How Steel got the Wachovia deal done

Kovacevich was one of the most respected bankers in the industry, and his reputation continued growing as rivals cratered. In perhaps the biggest sign of his success, Warren Buffett was Wells Fargo's largest investor.

In 2007, Kovacevich had handed the CEO title to his longtime number two, John Stumpf, but stayed on as chairman. He was set to off-load that title at the end of the year and fully retire. This would be his chance at one more gamechanging deal.

At the Sunday-morning meeting, Kovacevich again told Steel he thought Wells could make a stock offer for all of Wachovia without government help, pending the bank's review of Wachovia's books. Wells Fargo's price wouldn't be in the $20-per-share range, Kovacevich said.

Steel and Carroll left the meeting optimistic. The debate inside Wachovia was whether the offer from Wells would be in the high or mid-teens per share.

By the afternoon, Wells was growing comfortable with Wachovia's option adjustable-rate mortgage portfolio, but the credit team was starting to worry about some of the bank's commercial loans. Wells was experienced in the mortgage business but had little background in corporate and investment banking. Wachovia officials tried to assuage any concerns but started to worry about Wells Fargo's waning enthusiasm.

Kevin Warsh, at the Federal Reserve in Washington, talked with both Steel and Kovacevich during the weekend. On Sunday after the breakfast meeting, Steel seemed positive about a possible Wells deal. To Kovacevich, Warsh repeated the message he had sent to Goldman Sachs (GS, Fortune 500) when it was looking at Wachovia a week earlier: If Wells was willing to pay a positive share price, the Fed could help facilitate the talks, especially since it was the primary regulator that approved these types of bank deals. But if the bank wasn't, Kovacevich needed to talk to Federal Deposit Insurance Corp. Chairman Sheila Bair, whose agency had procedures for dealing with failing banks.

As Wells did more due diligence, the price Kovacevich told Warsh he was willing to pay kept coming down. By the afternoon, he was no longer willing to do the deal without government help. Inside the Fed, a debate raged over whether or not Wachovia should be turned over to the FDIC if an unassisted deal couldn't be worked out. Officials kicked around the idea of some type of bridge loan if Wachovia needed help staying afloat until a deal could be reached, but that idea didn't go far. In the end, Fed officials decided Wachovia's resolution should be handled by the FDIC.

That afternoon, Bair waited at home to see if Wells agreed to buy Wachovia, but word never came. She called Warren Buffett to get a number for John Stumpf, the Wells Fargo (WFC, Fortune 500) CEO. The deal was off, Stumpf told her.

Around four o'clock, she started notifying her staff and drove to the FDIC's headquarters in Washington a short distance from the White House.

Shortly after reaching her office, Bair got a call from Ben Bernanke. The Fed would be willing to make a "systemic risk" determination related to Wachovia, the designation required to allow an open-bank assisted transaction.

The FDIC was required to use the "least costly" method to the deposit insurance fund to resolve failed banks. Assistance to open banks was generally barred because it would benefit shareholders. But a 1991 law allowed the FDIC to make an exception to this requirement in the case of systemic risk to the financial system. The provision required the recommendation of two-thirds of the Fed board and two-thirds of the FDIC board, plus the approval of the Treasury secretary after consultation with the president. To date, regulators had never used this exception.

After Bernanke's call, Bair heard from President George W. Bush's chief of staff, Josh Bolten, a former Goldman Sachs banker. The White House supported a systemic risk determination as well. The Federal Reserve had approved Wachovia's purchase of option ARM lender Golden West Financial Corp., and the Office of the Comptroller of the Currency had been the Charlotte bank's primary regulator. But now the FDIC had to deal with Wachovia's collapse. The FDIC's receivership staff called Citi (C, Fortune 500) and Wells to let them know it was going to take bids that night for a government-assisted transaction. A deal had to be arranged by Monday morning.

Around seven o'clock that night, Kovacevich called Steel, who was waiting with the Wachovia team at Sullivan & Cromwell law offices in Midtown Manhattan. Wells wasn't prepared to do a deal on such a short timetable without government assistance, the Wells Fargo chairman told Steel.

It was a wrenching blow for a group that had thought it was close to an agreement after watching deal after deal fall apart in the past two exhausting weeks.

Most of the executives had been up since early Saturday. Few had found time for showers or naps. They were surviving on takeout food and adrenaline.

Now, some executives thought they might be out of options. They knew Citi was still out there, but government assistance wasn't a sure thing. The unthinkable was happening. The bank might fail.

Not long after that, Bair called Steel, whom she knew from his days at Treasury.

The government had determined that Wachovia was a systemic risk to the financial system, and the FDIC planned to use its open-bank assistance powers.

The FDIC had contacted bidders and would call back with the results. This doomsday scenario was actually good news for Wachovia.

At some point that evening, Bair, continuing to review all options, considered a more severe outcome for Wachovia.

The FDIC chairman mulled failing the bank and disposing of its assets without an assisted transaction. Such a move could wipe out shareholders and damage bondholders. But this approach could also potentially result in zero losses to the deposit insurance fund, as in the sale days earlier of Washington Mutual operations to JPMorgan Chase. FDIC accountants also worried that if the agency booked an unexpected loss from an assisted transaction, it would be legally required to levy special assessments on other banks, adding more stress to the financial system.

Officials at the Fed and the OCC pushed back. Failing Wachovia would be a disaster for a financial system already reeling from the collapse of Lehman Holdings Inc. and WaMu. The Charlotte bank was far bigger and much more complicated than the Seattle thrift. Seeing the resistance, Bair continued with the bidding process.

Around nine that night, Wachovia held a board meeting to update its directors. A decision was likely in the next several hours.

Around 11, someone in the conference room with Steel, Sullivan & Cromwell attorney Rodgin Cohen, and Wachovia general counsel Jane Sherburne said they should revive a proposal they had set aside earlier in the weekend: A request for government aid as a stand-alone company. The idea had lost traction when it appeared Wells was going to do an unassisted deal. Around the same time, investment bankers from Goldman and Perella Weinberg, who were advising Wachovia over the weekend, burst into the room with the same idea.

This brief moment of hope gave the demoralized team something to do while Wachovia awaited the FDIC's decision. In the offer Wachovia crafted, the FDIC would share losses on $200 billion to $225 billion of the bank's worst assets. Wachovia would take the first $25 billion in losses, issue the government $10 billion in preferred shares, and raise another $10 to $15 billion in capital.

Wachovia thought the offer was less expensive than Citi's, which would call for the FDIC to cover $312 billion in assets, with Citi taking the first $42 billion in losses. The other positives: It would require no shareholder vote, it could be done in seven to 10 days, and it would keep the company in one piece. Cohen e-mailed Bair with the proposal around 12:30 a.m.

The FDIC considered the proposal but rejected it based on economics and a concern that financial markets wouldn't perceive Wachovia as a viable standalone institution even with the aid. Bair thought Wachovia needed to be paired with a stronger institution. The FDIC wasn't in the business of rescuing banks that made bad business decisions.

As the night went on, Bair became increasingly exasperated by Wells. It was taking hours for the San Francisco bank to deliver its bid. Wachovia executives didn't even know Wells Fargo was still in the running.

The other regulators were also frustrated with Bair, whom they felt was still resistant to pulling the trigger on an assisted deal. The FDIC, however, had to weigh the merits of two deals and was analyzing if it might be forced by law to levy the special assessment on the rest of the banking system, which would hurt the earnings and capital levels of other struggling financial institutions.

The logjam finally broke when FDIC analysts determined the cost of the Citi package was likely zero. That was because Citi was taking the first losses on a pool of assets and paying the government $12 billion in preferred stock and warrants. In the Wells offer, the FDIC would share in the first loss on a pool of assets, guaranteeing that it took a hit.

At four in the morning on Monday, September 29, Bair declared Citi the winner of the auction. She called Steel with the news. He asked why the independent plan didn't win out and was told Wachovia needed a partner. The explanation made Wachovia officials wonder if Citi was also in need of help.

Wachovia had only a few hours to assent to a nonbinding "agreement-in-principle" that laid out the basic terms of the transaction. Under the offer, Citi would acquire Wachovia's banking operations for $2.16 billion in Citi cash and/or stock-essentially $1 per share-while the FDIC would assume up to $42 billion in losses on $312 billion in assets.

Wachovia continued to push Citi to buy all of the company but was rejected. An independent Wachovia holding company comprising asset management and brokerage businesses would remain after Citi plucked out the banking operations.

At 6:04 a.m., Bair presided over an FDIC board meeting to give approval for the agreement. More than two dozen officials participated either in person or by telephone. Normally much more formally dressed, the officials and staff members wore blue jeans and other casual clothes during the hectic weekend in the office.

Bair was stationed in her normal position on the dais at the front of the agency's wood-paneled boardroom. Since staff advised that Wachovia's banking units were "in danger of default," the five FDIC board members unanimously agreed to approve the Citi deal, finding Wachovia's failure would have "serious adverse effects on economic conditions or financial stability."

Treasury secretary Henry Paulson, limiting his contact with Wachovia because of Bob Steel's past role as one of his lieutenants, had gone to bed thinking the bank would be sold to Wells. That meant one of his deputies, David Nason, had to call Josh Bolten at the White House to officially get the president's systemic risk consent. The Fed also signed off on the decision, meeting the legal requirement for a systemic risk determination.

The Wachovia board met by telephone at 6:30 a.m. Steel had made a quick trip to his home in Greenwich, Connecticut, for a shower and a change of clothes and looked more refreshed than the others gathered in the Sullivan & Cromwell conference room. He explained the situation: Wachovia needed to sign the agreement-in-principle with Citi and the FDIC or face the prospect of being placed in receivership, resulting in a likely bankruptcy filing. The board didn't have much of a choice. The directors backed the Citi deal unanimously.

The board meeting lasted until about 7:30 a.m., leaving only a half-hour until the FDIC planned to publicly announce the deal. Lawyers from Citi's outside law firm, Davis Polk & Wardwell, e-mailed over the nonbinding agreement-in-principle, plus a second document.

Sherburne signed off on the agreement-in-principle but asked about the second document. A lawyer on speaker phone said it was an exclusivity agreement barring Wachovia from talking to any other parties about a deal.

"I have to read it," Sherburne said.

"Just sign it. Just sign it," the lawyer said.

"I'm not signing something I haven't read," she snapped before flipping through the pages.

Sherburne noticed the exclusivity agreement had no end date. She penned one in for a week later-October 6, 2008-and scribbled her initials.

At 7:55 a.m., Sheila Bair sent an e-mail with only a subject line to the FDIC board: "Wachovia and Citi Boards have approved the terms of the transaction."

--Rick Rothacker has been covering banking for the Charlotte Observer since 2001. "Banktown" is based on reporting for the Observer, new interviews, court documents, securities filings and other research.  

Tennessee Commerce gets hit with regulatory actionRenewable energy: The government piggy-bank

After a drug conviction, can you ever get hired?

Dear Haunted: You're far from alone. Consider: Sterling InfoSystems conducts several million background checks on job applicants annually and has found that "the percentage of people with some kind of criminal record has been rising steadily for years now," says CEO Bill Greenblatt. "Currently, about 10% of all applicants we screen have been convicted of something."

That's partly because of the relatively recent nationwide crackdown on driving under the influence. "It isn't necessarily that more people are doing it," says Greenblatt. "But more people are getting caught."

His advice: Since your conviction was a one-time thing 14 years ago, and you've stayed out of trouble ever since, consult an attorney about getting your record expunged. "Often in this situation you can find a judge who agrees with you that this single dumb mistake in your past shouldn't follow you through the rest of your life," notes Greenblatt.

Talkback: Would you hire someone with a criminal record? Leave your comments at the bottom of this story.

But let's suppose that doesn't work. Now what? As you may already know, federal civil rights law prohibits employers from having blanket policies against hiring ex-offenders.

"The EEOC's position is that, if you're going to refuse to hire someone because of his or her criminal record, you must have a legitimate business reason for it. There has to be a connection between the offense and the job," explains David Gevertz, head of the employment practice at law firm Baker, Donelson, Bearman, Caldwell & Berkowitz in Atlanta. State laws in this area require the same thing.

Of course, what the law says and what hiring managers actually do can be quite different. So a movement is afoot among some unions and civil rights organizations to remove the "Have you ever been convicted...?" question from the initial application for any job. "Ban the box"-ers wouldn't allow employers to ask about convictions "until the person has reached the interview stage and gets a chance to explain," Gevertz says.

In the meantime, when you check the box on applications, find room on the form to explain the basics -- that it was a youthful mistake with drugs 14 years ago and that you've stayed out of trouble since.

If you do get to the interview stage -- which isn't easy these days even for job seekers with no convictions -- "be completely upfront about what happened, and bring it up before the interviewer does," Greenblatt advises. "The last thing you want is to appear to be hiding anything."

This is particularly true in your case, he adds, because companies' worries about network and database security make it imperative that IT staffers have squeaky clean backgrounds.

"In some states, employers can and do refuse to hire ex-felons for IT positions," he says. "But different companies have different policies, so keep trying. You might also stay away from big banks, and big companies in general, which tend to have policies set in stone. Small companies with fewer hard and fast rules are a better bet."

For any job seeker hoping to overcome a criminal conviction, here are four useful resources:

Your state's "one stop" career-services agency, job bank or career center. Every state has one; you can usually find it through the Web site of your state's Department of Labor.

"They all have people on staff who specialize in connecting ex-offenders with job opportunities," says Cheryl Naill, who does this job in York, Pa. "I constantly update my list of employers who are willing to take advantage of federal and state tax credits for hiring ex-felons."

Tax credits? Yes, up to $4,800 for each hire -- because if ex-offenders can't find jobs, she says, "the financial burden on taxpayers is huge."
The National Reentry Resource Center, a nonprofit clearinghouse for information about government funds earmarked for companies and community groups that hire ex-offenders.The National HIRE Network, a research and advocacy group that "can give you specific strategies for expunging your conviction, state by state -- using legal processes that are in place but not often used because people don't know about them," says David Gevertz.The Self Reinvention Corporation, a nonprofit that has created business incubators for new enterprises that have hired thousands of ex-felons.

Good luck.

Talkback: Would you hire someone with a criminal record? If you've found work despite a record, how did you do it? Tell us on Facebook, below. 

Shoppers are choosy in shaky economyJobless claims slide more than expected

Consumer Confidence

July's reading was lower than expected. Economists had forecast the index to have ticked down to 51 in July from 52.9 in June, according to a consensus estimate from Briefing.com.

"Consumer confidence faded further in July as consumers continue to grow increasingly more pessimistic about the short-term outlook," Lynn Franco, director of the Conference Board Consumer Research Center, said in a statement. "Concerns about business conditions and the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves."

Before the sharp drop in June, the consumer confidence index had risen for three straight months. And while the latest reading of 50.4 is much higher than the record low of 25.3 hit in February 2009, it is still significantly below 90, a level that typically indicates a stable economy.

The decline in consumer confidence in July was driven by lower expectations about short-term economic improvement and more pessimism about the present state of the economy.

The index's expectations component slipped to 66.6 in July from 72.7 in June, while the present situation component, which tracks consumers' expectations over the next few months, fell to 26.1 from 26.8.

Consumers were also increasingly gloomy about job prospects this month, with 14.3% of consumers anticipating more jobs in the coming months, down from 16.2% in June.

They had reason to worry, since the government's closely watched jobs report for June showed that the U.S. economy lost jobs for the first time this year.

July's report is expected to show a loss of 116,000 jobs, following the decline of 125,000 in June.  

Report shows what to expect in consumer recoveryConsumer Confidence

Manufacturing (ISM)

While the report shows growth in the manufacturing industry slowed during the month, July's number is slightly better than analysts expected, showing higher employment, supplier deliveries and prices in the industry.

Economists surveyed by Briefing.com were expecting a reading of 54.2.

"July marks 12 consecutive months of growth in manufacturing, and indications are that demand is still quite strong in 10 of 18 industries," Norbert Ore, chairman of the Tempe, Ariz.-based ISM's Manufacturing Business Survey Committee, said in a statement.

Of the 18 industries surveyed in the report, 10 reported growth. Plastics and rubber products, electrical equipment and appliances were among the industries showing the strongest growth.

Overall, manufacturing growth has slowed for the last three months, with the index dropping about 5 points from the 60.4 reading in April that was the fastest growth rate in six years. The slowdown is consistent with an overall easing in the economic recovery, said Paul Dales, an economist with Capital Economics.

"July's ISM survey provides further evidence of what we have been expecting all along; a fading of the economic recovery in the second half of this year and into next year, but no second recession," he said in a note to investors.

The employment section of the index reported a jump in hiring in the industry, which is an optimistic sign for the economy overall, said Dan Meckstroth, chief economist with the Manufacturers Alliance/MAPI .

Uncertain about the recovery, firms have been reluctant to boost their hiring and, instead, have been increasing hours or productivity in other ways. A boost in manufacturing jobs likely means that firms are confident there will be a lot of new orders in the pipeline, Meckstroth said.

The report brought two other encouraging signs: exports are growing faster than imports, and inventories expanded in July after contracting for the previous three months.

Meckstroth expects to see stronger overall growth in August in the machinery and high-tech sectors, as factories use their extra cash to make selective improvements to their equipment to further increase productivity.

The ISM index reflects the number of people who say economic conditions are better, compared with those who say conditions are worse.

While the index can paint a picture of broad trends, some analysts warn that because it stems from a survey, the index can be subjective.  

Manufacturing jobs make comeback in TNManufacturing (ISM)

Consumer spending picks up

She also noted the spending jump was linked to a rise in car sales, which could be "a seasonal quirk" because some auto plants stayed open in the summer.

Income and savings: Personal income edged up $30 billion, or 0.2%, last month, following a revised 0.1% decline in June, the Commerce Department said.

A consensus of economists polled by Briefing.com expected personal income to climb 0.2% in July.

Monday's report also showed consumers were saving less in July. Personal savings as a percentage of disposable income rose 5.9%, down from last month's downwardly revised 6.2% in June.

June 2010's savings rate was the highest since June 2009, when the reading came in at 6.7%.

"Even though the savings rate edged down over the month, it's still very high," Khan said.

Paul Dales, U.S. economist at Capital Economics, agreed the savings rate "remains high by the standards of the last 20 years."

Households are set on paying down their debt, which will help the economy in the medium term, Dales wrote in a research note. But that benefit will take time, and it will hurt near-term growth.

"Overall, the U.S. economy cannot rely on households to lift it out of its current funk," he said. 

Bankruptcy filings reboundRetail Sales

More Dems back tax breaks for the rich

However, the Senate Democrats don't have the 60 votes needed to beat back a filibuster and pass Obama's tax plan, a Senate Democratic aide confirmed. Sen. Ben Nelson, D-Neb., Sen., Kent Conrad, D-N.D. and Sen. Joe Lieberman, a Connecticut Independent who caucuses with Democrats, have all recently said that raising taxes -- even for the rich -- doesn't make sense while the economy is faltering.

They all say they'd favor some kind of temporary extension of the Bush tax cuts -- for a year or possibly 18 months -- including for those in the top income bracket.

Friday topped off a week of economic bad news, including plunging home sales and a downward revision in the Gross Domestic Product numbers.

These reports are prompting more Democrats to call for all sorts of tax cuts, including those that benefit the wealthy.

Rep. Harry E. Mitchell, D-Ariz., said in a letter sent Friday to House Speaker Nancy Pelosi that he wants to make the Bush era tax cuts on capital gains and estate taxes permanent.

"With today's news that the nation's gross domestic product expanded at only a 1.6 percent annual rate for the second quarter, I once again urge you to allow a vote on the extension of key tax cuts that are about to expire," Mitchell wrote.

0:00/4:21Obama vs. the rich

The Bush tax cuts are particularly controversial. Republicans passed the tax cuts back in 2001 and 2003 and they're set to expire at the end of this year.

Under the White House plan, the top two tax rates would revert to where they were in the late 1990s: The 35% rate would go to 39.6% and the 33% rate would go to 36%. The highest-income filers would also see their tax rates on capital gains and dividends go up.

Making tax cuts permanent just for families making less than $250,000 would cost estimated $2.2 trillion over 10 years. Extending tax cuts for everyone costs $3 trillion over 10 years.

Rep. Chris Van Hollen, D-Md., who runs the Democratic Congressional Campaign Committee, said Friday that House Democrats have secured votes needed to pass the Obama-proposed plan of limiting tax cuts for middle class families.

But, Van Hollen acknowledged that the onslaught of bad economic news has given some Democrats pause about allowing the tax cuts to expire for those in the top income bracket.

"Obviously you have a variation of opinion in the Democratic Caucus," Van Hollen said. "There are obviously different variations (of tax breaks) that are possible; but anything you do has got to get out of the Senate."

And that's why the House wants the Senate to go first on the Bush tax cuts. The House has spent the last two years watching the Senate struggle with stalemates over other high profile Obama policy priorities, including health care reform, Wall Street reform and small business lending assistance, all of which passed more easily and quickly in the House.

The Senate returns from recess the week of Sept. 13. But Senate leaders have been "discussing all options," because they lack the votes to pass the Obama plan on tax cuts as planned, Senate Democratic aides confirm.

Senate Budget Chairman Kent Conrad, D-N.D., a fierce deficit hawk, said last month that he would be reluctant to let anyone's tax cuts expire just yet.

"In a perfect world, I would not be cutting spending or raising taxes for the next 18 months to two years" Conrad said. "This downturn is still very much with us unfortunately."

- CNN Political Producer Peter Hamby and CNNMoney's Jeanne Sahadi contributed to this report.  

Raise taxes now — the elders of the economy say soU.S. rethinks subsidies for home ownership

Manufacturing (ISM)

While the report shows growth in the manufacturing industry slowed during the month, July's number is slightly better than analysts expected, showing higher employment, supplier deliveries and prices in the industry.

Economists surveyed by Briefing.com were expecting a reading of 54.2.

"July marks 12 consecutive months of growth in manufacturing, and indications are that demand is still quite strong in 10 of 18 industries," Norbert Ore, chairman of the Tempe, Ariz.-based ISM's Manufacturing Business Survey Committee, said in a statement.

Of the 18 industries surveyed in the report, 10 reported growth. Plastics and rubber products, electrical equipment and appliances were among the industries showing the strongest growth.

Overall, manufacturing growth has slowed for the last three months, with the index dropping about 5 points from the 60.4 reading in April that was the fastest growth rate in six years. The slowdown is consistent with an overall easing in the economic recovery, said Paul Dales, an economist with Capital Economics.

"July's ISM survey provides further evidence of what we have been expecting all along; a fading of the economic recovery in the second half of this year and into next year, but no second recession," he said in a note to investors.

The employment section of the index reported a jump in hiring in the industry, which is an optimistic sign for the economy overall, said Dan Meckstroth, chief economist with the Manufacturers Alliance/MAPI .

Uncertain about the recovery, firms have been reluctant to boost their hiring and, instead, have been increasing hours or productivity in other ways. A boost in manufacturing jobs likely means that firms are confident there will be a lot of new orders in the pipeline, Meckstroth said.

The report brought two other encouraging signs: exports are growing faster than imports, and inventories expanded in July after contracting for the previous three months.

Meckstroth expects to see stronger overall growth in August in the machinery and high-tech sectors, as factories use their extra cash to make selective improvements to their equipment to further increase productivity.

The ISM index reflects the number of people who say economic conditions are better, compared with those who say conditions are worse.

While the index can paint a picture of broad trends, some analysts warn that because it stems from a survey, the index can be subjective.  

Manufacturing (ISM)Manufacturing jobs make comeback in TN

Bush tax cuts: Republicans stretch the truth

So goes the current debate over the Bush tax cuts.

To start, not a single important Democrat favors letting all the Bush tax cuts expire at the end of the year, as the Republicans on the House Ways and Means Committee allege. Ever since his campaign for president, Obama has vowed not to raise taxes for anyone making $200,000 or less -- a pledge I wish he had never made, but one he has nonetheless kept.

Obama's 2011 budget explicitly calls for extending nearly all of those tax cuts (except for the highest-earning 3% of taxpayers).

Leading Democrats Finance Committee chairman Max Baucus, Senate leader Harry Reid, House Speaker Nancy Pelosi and Ways and Means Chairman Sandy Levin all favor continuing the tax cuts, at least for the middle-class. Relative to current law, this would cut taxes by $3 trillion over 10 years.

So to say that "on Jan. 1, 2011, Democrats will drop a $3.8 trillion tax increase on American small businesses and families" is -- not to put too fine a point on it -- a lie.

Then there is the matter of whether allowing all the Bush tax cuts to expire, would, in fact, be "the largest tax hike ever."

By any fair measure, that's not true either. To be sure, it would be a very big tax increase, raising revenues by about 2% of gross domestic product.

But the biggest ever? Not by a long shot. Back in 2006, Jerry Tempalski at the Treasury Department measured the relative size of all major tax bills just since 1940 (which fits pretty well into the definition of "ever").

This is what he found: The Revenue Act of 1941 raised taxes by an average annual rate of 2.2% of GDP, more than the impact of letting all the Bush tax cuts expire. The Revenue Act of 1942 was even bigger. It raised taxes by a whopping 5% of GDP. Remember, we used to pay for our wars in the old days, instead of leaving the bill to our grandchildren.

And, in case you were wondering, the three major tax increase bills signed by President Reagan -- TEFRA of 1982, the Social Security Amendments of 1983 and the Deficit Reduction Act of 1984 -- raised taxes by a combined 1.6% of GDP, not much less than what we are yelling about today.

We've been here before: Now, there is nothing new about this "biggest tax cut ever" canard. Republicans said it about President Clinton's 1993 tax increase, which actually raised taxes by 0.63 percent of GDP. They trotted it out again in their campaign against Obama's health bill.

Myron Ebell at Human Events probably wins the breathless rhetoric award, however. He called last year's House energy bill the "the biggest tax increase in world history." Whew.

This isn't to say Democrats won't stoop to their own overheated hyperbole. Just listen to what some on the left say about efforts to reform Social Security.

But there ought to be limits to this stuff, even in Washington. Words still mean something and just as Republicans went far over the line last year with their accusations about death panels in the health bill, they are doing it again this year with taxes. They should be ashamed. 

Raise taxes now — the elders of the economy say soTax law fix tied up in Congress

Ask for a bigger salary -- and get it

Dear S.T.: Ah! No surprise that you were caught off guard. You've been hit with the dreaded so-called "pre-offer." Gary Bergmann, a senior consultant at Boston-based outplacement and executive coaching firm ClearRock, says he has been seeing more and more pre-offers in recent months.

"This is a way for employers to feel out someone they want and get an idea what salary it will take to land that person, without having to make a formal offer first," he says. "They're telling you they want to make only one written offer they know you will accept."

The bright side is that they apparently want your talented self. The tricky part, as you've noticed, is that they've put you on the spot and made you play a guessing game.

"The rest of the compensation package -- including medical, dental, vacations, bonuses, 401(k) contributions, stock options if any, and so on -- can easily have an impact on what salary range would be acceptable to you," Bergmann notes. "It's not likely you can make a sound business decision if you have only a small part of the information you need."

Hence his advice to his coaching clients who get pre-offers: "If you receive a pre-offer, you should pre-negotiate." How? The ideal way to answer the question would have gone something like this: "My base salary requirements are flexible depending on the rest of the compensation package. Given that my qualifications are an excellent fit for this job, I believe a fair salary range would be between $X and $Y, again depending on the rest of the package. Is that within the range you have in mind?"

This approach "gets the right conversation started and quickly indicates that you need to know more than just the potential base salary," says Bergmann. "Once they provide you with all the facts, you can have a more balanced discussion."

Talkback: Have you ever gotten a "pre-offer"? How did you handle it? Leave your comments at the bottom of this story.

Okay, so they blindsided you, and you had to think fast. You'll be better prepared next time, but it's still not too late to remedy this situation. "Remember that the best time to negotiate is after an offer has been made and before you have accepted it," says Bergmann. "Once the offer is made, the balance of power shifts from the one making the offer to the one considering it, so be prepared to use this leverage to your full advantage."

In practical terms, this means that, if the company has still not made you a formal offer, you have to get busy and figure out the fair market value of the job you're up for. Bergmann recommends checking out pay ranges for comparable jobs on Web sites like Salary.com, JobNob.com, and GlassDoor.com, as well as asking recruiters (if you know any), and seeking out salary survey data from trade associations.

Then, when and if a formal offer comes your way (with information about benefits included), compare it with what you've learned about compensation in similar jobs. Take your time. "Don't reject a low offer on its face without asking why it's below fair market value," Bergmann advises.

On the other hand, don't be too quick to jump at a big salary, "even if it's beyond your expectations," he says. If the offer is way out of line with what similar jobs pay elsewhere, there is probably a reason for that too. Try, tactfully, to find out what it is. If, for example, the last 5 people hired for this job quit within a year because the boss is an unbearable tyrant, you're better off knowing that now than discovering it later.

Let's say the company takes you at your word and makes you an offer based on the figure you already gave them -- and you find out, through your research, that it is on the low side. Or let's say the salary is okay, but the benefits turn out to be skimpy.

"Always ask permission to negotiate," Bergmann suggests: "Instead of diving right into the heat of battle with 'I feel I deserve a higher salary because of my credentials,' for instance. A stronger opening would be, 'With regard to the salary (or vacation time or whatever the sticking point is), I'd like to know if you have any flexibility with that.' If the answer is 'no,' move on to the next point. If the reply is, 'What did you have in mind?' you've been given the green light."

One more tip from Bergmann: "Use the word 'need' rather than 'want' when you negotiate, to underscore what it will take for you to accept the job." Good luck.

Talkback: Have you ever gotten a "pre-offer"? How did you handle it? What are the best secrets for negotiating salary? Tell us on Facebook, below. 

Senate to vote on $27 billion in aid for desperate statesHealthier Ford will again pay chairman

Jobless claims slide more than expected

Economists surveyed by Briefing.com were expecting new claims to fall to 485,000.

Claims had been stuck in the mid- to upper-400,000 range for about nine months, but spiked above 500,000 for the first time since November in last week's report.

"The latest numbers provide a sigh of relief to stressed financial markets and at least uphold the possibility that the economy can avoid a double-dip recession," said economist John Lonski, of Moody's Economy.com. "But we still need to establish a declining trend for jobless claims so we can feel more confident in the economic recovery."

The 4-week moving average of initial claims -- a number that tries to smooth out week-to-week volatility -- was 486,750, up 3,250 from the previous week.

Lonski said that figure needs to break below 450,000 and set new lows in order to improve the outlook for the job market, which he is optimistic about.

"Given that business sales rebounded in July after two months of decreases, companies may hold on to more employees, if not hire more," he said. "So it's conceivable that that latest decline in jobless claims will be the first in a series of such declines."

0:00/3:19100 years old - and still working!

Continuing claims: The government said 4.46 million people continued to file unemployment claims for their second week or more, during the week ended Aug. 14, the most recent data available. That's down 62,000 from an upwardly revised 4.52 million the week before.

Continuing claims reflect people who file each week after their initial claim until the end of their standard benefits, which usually last 26 weeks. The figures do not include those who have moved to state or federal extensions, or people who have exhausted their benefits but are still out of a job.

The 4-week moving average for ongoing claims fell by 28,000 to 4.51 million.

State-by-state: Jobless claims in eight states declined by more than 1,000 in the week ended Aug. 15, which is the most recent state data available. Claims in California dropped the most, by 5,275. The state attributed the drop to fewer layoffs in the service and manufacturing industries.

Claims jumped by more than 1,000 in Wisconsin and Puerto Rico.  

Shoppers are choosy in shaky economyOngoing jobless claims plummet to 17-month low

American job creation 101: stop fretting over Chinese investment

This isn't the first time lawmakers have given Huawei a very public grilling. In 2007, Bain Capital Partners' announced a joint venture with Huawei to acquire 3Com. A deal never went through as the companies withdrew the bid following national security concerns.

It is perfectly appropriate for the U.S. government to evaluate the flow of foreign investments through its Committee on Foreign Investments. In the past, the committee has rarely come up with negative findings and the majority of investments typically move forward, says Ken Lieberthal, director of Brookings Institution's John L. Thornton China Center. Lieberthal wonders if some lawmakers have chosen to add unnecessary publicity to the review process that could end up scaring off Chinese investors from putting their money into the U.S.

We've seen this movie before. In 2005, China National Offshore Oil Corporation, one of the country's three major state-owned oil companies, faced fierce opposition from US lawmakers when it made a bid to take over U.S.-based Unocal Corporation. CNOOC withdrew plans amid a political firestorm fanned by national security concerns.

"That was a searing experience for the Chinese side," Lieberthal says. "This created the impression that Chinese capital was not welcome in the U.S."

Nevertheless, Chinese investments into the U.S. economy have jumped steadily in recent years, although not quite as high as the peaked level Japan saw in 1991. In 2009, Chinese companies announced new direct investments in the U.S. of nearly $5 billion as reported in Fortune's May cover story. This is a marked increase for China, which during previous years averaged about $500 million annually.

It's anybody's guess how Huawei's latest investment plans could pan out. The national security issues lawmakers including Senator Jon Kyl of Arizona and Christopher Bond of Missouri have raised deserve a solid review. However, it's also clear that the tone of their concerns needs to change if the U.S. will attract investments from the country that now has world's second largest economy. China must see investing in America as a worthwhile business venture -- not a risk-filled project that will all too likely make embarrassing headlines. Perhaps it's time we do the same.

The senators Fortune contacted could not be reached for comment on the letter. But we had several points to bring up with them about seeing Chinese investment in a different light:

1) America needs jobs

With unemployment hovering at an uncomfortable 9.5% and an economy facing lackluster growth, Chinese investments have the potential to create thousands of new jobs. Take for instance China's Anshan Iron and Steel Group Corp. The company wants to buy a small stake in a $175 million rebar facility under construction by a U.S. start-up called, Steel Development Co. in Armory, Mississippi.

But a group of 50 U.S. lawmakers have called for an investigation into the deal, saying that it threatened U.S. jobs and national security. Steel Development Co. has defended the Chinese investment and pointed that it could create about 1,000 construction jobs and more than 200 permanent manufacturing jobs once the facility is done.

Not all public officials have discouraged Chinese investments, however. State governments, including those in South Carolina and Texas, have made concerted efforts to attract Chinese investments that create factories and jobs.

"The combination of successful Chinese investments in Minnesota, South Carolina, North Carolina, Kentucky, and elsewhere combined with the global recession, have made Americans generally receptive to Chinese investments that creates jobs, as long as investors abide by U.S. law and practice and are not seeking acquisitions in military sensitive areas," says David M Lampton, China studies director at Johns Hopkins University.

2) It's (properly) already hard for China to do business in the U.S.

While Chinese firms see the U.S. as an attractive place to do business, executives also think it's an incredibly risky venture.

Chinese companies that decide to move or expand into the American marketplace know that the business environment is more mature but also highly legalistic, with stacks more regulation on everything from labor regulations to workplace safety.

Adjusting to a new regulatory environment is hard enough. Expecting Chinese companies to deal with elected officials making a political case out their dealmaking creates an unnecessary barrier to doing business.

Indeed, China's marketplace has all sorts of quirks that give the country an unfair advantage over other economies, including an artificially low renminbi. Evening that out, the political storm that erupts when a Chinese company wants to invest in the U.S. is almost comparable to an unofficial tariff.

3) A measured stance would give the U.S. more negotiating power and improve diplomacy

The interest that Chinese companies have shown in investing money in America could suddenly give officials on Capitol Hill more leverage when it comes to negotiating trade issues and economic policies with its East Asian neighbor, China expert Dan Rosen told Fortune in May.

The U.S. already depends a lot on China for everything from clothing to electronics. Even amid the world's economic uncertainties, exports from China to the U.S. in July rose 38.1% to $145.5 billion, widening the trade surplus with the U.S. by 46% to $28.7 billion. And though China has cut its holdings on U.S. Treasury notes and bonds recently, it's still America's largest creditor next to Japan. As of July, China held 10% of the $8.18 trillion in publicly traded U.S. debt.

At the same time, China has huge stakes in the U.S., as it overwhelmingly depends on U.S. demand to drive its export-led growth. Encouraging Chinese investment could only help America's negotiating powers by giving China an even larger interest in the US economy. It might just give U.S. lawmakers that extra edge to smooth issues (from human rights to tariffs) between East and West.

"I lived in Ohio in the 1970s and 1980s, when Japanese automakers were investing in what we then called the rust belt -- that investment not only created employment that was welcome, but it also helped diffuse trade tensions with Japan," Lampton says. "The Chinese are taking a page from the Japanese playbook."

4) It doesn't matter. Regulators will do what's best

It's pointless for U.S. lawmakers to make huge public stinks over national security concerns. While these are valid issues that need to be thoroughly addressed, they are mostly a sideshow. U.S. regulations will ultimately dictate how Chinese companies behave in our markets. And more importantly, they will decide whether these companies have the bona fides to operate in the U.S. 

Cummins to bring 220 jobs to Nashville consolidated call centerChina manufacturing growth slows

Manufacturing (ISM)

While the report shows growth in the manufacturing industry slowed during the month, July's number is slightly better than analysts expected, showing higher employment, supplier deliveries and prices in the industry.

Economists surveyed by Briefing.com were expecting a reading of 54.2.

"July marks 12 consecutive months of growth in manufacturing, and indications are that demand is still quite strong in 10 of 18 industries," Norbert Ore, chairman of the Tempe, Ariz.-based ISM's Manufacturing Business Survey Committee, said in a statement.

Of the 18 industries surveyed in the report, 10 reported growth. Plastics and rubber products, electrical equipment and appliances were among the industries showing the strongest growth.

Overall, manufacturing growth has slowed for the last three months, with the index dropping about 5 points from the 60.4 reading in April that was the fastest growth rate in six years. The slowdown is consistent with an overall easing in the economic recovery, said Paul Dales, an economist with Capital Economics.

"July's ISM survey provides further evidence of what we have been expecting all along; a fading of the economic recovery in the second half of this year and into next year, but no second recession," he said in a note to investors.

The employment section of the index reported a jump in hiring in the industry, which is an optimistic sign for the economy overall, said Dan Meckstroth, chief economist with the Manufacturers Alliance/MAPI .

Uncertain about the recovery, firms have been reluctant to boost their hiring and, instead, have been increasing hours or productivity in other ways. A boost in manufacturing jobs likely means that firms are confident there will be a lot of new orders in the pipeline, Meckstroth said.

The report brought two other encouraging signs: exports are growing faster than imports, and inventories expanded in July after contracting for the previous three months.

Meckstroth expects to see stronger overall growth in August in the machinery and high-tech sectors, as factories use their extra cash to make selective improvements to their equipment to further increase productivity.

The ISM index reflects the number of people who say economic conditions are better, compared with those who say conditions are worse.

While the index can paint a picture of broad trends, some analysts warn that because it stems from a survey, the index can be subjective.  

Manufacturing jobs make comeback in TNManufacturing (ISM)

SEC gives shareholders power to nominate directors

"Long-term, significant shareholders should have a means of nominating candidates to the boards of the companies that they own," said SEC chairwoman Mary Schapiro.

The idea is to make it easier for shareholders to shape corporate leadership, with an eye toward holding corporate boards more accountable for decisions like rewarding executives who make risky bets.

The SECvoted 3 to 2 in favor of the new rule.

Currently, a company's existing board of directors effectively controls which director candidates are placed on the ballot that is sent to shareholders.

The rule would limit the number of potential shareholder board nominees to 25% of a company's board or 1 board director, whichever is greater.

The SEC will give smaller companies a reprieve, as smaller publicly-traded companies won't have to abide by the new rule for three years.

The commission puts some speedbumps in place to stop shareholders from gaming the new rule. For instance, it bars shareholders from borrowing stock to hit the threshold for nominating directors.

0:00/5:59Your say in a CEO's pay

Those who oppose the move argue it will pressure companies to focus on shorter term results and empower shareholders with "parochial agendas," wrote Randall L. Stephenson, chief executive of AT&T (T, Fortune 500), in a letter to the SEC. Many other chief executives at giant companies, including Target (TGR), Union Pacific (UNP, Fortune 500) and Texas Instruments (TXN, Fortune 500) wrote similar letters.

David Hirschmann, president and CEO of the U.S. Chamber's Center for Capital Markets Competitiveness, called the move "special interest-driven." He warned that labor union pension funds would use it to "ram through their agenda."

Several Senate Republicans wrote SEC Chairwoman Schapiro to note that the new Wall Street reform law didn't "mandate" the SEC to create new rules governing proxy access and urged the Commission to be careful not to put up roadblocks for companies.

"At a time when capital formation and job creation are in jeopardy, the Commission should be particularly careful not to impose unnecessary requirements on public companies," according to the letter signed by 10 Senate Republicans, including Sen. Richard Shelby, R-Ala., who opposed the reforms.

But one SEC commissioner said the move is a long time coming.

"For far too long, shareholders have been shut out of the nominating and election process," Commissioner Elisse B. Walter said. "It is also a matter of principle to facilitate individual shareholder rights."

The rules would mostly impact board of director elections starting in 2011. 

Corporate cash hoarding isn’t sustainableNashville People in Business

Feeling flush: Virginia's budget surplus doubles

"But please don't get too excited," McDonnell said during an address to state congressional members. "Most of it is already obligated in statute or in the budget to meet various needs."

About $82 million of the unexpected surplus will go to boost state employee pay with a one-time 3% holiday bonus in December. They have not received a raise since November 2007.

The surplus will also award $18 million to the local school district and $36.4 million to Virginia's Water Quality Improvement Fund, which aims to clean up the Chesapeake Bay. Another $32.7 million will go to transportation, while public schools already received $18.7 million.

The governor has several months to determine what to do with the rest of the surplus.

McDonnell said much of the boost was thanks to state employees, who spent $175 million less then the budget allowed rather than whittling down balances to zero. Plus, Virginia collected $228 million more in individual tax revenues that it was expecting.

The state had forecast revenue to fall by 2.3% during the year, but it only slipped 0.7% lower from the previous year.

"This slight improvement is worth noting, but it does erase the fact that this was the first time in history that general fund revenues declined two successive years," McDonnell said. "Clearly, while the fiscal year finished with some optimistic trends, we must budget conservatively going forward."

Virginia is among about a dozen states -- including Arkansas, Connecticut, Kentucky, New Hampshire, North Dakota, Ohio and Maine -- that ended up with a budget surplus after making spending cuts to compensate for steep drops in revenue, said Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers.

And while revenue collections have since stabilized, they are still only at the 2006 level, meaning that state budgets constraints will continue. For fiscal 2011, Sigritz said revenue collections will be $53 billion less than they were in 2008.

0:00/5:02Digging Illinois out of debt

A loss of federal stimulus funds is also expected to add pressure.

In fact, without the $2.5 billion it received in stimulus funds, Virginia would not have been able to beat the odds, according to the Commonwealth Institute for Fiscal Analysis.

"Recovery Act funds helped Virginia avoid deeper cuts in key services like health care, education, and public safety," said Michael Cassidy, president and chief executive of the Richmond, Va.-based think tank.

But while the stimulus "helped soften some of the fiscal blow" of the recession, Cassidy said Virginia still "has a long way to go before its budgets are back in healthy shape."  

CCA raises profit forecastPain, but no gain: local governments face budget doom

California's Furlough Fridays are back

The furloughs were to have started Aug. 1 but were temporarily blocked by a lower court decision. On Wednesday, the state supreme court allowed the furloughs to resume.

The Professional Engineers in California Government union, which had previously sued on the grounds that the governor did not have the authority to furlough employees, said it will urge the supreme court to rule that the furloughs are illegal. Employees are entitled to full paychecks, the union said in a statement.

The furloughs affect about 150,000 state employees and will save $150 million a month, the governor's office said.

Life on furlough: Working 12 months for 11 months pay

Cash-strapped California first implemented furloughs in February 2009, demanding employees take two unpaid days off per month.

As revenues continued to plummet six months later, officials bumped the number of monthly furlough days to three. That mandate expired with the end of the fiscal year on June 30.

In addition to furloughs, California may also have to issue IOUs in two to four weeks to keep the state solvent, according to State Controller John Chiang.

0:00/5:02Digging Illinois out of debt

He estimates there are $2.2 billion in expenses -- mainly to social service agencies, vendors and schools -- that will go unpaid in August. Last year, a budget crunch forced California to issue 450,000 IOUs worth $2.6 billion between July 2 and Sept. 4

Schwarzenegger is also trying to impose the minimum wage on state workers until a budget is passed, but that effort remains tied up in the courts.

--The CNN Wire and CNNMoney senior writer Tami Luhby and staff reporter Hibah Yousuf contributed to this article.  

California close to issuing IOUs - againNissan credit union faces regulators’ scrutiny

A bitterly divided Congress, fanned by the White House

Dodd presided over his own brawl this summer when he squeezed a massive financial reform bill through the Senate without the backing of a single Republican member in his committee. Of all the failures at bipartisanship -- the $862 billion stimulus package and the $940 billion healthcare reform chief among them -- the new "Dodd-Frank Wall Street Reform and Consumer Protection Act" stands as the most egregious.

Why? Because it squandered a rare moment in Washington, one in which broad outlines of agreement had already emerged from serious-minded lawmakers negotiating in good faith. Because senators were acting the way American voters -- who repeatedly tell pollsters they are disgusted with Congress -- expect their elected officials to act. Because a full year of hard bipartisan work fell prey to election-year politics.

New law, same troubled economy

With Dodd-Frank (named also for House Banking Committee chair Barney Frank) now signed into law, Washington moves into a ritual so familiar it's like comfort food: government regulators drafting more than 200 rules, law firms auditioning to show prospective clients that they can maneuver the new rules, business pages guessing at likely candidates to oversee it all.

But on Capitol Hill, the experience added a new layer of bitterness and distrust that will haunt Congress when it returns after Labor Day to stare down a deep, dark well of troubles -- jarringly high unemployment, a mounting debt that threatens the nation's fiscal solvency, immigration fears creating emotion-charged divisions.

Sadly, that wasn't Dodd's original intention. Senators on both sides of the aisle tell me the banking committee chairman was determined to bring both sides together. (A spokesman said Dodd was not available to comment for this column.) "Left to his own druthers, Chris Dodd would have produced a really good bill that would have been bipartisan," says New Hampshire Senator Judd Gregg, a Republican.

Last winter -- as the poisonous divide over healthcare engulfed Washington -- Senate banking committee members, at Dodd's direction, were meeting in pairs to hash out major portions of a complex bill aimed at preventing a repeat of the 2008 financial crisis. Republican Bob Corker was paired with fellow businessman Mark Warner, Democrat of Virginia, to hammer out a way to prevent massive financial firms from holding the economy hostage -- commonly known as the "too big to fail" conundrum. Gregg and Democrat Jack Reed were tasked with addressing derivatives; ranking GOP member Richard Shelby and Dodd were working on consumer protection provisions, and so on. "We realized these issues don't break down on a left-right continuum," Warner says.

Senators and their staffs, who had already worked across party lines in dozens of formal and informal hearings, were meeting around the clock. There was a certainty among the senators that their efforts would not end in the brawl that healthcare had become. Everyone agreed that the laws governing the nation's financial sector needed reform. "The banking committee is the one place where I actually feel like a senator," says Corker, "where we talk about substance, and not in a partisan way."

So, what happened? In March, the Obama administration began to smell a better election-year opportunity. "We were so far down the road when, out of nowhere, the President and his people decided to make this a political exercise," charges Gregg. "The White House was getting pummeled on their programs, especially healthcare, and they needed a bad guy, so central casting sent them Wall Street. The bill got caught up in pandering populism."

The White House role

That's a Republican charge. But Democrats privately acknowledge that White House pressure played a role in the ultimate decision by Dodd to pick off just enough Republicans to get the bill through the chamber -- rather than seek broad bipartisan agreement. According to a detailed account in the Washington Post , President Obama met with Dodd in mid-March, told him that GOP ranks were fraying and suggested he pick off votes from the same tiny handful of Republicans who had supported healthcare and the stimulus.

Ultimately, that is what Dodd did -- rather than entertain substantial compromise with thoughtful Republicans on his own banking committee, like Gregg and Corker. With the White House weighing in, the March winds shifted on Capitol Hill. Corker had been conducting a one-on-one negotiation with Chairman Dodd and says they were "down to the five-yard-line." But one morning that month, Dodd's demeanor changed. "I could just tell he felt loose, wobbly, not fully engaged. I've been in enough business deals that I can tell when your partner is getting a little wobbly." The following day, Dodd told him he was losing Democratic votes on the left: "Bob, I've got to move on." Says Corker: "I was livid."

It is true, as Democrats charge, that the Republican leadership was "obstructionist" on the bill -- but by then the Democrats were already moving forward with a plan to pick off just enough GOP votes to clear the Senate.

The banking committee's ranking GOP member -- a target of the obstructionist accusation -- insists he started out seeking a bipartisan bill that would attract 75 to 80 votes. "Why did we not have a bipartisan bill?," asks Shelby. "The Democrats didn't want one and they didn't have to have one. We had two or three Republicans who left the fold at crucial times." The law that President Obama signed July 31 narrowly passed with just three GOP votes in the Senate.

Congressional Democrats and the White House viewed this narrow victory as the ideal election-year calling-card: Tell voters that the Republicans opposed reform because of their ties to Wall Street special interests.

In fact, though, it's not clear the strategy will pay off on Election Day. Democrats face a Republican counter-attack that the law is "government power grab" that will constrict credit and hurt Main Street rather than Wall Street. And voters, so far at least, aren't thrilled with the complex new law. A Bloomberg poll found that four out of five America have little or no confidence that it will prevent another crisis. Meanwhile, the law stands as another lesson in why Americans have lost faith in Washington. This time, though, the problem was less Congress than the White House. Despite all the handwringing these days about our "broken Senate" Senate Banking Committee members, left to their own devices, likely would have crafted legislation with broad support.

Says Gregg: "There are still people in the Senate like Chris Dodd who want to legislate in a constructive bipartisan way. There is still a center ground in the Senate where you can legislate constructively if politics don't overtake you." 

Tax law fix tied up in CongressSenate approves $26 billion for needy states

Manufacturing (ISM)

While the report shows growth in the manufacturing industry slowed during the month, July's number is slightly better than analysts expected, showing higher employment, supplier deliveries and prices in the industry.

Economists surveyed by Briefing.com were expecting a reading of 54.2.

"July marks 12 consecutive months of growth in manufacturing, and indications are that demand is still quite strong in 10 of 18 industries," Norbert Ore, chairman of the Tempe, Ariz.-based ISM's Manufacturing Business Survey Committee, said in a statement.

Of the 18 industries surveyed in the report, 10 reported growth. Plastics and rubber products, electrical equipment and appliances were among the industries showing the strongest growth.

Overall, manufacturing growth has slowed for the last three months, with the index dropping about 5 points from the 60.4 reading in April that was the fastest growth rate in six years. The slowdown is consistent with an overall easing in the economic recovery, said Paul Dales, an economist with Capital Economics.

"July's ISM survey provides further evidence of what we have been expecting all along; a fading of the economic recovery in the second half of this year and into next year, but no second recession," he said in a note to investors.

The employment section of the index reported a jump in hiring in the industry, which is an optimistic sign for the economy overall, said Dan Meckstroth, chief economist with the Manufacturers Alliance/MAPI .

Uncertain about the recovery, firms have been reluctant to boost their hiring and, instead, have been increasing hours or productivity in other ways. A boost in manufacturing jobs likely means that firms are confident there will be a lot of new orders in the pipeline, Meckstroth said.

The report brought two other encouraging signs: exports are growing faster than imports, and inventories expanded in July after contracting for the previous three months.

Meckstroth expects to see stronger overall growth in August in the machinery and high-tech sectors, as factories use their extra cash to make selective improvements to their equipment to further increase productivity.

The ISM index reflects the number of people who say economic conditions are better, compared with those who say conditions are worse.

While the index can paint a picture of broad trends, some analysts warn that because it stems from a survey, the index can be subjective.  

Manufacturing jobs make comeback in TNManufacturing (ISM)

Sales taxes are highest in...

Until recently, Chicago held the title of highest metro area sales tax. But the Windy City was unseated after Cook County lowered its rate by 0.5 percentage point in July, giving it the sixth highest rate at 9.75%

Among the nation's other metro areas with at least 200,000 inhabitants, there are five California cities with sales tax rates above 9%: Long Beach, Los Angeles, Oakland, Fremont and San Francisco. Glendale, Ariz., and Seattle also ranked high on the list.

"Larger cities have an increased demand for government services and a higher rate of tourism, so it should not be particularly surprising that they tend to have higher reliance on the sales tax," said Tax Foundation adjunct scholar Lawrence Summers.

0:00/5:18Higher taxes loom for the rich

Meanwhile, the state with the second highest combined sales tax rate after Tennessee is California, at 9.08%, while Arizona came in third, at 9.01%. Other states with particularly high rates are Louisiana, Washington, New York, Oklahoma, Illinois, Arkansas and Alabama.

Sales taxes are levied by state, county and city governments. As a result, rates vary widely across the nation, making it difficult to measure and compare sales tax trends, said Kail Padgitt, a Tax Foundation economist.

"Even within a state, it can be difficult to know what the average sales tax rate is when there can be hundreds of different jurisdictions charging different rates," said Padgitt.

There are 34 states that allow local governments to charge a local option sales tax on top of the state sales tax, while 16 states have no local sales tax. Then there are five states that have no statewide tax at all: Alaska, Delaware, Montana, New Hampshire and Oregon. 

Pain, but no gain: local governments face budget doomHome sales take unexpected dip

Home Prices

The price rise might have reflected one of the last gasps of the government's incentive program, which paid tax refunds of as much as $8,000 to homebuyers if they signed a sales contract before May 1.

"It does look like the market was boosted by the tax credit," said Robert Dye, senior economist for PNC Financial Services. "It seems to have pulled some of the demand forward."

Although the increase was welcome news for the beleaguered housing market, S&P spokesman David Blitzer downplayed the gain.

"While May's report on its own looks somewhat positive, a broader look at home price levels over the past year still do not indicate that the housing market is in any form of sustained recovery," he said. "Since reaching its recent trough in April 2009, the housing market has really only stabilized at this lower level. The last seven months have basically been flat."

Home prices peaked back in July 2006 and fell for 33 straight months before bottoming out in April 2009. The peak-to-trough decline came to more than 32%.

The index went on a short upswing for five months, regaining 5.3% of its loss before turning tail again, declining 2.2% before a modest rebound in April.

Winners and one loser

Only one of the 20 metro areas, Las Vegas, reported a price decline for May, with a 0.5% loss. Minneapolis had the largest spike: prices jumped 2.8% and were up 11.6% over the prior 12 months.

San Francisco had the largest year-over-year gain, 18.3% higher than May 2009. San Diego, at 12.4%, and Los Angeles, at 9.7%, have also posted healthy year-over-year gains.

In a way, the index may understate its positive results. It counts all sales, including distressed properties. Those have become a major component of the market, with short sales and bank repossessions accounting for close to a third of all sales.

Repossessions sell, on average, for 27% less than conventional sales, according to a recent report from MIT economist Parag Pathak and two Harvard researchers, John Campbell and Stefano Giglio.

"It's not surprising that there is a discount due to foreclosure," said Pathak in a release. "But it is surprising that it's so large."

The repossession discount comes from a couple of factors. Borrowers who lose their homes to foreclosure may not have had the funds or the incentive to maintain their homes well. The homes often come onto the market in poor condition, lowering their values.

In addition, lenders often want to sell the homes very quickly to avoid all the expenses of home ownership - taxes, utilities, insurance and maintenance - so they're willing to sell at far below comparable homes.

Maureen Maitland, vice president for index services at S&P, said foreclosure and short sale data is included in the index because they represent such a big part of the market. "In some metro areas they're 50% to 60% of sales," she said.

They're expected to remain so for a long time. The run rate for bank repossessions so far this year indicates more than a million homes will be lost to foreclosure and put back on the market by the banks.

That will extend the overhang on inventory, which along with the end of the tax credit will probably keep prices down for at least the summer months, according to Maitland.

It may be autumn, if then, before improvement in the economy puts housing markets back on a firm footing, according to Dye.

"Housing has firmed up since the dark days of 2008 and 2009, but it's still wobbly," he said. 

Nashville area home sales fall 21 percent in JulyHome Prices

What's missing for back-to-school? 135,000 teachers

"School districts are going to be stripped down from what there were a few years ago," said Jack Jennings, head of the Center on Education Policy, an advocacy group. "They are really feeling the economic squeeze."

The national economic downturn has sucked state coffers dry, forcing cuts to school districts and municipalities. The Obama administration's stimulus package softened the impact, but many districts still found themselves having to downsize.

"Every student is being affected in some way or another," said Dan Domenech, executive director of the America Association of School Administrators.

Teachers are experiencing the brunt of the budget cuts this year, even though Congress last week gave states an additional $10 billion to keep an estimated 140,000 educators and support staff employed.

Still, the number of teachers who won't have a job this school year could be as high as 135,000, experts said.

0:00/1:56New teachers see fewer openings

While grateful for the federal funds, school officials are not sure they will be able to use it to bring back many teachers this year. Many states have yet to say how they will distribute the money and many districts have already started or set up their class schedules.

Some plan to use it to hire tutors, counselors and non-core classroom educators such as art and music teachers. But others say they may hold onto the money until the next school year, when the last of the stimulus money is set to disappear.

"We're all looking ahead over the next couple of years and not seeing any respite," said Chris Nicastro, Missouri's commissioner of education.

More kindergarteners per class

The great wave of layoffs means students will have to share their classrooms -- and their teachers' attention -- with more of their peers.

In California, for instance, state education officials have approved 23 requests from local districts to increase their average class sizes beyond the maximum allowed. At least 33 more are scheduled to be reviewed in coming months.

This is quite a change from the previous decade, when the state received no requests.

"It's rising exponentially," said Judy Pinegar, manager of the waiver office at the California Department of Education.

Facing a $25 million budget gap for this year, Modesto City Schools district officials decided to raise the average class size in kindergarten through third grade to 25 kids, up from 20.

The school district was initially looking to lay off one-third of its teachers, or 500 people. But after educators agreed to give up their raises and some retired, only 50 teachers were not rehired for this school year.

Still, the larger class sizes will have an impact, said Megan Gowans, executive director of the Modesto Teachers Association.

"Students are going to feel that they are getting less one-on-one attention," she said.

Neighboring Sylvan Union School District now has elementary school classes with up to 34 students in them. That's 12 more than the average size last year. The elementary schools now only have one librarian and no dedicated art teachers, when there used to be four of each. In all, there are 19 fewer educators on staff, said Superintendent John Halverson.

The district has gone so far to combine several grades, teaching kindergarten and first graders and first and second graders together for the first time in recent memory.

These moves allow school officials to keep some classrooms dark, helping close a $5 million gap in its $60 million budget. But the changes won't go unnoticed.

"I can't say it won't have an impact because I think it will," said Halverson, who has been in the California school system for 33 years.

Paying for programs

Elsewhere in the nation, school districts have cut back on programs and services or are charging for them.

Take Queen Creek, a small town 38 miles southeast of Phoenix. When the state cut funding for full-day kindergarten programs, Queen Creek took a $900,000 hit, but decided to continue offering it...at a price. Parents have to pay $200 a month to enroll their 5-year-olds.

"Our community was used to having it," said Shari Zara, the district's chief financial officer. "We thought we'd still offer it for those who could pay."

Some 122 kids signed up for the extended program, while another 216 are in the free half-day class. Charging tuition spared the district from having to cut teachers or programs, Zara said.

Busing is another area that has taken a hit in scores of districts.

In the Bayless school district in the St. Louis area, for example, the board and administrators decided to eliminate bus service instead of laying off staff and raising class sizes beyond the current 25 to 30 per room. The decision affects about 650 of the district's 1,650 students and saves $240,000 a year, said John Stewart, chief financial officer.

Getting rid of transportation helped close the roughly $650,000 gap in the district's $14 million budget. Employees also agreed to pay more toward their health insurance.

"We wanted to impact the classroom and educational process as little as possible," Stewart said. 

CCA raises profit forecastHouse gives needy states $26 billion for Medicaid, teachers

California close to issuing IOUs - again

State Controller John Chiang said Wednesday that the state could have to issue IOUs in two to four weeks to keep the state solvent. He estimates there are $2.2 billion in expenses -- mainly to social service agencies, vendors and schools -- that will go unpaid in August.

"The failure to pass a timely budget remains the biggest threat to California's finances," said Chiang last week, after issuing a report showing July tax revenues came in 1.9% below estimates.

California is the only state that is late in passing its fiscal 2011 budget.

California is no stranger to IOUs. A budget crunch last year forced the state to issue 450,000 IOUs worth $2.6 billion between July 2 and Sept. 4.

Gov. Arnold Schwarzenegger, however, did get some good news on Wednesday. The California Supreme Court overturned a lower court ruling that temporarily blocked the state from imposing a new slew of furloughs on government workers. The state's Supreme Court will hear oral arguments on the matter on Sept. 8.

Workers will now take off this Friday and next Friday, as well as one floating day this month. More than 150,000 state employees then will have to take off three days a month until the budget is passed, unless the court rules otherwise. It is expected to save the state $147.2 million a month.

"The furloughs are a direct result of the legislature's failure to pass a budget, which is causing the state to run out of cash and face IOUs this month," said Rachel Arrezola, a spokeswoman for the governor. "This is not an action the governor wants to take, but he must ensure the state continues to function and can pay its bills."

The governor is also trying to impose the minimum wage on state workers until a budget is passed. That effort remains tied up in the courts. 

Pain, but no gain: local governments face budget doomHard health-care decisions await next governor

A hedge fund pioneer looks at 30

The most consistent hedge fund managers in this game are very matter of fact and common sense people. They have their own repeatable risk management process. They are as competitive as a professional athlete in executing it. And they are mentally flexible enough to change their positioning as the game changes.

Druckenmiller likes to look at charts. I have a beauty that's taped on the inside of my notebook that I often show clients to depict the correlation between hedge fund strategies going back to the early 1990's. I use the early 90's because that's when we started to see the divergence between the real pros in this business and the also-rans in the hedge fund world who simply chase one another's positions.

This chart (use your imagination) demonstrates one very obvious fact: hedge funds used to have very low correlations to one another (0.3 in 1993) and now they have very high correlations to one another (averaging between 0.7-0.8 from 2007-2009). Therefore, you should invest with those hedge fund managers that can generate absolute returns in down markets.

In the down year of 2008, Druckenmiller was +11%. That says a lot about the independence and flexibility of his strategy.

From our skunk-works of chaos theory here at Hedgeye in New Haven, CT, here are some deep simplicities associated with hedge funds that manage to consistently drive absolute returns across bull and bear markets:

1) Hedge funds that consistently find alpha in their idea generation.

2) Hedge funds that maximize that alpha (spreading their wings) when they find it.

3) Hedge funds that truly hedge.

What a fund manager is not to do: run a fund's assets at 140% net long and cut net exposure to 107% when upon realizing it's a bear market. That's not hedging. That's called being levered long. The nascent history of this industry has shown plenty of real pros end up feeling silly and exposed when they go there.

0:00/3:16Regulation won't stop short sellers

Another way that a real pro can start having performance issues is when they miss a big macro move. On top of the statistical reality that there are upwards of 10,000 hedge funds trading their gross and net exposures in a highly correlated way, the institutionalization of asset management drives fund flows to the same places When the macro wind moves from bullish to bearish, fund managers need to be flexible.

Going back to 1993, when the fund ecosystem was more wild and woolly, the percentage of the US market controlled by "institutional investors" was running just inside of 45%. Today, that number is running closer to 65-70%, and there is an intense amount of pressure for asset managers to be fully invested -- having a very low position in cash as a percentage of assets under management. After all, the art of managing money is actually having money to manage, so asset managers need to feed the beast. Just because the pressure is on fund managers to do this doesn't mean it's the right way to run a fund.

If you look at the cash positions in US Equity Mutual Funds today versus the early 1990's, the chart may or may not shock you. Cash as a percentage of assets under management has plummeted from 13% in 1991 to less than 4% today, and that number is likely to keep heading downwards.

Another pressure comes from long only investors chasing relative performance on a monthly basis while levered long funds (disguised as hedge funds) chase them daily and weekly. Asset managers who are open-minded and flexible -- and not afraid to reallocate into cash when it makes the most sense --- are going to continue to deliver to their clients what they really want: Not losing their money.

I wake up every day with one risk management goal in my head - don't lose Hedgeye's clients any money. Maybe I should have been a goalie - or maybe I should have submitted my resume to a pro like Druckenmiller who could have taught me how to spread my wings when I get the hot hand.

Our cash position in the Hedgeye Asset Allocation model is currently 61%. When we were bullish in August of 2009 it was 23%. We remain a short seller of both the US Dollar (UUP) and the SP500 (SPY) on strength and our best long ideas in global equities remain Utilities (XLU), Brazil (EWZ), and Indonesia (IDX).

Enjoy time with your family and friends Mr. Druckenmiller. Your world class risk management performance will be missed, but never forgotten.

-- Keith R. McCullough is CEO of Hedgeye , a research firm based in New Haven, Conn. The opinions expressed in this column are his own.  

Useless: The Social Security trust fundSmall businesses struggle despite federal money for lending

Higher taxes for the rich: What they'll pay

That means people making more than $195,550 in taxable income ($200,000 in adjusted gross income) and joint filers with taxable income over $237,300 ($250,000 in adjusted gross income) would be pushed up from the current 33% and 35% tax brackets into 36% and 39.6% brackets next year.

"It comes down to the greater your earnings, the greater the tax hit," said Robert Kerr, senior director of government relations at the National Association of Enrolled Agents. "But it's all relative. For someone used to spending that money -- whether on a big family or expensive habits -- it's impossible to say how much they would be impacted."

How Uncle Sam's cut will change

While most people in the top two brackets would end up paying more if the cuts expire, some taxpayers at the very bottom of the new 36% tax bracket would actually end up paying less next year, according to estimates from the congressional Joint Committee on Taxation. That's because the lower tax rates, which high earners also pay on portions of their income, have been expanded.

For example, in the case of a person on the low end of the 36% bracket, only the highest sliver of income would be taxed at the new 36%, while larger portions are taxed at the broadened lower brackets, resulting in a net tax reduction .

Take someone with a taxable income of $210,000. Last year, they owed $54,000 in taxes (assuming one personal exemption and a basic standard deduction), but they would owe $53,512 under the new tax bracket, amounting to a $488 tax reduction, the JCT estimates showed.

Does $250,000 make you rich?

But once taxable income exceeds about $240,000, you could end up owing anywhere from an additional few hundred dollars to hundreds of thousands of dollars in extra taxes depending on how much you make.

Say you're a single filer with a taxable income of $250,000. This year, you owed $67,617 in income tax under the 33% bracket. Under the new system, you would pay $67,912 in taxes next year, a slight increase of $295.

0:00/1:21Considering yourself 'rich'

But those people making more than $300,000 are going to owe additional amounts in the thousands. For instance, if you make $382,650 you'll owe an extra $4,095 in income tax.

Single filers with $500,000 in taxable income would owe Uncle Sam an additional $9,492 from this year's tax bill. Meanwhile, joint filers with taxable income of $700,000 would owe $232,396 in 2011, an extra $17,088 from $215,308 in 2010.

Those Americans lucky enough to be earning millions each year, whether filing as individuals or jointly, could end up seeing increases in the six-figures.

A single filer with a million dollars in taxable income would owe $32,493 more than in 2010, While joint filers with the same income would owe $30,888 more than they paid in 2010.

For single filers making $5 million in taxable income, get ready to hand over $1,944,137 for the 2011 tax year, an increase of $216,493 from $1,727,644 in 2010.

And as a joint filer with an income of nearly $5 million in 2009, even Obama is likely to see his tax bill go up more than $200,000 next year.  

HealthStream’s Q2 revenues up, net income downA surprise tax cut for the (almost) rich

Common sense saves Illinois $140 million in health care costs

North Carolina implemented a Community Care program in 1998 to scale its earlier Medicaid medical home program, Access, to serve more patients. The new program saved the state over $400 million in 2003 and 2004 compared to the state's previous fee-for-service medical model, according to estimates from Mercer Government Human Services Consulting.

Medical home systems save money because doctors can keep a better eye on patients with chronic conditions, like asthma and diabetes. This means patients see their doctors about acute problems with their illnesses, and don't wait until the ER is their only option. States can then avoid paying out costly emergency care fees. The University of North Carolina found that the community care program saved the state about $3.3. million on asthma patients and about $2.1 million for patients with diabetes.

In Illinois, medical home programs saved the state $220 million over 2008 and 2009, according to a recent study from the Robert Graham Center. The program actually saved $140 million in 2009 alone, the first year it was fully implemented. Illinois started seriously investing in medical home programs in 2006, when, according to the report, there wasn't much federal leadership on healthcare reform. So the state took matters into its own hands.

The millions of dollars in savings are especially relevant now, since the state's Department of Healthcare and Family Services is facing $208 million in cuts under Governor Pat Quinn. The report also predicts that state budgets all over will be stressed by the Patient Protection and Affordable Care Act. Illinois is one our most populated states, but even a back of the notebook calcaulation suggests multiplying its $140 million savings from the medical home program by all fifty states could add up to real money, even in health care terms.

States looking to cut costs could look to the Illinois and North Carolina medical home program as a model. In the programs, patients chose a participating primary care provider, who then curates all of the patient's medical needs. The physician can make referrals, but all of the records channel through that one doctor's office.

Think health care global, act health care local

These programs also help make sweeping health care reform digestible by folding preventative care services like screenings into a local health care model. Medical home programs generally offer certain screenings and tests for free, especially for children.

0:00/4:04Health care goes wireless

This could be a good way to sidestep possible issues with Americans making the mental shift necessary to make preventative care work, bundling it into an easily accessible package that's part of their regular care, while retaining access to a broader network of care as needed. In a way, it's nothing so much as a return to the days of actually knowing who your doctor is and vice versa, rather than debating billing codes with a huge HMO or insurance company.

Medical homes could also help with President Obama's project to computerize all medical records over the next five years. Obama just allotted $975 million to develop better technology in health care. Much of that money is going towards digitizing medical records. That'll be much easier to accomplish when records are held at a single point, like a medical home. In Illinois, medical home programs are partnering with a third-party company called Automated Health Systems, which organizes the information for the program, providing further savings.

Medical records across the country would be much easier to digitize if patients start trafficking all their forms through one hub, instead of pulling files from a scattershot system of clinics, doctors, emergency rooms and hospitals.

While figures for the cost of health care reform still vary, with many estimates coming in around $1 trillion over ten years, there's no question the thrust of the program is supposed to spur providers, insurers, and state administrators to wring inefficiences out of the system and direct the savings to improved care. The medical home model appears to fit that bill. And that, in turn, may end up lowering the bill on health care reform for everyone. 

Vermont to seniors: Return those $250 checksBell construction widens its scope