Fewer Rules than the Rest of Us

Interest rates are still low, and as the economy continues to teeter – the “growth” mostly producing lower-paying or contract or even part-time jobs that truly do not augur well for long-term economic health – the Fed is holding steady with cheap money. Stocks have soared, primarily because there are few places to invest, there is growing fear in the real estate market of another bubble (they ability of average Americans to buy homes has begun to fall), and because of a sheep-like mentality that infects Wall Street from time to time (remember the subprime mortgage crisis, when they knew what they were trading was crap?).

But income inequality grows, small business continues to be denied loans (and when they are obtained, the rates are pretty high), and access to just about everything juicy is increasingly being relegated to those at the very top of the food chain. You’ve seen the horrific income polarization numbers, the contraction of the middle class and the growth of the bottom of the ladder while the top continues to Bogart an increasing share of American wealth. But how aware are you of how incredibly the rules and tax laws are slanted against average Americans and how much they favor the well-heeled, a fact that has no real chance of being changed given a House of Representatives that is solidly committed to support a less-regulated wealthy class enhanced with a litany of tax breaks your or I will never see.

Aside from a capital gains tax rates on investments held over a year – noting it is the richest in the lot who make most of their money buying and trading financial assets – loopholes on oil depreciation, the ability to shelter income overseas sidestepping U.S. taxes, interesting ways to use charitable donations to retain large estates (even as estate taxes have dropped), etc., etc. We know that fund managers can drop the taxes on their management upside fees (those based on pure services and not their actual cash investments) to exceptionally favorable capital gains rates (a fraction of the taxes they would have paid had their fees been labeled as service income) under the “carried interest” rule. Abysmally unfair!

And the corporate trends towards “moving overseas” to avoid taxes – or planting valuable underlying rights (patents and copyrights) in an overseas entity to turn income from those rights into a deduction to the U.S. entity – are now standard operating procedures. We may have among the highest corporate rates in the world, but given the loopholes, the biggest baddest boyz seldom pay most (if any) of what you’d expect. Moving U.S. operation overseas and away from the IRS is now big business. “[G]uess who’s behind the recent spate of merger deals in which major United States corporations have renounced their citizenship in search of a lower tax bill? Wall Street banks, led by JPMorgan Chase and Goldman Sachs.

“Investment banks are estimated to have collected, or will soon collect, nearly $1 billion in fees over the last three years advising and persuading American companies to move the address of their headquarters abroad (without actually moving). With seven- and eight-figure fees up for grabs, Wall Street bankers — and lawyers, consultants and accountants — have been promoting such deals, known as inversions, to some of the biggest companies in the country, including the American drug giant Pfizer.” New York Times, July 28^th. As horrible as these “legitimate” tax avoidance schemes seem to be, it is equally bad in the world of financial regulation.

When the commercial banks and the traders lost their Glass Steagall Banking Act proscription against being in the same company in 1999, the seeds of the Great Recession were planted and the future of income inequality was richly fertilized. As Canada has escaped major financial collapses throughout its entire existence, the United States has lived in boom-or-bust cycles of calamity for well over a century and a half. The difference between the two economies is simply a question of financial regulation. Canada has it, and the United States still believes in the minimalist approach with reliance on a “free market” (which, given all the loopholes and tax breaks, the ability to deploy flash trading technology, etc., it most certainly is not) capitalism. The best we could produce after the Great Recession is the Dodd-Frank financial reform law, a watered down statute that has found funding opposition in our House of Representatives.

Mega-rich individuals and companies, unrestrained anymore by campaign finance restrictions on the big marketing campaigns, have lobbied Congress, funded their message and their candidates without shame or meaningful restriction (thank you, Supreme Court) and spread a false notion of rich as job creators, a version of that that completely discredited “trickle-down economics” theory of the 1980s. But even within the financial community, the playing field is tilted, favor some big boyz over others.

But where does all that cheap Fed money actually go? Try this major category of “cheap debt users.” Private equity is a generic term that refers mostly to firms that specialize in using heavily leveraged debt (i.e., using as much borrowing as the structure can support with the least amount of their own “at risk” equity) to buy assets – usually functioning companies – streamlining their acquisitions (usually involving massive layoffs and other cost-cutting strategies) and then flipping the rejiggered acquired company bank into the public (or high-end private) marketplace. Yummy profits abound most of the time. Generally, PE (as they are called) firms are pretty much the old “leveraged buyout” firms of a few decades ago, managing their investors stakes and taking handling fees and percentage of the upside (generally 20%), with that lovely carried interest tax rule noted above.

They are heavily involved in buying and selling shares of companies – “securities” trading if you will – but they are only lightly regulated as “Investment Advisors” as opposed to the more stringent “broker-dealer” certifications that apply to more traditional trading institutions. “[The S.E.C. has not required it or many other private equity firms to comply with broker-dealer requirements. Nor has the S.E.C. clamped down on buyout firms for marketing private equity funds to endowments, pension funds and wealthy investors. These activities, too, are usually the purview of broker-dealers…

“For decades, the private equity industry was almost completely unregulated. Private equity firms use borrowed money to set up partnerships that acquire companies that they hope to resell later at a profit. The firms sell interests in the partnerships to endowments, pension funds and wealthy individual investors. In 2010, Congress stepped in with the Dodd-Frank Act, which required private equity firms with more than $150 million in assets to register in the category of investment advisers. That registration process began in 2012.

“As regulatory regimes go, however, oversight of broker-dealers is much stricter than it is for investment advisers. Brokers receive more frequent audits and examinations — only 9 percent of investment advisers are examined annually, compared with 55 percent of broker-dealers — and face capital requirements and greater legal liabilities.” New York Times, July 26^th. Living in a two-tiered (teared?) system, one for the rich and their handlers who get to kept almost all of America’s wealth, giving the rich disproportionate influence over the political system, usually at the expense of the vast majority, is called a plutocracy… sometimes “a banana republic.” Shame on us!

I’m Peter Dekom, and that Biblical “reap what you sow” admonition seems to fall on deaf ears in the United States.