Hidden Agendas

20.Nov 12    SNB und Finma ohne genaue Kenntnisse: Schwer fassbare Schattenbanken, NZZ, gho./ti
20.Nov 12    Financial Stability Board: Die Schattenbanken im Visier, NZZ, Martin Lanz
20.Nov 12   Blackrock: Die grösste Schattenbank der Welt, Tages-Anzeiger, lü
20. Nov 12   Schattenbanken sind unverzichtbar fürs System, finews, Martin Hess
19.Nov 12   Unbeaufsichtigte Finanzgeschäfte:Schattenbanken sind größer als vor der Finanzkrise, Süddeutsche Zeitung
19.Nov 12   Maurice Pedergnana: «Schattenbanken sind ein Schönwettersystem», Tages-Anzeiger, Simon Schmid
19. Nov 12   Schattenbanken-System wächst bedrohlich, finews
18 Nov 12   Global Shadow Banking Monitoring Report 2012, Financial Stability Board FSB
8.Nov 12   Wer gilt denn überhaupt als Schattenbank?, finews, Martin Hess
27 Oct 12   Tax dodge hunter & golden goose killer Shulman leaves IRS, memo on behalf of Swiss lawmakers
2.Okt 12   Susanne Schmidt: "Banker meinen, der liebe Gott hätte sie zum auserwählten Volk erklärt", Süddeutsche Zeitung. Oliver Das Gupta et al.
7 Sep 12   Another level-playing field, Cambridge Symposium, Anton Keller
4.Jul  12  US-Regierung wollte Schweiz als Steueroase ersetzen, Tages-Anzeiger, ami/AFP
3 Jul 12   Where the Money Lives, Vanity Fair, Nicholas Shaxson
2004    Hot Money and the Politics of Debt, McGill-Quen's University Press, R. T. Naylor
1987    Alfred Schäfer: "... und gehört nunmehr zu den kapitalstärksten Banken Europas", Tages-Anzeiger Magazin, Gian Trepp
12 May 11    Preet Bharara: U.S. Attorney Sends a Message to Wall Street, NYT, By BENJAMIN WEISER et al.

May 12, 2011

U.S. Attorney Sends a Message to Wall Street

In 21 months as United States attorney, Preet Bharara has had a major impact on corporate crime. Fred R. Conrad/The New York Times

Every few days during the trial of Raj Rajaratnam, the Galleon Group’s co-founder, Preet Bharara, the United States attorney for the Southern District of New York, would quietly enter the courtroom and take a seat in the last row of the gallery.

From that unassuming vantage point, Mr. Bharara watched his colleagues try to persuade a jury to convict the former hedge fund titan of securities fraud and conspiracy.

The consistent presence of Mr. Bharara at the largest insider trading case in a generation — and the office’s resounding victory on Wednesday — signaled that the chief federal prosecutor in Manhattan was back as the sheriff of Wall Street.

Over the last decade, the New York attorney general, federal prosecutors in Brooklyn, the Manhattan district attorney and even the Justice Department in Washington angled for their share of financial fraud cases, an area traditionally dominated by the Southern District. For example, Eliot Spitzer grabbed headlines when he was New York attorney general by focusing on malfeasance at investment banks.

But Mr. Bharara has not-so-quietly reaffirmed his office’s leading role in pursuing corporate crime with this landmark insider trading case, which relied on aggressive prosecutorial methods and unprecedented tactics. For the first time, federal authorities used wiretaps to listen in on stock traders swapping illegal tips.

.“What this case has done,” said Neil M. Barofsky, a former Southern District prosecutor who recently served as the special inspector general for the government’s Troubled Asset Relief Program, “goes well beyond simply putting a billionaire hedge fund manager behind bars.”

“The case will impact an entire industry,” Mr. Barofsky said. He said that Mr. Bharara “did more than just oversee and support the prosecution — he made sure that the target audience, traders on Wall Street, fully understood the extraordinary lengths that his office will go to discover these crimes, and that justice will be served.”

It has been 21 months since Mr. Bharara, 42, was appointed United States attorney by President Obama.

In that short tenure, his staff has ventured far beyond Wall Street, prosecuting some of the nation’s — and the world’s — most prominent defendants. Among them: Faisal Shahzad in the Times Square bomb plot; agents in a Russian spy ring; Ahmed Khalfan Ghailani, the first Guantánamo Bay detainee to be tried in the civilian system; Viktor Bout, a Russian accused of being an arms trafficker; a Somali man charged with piracy; and four men charged in a plot to bomb synagogues in the Bronx.

Not every case has gone smoothly. In Mr. Ghailani’s trial, the jury acquitted him of more than 280 counts of murder and conspiracy and convicting him of a single count of conspiracy to destroy government buildings and property. Nonetheless, Mr. Ghailani received a life sentence.

Some academics and newspaper columnists have also criticized Mr. Bharara for not filing criminal charges against senior executives at the center of the financial crisis. Last week, when his office filed a civil mortgage-fraud lawsuit against Deutsche Bank, he said there was not enough evidence to justify a criminal complaint.

Mr. Bharara was an infant in 1970 when he came to the United States from India with his parents. He grew up in Eatontown, N.J., and earned degrees from Harvard and Columbia Law School.

After several years in private practice, including a stint at Gibson Dunn & Crutcher in New York, Mr. Bharara became a federal prosecutor in Manhattan, handling organized crime, narcotics and securities fraud cases. In 2005, he became chief counsel to Senator Charles E. Schumer of New York, leading a Congressional inquiry into the firings of United States attorneys.

Rudolph W. Giuliani in 1986, when he occupied the United States attorney post now held by Preet Bharara. Jim Wilson/The New York Times

Some lawyers have wondered aloud whether Mr. Bharara may have political aspirations like his predecessors, including former New York Mayor Rudolph W. Giuliani, who filled the post in the 1980s. As with Mr. Giuliani, Mr. Bharara is a charismatic figure who is comfortable in front of cameras, can talk tough and has a knack for the witty sound bite. At a news conference announcing Mr. Rajaratnam’s arrest, Mr. Bharara riffed off a famous line from the movie “Wall Street.”

“Greed, sometimes, is not good,” he said.

Unlike Mr. Giuliani, whose political ambitions seemed barely hidden while he led the prosecutor’s office, Mr. Bharara has told friends he has no interest in elected office.

“Everything about Preet’s record suggests that he’s a federal prosecutor for all the right reasons,” said Randy Mastro, a lawyer at Gibson Dunn and a former top deputy under Mayor Giuliani. “The best prosecutors are often those who don’t have political ambitions.”

Mr. Mastro, who overlapped for a time with Mr. Bharara at Gibson Dunn, added, “But that doesn’t mean he shouldn’t be drafted into running.”

Ellen Davis, Mr. Bharara’s spokeswoman, said in a statement on Thursday: “Preet loves his job and has no desire to run for public office now or ever.”

Mr. Bharara has not commented publicly on the Rajaratnam verdict, other than a short statement in a news release. But in a series of speeches, he has explained his aggressive approach to corporate crime.

“When sophisticated business people begin to adopt the methods of common criminals, we have no choice but to treat them as such,” Mr. Bharara said weeks after revealing the use of wiretaps in building a case against Mr. Rajaratnam. “To use tough tactics in these circumstances is not being heavy-handed; it is being even-handed.”

He has taken that approach in other areas of financial crime.

His office secured convictions in two high-profile criminal cases against bank executives accused of stealing proprietary computer code related to high-frequency trading businesses, including a case against a former programmer at Goldman Sachs. More recently, Mr. Bharara’s prosecutors charged the operators of three popular online poker sites with fraud and money laundering.

And Mr. Bharara continues to pursue insider trading cases. Over the last 18 months, his office has charged 47 individuals with insider trading crimes, 36 of whom have pleaded guilty or been convicted. At a recent news conference, he indicated there was more to come.

“I wish I could say we were just about finished, but sadly we are not.”

Vanity Fair    August 2012 (publ. July 3, 2012)

Where the Money Lives
By Nicholas Shaxson

For all Mitt Romney’s touting of his business record, when it comes to his own money the Republican nominee is remarkably shy about disclosing numbers and investments. Nicholas Shaxson delves into the murky world of offshore finance, revealing loopholes that allow the very wealthy to skirt tax laws, and investigating just how much of Romney’s fortune (with $30 million in Bain Capital funds in the Cayman Islands alone?) looks pretty strange for a presidential candidate.
BURIED TREASURE Grand Cayman, where Bain Capital maintains at least 138 funds. Inset, Mitt Romney tries to spot his La Jolla home from the campaign plane. © Ruth Tomlinson/Robert Harding World Imagery/Corbis (beach); by Justin Sullivan/Getty images (inset).
Read Inside Box 438, the British Virgin Islands’ Tax-Friendliest Address

A person who worked for Mitt Romney at the consulting firm Bain and Co. in 1977 remembers him with mixed feelings. “Mitt was … a really wonderful boss,” the former employee says. “He was nice, he was fair, he was logical, he said what he wanted … he was really encouraging.” But Bain and Co., the person recalls, pushed employees to find out secret revenue and sales data on its clients’ competitors. Romney, the person says, suggested “falsifying” who they were to get such information, by pretending to be a graduate student working on a proj­ect at Harvard. (The person, in fact, was a Harvard student, at Bain for the summer, but not working on any such proj­ects.) “Mitt said to me something like ‘We won’t ask you to lie. I am not going to tell you to do this, but [it is] a really good way to get the information.’ … I would not have had anything in my analysis if I had not pretended.

“It was a strange atmosphere. It did leave a bad taste in your mouth,” the former employee recalls.

This unsettling account suggests the young Romney—at that point only two years out of Harvard Business School—was willing to push into gray areas when it came to business. More than three dec­ades later, as he tried to nail down the Republican nomination for president of the United States, Romney’s gray areas were again an issue when he repeatedly resisted calls to release more details of his net worth, his tax returns, and the large investments and assets held by him and his wife, Ann. Finally the other Republican candidates forced him to do so, but only highly selective disclosures were forthcoming.

Even so, these provided a lavish smorgasbord for Romney’s critics. Particularly jarring were the Romneys’ many offshore accounts. As Newt Gingrich put it during the primary season, “I don’t know of any American president who has had a Swiss bank account.” But Romney has, as well as other interests in such tax havens as Bermuda and the Cayman Islands.

To give but one example, there is a Bermuda-based entity called Sankaty High Yield Asset Investors Ltd., which has been described in securities filings as “a Bermuda corporation wholly owned by W. Mitt Romney.” It could be that Sankaty is an old vehicle with little importance, but Romney appears to have treated it rather carefully. He set it up in 1997, then transferred it to his wife’s newly created blind trust on January 1, 2003, the day before he was inaugurated as Massachusetts’s governor. The director and president of this entity is R. Bradford Malt, the trustee of the blind trust and Romney’s personal lawyer. Romney failed to list this entity on several financial disclosures, even though such a closely held entity would not qualify as an “excepted investment fund” that would not need to be on his disclosure forms. He finally included it on his 2010 tax return. Even after examining that return, we have no idea what is in this company, but it could be valuable, meaning that it is possible Romney’s wealth is even greater than previous estimates. While the Romneys’ spokespeople insist that the couple has paid all the taxes required by law, investments in tax havens such as Bermuda raise many questions, because they are in “jurisdictions where there is virtually no tax and virtually no compliance,” as one Miami-based offshore lawyer put it.

That’s not the only money Romney has in tax havens. Because of his retirement deal with Bain Capital, his finances are still deeply entangled with the private-equity firm that he founded and spun off from Bain and Co. in 1984. Though he left the firm in 1999, Romney has continued to receive large payments from it—in early June he revealed more than $2 million in new Bain income. The firm today has at least 138 funds organized in the Cayman Islands, and Romney himself has personal interests in at least 12, worth as much as $30 million, hidden behind controversial confidentiality disclaimers. Again, the Romney campaign insists he saves no tax by using them, but there is no way to check this.

Bain Capital is the heart of Romney’s fortune: it was the financial engine that created it. The mantra of his campaign is that he was a businessman who created tens of thousands of jobs, and Bain certainly did bring useful operational skills to many companies it bought. But his critics point to several cases where Bain bought companies, loaded them with debt, and paid itself extravagant fees, thereby bankrupting the companies and destroying tens of thousands of jobs.

Come August, Romney, with an estimated net worth as high as $250 million (he won’t reveal the exact amount), will be one of the richest people ever to be nominated for president. Given his reticence to discuss his wealth, it’s only natural to wonder how he got it, how he invests it, and if he pays all his taxes on it.

Ironically, it was Mitt’s father, George Romney, who released 12 years of tax returns, in November 1967, just ahead of his presidential campaign, thereby setting a precedent that nearly every presidential candidate since has either willingly or unwillingly been subject to. George, then the governor of Michigan, explained why he was releasing so many years’ worth, saying, “One year could be a fluke, perhaps done for show.”

But his son declined to release any returns through one unsuccessful race for the U.S. Senate, in 1994, one successful run for Massachusetts governor, in 2002, and an aborted bid for the Republican Party presidential nomination, in 2008. Just before the Iowa caucus last December, Mitt told MSNBC, “I don’t intend to release the tax returns. I don’t,” but finally, on January 24, 2012—after intense goading by fellow Republican candidates Newt Gingrich and Rick Perry—he released his 2010 tax return and an estimate for 2011.

These, plus the mandatory financial disclosures filed with the Office of Government Ethics and released last August, raise many questions. A full 55 pages in his 2010 return are devoted to reporting his transactions with foreign entities. “What Romney does not get,” says Jack Blum, a veteran Washington lawyer and offshore expert, “is that this stuff is weird.”

The media soon noticed Romney’s familiarity with foreign tax havens. A $3 million Swiss bank account appeared in the 2010 returns, then winked out of existence in 2011 after the trustee closed it, as if to remind us of George Romney’s warning that one or two tax returns can provide a misleading picture. Ed Kleinbard, a professor of tax law at the University of Southern California, says the Swiss account “has political but not tax-policy resonance,” since it—like many other Romney investments—constituted a bet against the U.S. dollar, an odd thing for a presidential candidate to do. The Obama campaign provided a helpful world map pointing to the tax havens Bermuda, Luxembourg, and the Cayman Islands, where Romney and his family have assets, each with the tagline “Value: not disclosed in tax returns.”

Romney’s personal tax rate is a particular point of interest. In 2010 and 2011, Mitt and Ann paid $6.2 million in federal tax on $42.5 million in income, for an average tax rate just shy of 15 percent, substantially less than what most middle-income Americans pay. Romney manages this low rate because he takes his payments from Bain Capital as investment income, which is taxed at a maximum 15 percent, instead of the 35 percent he would pay on “ordinary” income, such as salaries and wages. Many tax experts argue that the form of remuneration he receives, known as carried interest, is really just a fee charged by investment managers, so it should instead be taxed at the 35 percent rate. Lee Sheppard, a contributing editor at the trade publication Tax Notes, whose often controversial articles are read widely by tax professionals, is nonplussed that the Obama campaign has been so listless on the issue of carried interest. “Romney is the poster boy, the best argument, for taxing this profit share as ordinary income,” says Sheppard.

In the face of such arguments, Romney’s defense is that he never broke the rules: if there is a problem, it is in the laws, not in his behavior. “I pay all the taxes that are legally required, not a dollar more,” he said. Even so. “When you are running for president, you might want to err on the side of overpaying your taxes, and not chase every tax gimmick that comes down the pike,” says Sheppard. “It kind of looks tacky.”

The assertion that he broke no laws is widely accepted. But it is worth asking if it is actually true. The answer, in fact, isn’t straightforward. Romney, like the superhero who whirls and backflips unscathed through a web of laser beams while everyone else gets zapped, is certainly a remarkable financial acrobat. But careful analysis of his financial and business affairs also reveals a man who, like some other Wall Street titans, seems comfortable striding into some fuzzy gray zones.

The Caped Avoider!

One might perhaps accept an explanation by Romney’s campaign spokeswoman, Andrea Saul, that the candidate’s failure to include his Swiss account in earlier financial disclosures was merely a “trivial inadvertent issue.” But deeper questions do emerge.

All the assets on Mitt’s financial disclosures are in blind trusts or retirement accounts held by him and Ann. Blind trusts are designed to avoid conflicts of interest for those in public office by having politicians’ assets managed by independent trustees. The Romneys’ blind trust was created when Mitt was elected governor of Massachusetts. Curiously, the Romneys appointed Bradford Malt as their trustee. It’s certainly true that under Malt the trusts don’t appear to be as blind as they might be: for instance, in 2010 the Romneys invested $10 million in the start-up of the Solamere Founders Fund, co-founded by their eldest son, Tagg, and Spencer Zwick, Romney’s onetime top campaign fund-raiser; Solamere is now in the Ann Romney blind trust. Malt has said he invested in Solamere without consulting Mitt or Ann and explained he liked Solamere because of its diversified approach and because he knew the founders and had confidence in them.

Likewise, the Romneys were reported to have invested at least $1 million in Elliott Associates, L.P., a hedge fund specializing in “distressed assets.” Elliott buys up cheap debt, often at cents on the dollar, from lenders to deeply troubled nations such as Congo-Brazzaville, then attacks the debtor states with lawsuits to squeeze maximum repayment. Elliott is run by the secretive hedge-fund billionaire and G.O.P. super-donor Paul Singer, whom Fortune recently dubbed Mitt Romney’s “Hedge Fund Kingmaker.” (Singer has given $1 million to Romney’s super-pac Restore Our Future.)

It is hard to know the size of these investments. Romney’s financial disclosure form lists 25 of them in an open-ended category, “Over $1 million,” including So­lamere and Elliott, and they are not broken down further. Romney hides behind a disclaimer that the fund managers “declined to provide such information” about their underlying assets. Many of these funds are set up in tax havens such as the Cayman Islands, where a confidentiality law states that you can be jailed for up to four years just for asking about such information.

Andrea Saul said of these investments, “Everything … was reported correctly.” Joseph Sandler, a Democratic lawyer who has worked with candidates on disclosures for more than two dec­ades, is skeptical. “The law is the law,” Sandler says. “[Romney] says, ‘Well, you know, they won’t tell me.’ But when you run for office in the U.S. and are not prepared to comply with disclosure requirements, you should either divest yourself of the assets or don’t run.” The Washington Post summarized the opinions of experts across the political spectrum by saying Romney’s disclosures were “the most opaque they have encountered.”

Mysteries also arise when one looks at Romney’s individual retirement account at Bain Capital. When Romney was there, from 1984 to 1999, taxpayers were allowed to put just $2,000 per year into an I.R.A., and $30,000 annually into a different kind of plan he may have used. Given these annual contribution ceilings, how can his I.R.A. possibly contain up to $102 million, as his financial disclosures now suggest?

The Romneys won’t say, but Mark Maremont, writing in The Wall Street Journal, uncovered a likely explanation. When Bain Capital bought companies, it would create two classes of shares, named A and L. The A shares were risky common shares, to which they would assign a very low value. The L shares were preferred shares, paying a high dividend but with the payoff frozen, and most of the value was assigned to them. Bain employees would then put the exciting A shares in their I.R.A. accounts, where they grew tax-free. With all the risk of the deal, the A shares stood to gain a lot or collapse. But if the deal succeeded, the springing value could be stunning: Bain employees saw their A shares from one particularly fruitful deal grow 583-fold, 16 times faster than the underlying stock.

The Romneys won’t tell us how, or even if, they assigned super-low values to the A shares, but there are a couple of ways to do it. One is to use standard options models to price the shares—then feed inappropriate assumptions into those models. Romney could alternatively have used a model called liquidation valuation, which Kleinbard says would have been “completely inappropriate.” Without seeing the assumptions used on Romney’s tax returns from the years when those lowball A shares were squirted into his I.R.A., we cannot know how he did it. Whatever methods he used, however, the valuations were, according to Andrew Smith, of Houlihan Capital in Chicago, “pushing the envelope.” (Andrea Saul retorts, “Why should successful investments be criticized?”)

Mitt’s and Ann’s I.R.A.’s have also been receiving profit interest from (mostly Cayman Island–based) Bain Capital funds that were set up long after he had left the company, in 1999. For example, the 2010 return reveals a profits interest in a Cayman-based fund called Bain Capital Partners (AM) X LP, which was transferred to the Ann D. Romney trust in October 2010. An attachment to the return says the Ann D. Romney trust is “performing services” to the partnership, which is boilerplate language for these kinds of filings. Her blind trust could receive lightly taxed income from Bain Capital for years to come, well into the presidential term her husband hopes to win.

But administrative guidance says you can do this kind of thing only if the compensation is in recognition of past services you have provided. “This should not mean retired from the mother ship 10 years out and getting profits you had nothing to do with,” Sheppard says, adding that Romney can get away with it because of excessive “administrative indulgences” that have allowed a “perversion of the law in favor of a small class of overcompensated investment managers.”

Romney’s I.R.A. also appears to have invested in so-called blocker corporations in the Cayman Islands and elsewhere. U.S. pension funds, foundations, and even I.R.A.’s routinely use offshore blocker corporations to avoid something called the Unrelated Business Income Tax, which was designed to keep nonprofits from competing with ordinary companies in areas outside their core purpose: if you invest directly you get hit with the tax, but if you invest in a blocker, which then invests in the U.S. business, you escape it. Romney’s I.R.A. appears to have employed this lawful escape route, and his campaign has used language suggesting that it has. But that would mean the Romney camp’s claim that Mitt’s tax consequences of investing via the Cayman Islands is “the very same” as it would have been had he invested directly at home is simply not true. (Romney spokesperson Andrea Saul says Romney “gets the same benefit anyone would get from an I.R.A.,” but she did not respond to questions on whether his I.R.A. had used blockers or avoided taxes by investing via tax havens.)

A Deutsche Bank analysis of 68 Bain deals Romney was involved in calculated an internal rate of return—a standard private-equity benchmark—at a staggering 88 percent annually (though after fees and inflation, investor performance may have been little more than half that). It is substantially on this stellar rec­ord that Romney is now running for president. His work at Bain was unquestionably good for himself and for Bain, but was it also good for the businesses he acquired, for their workers, and for the economy, as he claims?

A report by Bain and Co. itself, looking at the period from 2002 to 2007, concluded that there is “little evidence that private equity owners, overall, added value” to the companies they took over: nearly all their returns are explained by broad economic growth, rising stock markets, and leverage. Josh Kosman, who researched the subject of private equity for his book The Buyout of America, singles out Bain Capital in particular. “They take pride in pushing the leverage envelope [i.e., use of borrowed money, which magnifies returns, while off-loading the risks onto others] more than their peers,” he says. “I have heard that from limited partners in Bain’s funds. I have heard that from bankers who lend money to finance their leveraged buyouts. Bain always prided itself on ‘We’ll push leverage more than the others.’ They brag about that, behind closed doors.”

Dade Behring is a cause célèbre for Romney’s and Bain’s critics, and it illustrates the leverage problem clearly. In 1994, Bain bought Dade International, a medical-diagnostics company, then added the medical-diagnostics division of DuPont in 1996 and a German medical-testing company called Behring in 1997. Former Dade president Bob Brightfelt says the operation started well: the Bain managers were “pretty smart guys,” he recalls, and they did well cutting out overlap, and exploiting synergies.

Then brutal cost cutting began. Bain cut R&D spending to an average of 8 percent of sales, a little more than half what its competitors were doing. Cindy Hewitt, Dade’s human-resources manager, remembers how the firm closed a Puerto Rico plant in 1998, a year after harvesting $7.1 million in local tax breaks aimed at job creation, and relocated some staff to Miami, then the company’s most profitable plant. Based on re­a­ssur­ances she had received from her superiors, she told those uprooting themselves from Puerto Rico that their jobs in Miami were safe for now—but then Bain closed the Miami plant. “Whether you want to call it misled, or lied, or manipulated, I do not believe they provided full information about what discussions were under way,” she says. “I would never want to be part of even unintentionally treating people so poorly.”

Bain engaged in startling penny-pinching with the laid-off employees. Their contracts stipulated that if they left early they would have to pay back the costs of relocating to Miami—but in spite of all that Dade had done to them, it refused to release the employees from this clause. “They said they would go after them for that money if they left before Bain was finished with them,” Hewitt recalls. Not only that, but the company declined to give workers their severance pay in lump sums to help them fund their return home.

In 1999, generous pensions were converted into less generous benefits, wages were cut, and more staff members were laid off. Some employees contacted Norman Stein, then the director of the pension-counseling clinic at the University of Alabama law school, with a view to challenging the conversions. Stein says the employees were “extraordinarily nervous,” so fearful, in fact, that they refused to let lawyers even make copies of pension documents. “I have been dealing with pensions issues for over 25 years and I never saw anything like this,” recalls Stein. The spooked employees did not go to court. Stein says that, while breaking pension contracts like this was not unheard of, the practice at that time was “questionable,” adding that Dade may have saved $10 to $40 million from converting its pensions.

The beauty—or savagery—of leverage is that it can magnify any and all cash-flow boosts, such as this one. Take $10 to $40 million squeezed from a pension pot, then use that to create new, rosier financial projections to borrow several times that amount, and then pay yourself a big special dividend from the borrowed funds, many times the size of the pension savings. That is just what Bain Capital did: the same month it converted the pensions, it created new financial projections as a basis to borrow an extra $421 million—from which Bain, its co-investor Goldman Sachs, and top Dade management extracted $365 million in dividends. 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.

Nor was this an isolated incident: Kosman lists five other “formerly healthy” companies—Stage Stores, Ampad, GS Technologies, Details, and KB Toys—Bain helped drive into bankruptcy, while making big profits. (Despite numerous entreaties from Vanity Fair to Bain Capital to address on the record points in this article with which it might disagree, the firm refused to do so and instead provided this statement: “When politics overwhelm fact, some will distort or cherry-pick our record and launch unfounded allegations and insinuations. The truth and the full record show that Bain Capital operates with high standards of integrity and excellence in compliance with all laws. Any suggestion to the contrary is baseless.”)

Tax Haven U.S.A.

The term “financialization” describes two interlocking processes: a disproportionate growth in a country’s deregulated financial sector, relative to the rest of the economy, and the rising importance of financial activities with a focus on financial returns among industrial and other non-financial corporations, often at the expense of real innovation and productivity.

Some see the rising influence of finance and financial models in epochal terms. Author of Financialization and the U.S. Economy Özgür Orhangazi summarizes academic literature that sees financialization “as one of the indicators of the decline of the hegemonic power”: imperial Venice, Genoa, Holland, and Britain all saw their power rise on the back of productive industrial capitalism, followed by domination by the financial sector, which eventually began to cannibalize the productive sector in pursuit of financial returns—a process that ended in weakness and collapse.

Little noticed in the academic discussions of financialization is the role of offshore tax havens, one of the big reasons the financial sector has become so powerful. In 1966, Michael Hudson, a young Chase Manhattan balance-of-payments economist, was in a company elevator when he was handed a memo by a former State Department operative. The memo came from the U.S. government, and Hudson was tasked with figuring out how much foreign money the U.S. might attract. “They were saying, ‘We want to replace Switzerland,’?” Hudson explains. “All this money will come here if we make this the criminal center of the world. We wanted foreign criminal money, which was patriotic, but not American criminal money.”

In the years since then, almost unknown to most Americans, the United States has turned itself into a giant tax haven for foreigners, just as the memo suggested. Federal and state tax laws have been deliberately shaped to give foreigners special tax exemptions unavailable to Americans, plus financial secrecy and exemptions from regulatory restraints. “We have criticized offshore tax havens for their secrecy and lack of transparency,” said Senator Carl Levin. “But look what is going on in our own backyard.”

In this grand scenario, tax havens such as the Caymans serve as feeders of foreign savings into Tax Haven U.S.A. from abroad, providing foreign investors with additional ways to skip around tax, disclosure, and regulatory requirements that they might trigger if they invested directly.

The money sucked into Tax Haven U.S.A., often via the “feeder” tax havens, is frequently tax-evading and other criminal foreign money, in the spirit of Hudson’s 1966 memo, and it is predominantly channeled not into productive investment but into real estate and financial business.

One cannot properly understand Wall Street’s size and power without appreciating the central role of offshore tax havens. There is absolutely no evidence that Bain has done anything illegal, but private equity is one channel for this secrecy-shrouded foreign money to enter the United States, and a filing for Mitt Romney’s first $37 million Bain Capital Fund, of 1984, provides a rare window into this. One foreign investor, of $2 million, was the newspaper tycoon, tax evader, and fraudster Robert Maxwell, who fell from his yacht, and drowned, off of the Canary Islands in 1991 in strange circumstances, after looting his company’s pension fund. The Bain filing also names Eduardo Poma, a member of one of the “14 families” oligarchy that has controlled most of El Salvador’s wealth for decades; oddly, Poma is listed as sharing a Miami address with two anonymous companies that invested $1.5 million between them. The filings also show a Geneva-based trustee overseeing a trust that invested $2.5 million, a Bahamas corporation that put in $3 million, and three corporations in the tax haven of Panama, historically a favored destination for Latin-American dirty money—“one of the filthiest money-laundering sinks in the world,” as a U.S. Customs official once put it.

Bain Capital has said it did everything required by the U.S. government to check that the investors were not associated with unsavory interests. U.S. law doesn’t require Bain to enforce the tax laws of its investors’ home countries, but the presence of Swiss trustees, Bahamas trusts, and Panama corporations would raise red flags with any tax authority.

Many Americans might react with a shrug to the idea of shady foreign money such as Robert Maxwell’s being invested here. But, says Rebecca Wilkins, of the Washington, D.C.–based nonprofit Citizens for Tax Justice, “It is shocking that a presidential candidate should think that is O.K.”

The Bain of Romney’s existence (Michael Kranish and Scott Helman, February 2012)
Bush’s tax gauntlet (Joseph E. Stiglitz, December 2007)
Election 2012: the parties reverse roles (Todd S. Purdum, June 2012)
Public consequences of private equity (Michael Wolff, May 2007)

Tages-Anzeiger    4.Juli 2012

US-Regierung wollte Schweiz als Steueroase ersetzen

Das unübersichtliche Finanzgeflecht von Mitt Romney lenkt die Aufmerksamkeit auch auf Steuerparadiese. Brisant: Seit den Sechzigerjahren strebt Washington diesen Status nach Schweizer Vorbild an.
ami/AFP  -   Der designierte Präsidentschaftskandidat der US-Republikaner, Mitt Romney, erzielt einem Medienbericht zufolge einen grossen Teil seines Vermögens mit einem unübersichtlichen Netz von Investitionen im Ausland.

Allein auf den Cayman Islands sei Romney nach wie vor mit einem geschätzten Wert von rund 28 Millionen Franken an mindestens zwölf von 138 Fonds seiner 1984 gegründeten Investmentfirma Bain Capital beteiligt, berichtete das US-Magazin «Vanity Fair» gestern in einer ausführlichen Recherche.

Ausland-Transaktionen auf 55 Seiten
Auch in der Schweiz soll Romney rund 3 Millionen Dollar auf einem Konto liegen haben. Erstmals in einer Steuererklärung angegeben hat er es 2010 – dass dies nicht früher geschah, ist laut seiner Sprecherin ein Versehen. Auch auf den britischen Bermudas hat Romney grosse Vermögen.

Lange weigerte er sich, überhaupt Informationen zu seinem Reichtum zu veröffentlichen. Im Vorwahlkampf wurde der Druck aber immer grösser, schliesslich gab er nach. Seither weiss man: allein auf 55 Seiten seiner Steuererklärung geht es um seine Transaktionen im Ausland. Romney versichert stets, er nutze seine Investitionen in all diesen Steuerparadiesen nicht dazu, weniger Steuern in den USA zu zahlen. Doch da er vom Gesetz her keinen Nachweis für sein dortiges Vermögen erbringen muss, stellen dies viele infrage.

Augenmerk auf Steueroasen
Insgesamt soll Romney mithilfe seiner Investmentfirma Bain ein Vermögen von schätzungsweise 250 Millionen Dollar angehäuft haben. Genaue Zahlen gibt es nicht. Seinen Erfolg als Geschäftsmann führt er im Wahlkampf als Argument dafür an, dass er besser geeignet sei als Amtsinhaber Barack Obama, die Wirtschaft des Landes aus der Krise zu steuern.

Doch die Rolle von Bain ist umstritten. Kritiker werfen der Firma vor, systematisch funktionierende Unternehmen aufgekauft, ausgesaugt und dann verscherbelt zu haben. Mit der Debatte um Romneys Finanzgeflecht und die Rolle von Hedgefunds wie Bain wird die Aufmerksamkeit auch auf die Steueroasen innerhalb der USA gelenkt. Denn ohne sie wäre jene Finanzialisierung der Wirtschaft nicht möglich gewesen, von der Firmen wie Mitt Romneys Bain profitierten.

«Wir wollen die Schweiz ersetzen»
In diesem Zusammenhang erwähnt der Bericht von «Vanity Fair» am Rande ein pikantes Detail. Es macht klar, dass sich US-Regierungen seit bald 50 Jahren der Wichtigkeit von Steuerlücken durchaus bewusst sind und sie aktiv geschaffen haben – zumindest für Ausländer.

Im Jahr 1966 bekam demnach ein Bankmitarbeiter in einem Fahrstuhl von einem ehemaligen Regierungsbeamten ein Memo zugesteckt. Es stammte von der Regierung in Washington und war in seinem Wortlaut explizit: «Wir wollen die Schweiz ersetzen.» Er, der Ökonom, sollte nach Strategien suchen, wie die USA ausländische – ausdrücklich keine US-amerikanischen – Schwarzgelder anziehen könnten.

Seither haben sich die USA – nahezu unbemerkt von der eigenen Öffentlichkeit – zu einem gigantischen Steuerparadies entwickelt. Der US-Bundesstaat Delaware gilt als grösstes Steuerparadies überhaupt. Jenes Kapital, das so in die USA fliesst, will irgendwo angelegt sein. Davon profitieren Firmen wie Bain – und damit auch Präsidentschaftskandidat Mitt Romney, der aus seiner ehemaligen Firma noch immer Geld bezieht. Erst im Juni machte er einen Bezug von zwei Millionen öffentlich.

Memo to about-to-retire IRS head Shulman - final fourth mail copy of October 27, 2012

Has the $5bn golden boy mindlessly killed
the $500bn/y QI & FATCA golden gooses?

Email of January 2, 2012
to Internal Revenue Service Commissioner Douglas H. Shulman, Washington

Dear Sir,

This is to present my compliments at the beginning of a new year and - I trust - a renewal of friendly and mutually respectful and helpful relations between the American and the Swiss people, as reflected notably in the Swiss/American Friendship, Reciprocal Establishments, Commerce, and Extradition Treaty of November 25, 1850 (SR and, more recently, in the Joint Declaration of the US Congress of October 30, 1985.

I've been a long-term observer of relations between our two countries and, in my capacity as adviser of past and current members of the Swiss Parliament, on different occasions, I've been called upon in delicate parallel diplomacy missions involving the United States and third countries, including Iran and the Soviet Union. The topic of this information request concerns a complicated subject where the US Internal Revenue Service is understood to have a perfect deep-draught up-to-date knowledge, i.e. the Qualified Intermediary (QI) system and its application on the background of the US/Swiss double-taxation treaty of 1996 (96 Treaty: SR 0.672.933.61).

The Swiss Parliament is currently in the process of considering both various aspects of the QI system, and an amendment to a previously, in 2010 passed revision ("revision", dated September 23, 2009) of the 96 Treaty. In order to help clarify some related points, I have the honor, on behalf of several Swiss lawmakers, to submit the following questions to your benevolent attention for reply (the responsible commissions are scheduled to meet on January 9, 10 and 31, and in order for your answers, in the event, to be considered in these proceedings, I expect them as soon as possible):

1.    a)  How is the IRS justifying its campaign to hunt down - at disproportionate political, financial and goodwill costs world-wide - suspected treaty shoppers and tax dodgers with an alleged annual loss to the US Treasury in the range of some hundred million dollars, when in fact its QI system's obscured yet real backup withholding part is designed and capable to syphon off revenue streams grosso modo one thousand times larger from the global parallel economy, as revealed and repeatedly discussed at recent sessions of the Cambridge International Symposium on Economic Crime?  Which also begs the supplementary question: If indeed, in the event, the IRS hasn't seen fit to use this system in order to rake in all those hundreds of billion dollars from undelicate and indeed very willing US and non-US persons - and below the radar of all democratic controls at that -, what has kept it from helping to defuse the US debt crisis and to relieve the US economy with those means?
    b)  How much total revenues did the IRS receive from Swiss QIs (notably banks) in each year since 2001 when the QI system became operational,
    -  under the applicable 15% or 30% tax rate for interest, dividends, etc., and
    -  under the applicable 28% or 31% backup withholding rate for securities sales (US and others, "deemed" or otherwise)?

2.    a)  When did the US Congress examine and approve, when did the US President sign and put into effect, the IRS' "Rev. Proc 2000-12" (model QI Agreement) or any of its amendments?
    b)  Why, in the event, was neither necessary, even though the backup withholding on securities sales (US and others, "deemed" or otherwise, initially 31% and later 28%) - whether it is called a tax or not - falls into the exclusive purview and competence of the US Congress (Section 8 US Constitution), and the conditions of the mandatory Administrative Procedure Act (APA, 5 U.S.C. § 702ss) were met?

3.    Where - in the 96 Treaty, in the pending revision of same, in any other related congressional material, and in the Treasury's "Technical Explanation" of the 96 Treaty - is authority granted:
    a)  for requests involving anything but individually and properly identified taxpayers?
    b)  for requests involving anything but administrative procedures available in both countries?
    c)  for requests intended and serving any other purpose than the proper administration of the treaty itself and the "prevention" of - i.e. exclusively in the field preceding, much less enforcing penal norms regarding - "fraud and the like"?
    d)  for nameless group requests for pseudo-administrative but in fact - due to the Swiss/US legal assistance treaty of 1973 (SR 0.351.933.6) - essentially excluded legal assistance in fiscal matters?
    e)  for Swiss nameless group requests for checking, at American banks in the US, whether, e.g., the spirit and the letter of the 96 Treaty is fully upheld, thus honoring the fundamental and time-tested principle of reciprocity?

4.    On what authority and grounds, in the event,
    a)  can a US Senate-approved treaty, like the 96 Treaty, be transgressed by any US entity?
    b)  could the QI Agreement between the IRS and UBS and Credit Suisse, respectively be negociated and placed into which legal status outside the framework of existing US/Swiss treaties?
    c)  could the Swiss/US memorandum of understanding of August 19, 2009 (SR 0.672.933.612) be negociated and signed by IRS Deputy Commissioner Barry B. Shott outside the framework of existing Swiss/US treaties (according to the applicable laws of both the United States and Switzerland, this memorandum - like any other administrative agreement - is understood to be legally binding only within the limits defined in the 96 Treaty; the Swiss Administrative Federal Court, in its landmark decision A 7789/2009 of Januar 21, 2010 thus ruled against delivery of any banking data on the sole basis of said memorandum, declaring this memorandum to be essentially outside the confines of the 96 Treaty)?
d)  could the US/Swiss memorandum of understanding of March 31, 2010 be negociated and signed by Treasury Director Douglas W. O’Donnell outside the framework of existing US/Swiss treaties (the Swiss constitutional lawmakers felt obliged to raise that revised memorandum to the level of a treaty; the US constitutional lawmaker, however, is understood to have never been even invited to consider same, and the US President is not known either for ever having put his signature on this document, for which reason it has not even been raised to the level of an executive agreement and has thus, according to US law, too, remained a purely administrative ukase with no legally binding effect - neither for the Swiss authorities, which thus acted outside the frame of both the 96 Treaty and other applicable laws, nor for US authorities and any affected US person whose privacy rights were thus violated, and who may thus yet benefit from the fundamental rights to which they are entitled)?
    e)  could and should the IRS have sought enforcement of a memorandum of understanding negociated and signed outside the framework of existing Swiss/US treaties,outside of applicable US administrative procedures (e.g. 11 FAM 700, 11 FAM 720, 11 FAM 721.2, notably Department of Justice Memorandum of 25.November 1996 "Validity of Congressional-Executive Agreements that substantially modify the United States' obligations under an existing treaty" by Christopher Schroeder, Acting Assistant Attorney General, addressed to Alan J. Kreczko, Special Assistant to the President and Legal Adviser to the National Security Council), and for which it obtained neither congressional approval nor the Presidential Seal, and which, moreover, in light of applicable conventions, has been invalid ex tunc?

5.    a)  Why should it be in the United States' overall interest to have, in law and in practice, Swiss authorities not to strictly, reliably and with utmost determination respect its own and others' treaty rights, obligations and limits, as it did when other US office holders saw fit to seek to kidnap Marc Rich on Swiss territory, to try to nail the scalp of Swiss banking secrecy to the wall, or to pressure Swiss authorities into extraditing Roman Polanski?
    b)  Why should Swiss authorities accept - be it under genuine or false flags, whether because of real or made-believe hypocritical concerns - to be steamrolled into assisting any US authority in the pursuit of the latter's interests under any circumstance, particularly as long as Switzerland has not on its own, sovereignly and freely decided such a course of action to be in its interests, to be fully in line with its public ordre and to favor its internationally recognised permanent armed neutrality not excluding its traditional courant normal?
    c)  Why, in the event, should Switzerland not recognise and treat its QI bankers and their clients as victims of a bureaucratic conspiracy - and annul forthwith the penal code exemption (art.271) which, since 2001, has allowed its bankers to support, even privilege the US economy through the disproportionally costly QI system, a conspiracy, incidently, which by now involves some 7000 foreigns banks world-wide and which - with its obfuscated, legally questionable and apparently uncontrolled confiscatory backup withholding tax - may be useful to bring a big chunk of the world's annual trillion dollar underground pot back into the "white economy"? Why, in the event, should Switzerland - with a view to help to globally re-stabilise financial markets - not lend a hand to those willing to achieve this very objective of rechannelling marauding underground funds with more mutually beneficial and democratically better controlled ways and means? And why, in the event, should Switzerland not expect the US authorities' full cooperation - i.e. without need to take recourse to corrective and compensatory political and legal actions in the United States and elsewhere - to withdraw forthwith all related administrative assistance requests, to reconsider its FATCA and similar anti-freedom, anti-sovereignty and anti-market plans, and to stop all proceedings against what are seen to be hood-winked and essentially falsely accused Swiss banks and their thus improperly persecuted clients?

Thanking you for your attention, I take this opportunity for extending to you my best regards and New Year wishes.

Anton Keller
Geneva Switzerland

cc: selected members of US Congress

here's a PS note to ponder:

Özgür Orhangazi is quoted on "the decline of the hegemonic power: imperial Venice, Genoa, Holland, and Britain all saw their power rise on the back of productive industrial capitalism, followed by domination by the financial sector, which eventually began to cannibalize the productive sector in pursuit of financial returns—a process that ended in weakness and collapse." (Nicholas Shaxson, Where the Money Lives, Vanity Fair, August 2012: And Shaxson follows up with these noteworthy background info on what lies behind the IRS' unconstitutional and no-future, for aberrant global QI & FATCA systems:

"Little noticed in the academic discussions of financialization is the role of offshore tax havens, one of the big reasons the financial sector has become so powerful. In 1966, Michael Hudson, a young Chase Manhattan balance-of-payments economist, was in a company elevator when he was handed a memo by a former State Department operative. The memo came from the U.S. government, and Hudson was tasked with figuring out how much foreign money the U.S. might attract. “They were saying, ‘We want to replace Switzerland,’?” Hudson explains. “All this money will come here if we make this the criminal center of the world. We wanted foreign criminal money, which was patriotic, but not American criminal money.”
    In the years since then, almost unknown to most Americans, the United States has turned itself into a giant tax haven for foreigners, just as the memo suggested. Federal and state tax laws have been deliberately shaped to give foreigners special tax exemptions unavailable to Americans, plus financial secrecy and exemptions from regulatory restraints. “We have criticized offshore tax havens for their secrecy and lack of transparency,” said Senator Carl Levin. “But look what is going on in our own backyard.”
    In this grand scenario, tax havens such as the Caymans serve as feeders of foreign savings into Tax Haven U.S.A. from abroad, providing foreign investors with additional ways to skip around tax, disclosure, and regulatory requirements that they might trigger if they invested directly.
    The money sucked into Tax Haven U.S.A., often via the “feeder” tax havens, is frequently tax-evading and other criminal foreign money, in the spirit of Hudson’s 1966 memo, and it is predominantly channeled not into productive investment but into real estate and financial business.
    One cannot properly understand Wall Street’s size and power without appreciating the central role of offshore tax havens."
At the annual Cambridge International Symposium on Economic Crime, we've been discussing the size and dynamics of the global black economy for some 5 years now. The colleagues from the IMF, too have long been left to guesswork - starting with their former head Michel Camdessus' vintage but still widely-cited 2-5% of global GDP. Last month, they started to make a dent with preliminary results on the IMF's ground-breaking study on the Peruvian economy. And - reflecting Shaxson's commendable Vanity Fair piece - it was also pointed out that in his early days on Wall Street, Michael Hudson was tasked not only with "firing Greenspan" but also with some related work on non-US black money flows which might be channeled to and plowed into the US economy.

Thus, if anyone out there has related data and writings or knows of others who may be willing to share, I'd appreciate a smoke signal ( And if Shaxson's above story of an instructive early - 1966 - Foggy Bottom memo pans out, what else has since (QI?) or still will come of it (FATCA?), and who can you provide me with a copy or point out possible sources?