'The Journal Editorial Report,' March 14, 2009

This is a rush transcript from "The Journal Editorial Report," March 14, 2009. This copy may not be in its final form and may be updated.

PAUL GIGOT, FOX HOST: Up next on "The Journal Editorial Report," it's brass knuckle time for big labor as their drive to end secret ballots in union elections turn nasty. But are some Democrats going wobbly?

Plus, lessons from the Madoff swindle. Have investors learned anything? And will investigators be able to spot the next big scam?

The charity rose bowl. Liberal nonprofits seeing red with the Obama plan to sock it to rich donors.

"The Journal Editorial Report" begins right now.

Welcome to "The Journal Editorial Report." I'm Paul Gigot.

Big labor's drive to eliminate the secret ballot in union elections came back to Capitol Hill this week as the so-called Employee Free Choice Act was introduced in both houses of Congress. The bill, which would allow unions to gain representation simply by showing cards signed by a major of workers, has business groups united in opposition. Labor chiefs are putting on the brass knuckles threatening companies with government retaliation if they don't stop lobbying against it.

Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; assistant editorial page editor, James Freeman; Washington columnist, Kim Strassel; and senior editorial writer, Colin Levy.

Kim, I've never seen business as united against legislature in 20 or 30 years. Explain to our viewers why are they so opposed? How this would work.

KIM STRASSEL, WASHINGTON COLUMNIST: There's two aspects to this bill. One, as you mentioned, has to do with secret elections. Instead of having secret elections and going and voting your conscious as to whether or not you want to join the union, you would have to go and sign a card. This would be an ongoing process. And when unions finally got more than 50 percent of workers who signed this card, then they would get a union. That's one part of it.

The second part has to do with what's known as mandatory arbitration. It would say any newly created union, if they were having difficult coming to a first contract with their employer, it would get tossed to some sort of federal arbitrator who would make a decision about the contract.

(CROSSTALK)

GIGOT: And that second part, in particular, would put unions in the driver's seat when it comes to being able to negotiate a contract. If they can't settle after 120 days, the union could run out of clock and this arbitrator would settle in between whatever the two offers were.

James, I think this is the biggest — this would be the biggest change in union law in 60 years. So this is labor's number one priority.

JAMES FREEMAN, ASSITANT EDITORIAL PAGE EDITOR: Huge. And the reason they're bringing out the brass knuckles, the reason they're trying to stop this advertising and lobbying campaign is because it's working. This is really bad policy saying you want to take away the secret ballot. I have to believe if there's one vote where Mitch McConnell can hold his caucus...

GIGOT: He's the Republican major leader.

FREEMAN: Then you look at Democrats. This is a tough vote, especially for moderate southern Democrats, saying we're going to take away secret ballot or in the arbitration setting, we'll let the government set pay and benefits.

GIGOT: Colin, what are unions doing to get businesses to stop lobbying against them?

COLIN LEVY, SENIOR EDITORIAL WRITER: It's a classic case where they're using their toughest tactics to push their legislative agenda. They've written a letter — a group of unions led by the Service Employees International Union, wrote a letter a few weeks ago to Treasury Secretary Tim Geithner suggesting that these banks or companies that receive funds from the Troubled Asset Relief Programs shouldn't be able to lobby — shouldn't be able to lobby.

GIGOT: Saying to Geithner, look, you should cut these folks off if they keep lobbying against us. And they mentioned specifically the principal financial group out of Des Moines which had been playing a role against this.

Is this kosher, can you do that?

LEVY: Well, this is something that's a complete double standard by the union because unions every year receive millions of dollars in grants from agencies that they lobby. So there's really a case of the pot and the kettle here.

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: I think the fact we're describing in here is so much of this rubs people the wrong way. First of all the Card Check is a union organizer, going up to some guy and saying, hey, you want to join the union and sign this card.

GIGOT: Just so people understand, typically, you will be able to make that decision in private. If they come up to you and say, will you sign this card, and you don't do it, there's very visible peer pressure.

HENNINGER: I would say so. I would say so.

GIGOT: Put the arm around you and say, hey, Dan, you going to sign or not.

HENNINGER: And the second point, beyond that, if you join the unions, then a certain percentage of your paycheck would be taken out for union goes that go for political organizing. There's an element of desperation here. The unions are faced with economic reality. They're in a global economy. Wages are competitive now. And it's very difficult for them to maintain those wage scales. And to take these steps shows just how desperate they are.

The Chamber of Commerce, business is going to go to the masses, make big ad buys, explain this to the American people. As we were just suggesting, it could be a very difficult vote I think at crunch time in Congress. They have to go to their compromise solution.

STRASSEL: You know, — sorry. I was just going to say, too, this is a case where unions are trying to the take the opportunity of a down economy, when companies are sort of unpopular, to push their, you know — reverse the trend of the declining unionization. The unions used to be about 20 percent of the economy back in — the work force back in 1980. and they're down to 12 percent now. So they're seeing a small uptick in that regard and that's what they're going for while businesses are on the defensive.

GIGOT: Kim, which Senate Democrats are going wobbly, if any?

STRASSEL: There are a number of them. First of all, the one Republican who voted for this back in 2007, Arlen Specter, is backing away. You have, for instance, two of them, Blanch Lincoln, Mark Prior, both Democrats from Arkansas. Wal-Mart is in their state. People are worried about what this would do to economic performance of Wal-mart. You've got some of the new Colorado Senators, Senator Bennett, and Senator Udall, who are on the fence. You've got some other red state Democrats who are concerned.

It's important. They just introduced this legislation this week. Last time around, they had 46 cosponsors in the Senate. This time they've got 40.

GIGOT: Well, President Obama, ten days ago, said it's going to pass. So we're going to have a big brawl on this one.

Still ahead, the Bernie Madoff plea. Lessons for investigators and government investigators when we come back.

(COMMERCIAL BREAK)

(NEWS BREAK)

GIGOT: Former NASDAQ Chief Bernie Madoff pleading guilty to what could be the biggest swindle in Wall Street history, a Ponzi scheme almost 20 years in the making. Despite returns too good to be true and a competitor who repeatedly warned the SEC, the Madoff scandal came to light only after his son turned him in last December. Will investors and investigators be any smarter next time around?

We're back with Dan Henninger and James Freeman. Deputy Taste Editor Naomi Schaefer Riley also joins the panel.

Dan, Bernie Madoff in the slammer. That's satisfying. And going directly to jail, not his penthouse.

What have investigators learned and investor about this?

HENNINGER: It's a tremendous tragedy. I think we learned some things. The question is how long will we hold the lesson in our heads.

The first thing is, Bernie Madoff and these investors, richer, poorer, was producing incredible returns quarter after quarter after quarter. He was up around 14.5 percent. And a lot of people had to be saying to themselves, this is almost too good to be true. You know what, it was too good to be true. When you start thinking that, what then you have to do is something called due diligence, which was forgotten, not only by the small investor, but by the big boys like Fairfield Greenwich Group and Banco Santander, which really have something to answer for, for not doing simple due diligence.

GIGOT: James, do you think this is going to stop just with Madoff or are we going to see other people prosecuted. Certainly other people have been sued like these feeder funds that Dan referred to.

FREEMAN: That's right, more lawsuits. We should all be skeptical of his claim in court, that essentially he was acting alone. He didn't get into who else might have been involved in the conspiracy. Yes, I think there are others. Harry Markopolos said in his congressional testimony...

GIGOT: He's the competitive whistle blower.

FREEMAN: That's right. He tried to warn the SEC for years this was a Ponzi scheme. He said there are other operations in Europe. And I think it's also going to put a lot of pressure on hedge funds. Because the whole marketing premise is, I have a black box, it's a secret way of beating the market that I can't share with people. I think it's going to pressure a lot of people to maybe provide more detail.

GIGOT: One of the things I have a hard time understanding, the SEC did not look into the fact that he wasn't even trading. They put the money in a bank account, told everybody he was trading, and then never traded stocks. How can that be?

(LAUGHTER)

FREEMAN: Yeah. This is the greatest failing of my former colleagues at the SEC, they didn't ask the commissioners for subpoena power. They should have gotten the subpoenas, should have gone to the banks that did this with him, people that had connection and see if they could back up the claim. They basically seem to have taken his word at face value and gave him a slap on the wrist.

GIGOT: Naomi, they're going after nonprofits here. Some people as well. Those who have already been victimized for investing may have to pay another piper.

NAOMI SCHAEFER RILEY, DEPUTY TASTE EDITOR: This is a question about who is the victim here. I mean, Chuck Grassley once again has sort of made his voice known here.

GIGOT: Iowa populist, the (INAUDIBLE) foundation.

RILEY: He is. But look, he has a point. But he has said that all these foundations, board of directors, that include smart people — Morris Zuckerman has come out saying he was very wrong about the whole thing. But it included some very smart people and Chuck Grassley said maybe it's time to go after these people for investing foundation and nonprofit money with this guy. He has proposed extending something called the jeopardy excise tax, which punishing nonprofits for making risky investments. You could see a lot more people in court over this.

GIGOT: Has the SEC ever caught one of these guys?

HENNINGER: That's kind of the point. Every time something like this happens, we have this overreaction and we go, more regulation, go get them. It's like food contamination and the Food and Drug Administration. These regulators are responsible for thousands and thousands and thousands of individuals and institutions. If you think that that system is going to protect you 100 percent, I've got a bridge in Brooklyn or a Madoff Ponzi scheme.

GIGOT: Here's the question, James. Is this, this horrible case, and really a genuine crime, could this lead to prosecutors saying you know what, we're going to start to flood the zone with subpoenas and start to...

FREEMAN: It's a danger. The overreaction says danger. The SEC chairman has already signaled she wants to go after public companies. In other words, the bigger fines that shareholders end up paying. This wasn't a public company. But I've got to give the SEC credit for one thing. They had told people for years that your best defense is your own skepticism and diversifying. That essentially they are usually there after the problem already occurred. They probably can't get your money and back. It's like "Law & Order," once hearing the music, somebody's already dead.

(LAUGHTER)

GIGOT: When we have a mania like this, which is what we had, when everybody thought the stock would always going to go up and credit was easy to get, this is the kind of thing you get. People think — they forget that too good to be true.

HENNINGER: The first in history? No. It will be back. And the question is how long will people remember.

GIGOT: Dan, thanks.

When we come back, the charity revolt. Nonprofit liberals are seeing red over President Obama's plan to sock it to rich donors.

(COMMERCIAL BREAK)

GIGOT: Well, it looks like liberals have finally met a tax hike they don't like. The nonprofit world is up in arms over President Barack Obama's plan to limit tax deductions for charitable giving. The president's 2010 budget would introduce write-offs for Americans who fall in the top two tax brackets. Universities and other nonprofits fear that could curtail donations.

Naomi, the president's proposal to take the deduction you can take for, say, if you spend a dollar in donations right now, you get 35 percent of that you can write off, if you pay the top marginal rate. He wants to raise the top rate to about 40, but reduce the amount you can deduct to 28 percent. That's not that much.

Why are people upset?

RILEY: This has been a rough year for nonprofits and foundations, Paul. Their endowments have gone down. They've taken a big hit and now Obama is dealing them another hit and they are mad. People give a lot and tax exceptions are an incentive for them to give. They're going to lose money on this deal.

GIGOT: Who's rebelling, the Ivy League colleges, foundations, everybody across the board?

RILEY: Pretty much everybody across the board that I talked to, whether it's you're a local nonprofit in Harlem to some large universities. Everybody really sees this as it's going to be a big problem for them going forward. I think a lot of congressmen, Rangel among them...

GIGOT: Charlie Rangel, chairman of the tax writing Ways and Means Committee in the House.

RILEY: Congressmen are hearing from their constituents and some constituents are people that give them a lot of money and some of them are...

GIGOT: These are all Democrats. They love Barack Obama at Harvard and Yale.

HENNINGER: It's not going to get better for them. This tax plan was hatched during the campaign. It's like the Madoff tax plan. It's out of fantasy land, back when we were living fat. He's going to propose not only this, but in 2011, as we know, that the Bush tax cuts expire. Just when these donors are going to reconstitute their assets and wealth and growing it, he's going to raise the capital gains tax and raise their marginal rate, hitting these donors again and hitting these nonprofits again.

GIGOT: But this is an issue, Colin, about whether or not people give to charity because of the tax break or just out of the generosity in their hearts. Why should anybody get a tax break for giving?

LEVY: Well, I think the tax break is important because unless we have a system that's just a completely fair, flat tax, this is a way to get those people who have the most money to give to use that money. This is a situation now where about 40 percent of all the money that's given to charities comes from those top two tax brackets. And if you look at figures that came out recently, you actually had a situation where the number of millionaires across the country is at now, it's lowest level since 2003. It's gone from about 9 — a little over 9 million last year to about 6.5 million now. That's a significant decrease in the number of people who are giving the most money to charities.

GIGOT: But if you make $50,000 and you pay only 28 percent tax rate then you get a smaller tax deduction than the people in the high tax bracket for your charitable contributions. Is that really fair?

LEVY: Well, I mean, it's fair in the sense that, you know, you can't turn everything into class warfare. As soon as we start talking about reducing, you know, making it an issue in those terms, I think you're really sort of stepping backwards.

GIGOT: Obama is trying to make it a class issue, Naomi. He's trying to say if you're wealthier, you should not get the same kind of benefits that other do.

RILEY: He's essentially rerouting the charitable funds for the IRS. He's thinking of our taxes as charity as Joe Biden said during the campaign. He would just like the government to be in charge what the public good is and not have individual people making the decision.

GIGOT: Another issue in the charitable world, which is foundations are being lobbied heavily to make some of their donations based on race, gender and sexual preference, a portion of it. Explain that movement.

RILEY: Well, last week, a group called the National Committee for Responsibility came out with a report saying that these are the things they think foundations should do with their money. They should start giving 50 percent of it to marginalized groups. And you've just defined those for us. They should be giving 25 percent to organizing activities. And that they should also have diverse boards and staff, meaning that they hope that, you know, all these marginalized groups are represented on the board, and that those different groups basically spend their time on the boards arguing over where the money should go.

Without regard, of course, to the intent of the donor, who gave the money in the first place.

GIGOT: That's the thing. These foundations are created based on intent. Somebody says I want this money to go to, say, religion. I want this money to go to higher education. I want it to go to cancer research. All those things are very apolitical in the sense that they're not designed to go to any politically organized group. This is a way of politicizing charities, it seems.

RILEY: Absolutely. There are a number of large groups of that bought into this idea that with the goal of all charities is encouraging what the NCRP calls participatory democracy. It doesn't matter if your foundation is devoted to curing of cancer or higher education. What it should be devoted to is to the public good as we define it. We're getting these activist groups and a lot of legislators signing on to this idea this is the money should go.

GIGOT: There's some political momentum behind this on Capitol Hill. We have to watch this carefully.

We have to take one more break. When we come back our "Hits and Misses" of the week.

(COMMERCIAL BREAK)

GIGOT: Winners and losers, picks and pans, "Hits and Misses," it's our way of calling attention to the best and the worst of the week.

Dan, first to you.

HENNINGER: Famously, this week, President Obama signed a spending bill in private because he was so sick of hearing about earmarks. I just do not understand the embarrassment here. The big thing we're doing now is stimulus spending. $787 billion basically dropped from airplanes. Earmarks are pure stimulus. It can't get any better. Remember Hillary's hippy museum of Woodstock that would employ probably 50 people.

(LAUGHTER)

This is good stuff. I think the president should be signing those earmarks on the White House lawn.

GIGOT: All right.

Naomi?

RILEY: This week, Ward Churchill, the professor fired from the University of Colorado, started his wrongful termination suit against the university for firing him for shoddy scholarships. His lawyer, in his opening statement, managed to compared Mr. Churchill to Galileo, who was persecuted for speaking the truth to power, and also to John Scopes, who dared to each evolution in the schools. I would give a big miss to them for the comparison.

GIGOT: Historical overreach?

RILEY: Yes, perhaps.

Kim?

STRASSEL: A miss to the United Nations where all the malfeasance has come flooding out of the closet, this time in response to the U.N.'s new population report that says the population is going to hit 9 billion by 2050. This has caused much wailing and gnashing of teeth, can the earth really sustain all this. And, of course, the usual prescription is that we need to encourage everyone, especially the developing world, to stop making babies. Once again the United Nations just not celebrating humanity, but instead thinking of the bad side of the numbers.

GIGOT: So is Ward Churchill going to be reinstated, do you think, Naomi?

RILEY: No. I think the people of Colorado have had enough.

GIGOT: All right, thanks.

That's it for this week's edition of "The Journal Editorial Report." Thanks to my panel and to all of you for watching.

I'm Paul Gigot. We hope to see you right here next week.

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