Monday, August 31, 2009

The 7 Most Overrated Businesses
By Kelly K. Spors and Kevin Salwen

With roughly 6.7 million jobs lost since the start of the recession, it's tempting - and often a great idea - to launch your own business. That way, of course, you can take matters into your own hands. No more rolling your eyes at the boss; it's your show.

But many people do a lousy job of picking businesses they can realistically turn into a profitable operation.

"There's this very sad pattern about how people start businesses," says Scott Shane, an entrepreneurship professor at Case Western Reserve University in Cleveland, Ohio. "People are most likely to start businesses in industries where start-ups are most likely to fail."

The problem: Many would-be entrepreneurs are drawn to businesses they like to patronize or the ones that are cheapest and easiest to start. Instead, experts argue, aspiring entrepreneurs should create firms in which they have professional experience so they have a competitive advantage in the market.

So, what are most overrated businesses out there? We spoke with small business experts to find out. Here are seven you might want to think twice about - and then maybe twice more.

1. Restaurants. Dining out and cooking are among Americans' favorite pastimes. But "restaurants are among the toughest businesses to run," says Donna Ettenson, vice president of the Association of Small Business Development Centers in Burke, Va.

Far too many people assume their culinary abilities will lead to success in the restaurant business. Instead, about 60% of restaurants close in the first three years, according to a 2003 study at Ohio State University. That's quite a bit higher than the roughly half of all start-ups that close in the first five years.

The reason: Restaurants typically have low profit margins and need strong managers who can run an ultra-tight ship through seasonal fluctuations and other struggles. Most people don't have that kind of intense managerial ability to pull it off. By the way, the pitfalls are quite similar for restaurants' cousin – the catering business. In other words, Chef Emptor.

2. Direct Sales. It's a tempting pitch: Work from home and earn commissions by selling cosmetics, kitchen knives or cleaning products. But companies that recruit independent sales reps tend to attract new team members by pointing to the success of their highest earners.

A harder look shows that those high earners are making big money in large part by recruiting new reps into the organization and getting bonuses or a cut of their recruits' commissions, says Ken Yancey, chief executive of SCORE, a Herndon, Va., organization of current and retired business executives who volunteer time counseling entrepreneurs. The new reps then have a much harder job because they need to recruit more people on top of selling product even though the number of reps out there is increasing.

The result, Yancey says: "Most of them wind up with a bunch of jewelry or kitchen equipment sitting in their basement that they can't sell."

3. Online Retail. By far, one of the easiest businesses to start is selling items through online marketplaces such as eBay or Amazon. But as online commerce ages and these sites fill up with more established retailers, it's much harder for new, small sellers to compete for attention and generate a viable income.

"A lot of people are thinking it's the Web of five or 10 years ago and you stand out simply because you're on the Web," says Rieva Lesonsky, chief executive of GrowBiz Media, a content and consulting company for small businesses based in Irvine, Calif.

Instead, successful online retailers today must have a handle on sourcing their products at a low enough price, then layering on clever online marketing and fine-tuned logistics. These businesses won't generate much income if they can't be easily found in searches, maintain a good reputation among buyers or add enough value so that sellers can build profit margins high enough to take on bigger players and physical stores.

4. High-End Retail. Many people dream of opening a day spa, luxury jewelry store or designer clothing boutique – businesses they feel good patronizing. But specialty retail businesses close at higher rates than non-specialty stores, according to the Small Business Administration's Office of Advocacy, and are even riskier now that consumer discretionary spending has dried up and people are no longer spending money on little luxuries.

"It's going to be a long time before we return to the days of conspicuous consumption," says Ms. Lesonsky of GrowBiz Media. High-end retailers often suffer from poor locations and lack of understanding of how to source and market their products in an effective way. In today's economy and in coming years, she says, retail entrepreneurs should be looking to sell non-discretionary consumer goods or offer items at a value rather than high-end products.

5. Independent Consulting. Common advice for aspiring entrepreneurs is to stick with industries they know. So, for many looking to escape the corporate treadmill that means turning their professional expertise into a one-person consulting firm.

It seems practical – more companies are indeed relying on independent contractors and freelancers these days – but it's not as easy to pull off as many imagine, says Dennis Ceru, an entrepreneurship professor at Babson College in Babson Park, Mass. Many consultants struggle with time management problems, spending so much time scouting work that it's very difficult to earn steady income. "The difficulty many face is they go through peaks and valleys of having work," says Prof. Ceru. "When the engagement ends, they are frantically looking for work," which may take weeks or months.

A possible solution: "A successful consulting firm needs people to find the work, grind out the work and mind the work. Unless you know you can do all three yourself, you potentially expose your business to great risk."

6. Franchise Ownership. The idea of being handed a proven business plan without the uncertainties and headaches that come with building a business from scratch is understandably alluring. But too many people don't understand the risks associated with franchising and sign restrictive franchise agreements without thoroughly researching their franchisor and their contractual obligations, says SCORE's Yancey.

Some franchisors, for instance, allow franchisees to open stores too close together, oversaturating the market. Or they simply require their franchisees pay so much in royalties and fees or other operational costs that it's very difficult to be profitable. Beyond that, when a franchisee fails, a franchisor may make it extremely difficult and costly to get out of its contract.

It's a myth that franchises are far more successful than independent businesses. A 1995 study by a researcher at Wayne State University found that 62% of franchises were open for business after four years, compared with 68% of independent businesses. And franchises were also found to be less profitable in those early years.

7. Traffic-Driven Web Sites. Everybody has witnessed the success of social-networking sites like Facebook and popular blogs that generate all their revenue off advertising. But as the Internet ages, that's much harder to accomplish, says Martin Zwilling, a start-up consultant in Fountain Hills, Ariz., who specializes in helping entrepreneurs find angel investors.

Zwilling says he hears pitches for new social-networking sites about once a week, but actively deters people from starting them. "I say, skip it," he says. "You need to invest $50 million to get any presence" in the social-networking space right now and it's very difficult to get people to leave established sites. What's more, he says, the amount of traffic needed to build a lucrative traffic-driven Web site is far more than most new Web entrepreneurs realize: "Until you get to the point where you have a million page views a day, you're nowhere."

Thursday, August 27, 2009

Even higher taxes coming for Californians,0,1796963.story
Lower brackets and reduced deductions mean yet higher payments to Sacramento for 2009
By Shane Goldmacher
August 27, 2009

Reporting from Sacramento - While Californians are still feeling the sting of income and sales tax hikes signed into law earlier this year, now comes news that state tax authorities plan to take a little more from their pockets.

For only the second time in 30 years, the tax board is lowering the point where each tax bracket begins, bumping many people into a higher category. At the same time, officials are cutting back some deductions. Everyone will pay more, even people whose bracket or income doesn't change.

The extra sums will total as much as $140 per family, on top of the increases previously enacted.

Officials said the latest adjustments have been triggered by inflation, or rather the lack of it. This year, the state's inflation index was a negative number for the first time since 1983. When the economy takes a deep plunge, so do tax brackets.

The new changes apply to the 2009 tax year. Residents are already paying hundreds -- even thousands -- of additional income tax dollars under the quarter-point rate increase and other tax hikes approved in February as part of a budget deal.

"Everything is going up, up, up," said Othman Rabie, owner of a sandwich shop in downtown Sacramento. "And business is going down."

Back in February, state lawmakers and Gov. Arnold Schwarzenegger approved a slate of temporary tax increases in an effort to balance California's perennially out-of-whack books.

In addition to the income tax rate rising 0.25%, the dependent credit was slashed by more than two-thirds. The vehicle license fee nearly doubled to 1.15% of a car's value. The state sales tax climbed 1%.

This summer, lawmakers and Schwarzenegger decided to withhold 10% more from workers' paychecks starting Nov. 1 -- an accounting scheme to collect taxes faster. Under another bookkeeping maneuver, individuals and businesses that make estimated tax payments will pony up more of that money sooner starting in the first half of next year.

And some local taxes are on the way up. In Los Angeles County, a half-cent-higher sales tax approved by voters took effect in July to fund transportation projects.

Under the latest changes, for a married couple filing jointly, the top tax rate of 9.55% now begins at $92,698, down from $94,110. Combined with the earlier increases, such a couple with two children, earning $100,000, will see their California income tax bill rise by 22.3%, or $716, according to the state Franchise Tax Board. Their tax would go from $3,208 to $3,924, factoring in a $110 drop in the standard deduction for joint returns.

For singles, the top tax threshold has dropped from $47,055 to $46,349. This year, a single filer without children who earned $30,000 in 2008 and 2009 would pay 13.8% more: $617 instead of $542. The standard deduction for sole filers will fall by $55.

The state automatically adjusts its tax brackets. They have moved in taxpayers' favor for the last 25 years, with the amount of earnings required to kick people up a notch continually increasing. But that doesn't salve the pain of the latest changes, said Assemblyman Chuck DeVore, the Republican vice chairman of the Assembly Revenue and Taxation Committee.

"It takes more money out of the taxpaying productive sectors and scoops it into the government coffers at a time when taxpayers are already reeling," DeVore said.

It is unclear how much additional revenue the new brackets will yield for beleaguered state coffers; the state has not computed that yet, said Denise Azimi, spokeswoman for the tax board.

Meanwhile, experts such as Ted Gibson, who was chief state economist under both a Republican and a Democratic governor, remind policymakers even modest tax increases affect the state's financial health because they prompt people to further pinch pennies.

"It will hamper the recovery a little bit," Gibson said.

Some taxpayers say they are worried about their very livelihoods.

Martha Franco, 56, has struggled to keep open her family-run restaurant, Pepe's Tacos in Azusa.

"I average about $6 an hour [in receipts] and I'm open 12 hours a day," she said, sitting in the empty establishment as her son mopped the floor around her. "It already feels like I'm just working to pay my taxes," she said.

Not everyone minds paying more to protect such services as education, healthcare and parks, though.

An extra $100 or so, said Sharon Sugerman, a 59-year-old Sacramento resident who declined to give details about her job, "seems pretty reasonable to me."

Times staff writer Corina Knoll in Los Angeles contributed to this report.

Copyright © 2009, The Los Angeles Times

Wednesday, August 26, 2009

Deficit fears put Obama’s reforms in jeopardy
By Edward Luce and Sarah O’Connor in Washington
Published: August 25 2009 20:44 | Last updated: August 25 2009 20:44

Tuesday’s sharply upgraded forecasts for growth in US national debt over the ext decade could hardly have come at a worse time for Barack Obama. Shortly after he was elected last November, the president let it be known he preferred the “big bang” approach to domestic reforms.

As Rahm Emanuel, the White House chief of staff put it, you should “never allow a crisis to go to waste”. In other words, the financial meltdown was seen as an opportunity for Mr Obama to enact as many of his key reforms, including healthcare, within the first year of taking office.

But fears of the Great Depression have receded only to be replaced by mounting concern over the country’s long-term creditworthiness. Rather than shoring up the appetite for domestic reform, the rising tide of fiscal panic could threaten large chunks of Mr Obama’s agenda.

In particular, prospects for enacting Mr Obama’s proposed $1,000bn (€700bn, £610bn) 10-year expansion in healthcare coverage this autumn are beginning to look dicey given the projected rise in the national debt of more than $9,000bn in the next decade.

Even though Mr Obama has promised the healthcare reforms will be self-funding, some believe the sharply altered mood in Washington could force the president to reorientate his priorities. Recent polls show the deficit ranking second only to jobs among the public’s chief worries. Healthcare comes a distant third.

“The national debt doubled under George W. Bush and it is set to almost double under Barack Obama,” says David Walker, head of the Peterson Foundation and former head of the General Accountability Office. “Unless we see a dramatic fiscal course correction we are likely to see all sorts of negative consequences, including a reduction in trend growth rates and growing international distaste for holding American debt.”

Mr Walker is among a growing body of observers who believe America’s deteriorating debt position could have consequences for the country’s national security – even compromising its superpower status. Pointing to the UK, which saw it’s triple A credit rating put on negative outlook earlier this year, Mr Walker says the US faces a similar spectre unless it changes course.

“At the moment we have a home team bias [the credit rating agencies are based in New York] and we are benefiting from having the dollar as the international reserve currency,” he says. “But we cannot take the reserve currency status for granted. The Chinese have already made a shot across our bows and these numbers will only reinforce their concerns.”

However, some economists caution against taking the latest forecasts as gospel. On Tuesday the Congressional Budget Office caused as much confusion as clarity when it brought out its own 92-page report alongside the White House’s 74-page document. Back in March the CBO said that if Mr Obama’s policies were implemented, the 10-year deficit would reach $9,300bn. Yesterday the White House seemed to acknowledge the CBO was more or less right. But the CBO had already been at work on new revisions.

To seasoned economists it was a reminder that projections are not always right. “The first thing you learn in doing these projections is to be very humble,” said James Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities. “You know they’re going to be wrong and you know they’re going to be wrong by huge dollar amounts.”

Copyright The Financial Times Limited 2009.

Sunday, August 23, 2009

New deficit projections pose risks to Obama's agenda
By Jeff Mason Jeff Mason – Sun Aug 23, 8:28 am ET

WASHINGTON (Reuters) – President Barack Obama's domestic policy proposals will face the reality of skyrocketing deficits on Tuesday when officials release two government reports projecting huge budget shortfalls over the next decade.

The White House budget office and the Congressional Budget Office (CBO), a non-partisan arm of Congress, release updated economic forecasts and deficit estimates on Tuesday, providing further fiscal fodder to opponents of Obama's nearly $1 trillion healthcare overhaul plan.

Many of the figures are already known.

The White House has confirmed that its deficit estimate for the 2009 fiscal year, which ends September 30, will inch down to $1.58 trillion from $1.84 trillion after eliminating billions of dollars originally set aside for bank rescues.

Looking forward, an administration official told Reuters the 10-year budget deficit projection will jump by about $2 trillion to roughly $9 trillion from an original forecast of $7.1 trillion.

"One message the numbers will send is that the medium- and long-term deficits need to be addressed," said Chuck Marr, director of federal tax policy at the Washington-based Center on Budget and Policy Priorities, an analysis and research organization.

Obama has promised to do that. The president, a Democrat, says he will cut the deficit in half by the end of his four-year term, and he sees lowering healthcare costs as a key ingredient toward achieving long-term deficit reduction.

But Republicans charge that his proposals to extend coverage to uninsured Americans and create competition for private insurance providers are too expensive, especially as deficits go up.


"We're still on a long-run trajectory that's not sustainable," said Rudolph Penner, a fellow at the Urban Institute and former CBO director from 1983-1987.

"In an ideal world they would be doing a lot more to get health costs under control and, in my view, we wouldn't be talking about expanding coverage right now," said Penner, who describes himself as a moderate Republican.

The CBO had previously forecast that deficits between 2010 and 2019 would total $9.1 trillion, generating heat for the White House, which stuck to its original $7.1 trillion forecast earlier this year. The new number will bring White House projections into line with the CBO, the official said.

In line or not, the political challenges of the updated deficit projections are numerous. With Congressional elections looming next year, Obama will need to show he is serious about cutting costs in order to neutralize an otherwise politically radioactive issue for both political parties.

Many economists think it is unlikely that the government can curtail spending, which means taxes would have to rise to cover the increasing costs of providing retirement benefits and healthcare to older people. That could slow economic growth.

Stanford University economics professor John Taylor, an influential economist, told Reuters Television on Friday the U.S. budget deficit poses a greater risk to the financial system than the collapse in commercial real estate prices.

"If that gets out of control, if interest rates start to rise because people are reluctant to buy all that debt, then that can slow the economy down. So, that's the more systemic concern I have," Taylor said.

(Editing by Eric Walsh)

Social Security Checks Shrink for Millions
No Cost of Living Adjustment for Next 2 Years, Trustees Say; First Time in Generation Payments Would Decrease

(AP) Millions of older people will face shrinking Social Security checks next year, the first time in a generation that payments would not rise.

The trustees who oversee Social Security are projecting there won't be a cost of living adjustment (COLA) for the next two years. That hasn't happened since automatic increases were adopted in 1975.

By law, Social Security benefits cannot go down. Nevertheless, monthly payments would drop for millions of people in the Medicare prescription drug program because the premiums, which often are deducted from Social Security payments, are scheduled to go up slightly.

"I will promise you, they count on that COLA," said Barbara Kennelly, a former Democratic congresswoman from Connecticut who now heads the National Committee to Preserve Social Security and Medicare. "To some people, it might not be a big deal. But to seniors, especially with their health care costs, it is a big deal."

Cost of living adjustments are pegged to inflation, which has been negative this year, largely because energy prices are below 2008 levels.

Advocates say older people still face higher prices because they spend a disproportionate amount of their income on health care, where costs rise faster than inflation. Many also have suffered from declining home values and shrinking stock portfolios just as they are relying on those assets for income.

"For many elderly, they don't feel that inflation is low because their expenses are still going up," said David Certner, legislative policy director for AARP. "Anyone who has savings and investments has seen some serious losses."

About 50 million retired and disabled Americans receive Social Security benefits. The average monthly benefit for retirees is $1,153 this year. All beneficiaries received a 5.8 percent increase in January, the largest since 1982.

More than 32 million people are in the Medicare prescription drug program. Average monthly premiums are set to go from $28 this year to $30 next year, though they vary by plan. About 6 million people in the program have premiums deducted from their monthly Social Security payments, according to the Social Security Administration.

Millions of people with Medicare Part B coverage for doctors' visits also have their premiums deducted from Social Security payments. Part B premiums are expected to rise as well. But under the law, the increase cannot be larger than the increase in Social Security benefits for most recipients.

There is no such hold-harmless provision for drug premiums.

Kennelly's group wants Congress to increase Social Security benefits next year, even though the formula doesn't call for it. She would like to see either a 1 percent increase in monthly payments or a one-time payment of $150.

The cost of a one-time payment, a little less than $8 billion, could be covered by increasing the amount of income subjected to Social Security taxes, Kennelly said. Workers only pay Social Security taxes on the first $106,800 of income, a limit that rises each year with the average national wage.

But the limit only increases if monthly benefits increase.

Critics argue that Social Security recipients shouldn't get an increase when inflation is negative. They note that recipients got a big increase in January - after energy prices had started to fall. They also note that Social Security recipients received one-time $250 payments in the spring as part of the government's economic stimulus package.

"Seniors may perceive that they are being hurt because there is no COLA, but they are in fact not getting hurt," said Andrew G. Biggs, a resident scholar at the American Enterprise Institute, a Washington think tank. "Congress has to be able to tell people they are not getting everything they want."

Social Security is also facing long-term financial problems. The retirement program is projected to start paying out more money than it receives in 2016. Without changes, the retirement fund will be depleted in 2037, according to the Social Security trustees' annual report this year.

President Barack Obama has said he would like tackle Social Security next year, after Congress finishes work on health care, climate change and new financial regulations.

Lawmakers are preoccupied by health care, making it difficult to address other tough issues. Advocates for older people hope their efforts will get a boost in October, when the Social Security Administration officially announces that there will not be an increase in benefits next year.

"I think a lot of seniors do not know what's coming down the pike, and I believe that when they hear that, they're going to be upset," said Sen. Bernie Sanders, an independent from Vermont who is working on a proposal for one-time payments for Social Security recipients.

"It is my view that seniors are going to need help this year, and it would not be acceptable for Congress to simply turn its back," he said.

Saturday, August 22, 2009

It's Time to Give Up On the Public Option
By Steven Pearlstein
Wednesday, August 19, 2009

Enough already with the public option!

It is not the be-all and end-all of health-care reform. It is not the long-awaited safety net for the uninsured. And if, as many liberals hope, it turns out to be nothing more than Medicare for All, it won't do anything to hold down long-term growth in health spending.

The public option is nothing more than a political litmus test imposed on the debate by left-wing politicians and pundits who don't want to be bothered with the real-life dynamics of the health-care market. It is the Maginot Line of health-care policy, and just like those stubborn French generals, liberal Democrats have vowed to defend it even if it means losing the war.

So there was Howard Dean, the former Democratic Party chairman, over the weekend declaring that health reform without a public option simply isn't worth doing. My colleague Ezra Klein pointed out on his must-read blog that Dr. Dean's fascination with a public option is rather recent since it was nowhere to be found in the reform plan he proposed when running for president in 2004.

Or how about MSNBC's Rachel Maddow, who opined that the failure to deliver on a public option would represent nothing less than the "collapse of political ambition" for American liberalism?

The public option has become for the left what "death panels" have become for the right -- an easily understood metaphor that can be used to wage an ideological war over the issue of Big Government, and mostly a sideshow.

The case for a public option begins with the unassailable observation that our system of private health care and health insurance has not been effective in restraining the growth of medical expenditures.

Some of that cost growth has to do with an aging population and technological gains that have dramatically increased the number of cures and treatments. But those same cost drivers can be found in other advanced countries, including those with government-run health-care systems.

Liberals have a point when they argue that the price competition in our private markets is something less than robust.

Because consumers don't pay out of pocket for much of their health care, they don't shop around for bargains the way they do for cars or toilet paper. Nor is it clear that people would flock to the heart surgeon in town who advertises bargain-basement rates.

Competition is also imperfect because many regions of the country have dominant hospital chains that can virtually dictate rates to private insurers. You simply could not offer a competitive insurance product in Northern Virginia, for example, if Inova's Fairfax Hospital weren't in your network. And in many rural communities, there's only one hospital.

Drug companies have monopoly pricing power for drugs under patent for which there is no substitute. Ditto for medical-equipment makers with the latest imaging machines or artificial hip joints.

One goal of health-care reform is to begin to address these market imperfections. But there's no particular evidence that a government-run insurance plan will be any more successful than what we currently get from big private insurers -- unless, of course, the government-run plan is so big or so powerful that it can dictate prices to providers, as Medicare now does. Proposing that, however, would immediately unite doctors, hospitals and drug companies in opposing reform.

You also hear the argument that government-run insurance would have lower costs because it wouldn't have to generate a profit (that's true) and would be more efficient than private insurers (that isn't). The evidence of greater efficiency is Medicare, which spends about 2 to 3 percent of its budget on administration. But if a government-run plan had to spend its own money to collect premiums, market itself to customers, maintain a reserve, and manage care in a way that lowers costs and raises quality -- none of which Medicare now does -- then you can be sure its administrative costs would be nowhere near 2 or 3 percent.

In sum, there is nothing about having one government-owned health insurance company that is likely to change the competitive dynamic and bring costs under control.

That's not to say there aren't other things we could do -- many fixes are already included in bills before Congress. These include the government-sponsored health-care exchanges that would bring national insurance companies to nearly every market in the country and proposals to begin paying doctors and hospitals for the quality of the health care they provide rather than the quantity. There is also a provision requiring that companies participating in the new insurance exchanges use no more than 15 cents of each premium dollar for administrative costs and profits.

Finally, there are the government-chartered cooperatives that key members of the Senate Finance Committee are pushing. Although public-option enthusiasts scoff at the idea, the experiences of a number of communities show that cooperatives could significantly contain costs, provided the cooperatives are big enough and built around networks of hospitals and physician practices that accept a fixed, annual fee for treating patients rather than billing for every procedure. The key isn't that the cooperatives would be not-for-profit, but that the annual payments would give doctors and hospitals a financial incentive to control costs, better coordinate care, and eliminate procedures with little or no benefit.

A few other ideas not in any bill but worth considering: To address the pricing power of the big hospital chains, the government could require that they offer the same set of prices to all private insurers. Congress could also toughen antitrust laws to make it more difficult for hospitals in the same region to merge and require the breakup of chains that charge rates that are significantly higher than in other markets.

To bring down drug prices, Medicare could cap what it is willing to pay for any drug at 150 percent of the average price paid by other industrialized countries, where governments negotiate prices that are significantly lower. That would become a new benchmark for what private-pharmacy benefit managers would pay.

Such approaches would not only be better policy than a public option, they'd also be better politics. By insisting on a government-run plan, liberals have played right into the hands of Republicans who aim to defeat any reform by mischaracterizing it as a government takeover.

If there is anything that's been made clear over the last two weeks, it is that the public option is a political non-starter that threatens the entire reform effort. It's time to let it go.

Steven Pearlstein can be reached at

Friday, August 21, 2009

Regulators shut Guaranty Bank
The Associated Press

WASHINGTON - Regulators on Friday shut down Guaranty Bank, a big Texas-based lender felled by losses on loans to homebuilders and borrowers, in the second-largest U.S. bank failure this year.

Guaranty's failure, along with those of three banks in Georgia and Alabama Friday, brought to 81 the number of U.S. bank failures in 2009, a mounting toll and the most in a year since 1992 at the height of the savings-and-loan crisis.

The Federal Deposit Insurance Corp. seized Guaranty Bank, with about $13 billion in assets and $12 billion in deposits, and sold all of its deposits and $12 billion of the assets to BBVA Compass, the U.S. division of Banco Bilbao Vizcaya Argentaria SA, Spain's second-largest bank. It was the first foreign bank to buy a failed U.S. bank. In addition, the FDIC agreed to share losses with BBVA on about $11 billion of Guaranty Bank's assets.

The collapse of Austin-based Guaranty Bank, whose parent company was Guaranty Financial Group Inc., was the 10th-largest bank failure in U.S. history. It is expected to cost the deposit insurance fund an estimated $3 billion.

The bank, with 162 branches in Texas and California, also suffered losses on mortgage-linked securities it bought from other banks.

Birmingham, Ala.-based BBVA Compass, with 600 branches from Florida to California, said the acquisition creates the 15th-largest commercial bank in the U.S., with about $49 billion in deposits. "This compelling transaction makes excellent strategic sense and represents an exciting growth opportunity for BBVA Compass as we continue to build the leading banking franchise in the high-growth Sunbelt region," Jose Maria Garcia Meyer, chairman of BBVA Compass, said in a statement.

In contrast to the big bank failures early in the financial crisis, many of the recently shuttered banks were undone not by exotic mortgage products but by garden-variety loans.

At the same time, a knot of big, complex banks collapsing in recent months is sapping billions from the federal deposit insurance fund that insures regular accounts up to $250,000, spurring regulators to court potential buyers from the world of private investment.

The FDIC last week seized Colonial Bank, a big lender in real estate development, and sold its $20 billion in deposits, 346 branches in five states and about $22 billion of its assets to BB&T Corp.

It was the biggest bank failure so far this year, and the sixth-largest in U.S. history, expected to cost the insurance fund $2.8 billion.

While losses on home mortgages may be leveling off, delinquencies on commercial real estate loans remain a hot spot of potential trouble, experts say. Many regional banks like Montgomery, Ala.-based Colonial hold large numbers of them. Many companies have shut down in the recession, vacating shopping malls and office buildings financed by the loans.

Also Friday, the FDIC seized two small banks in Georgia and one in Alabama: ebank, located in Atlanta, with $143 million in assets and $130 million in deposits; First Coweta, based in Newnan, Ga., with $167 million in assets and $155 million in deposits; and CapitalSouth Bank, based in Birmingham, Ala., with $617 million in assets and $546 million in deposits.

The agency expects bank failures will cost the fund around $70 billion through 2013. The fund stood at $13 billion , its lowest level since 1993 , at the end of March. It has slipped to 0.27 percent of total insured deposits, below the minimum mandated by Congress of 1.15 percent.

The costliest failure was the July 2008 seizure of big California lender IndyMac Bank, on which the fund is estimated to have lost $10.7 billion.

Among the 81 banks closed so far this year , compared with 25 last year and three in all of 2007 , were a stream of smaller institutions, many felled by losses on ordinary loans amid the souring economy, tumbling home prices and spiking unemployment. Their business was a far cry from the complex securities favored by Wall Street investment banks that precipitated the financial meltdown.

The average cost to the fund of a bank failure over the past 19 months has run higher than during the savings-and-loan debacle. That's partly due to smaller banks having higher resolution costs than larger ones, and because the steep decline in home prices that set off the current distress wasn't a factor in the earlier crisis, said Jim Wigand, deputy director of resolutions and receiverships at the FDIC.

Because of the tumble in prices, the loss rates on home loans and construction and development loans were higher for banks, with a domino effect on related securities, Wigand said.

Many of the smaller banks that failed in the recent run shared common attributes: rapid growth, heavy concentration of brokered deposits sold by securities firms to customers outside the bank's local area, and heavy lending in "hot markets" like Arizona, California, Florida and Nevada, noted Bert Ely, a banking consultant based in Alexandria, Va.

They are spread nationwide, though there is a concentration of banks in Georgia, where 17 have fallen since the beginning of last year, more than in any other state. That is a reflection of the local real estate market, whose distress has rippled throughout the economy there.

In Friday's other three closings, Stearns Bank, based in St. Cloud, Minn., agreed to buy the assets and deposits of ebank. United Bank, based in Zebulon, Ga., is assuming the deposits and $155 million of the assets of First Coweta; the FDIC will retain the rest for eventual sale. IberiaBank, based in Lafayette, La., is assuming the deposits and $589 million of the assets of CapitalSouth Bank.

Those failures are expected to cost the insurance fund an estimated $63 million for ebank, $48 million for First Coweta and $151 million for CapitalSouth Bank.

Last spring, the FDIC adopted a new system of special fees paid by U.S. banks and thrifts that shifted more of the burden to bigger institutions to help replenish the insurance fund.

The number of troubled banks on the agency's confidential list leaped to 305 in the first quarter, the highest number since 1994. Some analysts expect hundreds of banks to collapse over the next year or so.

Around 2,900 banks failed during the S&L crisis from 1980 through 1994.

Commercial Credit Crunch Means We May Not Be Out of This Yet
By Steven Pearlstein
Friday, August 21, 2009

You've probably heard that the nation's financial system is out of the intensive care unit but still requires enough support that it's not ready to be released from the hospital. A big reason: the fear of a relapse caused by the collapse of the commercial real estate market.

To understand the problem, think back to the height of the credit bubble in 2007, when $230 billion worth of office buildings, hotels and shopping centers were financed through the magic of securitization -- that process in which loans were assembled into packages and sold off in pieces to investors.

Back then, the loans originated by banks and investment houses would typically be made at 80 percent of the market value of a property, at rates as low as 1.5 percentage points over the Treasury's 10-year borrowing rate. There was often a second mortgage, known as a mezzanine loan, to cover an additional 10 percent of the original purchase price. And to make things even easier, many of the loans were interest-only, on the theory that commercial property values could only go up.

Now, of course, the credit bubble has burst. Commercial property values have fallen an average of 35 percent, with further declines expected as the recession drives more tenants out of business or puts them behind in their rent payments. The process of securitizing new loans has ground to a complete halt, and the limited financing that's available now comes from banks and insurance companies on much tougher terms. Loans now are typically for no more than 60 percent of a property's current value, with an interest rate four percentage points above the Treasury rate. Borrowers must also repay principal, which is like adding another two percentage points to an interest-only loan.

All of this has been wrenching for the industry -- particularly for some of the biggest names, such as General Growth Properties, Maguire Properties and Tishman Speyer, which bought at the top of the market. Not only has their equity been pretty much wiped out, but those who financed their bubble purchases have lost anywhere from 35 cents to 100 cents on every dollar lent.

Unfortunately, this isn't just a tragedy for rich developers, bankers and investors. It's also a problem for the rest of us.

For starters, local and regional banks have so many souring commercial real estate loans that they have begun to fail at a rate not seen since . . . well, you know. The latest was Colonial Bank of Alabama, which was rescued last week at a cost to the Federal Deposit Insurance Corp. of about $2.8 billion, the sixth-largest bank failure in history. And over the coming year, it will be a rare Friday afternoon that the FDIC doesn't announce the takeover of some bank that lent too much to local builders and commercial real estate developers despite abundant evidence that a bubble had developed. It's a good bet the agency will have to replenish its coffers by drawing on its line of credit from the U.S. Treasury.

Then there's the matter of half a trillion dollars in securitized loans that were made during the bubble and will be coming due over the next few years. These will need to be refinanced. Unless the securitization machine can be cranked up again, there's simply not enough lending capacity at the banks and insurance companies to fill the gap. Moreover, there can be no refinancing until the current owners of the buildings come up with billions of dollars in fresh equity to make up for what has already been lost.

Consider the example of a hypothetical office building bought for $100 million back in the go-go days, with 90 percent of the purchase financed with borrowed money. Now, suddenly the loan needs to be refinanced, but the value of the property has fallen to $65 million. In the new conservative environment, the owner can only get a new loan for $50 million, which means that in order to avoid foreclosure and keep ownership of the building, he has to come up with an additional $50 million in equity. Given that the value of the building would have to hit $90 million before anyone would realize a dime in profit, investors probably won't be lining up for that opportunity.

So how does all this get resolved?

In the case of buildings that still generate rents sufficient to pay the monthly interest charges, the lenders -- that is the holders of the mortgage-backed securities -- will probably agree to extend the loan for a few years in the hope that property values quickly rebound and the market for securitized loans revives. "Amend, extend and pretend," as my friend Arthur, the real estate maven, put it.

In the case of projects with rising vacancies and falling rents, however, the more likely scenario is that the lenders would foreclose on the property and sell it for whatever they can get. The problem is that if too many buildings are dumped on the market at the same time, it would trigger a self-reinforcing downward cycle that could depress property values even further, leading to more foreclosures and causing even more banks to fail. That's what happened back in the savings and loan crisis.

This is why commercial real estate is now a top priority for policymakers in Washington. Earlier this week, the Treasury and the Federal Reserve quietly extended until next June their program to offer low-cost loans to banks, hedge funds and other investors willing to purchase mortgage-backed securities. While $3 billion has now been lent for the purchase of securities issued before the crisis, there's been no lending for newly issued securities, because no new securities have been issued. Government and industry officials say this reflects a continuing distrust of the securitization process and widespread concern among investors that property values still have further to fall. They also cite the difficulty in finding the additional equity capital necessary to make refinancing possible.

Hang on -- this financial crisis isn't over just yet.

Steven Pearlstein can be reached at

Troubled Mortgages Hit Record High
Problem Shifts From Subprime Loans to Jobless Homeowners
By Renae Merle
Washington Post Staff Writer
Friday, August 21, 2009

The proportion of homeowners delinquent on their mortgage or in foreclosure rose to its highest levels in at least four decades, according to industry data released Thursday, despite extensive government efforts to help borrowers and signs that the economy is starting to heal.

The problem has shifted from the subprime loans that helped spark the foreclosure crisis to borrowers driven into delinquency by unemployment, according to the Mortgage Bankers Association, which issued the survey. The recession's impact on the market could send foreclosure rates up through the end of next year, said Jay Brinkmann, the group's chief economist.

"It is unlikely we will see meaningful reductions in the foreclosure and delinquency rates until the employment situation improves," he said.

About 9.24 percent of borrowers were delinquent on their mortgage during the second quarter, according to the survey, and 4.3 percent more were somewhere in the foreclosure process. Overall, one in eight, or 13.16 percent, of mortgage loans were delinquent or in the foreclosure process during the quarter, according to the group.

That is the highest level ever recorded by the survey, which has been conducted since 1972, and breaks the high mark set during the first quarter. It is up from about 9 percent during the second quarter of 2008.

"I think these numbers reflect the gap between the number of modifications that have been done and the need that still exists," said Charlene Crowell, a spokeswoman for the Center for Responsible Lending. "Until that gap is closed, the housing market will continue to suffer."

More than half the mortgages in the foreclosure process during the second quarter were prime loans, which are traditionally considered safer and make up the bulk of the mortgages outstanding in the country. Subprime loans are still a significant portion of the problem, but their impact has been shrinking as the recession and rising unemployment have taken over as a driving force in the foreclosure crisis, Brinkmann said.

The majority of the problem remains in the Sun Belt states like California and Florida, which accounted for about 35 percent of the foreclosures started during the second quarter.

The problem is less severe in the Washington region. About 10 percent of borrowers in the District were delinquent or in the foreclosure process during the second quarter, compared with 6.6 percent a year earlier, according to the industry data. In Virginia, 9 percent of borrowers were in distress, compared with 6.3 percent last year. Maryland had the highest delinquency rate in the region, at 12.4 percent, compared with 7.8 percent last year.

This comes as the Obama administration prods lenders to do more to help borrowers under the federal Making Home Affordable program. The prevention program pays lenders to lower borrowers' mortgage payments. It has helped more than 200,000 borrowers since it started in March, but the administration is aiming to reach 500,000 by Nov. 1.

Homeowners have complained that it remains a frustrating and time-consuming ordeal to get help from lenders. There is sometimes confusion even within the banks about what kind of help is available. Lenders have said they have hired more staff and are working through the backlog of borrowers in need of help.

Most Failing Banks Are Doing It the Old-School Way
Published: August 20, 2009

Banks are now losing money and going broke the old-fashioned way: They made loans that will never be repaid.

As the number of banks closed by the Federal Deposit Insurance Corporation has grown rapidly this year, it has become clear that most of them had nothing to do with the strange financial products that seemed to dominate the news when the big banks were nearing collapse and being bailed out by the government.

There were no C.D.O’s, or S.I.V.’s or AAA-rated “supersenior tranches” that turned out to have little value. Certainly there were no “C.D.O.-squareds.”

Staying away from strange securities has not made things better. Jim Wigand, the F.D.I.C.’s deputy director of resolutions and receiverships, says banks that are failing now are in worse shape — in terms of the amount of losses relative to the size of the banks — than the ones that collapsed during the last big wave of failures, from the savings and loan crisis.

The severity of the current string of bank failures shows that many of the proposed remedies batted about since the financial crisis erupted would have done nothing to stem this wave of closures. These banks did not get in over their heads with derivatives or hide their bad assets in off-balance sheet vehicles. Nor did their traders make bad bets; they generally had no traders. They did not make loans that they expected to sell quickly, so they had plenty of reason to care that the loans would be repaid.

What they did do is see loans go bad, in some cases with stunning rapidity, in volumes that they never thought possible.

The fact that so many loans are souring is a testament to how bad the recession, and the collapse in property prices, has been. But looking at some of the banks in detail shows that they were also victims of their own apparent success. Year after year, these banks grew and grew, and took more and more risks. Losses were minimal. Cautious bankers appeared to be missing opportunities.

As the great economist Hyman P. Minsky pointed out, stability eventually will be destabilizing. The absence of problems in the middle of this decade was taken as proof that nothing very bad was likely to happen. Any bank that did not lower its lending standards from 2005 through mid-2007 would have stopped growing, simply because its competitors were offering more and more generous terms.

Take the recent failure of Temecula Valley Bank, in Riverside County, Calif. For most of this decade, it grew rapidly. Deposits leapt by 50 percent a year, rising to $1.1 billion in 2007, from less than $100 million in 2001.

That growth was powered by construction loans, on which it suffered virtually no losses for many years. By 2005, loans to builders amounted to more than half its total loans — and to 450 percent of its capital.

Temecula appeared to be very well capitalized. But virtually all that capital vanished when the boom stopped.

When the F.D.I.C. stepped in last month, the bank had $1.5 billion in assets. The agency thinks it will lose about a quarter of that amount.

Across the country, at Security Bank of Bibb County, Ga., the story was remarkably similar. Its fast growth was powered by construction loans, although in this case the loans mostly financed commercial buildings, not houses. When those loans went bad, what had appeared to be a well-capitalized bank went under. The F.D.I.C. estimates its losses will be almost 30 percent of the bank’s $1.2 billion in assets.

In both of those cases, to get another bank to take over the failed bank, the F.D.I.C. had to agree to share future losses on most of the loans. That is one reason the agency’s estimates of its eventual losses could turn out to be wrong. In the best of all worlds, the loss estimates would be too high because the economy and property prices recover rapidly. But if the recovery is slow, the losses could grow.

In either case, the F.D.I.C. may soon need to seek more money to pay for failing banks. It could seek that cash from the Treasury, where it has a line of credit, or it could seek to raise the fees it charges banks.

So far this year, the F.D.I.C. has closed 77 banks, and there almost certainly will be more on Friday, the agency’s preferred day for bank closures. Last Friday there were five. Not since June 12 has there been a Friday without a bank closing. By contrast, there were three failures in 2007 and 25 in 2008.

Of the 77 failures in 2009, the F.D.I.C. could not even find a bank to acquire eight of them. Of the other 69, the agency signed loss-sharing agreements on 41.

By contrast, the agency found acquirers for all of the 25 failed banks in 2008, and had to sign loss-sharing agreements for just three of the banks.

“Loss-sharing” is something of a misnomer. In practice, the vast majority of the losses are borne by the F.D.I.C. Typically, it takes 80 percent of the losses up to a negotiated limit, and 95 percent of losses above that level.

Although the losses on current failures stem mostly from construction loans, it is possible that commercial real estate will be the next big problem area. Losses in that area were growing at the Temecula bank, although its portfolio was relatively small.

During the credit boom, loans on those properties became easier and easier to get, on more and more liberal terms. Unlike residential mortgages, commercial real estate loans typically must be refinanced every few years. With rents and values down in many areas, that will not be possible for a lot of buildings, and some owners are just walking away from their buildings.

Two years ago, when the subprime mortgage problems began to surface, Washington took great comfort from solid balance sheets, which regulators thought meant the banks could easily weather the problem.

Last year, we learned that the regulators, like the bankers, did not comprehend the risks of some of the exotic instruments dreamed up by financial engineers. This year we are learning that the regulators, like the bankers, also failed to understand the risks of the generous loans that the banks were making in the middle of this decade.

Tuesday, August 18, 2009

IRS Could Become Health Insurance Watchdog

This would be similar to MA's mandatory health insurance program where the MA Department of Revenue is the watchdog. Health insurance companies in MA are required to send the insured a Form 1099 with a code indicating the taxpayer has adequate insurance coverage. The taxpayer is required to include that code in his tax return proving that he has adequate health insurance coverage.
By Michael Cohn
August 17, 2009

The IRS will bear responsibility in making sure that taxpayers have health insurance, and taxing them if they don’t, if some provisions in the legislation now in Congress go through in their present form.

An interesting blog post on a site called Hot Air describes some of the requirements in both the House and Senate HELP Committee versions of the legislation, both of which of course are still a work in progress. However, as the author (identified only as “Legal Insurrection”) points out, there has been relatively little attention given to the IRS’s role in implementing health care reform so far. In the Senate version of the bill, anybody who provides health coverage for another person would have to file a return with the IRS listing the names, addresses, Social Security numbers and coverage period for each person.

In the House version, they would have to furnish the name, address, and taxpayer identification number of the primary insured person, the name of each individual covered under the policy, and the period under which each person was provided coverage. Both versions of the bill allow the Secretary of Health and Human Services to add other reporting requirements.

If a person does not have acceptable health insurance coverage at any time during the tax year, a tax would be imposed under the House bill equal to 2.5 percent of either the taxpayer’s modified adjusted gross income or the gross income specified under Section 6012(a)(1) of the Tax Code. The Senate version has some differences, including calling the tax a “shared responsibility payment” and giving people a month to go without insurance, with some exemptions allowed.

Presumably the IRS would be able to cross-check income tax returns with health coverage filings and withhold income tax refunds if people cannot prove they have acceptable health coverage, either from an employer or some other source. Effectively the legislation could allow the IRS to get involved in reviewing the health care and coverage information of taxpayers and their dependents for the first time, raising some privacy concerns.

This begs the question of how the IRS is going to determine that someone’s health insurance coverage is adequate or appropriate. For many uninsured people who are forced to buy health insurance or face penalties unless they qualify for subsidies or Medicaid, chances are they’re going to opt for bargain basement coverage that will provide them with some form of insurance for the lowest cost possible. It will be interesting to see how all this plays out and what kind of guidance the IRS would provide if the health reform bill passes, which lately has been looking less and less certain.

Are we going to see traditional insurers and fly-by-night companies rushing out ultra-cheap plans that promise much, but deliver little, in order to allow people to meet the minimum coverage requirements, or are the so-called “public option” or the murky “insurance cooperatives” going to somehow fill the gap? Maybe one day insurance fraud will become a form of tax fraud, even if it’s just to claim one has insurance when the insurance is either fictitious or inadequate in the event of a major medical expense.

Sunday, August 16, 2009

Biggest 2009 bank failure
Colonial BancGroup becomes biggest bank failure of 2009
BB&T takes over after FDIC shuts Alabama lender at cost of $2.8 billion
By Alistair Barr & Ronald D. Orol, MarketWatch

SAN FRANCISCO (MarketWatch) -- Colonial BancGroup Inc. has become the largest bank failure this year as the 2009 toll of financial institutions approaches 80.

The Federal Deposit Insurance Corporation seized the struggling Alabama-based lender Friday and sold it to BB&T Corp.

Late Friday, the FDIC announced four other banks had been closed: Community Bank of Nevada and its Arizona subsidiary, Community Bank of Arizona; Union Bank, Gilbert, Ariz; and Dwelling House Savings and Loan Association, Pittsburgh.

The Colonial BancGroup deal will knock roughly $2.8 billion off a pool of money, known as the Deposit Insurance Fund, which the FDIC maintains to guarantee bank customer deposits.

BB&T agreed to assume all of Colonial's deposits, which totaled about $20 billion at the end of June, the FDIC said. Depositors of Colonial will automatically become depositors of BB&T and customers can continue accessing their money by writing checks or using ATMs and debit cards, the regulator stressed.

Colonial had $25 billion in assets at the end of June. That makes it the largest bank failure this year, exceeding the collapse of Florida's BankUnited Financial, which had less than $13 billion in assets. See full story.

BB&T agreed to buy about $22 billion of Colonial's assets. The FDIC said it will hold on to the rest - about $3 billion worth - and will try to sell them later.
Colonial BancGroup has become the biggest US bank to collapse this year.

Colonial, a property lender based in Montgomery, Alabama, had about $25bn of assets, said the US regulator, the Federal Deposit Insurance Corp (FDIC).

The agency approved the sale of Colonial's $20bn in deposits to BB&T, a North Carolina-based bank. BB&T will also buy $22bn of Colonial's assets.

The collapse is expected to cost the FDIC about $2.8bn. The total number of bank failures is now over 70 in 2009.

The FDIC also entered into a loss-sharing agreement on about $15bn of Colonial's assets with BB&T, the regulator said.

Tuesday, August 11, 2009

Soaring deficit may defy forecasts
Timing could hurt health care plans
By Richard Wolf, USA TODAY

WASHINGTON — Stagnant unemployment, shrinking tax revenue and a struggling economy threaten to quadruple the size of last year's federal budget deficit, raising more questions about the timing of costly proposals to overhaul health care.

As the White House and Congressional Budget Office (CBO) prepare to release new deficit estimates this month, several economists say the news is likely to be as bad as or worse than forecasts.

"This is going to be a very depressing outlook," predicts former CBO director Douglas Holtz-Eakin, top adviser to Republican John McCain in last year's presidential election. "They have just a nightmare in terms of these health care bills, which do nothing but make things worse."

A fiscal year 2009 deficit of $1.8 trillion was anticipated by the White House, $1.7 trillion by Congress. Reaching that level would produce a deficit four times last year's $459 billion deficit, just as Congress is considering health care overhaul plans that could cost $1 trillion over 10 years.

Lawmakers are struggling to pay for a plan with a mix of tax increases on upper-income people and Medicare spending reductions aimed at doctors, hospitals, drugmakers and insurers. Some town-hall forums across the U.S. this month have been disrupted by protests for and against proposals.

While revenue continues to decline, government spending is rising as a result of the $787 billion economic stimulus plan passed six months ago. Stimulus spending will increase in the next few months, says Treasury chief economist Alan Krueger.

Deficits of $1.8 trillion this year and $1.3 trillion in 2010, as predicted by the White House, would add to the federal debt. The current $11.7 trillion debt already equals about $38,500 for every U.S. resident. The recession, now in its postwar-record 21st month, has dealt a worse blow to the budget than the administration expected:

• The economy is set to shrink by 2.6% this year, more than twice what the White House predicted in February and May.

• As a result, tax revenue is down by $353 billion over 10 months, which is about what the White House thought it would lose for the entire year.

• Unemployment, projected at 8.1% this year by the White House, was 9.4% in July. Spending for jobless benefits, Medicaid and Medicare has soared as people have lost work and health insurance. Jobless benefits are costing more than twice what was spent last year.

"The deficit picture is very challenging," White House budget director Peter Orszag wrote on his blog last month.

Sen. Judd Gregg, R-N.H., top Republican on the Senate Budget Committee, says having a deficit at "previously unthinkable levels … shows an incredible lack of fiscal responsibility."

Former CBO director Robert Reischauer, president of the non-partisan Urban Institute, an economics and social policy think tank, says administrations tend to believe that "the harder and faster one falls, the more rapid and steep the recovery."

Why Obama will have to raise taxes
By Clive Crook
Published: August 9 2009 19:30 | Last updated: August 9 2009 19:30
“Read my lips. No new taxes.” George Bush senior made that fatally memorable promise during his campaign for the White House. Later he saw that for the sake of the economy he would have to break it. When he did the right thing and went back on his word, he was vilified. It was a turning point in his presidency – his one-term presidency.

Not that Barack Obama needs reminding. He finds himself in exactly the same position. During his own run for the White House, he promised that taxes would not rise for families making less than $250,000 a year. If you are middle class, he said in his stump speech, “you will not see your taxes increased by a single dime. Not your income tax. Not your payroll tax. Not your capital gains tax. No tax”. Mr Obama knows the risk if he, too, breaks his word.

But he also knows he will have to. Higher taxes on the broad middle class would be needed even without Mr Obama’s long-term plans for healthcare reform, infrastructure spending and the rest. Factor those plans in, and the need is plain even on the administration’s own flattering arithmetic: its budget leaves an enormous long-term deficit even after the economy has returned to full employment. Make less rosy assumptions, and the hole is bigger still.

Much as Mr Obama would prefer to let the rich carry the burden alone, that will not be possible. The US tax code, contrary to popular perception, is heavily skewed towards taxing the rich. On plans already announced, it will soon be even more so. Before long, especially if you add state income taxes, the US will be a conspicuous outlier among industrial countries in how progressive its taxes are. What about taxing profits? The answer is much the same. Business taxes are already high by international standards.

So the administration’s options are limited. The fiscal gap is so big that closing it will be literally impossible without either broadening the extremely narrow base of the current income tax, or raising other taxes on the middle class, or both.

Last week Tim Geithner, the Treasury secretary, and Larry Summers, the White House economics director, were both pressed on the issue. To their great credit, both made a start on retracting Mr Obama’s pledge. As you would expect, it was all a matter of timing and uncertainty about the future. With the economy still frail, they said, this was not the moment to raise middle-class taxes. But for the future, it would be unwise to rule anything out. Also, bringing down the long-term budget deficit was an administration priority.

Well, they did the best they could. Asked for clarification, Robert Gibbs, the White House press secretary, then stamped on this tentative preamble for a new policy. He reaffirmed Mr Obama’s pledge, cancelling whatever wiggle room Messrs Geithner and Summers might have created. If that was a calculated move, rather than an improvised response, the person doing the calculating deserves to be slapped.

What should the White House be planning on taxes? The textbook answer, of course, would be comprehensive tax reform. Sadly, this looks unlikely. The problem is not working out what to do. There are plenty of good blueprints, focusing mostly on eliminating tax exemptions and deductions to broaden the income-tax base. The problem is that this would be yet another ambitious and uncontrollable project for an administration already struggling to do too much. Combining comprehensive tax reform with comprehensive healthcare reform – desirable in principle as this pairing might be – would surely overload the system.

So it will have to be patch and mend, preferably with the fundamental goal of comprehensive reform – namely, broaden the base to keep rates of tax low – kept in mind.

Ending or limiting the tax exemption for employer-provided healthcare makes a lot of sense, as I have previously argued, and in more ways than one. It can raise a lot of revenue (the exemption costs the Treasury $300bn a year.) It can keep healthcare reform deficit-neutral, as the administration has promised. And by removing an implicit subsidy, it would improve the structure of incentives within the healthcare system. Admittedly, this idea requires a double recanting, first because it is a middle-class tax increase, and second because Mr Obama denounced it during the election campaign. But moderate Democrats are willing. Mr Obama must graciously concede the point, in the spirit of principled compromise for which he is so well known.

Tweaking this exemption is the most one can expect: eliminating it looks out of the question. So this will not be enough, and the administration needs to start preparing the country for other ideas. It may not be too late to use carbon cap-and-trade to raise revenue, as the administration first hoped. The retirement age will need to rise, to help balance the books for social security. Then, beyond all this, and assuming that Congress will be incapable of comprehensive income-tax reform, the US is eventually going to need a European-style value-added tax.

Needless to say, Mr Obama needs to win another election before he can get squarely behind that idea. In the meantime, he can avoid ruling it out. He must renege in smaller, less conspicuous ways, making sure that the proceeds add up. The biggest worry is not that he breaks his word, but that he may try to keep it, until outright fiscal collapse – see California – wipes it away.