Thursday, April 14, 2011
Goldman Sachs Misled Congress After Duping Clients, Levin Says
Goldman Sachs Group Inc. (GS) misled
clients and Congress about the firm’s bets on securities tied to
the housing market, the chairman of the U.S. Senate panel that
investigated the causes of the financial crisis said.
Senator Carl Levin, releasing the findings of a two-year
inquiry yesterday, said he wants the Justice Department and the
Securities and Exchange Commission to examine whether Goldman
Sachs violated the law by misleading clients who bought the
complex securities known as collateralized debt obligations
without knowing the firm would benefit if they fell in value.
The Michigan Democrat also said federal prosecutors should
review whether to bring perjury charges against Goldman Sachs
Chief Executive Officer Lloyd Blankfein and other current and
former employees who testified in Congress last year. Levin said
they denied under oath that Goldman Sachs took a financial
position against the mortgage market solely for its own profit,
statements the senator said were untrue.
“In my judgment, Goldman clearly misled their clients and
they misled the Congress,” Levin said at a press briefing
yesterday where he and Senator Tom Coburn, an Oklahoma
Republican, discussed the 640-page report from the Permanent
Subcommittee on Investigations.
Goldman and Deutsche
Much of the blame for the 2008 market collapse belongs to
banks that earned billions of dollars in profits creating and
selling financial products that imploded along with the housing
market, according to the report. The Levin-Coburn panel levied
its harshest criticism at investment banks, in particular
accusing Goldman Sachs and Deutsche Bank AG (DB) of peddling
collateralized debt obligations backed by risky loans that the
banks’ own traders believed were likely to lose value.
In a statement, New York-based Goldman Sachs denied that it
had misled anyone about its activities. “The testimony we gave
was truthful and accurate and this is confirmed by the
subcommittee’s own report,” Goldman Sachs spokesman Lucas van Praag said.
“The report references testimony from Goldman Sachs
witnesses who repeatedly and consistently acknowledged that we
were intermittently net short during 2007. We did not have a
massive net short position because our short positions were
largely offset by our long positions, and our financial results
clearly demonstrate this point,” van Praag said.
‘Divergent Views’
In a statement, Deutsche Bank spokeswoman Michele Allison
said, “As the PSI report correctly states, there were divergent
views within the bank about the U.S. housing market. Moreover,
the bank’s views were fully communicated to the market through
research reports, industry events, trading desk commentary and
press coverage. Despite the bearish views held by some,
Deutsche Bank was long the housing market and endured
significant losses.”
The panel’s report also examined the role of credit-rating
firms in the meltdown, lax oversight by Washington regulators
and the drop in lending standards that fueled the mortgage
bubble and ultimately caused hundreds of bank failures.
The subcommittee’s findings show “without a doubt the lack
of ethics in some of our financial institutions who embraced
known conflicts of interest to accomplish wealth for themselves,
not caring about the outcome for their customers,” said Coburn.
“When that happens, no country can survive and neither can
their financial institutions.”
Final Assessment
The report is likely Washington’s final official assessment
of the turmoil beginning in 2007 that froze credit markets, took
down investment banks Bear Stearns Cos. and Lehman Brothers
Holdings Inc. (LEHMQ), sent housing finance giants Fannie Mae and
Freddie Mac into government conservatorship and caused the worst
economic collapse in the U.S. since the Great Depression.
The $700 billion taxpayer bailout that followed in October
2008 upended the relationship between Wall Street and the
federal government, turning CEOs like Blankfein and Lehman’s
Richard Fuld into political punching bags. Populist anger at
high-paid bank leaders helped fuel the passage of last year’s
Dodd-Frank law, which set out the biggest changes to financial
oversight since the 1930s.
The Senate report comes less than a year after Goldman
Sachs paid $550 million to resolve SEC claims that it failed to
disclose that hedge fund Paulson & Co was betting against, and
influenced the selection of, CDOs the company was packaging and
selling.
Goldman Sachs, in its settlement with the SEC, acknowledged
that marketing materials for the 2007 CDO deal contained
“incomplete information.”
Documents and Footnotes
The Senate subcommittee’s bipartisan report, buttressed by
2,800 footnotes and thousands of internal documents from Goldman
Sachs and other firms, may have more impact than previous
investigations into the crisis.
It’s an open question whether the Justice Department and
the SEC will review its findings. Levin does not have the power
to refer the allegations to federal authorities on his own. The
subcommittee has a formal process for making referrals, which
requires Levin to get the support of Coburn before making an
official referral. Levin is going to recommend that the
subcommittee make referrals, though he has not done it yet,
staff members said.
The Levin report will be examined by policy makers
including the SEC and Commodity Futures Trading Commission,
which are writing hundreds of Dodd-Frank rules governing
derivatives, mortgage securities and proprietary trading.
Coburn, the senior Republican on the subcommittee, said the
review carries more heft than the three separate reports issued
earlier this year by a politically divided Financial Crisis
Inquiry Commission.
Goldman Practices
“We don’t need commissions to do our job and this proves
it,” Coburn said. The FCIC “spent $8 million and 15 months”
on its inquiry and “didn’t report anything of significance.”
The panel said Goldman Sachs relied on “abusive” sales
practices and was rife with conflicts of interest that
encouraged putting profits ahead of clients.
“While we disagree with many of the conclusions of the
report, we take seriously the issues explored by the
subcommittee,” van Praag said.
Van Praag pointed to the firm’s recent examination of its
business practices that prompted it to make “significant
changes that will strengthen relationships with clients, improve
transparency and disclosure and enhance standards for the
review, approval and suitability of complex instruments.”
In the case of one CDO, Hudson Mezzanine Funding 2006-1,
Goldman Sachs told investors its interests were “aligned” with
theirs while the firm held 100 percent of the short side,
according to the report.
Gemstone CDO
The report detailed a $1.1 billion Deutsche Bank CDO known
as Gemstone VII, which was backed with subprime loans that its
then-top trader, Greg Lippmann, referred to as “crap.” The
head of the bank’s CDO group, Michael Lamont, said in an e-mail
cited in the report that he would try to sell the CDO “before
the market falls off a cliff.”
On lending, the panel alleges that executives at failed
thrift Washington Mutual Inc. (WAMUQ) dumped its bad loans on clients
while misleading them about their value.
“WaMu selected delinquency-prone loans for sale in order
to move risk from the banks’ books to the investors in WaMu
securities,” Levin said.
Compounding that problem, the subcommittee found, was an
apparently cozy relationship between WaMu and its regulator, the
Office of Thrift Supervision.
WaMu E-Mail
The report cited a July 2008 e-mail from then-OTS director
John Reich to WaMu CEO Kerry Killinger, in which Reich said the
regulator would issue a memorandum of understanding regarding
the bank’s problems.
“If someone were looking over our shoulders, they would
probably be surprised we don’t already have one in place,”
Reich wrote, apologizing twice for communicating the decision in
an e-mail.
Under the Dodd-Frank regulatory overhaul, the OTS will be
folded into other regulators in July.
“The head of OTS knew his agency had been providing
preferential treatment to the bank,” Levin said. “The OTS was
abolished by Dodd-Frank, and for good reasons.”
At yesterday’s press briefing Levin called credit rating
firms Moody’s Investors Service and Standard & Poor’s “a key
cause to the crisis.”
Triple-A Ratings
The raters, which the report says stamped the highest
Triple-A grades on securities they knew were souring, were
hamstrung by a system that has a built-in conflict of interest,
Levin said. The Wall Street banks pay the firms for their
ratings, leading to competitive pressure between the firms that
may have pushed them to more readily place a high rating on a
product.
The panel released nine “findings of fact” on the
failures of the credit raters, including inadequate resources,
inaccurate rating models and a failure to reevaluate old ratings
when they recognized they might be inaccurate.
The raters also “shocked the financial markets” with mass
downgrades of thousands of residential mortgage-backed
securities and CDO ratings, according to the report.
“Perhaps more than any other single event, the sudden mass
downgrades of RMBS and CDO ratings were the immediate trigger
for the financial crisis,” the report said.
To contact the reporters on this story:
Robert Schmidt in Washington at
rschmidt5@bloomberg.net;
Clea Benson in Washington at
cbenson20@bloomberg.net;
Phil Mattingly in Washington at
pmattingly@bloomberg.net.
To contact the editor responsible for this story:
Lawrence Roberts at
lroberts13@bloomberg.net
http://www.bloomberg.com/news/print/2011-04-14/goldman-sachs-misled-congress-after-duping-clients-over-cdos-levin-says.html
Whoa yeah: Kucinich rips Walker a new one
Ohio Rep. Dennis Kucinich just shredded
Kucinich first told Walker he was full of crap (not quite in those words). Walker had testified he didn't sit down with unions -- even though they'd agreed to sacrifices -- because they later voted for contracts that didn't include those sacrifices. Kucinich said the unions voted on those contracts because:
You refused to drop your demand to strip workers of their collective bargaining rights, which had nothing to do with the budget.
Then Kucinich demanded to know how much money Walker would save by destroying workers' rights. He got his answer. Walker:
It doesn’t save any."This is supposed to be a hearing about state and municipal debt," Kucinich said. "Your proposal would require unions to hold annual votes to continue to represent their members."
Walker:
We wanted to make sure we’re protecting the workers of our state...It would save employees up to $1,000 a year.Kucinich:
It wouldn’t save any.He then presented a letter from the nonpartisan Legislative Fiscal Bureau, which was asked to identify the budget impact of Walker's attempt to take away workers' rights. Kucinich said:
This letter confirms the obvious: Gov. Walker's efforts to repeal the rights of Wisconsin workers is a nonfiscal policy item...What we’ve been able to demonstrate here is the attack on collective bargaining rights is a choice.Walker had no Koch-funded boilerplate with which to respond.
http://teamsternation.blogspot.com/2011/04/whoa-yeah-kucinich-rips-walker-new-one.html
Unnecessary Austerity, Unnecessary Shutdown
Reversing tax giveaways to the super-rich and the nation's largest corporations could raise $4 trillion within a decade and avert possible government closures.
"We're broke."
Or so claim governors and lawmakers all over the country. Our states and our nation can no longer afford, their plaint goes, the programs and services that Americans expect government to provide. We must do with less. We need "austerity."
But we're not broke. Not even close. The United States of America is awash in wealth. Our corporations are holding record trillions in cash. And overall individual wealth in the United States, the Credit Suisse Research Institute reported this past fall, has risen 23 percent since the year 2000, to $236,213 per American adult.
We have, these indicators of overall wealth suggest, survived the Great Recession quite nicely. So how can average families — and the national, state, and local governments that exist to serve them — be doing so poorly? Why do "deficits" dominate our political discourse? What explains the red-ink hurricane now pounding government budgets at every level?
This Tax Day report identifies two prime drivers behind our current budget "squeeze."
One, we have indeed become wealthier than ever. But our wealth has become incredibly more concentrated at our economic summit. U.S. income is cascading disproportionately to the top.
Two, we are taxing the dollars that go to our ever-richer rich — and the corporations they own — at levels far below the tax rates that America levied just a few decades ago. We have, in effect, shifted our tax burden off the shoulders of those most able to bear it and away from those who disproportionately benefit from government investments the most.
These two factors — more dollars at the top, significantly lower taxes on these dollars — have unleashed a fiscal nightmare. Can we wake up in time to avoid the crippling austerity that so many of our political leaders insist we must accept?
This report offers both an analysis of our current predicament and a series of proposals that can help open our eyes to a far more equitable — and brighter — future.
Key Tax Facts
- 15,753: The number of households in 1961 with $1 million in taxable income (adjusted for inflation).
- 361,000: The number of households in 2011 estimated to have $1 million in taxable income.
- 43.1: Percent of total reported income that Americans earning $1 million paid in taxes in 1961 (adjusted for 2011 dollars)
- 23.1: Percent of total reported income that Americans earning $1 million are likely to pay in taxes in 2011, estimated from latest IRS data.
- 47.4: Percent of profits corporations paid in taxes in 1961.
- 11.1: Percent of profits corporations paid in taxes in 2011.
http://www.ips-dc.org/reports/unnecessary_austerity_unnecessary_government_shutdown
Finally, Obama's Talking about Taxing the Wealthy
He has public opinion on his side.
President Obama has broken through the silence about revenue in Washington's dominant budget and deficit debate.
"At a time when the tax burden on the wealthy is at its lowest level in half a century, the most fortunate among us can afford to pay a little more," Obama said in a speech at Georgetown University on Wednesday. "I don't need another tax cut. Warren Buffett doesn't need another tax cut."
He lambasted the GOP budget proposal put forward by House Budget Chairman Paul Ryan. "There's nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires," he said.
In addition to reversing tax hikes on the wealthy, Obama made vague recommendations about closing loopholes, especially for high-income households. Unfortunately, he avoided the important issue of corporate tax dodging through off shore tax havens.
"Unnecessary Austerity," the IPS report I recently co-authored , questions the assumption that budget cuts are the only path to fiscal health. Instead, we argue, Congress should focus on reversing tax cuts for millionaires and billionaires — and closing tax loopholes and overseas tax havens that enable corporations to shrink their tax bills.
The United States is far from broke. The problem is that wealth and income have become concentrated in the hands of the richest 1 percent of Americans and our largest multinational corporations. Yet over the last generation, we've greatly reduced taxes on the wealthy and global corporations.
For example, if the federal government taxed households with incomes over $1 million and big corporations at 1961 levels, the Treasury would collect an additional $716 billion a year, or $7 trillion over a decade. We've reduced the actual tax levy on millionaires by almost half during the past 50 years. In 1961, families with more than a million dollars of annual income paid 43 percent of their income in federal income taxes. This year, they will pay just 23 percent.
"I believe that most wealthy Americans would agree with me," Obama said. "They want to give back to their country, a country that's done so much for them. It's just Washington hasn't asked them to." His argument in favor of increasing tax rates for the wealthy is reinforced by a new call to action by Wealth for the Common Good and Patriotic Millionaires for Fiscal Strength. Those groups encompass more than 100 millionaires calling on Congress to raise their taxes.
Obama has public opinion on his side. Polls show that the majority of voters would rather hike taxes on millionaires than slash spending. But some of his proposals — like reducing charitable and home mortgage interest deductions for millionaires — may encounter tough sledding. Those proposals will mobilize opposition from not only corporate lobbyist and a segment of the wealthy. They'll face the wrath of the second-home real estate lobby and charity advocates.
But one way or another, taxes on the top are going to rise in the coming two years.
http://www.ips-dc.org/blog/finally_obamas_talking_about_taxing_the_wealthy
Goldman Sachs Chief Blankfein Could Face Criminal Prosecution For Role In Financial Crisis
Carl Levin, chair of the Senate Permanent Subcommittee on Investigations, will recommend that Goldman executives who testified before his panel, including chairman and chief executive Lloyd Blankfein, be referred to the Justice Department for possible criminal prosecution, the Michigan Democrat announced Wednesday. Members of the subcommittee will now deliberate Levin's proposal.
A Goldman spokesman said its executives were truthful in their testimony, adding that the firm disagreed with many of the panel's conclusions.
Two and a half years after a historic crisis that has yielded not a single criminal conviction of anyone who played a leading role in causing it, the prosecution of such a high-profile Wall Street executive may satisfy the public's desire to see culprits brought to justice. Last year, the Securities and Exchange Commission settled a lawsuit it had brought against Goldman.
But the firm was just one target of a sweeping, 639-page report by the Senate panel into the causes of the crisis. Hardly a fluke occurrence, the meltdown was the product of a deeply corrupt financial system, one fueled by profit-hungry banks that deceived their clients, and overseen by lax regulators who were complicit in the firms' chronic abuse of the most fundamental rules of the game, the report concludes.
The investigation found a "financial snake pit rife with greed, conflicts of interest, and wrongdoing," Levin said.
More than any other government report produced in the wake of the crisis, this account names names, blaming specific people and institutions: Goldman Sachs, Washington Mutual, Moody's Investors Service, Standard & Poor's, the Office of Thrift Supervision and others. It targets four types of institutions, all of which it says played key roles in causing the crisis: mortgage lenders that offered prospective homeowners booby-trapped loans; regulators that were paid by the institutions they were regulating and cooperated in widespread deception; rating agencies that gave seals of approval to products they knew to be especially risky, all in the pursuit of market share; and Wall Street banks that duped investors into buying securities that only the insiders knew were destined to go bad.
"Blame for this mess lies everywhere from federal regulators who cast a blind eye, Wall Street bankers who let greed run wild, and members of Congress who failed to provide oversight," said the panel's ranking member, Sen. Tom Coburn, an Oklahoma Republican.
Eventually, as the falling housing market helped drag the broader economy into the most punishing recession since the 1930s, this parasitic apparatus began to crumble. At that point, the key players had already pocketed their profits and were poised to pocket more, while legions of investors and homeowners had been set up for ruin.
The forces behind the economic collapse were multiple, with some causes likely originating decades before the crash. But this report exposes the people who, it says, most immediately caused the crisis -- whose behavior, motivated by profit above seemingly anything else, trashed the financial system, and magnified the devastation from which the real economy has yet to recover.
Wall Street banks magnified the crisis and its fallout. The Senate subcommittee singled out Goldman as a particularly representative case.
Investigators pored over millions of pages of internal Goldman documents and correspondence. They found evidence of traders boasting about how they sold their clients "shitty" deals, and discovered documents that detailed how the storied investment bank -- which has long maintained it didn't make a firm-wide bet against American homeowners -- reversed course over a three-month period in late 2006 through 2007, shedding bets that the value of subprime mortgage-linked investments would rise.
Rather, the firm went "short," the report exhaustively documents. In Wall Street parlance, shorting an investment means betting its value will fall.
Levin said his investigators found 3,400 instances of Goldman officials using the phrase "net short" in the documents they reviewed. He intimated that Goldman likely used the phrase many more times in other documents not reviewed by his panel.
As of December 2006, Goldman had $6 billion in bets that the value of its subprime assets would surge, according to the panel's report. By February of the next year, its mortgage traders had $10 billion in bets that such securities would collapse.
By June, the firm was net short on subprime borrowers to the tune of $13.9 billion, according to the report.
As more borrowers fell behind on their payments and as the value of securities linked to their mortgages slid, Goldman stayed "net short." Other banks suffered. But not this one.
"Tells you what might be happening to people without the big short," Goldman's chief financial officer David Viniar wrote in a July 2007 email to the firm's chief operating officer, Gary Cohn.
Even when these documents came to light last year, Goldman maintained it never took the position that housing-linked securities would decline, particularly considering that it was selling its clients investments that were bullish on homeowners. Goldman, too, suffered losses from housing-related investments, the firm pointed out.
But Levin's investigators don't dispute that Goldman took losses during the financial crisis. His team asserts that while Goldman salesmen were peddling investments linked to bonds backed by subprime mortgages, its traders were betting that those securities -- and others like it -- would fail, and that the two teams were in contact. The assertion raises a crucial question about whether the firm violated securities rules prohibiting double-dealing.
Worse, Levin said, Goldman traders attempted to manipulate the market for derivatives linked to such investments, according to the report.
Internal company documents show that in May 2007, Goldman traders tried to artificially drive down the price of certain bets it wanted to make -- bets that borrowers would default on their home loans.
The plan was for one group of Goldman traders to peddle such securities across Wall Street "at lower and lower prices, in order to drive down the market price [of the securities] to artificially low levels," the report notes. Due to Goldman's size and market power, that would have driven down prices across the Street, forcing holders of such securities to record losses.
The firm wanted "to cause maximum pain," Michael Swenson, a head mortgage trader at Goldman, wrote in a May 25, 2007 email documented in the report.
By that point, many Wall Street players were betting on homeowners to default. The price of placing such bets was rising. Goldman wanted a cheaper way in.
As part of the plan, another Goldman unit was to buy those positions at a lower price, enabling them not only to add to their growing bet that the American homeowner would eventually default, but to do so at a lower price.
Goldman initiated this plan "despite the harm that might be caused to Goldman's clients," according to the report. Indeed, clients began to complain of a "sudden mark-down" of their positions.
A Goldman representative who showed Swenson the complaints of one hedge fund client was met with a terse response: "We are ok with that," Swenson wrote in another documented email. "They do not have much more gun powder."
In other words, Goldman didn't have to worry about the client because the client didn't have the resources -- the "gun powder" -- to compete with Goldman, according to the report.
One of the traders Swenson oversaw, Deeb Salem, laid this all out in a self-evaluation of his performance in 2007 that he sent to Goldman's senior management.
"In May, while we were remain[ing] as negative as ever on the fundamentals in sub-prime, the market was trading VERY SHORT, and susceptible to a squeeze," Salem wrote, emphasizing that traders across Wall Street were shorting the market. "We began to encourage this squeeze, with plans of getting very short again, after the short squeezed cause[d] capitulation of these shorts."
"This strategy seemed do-able and brilliant," he wrote.
Interviewed by investigators in October of last year, Salem denied that he had tried to squeeze the market. Investigators reading his self-evaluation put too much emphasis on "words," according to the report.
Goldman abandoned the plan the next month after a rival investment bank's hedge funds collapsed.
"While we disagree with many of the conclusions of the report, we take seriously the issues explored by the subcommittee," Goldman said in a statement. A Goldman spokesman added that the firm recently overhauled its business standards to improve transparency and disclosure and to strengthen its client relationships.
Levin, who briefly described the strategy during a Senate hearing last December, said Wednesday that it was the type of "disgraceful" behavior emblematic of Goldman's attitude at the time: Goldman first, clients last.
Deutsche Bank, Germany's largest lender and one of the biggest in the world, also came under fire for its crisis-era activities.
The panel caught one of its former traders, Greg Lippmann, referring to such securities over email as "crap" and "pigs," according to the report. Lippmann was made semi-famous by author Michael Lewis for his prescient call to short subprime securities.
His unit sold some of the very securities he criticized.
The banker who oversaw Lippman's unit, Michael Lamont, told a colleague at another firm how Deutsche was rushing to sell these financial instruments "before the market falls off a cliff," according to a February 2007 email Lamont sent.
Meanwhile, buyers of the securities were never told.
At one point, Lippman described the creation and selling of such instruments as a "Ponzi scheme." He also said he would "try to dupe someone" into buying a particularly risky mortgage-linked security he himself was being asked to purchase, according to the report.
He later backed off some of those comments when interviewed by Senate investigators.
Levin said the German bank engaged in "disturbing activities."
During this time, the now head of enforcement at the SEC, Robert Khuzami, served as a top lawyer at Deutsche, overseeing litigation and regulatory investigations.
The panel said it didn't find anything incriminating that would implicate Khuzami in the matters under investigation.
Khuzami is now in charge of pursuing financial wrongdoers. He has pledged to recuse himself from investigations involving the German lender.
Goldman, for its part, sold a collection of questionable securities. Levin's investigators uncovered four securities -- complex financial instruments with names like Hudson and Timberwolf -- that Goldman recommended to customers without fully disclosing key information, or saying whether the firm was betting against them.
For example, in the Hudson deal, Goldman told investors its interests were "aligned" with theirs when in reality the firm held "100 percent of the short side" of that security, according to the report. Goldman was betting on Hudson to fail.
Also, Goldman said the assets in Hudson were "sourced from the Street." But investigators said Goldman selected the assets and priced them itself.
Wednesday's disclosures are similar to a case from last year, in which Goldman Sachs allegedly helped set up a mortgage-linked investment for a favored client, designing it to fail, yet selling it anyway to its other clients, reaping the favored client nearly $1 billion. The deal, named Abacus, was also targeted in the Senate report. Goldman settled the accusations with the SEC last year for $550 million.
"Goldman was sticking it to their own clients," Levin told reporters. "Goldman gained at the expense of their clients, and used abusive practices to do it."
Goldman, though, has rejected such characterizations.
"Much has been said about the supposedly massive short Goldman Sachs had on the U.S. housing market," Goldman chief Blankfein said in testimony before Levin's panel last year. "The fact is, we were not consistently or significantly net-short the market in residential mortgage-related products in 2007 and 2008."
"We didn't have a massive short against the housing market, and we certainly did not bet against our clients," he added. Other Goldman executives made similar claims.
"That is simply not true," Levin said Wednesday. "They clearly misled their clients and they misled the Congress," he added, announcing that he will recommend that his panel refer all of the Goldman executives who testified before the committee for possible criminal prosecution by the Justice Department and for sanctions by the SEC for violations of securities laws.
Goldman disputed Levin's characterizations.
"The testimony we gave was truthful and accurate and this is confirmed by the subcommittee's own report," the firm said. "The report references testimony from Goldman Sachs witnesses who repeatedly and consistently acknowledged that we were intermittently net short during 2007. We did not have a massive net short position because our short positions were largely offset by our long positions, and our financial results clearly demonstrate this point."
The investigative panel must deliberate Levin's recommendations before making any referrals to prosecutors or regulators. Coburn, the Republican, would have to agree with Levin in order for the referrals to be made.
Asked about the general lack of prosecutions of high-powered Wall Street executives, Levin replied: "There is still time."
"Hope springs eternal," he added with a smile.
http://www.huffingtonpost.com/2011/04/14/goldman-financial-crisis-prosecution_n_848994.html
The Paradox of Corporate Taxes
By: David Leonhardt
The Carnival Corporation wouldn’t have much of a business without help from various branches of the government. The United States Coast Guard keeps the seas safe for Carnival’s cruise ships. Customs officers make it possible for Carnival cruises to travel to other countries. State and local governments have built roads and bridges leading up to the ports where Carnival’s ships dock.
But Carnival’s biggest government benefit of all may be the price it pays for many of those services. Over the last five years, the company has paid total corporate taxes — federal, state, local and foreign — equal to only 1.1 percent of its cumulative $11.3 billion in profits. Thanks to an obscure loophole in the tax code, Carnival can legally avoid most taxes.
It is an extreme case, but it’s hardly the only company that pays far less than the much-quoted federal corporate tax rate of 35 percent. Of the 500 big companies in the well-known Standard & Poor’s stock index, 115 paid a total corporate tax rate — both federal and otherwise — of less than 20 percent over the last five years, according to an analysis of company reports done for The New York Times by Capital IQ, a research firm. Thirty-nine of those companies paid a rate less than 10 percent.
Arguably, the United States now has a corporate tax code that’s the worst of all worlds. The official rate is higher than in almost any other country, which forces companies to devote enormous time and effort to finding loopholes. Yet the government raises less money in corporate taxes than it once did, because of all the loopholes that have been added in recent decades.
“A dirty little secret,” Richard Clarida, a Columbia University economist and former official in the Treasury Department under President George W. Bush, has said, “is that the corporate income tax used to raise a fair amount of revenue.”
Over the last five years, on the other hand, Boeing paid a total tax rate of just 4.5 percent, according to Capital IQ. Southwest Airlines paid 6.3 percent. And the list goes on: Yahoo paid 7 percent; Prudential Financial, 7.6 percent; General Electric, 14.3 percent.
Economists have long pleaded for an overhaul of the corporate tax code, and both President Obama and Republicans now say they favor one, too. But it won’t be easy. Companies that use loopholes to avoid taxes don’t mind the current system, of course, and they have more than a few lobbyists at their disposal.
The official position of the Business Roundtable, one of the most important corporate lobbying groups, is telling. The Roundtable says it supports corporate tax reform. But it actually favors only a reduction in the tax rate. The group refuses to say whether it also favors a reduction of loopholes. In effect, the Roundtable wants a tax cut for its members regardless of how much the tax code is simplified — or whether the budget deficit grows.
The tax filings of companies, like those of individuals, are confidential. In their public reports to investors, however, companies are required to list something called “cash taxes paid” — the total amount of corporate income tax they paid that year, be it to foreign governments, the United States government or state and local governments.
This number varies significantly from year to year, depending on how many loopholes a company qualifies for. So looking at a single year’s number is often misleading. But in a 2008 academic paper, three accounting professors — Scott Dyreng of Duke, Michelle Hanlon of M.I.T. and Edward Maydew of the University of North Carolina — suggested a new method for analyzing corporate tax avoidance.
It compares cash taxes paid over several years — like five, as in the analysis for The Times — to pretax earnings over that same period. The accounting experts I interviewed called it the best available method for looking at corporate taxes.
Some obvious patterns emerge. Companies that lost large amounts of money in previous years can subtract these subsequent losses from their initial profits and avoid taxes until they’re turning a consistent profit. Yahoo falls into this category. Of all the reasons to have a low tax rate, this one may be the most defensible, economists say.
Other companies are able to avoid taxes by spending large sums on new equipment or buildings. Such spending can often be deducted. Southwest Airlines, for instance, has bought a lot of planes in the last five years. Several energy companies with tax rates below 2 percent, like NextEra, Xcel and Range Resources, have likewise been expanding.
A third group of companies simply seems to have become expert at avoiding taxes. When the three accounting professors analyzed more than 2,000 companies, they found big variations in tax rates within almost every subset of companies. Companies in the same industry often paid very different rates, even when they were similar in size.
G.E. is so good at avoiding taxes that some people consider its tax department to be the best in the world, even better than any law firm’s. One common strategy is maximizing the amount of profit that is officially earned in countries with low tax rates.
Carnival pays so little tax partly because of a provision that lets some shipping companies legally incorporated overseas (Panama, in Carnival’s case) avoid taxes. The fact that Carnival’s executives sit in Miami and or that many passengers board in Baltimore, Los Angeles, Miami, New York and Seattle doesn’t matter. Nor does the fact that Carnival isn’t paying much tax in Panama.
Companies that pay relatively high rates tend to be those that are not expanding rapidly and that are not as ingenious as G.E., at least on taxes. The average total tax rate for the 500 companies over the last five years — again, including federal, state, local and foreign corporate taxes — was 32.8 percent. Among those paying more than the average were Exxon Mobil, FedEx, Goldman Sachs, JPMorgan Chase, Starbucks, Wal-Mart and Walt Disney.
The problem with the current system is that it distorts incentives. Decisions that would otherwise be inefficient for a company — and that are indeed inefficient for the larger economy — can make sense when they bring a big tax break. “Companies should be making investments based on their commercial potential,” as Aswath Damodaran, a finance professor at New York University, says, “not for tax reasons.”
Instead, airlines sometimes buy more planes than they really need. Energy companies drill more holes. Drug companies conduct research with only marginal prospects of success.
Inefficiencies like these slow economic growth, and they are the reason that both conservatives and liberals criticize the corporate tax code so harshly. Mitch McConnell, the Republican Senate leader, says it hurts job creation. Mr. Obama, in his State of the Union address, said that the system “makes no sense, and it has to change.”
A lot of economists agree. Then again, any system that creates as many winners as this one won’t be changed easily.
http://www.cnbc.com/id/41388728
Yes Men, US Uncut Behind GE Hoax
The Yes Men, a culture-jamming activist duo, and the anti-tax dodging group US Uncut [1] were the players behind a widely circulated (and false) AP report [2] stating GE would be returning its entire 2010 tax refund of $3.2 billion to the US Treasury.
The groups told ABC News they are forced to impersonate public figures and companies in order to break into a media space that is oversaturated with the loudest voices and those with the best public relations departments.
"Corporations spend billions of dollars a year shoving lies down that pipeline, so we have to impersonate them just to get information out," Yes Men spokesman Michael Bonanno told ABC News. "Our lies are designed to be recognized as lies almost instantly. But we have to impersonate these companies that already have a voice to say something, otherwise nobody would listen."
US Uncut followed up the publishing of the AP story by posting a press released titled, “US Uncut Welcomes GE’s Change of Heart [3],” complete with a fabricated interview with US Uncut spokesman Carl Gibson.
And while the prank might have disappointed activists eager to see a corporation that paid no federal income taxes while raking in $14 billion in worldwide profits last year finally pay its fair share, the false report did have a dramatic effect on GE’s stocks. The “tiny guerilla team” managed to knock $3.5 billion [4] off GE’s market value in a matter of hours. "Obviously, GE can't possibly be expected to do the right thing voluntarily; their stock would keep plunging," says Gibson. "That's why we must change the law."
This certainly isn’t the first time the media has been hoodwinked by the Yes Men. The group has performed other “identity correction” stunts such as Andy Bichlbaum’s legendary appearance as “Jude Finisterra,” a Dow Chemical spokesman, during a 2004 BBC World appearance in which he announced that Dow planned to liquidate Union Carbide, the company responsible for the chemical disaster in Bhopal, and use the resulting $12 billion to pay for medical care and clean up.
And again in 2009, the group staged a news conference to falsely announce that the US Chamber of Commerce [5] had reversed its stance on climate change legislation.
The idea behind the Yes Men’s activism, of course, isn’t to raise the hopes of victims only to crush their spirits in the last hour. The real purpose is to force companies like GE to defend their wildly unethical behavior, which GE ultimately did today. Deirdre Latour, a GE spokeswoman, said, “It’s a hoax and GE did not receive a refund,” a statement that conflicts with reports GE did indeed claim a tax benefit [6] of $3.2 billion.
The lesson here is that if it sounds too good to be true, it’s probably the work of the Yes Men.
http://www.thenation.com/print/blog/159931/yes-men-us-uncut-behind-ge-hoax
The False Debate on the Debt
This story originally appeared at Truthdig [1]. Robert Scheer is the author of The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street [2] (Nation Books).
In the ever-so-smug company of the rich and powerful it is a given that there is never to be any expression of remorse or other acknowledgment of the pain they have inflicted on the lesser mortals they so cavalierly plunder. It’s convenient for them that the media and the politicians, which they happen to own, rarely connect the dots between the scams that made the rich so rich and the alarming rise in the federal debt that is crushing this nation.
The result of this purchased public myopia is that we are left with an absurd debate over how deeply to cut teachers’ pensions and seniors’ medical benefits while preserving tax breaks for the superrich and their large corporations. At a time when 10 million American families will have lost their homes by year’s end, when $5.6 trillion in home equity has been wiped out, when most Americans face steep unemployment rates and stagnant wages, a Democratic president is likely to compromise with Republican ideologues who insist that further cuts in taxes for the rich is the way to bring back jobs.
Let’s deal right off with that canard. There is currently no shortage of corporate profits or excessive executive compensation to explain away the failure of the private sector to create jobs. On the contrary, as the New York Times reports, “In the fourth quarter, profits at American businesses were up an astounding 29.2 percent, the fastest growth in more than 60 years. Collectively, American corporations logged profits at an annual rate of $1.678 trillion.” And to add insult to injury, the top executives, who seem unable or unwilling to create jobs or adequately reward their workers, have increased their own compensation by a whopping 12 percent over the previous year, setting the median pay at $9.6 million per year for those in control of the leading 200 companies. The Times adds that “CEO pay is also on the rise again at companies like Capital One and Goldman Sachs, which survived the economic storm with the help of all of those taxpayer-financed bailouts.”
Lost in this faux debate is the reality that our debt now looms so large because the government had to bail out many of those same corporations, quite a few of which, like General Electric and AIG, pay no taxes and have no problem paying truly obscene amounts to their top executives. GE CEO Jeffrey Immelt, whom President Barack Obama named chairman of the Council on Jobs and Competitiveness, is making as much as he did before the recession hit, a recession that his GE Capital division did much to cause with its reckless loans. AIG, saved with a government infusion of $170 billion, has just lavishly rewarded its top executives but has providing no relief for the homeowners ripped off by its phony credit default swaps.
The AIG deal was engineered by then-President of the New York Fed Timothy Geithner, who was rewarded for his efforts to save the bankers by being named Obama’s treasury secretary. Geithner, an energetic member of the team of Robert Rubin and Lawrence Summers that ran Treasury when the Bill Clinton administration cooperated with Congressional Republicans in gutting regulation of the financial community, is proud of saving the banks from the wreckage that they and the Clinton policies caused. Last October he proclaimed the TARP banker bailout program “the most effective government program in recent memory.”
What he is referring to is that in order to escape the federal restrictions on executive compensation, the banks have been eager to pay back the TARP funds. What he and other apologists for the Obama and George W. Bush administrations’ Bankers First program choose to ignore—as Paul Atkins and two other members of the Congressional Oversight Panel for the Troubled Asset Relief Program revealed in a damning Wall Street Journal column titled “TARP Was No Win for the Taxpayers”—is that the banks are not paying back the trillions of dollars in non-TARP governmental assistance that saved them from bankruptcy. “It hides the full story of the government’s financial crisis effort, of which TARP is but a minor part,” the op-ed column said of the maneuvering. The major part is the $1.1 trillion in toxic-mortgage-based securities that the Fed purchased, relieving the banks of their obligations, and the $380 billion bailout of Fannie Mae and Freddie Mac, organizations that backed those securities, along with “other Fed and FDIC programs [that] added another $2 trillion of taxpayer money at risk to the 19 stress-tested banks alone.”
What Geithner celebrates is a shell game of his own construction in which far more costly federal programs, with no serious restrictions on banker greed, were used by the banks to “repay” the TARP funds. Nothing was obtained in return from those banks in the way of mortgage cramdowns to keep people in their homes or any restrictions on the interest rates that banks charge on credit cards: Clearly usurious rates of more than 25 percent are now the norm for those struggling to keep their families above water. No wonder consumer confidence is down, the housing market is expected to decline an additional 10 percent over the next year, and the job market is predicted by most of the experts to stagnate for years to come. Continued tax breaks for the 1 percent of the population that controls 40 percent of the nation’s wealth will do nothing to restore the confidence of the other 99 percent of consumers who are suffering so.
This at least Obama seems to understand, but count on him to betray his own better instincts by once again following the advice of his treasury secretary and the Wall Street crowd that contributed so lavishly to his first presidential campaign and whose support he seeks once again.
Robert Scheer is the author of The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street [2] (Nation Books).
http://www.thenation.com/print/article/159906/false-debate-debt
