Obama Plans New Scrutiny for Contractors on Labor Practices

From today’s NYT “Politics” section by Michael Shear and Steven Greenhouse:

President Obama is expected to sign an executive order on Thursday that could make it harder for companies that violate wage, labor and anti-discrimination laws to win federal contracts, administration officials said on Wednesday.

Under the order, Mr. Obama will require federal contractors to disclose any labor violations that their companies committed over the previous three years, with government procurement officials then being advised to steer clear of those with repeated and egregious violations.

“The president’s view is that taxpayer dollars should not reward corporations that break the law,” said an administration official, who insisted on anonymity because the executive order had not yet been issued. The order would affect about $500 billion a year in contracts like those awarded to make Navy uniforms and run federal cafeterias.

Read the entire article here.

Moody’s to downgrade large banks

FROM THE NYT DEAL BOOK BLOG:  If true, this is an important step by the market to correct for false advertising. One question is whether it will make a difference cleaning up corporate malfeasance and fraud.

Believing that the government is now more likely to let large banks fail in a crisis, Moody’s Investors Service threatened on Thursday to downgrade the credit ratings of several big financial firms.

If it follows through, Moody’s could reduce the ratings of Wall Street giants like Goldman SachsMorgan Stanley and JPMorgan Chase as much as two grades.

Such a move might weigh most heavily on Morgan Stanley because a two-notch downgrade would leave the company just above a junk credit rating. But the effects on the bank may also be muted. Confidence in large banks, judging by their stock prices and other financial indicators, appears to have risen since Moody’s cut their ratings last year.

Banks, more than other types of corporations, borrow huge sums of money to finance their activities. As a result, a lower credit rating can make it harder for them to find buyers for their debt, pushing up their borrowing costs. A lower rating can also deter trading partners from entering certain types of lucrative transactions with a bank.

Financial companies’ reliance on borrowed money is what made them so unstable in the 2008 financial crisis. The government has introduced measures, many of which are contained in the 2010 Dodd-Frank financial overhaul law, that are intended to put banks on a firmer financial footing.

Dodd-Frank also tries to set up a process for an orderly winding down of failing banks. Lawmakers wanted to avoid a repetition of the 2008 situation, where taxpayers were effectively forced to bail out banks to prevent their failure from hurting the wider economy.

The orderly wind-downs envisioned in Dodd-Frank could lead to big losses for creditors to banks. In recent months, regulators have started to flesh out how they might liquidate a collapsing bank. This progress prompted Moody’s to consider the downgrades now to reflect the lower possibility of government support.

“The conviction on this subject is clear, even growing,” David Fanger, a bank analyst at Moody’s, said. “This could lead to a one- or two-notch downgrade for some of these firms.”

Goldman, whose rating is A3, and JPMorgan Chase, whose rating is one notch higher at A2, declined to comment.

Many critics of the Dodd-Frank liquidation provisions doubt that the government would have the stomach to inflict losses on bank creditors in times of systemic stress. In April, Paul Volcker, a former chairman of the Federal Reserve, expressed skepticism about Dodd-Frank’s wind-down approach. “No one in the market believes it,” he said.

Still, Moody’s thinks the efforts have credibility, in part because regulators have started to describe the exact steps they might take in a liquidation. Under the plans, the government would seize the parent company of a bank and turn its debt into equity capital to make it stronger financially. In the process, regulators would most likely not seize the affected bank’s subsidiaries. That is why Moody’s on Thursday threatened to downgrade parent company ratings but not always those of bank subsidiaries.

Moody’s decision to review the ratings will reinforce the beliefs of those who say Dodd-Frank’s measures are sufficient to deal with the “too big to fail” issue. But the actions of lawmakers who do not feel the act is adequate may have also contributed to Moody’s actions. In recent months, lawmakers have introduced two bills that aim to do more to rein in large banks.

“They simply indicate the conviction within the United States government to solve the ‘too big to fail’ problem,” Mr. Fanger said. “They clearly put pressure on regulators to make the current law work.”

Mr. Fanger added that the Dodd-Frank liquidation process might lead to lower losses for creditors than a potentially less orderly approach. To reflect that possibility, any downgrades may be less severe, he said.

Citigroup and Bank of America, large banks that have relatively low ratings, may not have to worry about Moody’s latest action. The agency said their ratings had been placed on review “direction uncertain.” Moody’s perceives improved financial health at the two banks’ subsidiaries. That could offset the downward pressure on ratings from the Dodd-Frank liquidation process, Moody’s said.

Cisco cuts 4,000 jobs despite better than expected quarterly earnings

The nation’s largest computer infrastructure company today announced it would cut 4,000 jobs, representing 5 percent of its workforce, citing the challenge of global competition as reason to reorganize despite its quarterly report posting better than expected profits.

John Chambers, CEO said that in spite of the earnings report, Cisco faced challenges ahead, though he was short on whether there were any specific challenges requiring a trimmer workforce.

“We’ve got to take out middle-level management,” he said. “What I’m really after is not speed of decisions but speed of implementation.” He said that the company’s performance had improved over the last year, but that “it’s just been slow.”

Translation:  Even though the company reported it earned $2.27 billion in the fourth quarter, up from $1.92 billion at this time last year, the 6 percent overall increase in revenue to $12.42 billion from $11.69 billion was not a strong enough showing, and more needed to be done to keep up appearances of short-sighted profiteering, even if that meant cutting thousands of jobs in an already jobless economic recovery.

Obama proposes lower corporate tax rates, but tax reform remains elusive

There is a concerted bipartisan effort to pass tax reform legislation among centrist Democrats and Republicans alike. However, the deep animosity between the radicalized House Republicans and the Obama Administration is going to make agreement about any kind of substantial reform hard to achieve as they enter yet another round of budget battles. There was no victor in the last round of budget bickering and only losers, as the so-called “sequestration” led to across-the-board spending cuts and potentially hampered efforts at economic recovery.

This week President Obama announced a “grand bargain” of sorts at an Amazon distribution center in Chattanooga, TN. In an effort to jump start a serious political conversation about tax reform generally the President made public his proposal for streamlining corporate taxes in America and creating jobs through education, training, and public works projects.

“If folks in Washington really want a ‘grand bargain,’ how about a grand bargain for middle-class jobs? If we’re going to give businesses a better deal, we’re going to give workers a better deal, too.”

The President outlined a similar proposal for tax reform in early 2012 during the presidential election. His idea is to cut the corporate tax rate from 35 to 28 percent, with a slightly lower for manufacturing firms in an effort to retain and expand those kinds of jobs. The proposed measure is supposed to be “revenue-neutral” so that it neither adds to nor subtracts from the deficit. There would be a one-time revenue boost, however, that would create enough savings to invest in jobs, something the Republicans have blocked time and again.

The national debate that ensued has also drawn attention to Sen. Max Baucus (D-MT), head of the Senate Finance Committee, and his House counterpart Rep. Dave Camp (R-MI) on the Ways and Means Committee. The two have been quietly working for months on substantial bipartisan tax reform aimed at overhauling and simplifying the nation’s antiquated tax code. Like all earlier attempts at reform their proposal suffers from being well-liked as an ideal theory but subject to the nitpicking and haggling of realpolitik by those who want to preserve parts of a system that benefits them. In short, everyone likes the idea of tax reform but no one will agree to the unforeseen outcomes of the details that might threaten their pocketbooks.

Now that the nation’s attention has been drawn to it, the partisan resistance by the Republicans to make any compromises has been emboldened. They have painted the President’s plans to reduce both corporate and middle income taxes as “tax increases” that compromise economic recovery, even though his proposal calls on reducing taxes for most Americans and small businesses. In ungovernable climate like this, the prospects of substantial tax reform remain dimmer than ever.

American Trust Inc., or Why we are losing the battle for our democracy

 A Gallup News Poll released Monday is telling. Americans trust their bankers more than their elected officials. According to the poll, 64 percent of Americans rate the honesty and ethical standards of Congress as low/very low. This is the lowest rating since the poll was first started in 1976 to rate the public’s perception of the trustworthiness of various professions. Congressional representatives (and presumably senators) are now tied with lobbyists, who are consistently ranked at the bottom along with the ubiquitously sleazy profile of used car salesmen and telemarketers. (Won’t somebody give good ‘ol Gil a break?) In other words, well over half of Americans believe their politicians are liars.

This dim view of American democracy is consistent with the public’s low disapproval rating of the job Congress is doing, or not doing as it were. An overwhelming 82 percent of the electorate is dissatisfied with its performance, whereas 10 years ago an average of 60 percent of those surveyed approved of the job Congress was doing. Times have changed. Or have they?

Two troubling facts stand out when placed alongside these statistics.

1. The incumbency rate in Congress has been above 80 percent since 1964. That means less than 20 percent of the U.S. House of Representatives turns over from year to year. In the Senate the numbers vary slightly more but not by much. Since 1964 the incumbency rate in the U.S. Senate has never dropped below 50 percent, and since 1982 it has remained steady at 70-80 percent. What does this mean? Despite skepticism of both the profession and institution, Americans continue to send the same people back to Washington over and over again. In short, they reward the apparently poor performance of representatives and senators by reelecting them. (This fact can be related to the alarming salaries and bonuses that corporate executives are giving themselves despite their poor performance. Got Enron-fever, anyone?)

2. In addition, Americans rate the honesty and ethical standards of various business professionals higher than Congress. Only 22 percent of responders ranked real estate agents as low/very low, 26 percent for bankers, 32 percent for executives, 37 percent for lawyers, and 40 percent for stockbrokers. This means that on average Americans trust big business more than democracy despite the fact that the former is paying off the latter to do its dirty work, and despite the fact that the public is supposed to exercise control over the latter with the power of voting.

What is troubling about these statistics is that Americans are clearly losing (have lost) control of their democracy, and the numbers explain exactly why this is happening. They basically trust the corporate world (slightly) more than their politicians. Yet it is corporate America that is getting its way in Washington and having its way with America—by flooding the nation’s capital with billions of dollars in election money, corporate sponsorship of policy think tanks, and downright graft. Even though the electorate is apparently aware that the honesty and ethical standards of politicians have been compromised, they are alarmingly less aware that the source of that corruption can be traced to corporate America.

For all the vaunted talk of the Tea Party’s renewal of responsible government it is the anger and frustration reflected in the Occupy movement that best reflects the political reality. The exclusive blame for America’s problems lies neither with politicians and big government, nor corporations and their greedy executives. There is plenty of blame to spread around there, and OWS has taken an important first step in exposing this evil collusion between elected officials and big business. When it comes down to it, the electorate shares much of the blame for sending the same people back to Congress year after year, effectively preserving a perverse incentive structure for rewarding incompetence and corruption. Maybe it’s time to run for Congress?