FDA Regulation, Big Tobacco, and Pending Bond Defaults

[toddkuen]

Sixteen years ago the Master Settlement Agreement (MSA) between the big tobacco companies and 46 US states created a huge stream of future revenue for the states (largest among them NY and CA).

Each year the tobacco companies paying billions in reparations for making people sick.

NY, CA and many other states sold bonds to, as they say on the radio "get cash now." This allowed them to get the settlement money up front and let the big tobacco companies pay over decades.

E-cigs, however, are creating a huge problem as cigarette sales have dropped, according to this Reuters article, almost 5% in a year.

Now look at the states going after ecigs the hardest: NY, CA.

Ask yourself why?

Do they want to participate in (or create) another 2008-sytle financial crisis?

The money for these bonds has already been spent - its gone. Grandma has these bonds in her portfolio and they are going to default UNLESS ecigs become cigarettes and subject to these bond payments.

Hence the FDA driving forward e-cig=cigarettes regulations to provide cover for big tobacco.

This places the 46 settlement states squarely on the side of big tobacco to protect these bond revenues from default.

Follow the money - it took billions to set up the FDA CTP - I bet the money trail leads back into the MSA right along with all the ANTZ funding.

Little wonder NY and CA have a vested interest in their citizens dying from smoking...

EDIT: According to the linked Reuters articles some states are already have to "borrow" money from other sources to cover the shortfalls. FDA CTP funding comes directly from big tobacco payments so its funding would also be linked to the corresponding collapse of bonds.

 

[AgentAnia]

So. Another point on the Follow the Money map.

We've seen several (quite a few, actually) articles pointing out the states' dependence on Master Settlement dollars as a reason they're going after ecigs, but this is the first time I'm hearing about "tobacco bonds." Another good example of how dependent the states are on tobacco revenue. Shameful.

 

[toddkuen]

The same article says that NJ just started dipping into the general fund to "make up" for the missing payments from big tobacco - little wonder Cristy is so busy with taxes.

This could easily participate a 2008-style set of cascading defaults in the bond market.

Here's the tobacco bond stain of shame for CA.

"Securitizing" future payments - greedy S O Bs.

 

[toddkuen]

Greedy governments still have 9 years of debt service (payments to bond holders) left based on cigarette sales levels of 16 years ago.

The MSA money was to be used for future Medicare/Medicaid payments for tobacco based disease.

"Monetizing" it as they did in 1998 means it was all spent in 1998.

Its not like the states saved some for future interest payments.

Ecigs will likely cut the tobacco payment levels to 1/2 within 5 years if left alone.

 

[Kent C]

So while the dismal effects of the CDC as stated in the HELP hearing as being a 'causal effect' of the percentage drop, not everyone agrees:

"Tobacco bond analysts have blamed the decline in consumption of cigarettes on public smoking bans and new excise taxes, until now.

Last year, cigarette shipments dropped by 4.9 percent, the biggest decline since the government passed a federal excise tax in 2009, a drop some blame on the rising popularity of the industry's new tobacco-free alternatives, such as e-cigarettes.

"The only cause I can attribute it to is e-cigarettes," said Alan Schankel, managing director of Janney Capital Market's Fixed Income Strategy team. "I think they are having an impact."

In 2013, Americans purchased 13.3 billion packs of cigarettes and 400,000 equivalent packs of e-cigarettes, versus 14.1 billion packs of cigarettes and 200,000 equivalent e-cigarettes in 2012.

Wells Fargo Securities predicts the pace at which consumers switch from traditional cigarettes to e-vapor alternatives will surge in the coming years. It estimates that sales volumes for traditional cigarettes in the U.S. will decline by 68 percent over the next 10 years, while vapor cigarette sales will soar by more than 13-fold in the same period."

Short the tobacco bonds

.... and the CHIP program. Children's Health Insurance Program.

wiki:

"On February 4, 2009, President Barack Obama signed the Children's Health Insurance Reauthorization Act of 2009, expanding the healthcare program to an additional 4 million children and pregnant women, including for the first time legal immigrants without a waiting period."

Eleven days later we get the Tobacco Control act.

"An initial objection (to CHIP) of Republicans in the Senate was that proposing to pay for the services by raising the federal tax on cigarettes, from 24 cents a pack to 67 cents a pack, ignored the likely consequence that sale of tobacco products would decrease and tax revenues would increasingly fall short of those needed to pay for the expansion of benefits."

 

[Endor]

Toddkuen, thanks for sharing that paper... very interesting read, especially this part in the Terms of the MSA portion on the first page:

The participating manufacturers agreed to pay the settling states a total of $246 billion over a 25-year period; however, if the annual losses of tobacco sales of the participating manufacturers are more than two percent compared to the other tobacco companies that are not part of the MSA, the participating manufacturers can reduce their payments.

I haven't done any research beyond this paragraph on what that section in bold really means (perhaps others here are much more versed in the MSA than I am can raise their hand), but it raises some interesting scenarios in my mind:

1) Scenario 1: If e-cigs are deemed as tobacco products, then wouldn't that make e-cig manufacturers "other tobacco companies that are not part of the MSA" as soon as they are deemed? Although Blu is owned by one of the participating companies (Lorillard), NJOY and countless others are not. If we see the continued trend to move to e-cigs and resulting decrease in cigarette consumption as a result, wouldn't that allow for the payments to the states to be decreased since the MSA-participating tobacco companies can now compare their sales to new, non-MSA-participatory e-cig manufacturers?

2) Alternative Scenario 2: There has been a fair amount of discussion on the belief (that I share) that the draconian requirements for SE/new product submission that are part of the FDA proposed deeming regs will result in only the largest players having the resources to follow the process and get approved product. This means primarily BT. So, destroying the cottage industry manufacturing e-cigs and handing everything to BT would potentially help keep the payments steady. "Look, Lorillard, you're sales haven't decreased, you're selling Blu ecigs instead of traditional cigarettes; both are now tobacco products, so keep paying up!".

 

[Endor]

"On February 4, 2009, President Barack Obama signed the Children's Health Insurance Reauthorization Act of 2009, expanding the healthcare program to an additional 4 million children and pregnant women, including for the first time legal immigrants without a waiting period."

Eleven days later we get the Tobacco Control act.

"An initial objection (to CHIP) of Republicans in the Senate was that proposing to pay for the services by raising the federal tax on cigarettes, from 24 cents a pack to 67 cents a pack, ignored the likely consequence that sale of tobacco products would decrease and tax revenues would increasingly fall short of those needed to pay for the expansion of benefits."

...which is easily resolved by deeming e-cigs as tobacco products. Now, its easy-peasy to pass legislation to include e-cigs in the tax to continue the funding.

The rabid, frantic calls to deem e-cigs is all starting to click into place, isn't it?

 

[patkin]

I didn't think the stench coming off this pile of manure could get worse... boy was I wrong. I no longer wonder why only two of the "ailments" in my home medical dictionary among hundreds are NOT attributed to smoking. ("ailments" in quotes because one of them is pregnancy)

 

[Kent C]

Toddkuen, thanks for sharing that paper... very interesting read, especially this part in the Terms of the MSA portion on the first page:



I haven't done any research beyond this paragraph on what that section in bold really means (perhaps others here are much more versed in the MSA than I am can raise their hand), but it raises some interesting scenarios in my mind:

1) Scenario 1: If e-cigs are deemed as tobacco products, then wouldn't that make e-cig manufacturers "other tobacco companies that are not part of the MSA" as soon as they are deemed? Although Blu is owned by one of the participating companies (Lorillard), NJOY and countless others are not. If we see the continued trend to move to e-cigs and resulting decrease in cigarette consumption as a result, wouldn't that allow for the payments to the states to be decreased since the MSA-participating tobacco companies can now compare their sales to new, non-MSA-participatory e-cig manufacturers?

2) Alternative Scenario 2: There has been a fair amount of discussion on the belief (that I share) that the draconian requirements for SE/new product submission that are part of the FDA proposed deeming regs will result in only the largest players having the resources to follow the process and get approved product. This means primarily BT. So, destroying the cottage industry manufacturing e-cigs and handing everything to BT would potentially help keep the payments steady. "Look, Lorillard, you're sales haven't decreased, you're selling Blu ecigs instead of traditional cigarettes; both are now tobacco products, so keep paying up!".

Good questions. I'd point out how Bonnie, I think it was her, who pointed out that the cigalikes don't really deliver.... Here it is:

"Bonnie Herzog’s team suggest that the growth of second and third generation devices in the US (‘Vapors/Tanks’) is increasing faster than the overall sales of e-cigarettes (she uses the term E-Vapor to describe this category rather than ‘e-cigarettes’), and may be contributing to the slowing in the growth of e-cigarette sales as vapers switch from cigalikes to second and third generation devices."

New estimates double size of US e-cigarette market; increasing importance of refillable and modified devices. - Nicotine Science and Policy

... sooooo.... if there is any attempt to replace MSA funds with ecigs, they better dump the deeming doc .... because they are going to come up short of funds. As an anti-tax advocate, the black market is looking a bit brighter as the solution to deeming. Maybe I should keep my 'comments' to myself

 

[Kent C]

...which is easily resolved by deeming e-cigs as tobacco products. Now, its easy-peasy to pass legislation to include e-cigs in the tax to continue the funding.

The rabid, frantic calls to deem e-cigs is all starting to click into place, isn't it?

Perhaps not. See 'above' Good thinking on this though, although it leads me to the opposite conclusion.

... and thanks todd for posting this!

 

[toddkuen]

The bonds are already in the toilet as this information has got to be relatively "old" compared to what Wall Street traders know and, sadly, you can't short CHIP - perhaps the providers but not CHIP itself.

The "monetized" bond structure is/was a house of cards - no one really ever expected anyone to quit smoking. Hence the MSA was really just a "health care tax" on big tobacco. As long as people continue to die at the 1998 rate from smoking and no one prevents new smokers from entering the system at the steady 1998 rate the flow of cash to the bond holders continues. States, big tobacco and the government in general (CHIP, etc.) win big.

But ecigs have changed the equation dramatically and exposed the truth: states, like big tobacco, require people to smoke in order for them to keep their operating revenue in order (well, as much order as they can considering many are technically bankrupt from pension woes).

One could reasonably argue that CA and NY, with their strong attempts to eliminate ecigs, are actually putting their citizens at direct risk of death from combustion tobacco in order to A) maintain the steady flow of tobacco payments to bond holders and B) prevent themselves from taking general fund revenue to cover the shortfall.

Basically systematic killing off smokers to continue the revenue pipeline.

This kind of "selective government health program" hasn't been around since 1940's Germany.

I see congressional hearings, RICO statutes and criminal conspiracy here for those that set this up and created the monetized bonds (oh, but don't worry, our feckless government servants are well protected from being sued personally because they are only doing good for all - but they can be held criminally liable).

Those that are most at risk, e.g., low income citizens of places like NYC who would benefit most from not smoking combustion products, are literally being sentenced to death so that bond holders get their money and states don't go bankrupt.

I was shocked in 1998 when I heard about the monetization in the first place. Sadly, I had forgotten all about it until my wife's partner posted the Reuters link on her shop's FB.

This certainly trumps, for example, the killing native Americans in the 1800's as government mass genocide in the name of money.

One can easily argue that monetization in 1998 means that smoking deaths since were literally bought and paid for by the states and bond holders.

A "bond fund" that only operates successfully financially if people continue to do something bad put in place by government officials is a criminal enterprise. They knew tobacco was killing people and yet they monitized it.

The bonds don't make logical sense any other way...

 

[Endor]

"Bonnie Herzog’s team suggest that the growth of second and third generation devices in the US (‘Vapors/Tanks’) is increasing faster than the overall sales of e-cigarettes (she uses the term E-Vapor to describe this category rather than ‘e-cigarettes’), and may be contributing to the slowing in the growth of e-cigarette sales as vapers switch from cigalikes to second and third generation devices."

New estimates double size of US e-cigarette market; increasing importance of refillable and modified devices. - Nicotine Science and Policy

... sooooo.... if there is any attempt to replace MSA funds with ecigs, they better dump the deeming doc .... because they are going to come up short of funds. As an anti-tax advocate, the black market is looking a bit brighter as the solution to deeming. Maybe I should keep my 'comments' to myself

Very interesting research, thanks for sharing. My subjective hunch was this was true, based on the progression of other vapers I know, but nice to see some data behind that hunch.

The best part: this lends credence to my scenario #1, and if that comes to bear, all this anti-ecig propaganda will backfire in their face.

 

[Kent C]

Yeah, the 'short CHIP' was a joke

Good points all. We had a situation in my school district where there were 'projected funds' from a planned local oil company expansion. The school 'spent' those funds and the expansion of the oil company was cancelled leaving millions in deficits for the school. I led the PAC against the school levies attempting to make up the difference - pointing out the fiscal irresponsibility to spend funds they didn't yet have. We beat them 4 times (in Nov., Feb., May., and Aug. - they just keep coming back ) but lost in Nov. but with the mills decreased by half (a 'semi-win'). Some pay cuts occurred and the superintendent quit within a year.

 

[Kent C]

Very interesting research, thanks for sharing. My subjective hunch was this was true, based on the progression of other vapers I know, but nice to see some data behind that hunch.

The best part: this lends credence to my scenario #1, and if that comes to bear, all this anti-ecig propaganda will backfire in their face.

Both scenarios were correct - the second was the 'solution' to the first but I don't think that will be enough for the reasons stated. They will have to revise MSA and I think they will, but 2nd and 3rd generation ecigs will still rule. It really does look like the big ecig companies will try to get their eGo-type devices in, but it will be interesting what they use as predicates and how they establish 'substantial equivalents' if they do.

That said, if the MSA is revised there will be some relief from cigalikes, but imo, not for long.....

 

[toddkuen]

If Zeller came from the MSA world we can now see why he thinks making ecigs "derived from tobacco" an top priority.

 

[dshgr]

So glad I have years of nic base stockpiled.

 

[Kent C]

If Zeller came from the MSA world we can now see why he thinks making ecigs "derived from tobacco" an top priority.

But MSA was based on the harm and healthcare aspects of combustible tobacco, not vaporized eliquid. And even Zeller states 'we don't know what ecigarettes can do' and of course we have the one out of context statement that ecigs are 'good for public health'. I think the courts would have a problem with allowing ecigs to be 'packaged' in with cigarettes despite the derivation of nic base from tobacco, since it is well known that combustible tobacco is the real problem. That said, I don't underestimate anything that the government would do at this point.

 

[Stosh]

But MSA was based on the harm and healthcare aspects of combustible tobacco, not vaporized eliquid. And even Zeller states 'we don't know what ecigarettes can do and of course we have the one out of context statement that ecigs are 'good for public health'. I think the courts would have a problem with allowing ecigs to be 'packaged' in with cigarettes despite the derivation of nic base from tobacco, since it is well known that combustible tobacco is the real problem. That said, I don't underestimate anything that the government would do at this point.

If that is the case, the vaporizers should be charged at 0.5% of what combustibles pay as the real harm is that much less. But the FDA still refuses to quantify any harm reduction besides their approved pharmaceuticals.

 

[toddkuen]

New York tobacco bonds, according to this Bloomberg article, are a "buy of a lifetime."

According to the article: "Under the terms of the 1998 settlement, tobacco companies pay 46 states a percentage of their domestic sales in perpetuity. States and municipalities have sold $20 billion in tobacco bonds since New York first did so in 1999.

Some states said they wanted to take the money, really just the first 25 or 30-years' worth, up-front. They did this by turning part of the predicted revenue into bonds. Some of them also reasoned that by doing this, they would be transferring all the risk of the tobacco industry collapsing to bond buyers, while still getting a big pack of money. "

Tisk, tisk - New York cashing in on the fortunes of smokers and then, to prop up their flagging finances, cutting off access to smoking alternatives.

Go here and see that, like reckless homeowners in an ever growing real estate market, municipalities are "refinancing" these bonds as their outlook becomes bleaker.

Lots of interesting news on tobacco bonds on the above link.

Imagine this with a different industry, say GM and its ignition switch problem (heavy, dangling key chains kill the ignition randomly).

So the switches shut the cars off on the road while driving and people die.

Rather than fix the problem GM pays the government a percentage of revenue forever and the government looks the other way.

Eventually drivers figure this out.

But not before the government sells bonds (financial instruments) that assume GM will just keep paying forever.

Grandma buys a bond and the government uses GM's payments to pay Grandma interest on the bond.

But drivers start buying Dodges instead (because they don't want to die).

So the government outlaws Dodges to keep GM afloat to keep on making payments.

Pretty neat, huh?

So now we're at the point where people should be WAKING UP to realize that governments (as well as the FDA and big tobacco and pharma) need folks to keep smoking so they can make their payments.

 

[Kent C]

Or if you were a GM bondholder when the government bought GM