The European Flash Crash

August 24, 2010 By Leave a Comment

If you haven’t read the 3 postings on this site concerning the Flash Crash, this latest piece won’t mean much. But if you have a moment, I’d read the three articles on the “Flash Crash” and then this piece listed on Dow Jones today…..where did they say that that program was sent to?

By LUKE JEFFS

LONDON Circuit breakers prevented sudden losses in five stocks Monday afternoon on the London Stock Exchange from causing a wider market crash, the exchange’s operator said.

The prices of five LSE-listed stocks BT Group PLC, Hays PLC, Next PLC, Northumbrian Water Group PLC and United Utilities Group PLC started to fall suddenly at 2 p.m. local time.

The cause is unknown at this stage but brokers who were watching the market at the time said yesterday it looked like a “fat finger” trade, where a trader pushes a wrong key or sequence of keys, or a glitch in a trading algorithm that automatically generates orders.

The impact of the sudden sell-off was limited however because the LSE’s automatic circuit breakers kicked in when the losses in these stocks neared 10% and trading these names was immediately suspended. The exchange then cancelled all sell orders on these stocks and reopened trading after five minutes, at which time the shares rebounded to their levels before the mini-crash in just a few minutes.

The FTSE 100, which had traded down 0.8% to 5138 between 12.45 p.m. and 1.15 p.m., was unaffected by the sudden fall of these five shares, hovering at the 5150 level throughout.

The London Stock Exchange Group PLC heralded the intervention as a small victory at a time when the European market model has been called into question following the May 6 flash crash when the Dow Jones Industrial Average fell nearly 1,000 points after a similar sell-off in a handful of stocks that wasn’t stopped.

“At around 14:00, our circuit breakers were triggered in a number of securities on the Exchange’s order book,” a spokesman for the LSE said. “These circuit breakers are built into the Exchange’s systems to track the prices at which automatic executions are occurring and will halt execution if certain price movement tolerances could be breached.”

The cause of the May 6 flash crash is being investigated by U.S. regulators but the fact that brokers could continue selling because different trading venues had different circuit breaker rules is believed to have been a factor. Circuit breakers have been triggered on a few occasions on U.S. exchanges since the flash crash.

A month ago Conservative Member of the European Parliament Kay Swinburne published a draft report in which she suggested that “post the ‘Flash Crash,’ all trading platforms stress-test their technology and surveillance systems” to ensure Europe isn’t prone to the factors that led to the U.S. crash in May.

BT Group, Hays and Northumbrian Water Group declined to comment while Next and United Utilities were unavailable for comment.

More at eFinancialNews.com

Write to Luke Jeffs at luke.jeffs@dowjones.net

Filed Under: Fear and Greed, Money is King, Politics and the Market Tagged With: , , , , , , , , , ,

Obama’s State of the Union and the CBO

August 17, 2010 By Leave a Comment

The following is an exert from President Obama’s State of the Union Address on January 27th, 2010……..

Now if we had taken office in ordinary times, I would have liked nothing more than to start bringing down the deficit. But we took office amid a crisis, and our efforts to prevent a second Depression have added another $1 trillion to our national debt.

I am absolutely convinced that was the right thing to do. But families across the country are tightening their belts and making tough decisions. The federal government should do the same. So tonight, I’m proposing specific steps to pay for the $1 trillion that it took to rescue the economy last year.

Starting in 2011, we are prepared to freeze government spending for three years. Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will.

We will continue to go through the budget line by line to eliminate programs that we can’t afford and don’t work. We’ve already identified $20 billion in savings for next year. To help working families, we will extend our middle-class tax cuts. But at a time of record deficits, we will not continue tax cuts for oil companies, investment fund managers, and those making over $250,000 a year. We just can’t afford it.

Now, even after paying for what we spent on my watch, we will still face the massive deficit we had when I took office. More importantly, the cost of Medicare, Medicaid, and Social Security will continue to skyrocket. That’s why I’ve called for a bipartisan, Fiscal Commission, modeled on a proposal by Republican Judd Gregg and Democrat Kent Conrad. This can’t be one of those Washington gimmicks that lets us pretend we solved a problem. The Commission will have to provide a specific set of solutions by a certain deadline. Yesterday, the Senate blocked a bill that would have created this commission. So I will issue an executive order that will allow us to go forward, because I refuse to pass this problem on to another generation of Americans. And when the vote comes tomorrow, the Senate should restore the pay-as-you-go law that was a big reason why we had record surpluses in the 1990s. I know that some in my own party will argue that we cannot address the deficit or freeze government spending when so many are still hurting. I agree, which is why this freeze will not take effect until next year, when the economy is stronger. But understand – if we do not take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery – all of which could have an even worse effect on our job growth and family incomes.

The CBO put out this piece in July 2010,  it outlines the problems in waiting to reduce spending and increase taxes.

Increasing Taxes and Reducing Spending
Austerity programs generally include both tax increases
and spending reductions. When fiscal crises occur during
recessions, as they often do, such policy changes can
exacerbate the economic downturns—although some
studies suggest that certain types of fiscal austerity programs
tend, at least in some circumstances, to stimulate
economic growth.
The later that actions are taken to address persistent
budget imbalances, the more severe they will have to be.
CBO’s long-term projections for the federal budget
indicate that an immediate, permanent cut in spending
or increase in revenues equal to about 1 percent of GDP
(relative to the policies assumed for the extended-baseline
scenario) or about 5 percent of GDP (relative to the
policies assumed for the alternative fiscal scenario) would
prevent a net increase in the U.S. debt-to-GDP ratio over
the next 25 years. The latter would be equivalent to
roughly 20 percent of all of the government’s noninterest
spending this year. Actions taken later, particularly if
there was a fiscal crisis, would need to be significantly
greater to achieve that same objective. Larger and more
abrupt changes in fiscal policy, such as substantial cuts in
government benefit programs, would be more difficult
for people to adjust to than smaller and more gradual
changes.

Filed Under: Fear and Greed, Markets vs Economics, The Burden of Debt Tagged With: , ,

Argentina’s Weather Revisited

August 17, 2010 By Leave a Comment

They say that this year it has been colder in Argentina than it has been in the Arctic Circle. Perhaps it is because of the article that the Congressional Budget Office (CBO) recently authored. One thing is for sure, the CBO is used by both parties to make points as the argument allows. No matter which party you may lean towards, the CBO’s points on Argentina are worth reminding us of the need to be more fiscally responsible.

Argentina
Argentina’s experience offers an example of the very serious
consequences that can arise from a fiscal crisis.
Although interest rates on Argentina’s debt had been
comparable for many years with those on debt of other
countries in emerging markets, Argentina’s fortunes
changed quickly when it found itself suffering from a significant
recession in 2000 and 2001. During the first half
of 2001, with government debt equal to about 50 percent
of the country’s GDP, investors became increasingly worried
about Argentina’s fiscal situation—in part because of
the country’s earlier defaults on its debt. As a result, investors
demanded premiums for holding government debt
that increased interest rates by more than 5 percentage
points.7 A few months later, as it became clear that
Argentina was not able to afford (or willing to make) the
interest payments on its debt, interest rates jumped again
to levels so high that the government was effectively
unable to borrow. Subsequently, Argentina ceased paying
its creditors, and ever since it has been unable to raise
funds in international markets. Argentina’s fiscal crisis
accentuated its underlying economic problems, and from
2001 to 2002, the country’s GDP dropped by nearly
11 percent.

Filed Under: About Us

How is Medicare Doing?

August 17, 2010 By Leave a Comment

How is Medicare Doing?   from Greg Mankiw‘s blog…

Worse than official projections suggest:

Administration officials can always be counted on to praise President Obama’s health care law. But Rick Foster, the chief actuary of Medicare, offers an unvarnished assessment of how the new law affects 47 million Medicare recipients, as well as the federal deficit.

“There is a strong likelihood that the cost projections in the new trustees report under current law understate the actual future cost that Medicare will face. A strong likelihood,” he says. “I’ve gone so far as to say that I don’t think it’s a reasonable projection of what will really happen.” Rick Foster made a rare public appearance at the American Enterprise Institute Friday to discuss the latest projections of Medicare which are required by law.

The single greatest uncertainty in the projections are the cuts to Medicare that the administration is counting on to pay for new benefits.The Obama plan assumes health care can accomplish the same kinds of increased efficiency, or productivity improvements, usually seen on production lines — like manufacturing cars. But few analysts believe that is possible. Joe Antos, a scholar at AEI, says, “they’re productivity improvements if productivity happens. If productivity doesn’t happen, they’re still cuts.”

And Foster adds that, “every single expert we talked [to] has told us they did not think these productivity adjustments were viable. They thought they just would not work.”

Filed Under: About Us

Flash Crash 3

August 6, 2010 By Leave a Comment

FAST FORWARD …….FLASH CRASH

On May 6th, 2010, 2:45 PM, the stock market had just gone into free fall. No one knew why this is happening, a long-time well known market commentator screamed, “market manipulation,” on CNBC. In a period of less than 15 minutes the market had fallen to an historic intra-day low of down 998 points. We all looked around to try and determine what had just happened. Many considered it a fat fingered trade…..please…..Others thought that large option trading had caused the problem. ……..again, please.

For days people shuffled around trying to figure out what had happened, Congressional hearings were held, the SEC Chairperson testified, Broker/Dealer firms put their two cents out there but then nothing. Can anyone definitively explain this event?

By the way….isn’t it interesting that this issue seems to have faded into the background and no one wants to re-visit it? Where do you think Sergey’s software ended up? Was May 6th the first foray into the US market? Why no further conversations? Is it fixed? Who fixed it? When was it fixed?

The stock market since May 6th certainly has been banging around trying to determine in which direction it is heading. Perhaps that is how the problem has morphed? Curiously the market has been very adept at moving back and forth without causing too much furor. I offer the following:

May 6th, 2010     -347.8

May 10th, 2010   +404.71

May 20th, 2010   -376.36

May 27th, 2010   +284.54

June 4th, 2010     -323.31

June 10th, 2010  +273.28

June 29th, 2010  -268.22

July 7th, 2010       +274.66

July 16th, 2010    -261.41

It seems this random walk may not have been so random for someone.

In the 132 trading days of 2010 there were 10 trading days that showed more than 250 point swings positive or negative. Nine of those trading days happened after the flash crash, within 49 trading days of each other, and in swings that were greater than 250 points per day. …..Go figure! Where did that software end up, and what could it do?

Regardless of the conspiracy theory behind these moves, there is one more strange twist to this story. Goldman Sachs, while all this turmoil in the market was occurring, settled with the U.S. Government with regards to its conflict over “disclosure.” Goldman, was looking to put this event behind them and to move on. But in a move brought on by the need to comply with the new FINREG – Volker requirements, Goldman is contemplating spinning off its proprietary specialty trading unit.

According to an article by Mark DeCambre, the Goldman Sachs Principal Strategies unit invests, ….”strictly on behalf of Goldman Sachs”…… What does that mean? …..The article states that the Volker rule prohibits investment banks (GS) from maintaining pure proprietary trading platforms. If GS can’t maintain a proprietary trading unit in the future, wouldn’t it be best to sell it now? Or perhaps it is because GS does can’t afford any other negative publicity to haunt them over their past “proprietary trading systems, units, or programs.”

What if the sale is part of that strategy? Distance yourself from any other potential conflicts with regards to trading, software, platforms, etc., by showing how you sold that business and walked away from the conflict. ( a public relations win for a tarnished firm!) However, what have these trading platforms and software packages spawned? Certainly computer generated trading will not go away, certainly, from time to time, it will have an unwanted influence on the market, and most definitely someone, or some entity, will use it unscrupulously in the future. If individuals feel that they can take advantage of the largest free market, they will, and I am sure that Goldman and others will want to have distanced themselves from even a trace of conflict given their most recent tribulations.

Or perhaps the sale of the trading arm isn’t their main concern, perhaps it is the fallout from these potential Trojan horses that they fostered. The knowledge that this trading exists, that quants throughout the world can create it, and that the stock market may have already been manipulated by it, surely is reason enough to distance yourself from the source of the conflict.

 FINREG may have reintroduced the Volker rule, which will eliminate the idea of cross purpose trading in order to level the playing field for all investors, but it will not stop the attacks on the trading systems and platforms of the different markets.

After all…….where did that software end up, and what can it do?

Filed Under: About Us

Flash Crash 2

August 5, 2010 By Leave a Comment

ENTER Senator Chuck….after all the little guy doesn’t really care. (Hey Chuck, it’s Lloyd, you got a minute?) ……………………..

On July 27th, 2010 Senator Charles Schumer (D) New York, urges the Securities and Exchange Commission on the floor of the Senate to ban the practice in which some equity exchanges hold orders to buy and sell shares for a split second before publishing them on competing platforms. This practice is overcome by something called FLASH ORDERS. (Bloomberg 07/27/2001 18:22 EDT by Edgar Ortega and Eric Martin)

The article states…. Schumer, a member of the Senate Banking Committee, said in a letter to SEC Chairman Mary Schapiro that he will introduce legislation to ban flash orders if the regulator doesn’t act on his request. He said the practice lets brokerages using rapid- trading programs “profit from advanced knowledge of buying and selling activity.”

“This kind of unfair access seriously compromises the integrity of our markets and creates a two-tiered system, where a privileged group of insiders receives preferential treatment,” Schumer wrote. “If allowed to continue, these practices will undermine the confidence of ordinary investors, and drive them away from our capital markets.”

The article also states, “Goldman Sachs Group Inc., the second-largest market maker pairing off buyers and sellers at the NYSE, doesn’t use flash- order systems, spokesman Ed Canaday said in an e-mail.

Wait a minute! Is this the same Goldman Sachs that just spent millions and millions of dollars to build a proprietary trading platform that takes advantage of flash trading and they don’t use it? Ok, right…I believe it……NOT.

Hey! What’s this, it’s an article that ran in a magazine called the BUSINESS INSIDER, titled, “Russian Arrested for Allegedly Stealing Goldman’s Trading Formula.” (by John Carney 07-06-2009 09:37) The third paragraph states the following,

“What’s more, the theft coincides with a breath-taking decline in the automated “program” trading activities of Goldman. In recent months, program trading–batches of trades of multiple stocks initiated by computer programs–on the NYSE has been dominated by Goldman Sachs. Just three weeks ago, the NYSE reported that program trades Goldman made for its own account represented 60% of all program trading. The following week, Goldman didn’t even show up on the list of program traders.

Didn’t that guy Canaday just say that they don’t use the system? Well I believe him, don’t you? Ok, so he said ‘flash order systems, not program trading. I guess its important to know what your definition of  is, “is.”

The article goes on to say, “Goldman’s until-recently dominant role in program trading has garnered lots of attention, as has the recent drop-off. Goldman’s rise to dominance has been attributed to a variety of causes. Back in April, we mentioned that government guarantees of financial sector debt may have had a distorting effect, driving some high-frequency traders out of the equities markets. Felix Salmon proposed that Goldman’s ability to borrow under the umbrella of an implicit guarantee may have given it cheaper access to capital that allowed it to make profits in markets that those with higher costs of capital could not. Goldman itself seemed to claim that it’s high rank on the program trading tables was just a result of it acting as a market maker in some mysterious NYSE liquidity program.

Of course, the leader in all discussions about the enigma of Goldman’s program trading has been a mysterious blogger who calls himself “Tyler Durden” and writes for a website called “Zero Hedge.“ Tyler points out that the NYSE suddenly announced that it was changing the way it calculated the program trading list, which also coincided with Goldman dropping off the list. This prompted some to wonder if the changes were made in order to conceal Goldman’s dominance. Tyler’s analysis of this arrest is complex but highly worth reading.

Read more: http://www.businessinsider.com/quant-trader-arrested-for-allegedly-stealing-goldmans-secret-formula-2009-7#ixzz0vkjB6ceo

Read more: http://www.businessinsider.com/quant-trader-arrested-for-allegedly-stealing-goldmans-secret-formula-2009-7#ixzz0vkiOlQgl

So Schumer decides that he is going to champion the end of “flash trading,” because it compromises the integrity of our markets….did anyone stand up and object? Was there anyone who felt that his position was untenable? Surely someone wanted to discuss this before they implemented the policy and banned these trades forever? Yet, there is little objection……..

What about all of the firms that have spent MILLIONS of dollars to develop these trading systems, where are they? Where is their response to this move by Schumer? What about the other firms who use these systems for clearing purposes? No screams of indignation, no cries of disrupting the frail fabric of the marketplace? Where is the lecturer from Baruch College being interviewed about how he feels and what will happen to the world if it is denied this capability? No CNBC? no Bloomberg? no FOX Business news?…….Nothing…..just nothing……..

8 days later…..this……

ENTER MARY SHAPIRO SEC Chairperson

Breaking News: SEC Plans To Ban ‘Flash Trades’ That Give Advance Info To Certain Traders

Submitted by Tyler Durden on 08/04/2009 10:50 -0500

In Personal Call With Schumer, SEC Chair Schapiro Pledges That A Ban On The Controversial Practice Is Imminent

Unfair Practice Gives Certain Traders Advance Knowledge of Buying and Selling Activity, Putting Retail and Institutional Investors At Unfair Disadvantage

Schumer, Having Urged SEC To Curtail Flash Orders In Letter Last Month, Praises Move

SEC Proposes Flash Order Ban

Six weeks and two days after Schumer talks to Shapiro, the following release is made by the SEC……

FOR IMMEDIATE RELEASE
Washington, D.C., Sept. 17, 2009 — The Securities and Exchange Commission today unanimously proposed a rule amendment that would prohibit the practice of flashing marketable orders.

So let me get this straight…..On July 3rd, 2009 they arrest Sergey. Exactly 2.5 months later the SEC bans flash trading…… I guess they thought it could be a problem……

Hey, that’s great. They solved the problem, got ahead of it, nipped it in the bud, squashed the critter, Terminatored the bugger, offed ‘em, good work Chuck, thanks Mary, another one for the big “O.”

Ahh, wait a minute, ahh, has anyone bothered to look here? It looks like this has been going on for a while. Maybe the kudos aren’t so warranted………

Tomorrow…..the Flash Crash and Goldman’s decision to sell its proprietary trading group…….

Filed Under: About Us

The Flash Crash

August 4, 2010 By Leave a Comment

THE FLASH CRASH

Please come with me on a short but important journey. The journey starts in Chicago where we will board a flight to New Jersey. It’s like any other flight we have ever taken. We are looking forward to getting home and enjoy the 4th of July. It will be a great weekend. We’ll celebrate with family, we will remember the time that our dad took us to the American cemetery at Anzio, on the shores of a beautiful Italian fishing village warmed by the winds of the Mediterranean, where he wept openly for those that he knew, for those that had died. (If you don’t know Anzio and its battle you really should learn about it.) We are almost home; the pilot is turning the plane to line up with the runway. By the way….have you noticed that man over there? He seems very odd.

Trudging up the gangway and into the airport will be the last queue that we’ll have to succumb to for at least the next 3 days and then we stop dead in our tracks. There is some kind of commotion going on in front of us. That man we were looking at seems to be in some sort of trouble. Men with shiny blue rain jackets are surrounding that odd man. The men have some sort of initials on their back, but then we instantly recognize FBI………..

Sergey Alynikov is arrested, it’s July 3rd, 2009. Three days later there is a story in the NY Times. Sergey Alynikov has been accused of stealing software code. This isn’t just any sort of software code. This software code was Goldman Sachs software code. This software code according to the New York Times article by Alex Berenson, “Arrest Over Software Illuminates Wall Street Secret,” states that the code, “could be used to “unfairly manipulate”stock prices.” Holy crap!

It seems that by taking advantage of this code Goldman Sachs is enabled to buy and sell shares of stock in milliseconds. In effect it allowed Goldman to get in front of other firms to take advantage of their inferior trading system software. Pretty cool, does it really work?

Well, don’t fret, Alex has done a pretty good job of letting us know that the former head of markets systems at Fidelity Investments Bernard S. Donefer, who happens to be a lecturer at Baruch College, says that they potentially provide BILLIONS in profitability to their firms. So believe it, Goldman Sachs has developed a software program that potentially can manipulate the stock market, looks like it is being used to provide BILLIONS in profitability to the firm that created it, and Sergey stole it.           Holy Crap…….

But it gets better! Sergey, who came to the U.S. in 1991, sent the software to Germany. You know, point and click and whoosh! A multimillion dollar software package developed by Goldman Sachs that makes them BILLIONS went bye-bye….to some dude in Germany. The assistant U.S. attorney tells the NY Times, “GS stands to lose its entire investment in creating this software ……which is millions upon millions of dollars.”  (see the Furry Brown Dog Blog, “On Goldman Sachs’ illegitimate high frequency program trading.”)

ENTER Senator Chuck….the infamous, “after all the little guy doesn’t really care.”  (Hey Chuck, it’s Lloyd, you got a minute?) …………….more tomorrow………..

Chuck’s in a huff!

Filed Under: About Us

How much cash does the U.S. Treasury usually print?

July 29, 2010 By Leave a Comment

A recent comment came in and asked the provocative question that is the title to this post. At first I thought that it was quite funny, but after a moment the humor was lost and the answer intrigued me. After a few web searches I found the following site, through the U.S. Treasury. In the production facts at the bottom of the information was this little comment from the Department of the Treasury, ” 95% of the notes printed each year are used to replace notes already in, or taken out of circulation.”

So I decided that I would do a little math. According to the US Department of the Treasury information in the Fiscal Year 1980, the Treasury printed paper money totaling a little over $35 Billion in paper notes of various denominations. Taking my trusty 12C calculator out and doing some quick calculations it would seem that there would be nearly $57 Billion in paper notes of various denominations by FY 1990, and $93 Billion in paper notes of various denominations printed by the U.S. Treasury by the year 2000. Inquisitive as I am, and not having a lot to do on a Wednesday evening, I asked my trusty 12C to calculate the potential printed note value for the year 2009. It provided me with a total of $144.3 Billion. So just to make sure that the U.S. Treasury wasn’t much off their mark, I found out that in 2009 the U.S. Treasury issued $223.5 Billion in paper notes of various denominations.

Being an educated person, I proffered that the difference had to be an inflationary effect that the economy has burdened the printing presses of the U.S. Treasury with meeting over the past 29 years.

But if that is the missing link, then please explain the following:

  • 2004        515,200,000 $100 bills printed
  • 2005        668,800,000 $100 bills printed
  • 2006        950,400,000 $100 bills printed
  • 2007     1,088,000,000 $100 bills printed
  • 2008     1,209,600,000  $100 bills printed
  • 2009     1,785,600,000  $100 bills printed

So when someone asks you how much cash the U.S. Treasury usually prints, tell them…….as much as it wants.

Filed Under: Markets vs Economics

529 Plans – NOW they tell me!

July 20, 2009 By Leave a Comment

There are two other posts with regards to 529 Plans on this site. Those articles talked to the dangers of investing in these types of plans. The link below is of an article that just came out today from Investment News.

What does it tell you about these plans when FINRA has doubts as to how they are being managed and sold to investors?

By the way, the Investment Company Institute has reported the total dollars in Massachusetss 529 Plans at the end of December 2008. If you don’t remember the statistics in prior years, they are below:

2008       $2,272.4 Million                               MEFA  commission (15 Bps) $3,408,600.00

2007       $2,820.0 Million                              MEFA commission (15 Bps) $4,230,000.00

2006       $2,349.0 Million                              MEFA commission (15 Bps) $3,523,500.00

So the Massachusetts Educational Financing Authority received over $10,000,000.00 in commissions from 529 plans for the years 2006, 2007, & 2008. According to the Fidelity Investments Mutual Fund Guide Special 2008 Year-End Issue (p.478), the 3-year return for 529 plans for the Commonwealth of Massachusetts Plan had the following returns:

3 Year Returns for Aged Based Portfolio:

2009       2012      2015      2018      2021     2024

-1.32      -2.43      -3.84      -5.88     -7.53     -8.90

Question: If MEFA, “a non-profit self financing state authority,” is receiving commissions from the sale of financial products, could they also be held accountable for the losses created by the sale of these products? After all, based upon the returns of the plan, the only entities to make money from these plans were MEFA and Fidelity Investments!

Question: If MEFA was created by the state legislature “at the request of Massachusetts colleges and universities,” are these same universities now culpable for losses? Or at the very least, are they planning to lower their tuition and fees to the paticipants of the plan based upon the FINRA stance?

The “age-based” portfolios obviously have not accomplished what they were designed to do.

Filed Under: Fiduciary Foolishness, Investing Misconceptions

Prescription for Failure ???

July 16, 2009 By Leave a Comment

Governor Mitt Romney was determined to provide a healthcare plan that served all the citizens of the Commonwealth of Massachusetts. On April 12th, 2006 Governor Romney signed the bill into law. Regardless of what you might think about the plan it was well conceived, implemented with the appropriate bumps along the way, and delivered on its intent to cover the citizens of Massachusetts.

The Commonwealth Care Health Insurance Program was designed to provide health insurance to those individuals that were not covered prior to its implementation, and who were at different levels of income below the poverty level. It was a bold and comprehensive plan to meet the growing needs of the citizens of the Commonwealth and it had an immediate effect on the number of citizens covered by health care in the Commonwealth.

However, the unintended consequences of the Program began to surface almost immediately. On January 11th, 2007, only 9 months after signing it into law, a meeting was held by the  Board of the Commonwealth Health Insurance Connector Authority. At this meeting the new Governor Patrick Deval, the Board’s chair Leslie Kirwan, and its Executive Director heard from Patrick Holland. It was Patrick Holland’s comments that at the time may not have set off alarms but were certainly the pre-cursor of the bloom coming off the rose.

From the minutes of the meeting, the following was noted:

  1. I.            Commonwealth Care Trust Fund Projection: Patrick Holland reviewed the projected cost for state fiscal year 2007. Mr. Holland explained how some differences in the actual demographics of enrollees compared to initial assumptions, has resulted in a higher average composite capitation rate. The population enrolled is older and more are located in the Greater Boston area than expected. Each MCO receives a specific payment based on its demographics. BMC and Network Health, being lower priced, represent 81% of the enrolled population. Mr. Holland told the board that he will get back to them with more information on SFY 2008. (BMC is Boston Medical Center, MCO is Medical Center Operator)

The Boston Globe reported that in February 2008 the Commonwealth Care Program covered 169,000 citizens at a cost of $618 Million. Projections are that by 2011 342,000 citizens will be covered at a cost of $1.35 Billion. The original projections were for the program to cover 215,000 citizens at a cost of $725 Million.

An article by Alice Dembner in the Boston Globe of February 3rd, 2008 stated the following: “The state has asked the federal government to shoulder roughly half of the program’s cost from 2009 through 2011, but there is no guarantee of that funding.”

Which bring us to today.

An article from the New York Times by Abby Goodnough stated the following, “The new state budget in Massachusetts eliminates health care coverage for some 30,000 legal immigrants to help close a growing deficit, reversing progress toward universal coverage just as Congress looks to the state as a model for overhauling the nation’s health care system.”

And finally, this article also from the New York Times by Abby Goodnough, where the BMC (Boston Medical Center) is suing the Commonwealth of Massachusetts. The article states, “The hospital, Boston Medical Center, faces a $38 million deficit for the fiscal year ending in September, its first loss in five years. The suit says the hospital will lose more than $100 million next year because the state has lowered Medicaid reimbursement rates and stopped paying Boston Medical “reasonable costs” for treating other poor patients.”

So how did the state respond to the lawsuit, “State officials have suggested that Boston Medical could reduce costs by operating more efficiently. The state has also pointed out that the hospital has reserves of about $190 million, but Tom Traylor, the hospital’s vice president of federal and state programs, said the reserves could only sustain the hospital for about a year.”

If I read the comment above correctly, the Commonwealth of Massachusetts officials have basically stated that BMC should spend all of its own money to provide for the healthcare of the citizens, that the state has foisted upon BMC.

BMC is one of the finest Medical Centers in the country. Its research capabilities and medical school are second to none. Its inner city geography provides some of the most superior medical care found in Massachusetts for those who for the past upteen decades couldn’t afford health care insurance. BMC serves the inner-city unlike it’s cross town rival for foreign and domestic dignitaries MGH.

If the state of Massachusetts is a microcosm of what to expect from a national health care plan. How will the prescription heal the patient?

Filed Under: Markets vs Economics Tagged With:
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