Monthly Archives: August 2014

Humor: The Borowitz Report

WASHINGTON (The Borowitz Report)—After announcing, on Thursday, that it would seek $500 million to help “train and equip appropriately vetted elements of the moderate Syrian armed opposition,” the White House today posted the following Moderate Syrian Rebel Application Form:

Welcome to the United States’ Moderate Syrian Rebel Vetting Process. To see if you qualify for $500 million in American weapons, please choose an answer to the following questions:

As a Syrian rebel, I think the word or phrase that best describes me is:
A) Moderate
B) Very moderate
C) Crazy moderate
D) Other

I became a Syrian rebel because I believe in:
A) Truth
B) Justice
C) The American Way
D) Creating an Islamic caliphate

If I were given a highly lethal automatic weapon by the United States, I would:
A) Only kill exactly the people that the United States wanted me to kill
B) Try to kill the right people, with the caveat that I have never used an automatic weapon before
C) Kill people only after submitting them to a rigorous vetting process
D) Immediately let the weapon fall into the wrong hands

I have previously received weapons from:
A) Al Qaeda
B) The Taliban
C) North Korea
D) I did not receive weapons from any of them because after they vetted me I was deemed way too moderate

I consider ISIS:
A) An existential threat to Iraq
B) An existential threat to Syria
C) An existential threat to Iraq and Syria
D) The people who will pick up my American weapon after I drop it and run away

Complete the following sentence. “American weapons are…”
A) Always a good thing to randomly add to any international hot spot
B) Exactly what this raging civil war has been missing for the past three years
C) Best when used moderately
D) Super easy to resell online

Thank you for completing the Moderate Syrian Rebel Application Form. We will process your application in the next one to two business days. Please indicate a current mailing address where you would like your weapons to be sent. If there is no one to sign for them we will leave them outside the front door.

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Photograph by RGA/REA/Redux.

Naked Capitalism on the Fraud of Bank Regulation


Gillian Tett’s Astonishing Defense of Bank Misconduct

Posted on August 29, 2014 by

I don’t know what became of the Gillian Tett who provided prescient coverage of the financial markets, and in particular the importance and danger of CDOs, from 2005 through 2008. But since she was promoted to assistant editor, the present incarnation of Gillian Tett bears perilous little resemblance to her pre-crisis version. Tett has increasingly used her hard-won brand equity to defend noxious causes, like austerity and special pleadings of the banking elite.

Today’s column, “Regulatory revenge risks scaring investors away,” is a vivid example of Tett’s professional devolution.

The twofer in the headline represents the article fairly well. First, it take the position that chronically captured bank regulators, when they show an uncharacteristic bit of spine, are motivated by emotion, namely spite, and thus are being unduly punitive. Second, those meanie regulators are scaring off investors. It goes without saying that that is a bad outcome, since we need to keep our bloated, predatory banking system just the way it is. More costly capital would interfere with its institutionalized looting.

In other words, the construction of the article is to depict banks as victims and the punishments as excessive. Huh? The banks engaged in repeated, institutionalized, large scale frauds. If they had complied with regulations and their own contracts, they would not be in trouble. But Tett would have us believe the regulators are behaving vindictively. In fact, the banks engaged in bad conduct. To the extent that the regulators are at fault, it is for imposing way too little in the way of punishment, way too late.

As anyone who has been following this beat, including Tett, surely knows is that adequate penalties for large bank misdeeds would wipe them out. For instance, as many, including your humble blogger, pointed out in 2010 and 2011 that bank liability for the failure to transfer mortgages in the contractually-stipulated manner to securitazation trusts alone was a huge multiple of bank equity. So not surprisingly, as it became clear that mortgage securitization agreements were rigid (meaning the usual legal remedy of writing waivers wouldn’t fix these problems) and more and more cases were grinding their way through court, the Administration woke up and pushed through the second bank bailout otherwise known as the National Mortgage Settlement (which included 49 state attorney general settlements) of 2012.

Similarly, Andrew Haldane, then the executive director of financial stability for the Bank of England, pointed out that banks couldn’t begin to pay for the damage they did. In a widely-cited 2010 paper, Haldane compared the banking industry to the auto industry, in that they both produced pollutants: for cars, exhaust fumes; for bank, systemic risk. Remember that economic theory treats cost like pollution that are imposed on innocent bystanders to commercial activity as an “externality”. The remedy is to find a way to make the polluter and his customer bear the true costs of their transactions. From Haldane’s quick and dirty calculation of the real cost of the crisis (emphasis ours):

….these losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.

It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.

Contrast Haldane’s estimate of what an adequate levy would amount to with how Tett’s article depicts vastly smaller amounts as an outrage:

A couple of years ago Roger McCormick, a law professor at London School of Economics and Political Science, assembled a team of researchers to track the penalties being imposed on the 10 largest western banks, to see how finance was evolving after the 2008 crisis.

He initially thought this might be a minor, one-off project. He was wrong. Last month his project team published its second report on post-crisis penalties, which showed that by late 2013 the top 10 banks had paid an astonishing £100bn in fines since 2008, for misbehaviour such as money laundering, rate-rigging, sanctions-busting and mis-selling subprime mortgages and bonds during the credit bubble. Bank of America headed this league of shame: it had paid £39bn by the end of 2013 for its transgressions.

When the 2014 data are compiled, the total penalties will probably have risen towards £200bn. Just last week Bank of America announced yet another settlement with regulators over the subprime scandals, worth $16.9bn. JPMorgan and Citi respectively have recently settled with different US government bodies for mortgage transgressions to the tune of $13bn and $7bn.

Yves here. Keep in mind that these settlement figures are inflated, since they use the headline value, and fail to back out the non-cash portions (which are generally worth little, or in some cases are rewarding banks for costs imposed on third parties) as well as tax breaks.

In an amusing bit of synchronicity, earlier this week Georgetown Law professor Adam Levitin also looked at mortgage settlements alone and came up with figures similar to the ones that have McCormick running to the banks’ defense. But Levitin deems the totals to be paltry:

There’s actually been quite a lot of settlements covering a fair amount of money. (Not all of it is real money, of course, but the notionals add up).

By my counting, there have been some $94.6 billion in settlements announced or proposed to date dealing with mortgages and MBS….In other words, what I’m trying to cover are settlements for fraud and breach of contract against investors/insurers of MBS and buyers of mortgages.

Settlements aren’t the same as litigation wins, and I don’t know the strength of the parties’ positions in detail in many of these cases, but $94.6 billion strikes me as rather low for a total settlement figure.

And that is the issue that Tett tries to finesse. The comparison that she and McCormick make on behalf of the banks is presumably relative to their ability to pay, when the proper benchmark is whether the punishment is adequate given the harm done.

In fact, despite McCormick’s and the banks’ cavilling, investors understand fully that these supposedly tough settlements continue to be screaming bargains. When virtually every recent settlement has been announced, the bank in question’s stock price has risen, including the supposedly big and nasty $16.6 billion latest Bank of America settlement (which par for the course was only $9 billion in real money). The Charlotte bank’s stock traded up 4% after that deal was made public. So if investors are pleased with these pacts, what’s the beef?

The complaint, in so many words, is that these sanctions are capricious. Tett again:

“The numbers are getting bigger and bigger,” observes Prof McCormick, who has been so startled by this trend that last month he decided to turn his penalty-tracking pilot project into a full-blown, independent centre. A former leading European regulator says: “What is happening now is astonishing. If you had asked regulators a few years ago to predict how big the post-crisis penalties might be, our predictions would have been wrong – by digits.”

Now the article does list some abuses, such as the Libor scandal, that were exposed after the crisis. That goes double for chain of title abuses, which suddenly exploded into media and therefore regulators’ attention in the fall of 2010. That means the reason that the penalties have kept clocking up is that, in the absence of having performed large scale systematic investigations in the wake of the crisis, regulators are dealing with abuses that came to their attention after the “rescue the banks at all costs” phase. Those violations are just too visible for the officialdom to give the banks a free pass, particularly since the public is correctly resentful that no one suffered much if at all for crisis-related abuses.

So the banks’ unhappiness seems to result from the fact that having been bailed twice by the authorities (once in the crisis proper, a second time via the “get of out jail almost free” of the Federal/state mortgage settlements of 2012), the financiers thought they were home free. They are now offended that they are being made to ante up for some crisis misconduct as well as additional misdeeds. Yet Tett tries to depict the regulators as still dealing with rabbit of 2008 bad deeds that are still moving through the banking anaconda, when a look at JP Morgan’s rap sheet shows a panoply of violations, only some of which relate to the crisis (as in resulting from pre-crisis mortgage lending or related mortgage backed securities and CDOs):

Bank Secrecy Act violations;
Money laundering for drug cartels;
Violations of sanction orders against Cuba, Iran, Sudan, and former Liberian strongman Charles Taylor;
Violations related to the Vatican Bank scandal (get on this, Pope Francis!);
Violations of the Commodities Exchange Act;
Failure to segregate customer funds (including one CFTC case where the bank failed to segregate $725 million of its own money from a $9.6 billion account) in the US and UK;
Knowingly executing fictitious trades where the customer, with full knowledge of the bank, was on both sides of the deal;
Various SEC enforcement actions for misrepresentations of CDOs and mortgage-backed securities;
The AG settlement on foreclosure fraud;
The OCC settlement on foreclosure fraud;
Violations of the Servicemembers Civil Relief Act;
Illegal flood insurance commissions;
Fraudulent sale of unregistered securities;
Auto-finance ripoffs;
Illegal increases of overdraft penalties;
Violations of federal ERISA laws as well as those of the state of New York;
Municipal bond market manipulations and acts of bid-rigging, including violations of the Sherman Anti-Trust Act;
Filing of unverified affidavits for credit card debt collections (“as a result of internal control failures that sound eerily similar to the industry’s mortgage servicing failures and foreclosure abuses”);
Energy market manipulation that triggered FERC lawsuits;
“Artificial market making” at Japanese affiliates;
Shifting trading losses on a currency trade to a customer account;
Fraudulent sales of derivatives to the city of Milan, Italy;
Obstruction of justice (including refusing the release of documents in the Bernie Madoff case as well as the case of Peregrine Financial).

Finally, let’s dispatch the worry about those poor banks having to pay more to get capital from investors. If this actually happened to be true, it would be an extremely desirable outcome, for it would help shrink an oversize, overpaid sector.

However, the Fed and FDIC earlier this month, in an embarrassing about face, admitted that the “living wills” that banks submitted were a joke, meaning that the major banks can’t be resolved if they start to founder. We’ve said for years that the orderly liquidation authority envisioned by Dodd Frank is unworkable. And we weren’t alone in saying that; the Bank of International Settlements and the Institute for International Finance agreed.

The implication, which investors understand full well, is that “too big to fail” is far from solved, and taxpayers are still on the hook for any megabank blowups. As Boston College professor Ed Kane pointed out in Congressional testimony last month, and Simon Johnson wrote in Project Syndicate earlier this week, that means that systemically important banks continue to receive substantial subsidies.

Yet Tett would have you believe that banks are suffering because investors see them as bearing too much litigation/regulatory risk. If that were true, Bank of America, the most exposed bank, would have cleaned up its servicing years ago.

It’s clear that banks and investors regard the risk of getting caught as not that great, and correctly recognize the damage even when they are fined as a mere cost of doing business. It is a no brainer that their TBTF status assures that no punishment will ever be allowed to rise to the level that would seriously threaten theses institutions. Everyone, including Tett, understands that this is all kabuki, even if the process is a bit untidy. So all of this investor complaining is merely an effort to get regulators to fatten their returns a bit.

Bank defenders like Tett would have you believe that the regulators have been inconsistent and unfair. In fact, if they have been unfair to anyone, it is to the silent equity partners of banks, meaning taxpayers. Banks are so heavily subsidized that they cannot properly be regarded as private firms and should be regulated as utilities. Fines for serious abuses that leave banks able to continue operating in their current form are simply another gesture to appease the public. Yet Tett would have you believe that a manageable problem for banks is a bigger cause for concern than the festering problem of too big to fail banks and only intermittently serious regulators.

Rolling Stone’s Tax Scam Story

Saved for posterity:

The Biggest Tax Scam Ever

Some of America’s top corporations are parking profits overseas and ducking hundreds of billions in taxes. And how’s Congress responding? It’s rewarding them for ripping us off

In July, the American pharmaceutical giant AbbVie, maker of the world’s top-selling drug – the arthritis treatment Humira – reached a blockbuster deal to acquire European rival Shire, best known for the attention-deficit medication Adderall. The merger was cheered by Wall Street, not for what the deal will do to advance pharmaceutical science, but because it will empower the bigger firm, AbbVie, to renounce its U.S. citizenship.

Tea Party The Nonexistent Case for Never Raising Taxes

At $55 billion, the AbbVie deal is the largest in a cavalcade of corporate “inversions.” A loophole in American tax law permits companies with just 20 percent foreign ownership to reincorporate abroad, which means that if a big U.S. firm acquires a smaller company located in a tax haven, it can then “invert” – that is, become a subsidiary of its foreign-based affiliate – and kiss a huge share of its IRS obligations goodbye.

AbbVie shareholders will continue to control 75 percent of the company, which will still be managed by executives outside Chicago. But the merged company will now file its tax returns on the island of Jersey – a speck of land in the English Channel, where Shire is incorporated. AbbVie, which racked up more than $10 billion in Humira sales last year, will slash its effective corporate tax rate from 22 percent to 13. The cost to the U.S. Treasury? Possibly as much as $1.3 billion by the year 2020.

Companies striking deals to become technically foreign can be found in all corners of American business, from California computer-equipment manufacturer Applied Materials to Minnesota medical-device giant Medtronic to North Carolina­based banana behemoth Chiquita. Little is changing in the core business of these firms. They will just pay less in taxes – and to a foreign government, often Ireland or the Netherlands.

These tax turncoats have drawn the ire of President Obama. “I don’t care if it’s legal,” he declared this summer. “It’s wrong.” These inverted companies, he said, “don’t want to give up . . . all the advantages of operating in the United States. They just don’t want to pay for it.”

With Congress gridlocked, Obama is vowing to tackle the problem on his own – as he has done to advance his agenda on LGBT equality and immigration reform. In August, he threatened “quick” executive action to “at least discourage” inversion schemes. But pressed for specifics, the president conceded the White House has no silver bullet. In fact, Treasury Secretary Jacob Lew had declared only weeks earlier, “We do not believe we have the authority to address this inversion question through administrative action. If we did, we would be doing more.”

Over the next decade, corporate inversions could cost the U.S. Treasury nearly $20 billion – revenues that could other­wise pay for Head Start programs, to rebuild roads and bridges, or just bring down the deficit. The wave of inversions is threatening “to hollow out the U.S. corporate income tax base,” Lew warned in a July letter to the chief tax writers in the House and Senate. But inversions are just the tip of the iceberg. The crisis of corporate tax avoidance is far more pervasive – and destructive – than either Obama or Lew is letting on. At a moment when Congress appears impossibly divided, a strong, bipartisan consensus has, in fact, emerged in Washington: The world’s richest corporations will get away with fleecing hundreds of billions of tax dollars from the rest of us.

In public, Democratic politicians blast corporate tax dodgers. But the party’s most viable comprehensive “reform” proposals would reward the crooked accounting of U.S.-based multinationals. Republican­backed legislation – no surprise – would only make the crisis worse. Why? “It’s not rocket science; it’s money and politics,” says Jared Bernstein, former top economic adviser to Vice President Joe Biden. “Concentrated wealth is buying the policy agenda it likes, and blocking one it doesn’t.”

Last year the IRS finally collected more in tax receipts than it did before the crash in 2007. But dig a little deeper into the numbers and it is clear we haven’t returned to normal: Corporations paid nearly $100 billion less in federal income taxes last year than before the Great Recession – down nearly 40 percent as a share of GDP. In fact, corporate profits and corporate tax collections are now trending in opposite directions. Profits were up $93 billion last year – to a high of $2.1 trillion, according to the Commerce Department. Yet corporate tax payments actually fell last year by more than $15 billion.

How is this possible?

It goes way beyond inversion. The top names in American business – from Apple to Xerox – have joined in the greatest tax dodge in world history. Using clever accounting games, these corporations have siphoned majestic sums out of the country and into tax-haven shell companies – where the money is untouchable by the IRS.

The numbers are staggering. More than $2 trillion in U.S.-based multinational profits currently sit in offshore accounts, representing, by credible estimates, in excess of $500 billion in unpaid taxes. If that money were deposited in federal coffers tomorrow, it would wipe out the deficit for 2014. And every year that Congress dithers on a crackdown, America is forfeiting an approximate $90 billion in revenue.

the great american bubble machine
The details of corporate tax avoidance can be dizzyingly complex. But the broad strokes are simple. For more than a century, American corporations have been required to pay taxes on their global income. There’s no double taxation problem; companies receive credit for taxes paid over to other governments. The logic of our system is straightforward: U.S. corporate citizens enjoy benefits that aren’t cabined inside our borders. The U.S. Navy secures shipping lanes needed to transport goods from Chinese factories to ports around the world. The American legal system protects corporate patents and other intellectual property worldwide. U.S. taxpayers fund the R&D that makes many of these corporations profitable in the first place.

There is one odd hitch in our system of global taxation. The corporate tax bill – nominally 35 percent – is not due in America until the foreign profits come home. In the jargon of the corporate world, the taxes are “deferred” until the profits are “repatriated.” Until then, the offshore cash can be invested and grow U.S.-tax-free, not unlike your 401(k).

“The deferral tax break really highlights how broken our tax code is,” says Ron Wyden, the Oregon Democrat who chairs the Senate Finance Committee. “When you park a big chunk of cash overseas, you get a huge tax break for it.”

In reality, much of the untaxed income is actually earned in the United States before elaborate accounting schemes siphon it overseas. The racket is simplest for tech and pharmaceutical companies, whose value is tied to intellectual property. According to David Cay Johnston, author of Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich – and Cheat Everybody Else, Pfizer provides a prime example. When the company was developing Viagra, it transferred the economic rights to its intellectual property abroad, ultimately to a shell company in Liechtenstein – an infamous European tax haven. On each sale of the drug here, the European subsidiary charged the U.S. parent company a steep royalty – payment of which moved the profit from high-tax America to low- to zero-tax Liechtenstein.

Adding insult to injury, this self-dealing creates a phantom business expense in the United States. “They get a tax deduction in America while they pile up the money in another country, tax-free,” says Johnston.

Contrary to what the term “offshore” might suggest, these untaxed profits are not stranded. “There’s this false notion that these funds are locked in a strongbox somewhere,” says Edward Kleinbard, a former chief of staff for Congress’ Joint Committee on Taxation. In reality, these untaxed foreign profits are often banked, by the offshore subsidiaries themselves, in Manhattan – where they’re used to invest in stocks and U.S. Treasury bonds. “The money,” says Kleinbard, “is already back in the U.S. economy.”

Worse, equally convoluted accounting sleights of hand can be used to make the untaxed income – or at least its financial power – available to fund daily corporate operations in the U.S., or just enrich shareholders. The ratings agency Standard & Poor’s recently coined a term to describe this practice: “synthetic cash repatriation.”

Take Apple, which wanted to reward investors last year with a $60 billion stock buyback that would boost the company’s share price. Apple did not have enough cash in its American accounts to complete the deal. And the company couldn’t legally tap its “offshore” billions (reportedly banked in Manhattan) without paying U.S. taxes.

To sidestep the law, Apple borrowed the cash, using the largest corporate bond offering in history to raise $17 billion in the States. Thanks to the massive piles of offshored cash and securities on its books – presently more than $137 billion – Apple’s net cost of borrowing was minuscule, about 1.57 percent. Apple liked this trick so much it repeated it – raising another $12 billion in April this year. Shareholders got their reward. Only Uncle Sam was cut out of the deal.

The crisis in multinational corporate tax avoidance is growing exponentially. According to an analysis by Audit Analytics, the indefinitely reinvested foreign earnings of the firms in the Russell 1000 Index surged from $1.1 trillion in 2008 to more than $2.1 trillion in 2013. That latter figure is greater than the GDP of Russia.

The analysis reveals that the biggest names in corporate America are boycotting the U.S. tax system, en masse. Top offenders include giants from high-tech (Microsoft, $76 billion); Big Pharma (Pfizer, $69 billion); Big Oil (Exxon­Mobil, $47 billion); investment banks (Goldman Sachs, $22 billion); Big Tobacco (Philip Morris, $20 billion); discount retailers (Wal-Mart, $19 billion); fast-food chains (McDonald’s, $16 billion) – even heavy machinery (Caterpillar, $17 billion). General Electric has $110 billion stashed offshore, and enjoys an effective tax rate of four percent – 31 points lower than its statutory obligation to the IRS.

“The things these companies are doing, 20 years ago would almost certainly have been illegal,” says Bob McIntyre, president of Citizens for Tax Justice. “But now you’ve got so many big, powerful corporations doing it that it’s the norm.” Systematic avoidance helps explain why corporate income taxes – one-third of federal revenue in the 1950s – have now dropped below 10 percent of Treasury receipts today.

Many in corporate America justify this rampant tax dodging by arguing that the 35 percent corporate tax rate in the U.S. is too high. In reality, our system offers big corporations so many other tax favors that the effective tax multinationals pay on their U.S. profits is often lower than what the same companies pay in other developed nations. “The constant corporate whining that they’re overtaxed in the United States,” McIntyre says, “is bullshit.”

America confronted – and largely dealt with – the issue of international tax loopholes once before. A half-century ago, the Kennedy administration understood that American corporations were using accounting gimmicks to shift untaxed profits overseas. “Deferral has served as a shelter for tax escape through the unjustifiable use of tax havens,” President Kennedy said in 1961. Congress eventually agreed on new laws that drew a sharp line between “active” income – earned from selling real-world goods and services – and “passive” income, the easily manipulated paper profits generated from financial transactions. The former would still qualify for the deferral tax break; the latter would be taxed immediately.

The Kennedy-era reforms kept corporate tax avoidance substantially in check through both Democratic and Republican administrations. Even Reagan cracked down on multinational tax dodgers with the tax reform of 1986. But changes in recent years – including one in 1997 and another in 2006 – have, according to a recent Senate investigation, “nearly completely undercut” the ability of the Treasury to tax the paperwork profits of multinationals. The original sin was committed by the Clinton Treasury – then led by Robert Rubin, later a top executive at Citigroup and a major player in the subprime mortgage crisis. In 1997, Treasury changed regulations to permit corporations to decide for themselves which subsidiaries were relevant for tax purposes, simply by ticking off a box on a tax form. But these changes, intended to simplify the tax code, also opened a colossal loophole.

By telling the IRS to treat certain offshore subsidiaries as “disregarded entities” – a.k.a. “tax nothings” – corporate accountants could divert and mask passive income, making it untaxable abroad. “I don’t think they realized how much check-the-box would lubricate international tax avoidance,” says Kleinbard.

Corporate accountants were gleeful. Tax watchdogs were horrified. “The stupid Clinton Treasury,” McIntyre says bitterly. “They were warned about this before they put out the regulations. Then they discovered that all the people who were telling them they were idiots were right.”

For a brief moment, Treasury sought to reverse course. But lobbyists from firms including Monsanto, Morgan Stanley, IBM and Philip Morris locked arms to defend their de facto tax cut. The Clinton Treasury backed down. Soon, some administration officials took a spin through the revolving door – raising troubling questions about the relationship between corporate America and its regulators. William Morris, who became the Clinton Treasury’s associate international tax counsel around the time the regulations were enacted, jumped to GE, where today he orchestrates the firm’s global tax policy.

The great corporate tax dodge exploded under the presidency of George W. Bush. By 2004, American multinationals had siphoned hundreds of billions of dollars offshore. Far from cracking down, the Republican Congress rewarded corporate tax dodgers with a “repatriation tax holiday.” Multinationals were invited to bring home their overseas earnings – to be taxed at a measly 5.25 percent.


The Vampire Squid Strikes Again

This tax giveaway was part of Bush’s American Jobs Creation Act and sold to the public as a way to provide a shot in the arm to the U.S. economy. More than $300 billion came home – nearly 80 percent of it from locations the U.S. government considers tax havens. But the tax holiday didn’t spur investment, growth or jobs. In fact, the top 15 participants, after bringing home a collective $150 billion, proceeded to slash 20,000 jobs. The act did little more than make rich investors even richer. A huge proportion of each repatriated dollar – between 60 and 92 cents – wound up in the hands of shareholders.

The Bush tax holiday also “dangled in front of every CFO in America the expectation that there would be another tax holiday, and another after that,” says Kleinbard. Eager to reassure corporate America that pipelining profits offshore was now kosher, Congress enacted little­debated legislation in 2006 that codified tax exclusions enabled by the decade-old check-the-box rules. The accounting boondoggle was now doubly entrenched – in law and regulation. The impact was stark: In 2006, corporations held roughly $600 billion offshore. That sum would soon double, then triple.

In his first campaign for president, Barack Obama called for “ending tax breaks for companies that ship jobs overseas” – shorthand for repealing tax deferrals on offshored corporate profits. But upon taking office in 2009, Obama lowered his sights, proposing more modest reforms, including elimination of check-the-box and a limit on tax deductions linked to offshore profits. Despite preserving deferral, these reforms were still projected to raise $210 billion over a decade. And Obama continued to talk tough. In May of that year, he denounced our “broken tax system, written by well­connected lobbyists,” and promised to “restore fairness and balance to our tax code.”

But even these proposals ran into a corporate buzz saw. Around 200 multi­nationals, including top backers of Democrats, had joined forces in a campaign spearheaded by the Business Roundtable and the U.S. Chamber of Commerce. Ken Kies, a top lobbyist for companies including GE and Microsoft, told reporters, “This is going to be the biggest fight for the corporate community in the next two years.”

The corporate blitz worked. The new president, who’d won more votes than Ronald Reagan, backed down. “We were doing the Recovery Act, health care reform and financial reform,” says Bernstein, Biden’s former economic adviser. “Adding a massive fight with multinational corporations just wouldn’t have been smart.” Far from ending the abuses of corporate tax avoidance, the Obama administration has since become complicit. The president has twice signed legislation reauthorizing the Bush law that effectively codifies check-the-box. The provision is among a package of “tax extenders” – including loopholes favored by both parties – that Congress habitually tacks on to other, must-pass legislation. These corporate giveaways were last rubber-stamped in the 2013 bill that pulled America back from the “fiscal cliff.”

Without meaningful resistance from Congress, corporations are pressing forward with abusive tax schemes. Two recent Senate investigations offer a window into the dark arts of corporate America’s tax avoidance.

Apple’s tax strategies in particular have come under the microscope. On a recent earnings call, the Silicon Valley giant announced it has parked $137.7 billion offshore. In its own SEC filings, Apple has revealed it would have to pay nearly 33 percent in U.S. tax – some $45 billion – to repatriate those offshored earnings. That would be more than enough to fund NASA for the next two years.

According to Senate investigators, Apple makes use of “ghost companies,” incorporated in Ireland as “a conduit for shifting billions of dollars in income from the U.S.” From 2009 to 2012, Apple booked $30 billion in income to a subsidiary called Apple Operations International, an entity with no official employees. But thanks to overlapping loopholes in Irish and American tax law, AOI has not been forced to declare itself a tax resident of either country. As a result, for the past five years, it filed no returns, and its profits weren’t taxed by any government. “Apple sought the Holy Grail of tax avoidance,” said Sen. Carl Levin, D-Mich., chairman of the Permanent Subcommittee on Investigations. Apple, for its part, insists that its accounting practices are legitimate. “We pay all the taxes we owe,” said CEO Tim Cook, testifying before Congress in May 2013.

While tech firms and Big Pharma have long made use of accounting tricks to offshore profits, big industrial concerns have not, historically, been able to play games to the same degree. That’s no longer true. Starting about 15 years ago, heavy-equipment manufacturer Caterpillar paid accounting firm PricewaterhouseCoopers $55 million to create a scheme to “migrate profits” from the U.S. to Switzerland.

With no change to its core business, Caterpillar began booking earnings from its U.S.-managed parts business in Geneva – after first negotiating a deal with Swiss authorities to tax those earnings at four to six percent. From 2000 to 2012, Caterpillar shifted more than $8 billion in taxable income to Europe, deferring $2.4 billion in U.S. taxes. “In the fantasy­land that is international tax law,” Levin said, “tax lawyers waved a magic wand to make millions of dollars in U.S. taxes disappear.”

The real problem with multinational corporate tax avoidance is not that the firms are breaking the law. It’s that the law itself is broken. “Most of what they’re doing is completely legal,” says a top Senate tax staffer. “The problem is with the system that allows them to do it.”

Democratic Senate Finance Chairman Ron Wyden has long sought to overhaul the corporate tax system. Wyden talks like a progressive champion, likening the current tax code to “a rotten carcass that the special interests feast on.” He has introduced legislation that would eliminate deferral for all international corporate profits, which would be a huge victory for taxpayers. According to a Joint Committee on Taxation estimate, forcing companies to pay taxes on their profits as they’re earned would raise around $600 billion over 10 years.

If only Wyden had stopped there. In an attempt to draw support from tax-phobic GOP lawmakers, Wyden would actually give away all that revenue – plus $200 billion more over the first decade, according to the Tax Policy Center – by slashing the U.S. corporate tax rate to just 24 percent. Wyden insists that this low rate would both keep high-skill, high-wage jobs at home and deter companies from “manipulating the tax code to set up shop overseas.”

“The morons in Congress are either unbelievably disingenuous,” H. David Rosenbloom, who directs the international tax program at NYU’s law school, says, “or too stupid to understand this.” There’s no way the U.S. can set its tax rates low enough to compete with tax-haven nations like Ireland, he says, and still run a global superpower.

Wyden has also called for a repeat of the 2004 tax holiday – allowing offshored cash to come at the discounted rate of just 5.25 percent. On $2.1 trillion in offshored earnings, that could give these companies close to a half-trillion-dollar tax break. Wyden calls the corporate giveaway “a sensible transition.”

The best that can be said of Wyden’s approach is that by ending deferral and making schemes to offshore U.S. profits moot, it would stop the bleeding. In contrast, the top Republican proposal, developed by House Ways and Means Chairman Dave Camp, would rip open new arteries. Like Wyden, Camp would also slash the overall corporate tax rate – to 25 percent. In lieu of a tax holiday, he would impose a “transition tax” on offshore profits, from 8.75 percent to as low as 3.5 percent. Camp’s legislation “solves” the problem of deferred offshore profits by largely surrendering the United States’ right to tax corporate earnings booked abroad – making our international tax system “even more of a mess than it is now,” writes McIntyre.

This is the reality of our political system in 2014: In what should be a titanic battle between multinational corporate power and federal power, our elected representatives are hardly putting up a fight. Obama has been a sharp critic of corporate tax avoidance. Yet the offshore corporate earnings stash has nearly doubled on his watch. Senate Majority Leader Harry Reid has unleashed blistering attacks on corporations like Walgreens that have threatened to renounce their U.S. citizenship for tax purposes. And he has said he’s “ready to roll” on a vote for a (sure-to-fail) Democratic bill that seeks a two-year moratorium on inversions. Yet Reid has also been shopping a stand-alone tax-holiday proposal, rewarding multinational tax avoiders with a 9.5 percent rate. Reid’s partner in this effort? Kentucky Republican Rand Paul – who’s been courting right-wing billionaire David Koch. “Rand’s got good ideas,” Koch told The Wichita Eagle in July.

The American people want change: Two-thirds of Americans believe large corporations should be paying higher taxes, and 80 percent believe corporate loopholes should be closed. But Washington isn’t listening. The kid-glove treatment of corporate tax offenders by both parties is exhibit A in America’s shift from a functioning democracy to a nascent oligarchy. It aligns with a recent study conducted by Princeton and Northwestern that concluded “organized groups representing business interests have substantial independent impacts” on federal decision making, while the interests of average Americans “appear to have only a minuscule, statistically nonsignificant impact.”

“Corporate tax breaks are beloved by those who take advantage of them,” says Bernstein. “You’re not going to change that without realigning a lot of politics.” Until that day comes, we’ll be living with the tax policy that multinational corporations have bought and paid for. Which means that you and I are stuck with the bills.


Inflation Since 1978


Greg Palast: Blood for Oil in New Orleans

Crime Scene—New Orleans

By Greg Palast
Tuesday, 26 August 2014

[Lower Ninth Ward, New Orleans]  Nine years ago this week, New Orleans drowned.  Don’t you dare blame Mother Nature.  Miss Katrina killed no one in this town.  But it was a homicide, with nearly 2,000 dead victims.  If not Katrina, who done it?  Read on.

The Palast Investigative Fund is making our half-hour investigative report available as a free download – Big Easy to Big Empty: The Untold Story of the Drowning of New Orleans, produced for Democracy Now.  In the course of the filming, Palast was charged with violation of anti-terror laws on a complaint from Exxon Corporation. Charges were dropped, and our digging continued.

Who is to blame for the crushing avalanche of water that buried this city?

It wasn’t an Act of God.  It was an Act of Chevron.  An Act of Exxon. An Act of Big Oil.

Take a look at these numbers dug out of Louisiana state records:

Conoco 3.3 million acres
Exxon Mobil 2.1 million acres
Chevron 2.7 million acres
Shell 1.3 million acres

These are the total acres of wetlands removed by just four oil companies over the past couple decadesIf you’re not a farmer, I’ll translate this into urban-speak:  that’s 14,688 square miles drowned into the Gulf of Mexico.

Here’s what happened.  New Orleans used be to a long, swampy way from the Gulf of Mexico.  Hurricanes and storm surges had to to cross a protective mangrove forest nearly a hundred miles thick.

But then, a century ago, Standard Oil, Exxon’s prior alias, began dragging drilling rigs, channeling pipelines, barge paths and tanker routes through what was once soft delta prairie grass.  Most of those beautiful bayous you see on postcards are just scars, the cuts and wounds of drilling the prairie, once America’s cattle-raising center.  The bayous, filling with ‘gators and shrimp, widened out and sank the coastline.  Each year, oil operations drag the Gulf four miles closer to New Orleans.

Just one channel dug for Exxon’s pleasure, the Mississippi River-Gulf Outlet (“MR-GO”) was dubbed the Hurricane Highway by experts—long before Katrina—that invited the storm right up to—and over—the city’s gates, the levees.

Without Big Oil’s tree and prairie holocaust, “Katrina would have been a storm of no note,” Professor Ivor van Heerden told me.  Van Heerden, once Deputy Director of the Hurricane Center at Louisiana State University, is one of the planet’s the leading experts on storm dynamics.

If they’d only left just 10% of the protective collar. They didn’t.

Van Heerden was giving me a tour of the battle zone in the oil war.  It was New Orleans’ Lower Ninth Ward, which once held the largest concentration of African-American owned homes in America.  Now it holds the largest contrition of African-American owned rubble.

We stood in front of a house, now years after Katrina, with an “X” spray-painted on the outside and “1 DEAD DOG,” “1 CAT,” the number 2 and “9/6” partly covered by a foreclosure notice.

The professor translated:  “9/6” meant rescuers couldn’t get to the house for eight days, so the “2”—the couple that lived there––must have paddled around with their pets until the rising waters pushed them against the ceiling and they suffocated, their gas-bloated corpses floating for a week.

In July 2005, Van Heerden told Channel 4 television of Britain that, “In a month, this city could be underwater.” In one month, it was.  Van Heerden had sounded the alarm for at least two years, even speaking to George Bush’s White House about an emergency condition:  with the Gulf closing in, the levees were 18 inches short.  But the Army Corps of Engineers was busy with other rivers, the Tigris and Euphrates.

So, when those levees began to fail, the White House, hoping to avoid Federal responsibility, did not tell Louisiana’s Governor Kathleen Blanco that the levees were breaking up.  That Monday night, August 29, with the storm by-passing New Orleans, the Governor had stopped the city’s evacuation.  Van Heerden was with the governor at the State Emergency Center.  He said, “By midnight on Monday the White House knew. But none of us knew.”

So, the drownings began in earnest.

Van Heerden was supposed to keep that secret.  He didn’t.  He told me, on camera—knowing the floodwater of official slime would break over him. He was told to stay silent, to bury the truth. But he told me more.  A lot more.

“I wasn’t going to listen to those sort of threats, to let them shut me down.”

Well, they did shut him down. After he went public about the unending life-and-death threat of continued oil drilling and channelling, LSU closed down its entire Hurricane Center (can you imagine?) and fired Professor van Heerden and fellow experts. This was just after the University received a $300,000 check from Chevron.  The check was passed by a front group called “America’s Wetlands”—which lobbies for more drilling in the wetlands.

In place of Van Heerden and independent experts, LSU’s new “Wetlands Center” has professors picked by a board of petroleum industry hacks.

In 2003, Americans protested, “No Blood for Oil” in Iraq.  It’s about time we said, “No Blood for Oil”—in Louisiana.

Naked Capitalism on Looting Pension Funds

New Jersey Funneling Pension Fund Cash to Wall Street Investment Managers

Posted on August 26, 2014 by

By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen

David Sirota has carved out a much-needed niche lately by poking around in the unseemly deals between public pension funds and Wall Street predators, and he brings yet another scoop, this time in New Jersey:

Gov. Chris Christie’s administration openly acknowledged that more New Jersey taxpayer dollars were going to land in the coffers of major financial institutions. It was 2010, and Christie had just installed a longtime private equity executive, Robert Grady, to manage the state’s pension money. Grady promoted a plan to put more of those funds into riskier investments managed by Wall Street firms. Though this would entail higher fees, Grady said the strategy would “maximize returns while appropriately managing risk.”

Four years later, New Jersey has secured only half the promised results. The state has sent more pension money to big-name Wall Street firms like Blackstone, Third Point, Omega Advisors, Elliott Associates and Grady’s old firm, The Carlyle Group. Additionally, the amount of fees the state pays financial managers has more than tripled since Christie assumed office. New Jersey is now one of America’s largest investors in hedge funds.

The “maximized returns” have yet to materialize… Had New Jersey’s pension system simply matched the median rate of return, the state would have reaped roughly $3.8 billion more than it did between fiscal years 2011 and 2014, says pension consultant Chris Tobe.

The $939.8 million million in Wall Street fees from 2010-2013 are bad enough, especially for below-market returns, but the sheer riskiness of these bets, essentially letting fund managers gamble with public money, is truly nauseating. As Sirota points out, New Jersey has authorized over one-third of its pension funds to alternative investments, from hedge funds to private equity firms to venture capital funds. That is alarmingly high. Calpers, the largest pension fund in the country, has dropped their alternative investment stake to less than half that. These investments don’t outperform the market, but they’re great to grease the palms of the managers with fees. In this case, those managers happen to be ket backers of Chris Christie:

The above-average costs for New Jersey are a direct result of Christie administration officials moving more pension money to Wall Street firms. The management fees those firms charge are far more expensive than the fees for passive index funds and the costs associated with equities being managed by in-house pension staff. Investments with Wall Street managers comprise less than half of New Jersey’s pension portfolio — but those investments’ attendant fees account for 96 percent of the pension system’s total overhead expenses, according to State Investment Council documents […]

As previously reported by IBTimes, campaign finance records show that employees and others affiliated with firms managing New Jersey pension money made $167,000 worth of donations to New Jersey Republicans since 2009. Employees of those firms have also donated more than $11 million to the Republican Governors Association and the Republican National Committee. Christie is the chairman of the RGA and both organizations spent heavily to support his 2013 reelection campaign.

This amounts to Christie funding his presidential ambitions with New Jerseyite’s taxpayer money. He funnels that money to Wall Street managers, and they recycle a chunk of it back to him and his causes. As Sirota points out, the donations line up with when the firms got the contracts to manage the pension money. In one case, a contract went to the venture capital firm General Catalyst Group right after one of their partners made a $10,000 donation to the state Republican Party.

It’s more than amusing seeing Orin Kramer try to justify these practices to Sirota. Kramer, the hedgie and former chair of the State Investment Council, ran the pension fund into the ground by dumping money into Lehman-related assets, leading to $115 million in losses. (We got a very fun phone call from Kramer the last time we had the temerity to mention that on this site, so keep your line open, Yves!)

The amount of back-patting and favor-making in New Jersey, done with public money, which all then justifies cutting the meager pensions of state employees, deserves a ton more scrutiny. So it’s good that Sirota’s been on the case.

Millions for Lobbyists While Avoiding Taxes

Thanks to Forbes for this table:


All figures below in millions.


Company Profits Taxes Paid Lobbying
General Electric $10,460 -$4,737 $84.35
PG&E Corp $4,855 -$1,027 $78.99
Verizon Communications $32,518 -$951 $52.34
Wells Fargo $49,370 -$681 $11.04
American Electric Power $5,899 -$545 $28.85
Pepco Holdings $882 -$508 $3.76
Computer Sciences $1,666 -$305 $4.39
CenterPoint Energy $1,931 -$284 $2.65
NiSource $1,385 -$227 $17.47
Duke Energy $5,475 -$216 $17.47
Boeing $9,735 -$178 $52.29
NextEra Energy $6,403 -$139 $9.99
Consolidated Edison $4,263 -$127 $1.79
Paccar $365 -$112 $0.76
Integrys Energy Group $818 -$92 $2.45
Wisconsin Energy $1,725 -$85 $2.45
DuPont $2,124 -$72 $13.75
Baxter International $926 -$66 $10.45
Tenet Healthcare $415 -$48 $3.43
Ryder System $627 -$46 $0.96
El Paso $4,105 -$41 $2.94
Honeywell International $4,903 -$34 $18.30
CMS Energy $1,292 -$29 $3.48
ConLway $286 -$26 $2.29
Navistar International $896 -$18 $6.31
DTE Energy $2,551 -$17 $4.37
Interpublic Group $571 -$15 $1.30
Mattel $1,020 -$4 $2.81
Corning $1,977 -$4 $2.81
FedEx $4,247 $37 $50.81


The Long, Deliberate March to Inequality



Thanks to for this graphic:


Humor: The Borowitz Report

WASHINGTON (The Borowitz Report)—G.O.P. chief Reince Priebus ripped President Obama on Sunday for consuming three meals a day while on vacation in Martha’s Vineyard.

“With international crises boiling over in Iraq, Syria, and Ukraine, it’s unconscionable that the President is having breakfast, lunch, and dinner,” he said.

The White House defended the President’s eating habits, noting that his predecessor, George W. Bush, frequently supplemented his three meals a day with an afternoon snack, but Priebus was unmoved by this argument. “It sends a very dangerous message to our enemies to see President Obama eating,” he said.

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