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WHAT’S AHEAD NOW THAT THE BAILOUT (ER, THE “RESCUE”) IS BEING IMPLEMENTED?

STRATEGIC FINANCE November 2008

IN the long term, Americans will view the $700 billion bailout package Congress passed during the first week of October as a preview of a much more dramatic reordering of the federal regulatory system that will have more serious implications for American corporations than the short-term emergency steps this fall. History may cast the popular outrage over the need for a bailout (er, rescue) as a kind of preliminary political tremor, not unlike the February Revolution that shook St. Petersburg in March 1917 and led to Czar Nicholas II packing his bags and leaving town while a provisional government took over. Six months later, Vladimir Lenin and the Bolsheviks took over the entire country. Things were never the same again.

Neither Barack Obama nor John McCain (this is being written prior to November 4) is a Lenin, nor are Barney Frank or Chris Dodd, the two leading congressional Democrats on financial issues, Bolsheviks. In all cases, they are far from it. But they will be riding a populist wave generated by outrage over bad business decisionmaking, golden parachutes, faulty federal oversight, and a
number of other pre-election revelations—all of which spell potentially revolutionary regulatory changes for American business.

One Washington lobbyist noted that the earliest version of the bailout package included provisions expanding shareholder access to corporate proxies and allowing voluntary votes on executive pay. Those provisions were eventually kicked out. But this lobbyist does expect the new Congress to propose wholesale regulatory changes in numerous areas.

At its fall conference in Chicago, which took place the week after Congress passed the bailout bill, the Council of Institutional Investors “licked its chops” as its investor advocates and state pension fund directors pored over 10 pages of previously adopted corporate governance recommendations that were being sifted for inclusion in what one participant predicted would be “dramatic changes to our regulatory structure.”

Steve Seelig, executive compensation counsel at Watson Wyatt, explains that both Sen. Chris Dodd (D.-Conn.) and Rep. Barney Frank (D.-Mass.) included punitive executive compensation provisions in their respective initial versions of the bailout package. Frank’s provision was
included in the final bill. It contains such things as an expansion of the 280(g) rules on golden parachutes (expanding them to severance packages), limits on compensation if a pay package forced an executive to take excessive risks, and an expansion of limits on the 162(m)
corporate deduction for pay. In the bailout bill, these provisions apply to either companies the Treasury purchases or companies that avail themselves of more than $300 million in bailout relief. In the short term, these compensation knives won’t draw blood from too many
executives, and certainly not more than a tiny handful, if that, outside the financial services industry. But Seelig sees Frank getting much further down the warpath in 2009 than he did in the last session of Congress when his voluntary “say on pay” bill passed the House but got stuck in Dodd’s Banking Committee. “Barney Frank said in an interview on CNBC that he intends
to apply the compensation restrictions in the bailout bill to a broad cross section of U.S. companies,” Seelig reports, “and it seems like the stars are aligned for more action.”

MORE IMMEDIATE CONCERNS
Obviously, though, at the moment, U.S. corporations are worried about more immediate problems such as the inability to sell commercial paper and the costs of issuing
corporate bonds. The bailout package will probably help
alleviate corporate borrowing pressures by the time the
new Congress takes office, although it will do that indirectly
because neither corporations nor their pension
plans—that is, those at nonfinancial corporations—have
invested heavily in the kinds of mortgage-backed securities
that the Emergency Economic Stabilization Act
(EESA) was aimed at. That law established a Troubled
Asset Relief Program (TARP) that will purchase or insure
underwater assets and whose work is being overseen by a
Financial Stability Oversight Board.
The EESA certainly has some provisions that would
affect financial companies immediately. The legislation
prohibits golden parachutes for “senior executives” in
companies whose assets are purchased by the Treasury
Department. But that applies only to executives hired
after the bailout and at companies that auction more
than $300 million. For executives with existing contracts
prior to a company’s dealings with TARP, those golden
parachutes may be subject to a 20% excise tax. Companies
that auction assets will see their tax deductions for
executive compensation cut in half to $500,000.

ACCOUNTING ISSUES
The bill also includes two sections on fair value accounting.
Section 132 of the EESA simply restates the authority
for the Securities & Exchange Commission (SEC) to
suspend the application of Statement of Financial
Accounting Standards (SFAS) No. 157, “Fair Value
Measurements,” “if the SEC determines that it is in the
public interest and protects investors.” One Washington
lobbyist for consumer groups calls that “a nothing provision”
inserted to keep the American Bankers Association
happy. Section 133 requires the SEC, in consultation
with the Federal Reserve and the Treasury, to conduct a
study on mark-to-market accounting standards that has
to be completed in 90 days.
The accounting and executive compensation provisions
in the bailout bill are notable more as fuses for the bigger
bangs they will set off once Congress returns to town in
January.Meanwhile, financial companies especially hope
the TARP helps them quickly turn the corner on their
troubles.Most nonfinancial companies will ignore TARP.
Eric Palley, director, Americas Pensions Team, BNP
Paribas Securities Corp., says that, in some instances,
asset managers working for corporate pension plans mayhave purchased some questionable investments in an
effort to beat an index, thus providing a “kicker” to plan
growth. But Palley also says that because federal law
requires plans to diversify their investments, the impact
of any suspect investments will only be on the margin.
Very few pension plans are holding bonds issued by
Lehman Brothers or Bear Stearns. In fact, strange as it
may sound, corporate plans will benefit over the medium
term. “As credit spreads have widened, they made pension
liabilities look smaller, so companies will not have to put
as much cash into underfunded pension plans,” Palley
explains. “That will make balance sheets look better.”

OTHER PROBLEMS
Of course the stock market has clobbered the value of
pension funds. TARP’s purchase of illiquid assets, if this
calms public fears about the economy, will provide the
beginnings of a bounce to the market and pension fund
balances as well as a contraction of the gap between the
interest rates companies have to offer for corporate bonds
and the rate paid by Treasuries. The market for corporate
bonds would seem to be a more important issue than the
availability of commercial paper, which companies sell
for periods of one day to nine months in order to raise
working capital. One investment company executive who
doesn’t want to be quoted estimates that only the Fortune
400 depend on commercial paper. And among top companies,
many were having no trouble getting loans even
as the flames from the credit crisis roared. Tim Pistell,
CFO at Parker Hannifin Corp., a manufacturer of
hydraulic equipment, told The Wall Street Journal a few
days before the bailout passed Congress: “I can get all the
capital I need, as can most of my big customers—the
Boeings, the Cats, the Deeres.”
General Motors, of course; the other two Detroit biggies;
and other manufacturers with shaky credit ratings aren’t in
such a position. But Parker Hannifin and many others are
far from crippled. In fact, Pistell told the WSJ that Parker
Hannifin, rated single A (not even AAA), is getting calls
from members of its banking syndicate—the survivors of
the financial mess and now colossuses like Citigroup,
Morgan Stanley, Bank of America, and Goldman Sachs—
and going after acquisitions in Asia, where targets look
considerably cheaper than they were six months ago. On
October 1, Parker announced an acquisition of three companies
whose total sales for their most recently reported
fiscal years approaches a half billion dollars.
The inability to sell bonds may be a bigger problem.
Jim Turner, head of debt capital markets at BNP Paribas,cites the example of Union Pacific Railroad, which in late
September issued a 10-year bond whose interest rate was
425 basis points over the 10-year Treasury. In April 2007,
by contrast, Union Pacific issued a 10-year bond that was
93 basis points over the Treasury rate at that time. “The
Emergency Economic Stabilization Act will help if it succeeds
in restoring confidence and credit spreads return to
lower levels,” Turner notes. “And I think it will be helpful
in cleaning up the balance sheets of banks.”
Beyond deflating the interest rates companies pay on
bonds, the bailout package, to the extent it underlines the
consolidation of commercial lenders and underwriters,
may change the way corporate CFOs, treasurers, controllers,
and others view lenders. Citigroup, Bank of
America, and JPMorgan Chase hold more than 40% of
bank loans to corporations. And the number of underwriters
has shrunk considerably with the demise of
Lehman Brothers and Bear Stearns and the elimination of
the entire “investment bank” regulatory category.
Of course, BNP Paribas believes that this consolidation
means that the “Big Boys” will be better capitalized. But
to the extent that BNP, Citibank, and Goldman Sachs will
be loaning their own money, the costs to corporate borrowers
for lines of credit and the like will certainly go up
since the banks are paying more for that money, too.
Joseph C. Stein, managing director of Peter J. Solomon
Co., which employs about 50 people, says the difference
between his private boutique investment company and
the Goldman Sachses of the world is that the boutiques
don’t have their own capital. That means that when a corporation
comes to them to underwrite a loan, for example,
Solomon essentially holds an auction and takes the
banks that make the lowest bids in terms of interest rates.
“And CFOs and treasurers rely on independent firms like
us to analyze situations in an unbiased way,” Stein says. “If
we run the right competitive process, we can get financial
institutions to bid more competitively and therefore save
companies money.”

LONG-TERM IMPLICATIONS
Again, this “New World Order” of vendors serving corporations
for financing is just another indirect impact of the
financial crisis, one with long-term implications. The
same is true of the accounting provisions in sections 132
and 133 of the bailout package. Fair value accounting has
been an issue for a while, with banks pushing hard for
changes to SFAS No. 157, whose deadlines the Financial
Accounting Standards Board (FASB) had previously The SEC already has the authority to suspend
157, and it has shown no indication
that it has the slightest desire to do so. It
would be straining credulity, given all
the abuse SEC Chairman Chris Cox has
taken for allegedly abetting the crisis
with weak regulation of investment
banks, to think he would, as one of his
last efforts as chairman, send Congress
recommendations to gut SFAS No. 157.
What isn’t generally known is that
some of the nation’s biggest banks oppose
the American Bankers Association, which is
the leading critic of SFAS No. 157. An accounting
policy executive at a large money center
bank explained he was on an ABA conference
call in early October. “A number of small bank accountants
expressed frustration that they are pressured or bullied
by their auditors on valuations. I can understand why
they are pushing for suspension of SFAS No. 157,” he
explains. “I think the difference is that we have the depth
of staff to value and support the prices we use.We also
have the ability to second-guess our auditors if they
attempt to take issue with our valuations. Frankly, our
experts know more about valuations than their experts.”
In fact, what the financial fallout does is obscure the
need for more modest changes to SFAS No. 157 that both
large banks and many nonfinancial corporations agree
are necessary. Alfred M. King, vice chairman of Marshall
& Stevens, notes that the current FASB definition of fair
value strays considerably from the old definition of fair
market value, which depended on there being a willing
buyer and willing seller, among other tests. Now, fair value
is the price at which a market participant would buy
an asset, even if there is no buyer. The current definition
is confusing for nonfinancial companies, too. For example,
a consumer products company that sells toilet paper
buys the division of a second consumer products company,
also with a toilet paper product. The buyer takes the
second product, cancels its trade name, and stamps its
own trade name on the competitor’s product.What’s the
fair value of the second company’s toilet paper trade
name under the current fair value definition? It’s impossible
to tell.

SMALL STEPS
Unfortunately, the bailout package and the wave of public
revulsion that greeted it make it more difficult for the 157. For its part, the FASB has been taking
its sweet time anyway on its various projects
dedicated to SFAS No. 157 reform.
The September 30 FASB/SEC press
release containing guidance on 157—
which simply restated what everyone
already knew—mentioned the Valuation
Resource Group (VRG), an advisory
committee within the FASB that
has been meeting for the past year with
the aim of making recommendations on
changes to the Standard, a process the
FASB began in January 2007. The VRG’s
last meeting was on September 23, 2008.
But the VRG hasn’t made any recommendations,
nor has the FASB moved very far on any of
its internal revision projects, such as one on SFAS No.
157-c,“Measuring Liabilities under FASB Statement No.
157.” A staff proposal was issued on January 18, 2008.
The comment period ended February 18, 2008. There
was considerable pushback, mostly by accounting firms.
Then, at its April 9, 2008, meeting, the Board directed
the staff to make changes. Ronald Maples, the staffer
working on 157-c, says nothing has happened on this
since April.
The danger is that the current crisis won’t only scare
off the SEC and FASB, but also the International
Accounting Standards Board (IASB), which is wrestling
with convergence issues generally and SFAS No. 157
specifically.When the IASB sent out a draft consensus
document on 157 last spring, it essentially used the FASB
Standard. Al King notes there was significant sentiment
within the IASB to make changes to the Standard that
would move it back closer to the original definition of
fair market value. “The IASB could give FASB political
cover to make some changes to 157 without appearing to
be bowing to political pressure one way or the other,”
King says.
Of course, neither the new administration nor the new
Congress will need political cover to revolutionize federal
regulatory policies.With regard to the need for changes
to executive compensation, corporate governance, and
other aspects of corporate life, the voice of public opinion
will be the voice of the rabble. n
Stephen Barlas has covered Washington for Strategic
Finance since 1984. He is a full-time freelance journalist
and writes for numerous trade and professional magazines.
You can reach him at sbarlas@verizon.net.
SEC and the FASB to make needed changes to SFAS No.
relaxed for both financial and nonfinancial companies.

Pharma faces Congressional battles in 2009


Drug Discovery News, 2008 September
by Stephen Barlas


When BIO, the trade group for biotechnology pharmaceutical companies, held a press briefing on the 2008 presidential election on Sept. 3, Jim Greenwood, the president and CEO of BIO, and a former Republican congressman from Pennsylvania, was asked if BIO would be endorsing either Barack Obama or John McCain for president. He didn’t have to think about the answer for very long. “No,” he said, explaining that there wasn’t enough difference between the two on issues of importance to pharmaceutical companies for BIO to make an endorsement.

Not only are the votes and positions of the two candidates near mirror images on many drug issues (except providing health insurance for the “uninsured”), but so is their rhetoric, which is sharp. McCain tells pharmaceutical companies they “must worry less about squeezing additional profits from old medicines.” Obama promises to prevent drug companies from “abusing their monopoly power through unjustified price increases.”

The propensity toward populist pandering, plus support for long-time, brand-name anathemas such as reimportation of drugs and greater use of generics, explains why most of the research-based pharmaceutical industry is bringing its political cannons up to the front lines in anticipation of pitched legislative battles in 2009, and not just those led by an antagonistic White House. Congress, which is likely to be more Democratic, will reprise some anti-industry proposals which fell short in the 2007-2008 term, in part because of the threat of a George W. Bush veto, in part because of Republican opposition in the Senate.

But there are some opportunities for the industry in the offing. Both McCain and Obama have talked about extending health insurance to the uninsured, which, if it becomes a reality, would lead to significant new spending on drug prescriptions. Kathryn Wilber, senior counsel, health policy, American Benefits Council, which represents Fortune 500 companies, says, “Health care reform is clearly a priority issue for both candidates.”

The Pharmaceutical Research and Manufacturers of America (PhRMA) understands that the elevation of the “uninsured” to the level of primetime issue presents all sorts of possibilities, good and bad. Billy Tauzin, president and CEO of PhRMA, says the group’s “Platform for a Healthy America” aims to assure all Americans have access to high-quality, affordable health insurance coverage.

“‘Platform for a Healthy America’ builds on the existing employer-based system and expands coverage through a public-private approach—with a focus on private health insurance expansions and leveraging such public health insurance programs as Medicaid and SCHIP to extend access to high-quality, affordable health insurance coverage to all Americans,” says Tauzin.

Finding the middle
The ‘Platform’ contains a little bit of the Obama plan and a little bit of the McCain plan; so it might be the kind of middle ground which many observers expect any final health insurance expansion—if there is a final bill—to occupy. McCain’s health insurance access proposal centers on eliminating the tax subsidies for employers to provide health insurance and instead giving individuals and families $2500/$5000 tax credits with which to purchase insurance in the private market. Obama would create a national insurance program, run by the federal government, that the uninsured could buy into, if they so desire. “The debate over the Obama plan versus the McCain plan is a little bit of a phony debate,” says one lobbyist for the PBM industry. “The final product is probably going to be something in the middle.”

A couple factors bear out that compromise notion. There are some key Democrats, such as Finance Committee Chairman Sen. Max Baucus (D-Mont.), who think the employer-provided health insurance system has outlived its usefulness. So in that respect, he agrees with McCain. And there are Republicans who already support an Obama-type plan; it is called the Healthy Americans Act, introduced early in 2007 by Sen. Ron Wyden (D-Ore.), with numerous Republican co-sponsors, including Sen. Charles Grassley (R-Iowa), influential ranking Republican on the Senate Finance Committee. The bill eliminates employer health insurance tax deductions, forces them to pass along what they would have deducted per employee as increased salary, sets up a federal program and allows individuals to buy in, with subsidies to those below 400 percent of the poverty level.

The Wyden bill covers a lot of ground, including changes to the Medicare Part D outpatient prescription program, where the bill gives Medicare the authority to negotiate prices with manufacturers of prescription drugs. Obama supports direct negotiation within the context of both his “access” proposal and within the Part D program.

McCain supports negotiation in Part D just as heartily as Obama does. In November 2003, as the House and Senate were adopting a conference agreement establishing the Part D program, McCain complained that providing an outpatient drug benefit to seniors without first getting drug costs under control was like “rearranging the deck chairs on the Titanic.” He expressly bemoaned the absence of a negotiation provision, saying, “Taxpayers should be able to expect Medicare, as a large purchaser of prescription drugs, to be able to derive some discount from its new market share. Instead, taxpayers will provide an estimated $13 billion a year in increased profits to the pharmaceutical industry.”

A broader Medicare Part D?
The Medicare Part D reform bill that comes up in 2009 will probably be broader than last year’s House and Senate bills, which were narrow in an effort, ultimately unsuccessful, to get a perceived “modest” proposal past a disapproving White House. In 2009, the Oval Office becomes a friend, not a foe, in terms of numerous anti-PhRMA proposals, with regard to Part D and much else. So House Democrats like Rep. Henry Waxman (D-Calif,) are licking their chops. Waxman, chairman of the House Oversight and Investigations Committee, pummeled the drug industry during two hearings in this past session and raised questions about inflated Medicare payments to the prescription drug plans (PDPs) which offer the Part D benefit. “Amendments to Part D will probably be front and center fairly early,” says one lobbyist for the drug store industry.

Be they bills on the uninsured or on Part D, rest assured that proposals aimed at cutting prescription drug costs will be flying like hungry birds around a just-stocked backyard feeder. One proposal Obama has made is to set up a federal entity of some sort and charge it with doing “comparativeness research,” that is looking at all drugs within a class and determining which one is the most effective. PhRMA supports that kind of research in principle, as long as it is “structured to promote better patient health and timely patient access to needed therapies, and avoids denying or delaying patients’ access to beneficial care, as what often occurs in Europe and Australia.” Whether the free-standing Comparative Effectiveness Research Act of 2008, introduced by Baucus and Sen. Kent Conrad (D-N.D.) in late July 2008, meets PhRMA’s yardstick is unknown.

Reimportation and generics
Obama also supports two proposals which made appearances in past Congresses: reimportation of drugs and wider use of generics, including establishing a first-time regulatory pathway at the Food and Drug Administration (FDA) for biogenerics. McCain is just as enthusiastic about these proposals; in fact, he was championing them long before Obama reached the Senate. As early as 2000, McCain joined with Sen. Charles Schumer (D-N.Y.) to sponsor the Greater Access to Affordable Pharmaceuticals Act, which would have made changes in the 1984 Hatch-Waxman Act designed to prevent brand-name companies from slowing (albeit legally) introduction of generics. That bill passed the Senate by a wide margin in 2002, but never cleared Congress, and would have probably been vetoed by President Bush anyway.

Six years later, that bill is long forgotten, and in its place is the latest generic legislative effort: the Biologics Price Competition and Innovation Act. It would create a pathway at the FDA for approval of biological generics under the Public Health Act, which is the law under which almost all major biologics such as Rituxan, Humira, Herceptin, Tysabri and Avonex are approved. Conventional chemical drugs and a small handful of biologics are approved under the FDA Act, which includes the Hatch-Waxman pathway for generics, which has been well-trod. The Senate Health, Education, Labor and Pensions Committee approved the Biologics Price bill in late June. BIO’s Greenwood says the bill is an improvement over an earlier version. But he wants a data exclusivity period of 14 years, not 12, and he has some problems with both the patent and pharmacist prescribing provisions.

Charlie Mayr, spokesman for the Generic Pharmaceutical Association, says the Democratic presidential platform includes an endorsement of both generics and biological generics. The Republican platform is less specific. “Both candidates have gone on record being supportive of generic drugs,” says Mayr. “Things are moving forward dramatically with legislation on biologic generics. They will be a reality; it is just a question of time.”

Legislation allowing drug wholesalers to import brand-name prescription drugs from developed countries will probably also become a reality. Both Obama and McCain support reimportation, which the pharmaceutical industry opposes.

So come January 20, 2009, whether it is McCain or Obama sitting in the Oval Office, pharmaceutical companies will be dodging the return of some detested drug initiatives, coming at them like so many boomerangs, but at the same time, keeping their heads up amidst opportunities generated by the health insurance access debate. DDN

Stephen Barlas is a Washington, D.C.-based freelance writer.

Alaskan Pipeline Project

Pipeline & Gas Journal, November 2008

FERC officials say they aren’t pressuring the competing Denali and TransCanada Alaskan pipeline projects to merge. But the two projects—one already in the pre-filing process—are heading toward submitting construction applications to FERC at roughly the same time in 2011 or 2012, depending on whom one talks to, in what would be a regulatory clash and crash that the agency hopes to avoid. Congress is also pressuring the two Alaskan gas transportation contestants, though very subtly. Legislation the House passed in late September whose primary purpose was extending the congressional ban on offshore oil and gas drilling included a symbolic amendment meant to strengthen the president’s hand in twisting the arms of Denali and TransCanada/Alaska to combine their efforts.
In an interview, Tony Palmer, vice president, Alaska Development, TransCanada, says his company continues to talk with BP and ConocoPhillips, the Denali partners—about taking an equity interest in the TC pipeline, whose proposed route is essentially the same as Denali’s. “No one has slammed the door,” he states, noting that TransCanada will not make hard and fast offers to the two companies, plus ExxonMobil and other potential shippers, until the start of the open season in spring, 2010.
Palmer says FERC has publicly encouraged the two Alaskan pipeline bidders to get together. “That would be positive if it occurs,” adds Palmer. “We favor shippers joining our project.”
Scott Jepsen, spokesman for Denali, is a bit more restrained. “The owners of Denali have stated that they will consider participation by other parties that add value and reduce risk,” Jepsen states.
Denali has a bit of a head start with FERC, which will approve only one of the two projects. FERC approved Denali’s entry into the pre-filing process in June. Palmer notes, however, that FERC granted TC a number of exemptions when approving its “very short” pre-filing application, which, he implies, was less than complete. Tamara Young-Allen, a FERC spokeswoman, acknowledges that FERC let TC slide a number of pre-filing requirements such as providing a list of landowners along the project’s route.
Palmer says TransCanada wants to be fully ready to enter pre-filing, and will file its application after its open season next spring. Post-open season is when pre-filing activities normally begin, he adds. Palmer states that TC expects to file a construction application in 2012. In the FERC letter to Denali approving its pre-filing application, the agency noted that Denali plans to file its construction application in 2011. So it is not clear, despite FERC’s warnings, that it will have to consider the two applications simultaneously. Rather, FERC may be concerned that it will have to act on Denali’s application without the benefit of having TC’s to compare it to. Conversely, Denali may be in a bit of a rush since the state of Alaska has blessed the TransCanada project, certifying it under the state’s Alaska Gasline Inducement Act. So it not only receives the political imprimatur of the state, but also $500 million in state funds for use during the pre-filing process.
FERC stated in its “Sixth Report to Congress on the Progress Made in Licensing and Constructing the Alaska Natural Gas Pipeline,” published at the end of August, that Alaska’s blessing of the TransCanada proposal would not give TC an advantage as far as FERC’s consideration of a construction certificate, which, again, will only be granted to one of the bidders. The report’s conclusion noted: “It is not unusual or detrimental at this stage that two projects are preceding forward.” But it went on to say, “We continue to seriously caution that reviewing multiple projects throughout the complete federal regulatory process would greatly challenge the Commission staff, the other agencies on the federal interagency team, and state agencies. We believe it to be in the public interest to avoid the consequences of a prolonged, duplicative regulatory review in a competitive situation…”
Mary O’Driscoll, the FERC spokeswoman, says, “We are not trying to merge these proposals. The report is just an acknowledgement of what everybody knows, there will be one pipeline.”


Automotive Policy Goes to the Polls

Automotive Engineering, October 2008

It was 100 years ago that Henry Ford launched the revolutionary Model T, a car whose technology was a marked departure from what had been used in the incipient autos in the industry’s gestation stage. The Model T’s steering wheel was on the left and the entire engine and transmission were enclosed; the four cylinders were cast in a solid block; the suspension used two semi-elliptic springs.

Now, too, Ford, General Motors and Chrysler are attempting to design and produce revolutionary autos and light trucks, those that run on alternative fuels such as E85 and those that run on batteries and even fuel cells. But while Henry Ford did not ask for help from the U.S. government to launch the Model T, Detroit, in more ways than one, is on its knees. Without the tax credits, research and development funding, reasonable auto energy mileage goals and foreign market opening assistance only the President and Congress can provide, Detroit could sink deeper into the financial morass from which only advanced technology vehicles can tow it out.

Before and during their respective primaries, neither Sen. Barack Obama (D-Ill.) nor Sen. John McCain (R-Ariz.) showed much sympathy for imperiled U.S. auto companies. Obama famously told the Detroit Economic Club in May 2007 that car makers deserved their just rewards for resisting the production of fuel efficient cars. He then campaigned across the country bragging about how he gored the lion in its own den. While Obama’s tone was sharper, McCain’s fangs had been growing for a much longer time. As early as 2002, he introduced legislation which would have upped the corporate average fuel economy (CAFE) standard to 36 miles per gallon by 2016, and explained on the Senate floor, when he introduced that bill on February 2, 2002, that his Fuel Economy & Security Act focused on “one of the major industrial greenhouse gas emitters, the automotive industry.”

Singing a new song; but will music stop after election?

Now fast forward to fall 2008. As the election draws within one month of votes being cast, both Obama and McCain are wearing cheerleading uniforms with big “Ds” on the front, “D” for Detroit. They have been in and out of Michigan of late on campaign swings journeying to GM, Ford and Chrysler plants in places like Warren, Flint and Sterling Heights. In July at the Warren, Michigan plant where the Chevy Volt will be produced, McCain praised GM and said he wants “to help in every way” to insure the success of that all-electric sedan. In Pittsburgh in June, Obama, sitting next to GM CEO Rick Wagoner during a panel discussion on the future of the auto industry, solicitously asked Wagoner: “The question is, assuming I’m president, what would be the one or two things that the federal government can do most constructive to make certain that in the race against time for the U.S. automakers that you are able to make this pivot as quickly as possible?”

What a difference a presidential party nomination makes! Greg Martin, GM’s spokesman in Washington, says, “The Detroit bashing has stopped and both candidates are being very supportive of the industry’s efforts.” That is because, he explains, both Obama and McCain have woken up to the importance of Michigan’s and Ohio’s status as “key states,” ones whose electoral votes could determine who wins the presidency on November 4, 2008.

The question is, of course, whether this change in tone is one of substance or convenience. It is an important question because this may be the most important presidential election for the auto industry in 100 years, a view shared by David Cole chairman of the Center for Automotive Research. Cole will vote for McCain. “They are both intensely focused on energy conservation and alternative energy,” says Cole, whose CAR sponsored a major industry confab in Traverse City, Michigan in August, where the candidates’ positions were dissected in the corridors. “But McCain has a more pragmatic view, supporting a more balanced approach to energy exploration, conservation and alterative energy. Obama tends to be overly optimistic and operates more in the theoretical space.”

But one official at another industry research group, who declines to be identified, prefers Obama because of his support for federal aid to auto manufacturers and their suppliers. Both candidates back some new federal assistance. GM’s Martin points out that visits like McCain’s to GM’s Warren technical center helps raise the profile of the need for federal help for battery technology development. McCain has proposed funding a $300 million award payable to the first company who develops an electric battery. After he made the comment, his campaign quickly jumped in and said the proposal would not be fleshed out until the Arizona senator became president. So there are no details. Obama derided the proposal as a ‘’bounty’’ for some ‘’rocket scientist’’ to win. The U.S. Department of Energy is already giving three consortiums involving GM, Ford and Chrysler $10 million each over three years for battery development, that money coming out of the $41 million a year the DOE has for its entire “energy storage program,” which funds R&D for passenger vehicles.

Mark Fields, executive vice president, Ford Motor Co., told a Washington, D.C. audience on June 11, 2008 that much more money was needed, and not just for battery chemistry, but for development of a manufacturing infrastructure, too. “Just as the Department of Energy recently placed nearly $400 million with various ethanol producers to hasten commercial applications, bold and dramatic incentives are needed to accelerate the commercial development of high-energy power batteries in the U.S.,” he said.

Mark Wagner, vice president, government relations, for Johnson Controls/Saft, says the U.S. is in danger of losing the lithium ion battery manufacturing base to the Asians. In fact, his company is supplying lithium ion batteries for the 2009 Mercedes S Class sedan, and manufacturing those batteries in France.

Obama pushes for revitalization of auto manufacturing base; McCain hesitant on aid

While Obama has not focused specifically on lithium ion development, either in the lab or on the manufacturing floor, he has said quite a bit about the need to convert auto company and supplier manufacturing facilities into launching pads for advanced vehicles. He was an original co-sponsor of Sen. Orrin Hatch’s (R-Utah) FREEDOM Act, a 2006 bill which offered first-year expensing for auto and component companies setting up production capacity in the United States for plug-in electric drive vehicles. Those provisions morphed into a different form in the Energy Independence and Security Act (EISA) which Congress approved in December 2007. That bill included provisions for low-interest loans to auto companies and their suppliers for retooling factories for “advanced technology” vehicles and a separate grant program for “refurbishment and retooling” of auto and component manufacturing facilities for manufacture of efficient hybrid, plug-in electric hybrid, plug-in electric drive, and advanced diesel vehicles. The low-interest loans would be made through a new Advanced Technology Vehicles Manufacturing Incentive Program (ATVMIP). Obama supports “immediate” funding of the ATVMIP. McCain at first refused to endorse federal money. But on August 22 he began to shift his position, saying he believed Congress should fund the ATVMIP.

Besides his battery “prize,” McCain has talked up his support for a $5,000 tax credit for consumers who purchase a plug-in electric vehicle such as the Chevy Volt GM hopes to have on its dealers’ lots for the 2010 model year. The FREEDOM Act, which Obama supports, and which the auto companies have consistently pressed for since Hatch introduced it, allows for a plug-in credit as high as $7500 depending on the kilowattage of the battery. Equally important, Obama backs eliminating the 60,000 unit per manufacturer limit on the number of vehicles which could qualify for the plug-in credit, a ceiling that applied to the hybrid tax credit in the 2005 energy bill, and which Toyota hit very quickly with Prius and Lexus sales.

Both favor federal incentives to consumers on electric plug-ins

Talking about tax credits, Obama has been a leading Senate proponent of tax credits to service station owners for the cost of building new E85 vehicle refueling facilities, introducing legislation to that effect in May 2005, two years before GM CEO Rick Wagoner, Jr. told the House Energy and Commerce Committee that the best opportunity for addressing the twin problems of high gas prices and CO2 emissions was “through increased use of bio-fuels.” McCain has been anti-ethanol, especially from a federal subsidy standpoint. He has warmed up to ethanol as a fuel—sans subsidy--of late.

“Senator Obama’s record regarding the use of domestic-renewable fuels such as ethanol is first-rate. Senator Obama has personally participated in E85 station Grand Opening events and offers a strong case as the Presidential candidate promoting change in our long dependence on the use of hydrocarbons,” says Phillip Lampert, executive director, National Ethanol Vehicle Coalition. “From my experience in working energy policy issues at the federal level, Senator McCain has only recently become aware that flexible fuel vehicles even exist. I don’t recall a single bill or proposal introduced or co-sponsored by Senator McCain that would have advanced the use of domestic-renewable transportation fuels.”

Obama and McCain green peas in pod on greenhouse gases

Of course, auto manufacturers see E85 vehicles not only as a way to reduce dependence on imported and expensive gasoline, but as a way to reduce greenhouse gas emissions. Both Obama and McCain are supporters of a national “cap-and-trade” greenhouse gas emissions program; one was incorporated into the Lieberman-Warner Climate Security Act of 2008 which came to the floor of the Senate for a vote on June 6, 2008 but failed to gain the necessary 60 votes to end debate. Obama and McCain supported the bill, although they have proposed slightly different carbon reduction targets, with Obama’s being a bit more aggressive. The auto industry doesn’t necessarily oppose a federal greenhouse gas mandate. Prior for the bill coming up for a vote, Ford said that it supports “a comprehensive, climate solution for reducing emissions through a economy-wide cap and trade federal framework with complementary state and local government roles.” Neither Ford nor GM or Chrysler took a position on the Lieberman-Warner bill itself, although Ford said, “This legislation is helping to progress the dialogue on climate legislation.”

The problem, from the auto companies’ standpoint, with that particular bill, is that an amendment was inserted on the Senate floor allowing California (and other states) to establish its own greenhouse gas limits on auto tailpipe emissions, which the EPA has so far prohibited the state from doing. Both McCain and Obama favor allowing states to adopt the California limits, or others of their own choosing, which would result in states imposing CAFE limits that are harder to meet than the 35 mpg by 2020 mandate in the EISA.

Positions on South Korea free trade agreement diverge; but industry ambivalent on issue

While Obama and McCain are pretty much twins on greenhouse gas regulation and CAFE standards, they diverge considerably on trade issues, which are increasingly important, particularly with regard to the Far East. McCain supports and Obama opposes the U.S.-South Korea free trade agreement President Bush negotiated in 2007, which includes a number of automotive proposals aimed at reducing the current automotive trade imbalance between the two countries. In 2006, according to the UAW, U.S. imports of Hyundai Motor Co. and Kia Motors products into the United States were valued at $12.4 billion, while U.S. exports of similar products to Korea amounted to just $751 million.

Obama has sided with the UAW, which opposes the agreement, even though it would result in elimination of Korea’s current eight percent tariff on imported U.S. vehicles (and, in return, the U.S. 2.5 percent tariff on Kias and Hyundis). The UAW has criticized the deal because it says it contains no hard-and-fast assurances that the Koreans would eliminate their non-tariff barriers. The pact poses a conundrum for the U.S. auto companies, who on the one hand want to be able to expand in Korea and Asia generally, but don’t want to impose conditions on South Korea which backfire, leading to restrictions on operations in that country, the latter factor weighing most heavily on GM. That balancing act explains why Martin, the GM spokesman, says, “We are agnostic on the U.S.-Korea agreement.” GM builds the Chevy Aveo in Korea. Ford and Chrysler, which have very limited operations in Korea, oppose the deal. Steve Biegun, Ford’s vice president, international governmental affairs, said in a statement after the Bush administration announced the agreement, “As a company that operates and competes in 200 markets globally, we see the real and tangible benefits of free trade. Unfortunately this agreement, as we understand it, will not open the Korean market to free trade in automobiles.”

Of course, in the end, U.S. auto manufacturers are most concerned about a freer flow of vehicles in America, where high gasoline prices have dammed up sales for the past year. Both Obama and McCain have shown their ears are now open to industry entreaties. “The next administration will be a lot more engaged with us than the current Bush administration,” says an official at a major auto industry research group.


FDA’s Janet Woodcock Riding High

Pharmacy & Therapeutics Journal, July 2008

CDER Director Wins “Wows” Amid Agency Woes
Stephen Barlas

Representative John Dingell (D-Mich.), the irascible, octogenarian Democratic chairman of the House Energy and Commerce Committee, normally sinks his teeth into Bush administration officials like a lion falling on a springbok. At a very contentious hearing on April 29, he tore into
FDA Commissioner Andrew von Eschenbach, MD, for spouting “hooey.” Mr. Dingell ranted, “Let’s come down to the nutcutting stage. I don’t want to weasel words.” But here John Dingell was two weeks later, listening to Dr. von Eschenbach’s deputy, Janet Woodcock, MD, and purring like a kitten.
“Again, I want it known that I appreciate Dr. Woodcock’s candor,” intoned Mr. Dingell,
whose committee has jurisdiction over the FDA. “To her credit, she has stepped forth in
the midst of a public health crisis to deal honestly with Congress. How I wish others in the
administration showed the same vigor, responsiveness, and leadership.”
Why was John Dingell stroking a Bush administration official? A few days before, at a different hearing, Dr. Woodcock, an internist and rheumatologist, had supplied what Dr. von Eschenbach had refused to furnish: an estimate that the FDA would need another $225 million per year to
inspect foreign drug-manufacturing firms such as the ones in China—the source of the contaminated active ingredient in heparin that has caused 81 deaths in the U.S. so far.
Heparin is just the most recent FDA drug disaster in a string of misadventures that started with Merck’s rofecoxib (Vioxx) and moved on to other public relations fiascos involving the
selective serotonin reuptake inhibitor (SSRI) class of anti - depressants, GlaxoSmithKline’s rosiglitazone (Avandia), and too many others to mention. In all those instances, including
heparin recently, FDA regulatory oversight has been, if not quite blind, then fuzzy enough to defy even the most talented optometrist. Never has the FDA’s regulation of drugs been
held in lower regard by Congress and the public.
But in a seeming paradox, amid the agency’s woes, its top drug regulator has been getting “wows.” In her roomy sixth floor office in the FDA’s new office building just outside the
Beltway off New Hampshire Avenue in suburban Maryland, Dr. Woodcock, who has worked at the FDA in one position or another since 1986—including an earlier stint as director of the
Center for Drug Evaluation and Research (CDER) from 1994to 2005—agrees that this has been the most contentious period for the FDA since she has been at the agency. She points to a
generic drug scandal in the late 1980s but calls that event more of “a tempest in a teapot,” compared with what is going on now.
“I regard the heparin problem as a landmark type of event,” she adds. “It demonstrated that an essential drug used everyday all over the health care system can be contaminated. That
is pretty bad.”
It is not often that one hears a top federal official admit to a serious mistake. Democrats
and Republicans on Capitol Hill appreciate Dr. Woodcock’s attempts to push candor to the
limits. Referring to her colloquy with Representative Dingell on May 1, Bill Hubbard, longtime
(now retired) Associate Commissioner at the FDA, who was also testifying at that hearing
and who worked with her at the FDA, says: “Janet was willing to speak her mind, which
is refreshing and also somewhat unusual. Usually, administration witnesses have to spout the
party line. She is very popular now on Capitol Hill, but she may have ticked off people in the
Bush administration.”
Pressed as to whether anyone in the White House has come down on her for making nice
with John Dingell, she demurs. “The chips will fall where they may,” she adds.
Director Woodcock is also apparently willing to take more than just rhetorical risks. Although she is well regarded by the drug industry, a few noses there might have gotten out of
joint when the FDA decided on April 28 not to approve Cordaptive, Merck’s new cholesterol-lowering medication. Analysts who had been predicting that the drug could easily top $1 billion
in sales were surprised by the news that the FDA sent a “Not Approved” letter to Merck. Dr. Woodcock refuses to discuss the case but explains, “Every year we learn more, and we
apply it moving forward.”
Ron Rodgers, a spokesman for Merck, says, “The question we sometimes get is whether the FDA is changing the standard for approval. We believe the rejection had to do with the ‘science’
and we hope to get an understanding of the agency’s reasoning in an upcoming meeting.”
Asked whether the black eyes the agency has earned in the past few years over Vioxx, SSRIs, and other drugs led the FDA to make a statement to the public by canning Cordaptive,
Dr. Woodcock laughs and says, “We don’t make decisions that pander to public approval.”
Heparin is the latest, if not the most disturbing, drug dis aster she has had to live through at the FDA. After taking over as Director of CDER in 1994, she was kicked upstairs in 2005 and
given the title of deputy commissioner and chief medicalofficer. Dr. von Eschenbach brought her back to the CDER, first as the acting director in October 2007, because then current
direct or, Rear Admiral Steven Galston, MD, MPH, was named acting surgeon general. With the Bush administration nearing the end of its line, not too many people were lobbying for the CDER director’s job, especially since its domain new drug approval and postmarketing surveillance—
was in serious dis repair as a result of successive political earthquakes. Dr. Woodcock’s “acting” designation was removed in March 2008.
Bush administration officials won’t say whether Dr. Woodcock returned to the CDER willingly or whether her arm had to be twisted. Bill Hubbard thinks she was frustrated with a
lack of discipline in the Commissioner’s office and is “probably glad to be back at CDER.” But now that she is back and has some political capital from Democrats to spend, expect her to keep speaking her mind, which she does politely but not pointedly. She laughs frequently throughout an hour-long interview, and smiles, two devices that seem to be used to make her refusal to get too colorful or too specific more palatable. Looking back over the past decade and a half, she can see where the seeds of many of the FDA’s current problems were planted. And in many of the cases, the Johnny Appleseeds were congressmen like John Dingell.
Throughout the 1990s, Congress piled new drug regulatory programs on the FDA: the Best Pharmaceuticals for Children program, the FDA Modernization Act of 1997, and others.
Dr. Woodcock cites former FDA official Peter Barton Hutt, who estimated that Congress had given the FDA 125 additional mandates over the past 15 years. However, even though those
laws heaped new responsibilities on the FDA’s shoulders, Congress did not provide increased appropriations to run those new programs. The CDER staff was stretched thinner than a
piece of Saran Wrap. The pharmaceutical industry kept paying higher user fees, of course, but those funds can be used only for restricted purposes.
Steadily increasing responsibilities and a lagging congressional appropriation eroded by inflation has led to a hollowing out of the CDER’s capabilities in terms of staff and infra -
structure. So it should have been no surprise when an FDA scientific advisory subcommittee published a report called FDA Science and Mission at Risk in November 2007. Garret
FitzGerald, MD, Professor of Medicine and Chair of Pharmacology at the University of Pennsylvania and one of the report’s authors, referred in testimony on January 29 to “a disturbingly systemic set of problems in the agency.”
Dr. Woodcock agrees with the conclusions of that report. “Our infrastructure is in very disturbing shape,” she concedes. But she sees the glass as being only half empty. “Our
level of scientific sophistication is unparalleled; there is no comparison to 20 years ago. While we are finding problems more frequently, our ability to identify them is at a higher level than ever before.” Nonetheless, she agrees that higher appropriations over the past decade, for example, would have allowed the agency to bolster its information technology resources, which are not
exactly state of the art. However, Dr. Woodcock does not commit political suicide by blaming the Bush (or Clinton) administration, whatever her private feelings might be. She won’t criticize criticize Congress directly, either, although it is fairly easy to read her unspoken thoughts. She notes:
“When I was at a hearing this winter in Ms. [Rosa] DeLauro’s subcommittee, she said that was the first drug hearing the subcommittee had held in 25 years.” Representative DeLauro (D-Conn.) is chairman of the House FDA appropriations subcommittee, which holds the pursestrings for the FDA.
Bill Hubbard is more direct. “DeLauro is inconsistent,” he states. “She won’t give more money until the FDA does a better job.”
Dr. Woodcock continues, “The FDA has gotten a lot of blame, but we’re not in charge of setting the federal budget. Period.”
Last year, Representative DeLauro declined to appropriate money for the new Reagan–Udall Foundation, which is intended to be a nonprofit group dedicated to getting Dr. Woodcock’s
“baby”—the Critical Path Initiative (CPI)—further off the ground. Dr. Woodcock established the CPI in 2004 as a funding source for new science advances that might help the
FDA assess new drugs more quickly and accurately. Money goes to universities and to private researchers, but the CPI never received much in the way of congressional appropriations,
she concedes. “If you consider that the hallmark of success, that is not happening,”
she says. “But there is a tremendous amount going on in Critical Path.”
Nonetheless, the Reagan–Udall Foundation is supposed to raise private funds that would dwarf what the FDA has been able to spend on CPI projects. Dr. Woodcock is circumspect when she explains why the Foundation has taken so long to get off the ground. She does
not blame Rosa DeLauro for not providing funds in 2008, as the FDA Amendments Act allowed her to do. Instead, she explains that it is the “elaborate procedures” specified in the FDA Amendments Act that have stymied the Foundation, although she argues that it takes a year to get many nonprofit organizations off the ground. But even though the FDA appointed a board of directors last October, headed by former FDA Commissioner Mark McClellan, MD, PhD, Dr. Woodcock says that the board has not even written the Reagan–Udall Foundation’s by-laws yet. That has to happen before the Foundation can begin its work. She estimates it will be up and running by the end of 2008.
But don’t ask her to offer any opinion on the Bush administration’s handling of problems with drug safety or to compare it with the Clinton administration’s approach. “Here we go,” she mugs when the question is asked. She clearly expects any self-respecting journalist to test her
tongue—and she is ready with the parry.
“How smart would that be,” she sniffs, feigning being insulted that she could be baited, as if she just fell off the hay wagon in Washington.
Just the opposite, actually; Janet Woodcock is riding high.

Who`s Best for Corporate Coffers?

Financial Executive magazine cover story, September 2008

By Stephen Barlas

Arguably the longest and highest-profile presidential campaign in history, its days are now numbered. Here are some insights on what U.S. businesses can expect — beginning on Jan. 20, 2009 — Day One of the new administration.

During their campaigns for president of the United States, both Sens. Barack Obama (D-Ill.) and John McCain (R-Ariz.) have beaten — like dusty rugs — on corporate executives, and sometimes corporations.

They have battered mortgage executives for their severance packages. The two have wrapped their rhetoric around the necks of auto executives for shortsightedness. McCain tells pharmaceutical companies they “must worry less about squeezing additional profits from old medicines.” Obama promises to prevent drug companies from “abusing their monopoly power through unjustified price increases.”

To rein in executive compensation, Obama sponsored a voluntary “say on pay” bill. McCain has gone further, backing a mandatory vote by shareholders.

The two sometimes seem to be competing for the William Jennings Bryan “Populist of the Year” award. The times make their anti-corporate rhetoric understandable, if not necessarily justifiable. And, given their “villainization” of corporations, it is not surprising that neither candidate has tossed out a lifeline to companies sinking in a recession, some of which face borrowing costs of crippling magnitude.

Kingman Penniman, president of KDP Investment Advisors, says the rate of default on corporate high- yield bonds was somewhere around 2 percent in June. He expects an increase to 6 to 8 percent in 2009.

“This raises the premium on risk,” he explains. “There is a tremendous amount of reservation on the part of each of them [Obama and McCain] to come up with a solution at this time to a situation as volatile as this. They are probably trying to keep their powder dry as long as they can to see what unfolds,” says Penniman.

The Candidates, the Issues

Regardless of which candidate a senior finance executive is personally backing, it’s a good time to consider what it would be like if either McCain or Obama is elected, and which would be a better choice for the U.S. economy and business. For financial executives, the choice for this 2008 election is not easy. It is much less clear than either 2000 or 2004, when George W. Bush faced Al Gore and John Kerry, respectively. Obama and McCain are “peas in a pod” on numerous issues of importance to U.S. corporations.

They are essentially twins on immigration reform, foreign investment in the U.S., global warming and the need for industries to become more energy efficient and produce more energy-efficient products. Even on corporate taxes, the similarities between the two are striking.

Both would drop the corporate income tax rate, though Obama would not go as low as McCain. Both would continue the Bush tax cuts for those earning less than $250,000 a year. In fact, argues Alan Viard, a resident scholar at the American Enterprise Institute, one could make the argument that Obama is apt to be the deeper slasher of taxes.

A Democratic Congress would likely block a number of McCain’s proposals. It would likely approve many of Obama’s proposed new tax cuts aimed at correcting income inequalities, such as a new $1,000 work credit, an expanded child care credit and an expanded tax credit for low-income savers — all of which are income limited in an effort to restrict them to families earning less than $150,000 a year. “McCain is proposing more tax cuts; Obama will get more through,” Viard says.

Still, there are some differences between the two. Their positions on the AFL-CIO’s agenda are a chasm apart. Obama is more protectionist on trade; although without Sen. Hillary Clinton (D-N.Y.) to worry about, the Illinois Democrat has been softening his talk about the North American Free Trade Agreement’s shortcomings.

McCain has pushed for more U.S.-based oil and gas drilling, including offshore exploration, something Obama had opposed. In early August, however, he softened his position, saying he’d accept some offshore drilling. But even here the dichotomy is narrow, with McCain having pushed hard for higher auto-efficiency standards via sponsorship of legislation in 2002, two years before Obama arrived in Washington, and began to introduce his own gas-saving bills.

Many Beltway business lobbyists express an off-the-record, begrudging, “best of two evils” preference for McCain, citing his expected opposition to union-organizing legislation, his free-market orientation and his opposition to federal pork spending. Obama, meanwhile, is seen as a traditional liberal, reflexively hostile to corporate interests.

Tom Lehner, director of public policy for the Business Roundtable, which is neutral in the presidential race, says: “If Obama wins, expect him to reach out to outsiders and academicians without Washington experience. That’s been done in the past, with mixed results. Nell Minow and Rich Ferlauto are the kinds of people he might appoint as [U.S.] Securities and Exchange Commission commissioners.” Minow is editor and co-founder of the Corporate Library and Ferlauto is director of pensions and benefits policy for the American Federation of State, County and Municipal Employees (AFSCME). Both are strong proponents of investors’ rights.

Day One: Jan. 20, 2009

Regardless of which man lands in the Oval Office in January, the U.S. corporate world will find itself confronting a president who will be much less sympathetic to business positions on a range of issues than his predecessor George W. Bush. Add to that the likelihood of a more heavily Democratic Congress and the picture gets even more pessimistic. Nowhere will the change be starker than at the SEC.

Under Chairman Christopher Cox, the commission has not been as cuddly with business as groups as the U.S. Chamber of Commerce would have liked. Nonetheless, the agency under either McCain or Obama may make the Bush SEC look like Valhalla. “They have to be scared,” says one Washington lobbyist for shareholder groups, referring to the business community and particularly the outlook at the SEC. “It won’t be good for them either way; even with McCain, they won’t have the kind of salad days they have had with George W. Bush.”

Corporate reporting issues rarely draw headlines; so neither McCain nor Obama has been outspoken recently except for their comments on executive pay. But those with long memories may remember McCain as the Republican running buddy for Sen. Carl Levin (D-Mich.), both of whom pushed hard in the wake of the Enron scandal to resurrect a bill — Ending the Double Standard for Stock Options Act — which first came up for a Senate vote in 1994.

When the Enron scandal broke, McCain brought the bill back, saying on the Senate floor in February 2002: “This double standard is exactly the kind of inequitable corporate benefit that makes the American people irate and must be eliminated. If companies do not want to fully disclose on their books how much they are compensating their employees, then they should not be able to claim a tax benefit for it.”

Obama has been just as critical of the use of stock options. He said in New York on Sept. 17, 2007: “It’s bad for business when boards allow their executives to set the price of their stock options to guarantee that they’ll get rich regardless of how they perform. It’s bad for the bottom line when CEOs receive massive severance packages after letting down shareholders, firing workers and dumping their pensions; or when they throw lavish birthday parties with company funds.”

McCain and Obama’s similar positions on executive compensation and stock options raises the possibility that whomever becomes the next SEC chairman may steer the agency in an anti-business direction on upcoming issues, like the U.S. moving toward using International Financial Reporting Standards (IFRS), which Cox has been championing under Bush.

Neither Obama nor McCain have addressed the issue in campaign speeches thus far, and neither sits on the Senate Banking Committee, which has jurisdiction over such issues. But key Senate Democrats such as Sen. Jack Reed (D-R.I.), chairman of the Banking Committee’s Securities Subcommittee, have made it clear they will ensure that the SEC decelerates consideration of U.S. corporate use of IFRS once Cox leaves the SEC.

Corporate transparency will definitely be a watchword for 2009. Both McCain and Obama complained and assailed the “bailout” feature of the Federal Reserve’s rescue of Bear Stearns Cos. Inc. taking a populist tack by inveighing against corporate greed. They did not raise major objections to the underlying action, nor to the Fed’s extension of the program through Jan. 30, 2009. But Fed loans to investments banks will get very close scrutiny in the next Congress.

Obama supports new standards on how investment banks manage liquidity risk, which has been neglected in the past. Disclosure requirements would be heightened. “Though transparency cannot rectify everything that has gone wrong, it is imperative that we enhance information flows to shareholders and counterparties of financial institutions in order to increase market discipline, as well as greater disclosure of off-balance sheet risks, such as exposure to structured investment vehicles,” Obama says.

McCain’s 15-page economic plan does not mention regulation of investment banks. When U.S. Treasury Secretary Henry Paulson announced his plan to rescue Bear Stearns, McCain said it was “not the duty of government” to bail out irresponsible lenders. But that is about as much as he said overall on the subject.

A detailed profile of McCain, which appeared in The Washington Post on Aug. 1, quoted an anonymous financial markets expert who said he met with McCain this summer. The source told the Post that McCain spoke about the subprime crisis “only ‘in platitudes,’ relying on populist political talking points.” McCain did not seem to understand economics, or to be interested in the subject, said this person, who insisted on anonymity to discuss the meeting.

But McCain’s Teddy Roosevelt-like view of big business makes him just as likely as Obama to sign onto the corporate reporting/transparency legislation that Democrats — emboldened by the removal of a Bush veto threat — will undoubtedly be sending to 1600 Pennsylvania Ave. next year.

An example of the kind of Democratic bill that may land in a new president’s lap — and be signed — is Rep. Barney Frank’s (D-Mass.) Extractive Industries Transparency Disclosure Act (H.R. 6066). This legislation would force all U.S. natural- resource companies to report royalty, tax, profits and other payments they make to foreign governments for extraction rights to the SEC, to give shareholders a sense of whether the company was pursuing risky strategies with perhaps undependable Third-world countries.

Frank, who is chairman of the House Financial Services Committee, held two hearings on his bill in the past session of Congress; but an anticipated Bush veto has kept it tied to its moorings.

Trade and Global Competitiveness

Given the current state of the economy and unemployment, as president, either Obama or McCain will have to address the competitive position of U.S. companies abroad and their attractiveness as investment magnets at home. Discussion about NAFTA has exposed a fairly sizeable rift between the two, with Obama implying during the primaries, that he might make considerable changes in the agreement.

On his Web site, Obama states: “NAFTA and its potential were oversold to the American people” and that he will “use trade agreements to spread good labor and environmental standards around the world and stand firm against agreements like the Central American Free Trade Agreement that fail to live up to those important benchmarks.”

Trade is one issue where McCain is a traditional Republican. He traveled to Canada, Colombia and Mexico in June — much to the dismay of the AFL-CIO — and tried to split the difference on the issue, voicing understanding for the loss of jobs that trade agreements have sometimes led to, adding, in typical McCain fashion: “But for me to give up my advocacy of free trade would be a betrayal of trust.”

Skirting specifics on certain areas of world trade, neither candidate has descended very deep into, much less said anything penetrating on this issue. And though the Doha round of World Trade Organizations talks collapsed amid squabbling in early August, experts say WTO liberalization is critical to U.S. business hopes for new markets for export trade.

Perhaps of equal importance to business is access of foreign companies and foreign financing to U.S. markets. This is particularly important as businesses have looked overseas — especially to China and the oil-rich Gulf countries — for sources of capital, often hoping to attract investments in sovereign wealth funds. Investments in U.S. businesses by sovereign wealth funds, foreign governments and foreign companies must be reviewed by the Committee on Foreign Investment in the United States, known as CFIUS, if the acquisition target has some national defense or critical infrastructure component.

Composed of federal financial officials, CIFUS uses as its guide the Foreign Investment and National Security Act, a bill Congress approved last year that made some changes in the operation of CFIUS in the wake of the 2006 proposed acquisition of some U.S. ports by Dubai Ports World, a government-owned entity based in the United Arab Emirates. According to a private equity lobbyist in Washington, both Obama and McCain supported FINSA, and both are “generally supportive,” he says, of foreign direct investment in the U.S.

Corporate Taxes

Encouraging foreign sovereign wealth funds and companies to invest in U.S. companies is one thing; helping U.S. companies invest in themselves is another. Certainly, a reduction in the corporate income tax from 35 percent to 25 percent, which McCain has proposed, would do that. But there is little chance that McCain would get that 10 percentage-point rate cut through a Democratic Congress.

Democrats have been open to reducing the corporate rate as they understand U.S. companies pay considerably higher rates than their foreign competitors. Rep. Charles Rangel (D-N.Y.), chairman of the House Ways and Means Committee, supports a reduction of the rate to 30.5 percent, which is still considerably above the 28.5 percent average within the Organization for Economic Cooperation and Development member countries.

Obama would “pay for” the loss in federal revenue by, among other things, increasing the tax on capital gains and dividends and eliminating corporate tax law benefits. One Washington business lobbyist points out that Obama has spoken consistently about eliminating or reducing the ability of U.S. companies to defer payment of taxes on foreign-earned income. “If a company is trying to compete overseas,” she says, “deferral makes a lot of sense.”

Closing corporate tax “loopholes,” such as the ability to defer taxes on foreign income has been part of the AFL-CIO’s agenda for years; union leaders have been decrying corporate “inversion” since the turn of this decade, complaining that companies are locating overseas to avoid paying U.S. taxes.

The AFL-CIO’s agenda would resonate with Obama in numerous areas. When the union endorsed Obama in June, it noted that Obama has a 98 percent voting record on “working families” issues, compared to just 16 percent for McCain.

One of the highest-priority issues for unions is passage of the Employee Free Choice Act, a bill that would allow workers in a company to decide to be represented by a union based on a majority of them signing cards to that effect. There would no longer have to be an actual election. That bill passed the House by a vote of 241-185 in early 2007; but when it came to the Senate floor in June of that year, Democrats could only muster 51 votes in favor, nine short of the 60 needed for cloture, meaning the end of debate and start of a vote.

Obama voted for cloture; McCain against. David Chavern, executive vice president, chief operating officer, the U.S. Chamber of Commerce, says: “Obama has come out full force in favor of union card check legislation and a whole host of pro-union legislation.”

McCain did not vote when the Senate took up a second AFL-CIO priority in April, the Lilly Ledbetter bill (H.R. 2831), which would allow employees greater latitude to sue a company for back pay. Obama voted for the bill. McCain was one of two senators absent for the vote; once again, a labor bill failed to get 60 votes, getting 56 instead.

McCain was also absent for some key cloture votes in the Senate in May and June last year, when the immigration reform bill came to the floor. But there wasn’t any uncertainty regarding where he or Obama stood on this issue.

Both favored the Secure Borders, Economic Opportunity and Immigration Reform Act of 2007, which McCain helped write along with Sen. Ted Kennedy (D-Mass.) and Sen. John Kyl (R-Ariz.). The bill opens up a path to citizenship for illegal immigrants through a new “Z” visa and a new “Y” visa category for guest workers.

Business groups, such as the Chamber of Commerce, supported the bill — especially its new employer verification system, though the Chamber noted that some of the provisions were objectionable; but the more important objective was to get comprehensive reform through Congress, which Secure Borders generally would have been.

Health-Care Solutions Differ

Another area slated for comprehensive reform is health care. This is one of the few issues where McCain and Obama have stated substantive differences, though both agree on the need to do something about the 47 million Americans without health insurance.

McCain wants to give every family a refundable tax credit — cash towards insurance — of $5,000 ($2,500 for individuals). For those who still can’t afford insurance, even with the tax credits, McCain would work with governors to develop a best practice model that states can follow — a guaranteed-access plan (GAP) — that would reflect the best experience of the states to ensure the patients have access to health coverage.

One approach would establish a nonprofit corporation that would contract with insurers to cover patients who have been denied insurance and could join with other state plans to enlarge pools and lower overhead costs. There would be reasonable limits on premiums and assistance would be available for Americans below a certain income level.

Obama would be more aggressive about covering the uninsured. He would establish a federal insurance system open to anyone who is not covered by Medicaid or the State Children’s Health Insurance Program (SCHIP), the federal insurance program for low-income children, or whose employer does not offer health insurance. Employers who do not offer insurance to workers would have to pay additional payroll taxes.

It is unclear how Obama would force insurance companies to participate in his program, or how he would guarantee that premiums would be affordable. That would be less of an issue with McCain’s plan, since $5,000 would buy the kind of high-deductible health plan already available on the market.

Despite the press of “social issues,” such as health care and immigration, the flagging economy will probably subsume the early days of the next president.

One Washington think tank official, who worked in the George W. Bush administration, says a heightened attention to corporate governance — in the wake of the Fannie Mae and Freddie Mac problems, bank failures and corporate bond defaults — will be a priority for either Obama or McCain.

No matter who becomes president, he says, there will be close scrutiny of issues such as how compensation packages are dealt with, what the board responsibility is. “It doesn’t take a genius to see that.”

Stephen Barlas (sbarlas@verizon.net) is a freelance writer who has covered developments in Washington, D.C., for 26 years. His profile of SEC Chairman Christopher Cox in the July/August 2007 issue of Financial Executive recently won an Apex Award for editorial excellence.


CFOs and the Presidential Election:

FEI Member Survey

Results of FEI’s quarterly survey to members — conducted in early August — indicate a majority of respondents leaning toward Sen. John McCain as more favorable for their business than Sen. Barack Obama. This, at a time when overall results showed CFOs at an all-time low in economic optimism.

FEI quarterly surveys generally comprise questions on a variety of subjects based on current conditions. The following summarizes the respondent results concerning the presidential election:

Selection of the next president of the United States is currently a focus nationwide, and as CFOs gear up to hit the polls, they are evaluating which candidate’s policies best align with their companies. When asked which candidate, if elected to office, would be most beneficial to their company overall, an overwhelming majority of CFOs selected Republican presidential candidate McCain (71 percent), while only 13 percent of respondents chose Democratic presidential candidate Obama.

Respondents were also asked to gauge the impact that each candidate’s policies would have on their companies regarding issues such as health-care coverage, taxes, foreign trade/commerce, production and manufacturing costs and energy costs. On average, less than 10 percent of respondents felt that McCain’s policies would have a negative impact on any of these factors, while a majority of respondents felt that Obama’s policies would have negative impacts on taxes (87 percent) and production and manufacturing costs (60 percent). Collectively, CFOs appear to be unimpressed by both candidates' health-care policies, revealing that most do not believe that either candidate will help control health-care costs. While nearly three quarters of respondents (70 percent) stated that Obama's polices would have a negative impact on their companies, an even larger number of CFOs (74 percent) said McCain would have no impact. Only 15 percent said he would have a positive impact on their firms.

Caregivers Unite

Human Resource Executive, June 16, 2008

A growing number of workers are filing lawsuits, some as class-actions, against organizations they say punish them for attending to family and caregiving responsibilities.


By Stephen Barlas

With his mother suffering from congestive heart problems and severe diabetes and his father succumbing to Alzheimer's disease, Chris Schultz, a 26-year veteran of the maintenance staff at Christ Hospital and Medical Center in Chicago, did what any good son would do.

It was 1999. The hospital had just made him employee of the year, choosing him from among about 5,000 employees. His picture hung in the lobby. He never thought taking intermittent time off from work to care for his parents would jeopardize his job. After all, leave taken in dribs and drabs for personal or family health reasons is his guaranteed right under the Family and Medical Leave Act of 1993.

But Schultz thought wrong. After he began taking the leave, which ultimately stretched into many months, his supervisor set up new monthly work standards employees had to meet in the building-operations department. These "productivity" standards varied from employee to employee.

"They held me responsible for all this work when I wasn't there," said Schultz in 2002, after a federal jury in Chicago awarded him $11.65 million in damages, the largest jury award ever for a case in the ever-growing area of family responsibilities discrimination (FRD). "I tried my best to get the work done. It just took a toll on me. But my parents came first."

Ultimately, rather than go through an inevitable appeal at the U.S. Seventh Circuit Court of Appeals, Schultz and the hospital agreed on a confidential settlement. Cynthia Thomas Calvert, deputy director of the San Francisco-based Center for WorkLife Law, says it's her understanding that the case was settled for less than $11.65 million, "but not a whole lot less. When you have a verdict like that, there are some things an appellate court can do to trim the judgment, but not a lot."

It is the multiple and increasingly sky-high state and federal court judgments that help explain -- along with other factors -- the very significant increase in the number of FRD lawsuits filed in the very recent past, after a long fallow period beginning after the Supreme Court decided the first FRD case in 1971.

According to Calvert, there were nearly 300 verdicts in 2007 alone. They included three multimillion-dollar jury awards: a $3 million judgment against FedEx Corp., a $2.23 million judgment against Bimbo Bakeries USA Inc. and a $2.1 million verdict against Kohl's Department Stores. The FedEx and Bimbo Bakeries cases were filed under Title VII of the 1964 Civil Rights Act and California's Fair Employment and Housing Act, which allows plaintiffs to surpass the $300,000 damage cap on Title VII claims by alleging intentional infliction of emotional distress.

FRD lawsuits come in numerous sizes and flavors. They always jump off from allegations that an employee was disadvantaged in terms of pay, promotion and work because he -- and men are increasingly filing suits -- or she either took time off, legally (under the FMLA) to care for a child or a parent, or was perceived to be less qualified for a promotion track because of the worker's presumed preference for caregiving over career climbing.

These lawsuits are typically filed under Title VII, which outlaws sexual discrimination, and the FMLA. But cases have been filed under other federal laws, such as the Americans with Disabilities Act. In addition, there are numerous state laws that parallel those federal laws, plus additional individual state tort laws that also come into play. Whereas the Schultz $11.25 million jury verdict tops the individual-award category, class-action awards have reached $25 million.

In such a climate, human resource executives would be wise to examine policies and transparencies at their organizations, and study up on this category of discrimination fast taking hold in the employment law landscape.

Back to the Beginning

The Supreme Court opened the door to litigation back in 1971 in Phillips vs. Martin Marietta Corp. In that case, the court ruled that Martin Marietta discriminated against women who were mothers because the company barred mothers of school-aged children from applying for jobs that fathers of school-aged children occupied. But that court decision only rustled the sleeping giant; it didn't wake her.

Congress laid the groundwork for the surge of litigation when it passed the Civil Rights Act of 1991. That gave employees claiming sex discrimination the right to a jury trial, and the right to recover damages for emotional suffering and punitive damages.

"It is likely that both of these changes positively affected employees' decisions to file discrimination suits, including FRD suits," states a 2006 WorkLife Law report. "As one would expect, the number of FRD lawsuits resolved by the courts began to increase soon after the 1991 act."

The FMLA came along in 1993. As the legal launching pad was being spring-loaded by those 1990s laws, the children of baby boomers were entering the workforce starting in the late 1990s with stronger feelings about the need for flexible work schedules to accommodate family responsibilities.

It was this new generation, men and women in their 20s and early 30s, who provided the bodies for the catapult as the new century opened. Cases began to proliferate, and as juries began handing out substantial awards, plaintiffs' attorneys began trolling for cases, especially since discrimination cases appeared to be considerably easier to win than other ones.

Family-discrimination cases were already gaining momentum when Schultz filed his case -- but the $11.25 million verdict in 2002 may have really ignited the trend. It sent out a couple of loud messages, that really big money was available, that men could successfully win FRD suits, and that the baby boomers -- who perhaps had been slow in the 1970s and 1980s to use Title VII to combat workplace discrimination on their own behalf -- could take advantage of the FMLA to help out their elderly parents.

The Supreme Court sent the next loud message in 2006, when it re-entered the fray after first kicking off the FRD movement in 1971. The nation's top court said, in Burlington Northern & Santa Fe Railway Co. vs. White, "[a] schedule change in an employee's work schedule may make little difference to most workers, but may matter enormously to a young mother with school-age children."

The WLL's Calvert says the Burlington Northern case was very important because it built on an Illinois case called Washington vs. Illinois Revenue Service, in which an African-American, female plaintiff had charged that her employer retaliated against her for filing a racial-discrimination lawsuit by eliminating her flexible work schedule, which she needed to attend to her child with Down syndrome.

In the Burlington Northern case, Tennessee rail yard forklift driver Sheila White claimed her 37-day suspension and subsequent reassignment to more administrative tasks was gender discrimination and retaliation for her having lodged a complaint with the company about sexual advances from a supervisor.

In that case, the Supreme Court established a new standard on what actions constitute retaliation under Title VII. The court opinion said retaliation under Title VII is not limited to the actions and harms that are "related to employment or occur at the workplace." Rather, it covers any employer action "that would have been materially adverse to a reasonable employee or job applicant."

The Burlington Northern decision underscored the nuances of the civil-rights laws as they applied to caregivers, and convinced the Equal Employment Opportunity Commission that some of those nuances were smudged and needed a little Windex.

So, in May 2007, the EEOC issued a guidance document called Unlawful Disparate Treatment of Workers with Caregiving Responsibilities .

Camille Olson, a partner of Chicago-based Seyfarth Shaw LLP and a member of its labor and employment law steering committee, says most employers were pretty surprised when they read the EEOC guidance. Olson has represented numerous employers in FRD lawsuits. Companies weren't aware that "caregivers," as a category, were protected under Title VII, Olson says.

"But it is the EEOC's view that there is a sufficient nexus between the issue of caregiving responsibilities and someone's gender to bring it under Title VII," Olson says. "The EEOC really reaffirmed what employers and managers should already know, that you cannot stereotype people, not even in a benevolent way, in terms of what they will or won't want to do in the workplace based on them being a caregiver."

The EEOC guidance -- even though it simply reiterated what all companies should have known for years -- probably proved valuable for some of them. But it may have bounced off the front door of other organizations where stereotyping is still de rigueur among managers. That was the allegation the EEOC tossed at Bloomberg L.P., according to Lisa Sirkin, supervisory trial attorney in the New York District Office of the EEOC.

Sirkin's office filed a class-action lawsuit against Bloomberg in October 2007, alleging that the media company discriminated against female employees who became pregnant and took maternity leave. In its suit, the EEOC asserted that Bloomberg engaged in a pattern of demoting and reducing the pay of female employees after they announced their pregnancies and after they took maternity leave. Some women were replaced by more junior male employees, the EEOC said.

The lawsuit also alleged that the same pregnant women and new mothers were excluded from management meetings and subjected to stereotyping about their abilities to do their jobs because of their family and caregiver responsibilities.

Complaints made by the women to Bloomberg's human resource department were dismissed, according to the EEOC.

"In these kinds of cultures, those kinds of actions are not seen as discrimination, but as acceptable," says Sirkin. Bloomberg declined to agree to a settlement, and the case probably will not go to court for a couple of years, says Sirkin.

She contrasts Bloomberg's allegedly illegal actions with what would be, in individual cases, a perfectly legal approach: discussing with a pregnant woman what her options will be upon her return to her job, the impact those options would have on promotion, pay and other work-related benefits, and then allowing the woman to make the choice that is right for her.

A Bloomberg spokeswoman did not respond to requests for comment.

Complex Issues

The issue of disparate treatment of caregivers, be they male or female, is not always clear. For example, a company's refusal to promote a mother with young children could just as easily be the result of her work history before coming to that company, her performance on the job or her failure to apply for a particular job opening. "That is where the debate is being waged in the courtroom," says Olson.

That is why it is important, she adds, for a company to have transparent leave and promotion policies, ones that are, for example, posted on the company Web site. The way those policies are applied to each individual should be documented. Beyond that, though, employees should understand how they get to an upper promotion track. "A lot of companies are doing a great job identifying high achievers, making sure they have well-rounded portfolios," Olson says.

Training is another important component. "Upper management should literally have conversations with its managers, not about what a particular law requires, but how they should view employees, how you promote employees, looking at the actual protocol," Olson says. Sirkin suggests that companies include a supervisor's handling of caregiving issues in that supervisor's performance review.

In the end, fair, legal, enlightened employee-leave and promotion policies are good business. "It is much cheaper for a company to retain a good worker than to go out and find a new worker and train her," says Calvert. "Also, employee continuity leads to better morale and accrues to the bottom line. There are many reasons to get rid of FRD in the workplace."