How Parasite Corporations Like Pfizer are Chucking U.S. Citizenship to Escape from Taxes

AlterNet / By Lynn Stuart Parramore
May 11, 2014 |


Let’s say you’re a giant American corporation like Pfizer, founded in Brooklyn way back in 1849. The fact that you exist and make a profit is largely due to the generous support of U.S. taxpayers. It’s the taxpayers, after all, who pony up for the National Institutes of Health, which does the basic research you rely on to develop drugs on which you make gigantic sums. And it’s the taxpayers who shell out large amounts of money to protect your patents, broker trade treaties in your favor, and protect your interests around the world in international negotiations. The same ones who pay for the public education of your employees and the costly infrastructure—the highways, airports, etc.—needed to move your products. The very folks who pay the billions in federal contracts you receive.

So what do you do? Do you pay your share of taxes to return some of this largesse?

Oh, no. You vigorously lobby for lower taxes and leave no loophole unexploited. You are not satisfied to have received $2.2 billion in federal tax refunds from 2010-2012 while raking in $43 billion worldwide even though 40 percent of your sales are in America. You’re not ashamed in the least that in 2012, you stashed $73 billion in profits offshore on which you paid zilch in U.S. income taxes.

Your greed and irresponsibility demand still more. So you decide to get out of paying a single nickel to the country that feeds you. You rig up an overseas purchase so you can “officially” relocate to a place with a lower tax rate and in doing so deliver a giant middle finger to your fellow Americans.

Last week, New York-based drugmaker Pfizer finally admitted why it wants to buy British drugmaker AstraZeneca, which is based in London. Sure, it will get some experimental drugs out of the deal, but that’s not what it’s really after. What Pfizer wants is to cheat American taxpayers.
Ian Read, CEO Hall of Shame

Pfizer is willing to shell out $100 billion for AstraZeneca so it can get a new tax home and lower its tax rate from the roughly 27 percent it paid last year, to the UK tax rate, which is now 21 percent and will drop down to 20 percent in 2015.

Let’s pause for a moment to consider the CEO of Pfizer, Ian Read, who is orchestrating this move. According to Forbes , he is a poster boy for grossly overblown executive salaries, hauling in almost $19 million bucks last year. Read looted the company for this obscene amount of money, despite the fact that under his leadership, profits actually declined in 2013. So instead of trying to make money by doing productive things, like, for example, investing in research and development for new products, Read is looking for shortcuts that are less about doing anything useful for society and more about plain destroying it.

Fiduciary Duty to Cheat?

Right on cue, Read trotted out the predictable nonsense that he has a fiduciary responsibility to maximize value for Pfizer shareholders, and therefore must make the tax-dodging move.

Actually, that is baloney, as economist William Lazonick has repeatedly pointed out.

Shareholder value ideology is merely an absurdity that has been spread through American business schools since the go-go 1980s — a specious justification that allows executives to turn corporations into predatory extraction machines at the expense of stakeholders like workers and taxpayers. The fiduciary-duty-to-shareholders argument would be laughed out of court in nearly all circumstances (such as the exceptional case when a company is going to be sold). The reason for this is simple. Any idiot can figure out that sometimes a company must take short-term profit hits in order to do things that are in the long-term interest of the company.

Shareholder value ideology is only about boosting stock prices in the short-term, which often depends on moves that decrease the company’s value over the longer time horizon,as Lazonick has tirelessly pointed out. So Read is utterly full of it. But things have gotten so out of hand in corporate America that executives now actually believe, as hedge fund legend Jim Chanos has observed, that they have a fiduciary duty to cheat .

There was a time when an American CEO would not dare to officially state the kind of complete disregard for the public that Read is expressing. We shouldn't underestimate the importance of shaming such anti-social CEOs for daring to do so now. Social norms matter for things like executive compensation and the consideration of stakeholders rather than just shareholders (people who own stock). Read should be made to feel that there is nothing normal, or acceptable, about his twisted logic.

A Modest Proposal

Read said that Pfizer would keep its corporate headquarters in the U.S. (a very swanky affair on 42nd Street in Manhattan) and keep its listing on the New York Stock Exchange. Which essentially means that his company will still be located in the place where it will not be paying any taxes. Which would make Pfizer a giant, blood-sucking parasite.

Of course, part of the problem is that mega-companies in other industries, like Boeing, actually pay no taxes at all, and that makes the Pfizers very upset. If other multinationals get off scott-free, why can’t they?

H. David Rosenbloom, an attorney at Caplin & Drysdale in Washington and director of the international tax program at New York University's law school, explained his view of Pfizer’s plans to Bloomberg: "This is basically an opportunity to go outside the U.S. and still sell in the U.S. and strip the tax base…If we ever had a legislature in the United States, we could do something about this, but I don't expect to live that long."

Which brings us to the question of what can be done about this looting. Some Democrats, like Sen. Carl Levin, are making noises about curbing offshore tax moves in the wake of Pfizer’s announcement. Will anything happen? Doubtful. Passing any meaningful legislation on international tax policy, as Rosenbloom points out, is all but impossible in a deadlocked Congress.

Since countries around the world are basically in a race to the bottom to lower corporate tax rates, causing companies to shift their tax burden by pretending to set up shop in places like Ireland, Switzerland and Bermuda, it may be that trying to collect corporate taxes is going to be a futile exercise in the future. Perhaps a better way, as Thomas Piketty suggests in his recent book, Capital in the 21st Century, is simply to tax individual income and wealth. We could start with Ian Read ( and don’t tell me he’s Scottish)— he’s living in the U.S. and doing his business here, so he should be paying taxes.

Here’s another idea, just for the heck of it: How about if the citizens simply occupy Pfizer’s headquarters in New York? Let us not forget that in 2010, after receiving millions of tax breaks to create jobs in New York City, Pfizer turned around and pinkslipped hundreds of employees . If Pfizer doesn’t want to pay any taxes in the U.S., then let's reclaim all the stuff we paid for, and consider Pfizer headquarters to be stolen goods. The fancy artwork in the company gallery would fetch a nice price at auction, and the office space could rent at a premium. An effort to pay back companies like Pfizer in their own coin might remind them that they can’t simply go on looting indefinitely. At some point, the looters may get looted.

US Taxpayers Liable For Gulf Clean Up Costs; BP, Transocean, Halliburton off the Hook

Unbelievable! Court Rules US Taxpayers, Not BP Or Transocean, Are Liable For Gulf Oil Spill Clean Up Costs

Alexander Higgins - June 18, 2011

US District court has dismissed over 100,000 lawsuits brought against BP And Transocean to pay for oil spill clean up costs and environmental damages caused to the Gulf of Mexico from the BP Gulf Oil Spill. The court ruled that injury stopped the moment the well was sealed and the Federal Government, aka The US Taxpayer, is now liable for clean up costs along with any damages caused by deficiencies of the cleanup of the Gulf Of Mexico.

The US District Courts have ruled that since oil is no longer flowing from the Macando Well BP and Transocean are not liable for cleanup costs and damages from the BP Gulf Oil Spill since the “well has already been sealed and the injury has already been committed”.

In the ruling the court goes on note that Federal Government is in charge of the oil spill clean up efforts. Thus any damages related to the cleanup are now the burden of the Federal Government, meaning the US Taxpayer.

The ruling means that Taxpayers are not only liable for the clean up of the BP Gulf Oil Spill but it also means that any damages caused by deficiencies of the clean up in the Gulf is now also the responsibility of the US Taxpayer.

The lawsuits against BP have been bundled into separate packages with all of the lawsuits pertaining to BP’s liability for cleanup costs and environmental damages being dismissed with this ruling.

Activists Post reports :

BP wins a big one in oil spill litigationSabrina Canfield
Courthouse News Service
Friday, June 17, 2011

NEW ORLEANS – Ruling in favor of Transocean and BP, a federal judge on Thursday dismissed third-party environmental claims in a giant pleading bundle in the Deepwater Horizon oil spill litigation, saying the fact that the oil flow has stopped makes those lawsuits irrelevant.

“The injunction at this stage would be useless, as not only is there no ongoing release from the well, but there is also no viable offshore facility from which any release could possibly occur,” U.S. District Judge Carl Barbier wrote. “The Macondo well is dead, and what remains of the Deepwater Horizon vessel is on the ocean floor, where it capsized and sank in 5,000 feet of water.

“Moreover, BP and the agencies comprising the Unified Area Command have been and are cleaning up the Gulf of Mexico. An injury is not redressable by a citizen suit when the injury is already being addressed.”

Judge Barbier is overseeing the massive, consolidated oil spill litigation, which has been divided into “bundles,” based upon the nature of the claims.

In instances where claims in the D1 bundle pertain to how the oil is being cleaned up, Barbier ruled that even if he allowed those claims to go forward, the claimants are not directly involved in the cleanup, so a ruling in their favor would not affect how the cleanup is progressing.

“The D1 defendants do not unilaterally direct the cleanup activities in the Gulf; such activities have been under the control of the National Incident Commander, Federal on-Scene Coordinator, Unified Area Command, and the Coast Guard in cooperation with other federal agencies. Thus, plaintiffs cannot show that an order from this court would actually resolve [to the defendants for] any potential deficiency in the ongoing cleanup,” Barbier wrote.

“In order to prevail on their claims for injunctive relief, plaintiffs must demonstrate an ongoing violation of various statutes on which plaintiffs’ claims for relief is based. Because the Macondo well is dead and is no longer discharging oil, plaintiffs’ only claims are confined to seeking environmental citizen suit injunctive relief of a prospective nature to stop noncompliance in the form of a continued release of oil. Thus, the citizen suit claims brought by the plaintiffs are moot, because no future-orientated injunction can provide any meaningful relief for plaintiffs in terms of stopping discharges that already concluded in mid-July 2010.”

Transocean’s Deepwater Horizon drilling rig, operated by BP, exploded and burned 50 miles off the Louisiana coast on April 20, 2010, killing 11 and setting off the worst oil spill in history. [Hundreds of] Millions of gallons of oil were spilled in the next 87 days.

More than 100,000 people have filed lawsuits seeking damages from the spill.
The lawsuits dismissed on Thursday belonged to the D1 pleading bundle.
D1 bundle claims were filed by third-party organizations that alleged environmental damages under the Clean Water Act; the Endangered Species Act; the Comprehensive Environmental Response, Compensation, and Liability Act; and the Emergency Planning and Community Right-To-Know Act.

This was the first ruling arising from issues addressed during a May 26 hearing on the defendants’ motions to dismiss particular bundles.

Claims with varying types of damages were included in more than one bundle, depending on type of claim.

In dismissing the D1 claims, Barbier said the claims could still be heard if they seek damages for violations other than environmental claims.

“To the extent that plaintiffs assert claims under general maritime law and/or state law, the court will consider those claims separately when it addresses the pending motions to dismiss the B1 bundle master complaint,” Barbier wrote.

During the May 26 hearing, Barbier indicated that he might find the claims asserted in the D1 bundle were moot.

“The fundamental argument is that this is all moot because the well is sealed,” Barbier said.

During the hearing, Ervin Gonzales, of the plaintiff steering committee, said the cleanup has not been adequate and “the environment is suffering.”

Greg Buppert, an attorney for Defenders of Wildlife, told Barbier at the hearing that “the Endangered Species Act is not linked to the well spill; it is linked to the take of species.”

In response, Barbier cited the federal government’s investigation of the spill. Federal attorneys have said that criminal charges will be filed if the investigation turns up evidence of willful negligence by the defendants.

Because of the continuing investigation, the government has tried to keep certain issues undercover. For instance, autopsy results of the hundreds of dead baby dolphins that have washed up along the Gulf Coast have been kept private, and independent scientists have not been allowed to conduct their own autopsies.
“Isn’t that what the federal government is doing?”  Barbier asked on May 26. “It sounds like you think they may not do it right.”

Later that day, Barbier told Buppert: “It’s speculative right now. You’re surmising that somebody is going to do something that you don’t like.”
Attorneys did not immediately return calls for comment.

Unbelievable. Shocking. The may need the entire congress to send twitter pics exposing themselves to distract the masses from this one. I guess the Judge believed that all of the oil magically disappeared from the Gulf the moment the well was sealed, just like the Federal Government told us it did. Never mind that fact that scientists reported the Feds confiscated the data of the underwater plumes and told the scientists to shut up about their research. Never mind the feds tried covering up the first plume that was discovered. You do remember that  massive 22 mile long plume larger than the size of Manhattan don’t you?
 
And even after the Feds said they couldn’t find the  oil the massive slick in the Gulf could still be seen from space. Then there were the fisherman that the Feds told to shut about the discovery of oil in Gulf seafood. Yep the damage, that all ended when the well was sealed, if what even sealed. Regardless of that debate that fact still remains that massive underwater lakes of oil are still in the Gulf and will remain there for years.

But none of that matters to our fascist government. Widespread sightings of oil washing up all over the Gulf continue to this very day. In fact NOAA has just recently confirmed a widespread “unexplained sickness” and lesions in sea life all across the Gulf that the Feds are desperately trying to keep a lid on.

That wouldn’t have anything to do with the almost 2 million gallons of the neurotoxin pesticide Corexit that was sprayed into the Gulf to limit BP’s cleanup costs for the Gulf.
Oh, the irony. Would BP have sprayed all of those toxins into the Gulf if they knew that the Federal courts would just let them off the hook for the clean up costs? The Feds would have never of needed to lie about the lethality of Corexit because the public couldn’t handle the truth.

The Irony. The Fascism. The Greed. The Corruption.

Why Are Taxpayers Subsidizing Facebook, and the Next Bubble?

By SIMON JOHNSON  --  January 6, 2011

Goldman Sachs is investing $450 million of its own money in Facebook, at a valuation that implies the social-networking company is now worth $50 billion. Goldman is also creating a fund that will offer its high-net-worth clients an opportunity to invest in Facebook.

On the face of it, this might seem just like what the financial sector is supposed to be doing – channeling money into productive enterprise. The Securities and Exchange Commission is reportedly looking at the way private investors will be involved, but there are more deeply unsettling factors at work here.

Remember that Goldman Sachs is now a bank-holding company – a status it received in September 2008, at the height of the financial crisis, in order to avoid collapse (see Andrew Ross Sorkin’s blow-by-blow account in “Too Big to Fail” for the details.)

This means that it has essentially unfettered access to the Federal Reserve’s discount window – that is, it can borrow against all kinds of assets in its portfolio, effectively ensuring it has government-provided liquidity at any time.

Any financial institution with such access to such government support is likely to take on excessive risk – this is the heart of what is commonly referred to as the problem of “moral hazard.” If you are fully insured against adverse events, you will be less careful.

Goldman Sachs is undoubtedly too big to fail – in the sense that if it were on the brink of failure now or in the near future, it would receive extraordinary government support and its creditors (at the very least) would be fully protected.

In all likelihood, under the current administration and its foreseeable successors, shareholders, executives, and traders would also receive generous help at the moment of duress. No one wants to experience another “Lehman moment.”

This means that Goldman Sachs’s cost of financing is cheaper than it would be otherwise – because creditors feel that they have substantial “downside protection” from the government. 

How much cheaper is a matter of some debate, but estimates by my colleague James Kwak (in a paper presented at a Fordham Law School conference last February) put this at around 50 basis points (0.5 percentage points), for banks with more than $100 billion in total assets.

In private, I have suggested to leading members of the Obama administration and Congress that the “too big to fail” subsidy be studied and measured more officially and in a transparent manner that is open to public scrutiny – for example, as a key parameter to be monitored by the newly established Financial Stability Oversight Council.

Unfortunately, so far no one has taken up this approach.

However, there is consensus that the implicit government backing afforded to Fannie Mae and Freddie Mac in recent decades allowed them to borrow at least 25 basis points (0.25 percent) below what they would otherwise have had to pay – a significant difference in modern financial markets.

In 13 Bankers, Mr. Kwak and I refuted the view that these government sponsored enterprises were the primary drivers of subprime lending and the 2007-8 financial crisis – that debacle was much more about extreme deregulation and private-sector financial institutions seeking to take on crazy risks.

Nonetheless, Fannie and Freddie were badly mismanaged – and followed the market in 2005-7 with bad bets based on excessive leverage – in large part because they had an implicit government subsidy. Those institutions should be euthanized as soon as possible.

Goldman Sachs now enjoys exactly the same kind of unfair, nontransparent and dangerous subsidy: it has effectively become a new form of government-sponsored enterprise. Goldman is not a venture capital fund or primarily an equity-financed investment fund. It is a highly leveraged bank, meaning that it borrows through the capital markets most of the money that it puts to work. 

As Anat Admati of Stanford University and her colleagues tirelessly point out, the central vulnerability in our modern financial system is excessive reliance on borrowed money, particularly by the biggest players.

Goldman Sachs is a perfect example. Most of its operations could be funded with equity – after all, it is not in the retail deposit business. But issuing debt is attractive to shareholders because of the subsidies associated with debt financing for banks and to bank executives because their compensation is based on return on equity — as measured, that increases with leverage.

If banks have more debt relative to equity, this increases the potential upside for investors. It also increases the probability that the firm could fail — unless you believe, as the market does, that Goldman is too big to fail.

Social-networking companies should be able to attract risk capital and compete intensely. They do not need subsidies in the form of cheaper financing, or in any other form.

Social networking is a bubble in the sense that e-mail was a bubble. The technology will without doubt change forever how we communicate with each other, and this may have profound effects on the nature of our society. But investors will get carried away, valuations will become too high and some people will lose a lot of money.

If those losses are entirely equity-financed, there may be negative effects, but they are likely be small – in the revised data after the 2001 dot-com crash, there isn’t even a recession (there were not two consecutive negative quarters for gross domestic product).

But if the losses follow the broader Goldman Sachs structure and are largely debt-financed, then the American taxpayer will have helped create another major financial crisis.

And if you think that sophisticated investors at the heart of our financial system can’t get carried away and lose money on Internet-related investments, remember Webvan: “During the dot-com bubble, Goldman invested about $100 million in Webvan, the online grocer that never got off the ground and eventually collapsed in bankruptcy.”

How Many Economists Does It Take to See an $8 Trillion Housing Bubble?

Sticking the Taxpayer (Not the Banks) With the Tab
By DEAN BAKER

The answer to that question has to be many more economists than we have in the United States. Very few economists saw or understood the growth of the $8 trillion housing bubble whose collapse wrecked the economy. This involved a degree of inexcusable incompetence from the economists at the Treasury, the Fed and other regulatory institutions who had the responsibility for managing the economy and the financial system.

There really was nothing mysterious about the bubble. Nationwide house prices in the United States had just kept even with the overall rate of inflation for 100 years from the mid 1890s to the mid 1990s. Suddenly house prices began to hugely outpace the overall rate of inflation. By their peak in 2006 house prices had risen by more than 70 percent after adjusting for inflation. Remarkably, virtually no U.S. economists paid any attention to this extraordinary movement in the largest market in the world.

Had they bothered, they would have quickly seen that there was no plausible explanation for this jump in prices in either the supply or demand side of the market. There were no major new restrictions on supply, with the builders putting up homes at near-record rates. Nothing on the demand side suggested that prices should rise. The healthy income growth of the late 90s was followed by stagnation in the last decade and population growth was relatively subdued. Finally, there was no unusual rise in rents, which just slightly outpaced inflation over this period.

Therefore it should have been easy for any competent economist to recognize the housing bubble. Moreover, the dangers for the economy should also have been apparent. The boom in construction (both residential and non-residential) had raised its share of GDP by more than 3 percentage points above its long-term average. In addition, the creation of $8 trillion in housing bubble wealth predictably led to a consumption boom, as households spend based on the new equity created by the bubble.

All of this presaged disaster for the time after the bubble burst. Construction spending was sure to plummet to below normal levels as the market recovered from the long period of overbuilding. Consumption would also fall back as households adjusted to the disappearance of the housing wealth that they expected to be available to them in future years.

Yet, almost no economists saw what was clearly in front of their eyes. They thought everything was just fine until the house of cards eventually collapsed in 2007-2008.

Unfortunately, the reign of error is not over. House prices in the United States are again declining and most of the economics profession remains clueless. The Case-Shiller 20-city house price index for October (the data is released with a two-month lag) showed a decline of 1.3 percent from September. This implied an acceleration from the prior month's decline, which is now reported as 1.0 percent. In other words, house prices are again declining at double-digit rates.

A more careful examination of the data reveals the underlying logic. Prices are declining most rapidly in the bottom third of the market. Prices for this bottom tier of the market were in a literal free fall in recent months in several cities.

The reason is that a first-time buyers tax credit ended in June. This credit caused many buyers to move their purchase forward. People who might have otherwise bought in the second half of 2010 or in 2011 instead bought in the first half of 2010.

This tax credit had the effect of ending the plunge in house prices in 2009 and even leading to small rise in the second half of the year. But with the credit now expired, the price decline is resuming. It will likely spread from the bottom tier of the market to the middle and higher end, since the sellers of bottom-tier homes are the buyers of higher-end homes. If they must sell for much lower prices than they had anticipated, then they will have less money to buy these higher-end homes.

The further decline in house prices will have predictable consequences for the economy. If house prices drop by another 15 percent, completing the deflation of the housing bubble, this would imply a loss of $2.5 trillion in housing wealth. If consumers spend 6 cents for every dollar of housing wealth (near the middle of the range of estimates), this would mean a fall in consumption of roughly $150 billion or 1 percent of GDP. This will be a substantial drag on growth over the next two years that will no doubt surprise most economists.

The other important part of this story is that many more homes will fall underwater and there will be new losses for banks. However one result of the delay in this second round of price adjustments is that trillions of dollars of mortgages were taken out of private hands and shifted over to Fannie Mae and Freddie Mac, the mortgage giants that are currently owned by the government. This means that the losses on these mortgages will be the problem of the taxpayers, not the banks. Why is no one surprised?

Fed Made Taxpayers Unwitting Junk-Bond Buyers

By Caroline Salas, Craig Torres and Shannon D. Harrington - Jul 1, 2010

Federal Reserve Chairman Ben S. Bernanke and then-New York Fed President Timothy Geithner told senators on April 3, 2008, that the tens of billions of dollars in “assets” the government agreed to purchase in the rescue of Bear Stearns Cos. were “investment-grade.” They didn’t share everything the Fed knew about the money.

The so-called assets included collateralized debt obligations and mortgage-backed bonds with names like HG-Coll Ltd. 2007-1A that were so distressed, more than $40 million already had been reduced to less than investment-grade by the time the central bankers testified. The government also became the owner of $16 billion of credit-default swaps, and taxpayers wound up guaranteeing high-yield, high-risk junk bonds.

By using its balance sheet to protect an investment bank against failure, the Fed took on the most credit risk in its 96- year history and increased the chance that Americans would be on the hook for billions of dollars as the central bank began insuring Wall Street firms against collapse. The Fed’s secrecy spurred legislation that will require government audits of the Fed bailouts and force the central bank to reveal recipients of emergency credit.

“Either the Fed did not understand the distressed state of some of the assets that it was purchasing from banks and is only now discovering their true value, or it understood that it was buying weak assets and attempted to obscure that fact,” Senator Sherrod Brown, an Ohio Democrat and member of the Senate Banking Committee, said in an e-mail when informed about the credit quality of holdings in the Maiden Lane LLC portfolio. The committee held the April 3 hearing.

Bear Stearns Purchase

Maiden Lane, named for a street bordering the New York Fed’s Manhattan headquarters, was created to hold the assets the central bank acquired to facilitate JPMorgan Chase & Co.’s purchase of Bear Stearns.

The Fed disclosed the Maiden Lane holdings in March after Bloomberg News went to court using the Freedom of Information Act, and the U.S. District Court in New York held that the Fed should release documents related to Bloomberg’s request.

“The Federal Reserve was not straightforward with the American people regarding the risks they were taking with taxpayer money, despite my efforts to obtain such clarity at the time,” U.S. Senator Richard Shelby of Alabama, the Senate Banking Committee’s top Republican, told Bloomberg News. “It is apparent that the Fed withheld from the Congress and the public material information about the condition of these securities.”

Downgraded to Junk

When Bernanke and Geithner testified in April 2008, $42 million of the CDO securities the Fed would eventually buy had been downgraded to junk, data compiled by Bloomberg show. By the time the central bank funded its $28.8 billion loan to Maiden Lane 12 weeks later, about $172 million of such securities the Fed purchased were rated below investment grade, according to data compiled for Bloomberg by Red Pine Advisors LLC, a New York firm specializing in the valuation of complex, illiquid securities.

CDOs bundle assets ranging from mortgage bonds to high- yield loans and divide them into new slices, or tranches, of varying risks. High-yield, or junk, bonds are those rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.

“As was noted in testimony, all of the cash securities in the Maiden Lane portfolio were investment grade on March 14, 2008, when the deal was agreed to in order to facilitate the acquisition of Bear Stearns and to prevent the systemic consequences of its sudden and disorderly failure,” Michelle Smith, a spokeswoman for the Fed’s Board of Governors, said in an e-mail.

Recover Principal

“The Federal Reserve considered not just credit-rating valuations, which have varied some over time based on economic conditions, but also relied on a separate assessment from an independent investment firm, which advised us that over time, we would likely fully recover our principal and interest,” Smith said. “We continue to expect the loan to Maiden Lane to be fully repaid.”

The Fed valued the loan at $27 billion as of the end of last year, $1.8 billion below the amount that was funded in 2008, according to financial statements audited by Deloitte & Touche LLP.

More than 88 percent of Maiden Lane’s CDO bonds and 78 percent of its non-agency residential mortgage-backed debt are now speculative grade, according to data compiled by Bloomberg based on holdings as of Jan. 29.

Securities, Derivatives

The nonagency home-loan bonds and CDO securities made up about 44 percent of the $74.9 billion in face amount of Maiden Lane’s assets, Fed data show. Maiden Lane also contains commercial real-estate loans and other mortgage debt. The central bank hasn’t released how or at what prices it has valued the securities and derivatives, which are contracts whose values are tied to assets, including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

Being “investment grade” was a requirement for Maiden Lane’s bonds even after Bernanke and Geithner publicly criticized inflated ratings for helping to cause the financial crisis.

“The complexity of structured credit products, as well as the difficulty of determining the values of some of the underlying assets, led many investors to rely heavily on the evaluations of these products by credit-rating agencies,” Bernanke said in a January 10, 2008, speech in Washington. “However, as subprime-mortgage losses rose to levels that threatened even highly rated tranches, investors began to question the reliability of the credit ratings and became increasingly unwilling to hold these products.”

Princeton, Dartmouth

Members of Congress pressed Bernanke, who received a doctorate in economics from the Massachusetts Institute of Technology and served as chairman of Princeton University’s economics department, and Geithner, a Dartmouth College graduate who earned a master’s degree in economics and East Asian studies from Johns Hopkins University, about the quality of the assets during the April Bear Stearns hearings.

“You’ve got about $30 billion of collateral. And some comments have been made that you feel comfortable because it’s highly rated,” Senator Jack Reed, a Rhode Island Democrat, told Bernanke, according to a transcript. “But a lot of highly rated collateral these days is being subject to questions.”

“Senator, as was mentioned, it is all investment-grade or current performing assets,” Bernanke responded. “We do not know for sure what will transpire,” he said. “But we have engaged an independent investment-advisory firm who gives us reasonable comfort that if we can sell these assets over a period of time that we will recover principal and interest for the American taxpayer.”

Chances for Loss

When asked by Shelby during the hearing what the chances were for a loss, Robert Steel, then the U.S. Treasury undersecretary for domestic finance, said the transaction “was $30 billion, approximately, of collateral, all investment-grade securities, all of them current in interest and principal.”

Steel, who was named deputy mayor for economic development last month by New York City Mayor Michael Bloomberg, declined to comment through Andrew Brent, a spokesman for the mayor’s office. The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

Bernanke and Geithner didn’t detail during the hearing that the Fed would expose itself to below-investment-grade assets through credit derivatives it was also acquiring. The $16 billion of credit-default swaps included bets protecting some junk-rated asset-backed securities against default, according to two people familiar with the agreement who declined to be identified because the terms weren’t made public.

‘Related Hedges’

The Fed hasn’t disclosed how much was tied to below- investment-grade debt. Geithner, who is now Treasury secretary, said in an addendum to the text of his remarks only that the Fed was assuming “related hedges,” without elaborating.

Credit-default swaps are used to hedge against losses or to speculate on creditworthiness. The derivatives pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

“I strongly object to the mischaracterization of the portfolio,” Sylvain Raynes, a principal at R&R Consulting in New York, said in an interview. “The ratings that were purportedly investment-grade had long lost their utility” and to call several billion dollars of derivatives “related hedges” is “nonsense” and a “material omission.”

So-called hedges aren’t without risk, said Raynes, who is also co-author of “Elements of Structured Finance,” which was published in May by Oxford University Press. “You can be on the wrong side of a hedge, by definition. Which side are they on?”

Shrinking Holdings

Maiden Lane has been unwinding its credit-default swaps, according to the people familiar with the agreement. The holdings shrank to a face amount of $11.8 billion in December 2008 and $7.3 billion at the end of last year, according to its financial statements.

Of the $7.3 billion, $2.45 billion were contracts guaranteeing debt against default, including $2.1 billion of junk-rated securities. The bank valued the credit swaps it sold at a $1.8 billion loss, according to the 2009 statement.

Overall, Maiden Lane assumed more bets against securities than for them, the people familiar with the agreement said. The market value of its entire swaps book, including more than $3 billion of interest-rate contracts, was $1.13 billion as of Dec. 31, 2009, according to year-end financial statements.

The Senate Banking Committee also called JPMorgan Chief Executive Officer Jamie Dimon to testify on the Bear Stearns deal on April 3, 2008.

Riskier, More Complex

“The assets taken by the Fed consist entirely of loans that are current and rated investment grade,” Dimon said, according to a transcript. “We kept the riskier and more complex securities in the Bear Stearns portfolio for our own account. We did not cherry-pick the assets in the collateral pool.”

If the Fed hadn’t engineered the takeover, “the consequences could have been disastrous,” Dimon said.

JPMorgan didn’t pick the individual securities for Maiden Lane, Geithner said in an annex to his April 2008 testimony. Instead, it selected groups of assets that met criteria set by the central bank, and the Fed and its adviser, New York-based BlackRock Inc., reviewed those assets, according to one of the people familiar with the agreement. As part of the bailout, JPMorgan agreed to absorb the first $1 billion in losses.

Assets, Liabilities

JPMorgan had to weigh how many real-estate assets it could absorb against its existing inventory, Dimon said, adding that the New York-based company acquired about $360 billion of Bear Stearns assets and liabilities in the transaction.

JPMorgan spokesman Justin Perras declined to comment further on Maiden Lane.

“We certainly had doubts at the time: Why wouldn’t JPMorgan want a bunch of AAA assets?” said Mark Calabria, a former Senate Banking Committee staff member who was present at the April 2008 hearings and is now director of financial- regulation studies at the Cato Institute in Washington. “The answer is it was all borderline junk.”

The average CDO security was cut 7.6 grades by Moody’s and 7.3 levels by S&P in the 22 months between the time the Fed funded the loan and April 2010, according to Red Pine.

“That is quite steep,” said Wade Vandegrift, a Red Pine partner. “The default rates and the delinquency rates of these deals were a significant multiple of even the worst-case projections that rating agencies and other people projected.”

Foreclosed Loans

WaMu Asset-Backed Certificates Series 2007-HE1 M2, a $4.1 million mortgage-bond position the Fed acquired, was backed by home loans originated by the subprime-lending unit of Washington Mutual Inc., the Seattle-based thrift that went bankrupt in September 2008. As of March 2008, the month Bear Stearns collapsed, more than 26 percent of the loans were at least 60 days late, in foreclosure or the properties had already been seized, according to data compiled by Bloomberg.

Three weeks after the Fed agreed to the Bear Stearns rescue and four days after Bernanke’s April testimony, Moody’s cut the security to junk. S&P followed a month later and now rates it D.

“It is hardly surprising or particularly newsworthy that the value of” the Maiden Lane “portfolio deteriorated in the midst of the worst financial crisis in generations, but it is unlikely that the taxpayers will lose a dime on the government’s loan,” Treasury spokesman Andrew Williams said in an e-mail. The Congressional Budget Office estimates the Fed will make $200 million on Maiden Lane from inception through 2020.

Demanding Accountability

Billions of dollars in Fed loans -- some possibly involving subsidies for the biggest banks and corporations -- remain secret, and Congress is demanding more accountability from the Fed than at any time in its history.

House and Senate negotiators agreed on the sweeping Dodd- Frank Wall Street Reform and Consumer Protection Act last week, which requires the Government Accountability Office to audit the Fed’s emergency loans and forces the Fed to reveal recipients of such credit by Dec. 1. The House approved the measure 237-192 yesterday. It awaits approval by the Senate and will then go to President Barack Obama for his signature.

Vermont Senator Bernard Sanders wrote the legislation requiring an audit of Maiden Lane and other credit facilities. The act also would make it more difficult for the Fed to provide emergency loans in the future.

“We need to lift the veil of secrecy at the Federal Reserve,” Sanders, an independent, told Bloomberg News when informed about the credit quality of Maiden Lane’s holdings. “We need a complete and independent audit. The American people have a right to know what the Fed is doing with trillions of their taxpayer dollars.”

Geithner: Taxpayers to Face "Very Substantial" Losses from Fannie/Freddie

Geithner: Taxpayers Are Likely to Face "Very Substantial" Losses From Government's Takeover of Fannie and Freddie


Tim Geithner told the House Financial Services Committee today that txpayers are likely to face "very substantial" losses from the government's takeover of home mortgage giants Fannie Mae and Freddie Mac.

As Shahien Nasiripour notes:

Taxpayers have pumped more than $125 billion into the failed firms -- and on the hook for many more after the administration promised an unlimited source of funds just before Christmas to backstop their growing losses. 

And as Nasiripour points out, Geithner has absolutely no idea how to fix Fannie or Freddie.

Heck of a job, Timmy.

Taxpayers hit as TARP takes a new turn

Taxpayers hit as TARP takes a new turn

Wed, Mar 3 2010
By Dan Wilchins and David Lawder - Analysis

NEW YORK/WASHINGTON (Reuters) - A small Midwestern bank has negotiated with the U.S. Treasury for taxpayers to essentially buy the bank's shares at an above-market-value price, in an unusual transaction reflecting how the government's bank investments are entering a new phase.

Midwest Banc Holdings Inc agreed to swap $84.8 million of preferred shares it sold to the U.S. government in 2008 for securities that will convert into about $15.5 million of common shares -- roughly an 80 percent loss to taxpayers.

To some analysts, the transaction is an outrageous giveaway to an ailing bank, and its investors.
"There's a lot of funny stuff going on here," said James Ellman, president at hedge fund Seacliff Capital in San Francisco.

Others say it is a sign of the tough choices the Treasury faces dealing with banks that remain weak despite receiving government capital. In some cases, taxpayers must choose whether to lose 80 percent of their money, or all of it.

A Treasury official told Reuters that the deal is designed to help Midwest Banc Holdings raise private capital, which is the main goal of this phase of the Troubled Asset Relief Program (TARP).

The biggest banks repaid the money they owed the U.S. Treasury last year and earlier this year, and with a few exceptions, they did so easily.
But more than 600 smaller banks are still left in the program, and owe roughly $130 billion to taxpayers.

In the latest stage of TARP negotiations, many banks will struggle to repay that money. The government will be forced to negotiate separate deals with banks that could result in losses for taxpayers.

The Chicago area, where Midwest Banc Holdings is based, could have a large number of problem lenders.

A recent presentation by rival Chicago bank MB Financial Inc said there are 157 banks in the metro area with more than $100 million of assets, and 70 of them are by one measure experiencing real credit stress.

When banks applied for the Treasury capital, they had to be deemed "healthy" by their regulators to receive taxpayer funds. So far, the only outright loss the government has taken so far on the TARP Capital Purchase Program is a $2.3 billion loss on its investment in CIT Group, which went through a bankruptcy reorganization last year.

The Treasury has said it expects its bank capital injection program overall to earn a profit, helped by preferred stock dividends and warrant sales. But the overall TARP program is expected to lose about $117 billion, from companies like insurer American International Group Inc .

Chris Robling, a spokesman for Midwest Banc, declined to comment.

SHARING THE GAINS

What irks some analysts is that the government may be giving up some potential gains on Midwest Banc's stock. The Treasury could have traded its $85 million of preferreds for common stock now worth about $85 million.

That move would have given Midwest the same amount of capital, but the bank would have issued more shares to taxpayers at a lower price, giving taxpayer's more profit if the company's shares rise.

"Taxpayers should be allowed to share in the upside," Seacliff's Ellman said.
An analyst in New York said, "The government is giving away money here."

But others argue that issuing fewer shares to the government may be necessary if the bank is looking to sell more common shares to private investors.

The government's mistake was investing in the bank in the first place, and its best option is now to choose the outcome that minimizes losses, said Linus Wilson, a longtime critic of TARP at University of Louisiana at Lafayette.

"We weren't in that good a bargaining position," Wilson said, adding that the current market value of the government's TARP preferred shares is about $8 million.

Midwest is not alone in having renegotiated its TARP obligations. Citigroup Inc exchanged about $25 billion of the United State's TARP preferred shares into common stock, and another $20 billion of TARP securities into trust preferreds.

Superior Bancorp and Popular Inc last year also exchanged trust preferreds for the government's preferreds.

And GMAC Financial Services in December swapped some of the government's TARP preferreds for mandatory convertibles.

Midwest Banc is giving securities known as mandatory convertibles to the U.S. government, in exchange for the preferreds it sold in December 2008 plus $4.5 million in unpaid dividends on that stock.

Those securities will automatically convert into about 47.1 million common shares in seven years. The bank can convert them sooner if it sells at least $125 million of new equity for cash, and meets a few other conditions.