Hello Wonketteers, by now you have probably realized that Gawker released 950 pages of Bain Capital records, and that this is either very important or a waste of everyone’s time, depending on whom you ask. WHICH IS IT? IS IT IMPORTANT OR IS IT A WASTE OF TIME? And also, what is a total return equity swap, and why should you care? And how did Romney manage to give $100,000,000 to his heirs without paying taxes on any of it? These are very pressing and important questions, and it is your lucky day because the answers are contained herein. Behold, Part 2 of Wonkette’s guide to the Gawker Super Scooper, where all questions will be answered and all doubts will be assuaged.
Carried Interest
“Carried interest,” which we touched on in our last post, is a share of any profits that the general partners of private equity firms and hedge funds receive as compensation, despite the fact that they haven’t contributed any initial funds . Carried interest is taxed at the capital gains rate of 15%, which allows equity chiefs and hedge fund managers toevadeavoid millions, if not tens of millions, of dollars in taxes, especially since the amount of carried interest generally comes to around a fifth of a fund’s total profit, and (in theory) functions to incentivize managers towards improving the fund’s performance. Mommy Benson, who holds an MBA in accounting, put it this way: "while you're slogging away on your blog or whatever it is you do and paying Social Security tax on your income, these people get to pay the 15% capital gains tax rate on their income because they are job creators, except they aren't creating jobs, they are creating crap." Indeed.
Is "carried interest" illegal?
The practice has become pretty controversial, and even Rupert Murdoch referred to carried interest as a “ racket ," taking to his Twitter account back in September of last year to urge Obama to tax carried interest earnings as income rather than as capital gains: "Romney tax uses long-term legal loophole. 'carried interest' makes all fund managers rich. Time both parties stopped selling out to Wall S,” he Tweeted. The next day, he still wasn’t done complaining and wrote "Carried interest tax racket. Billions over many years. Why and where has Obama been?" Of course, Obama has been advocating for higher taxes on private equity for awhile, but this would require Congressional approval and might risk offending the Job Creators, which we must not do at any cost lest we incur their wrath and they punish us by withholding low-wage jobs with no benefits and no long term security .
Total Return Equity Swaps
We have already explained about paper corporations and blocker entities in Part I. Let us now introduce you to another esoteric tax evading avoiding tactic practiced by the uber-wealthy, the total return equity swap. The total return equity swap is a practice whereby an investor obtains the benefit of owning a given asset without incurring any of the tax liability that occurs when you have to actually claim ownership of that asset on a balance sheet. The example that NYU professor Dan Shaviro uses is as follows: let’s say Wonkette wanted to buy some GE stock but didn’t want to pay taxes on it. We can't just buy it through a fake company we set up on the Cayman Islands because taxes would be deducted from the dividends. To avoid paying these taxes, we would arrange a swap with a bank so that one year from today, it will pay us interest that we would have owed it on a $100,000,000 loan, and pay an amount equal to the dividends that we would have derived during the same year had we actually owned that GE stock. The bank will also pay us however much $100,000,000 in GE stock had appreciated during the year. In other words, the bank acts as a middleman, purchasing and holding the asset for us for the cost of interest on the loan, and therefore allowing us to report ownership of a derivative rather than of the asset itself. This way, we can reap all of the benefits of owning the asset and have none of the liability.
Is this illegal?
So far, the consensus is that it looks to be legal.
The $100,000,000 Gift
One of the documents in the Gawker data dump is a 2008 presentation (pdf at link) made by a partner at Ropes & Gray LLP, a fancy law firm that represents Mitt Romney. According to the Wall Street Journal , the presentation focuses on how “private-equity executives could minimize gift and estate taxes by giving family members some of their ‘carried interest’ rights.” Apparently, between the 1990s and early 2000s, estate planning lawyers told their clients that they could transfer carried-interest rights to heirs and avoid tax liability by claiming that the gifts were worthless. It’s very possible that Romney managed toevadeavoid taxes on a $100,000,000 gift to the Ann & Mitt Romney Family Trust by reporting the assets as having a value of zero, but this is mere speculation since legally, these trust assets belong to Romney’s heirs and are thus not included in the financial disclosure forms he’s filed as a candidate. So we'll just have to wait until someone leaks those documents and tell you about it then.
Is this legal?
So far, no one has come out and said it was illegal. So there’s that.
By the way, doesn't Gawker’s Nick Denton have holdings in the Cayman Islands?
Apparently he does. We’ll be sure to ask him about that when he runs for president, or is appointed to a position that allows him to set tax policy.
So basically, these documents don't show any concrete evidence of wrongdoing?
For now, all this stuff -- carried interest, equity swaps, paper companies in the Cayman Islands, etc -- seems to be legal. Although as commenter MissTaken pointed out in the comments on Part 1, Internal Revenue Code Section 457A theoretically disallowed carried interest and 2 and 20 shenanigans, requiring hedge fund managers to take all existing deferrals into income by 2017. Hedge fund managers, realizing that the long-term viability of Medicare and Social Security hangs in the balance, soberly agreed to abide by this rule and in fact, some rushed to implement it sooner.
HA! HA! JUST KIDDING, hedge and private equity funds found ways to exploit loopholes in the law (the mechanics of which you can read about here if interested) and the status quo remained in place.
Anyway, you must be a Poor if you’re even asking about “laws” and “rules” and all that, because those things are beneath people like the Romneys. Note that with the exception of this guy, commentators have been very reluctant to characterize any of these practices as illegal, instead using terms like “ shady ” and “ dubious .” Also, note that even Victor Fleischer , the only guy who has gone on record to unequivocally claim that just one of these practices is illegal, does so on a speculative basis. In other words, he says that such practices “would not” survive a legal challenge, not that they are already definitely illegal by the standards set forth by a given legislative or judicial body.
So if none of this is illegal, isn’t it irrelevant?
Well, a lot of people have taken the position that none of this matters. Kevin Roose over at New York Magazine , for example, claims that not only is there “no scandal” hidden in the pages of these documents, but also that the important point about the data dump is that it “illuminates the huge gap between the average Gawker reader and Mitt Romney when it comes to matters of money." Also, he argues, holdings in the Cayman Islands, carried interest, two and twenty — all that stuff just sounds scary because Real Americans don’t know what they are. If financial journalists are “patient” and explain it to them, the scariness will just go away. And of course, as noted in Part 1, Forbes’ Dan Primack is under the impression that these documents are “worthless.” Your Wonkette, however, acknowledges that these practices are probably all legal and above board, but still respectfully disagrees with assessments that the documents are therefore worthless.
One Tax Code For Job Creators and One Tax Code for You People
Although Romney may not have done anything illegal or out of the ordinary for someone of his means, these documents give You People a small peek into what the tax code looks like for Job Creators, as well as exactly what kinds of maneuvers are outside the reach of Real Americans who want toevadeavoid taxes.
Furthermore, it’s ironic, and by ironic we mean disgusting, that the guy who wants to turn Medicare into a voucher program and raise the retirement age to 69 is the same guy who hasevaded avoided paying millions of dollars in taxes and refuses to endorse policies that will increase the capital gains tax (or at least tax carried interest as income instead of capital gains) though both of these low tax rates weaken the financial situation of Medicare and Social Security.
"I have friends who own NASCAR teams"
The fact that Romney continues to do all of these financial acrobatics -- which, as even New York Magazine's Kevin Roose notes, sound scary to Real Americans -- tells us something pretty important about Romney and about the company he keeps: Romney has had presidential aspirations since at least 2007, and has still engaged in all of these exotic and strange financial maneuvers to decrease his tax liability. So either he is so greedy that he cares more about saving a few million bucks than about being president, or he's become so accustomed to Quiet Rooms that these kinds of behaviors are totally normal to him. Or both, but the fact that so many financial reporters are "scratching their heads" over the significance of these documents speaks to the widespread normalization of tax avoidance schemes for the insanely wealthy.
"What I learned at Bain Capital"
If you haven't had the pleasure of reading the Wall Street Journal this weekend, let your Wonkette inform you that Romney has written a delightful op-ed called "What I learned at Bain Capital" wherein he talks all about how his experience at Bain will help him improve the economy. And it is SO TRUE. For example, turn to page 559 of the Gawker documents, wherein the Bain partners are treated to a presentation on how many jobs they have created that year and how many of these jobs pay above a living wage and offer full benefits. OH JUST KIDDING HA HA, there is no such document, because the purpose of Bain wasn't to create jobs or even to make products or services that would be of any practical use to anybody, it was to make the Bain partners craploads of money. Like, for example, the time that Bain bought KB toys , laid off 3,000 people, and yielded a 370% return for Bain on its "investment," or that other time Bain illegally crushed a pilot's union at a small airline in the 1980s because dealing with labor negotiations would have been a pain in the ass.
So judging from Bain's track record, President Romney would first fire all federal workers (including Congress and the military) and outsource their jobs to a factory in China and have the American workers first train their Chinese replacements so as to insure a smooth transition. After that, he'd sell off our oil reserves and national parks to investors--taking 20% as a transaction fee and accepting payment in the form of carried interest--and setting up the U.S. Treasury as a shell company to avoid any tax liabilities. Then, he'd value the Statue of Liberty at zero and give it to Tagg as a gift and finally, after four years of an impressive return on investments, he'd retroactively pretend step down from the office of President. We can't wait.
Well, no-one could sustain anger over credit default swaps in part because the media never properly explained what they were and how they threatened complete meltdown of the global financial system. All we really got was that they were somehow bad but everyone did them. We did not get that they were used in ways that were entirely indistinguishable from straight-up bets, except for who was doing it, used to deliberately increase banks' exposure to the risk profile of the mortgage market when there weren't enough actual mortgages being written to sate their ravenous appetite for the profits they had been making while the bubble was inflating. It was not explained in the MSM that banking and shadow-banking entities had built up trillions of dollars of exposure without ever having to put it on their books, and without there being any hope in hell of ever meeting their obligations if ever there was a correlated increased in default risk, such as occurs when a housing bubble pops.
I think if the population had understood that the entire financial sector was making pure bets they couldn't hope to pay out on and never had to reveal to shareholders or investors, and that it was completely legal because Phil Gram wanted to help Enron fuck the state of California, the anger would have been sustainable, and the media wouldn't be able to use the fact that people weren't that mad about stuff the media abjectly failed to explain as an excuse not to bother even trying to explain stuff any more.
At least the likes of Blackbeard reveled in their outlawry.