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Sunday, March 28, 2010

Stupid Congress Critter Tricks

I have been laughing all morning about this.

As readers may or may not know, publicly traded companies are required to be audited and to file a number of disclosures with the SEC. These disclosures include quarterly and yearly financials, and 8-Ks, which are disclosures of anything material affecting the company such as management changes, debt or profits. The theory behind that is that anything the management knows it must disclose to the public.

Now it is standard practice when filing an SEC statement to also release a press statement, because the last thing any company wants is for some enterprising reporter to go looking through the SEC filings and start writing articles with his or her interpretation of them. No, the company wants to control the narrative as far as it is possible and legal.

Okay, so last week a bunch of companies made "statements" regarding the health care legislation that passed. They were required by law to recognize accounting effects and file an 8-K as soon as they knew of the effects. They did so.

Here is Caterpillar's 8-K (aside from sigs and so forth):
As a result of the Patient Protection and Affordable Care Act (H.R. 3590) signed into law on March 23, 2010 (the “Act”), beginning in 2011 the tax deduction available to Caterpillar Inc. (“Caterpillar”) will be reduced to the extent its drug expenses are reimbursed under the Medicare Part D retiree drug subsidy (RDS) program. Although this tax increase does not take effect until 2011, Caterpillar is required to recognize the full accounting impact in its financial statements in the period in which the Act is signed. As retiree healthcare liabilities and related tax impacts are already reflected in Caterpillar’s financial statements, the change will result in a charge to Caterpillar’s earnings in the first quarter of 2010 of approximately $100 million after tax. This charge reflects the anticipated increase in taxes that will occur as a result of the Act. As mentioned on page A-106 of Caterpillar’s Form 10-K for the year ended December 31, 2009, Caterpillar’s 2010 Profit Outlook is based on tax law in effect as of February 19, 2010 and does not include the impact of the Act.
Short, sweet, simple and pretty self-explanatory. GAAP (Generally Accepted Accounting Principles) require that companies reflect future obligations in their current financials. SOX requires that their 10-K (annual financials) be audited by an independent accounting firm and certified as accurate by management. There are significant legal penalties for not disclosing accurate financial statements. There are also significant possible penalties for accountants who help management hide the reality.

So the tax credits were included against future obligations, and since the tax credits will disappear under current law, Caterpillar had to file this notice with the SEC.

So now Waxman's Commerce and Energy Committee wants to know what's up? Huh? They are holding who'd 'a thunk hearings to demand that these executives explain themselves. Here's the committee's page and statement:
Chairman Henry A. Waxman and Subcommittee Chairman Bart Stupak today announced that the Subcommittee on Oversight and Investigations will hold a hearing on April 21, 2010, regarding claims by Caterpillar, Verizon, and Deere that provisions in the new health care reform law could adversely affect their company's ability to provide health insurance to their employees. These assertions appear to conflict with independent analyses, which show that the new law will expand coverage and bring down costs.

Chairman Waxman and Subcommittee Chairman Stupak sent a letter to the Chief Executive Officers of Caterpillar, Verizon, Deere and others requesting their testimony at the hearing as well as information and documentation from each company on the law's projected impact.
In other words, we strongly suspect they're lying. This is where it gets so funny. From the letter to Caterpillar:
After the President signed the health care reform bill into law, your company announced that provisions in the law could adversely affect your ability to provide health insurance. Caterpillar stated in an SEC filing that its after-tax earnings for fiscal year 2010 will decrease by $100 million as a result of the law. A Caterpillar spokesman also warned of a reduction to employee benefits, claiming "there's greater cost pressures on us that could drive changes to plans."l

The new law is designed to expand coverage and bring down costs, so your assertions are a matter of concern. They also appear to conflict with independent analyses.
...
...we request that you provide the following documents from January 1,2009, through the present: (1) any analyses related to the projected impact of health care reform on Caterpillar; and (2) any documents, including email messages, sent to or prepared or reviewed by senior company officials related to the projected impact of health care reform on Caterpillar. We also request an explanation of the accounting methods used by Caterpillar since 2003 to estimate the financial impact on your company of the 28% subsidy for retiree drug coverage and its deductibility or nondeductibility, including the accounting methods used in preparing the cost impact released by Caterpillar this week.
The cost impact released by Caterpillar was a very specific one prepared by its accountants and included as a mention in its 10-K. The critters want the presidents of these companies to come and testify before their committee. What are these people supposed to say? "There's a law, we have to conform to it?" Are they supposed to explain GAAP accounting to these critters?

It seems quite unlikely that companies hadn't been lobbying about this provision of the law. So unlikely that it would be incredible. So is this committee really prepared to subject itself to a bunch of annoyed executives reading their financials, quoting their own lobbying efforts, quoting the law, reading from GAAP guidelines, and quoting their accountants?

Aren't these likely to be the most embarrassing hearings in the House for the decade? Verizon's case is a little different, because Verizon hadn't filed and was just communicating with its employees. But Verizon referenced the same provision.

Somehow I rather doubt these hearings will be held, but if they are, they should be riotously funny.

AT&T's 8-K can be most easily found at its website. The language:
On March 23, 2010, the President signed into law comprehensive health care reform legislation under the Patient Protection and Affordable Care Act (HR 3590). Included among the major provisions of the law is a change in the tax treatment of the Medicare Part D subsidy. AT&T Inc. ("AT&T") intends to take a non-cash charge of approximately $1 billion in the first quarter of 2010 to reflect the impact of this change. As a result of this legislation, including the additional tax burden, AT&T will be evaluating prospective changes to the active and retiree health care benefits offered by the company.
A billion here and a billion there - it adds up. The theory behind the subsidy originally was that Congress didn't want the companies to drop their retiree health benefits. Obviously there is a cost impact for companies that do provide this coverage against those that don't. Further, most of the costs of Medicare Part D (more than 3/4ths) are not paid by premium, but from the general fund. So it costs the government a lot when a retiree enrolls in the federal program. Congress gave some money back to the companies in the original Part D program as an incentive to keep them providing coverage, and Congress allowed companies to deduct the entire cost of the coverage from the program without offsetting the subsidy.

Here's a scope article:
Industry groups say they lobbied hard against the change in the tax rules before it was added to the health care law over the winter.

"It was in all of our letters and communications that went up to the Hill, and the companies were heavily involved in that," said Dena Battle, a tax specialist with the National Association of Manufacturers.
Of course they did.

Comments:
"Somehow I rather doubt these hearings will be held, but if they are, they should be riotously funny."

I have found many of the hearings of the last four years to be rather humurous. In fact, some of the questions often remind me of the old lawyer joke.
Lawyer to witness who is a doctor:
"And you are quite certain the victim was dead?
Witness: "Yes!"
Lawyer: "No doubt in your mind whatsoever?"
Witness: "Yes."
Lawyer: "How could you be so absolutely sure that this person was dead?
Witness: "Because his brain was sitting in a jar in my laboratory"
Lawyer: "And that is sufficient for you to declare him dead?
Witness: "Yes."
Lawyer: "How long have you been practicing medicine?"
Witness: "Long enough to know that when a person's brain is separated from the body it is a sure indicator of death."
Lawyer: "You're quite certain of that?"
Witness: "Yes!"
All ado about nothing or a symphony for idiots.

The Law of Unintended Consequences is already rearing its ugly head and the bill is only a few days old. But good old Henry and Bart want to nip this virus before it spreads throughout the business community. Sorry, this will probably be a pandemic soon.

Let the fun begin!
 
I'm with Jimmy J. I see this as a shot across the bow for any corporation thinking of getting uppity and challenging the carefully crafted narrative (read: propaganda) is going to get seriously hassled. Would you welcome Congress going through your email?

I gotta say though, something's in the water in Peoria. Back when the EPA went after the diesel engine manufacturers for gaming (legitimately, IM[expert]O) the emission compliance test cycle with their engine control software, it was Caterpillar that fought the litigation the hardest. And when the industry and EPA finally settled their suit, it was Caterpillar, for their conspicuous temerity, that was fined the hardest. I also reckon there are some upstate/downstate Illinois politics at play here as well.
 
I agree that this is an attempt to intimidate these companies, but it is a particularly poor method.

The SEC filings are a matter of law.

Somehow I think the executives are more intimidated by that than critters. And how would you react if you were called before Congress for this? You'd be mad as hell and want to make the critters responsible look dumb as hell.
 
I'm inclined to agree with you, M_O_M, that the CEOs are more afraid of the SEC than of Rep. Waxman.

When the CPSC was working on attempting to implement Waxman's new lead-testing requirements, the commissioners had several letters back and forth with his office basically telling him to fix his own d**n law! (In bureaucratese, anyway--I've never before seen anything quite like those letters.) He, in turn, sent letters back telling them to hurry the h**l up and put together something workable. The lead-testing regulations, however, are still not finalized at this date.

If a few appointees from both sides of the aisle weren't afraid of him, I'm thinking Rep. Waxman must not be quite as feared as he believes himself to be.
 
The funny part is going to be watching Waxman pretend he read the bill.
 
Oh, they didn't read it. Empty Gift Box 1.
 
As MOM points out, it would be extremely hard for Waxman et al to hold hearing in which they did not appear to be complete idiots. Even complete idiots like Waxman can see that. Hence, I expect the whole thing to be quietly dropped.
 
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