Why Wall Street Socialism Will Fail

Big Tax Breaks for Businesses in Housing Bill
Big Tax Breaks for Businesses in Housing Bill
By Stephen Labaton and David M. Herszenhorn
The New York Times
Wednesday 16 April 2008

Washington - The Senate proclaimed a fierce bipartisan resolve two weeks ago to help American homeowners in danger of foreclosure. But while a bill that senators approved last week would take modest steps toward that goal, it would also provide billions of dollars in tax breaks - for automakers, airlines, alternative energy producers and other struggling industries, as well as home builders.

The tax provisions of the Foreclosure Prevention Act, which consumer groups and labor leaders say amount to government handouts to big business, show how the credit crisis, while rattling the housing and financial markets, has created beneficiaries in the power corridors of Washington.

It also shows how legislation with a populist imperative offers a chance for lobbyists to press their clients' interests.

This has proved especially true on the housing legislation, which many lawmakers and lobbyists view as one of the last opportunities before Congress grinds to a halt amid election-year politics.

In the Senate bill, the nation's biggest home builders, some now on the verge of bankruptcy, won a provision that would let them claim millions in tax refunds by charging their current losses against the huge profits they made three or four years ago. Other struggling industries would benefit from this provision.

"This is our biggest legislative effort since the Tax Reform Act of 1986," said Jerry M. Howard, chief executive of the National Association of Home Builders. Hundreds of the association's members flooded the district offices of representatives and senators while they were home for the spring recess last month.

Supporters of the bill, including Senator Max Baucus, Democrat of Montana and the chairman of the Senate Finance Committee, say it represents sound tax policy carefully focused to help stimulate the lagging economy. But the White House opposes the Senate bill, and Democratic leaders in the House not only have promised to provide more relief for individual homeowners, but have also dropped the corporate tax provisions from their version.

Downtrodden automakers - Ford and General Motors - were especially dogged in securing a tax break that would let them collect alternative minimum tax credits, also known as the A.M.T., that would otherwise be out of reach because they did not pay enough taxes in recent years to claim a rebate.

If the provision becomes law, it could mean checks up to $40 million for the car manufacturers, as long as the companies had made investments in plant or equipment in that amount.

A Ford spokesman, Mike Moran, said he was aware that Ford would benefit from the tax credit in the bill passed by the Senate. But Mr. Moran said that the credit applied to a range of industries, not just automakers. A General Motors spokesman could not be reached.

Domestic airlines and manufacturers other than automakers would be eligible to claim the A.M.T. break as well. One lobbyist said that the companies that had sought the tax breaks in meetings with lawmakers included Ford, General Motors, American Airlines, Northwest Airlines and Goodyear Tire and Rubber.

Companies could claim only one of the new tax breaks, which in all, are expected to cost $6 billion through 2018. The jockeying among industry groups, including Realtors, home builders and bankers, is certain to intensify in coming weeks as lawmakers move to reconcile the Senate bill with a more ambitious package of housing legislation now under way in the House.

Lawmakers on the tax-writing House Ways and Means Committee have omitted the corporate tax cuts from their version of the bill in favor of tax breaks for first-time home buyers and developers of low-income rental housing, and more aid for owners facing foreclosure.

Congressional Democrats are also hearing from consumer advocates and other groups who say that the Senate bill does little to help Americans in danger of losing their homes to foreclosure.

"The Senate legislation gave corporations and Wall Street billions in tax breaks," Terence M. O'Sullivan, the president of the Laborers International Union of North America, said at a news conference on Tuesday to denounce the bill.

"Tax breaks for corporate home builders won't help stabilize the housing market, won't create jobs and won't prevent a single foreclosure," he continued. "If anything, this multibillion-dollar windfall will make things worse."

Even Senator Christopher J. Dodd, Democrat of Connecticut and the main author of the Senate bill, said the measure did not live up to its name and that he wanted changes. But other lawmakers, and the lobbyists who seek to influence them, also recognize a golden opportunity when they sense that the political winds virtually guarantee a bill's passage, and the housing crisis is just such a time.

In a sign of how such legislation allows lawmakers to advance many other goals, the Senate bill also includes tax provisions to encourage alternative energy production at a cost of roughly $6 billion over 10 years.

That provision was sponsored by Senator Maria Cantwell, Democrat of Washington, and Senator John Ensign, Republican of Nevada. A similar measure was dropped from a major energy bill last year and again from the economic stimulus bill in February.

But without quick action to extend expiring tax incentives, Ms. Cantwell said, many companies would simply drop projects. The housing bill was the easiest and fastest way to get things moving.

Other industries facing financial difficulties, like retailers, may realize that the tax provisions in the bill offer help for them, too.

Over the next few weeks, industry groups that fought to secure tax provisions in the Senate bill are expected to argue that providing help for important industries offers the best chance of helping to reverse the economic downturn.

To press their case on Capitol Hill, 15 of the biggest residential construction companies, including KB Homes and Toll Brothers, formed a coalition and hired a lobbying firm, the C2 Group, apart from the larger National Association of Home Builders.

Tom Crawford, a founder of the C2 Group, met with staff members of the Senate Finance Committee, several of whose members had already begun expressing concern about the effect of the slowing economy on home builders and other businesses.

The home builders were hardly the only industry that lawmakers heard from as the Senate housing legislation took shape and it became clear that the bill would provide more in the way of tax breaks aimed at stimulating the economy than direct assistance for distressed homeowners.

The cause of the automobile manufacturers was taken up by Senator George Voinovich, Republican of Ohio, and Senator Debbie Stabenow, Democrat of Michigan, who pushed to allow them access to up to $40 million each in alternative minimum tax credits.

Automakers and other companies that have lost money in recent years have accumulated billions of dollars in such credits, which are based on cumulative payments of the corporate alternative minimum tax. Companies, however, can claim a refund of such credits only in years when they pay regular corporate income taxes in amounts that exceed what they would owe under the alternative tax method.

The provision benefiting home builders and other struggling businesses would allow operating losses to be carried back over four years rather than the two years in current law. It is a strategy that Congress has used as a way of stimulating the economy in previous recessions, most recently in 2002 with the support of the Bush administration.

But the White House opposed the idea when members of Congress proposed it as part of the economic stimulus package earlier this year. And some House Democrats suggest that home builders and their lobbyists will face an uphill battle in trying to keep the provision when the Senate bill is reconciled with a rival tax package that was approved last week by the House Ways and Means Committee.

These Democrats said that the Ways and Means chairman, Representative Charles B. Rangel, Democrat of New York, and other leaders, including Nancy Pelosi, the House speaker, would oppose the provision as benefiting builders at a time when Congress should be helping homeowners.

"This ship largely sailed when Congressional Republicans left it out of the stimulus package," said one House Democratic aide, who spoke on condition of anonymity so as not to interfere with negotiations.

Unlike the Senate bill, which includes a tax credit of up to $7,500 for purchasers of foreclosed properties, Mr. Rangel's bill provides a credit for all first-time home buyers - a move that drew strong support from the National Association of Realtors.

"This is a meaningful incentive that should draw into the market many purchasers who, to date, have remained on the sidelines," the president of the group, Richard F. Gaylord, wrote. "We believe this credit can convert 'lookers' into first-time home buyers."

Other industry groups were also eager to sign on as supporters of Mr. Rangel's bill, even as many of them hope to push him to endorse a more expansive menu of tax breaks that will benefit them.

Among them were the National Association of Home Builders, the Mortgage Bankers Association, the Securities Industry and Financial Markets Association, the Council of Federal Home Loan Banks and the American Hospital Association.

Treasury Outlines Toothless Hedge Fund Rules
Treasury Outlines Toothless Hedge Fund Rules
By Kevin G. Hall
McClatchy Newspapers
Tuesday 15 April 2008

Washington - With an eye toward shoring up shaky financial markets, Treasury Department officials unveiled a plan Tuesday to provide greater transparency and management of risk in hedge funds.

However, the Bush administration's "best practices" proposal is voluntary, and less than two dozen of the more than 8,000 registered hedge funds signed onto the plan.

Hedge funds are large pools of investment capital owned by the wealthy. They are largely unregulated.

The plan, presented by Treasury Secretary Henry Paulson, doesn't introduce new regulation. It depends instead on self-policing and good behavior by hedge fund managers - two qualities missing in action in recent years as Wall Street excesses have led to what former Federal Reserve Chairman Alan Greenspan recently called the worst global financial crisis since World War II.

A former CEO of investment bank Goldman Sachs & Co., Paulson didn't rule out the possibility of future regulation.

"Both market and regulatory practices will evolve from here, but this is certainly a logical step at this time," Paulson said. "We must implement best practices and continually seek to strengthen our market and regulatory practices."

Critics of the plan, such as Connecticut Attorney General Richard Blumenthal, think it gives hedge fund managers, who helped devise the "best practices," a free pass.

"This plan is one small step when giant strides are needed. The Treasury Department's proposals for greater transparency and risk disclosure must be mandatory or they are meaningless," Blumenthal said in a statement. "Non-binding best practices or voluntary guidelines are an imaginary fence and virtual farce: They stop nothing."

Many economists have warned that loosely regulated hedge funds pose a system-wide risk to financial markets, but so far they've emerged from the current credit crisis in good shape. Instead it has been the investment banks - their business partners - whose losses now pose risks to global finance.

Hedge funds require investors to have a minimum net worth of more than $1 million and prior-year income above $200,000. Upon meeting that qualification, investors are required to have a minimum investment, matched by a small pool of partners, that can range from $250,000 to as high as $10 million.

These hedge funds are closed to small investors under the premise that only the rich can afford the risk of high hedge fund losses. The funds also offer far greater rewards to investors than is generally available through safer mutual funds and 401(k) retirement plans.

Although an average American cannot invest in hedge funds, which now boast more than $2 trillion in assets under management worldwide, state pension funds can and increasingly do.

This has raised concerns about accounting practices, fees, transparency and risk-management practices, particularly after the spectacular September 2006 collapse of Amaranth Advisors LLC. It had such a large concentration of investment in contracts for future delivery of natural gas that it was later charged by federal regulators with price manipulation.

Eric Mindich, founder of giant hedge fund Eton Park Capital Management and co-drafter of the "best practices" plan, told reporters Tuesday that "a bunch of warning flags would have been triggered (about Amaranth) if this had been in place at the time."

The state employee pension plans of California, Pennsylvania, Massachusetts and New Jersey were among those that lost money during Amaranth's collapse. Employees of San Diego County in California also lost big.

The chief investment officer of California's state pension fund, Russell Read, led one of two working groups that together came up with Treasury's "best practices" plan. He acknowledged that there was nothing to compel compliance and that there would be no public record of which companies are adopting "best practices."

There will be a "fair amount of missionary work" to convince companies it is in their interest to adopt these proposed standards, Read said.

Wall Street Winners Get Billion-Dollar Paydays
The "Robber Baron" era is alive and well (sick) today. ---BBB

Wall Street Winners Get Billion-Dollar Paydays
By Jenny Anderson
The New York Times
Wednesday 16 April 2008

Hedge fund managers, those masters of a secretive, sometimes volatile financial universe, are making money on a scale that once seemed unimaginable, even in Wall Street's rarefied realms.

One manager, John Paulson, made $3.7 billion last year. He reaped that bounty, probably the richest in Wall Street history, by betting against certain mortgages and complex financial products that held them.

Mr. Paulson, the founder of Paulson & Company, was not the only big winner. The hedge fund managers James H. Simons and George Soros each earned almost $3 billion last year, according to an annual ranking of top hedge fund earners by Institutional Investor's Alpha magazine, which comes out Wednesday.

Hedge fund managers have redefined notions of wealth in recent years. And the richest among them are redefining those notions once again.

Their unprecedented and growing affluence underscores the gaping inequality between the millions of Americans facing stagnating wages and rising home foreclosures and an agile financial elite that seems to thrive in good times and bad. Such profits may also prompt more calls for regulation of the industry.

Even on Wall Street, where money is the ultimate measure of success, the size of the winnings makes some uneasy. "There is nothing wrong with it - it's not illegal," said William H. Gross, the chief investment officer of the bond fund Pimco. "But it's ugly."

The richest hedge fund managers keep getting richer - fast. To make it into the top 25 of Alpha's list, the industry standard for hedge fund pay, a manager needed to earn at least $360 million last year, more than 18 times the amount in 2002. The median American family, by contrast, earned $60,500 last year.

Combined, the top 50 hedge fund managers last year earned $29 billion. That figure represents the managers' own pay and excludes the compensation of their employees. Five of the top 10, including Mr. Simons and Mr. Soros, were also at the top of the list for 2006. To compile its ranking, Alpha examined the funds' returns and the fees that they charge investors, and then calculated the managers' pay.

Top hedge fund managers made money in many ways last year, from investing in overseas stock markets to betting that prices of commodities like oil, wheat and copper would rise. Some, like Mr. Paulson, profited handsomely from the turmoil in the mortgage market ripping through the economy.

As early as 2005, Mr. Paulson began betting that complex mortgage investments known as collateralized debt obligations would decline in value, much as Wall Street traders bet that shares will drop in price. In that case, known as shorting, they borrow shares and sell them, wait for the price to fall, buy the shares back at a lower price and return them, pocketing the profit.

Then, over the next two years, Mr. Paulson established two funds to focus on the credit markets. One of those funds returned 590 percent last year, and the other handed back 353 percent, according to Alpha. By the end of 2007, Mr. Paulson sat atop $28 billion in assets, up from $6 billion 12 months earlier.

Mr. Soros, one of the world's most successful speculators and richest men, leapt out of retirement last summer as the market turmoil spread - and he won big. He made $2.9 billion for the year, when his flagship Quantum fund returned almost 32 percent, according to Alpha. Mr. Simon, a mathematician and former Defense Department code breaker who uses complex computer models to trade, earned $2.8 billion. His flagship Medallion fund returned 73 percent.

Like Mr. Paulson, Philip Falcone, who founded Harbinger Partners with $25 million in June 2001, cast a winning bet against the mortgage market. He pulled in returns of 117 percent after fees in 2007 and made $1.7 billion. The trade thrust him from relative obscurity to hedge fund heavyweight: he now manages $18 billion. Harbinger recently won agreement from The New York Times Company to add two members to its board.

Hedge fund managers share their success with their investors, which include wealthy individuals, pension funds and university endowments. They typically charge annual fees equal to 2 percent of their assets under management, and take a 20 percent cut of any profits.

With a combined $2 trillion under management, the hedge fund industry is coming off its richest year ever - a feat all the more remarkable given the billions of dollars of losses suffered by major Wall Street banks.

In recent months, however, scores of hedge funds have quietly died or spectacularly imploded, wracked by bad investments, excess borrowing or leverage, and client redemptions - or a combination of those events.

"To some degree it's a very gigantic version of Las Vegas," said Gary Burtless, an economist at the Brookings Institution.

As Alpha's list shows, managers who reap big gains one year can lose the next.

Edward Lampert, the founder of ESL Investments and a member of the 2007 Alpha list, was absent this year. His fund fell 27 percent last year, according to Alpha. About 60 percent of ESL's equity portfolio is invested in Sears, whose shares plunged 40 percent last year. ESL is also a major holder of Citigroup, whose abysmal performance matched that of Sears.

A manager who ranked high in the 2007 list and fell off in 2008 was James Pallotta of the Tudor Investment Corporation, who was 17th last year and earned $300 million. Mr. Pallotta's $5.7 billion Raptor Global Fund fell almost 8 percent last year, according to Alpha.

A few who did not make the cut still made buckets of money. Bruce Kovner of Caxton Associates and Barry Rosenstein at Jana Partners didn't make the top 50. But Mr. Kovner earned $100 million, and Mr. Rothstein earned $170 million, according to Alpha. Spokesmen for the hedge fund managers either declined to comment on Tuesday or could not be reached.

Since 1913, the United States witnessed only one other year of such unequal wealth distribution - 1928, the year before the stock market crashed, according to Jared Bernstein, a senior fellow at the Economic Policy Institute in Washington. Such inequality is likely to impede an economic recovery, he said.

"For a recovery to be robust and sustainable you can't just have consumer demand at Nordstrom," he said. "You need it at the little shop on the corner, too."

Despite the explosive growth of the industry - about 10,000 hedge funds operate worldwide - it is relatively lightly regulated. On Tuesday, two panels appointed by Treasury Secretary Henry M. Paulson Jr. advised hedge funds to adopt guidelines to increase disclosure and risk management.

And Mr. Gross, the fund manager, warned that the widening divide among the richest and everyone else is cause for worry.

"Like at the end of the Gilded Age and the Roaring Twenties, we are going the other way," Mr. Gross said. "We are clearly in a period of excess, and we have to swing back to the middle or the center cannot hold."

Death is the natural justice.
Death is also a communist philosophy.