Sneaking Suspicions
Archives-- December 3-16, 2006

This page includes posts from December 3-16, 2006 in the usual reverse order. Each posting on the home page is perma-linked to these archive pages.

December 16, 2006
Nasty reason for an absence

Steven Green was among the strong early influences on my decision to start and especially keep up with my blogging here.

He wrote with a frequently smart-ass style that was nonetheless serious about national security and terrorism, and the length of his posts often hit a nice middle ground between Glenn Reynolds and Steven Den Beste, two others whose work helped convince me to begin blogging almost six years ago.

Green was also among the first bloggers to add me to his blogroll (the Cosmopolitan section), so I've always been happy to return the favor.

Over the years I also enjoyed reading about his budding romance, his engagement, his wedding, and most recently his new baby.

His blogging had dropped off to non-existent recently, however. I just assumed it was simply a trade-off for his new work and the demands of his young family.

Until today, when Reynolds put up a short note pointing to Green's post explaining how an undiagnosed hyperthyroid problem had knocked him for a loop.

That a real nasty reason for an absence, as we know from some family experience with the condition.

I'm very glad to read that Steven is slowly recuperating from the massive weight loss and other problems he's suffered through recently.

Please keep him in your thoughts.

December 15, 2006
Totally wonked out

Earlier today I came across a notice of a brand-new publication, and sent the link to my home email address for later reading and perhaps a blog post or two.

Here's the title, along with the link:


I also used a single word in the subject line of the email.

That word was "cool."

Now, I didn't really think about that choice of terms until I opened the email this evening, but it definitely signals something.

I'm even more deeply wonkish than I previously thought possible.

Later this weekend I may have more to say about the actual article.

Of course, the fact that I plan to write about tax policy during a weekend sends its own special signal, doesn't it?

Hat tip: TaxProf Blog

December 13, 2006
Recommended reading

Every so often one hears folks declare ruefully that the younger generation just doesn't read anymore, especially such communitarian standbys as the daily newspapers.

Given the political slant of many of these media outlets, usually tilted in a single direction, one might be forgiven for a momentary bit of schadenfreude at this suggestion. Even so, the idea that the newspapers' current circulation drops are the result of young folks deserting the readership cohort can't be comforting for those of us who believe that a wide dispersion of the news is essential to developing consensus on the major issues we face.

There are some hopeful signs going in the other direction, however.

For example, read this short piece by Patrick O'Boyle, part of a six-part collection of articles on media myths in Ketchum's Online Magazine.

Full disclosure: Patrick's stepfather is a good friend of mine, who tipped me to the article as any proud parent would.

December 10, 2006
Not the intended market, but still fun

During my recent break from work and my normal recreational pursuits, I watched a lot more television than I usually do.

And thanks to The Learning Channel, I found a show I really enjoyed, though Iím sure Iím not part of the intended audience.

What Not To Wear puts a semi-willing participant under the often snarky but ultimately caring guidance of fashion journalists Stacy London and Clinton Kelly for a full-out makeover.

Based on the several episodes Iíve seen thus far, itís usually a young woman who needs or seeks the help. London and Kelly mince few words in describing the depths to which their test subjects have fallen.

Their corrective language is frequently brutal, but itís usually delivered in such a way as to cushion the potentially fragile egos involved.

After trashing the current wardrobe, the hosts then describe how to fix the wide variety of fashion faults they see. London and Kelly then arm their subjects with a four-figure clothing allowance and send them off to apply their lessons.

Some are more successful than others. Occasionally some even more frankly expressed guidance is necessary. 

After shopping trips for clothes and accessories, the subject is then treated to a hairstyling and make-up session with two other regulars, Nick Arrojo and Carmindy (who bears a very pleasant facial similarity with Kim Cattrall). These two are far kinder to the participants than London and Kelly, but their advice appears to be equally sound. Maybe the difference in treatment has something to do with their professional backgrounds.

With repeated viewing, the basic lessons are made pretty clear. There are certain classic rules to fashion, which if followed will enhance almost anyoneís appearance.

The transformations are sometimes startling. It's also interesting to watch the character development of the show's subjects.

Iím not suggesting that every young woman should run to their local Talbots at the first opportunity, or that no young man should be without a navy blazer from Brooks Brothers or risk being fired. Neither do the two hosts of WNTW. 

On the other hand, folks may be unwittingly holding themselves back from advancing in the world, based on either simple ignorance of how they look to others, or a blinding self-regard for their own appeal. 

I blame the self-esteem movement, as I have before in other contexts.

To cite a local example, last July I read a public legal agencyís summer dress code, in which the writers felt compelled to note that short shorts are not appropriate.

A state agency is not Hooters. You might think no one needed to be reminded of that factóand you would be wrong.

My own fashion sense is guided by two separate sources. First is Hal Rubenstein and Jim Mullenís Paisley Goes With Nothing, a useful and blunt guide for men.

Second, and far more influential on a daily basis, are the comments I receive from my wife and daughters. They all seem to have been born with an innate sense of what looks good.

And when they say to me, ďAre you going out in that?Ē itís done with love.

Sometimes tough love, but still.

December 10, 2006
A tip

There are far more comfortable ways to begin a pre-holiday diet regimen than to go through a bout of food poisoning, complete with high fever, a wildly efficient digestive tract, and assorted aches and pains, all of which can knock a middle-aged person down for a few days.

I think it was the leftover scallops and sausage Creole.

December 5, 2006
Rest in Peace Process

Over the last thirty-five years or so, I have come to really hate hearing or reading the phrase ďPeace ProcessĒ concerning the Middle East.

It always seemed like such a blatant falsehood, used by the media and too many politicians of all stripes to describe the ongoing war in which Arab states sought to eliminate the sovereign state of Israel.

You might have thought these same belligerents should have learned their lessons from their 1967 loss to the IDF, or from the relative peace obtained by Sadat in 1982 that returned a sizeable hunk of land to Egypt. Perhaps his later assassination acted as too much of a disincentive to others to follow his suggestion.

Nonetheless, the last two years of armed conflict in the area, combined with the Bush Administrationís response to the aggression against Israel, may have finally broken the hold that this old rhetorical device has held over so many for so long.

For an insightful analysis on this point, I highly recommend Chuck Frelichís op-ed piece in the Boston Globe, which I learned about thanks to a post by The New Republicís Martin Peretz.

Read the whole thingóplease.

December 4, 2006
Down a pint, and it's all right

Early this afternoon I paid a visit to the Bloodmobile and donated a pint.

The Blood Bank of Delmarva phlebotomists were, as usual, friendly, courteous, and extremely adept at finding a handy vein to tap with a minimum of fuss and bother.

On the other hand, the list of questions during the intake interview seemed to have lengthened since my last donation, if that was possible.

As best I can tell, an awful lot of folks must lead, shall we say, much more interesting lives than I have thus far.

I also learned that the presence of prescription drugs in your bloodstream wonít necessarily disqualify potential donors.

So if you end up receiving a transfusion of my O-Positive, for example, you might just discover the potential benefits of a daily regimen of Inderal 80 mg.

And if you are medically able to do so, please consider making a donation yourself, as Glenn Reynolds and other bloggers have.

December 3, 2006
Shameless promotion

I updated my golf web site with the two most recent columns.

December 1 piece is a hardy perennial, describing some of the appalling golf gifts now available.

I will never run out of material for that one.

Please don't give me these golf gifts for Christmas
December 1, 2006

Dear Santa:

Itís that time of year, when I tell you what I donít want for Christmas, and either you or the elves reading your mail for you just donít seem to understand.

Lemme try again, based on the horrifying stuff I have seen at some online golf stores. More..

The golfer's mind in late fall
November 24, 2006

Family events and the Rehoboth Beach Independent Film Festival recently kept me off the golf course for a while.

On my return, I learned again how the golferís mind affects his or her approach to the game. More..

Hope you like them.

December 2, 2006
A bit of an ingrate

Some states pride themselves on the taxes that they donít collect.

Think of Delawareís constant reminders that it has no general sales tax, or the way folks in Tennessee gasped in horror at the very idea of a personal income tax.

One way or another, however, the states have to find their money somewhere. Each makes calculated political and policy choices about the mix of taxes and fees theyíll ask businesses and individuals to pony up.

Over twenty years ago, for example, Delaware made a policy choice to encourage banks and other financial institutions to call the Diamond State their home. Among the incentives created for this purpose, the word ďusuryĒ would henceforth be treated as a quaint bit of history. The former legislated caps on interest rates would no longer put a brake on the banksí ability to charge whatever the market would bear. 

All the banks had to do was to open an office in Delaware, staff it with a statutory minimum of employees (assumed to be Delawareans), and pay a bank franchise tax that became cheaper as the banks became bigger.

It worked like a charm.

Look in your wallet--most of the credit cards there show the Delaware connection. For this act of unintended generosity we Delawareans give thanks. Your relaxed attitude about debt created a significant burst of economic activity here, as well as a nice bit of tax revenues for our stateís coffers.

This yearís bank franchise tax revenues topped $132 million, and the state Division of Finance estimates that number will go past $155 million for Fiscal Year 2007.

Nonetheless, apparently one of the new banks with a Delaware connection has become a bit of an ingrate.

Lehman Brothers is an investment banking firm. Several years ago it developed a keen interest in making money in the mortgage market. Among other challenges, however, Lehman faced the daunting prospect of finding relatively safe sources of cash to finance this new venture.

It just so happened that a tiny little Delaware bank was struggling to survive, and Lehman Brothers came to the rescue. It bought up the Delaware Savings Bank, F.S.B., and changed its name to Lehman Brothers Bank, F.S.B.

Owning a Delaware bank gave Lehman some significant advantages. It could sell Certificates of Deposit, which would raise a lot of money for its national mortgage venture. Even more important, the Bank could obtain funds from the Pittsburgh office of the Federal Home Loan Bank.

Using the money from these two sources, Lehman Brothers Bank would finance the mortgages that another Lehman subsidiary would sell, along with others. The  mortgages would then be carried on the books of the Delaware bank for a relatively short period of time, usually 45-60 days, and then be sold to Lehman Brothers on very favorable terms--as one might expect for a bank that was essentially a captive of its owner.

Lehman kept the Delaware bank location in place, in downtown Wilmington, but otherwise ran many of the bankís operations elsewhere. That remains the arrangement today, as a quick peek at their website shows.

As financial schemes go, it was a beautiful thing.

Despite its success at using its new Delaware resource, however, Lehman decided that it didnít really need to pay the Delaware Bank Franchise Tax.

The State Bank Commissioner did not take kindly to this decision. He began proceedings to collect the franchise tax, based largely on the interest income Lehman earned on these mortgages while they were kept on the Delaware bankís books. 

It added up quickly. The calculated assessments ranged from over $3.2 million in 2000 to over $11.5 million for 2003. The Commissioner also sought over $14 million in penalties for the same 2000-2003 period.

After losing at the Commissioner level, Lehman appealed to Superior Court, where the case was assigned to Fred Silverman, who was the Chief Deputy Attorney General when I began working for the Justice Department in 1987.

Silverman affirmed the Commissionerís decision in a 38-page opinion issued on November 30. He treated Lehmanís multiple arguments with respect, but did not agree with any of them. Instead, he adopted most of the reasons noted by the Commissioner in determining that Lehman owed a significant franchise tax, based on its choice to use the Diamond Stateís banking laws to enhance the firmís overall bottom line. 

The lynchpin of the Commissionerís decision is the fact that the Delaware tax is only imposed on interest income earned in Delaware. In computing the franchise tax, Delaware did not include other transactions, e.g. when the mortgages were purchased outside Delaware or any interest earned after their transfer to LBH in New York. [W]hat is done within the stateís own borders can be taxed. Here, Delaware only taxed what happened within the state. [notes omitted].

Delaware taxed the mortgage interest, for franchise tax purposes, only when the mortgages were held by and on the books at the Delaware Bank. Also, the funds used to purchase the mortgages came from the Bank. The Bank marshaled the FHLB funding received in Delaware with money earned from the CD sales in Delaware and channeled it to the borrowers. Therefore, the taxed income was earned in Delaware....

[T]he Bankís Delaware activities, such as accepting CD deposits and accessing FHLB loans, substantially furthered the Bankís mortgage business, contributing over 90% of the funds for it....

This [interest] income is attributable to Delaware since the funds from the Bank ďfueled the entire mortgage banking business.Ē Without these funds, the Bank could not buy the mortgages. And, it was the Bank that bought the mortgages. (It does not matter that someone else, LBH, told the Bank which mortgages to buy.) Then, the Bank earned money from them while they were here. Delaware did not tax any other transactions.

Given the amount of money at stake, itís certainly probable that Lehman will appeal this decision to the state supreme court. Nonetheless, given the comprehensive dismissal of each of its legal and constitutional arguments thus far, I think the only thing the appeal will do is give Lehman some extra time to find the money to pay the taxes it so obviously owes.

And as a Delaware taxpayer, Iím certainly willing to wait a little longer before Lehman eventually pays up--as long as it also pays the steep interest charges that are accumulating at a fast clip.

Itís only fair.


Contact Information:

Fritz Schranck
P.O. Box 88
Nassau, DE  19969

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© Frederick H. Schranck 2002-2006