Tag Archives: deficit

Overseas Cash and Justin Bieber

As tax reform is discussed in preparation for our upcoming leap off the fiscal cliff, among the topics has been corporate tax reform, in particular how American companies are taxed on their overseas income. As the system currently works, as long as US companies keep their cash offshore, they don’t have to pay US taxes. Once they bring that money back, it’s a flat 35% tax rate. So, not surprisingly, US companies with multinational operations have a lot of cash stashed overseas. Read all about it here, here, here and here.

The thing is, some of these companies have so much cash overseas, and so little here in the US, that they’re borrowing money to fund their operations here, or to fund dividends and stock buybacks. But they (the companies and the reporters covering this topic) are making it seem like the companies CAN’T bring the money back to America. Let’s be very clear: they CAN bring the money back, it will just cost them 35%.

For example, here is how the WSJ described it:

Each of these companies is grappling with a growing problem that comes from keeping Uncle Sam away from their foreign income: How to round up enough cash in the U.S. to cover items like dividends, share repurchases, debt repayments and pension contributions.

And here is how a CFO described it in the WSJ:

“You end up with the really peculiar result where you are borrowing money in the U.S. while you show cash on the balance sheet that is trapped overseas,” said Bruce Nolop, former chief financial officer of Pitney Bowes and E-Trade Financial and now a director at Marsh & McLennan. “It is a totally inefficient capital structure.”

Now I understand why companies are keeping their cash overseas: it’s their job to minimize taxes. And I can certainly see why they would rather borrow at historically low interest rates (like 5%) than pay a 35%. No complaints from me on either front. But for the companies to act like it’s just impossible for them to bring the cash home annoys me. They choose not to bring the cash home, for good reasons, but if they really wanted to they could. It’s like saying that you can’t get Justin Bieber to play at your daughter’s bat mitzvah. You can, but it’s going to cost you a boatload.

Matt Taibbi on Romney and Private Equity

Matt Taibbi has a new piece in Rolling Stone about Mitt Romney’s time at Bain Capital, and how Bain used large amounts of debt to execute its buyouts. The overall theme is one of financial engineering vs. making things, of pillaging companies to generate wealth vs. building companies to create jobs.

Like most things Taibbi writes, this article is:

  1. Very funny
  2. Savagely mean
  3. Only about 75% accurate, and you need to know a lot about Wall Street to know which quarter is wrong

However, in light of my prior post on private equity, there are two paragraphs that I wanted to quote because they are both amusing and apt.

Talking about the private equity model of loading up a company with debt and then paying fees and dividends to the buyout firm, Taibbi says:

This business model wasn’t really “helping,” of course – and it wasn’t new. Fans of mob movies will recognize what’s known as the “bust-out,” in which a gangster takes over a restaurant or sporting goods store and then monetizes his investment by running up giant debts on the company’s credit line. (Think Paulie buying all those cases of Cutty Sark in Goodfellas.) When the note comes due, the mobster simply torches the restaurant and collects the insurance money. Reduced to their most basic level, the leveraged buyouts engineered by Romney followed exactly the same business model. “It’s the bust-out,” one Wall Street trader says with a laugh. “That’s all it is.”

And then, comparing Romney’s speeches decrying America’s level of debt with his Bain Capital strategy of loading up companies with debt, Taibbi writes:

To recap: Romney, who has compared the devilish federal debt to a “nightmare” home mortgage that is “adjustable, no-money down and assigned to our children,” took over Ampad with essentially no money down, saddled the firm with a nightmare debt and assigned the crushing interest payments not to Bain but to the children of Ampad’s workers, who would be left holding the note long after Romney fled the scene. The mortgage analogy is so obvious, in fact, that even Romney himself has made it. He once described Bain’s debt-fueled strategy as “using the equivalent of a mortgage to leverage up our investment.”

I like that one because it makes the connection between private equity and mortgages, as I did in my post.

Again, I’m not fully supporting Taibbi’s reporting or his conclusions, but he makes some good points.

Private Equity Parallels the Mortgage Business

I’ve been trying to ignore all the discussion in the presidential campaign about Bain Capital and leveraged buyouts and private equity, but pull is too strong and I can no longer resist. Must….write…blog…entry.

First off, let me say that buyouts* are neither inherently good nor bad. People who are completely bashing buyouts as inevitably bad, as rapacious tools for the 1%, are simply wrong. People who are utterly defending buyouts as inevitably good, as the perfect form of free market capitalism, are also wrong. I mean, duh. Nothing as complicated as a buyout is going to just be good or just be bad.

Good: having a buyer focus a complacent or bloated company on its core products is often very productive. Bad: having a buyer stop investing in R&D and shut down pensions while continuing to pay itself fees and dividends is often very troubling.**

Rather than delve more into the good or the bad, I do want to point out one thing that isn’t often mentioned: how similar the buyout business is to the mortgage business as practiced on Wall Street. Both businesses are leveraged gambles with the government picking up at least some of the tab if you lose. We all know how Wall Street borrowed massively to bet on mortgage-backed securities. And they made jillions, paying out huge bonuses, until it went wrong, and the government bailed all of Wall Street out. Heads they win, tails we lose.

Buyout barons have a similar deal. Not quite as good, but similar. They borrow heavily to amplify the returns on their deals. If it goes well, they make tons; that is why Mitt Romney is so rich. But if it goes poorly, the Bains and KKRs of the world get to walk away, using the government bankruptcy code, and leaving the workers’ pension plan in the hands of the Pension Benefit Guaranty Program, a government agency. I don’t want to overstate the case: sometimes private equity firms lose money on bad deals. They don’t fully socialize their losses. But their losses are limited to that deal; the structure is such that they can walk away from bad deals.

In the meantime, they are borrowing against the assets of the company and paying themselves dividends with the money. You might say “they can’t be applying too much leverage, or banks wouldn’t lend them the money.” Sure, just like banks would never give mortgages to pool cleaners who made $25,000 per year. Oh wait, they did, repeatedly. To quote Mike Konczal, who is quoting Josh Mason, “It was a common trope in accounts of the housing bubble that greedy or shortsighted homeowners were extracting equity from their houses with second mortgages or cash-out refinancings to pay for extra consumption. What nobody mentioned was that the rentier class had been doing this longer, and on a much larger scale, to the country’s productive enterprises.”

Finally, I should also note that buyouts are structured as giant tax dodges. Again, this is not inherently bad; we expect companies and investors to legally minimize their taxes. But the fact is that a big part of the value of buyouts is their tax efficiency. That is why buyout firms continually sell companies to each other in a round robin of tax avoidance; they aren’t all adding “operational value.” There is only so much a bunch of ex-investment bankers can do to change the operations of a company, but each time a company is sold there is a new set of tax avoidance strategies.

How does this work? First of all, because interest payments are tax deductible, the leverage applied in a buyout is essentially subsidized. Much like homeowners are encouraged to take out larger home loans by the tax deductibility of mortgage interest, buyout firms are encouraged to leverage up as much as possible. This enables the company’s operating income be used on debt payments, amplifying returns, rather than going into taxable income. In addition, at the time of acquisitions, assets of the company can be written up to fair market value and then depreciated, with the non-cash depreciation expense also tax-deductible. That step-up in asset value at acquisition is precisely why buyout firms keep flipping companies to each other. In a perfect deal, the post-acquisition company will have taxable income below zero, but positive cash flow. In other words, regardless of whatever operational improvements a buyout firm might implement, a huge part of the value that accrues to that buyout firm is due to financial engineering, specifically financial structuring to avoid taxes.

* I will use the term “buyouts” here, which are usually leveraged but don’t need to be. Since “private equity” also refers to venture capital, I will avoid using that term.

** From a recent Vanity Fair article:
“According to Kosman, “Bain and Goldman—after putting down only $85 million … made out like bandits—a $280 million profit.” Dade’s debt rose to more than $870 million. Romney had left operational management of Bain that year, though his disclosures show that he owned 16.5 percent of the Bain partnership responsible for the Dade investment until at least 2001.
Quite soon, however, a fragile Dade faced adverse conditions in the currency markets, and it had to start in effect cannibalizing itself, cutting into the core of its business. It filed for bankruptcy in August 2002 and Bain Capital departed. When Dade emerged from bankruptcy, its new owners invested in long-term R&D, and it flourished again.”

The Fakery of Paul Ryan

Like most (all?) Washington politicians, Paul Ryan is a liar and a hypocrite. Read about it here. Skip to page 6 for the ultimate example of Ryan’s nearly pathological fakery.

Graphical Look at Federal Deficit

Courtesy NY Times

Democrats Need to Lead, or Lose

S&P downgraded US debt from AAA yesterday, knocking Treasuries from their perch as the safest debt on earth. We will see what happens to yields on Monday, but so far it’s not clear that the markets agree with S&P. After all, this is an agency that had AAA ratings on subprime mortgage-backed securities not that long ago.

But in the meantime, the GOP is using the downgrade to attack Obama, saying “look what happened on his watch.” The president doesn’t deserve all the blame, but I understand why the GOP has seized the downgrade as a bludgeon. And in the same way, democratic operatives are putting the blame on the tea party and its refusal to compromise on deficit cutting.

But you know who isn’t saying anything? Democratic leaders. The White House, Harry Reid, Nancy Pelosi — they are all keeping silent on this. They are trying to be the “adults” and not play the blame game. I appreciate that high-mindedness, but here’s the thing: the game is being played, with or without them. If they stay silent then they just let the GOP control the narrative. You know the Sunday talk shows will be full of Boehner and Cantor and Romney and the gang piling on Obama for the downgrade.

The Democrats have to realize that they are in the middle of a street fight and if they don’t fight back they will lose. And they’ll deserve to lose. If you are going to suck ass at politics, then you shouldn’t be a politician. Regular readers know that I mostly support Democratic policies (with some huge exceptions that I ought to detail one of these days), but I sure don’t support Democratic fecklessness. The Democrats got rolled on the debt ceiling negotiation, and now they are getting rolled on the downgrade. It’s pathetic. Or, to quote a senior democratic official: “if this White House showed a gram of leadership on the debt crisis we could have avoided this historic embarrassment.”

John Boehner Can Be A Hero

John Boehner has a choice: he can lead the Republicans, or he can save the country. He can’t do both.

The vote on the recent budget deal showed that compromises won’t get votes from tea party Republicans. Fifty-nine Republicans voted no on the agreement, and Boehner had to team up with Democrats to get something passed. Pundits are discussing whether Boehner will move right to get a unified Republican caucus. He’ll have to if a unified Republican caucus is his goal.

But Boehner’s goal should not be keeping his party together; it should be fixing the country. Instead, of moving right to pass “Republican” bills that will get vetoed by the President, what he should do is move left and pass meaningful reform with strong bipartisan support. Boehner can team regular (non-tea party) Republicans with conservative Democrats to come up with a common sense approach to solving our fiscal problems. America is a centrist country and Boehner has a chance to create a centrist solution.

The reality is that everybody knows the logical way to solve our debt problem. We need cuts in all spending: discretionary, military and entitlements, coupled with revenue increases. The debt is too big for either spending cuts or tax increases alone to solve the problem. We also need to control health care costs, which are driving Medicare and Medicaid to such extreme levels.

So stop jerking around with politics and start solving the problem. Boehner can lead the charge, and be a hero, if he is willing to walk away from his extreme fringe. He just needs to be less of a Republican and more of an American.

By the way, there is a similar situation in the Senate, with Tom Coburn in the bipartisan gang of six fighting with legendary douchebag Grover Norquist over tax increases.

Grover Norquist: Pompous Douche