the period of September 1, 2008, through December 31, 2009;

          • Elects COBRA when first offered or during the additional election period provided by the Act: and

           • Is involuntarily terminated and thus has a COBRA qualifying event between September 1, 2008, and December 31, 2009.

     These definitions include both involuntarily terminated employees and their dependents who lost coverage under a group health plan due to the involuntary termination. At present there is no additional guidance regarding these definitions.

     As part of these COBRA amendments, the Stimulus Bill limits the amount of premium a COBRA-covered group health plan can charge an "assistance eligible individual" to 35% of the otherwise applicable COBRA premium for a period of up to 9 months (the "Subsidy Period") beginning March 1, 2009.  Employers sponsoring these group health plans must pay the remaining 65% of the COBRA premium (the "COBRA Subsidy") for the assistance eligible individual during the Subsidy Period.

     However, the Stimulus Bill allows an employer to seek reimbursement of this subsidy from the federal government by claiming a payroll tax credit for these COBRA Subsidy payments by complying with applicable IRS procedures. The IRS will require employers to file a revised Form 941, the Employer's Quarterly Federal Tax Return, to maintain certain supporting documentation to claim the payroll tax credit.

     The required supporting documentation will include: documentation of receipt of the employee's 35% share of the premium; in the case of insured plans, a copy of an invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier; and declaration of the former employee's involuntary termination.

     The Stimulus Bill also requires certain assistance eligible individuals whose employment terminated between September 1, 2008, and February 16, 2009, and did not elect COBRA coverage when previously offered or who allowed COBRA coverage to lapse after electing that coverage be offered a second COBRA enrollment period in which to elect prospectively to enroll in COBRA coverage.

     It also requires that group health plans that offer employees different plan options allow assistance eligible individuals the option to change their coverage choice.  Also group health plan administrators must provide certain notifications to assistance eligible individuals concerning these changes.

     Oh, and by the way, stay tuned.

     President Obama today announced that healthcare is a major priority regarding improving the quality, access and lowering costs. Any solution should involve the classic, insurance-industry approach of “spreading the risk.”We offer a simple solution—that just might work—tax credits.

     There are two generally accepted truisms in modern society. One: government never does well running major programs. Every large federal program in the last 80 years has been rife with controversy, inefficiencies and corruption. A single payor rule or nationalized health insurance is not the answer. It worked well in Canada for about a year and now many Canadians regret it. In places like England and Sweden, people wait months, even years to get needed medical treatment, if they can get it all. In other socialized medicine countries, the medical profession has been devalued to such an extent that the best and brightest no longer become doctors.

     No matter what people say about the health care system in this country, at least we can all get access to the finest medical care when we need to—provided, of course, we can afford it.

     Next, let’s assume for the sake of argument that most employers, given the chance, want to do the right thing for their employees. We hear employers often express the wish that they could provide their employees with health insurance benefits, but they say they cannot afford it.

     The solution is three-fold. First, provide tax incentives to employers who provide health insurance benefits to their employees. We are not talking minor tax incentives. Let’s talk about major tax incentives— tax breaks that can be carried forward for years if necessary, tax breaks that are made permanent so that the pro-business lobby groups don’t feel compelled to lobby against this type of reform.

     As more employers provide health insurance, more people will be covered. As more people are covered, the lower the per capita cost per employee—and the government is not involved.

     To know this can work we only have to look to the State of Hawaii, which mandated for employers to provide their employees with health insurance benefits and the per capita cost of premiums and medical care dropped significantly.

     The 50th state is the only one that can boast of near universal health care. Under a 17-year-old program that requires employers to pick up the cost of insurance premiums for any person working more than 20 hours a week, most of Hawaii's 1.1 million people have some kind of medical insurance. The unemployed, seasonal workers and those whose job does not include insurance are taken care of by state medical subsidies.

     In all, 98 percent of Hawaiians have some kind of medical insurance. By contrast, in the country as a whole, 15 percent of the population, or 40 million people, lack medical insurance and get no government subsidy. Most are wage earners who work for small or low-paying businesses.

     Perhaps most surprising to many experts, the near universal access to health care in Hawaii has not led to soaring costs. While Hawaii ranks near the top of the states in cost of living, its average health insurance premium is near the bottom. For example, a family in Hawaii pays a premium of $263 a month, nearly half that of other states.

     Other states like New York, Connecticut and Rhode Island have varying forms of incentive programs that have also worked with some success. The American Enterprise Institute recently endorsed tax incentive programs for health insurance coverage such as the programs in Hawaii and other states so the know-how and the political will exists to enact a program such as this is the politicians are willing to consider it.

     SECOND, stop Congress from cutting the reimbursement rates for Medicare and Medicaid. Each time Congress cuts reimbursements, the cuts set off double-digit medical inflation as again, fewer people are covered or are covered less completely. In some cases the reimbursements are so low, or the process to obtain reimbursement is so cumbersome, that doctors will no longer even accept Medicare assignments. That lowers the overall level of care for the people who need medical coverage the most.

     THIRD, require the federal government to fully fund Medicare and Medicaid benefits. Right now the federal government requires state governments to provide Medicare and Medicaid. However, the federal government only partially funds the reimbursements. Increasingly, unfunded federal mandates are bankrupting the states. Let’s fully fund at least one of these unfunded or underfunded federal mandates.

     This solution is simple so why hasn’t it been implemented? The problem is that pro-business lobby groups have lobbied against health insurance tax incentives fearing the incentives will go away and eventually descend into government mandates. The solution to this concern: Make the incentives permanent and the problem and lobby pressure against such reforms will go away. If Hawaii can do it with its high cost of living, why can't the rest of the country?

     COMMERCIAL REAL ESTATE MORTGAGES. When it comes to commercial lending for real estate, we are hearing that some lenders are finally loosening up—though not many yet. Construction lending is still hard to find. The key words here are “feasibility studies” and “demand analysis”. For those who are under the age of 54, once upon a time no development loan was ever done without feasibility studies and demand analysis. Welcome to the “good  old days,” when properly structures loans did not fail so easily.

ILLINOIS -- TEDDY ROOSEVELT RETURNS(?).  When William McKinley ran for president, the pols decided to bury a reformer, Teddy Roosevelt, in the second spot to fade into oblivion. Little did they know. In this case, Lt. Governor Pat Quinn (D), a long-time reformer and maverick, was to be buried under Governor Rod Blagojevich (D). Historically and presently, everyone who knows Pat Quinn from both sides of the aisle say he has been and always will be clean, which is only one of the reasons the Democrat faithful do not like him. They also don’t like him because even Republicans like Pat Quinn. The Republicans don’t like him, because the public does, and he could stay in office for a long time.

     AUTO BAILOUT.  It will be done, however the method is pure yuk. The public wants a bailout. The sitting President and the President-elect want a bailout. Even Nancy Pelosi and Republican leadership want a bailout. So why can’t Congress get it together—for the sake of the country?

     Instead of passing a bill to accomplish the objective, a large enough few in Congress is forcing a lame-duck President to use TARP funds (authorized for bank bailouts) to bailout the automakers. This is a grotesque misuse of government authority—and our Congress is to blame. The leadership of both parties are okay with what Bush must do, but they are unwilling to control their own.

     There are several issues. Some say that the auto makers should reorganize under Chapter 11 of the Bankruptcy Code. This would enable the auto makers to void contracts in general and particularly union contracts, cut labor costs and automate production lines. And, it is true that Detroit is paying workers more than foreign manufactures are paying their workers in the U.S. This sounds good except for... oh so many things, among them:

     A Chapter 11 reorganization could still leave the managers in place—unfettered to repeat their old mistakes. There is hardly an American alive that has not wondered why GM, Chrysler and Ford have not made fuel efficient cars. They also wonder why GM routinely kills their best, most innovative  lines. GM killed their electric car years ago, are condemning the Saturn, their most innovative line ever, and have done almost nothing anywhere else to deal with energy efficiency. Ford and Chrysler are no better.

     The unions are ready to make concessions that will accomplish most of what the managers want.

     If there is to be Federal money made available, there must be some oversight of how the money is spent. It makes no sense to give the idiots a blank checkbook to run the asylum, when they created the problem. While we do not like government involvement in running businesses, the managers have run amok.

     Federal oversight, such as banks are supposed to have, can cause managers to behave somewhat responsibly and to meet long-term objectives. Instead of short-term gains that allow fat, obscene bonuses and comp plans for people who want to get theirs and run to retirement or their next kill, we need managers who want to build businesses with long-term thinking that goes beyond lunch.

     We should have an auto czar. Quite frankly, we like Lee Iacocca. He is a visionary, he is tough, experienced and would do the right thing. Yes, we do not like the Feds in private industry, but even Harry Truman got the steel workers back to work and the country survived and prospered.

     The strict oversight should be temporary and then followed up with something more general, such as encouraging companies to invest in future development, by rewarding research and development efforts with tax breaks. Also, salaries of top managers must be limited, or at least tied to long term successes—or failures—of the companies that they run.

     This is common sense to everyone, except those that show up in private jets, begging for billions. 

     So far it looks better than some of us ever imagined. Here’s what we believe is happening and will happen under the nascent presidency of Barack Obama. In general, we expect him to govern from the right of Center, which will upset left-wing Democrats more than moderate Republicans.

     Obama and House Speaker Nancy Pelosi know all too well that the Obama presidency could be crippled in the first hundred days if Democrats overreach, which they would want to do. Letting the extreme left have their way would also hurt the Democrats in the mid-term election, now less than two years away. Believe it: Everyone already is planning for the midterms.

     Moderation. Believe it or not, Nancy Pelosi will be a moderating force and keep her end of Congress in line. This includes preventing Democrats from asking, or demanding too much legislatively from the new President and stopping attacks and indictments against President Bush and others in his administration, as some extreme Democrats want to do.

     Here’s why. We believe that a deal was cut to enable Pelosi to keep her Speaker of the House position. Getting Rahm Emanuel out of her house and into the White House was a key to Pelosi’s political power and survival. In exchange, we believe that she pledged to cooperate with the new administration on all levels. She would have been challenged, and possibly been beaten by rising star Emanuel, now Obama’s rising Chief of Staff.

     Higher taxes? Don’t look for a “tax increase”, but instead a sun-setting of the Bush Tax Cuts and subsequent adjustments to the pre-cut levels established under Bill Clinton. What form will they take? We’ll have to wait and see.

     A new tax policy - “Zero based” budgeting and taxation. Congress (and eventually the States) will be spending tax dollars on what the money was intended for. How novel.

     For example, a lottery that raises cash for education will be used for education. Till now, if a targeted revenue source, such as lotteries for schools or tolls for highways, generated cash, the legislatures would take in the cash in the appropriate department through one door, while they took it away from budgets through another door. In short, our legislatures and bureaucracies were free to spend what they wanted, where they wanted, and let the promises to the electorate be damned. That now will change.

     Unfunded mandates. They are going. High on the new agenda will be doing away with Federal orders for the states to spend money without giving the money to do it.

     Energy policy. Within the next two to three years, it will be obvious that the US is well on its way to energy self-sufficiency, through conservation, new fuel sources and new fuels. Details to follow.

     Energy tax. Do not be surprised to have a flexible gasoline tax that will keep the per gallon price at the pump generally flat. This will have several key benefits. First, it will keep the price of gasoline high enough to encourage more efficient fuels and autos. Second, it will generate revenue that will go for public works. Third, by using the tax as a shock absorber, rising and falling of oil prices will have less of an impact on the U.S. economy. Financial stability is what we need now as much as anything.

     Caroline Kennedy is heading for the Senate, taking Hillary Clinton’s place. The plan here is that Teddy knows that his time is limited. He wants his legacy, and the Kennedy family tradition, to remain in the Senate and to have an influence on the country. Already he appears to be turning his entire staff over to her.

     Caroline appears to have everything that is ideal for a politician and very much unlike her uncle. She doesn’t drink, doesn’t do drugs, has not had illicit affairs and still is in her only marriage. Her children have not been in trouble and she and her husband have never had so much of a hint of scandal of any sort. Add to that, Caroline Kennedy is well educated, experienced in business and politics, articulate, totally competent, is well known and generally well liked by everyone.

     However, there are problems with getting Caroline into the Senate. Her husband is completely opposed to her entering politics for numerous reasons, not the least of which is her family history.

     On balance things are looking better already—we hope.  

     There are many who are touting a second coming of a Great Depression—but they are wrong - or to the Japanese of the late 1980s— or both. Whether they want to sell books or garner headlines and air time, those who think the similarities are compellingly simple do not understand history—or the present.

The Forgotten History

“The Great Depression” was created when a stock market bubble was caused by too many people buying on margin. They borrowed 90% of the stock’s price, leaving them only 10% of the stock’s value as collateral for their loan. When the market first went flat and then started to go down, the subsequent margin calls created a liquidity crisis that made a falling market crash.

     Then the Federal Reserve and the Federal Government made everything worse. Although the market had fully recovered from Black Friday in 1929 by the beginning of 1931, the Federal Reserve raised interest rates and tightened credit at a time when it should have made credit more available.

     In addition, the government raised taxes in a recession and caused an even greater liquidity crisis by closing the banks. Worse yet, the government threw up trade barriers that resulted in an international tariff war—all of which, together, strangled the economy for almost eight years.

     None of that is happening now. The Federal Reserve has pumped money into the economy and lowered interest rates. The government is not talking about increasing taxes. Instead there is talk of tax cuts for the middle class and leaving the Bush tax cuts in place until they expire in 2010.

     The Japanese real estate and banking failures of the late 1980s, really began more than 10 years earlier with their system of Keiretsu. That system, which the U.S. banned by the Glass-Stiegel Act of 1934, actually encouraged banks to own stock in the corporations to which they loaned money. Worse yet, the companies also owned stock in the banks—from which they borrowed.

     On top of that, the banks used that stock as collateral for making real estate loans, which again was backed by the real estate and guaranteed by the stock in the companies, which also included stock in the banks held by the companies. If all of this sounds financially incestuous, it was and made idiots of the financiers that participated.

     To make matters worse, “the Japanese spent yet another 10 years in denial,” said Paul McGonagle, CEO of an international insurance company. “They tightened money and did not provide liquidity for banking system 10 years or more. This alone prolonged their pain unnecessarily,” said McGonagle who was running international risk management for two large international banks at the time.

     Key to real present--our leaders know history.

     The current Fed Chairman is a student of both historic financial debacles. We can count on him not to repeat those mistakes, though he may make some new ones.

     The President-elect and the U.S. Congress have all made it clear that there will be a stimulation package of historic size.

     Governments throughout the world are doing likewise. And, instead of tariff wars, international free trade, lower interest rates and a freeing up of credit are the rules of the day.

     What we do need to be concerned about:

     Bailout money will be distributed to distressed industries. We know this, but let them show us a plan—before they get the money. And, let their CEOs take serious pay cuts or eliminate their salaries completely. The auto industry leaders showed themselves too arrogant to be taken seriously and should be replaced with managers who care more about getting the job done well than fattening themselves in a time of national crisis.

     Don’t forget an energy policy. We need to be independent of foreign oil and we need it within 5-7 years. No fall in petroleum prices should distract us from that goal. In addition to alternative fuels, we need to build autos that work efficiently, safely and make sense commonly.

     Beware of too many giveaways. No one ever got an incentive to advance themselves when they were assured that they could live well without working and without risk.

     Don’t make stupid loans ever again. Whether they are residential or commercial, loans should not be made to people or on deals where there is no way for them to get repaid. In short, our lenders need to do homework and relearn to lend properly. Interestingly enough, the much maligned FHA has been doing their home loans properly and as a result have fewer defaults that the rest.

     Control exotic financial instruments. We got into this mess because of exotic financial instruments that were so complex that Ph. Ds. could not comprehend them. These instruments had little resemblance to the original product, and a lot of good loans got a bad name and could not be sold in the secondary markets because they could not be distinguished from the relatively few bad loans. Here is one place where government oversight is necessary—and even a Libertarian might agree.

      If you want a commercial real estate or construction loan there is plenty of money available, but nobody wants to lend it. And while there still is money from private equity sources, some conservative financial institutions and government programs, it is harder to find than ever. But take heart: it is still there.

      The problem is one of perception. Loan money is drying up because of a combination of market hysteria and fears that regulators may force a lender to devaluate performing loans because of perceived decreases in property value. It’s called “mark to market” valuation and could put enormous pressure on a lender’s capitalization requirements that literally could force them out of business.

      Perhaps the regulators need to look at the tax assessments on these properties and consider what would happen if the taxes were adjusted to current property values as well. The result would be financial chaos when cities could not meet their obligations in providing services, maintaining infrastructure, and meeting payrolls.

      Let’s look at what is happening now: One of our favorite insurance companies has a loan portfolio of about $4 billion—and they have “zero” defaults. Even so, they are out of the lending market—meaning that they are making no loans at all. Clearly they did not make risky loans. So why not continue the methods that have worked over time? The answer is that they can’t—and we have a crisis in our economy.

      For new construction, there is no money out there at all and it is getting worse by the day. “We will lend to people who don’t need the money, but would like it. If they need the money, they are out of luck, and it isn’t getting better,” said a West Coast banker— who could not be named for obvious reasons. But, those were his marching orders—to stand pat.

      “Everyone is hoarding cash to build up their balance sheets right now. Even the SBA loans have closed down for new construction,” said the banker. “We have a crisis in confidence and we don’t have any non-performing loans on our books.”

      The home mortgage market. The loans that most of us have, conforming “A” paper (generally $417,000 or lower) are not in such bad shape. Only 3.0% are 60 days or more delinquent, which is up from 1.6% a year ago and 1.5% a year earlier.

      Most of the “A” paper problems are with “Jumbo” loans, many hitting $1 million or more. There, 5% are delinquent for 60 days or longer, up from 1.4% a year ago and 0.6% from a year earlier.

      Sub-Prime loan defaults appear to have bottomed out. The problems of resets (on adjustable-rate mortgages) and poor underwriting (and fraud) is behind us. Sub-prime loans represent 11% of all loans out there, which is down from 15% a year ago. Many of the sub-prime loans were classified as such because of unscrupulous loan officers, but have now been re-engineered into “A” paper loans. The rest of the problems are in foreclosure.

      Still to come are the negative amortization loans.  Those problems will come in about six months and last for another 12 months. However, they only represent about 6.5% of total mortgage market.

      We are not out of the mortgage problems yet, but they are getting more manageable by the day—because the bad news in the sub-prime area that started this whole mess is almost done.

      We need to stimulate housing values soon—if the economy is to be revived. To do this, we have to address the following:

      Balloons. Lenders with balloon loans coming due in the next five years must be ready to roll the loans over even though the then current market value have the house upside down. There is an old maxim real estate, time cure all ills. Our borrowers—and bankers—need the time.

      Limit all investor loans on residential properties. This already was done routinely, but not really enforced. It was common for lenders to allow individuals to borrow for 10 or more investment properties. This should be limited to people who are in the business of owning and renting to others—eliminating speculators who buy million dollar condos strictly on credit, while looking for a quick kill.

     Lenders must enforce the rules—but also must learn to be reasonable. We need a return of the “Bailey Building & Loan,” where the lender really knew the borrower.