Now taking nominations for the Worst Magazine Cover of the year

I humbly submit the following:


I saw this magazine cover sitting on the coffee table at a friend's house two days ago and I had to look twice to believe what I was seeing. After digesting my double-take i concluded my eyes had not deceived me; for there it was for all the world to see: Time Magazine equates the importance of "The War on Global Warming" with the Battle for Iwo Jima. I'll give Time an "A" for shock value alright, but if their intention was to shock folks like me into thumbing through the issue--let alone purchase it--well let's just say they failed miserably.

Dennis Prager sums up my thoughts on the matter rather succinctly, so I'll just add, "yeah, what he said."

The Time cover is cheap heroism. It is a liberal attempt to depict as equally heroic those who fight carbon emissions and those who fought Japanese fascists and Nazis.

Second, for much of the left, the cover reflects the primacy of environmental concerns over moral concerns. For example, the left seemed never to care about the millions of Africans who continued to die from malaria largely because of the environmentalists' worldwide ban on the use of DDT as pesticide. The same holds true for another leftwing environmentalist fantasy. Changing corn into biofuels is causing a surge in food prices throughout the world. The European Union continues this policy despite warnings even from some environmentalists that food shortages, starvation and food riots are imminent. But human suffering is not as significant as environmental degradation.

Third, the left is far more internationalist -- global, if you will -- in its orientation than national. As the Time article states, "Going green: What could be redder, whiter and bluer than that?" Whereas, for most Americans patriotism remains red, white and blue, for much of the left it is green.

Fourth, the further left you go, the more inclined you are to hysteria. From the threat of DDT to the threat of heterosexual AIDS in America to that mass killer secondhand smoke, the left believes and spreads threats that, unlike the threat of Islamic terror, really are "scare tactics."

I'm sure there are plenty of people out there who see nothing wrong with Time's cover this week--even going so far as to celebrate it as speaking "truth to power" or something--and will take the opportunity to dismiss any objection as typical right-wing hysteria. Too bad they'll also not realize that the men on the cover and their brothers-in-arms fought for their right to hold and express their mis-guided feelings and opinions.

Oh yeah, HAPPY EARTH DAY, whatever that means.

The Cost of Healthcare

One thing that I've never been able to understand with regards to our nation's perpetual health care debate is why anybody thinks that insurance is the best way to pay for health care in the first place. If one looks at the insurance industry model in general, the whole system is geared toward pricing the probability of one-off events occurring among a certain portion of those who are insured. For example, automobile insurance exists to protect against theft and accidents; home insurance to protect against catastrophic loss from fire and natural disasters; and life insurance to protect one's family against the untimely death of the breadwinner. Insurance companies can stay in business because the risk of all policy holders making a claim at the same time is unlikely, and most policies never pay out anything substantial if they pay anything at all.

Now consider health care. The probability that somebody with a health care policy is going to make a claim, actually several claims over the life of the policy, is all but assured. What would happen to the price of auto insurance if every time you got a tune up for your car, or filled the tank with gas, you then submitted a claim? Where would home insurance premiums be if it was standard practice to ask for reimbursement after having your house painted or the hot water heater fixed? Would it be within the realm of possibilities that insurance companies would try any number of tricks to make the process of filing a claim more cumbersome so as to cut down on the number of claims they were bound to honor?

The way the system is now, going in for a health check up or a minor procedure and submitting the bill to your insurance company for payment is akin to submitting an automobile tune up receipt or a general home maintenance receipt to your insurance company. A health check up, car tune up and the upkeep of one's home are all similar inasmuch as they can be categorized as general maintenance. Items that fall under general maintenance should not be subjected to the insurance reimbursement maze. As Dr. Kellerman puts it in an opinion article in today's WSJ:

The health insurance model is closest to the parasitic relationship imposed by the Mafia and the like. Insurance companies provide nothing other than an ambiguous, shifty notion of "protection." But even the Mafia doesn't stick its nose into the process; once the monthly skim is set, Don Whoever stays out of the picture, but for occasional "cost of doing business" increases. When insurance companies insinuate themselves into the system, their first step is figuring out how to increase the skim by harming the people they are allegedly protecting through reduced service.

Insurance companies act as middlemen, and middlemen add layers to the cost of business, not take them away.

Insurance is all about betting against negative consequences and the insurance business model is unique in that profits depend upon goods and services not being provided. Using actuarial tables, insurers place their bets. Sometimes even the canniest MIT grads can't help: Property and casualty insurers have collapsed in the wake of natural disasters.

Health insurers have taken steps to avoid that level of surprise: Once they affix themselves to the host – in this case dual hosts, both doctor and patient – they systematically suck the lifeblood out of the supply chain with obstructive strategies. For that reason, the consequences of any insurance-based health-care model, be it privately run, or a government entitlement, are painfully easy to predict. There will be progressively draconian rationing using denial of authorization and steadily rising co-payments on the patient end; massive paperwork and other bureaucratic hurdles, and steadily diminishing fee-recovery on the doctor end.

Anybody that's ever been to an auto body shop knows that a 2-tier system of billing exists. Tell them you are going to submit the bill to insurance for payment and you will get a much different estimate than if you reveal you'll be paying out of pocket. The same 2-tier system exists in our current health care system:

Some of us are old enough to remember visiting the doctor and paying him/her directly by check or cash. You had a pretty good idea going in what the service was going to cost. And because the doctor had to look you in the eye – and didn't need to share a rising chunk of his profits with an insurer – the cost was likely to be reasonable. The same went for hospitals: no $20 aspirins due to insurance-company delay tactics and other shenanigans. Few physicians became millionaires, but they lived comfortably, took responsibility for their own business model, and enjoyed their work more.

Several years ago, I suffered a sports injury that necessitated an MRI. The "fee" for a 20-minute procedure was over $3,000. My insurance company refused to pay, so I informed the radiologist that I'd be footing the bill myself. Immediately, the "fee" was cut by two thirds. And the doctor was tickled to get it.

Like so many things in life, personal responsibility needs to be introduced into the health care equation. Being forced to pay for one's own health maintenance should in theory promote a more healthy lifestyle. Young, healthy individuals need little more than catastrophic health insurance to protect against the big unforseen bumps in life. As one gets older, perhaps the level of coverage could go up on a sliding scale. In any case, whatever system of payment for health services is eventually instituted needs to be market-based and portable so it is not dependent on a particular job or social circumstance. Once the tremendous amount of inertia caused by the millions of minute claims processed each day by insurance companies is reduced, maybe then they can focus on the efficiency of the system; or get out of the business altogether.

Quantifying a WAG

Today several investment banks announced their share of Level 3 assets. In case you are wondering what level 3 assets are--and level 1 and 2 assets for that matter--the Wall St. Journal has this definition:

Level 1 is assets that have observable market prices. Think a stock traded on the NYSE.

Level 2 assets don’t have an observable price, but they have inputs that are based on them. Think an interest-rate swap where its components are observable data points like the price of a 10-year Treasury bond.

Level 3 is for assets where one or more of those inputs don’t have observable prices. This is the bucket that has been described as a guesstimate, because it is reliant on management estimates. As things stand now, companies who haven’t early adopted FAS 157 don’t give this more detailed breakdown to investors. So, one result of FAS 157 is more information.

Warren Buffet famously said that he never invests in things that he does not understand. I wonder how many investment banks truly understand what they have filed under Level 3 assets? (Bloomberg article)

Goldman's share of Level 3 assets surged 39 percent to $96.4 billion at the end of February from $69.2 billion in November, according to a filing with the U.S. Securities and Exchange Commission today. The ratio of Level 3 to total assets rose to 8.1 percent from 6.2 percent.

While many subprime-related stakes that lost almost 100 percent of their value since July were categorized in Level 3, other holdings such as private-equity stakes, real estate and rarely traded corporate debt are also included because market prices for them aren't available. More assets have become difficult to value in the last three months as investors shunned a wider array of credit, reducing trading.

Goldman Sachs has $96.4 billion of Level 3 exposure that is valued on what amounts to a wild ass guess (WAG). The obvious question is how can the figure $96.4bil be taken seriously if it is, by definition, a WAG?

Goldman Chief Financial Officer David Viniar said last month the Level 3-to-assets ratio had risen to about 8 percent mostly because some assets classified as Level 2, including commercial real estate loans, dropped to Level 3. The biggest increase in the hard-to-value category was a 59 percent jump in derivative contracts, according to today's filing. Mortgage and other asset-backed loans and securities increased 56 percent in the quarter.

Mr. Viniar does not seem too concerned that assets that were formerly able to be valued (Level 2) are dropping into the Level 3 bucket. This is the same Mr. Viniar that last August was shocked when their volatility models did not anticipate the severity of the sub-prime melt-down.

“We are seeing things that were 25-standard deviation events, several days in a row,” he said then.

My biggest problem with derivatives in general is that once you move beyond the realm of equity index options and futures, they seem to become easily decoupled from the underlying asset from which they are supposed to derive their worth. Many derivative markets, until recently, were several times more liquid than the market for the underlying asset, which is why a derivative was created in the first place. The problem then becomes once the music stops, the person left without a chair is stuck holding a bag that is impossible to value accurately. Once that person tries to value his "bag" it forces everybody else to do the same. And so the downward spiral of valuation begins; unless you can stuff it in the Level 3 sack. Eventually though, the can that keeps getting kicked down the road is going to get kicked back. I won't be surprised if it's loaded with gun powder and the fuse is lit.

To be sure, Goldman Sachs is not the only investment bank with this problem, just the biggest.

Morgan Stanley's Level 3 assets rose 6.1 percent to $78.2 billion last quarter, the firm said today in an SEC filing. Lehman, which also filed a report with the agency today, said its Level 3 holdings rose 1.3 percent to $42.5 billion. All three firms are based in New York. The harder-to-value securities made up 7.2 percent of Morgan Stanley's total assets at the end of February, up from 7 percent three months earlier. Lehman's ratio declined to 5.4 percent from 6.1 percent as total assets grew faster.Lehman CFO Erin Callan said last month the ratio would be around 5 percent.

Before we congratulate Lehman Brothers for a job well done, recall that they just raised $3bil a couple weeks ago to shore up their liquidity issues.

``The uncertainty of Level 3 asset valuation is already priced in the stocks of brokerage firms,'' said Steve Roukis, managing director at Matrix Asset Advisors Inc. which oversees $1.8 billion of assets in New York. ``We expect more writedowns in coming quarters, but they're not going to be huge numbers like the past quarters.''

I wish I was as optimistic as Mr. Rourkis, who believes that assets valued by WAGs are already priced into the market. However, I do not see this liquidity problem ending any time soon, which may be a contrary indicator...or not.