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Wall Street Tax Dodge

By Bernhard WarnerPosted Thursday, Sept. 11, 2008, at 6:12 AM ET

Wall Street's biggest banks cooked up elaborate "derivatives gimmicks" over the past decade to help their best foreign clients dodge the tax man, U.S. Senate investigators allege, the Wall Street Journal reports this morning. The racket cost the country $100 billion a year in unpaid taxes, the Senate Permanent Subcommittee on Investigations charges. The yearlong investigation, the newspaper says, "concludes that Wall Street firms actively competed with one another in dreaming up complex transactions that allowed hedge funds to avoid withholding taxes imposed on dividends paid by U.S. companies." The Financial Times says the biggest banks on the Street have been named in the tax-dodge probe, including Lehman Brothers, Morgan Stanley, Citigroup, Deutsche Bank, UBS, and Merrill Lynch. They will testify today, along with a variety of hedge funds, the newspaper adds.

Citing the report, FT says Lehman alone succeeded in helping clients avoid paying $115 million in tax and that Citigroup voluntarily paid the IRS $24 million in what it believed to be withheld tax between 2003 and 2005. The IRS is also not getting off lightly. The Associated Press reports that Sen. Norm Coleman of Minnesota, the ranking Republican on the committee, took the agency to task for allowing the practice to go on for as long as it did. Coleman said it was "especially troubling that the IRS has failed to address many of these problems for so long," AP reported.

Sex, drugs, and lavish gifts: just another day at the office for the U.S. Interior Department employees tasked with collecting about $4 billion per year in oil and gas royalties who now find themselves "caught up in a wide-ranging ethics scandal," the New York Times reports. Congress is investigating a dozen current and former employees of the department's Minerals Management Service who, the reports say, allegedly are guilty of a range of abuses including steering lucrative energy contracts to a trusted aide, accepting gifts from the companies they were supposed to collect from, and cultivating a "culture of substance abuse and promiscuity" while on the job. "The reports portray a dysfunctional organization that has been riddled with conflicts of interest, unprofessional behavior and a free-for-all atmosphere for much of the Bush administration's watch," the newspaper says. The NYT adds this isn't the first time the department has come under congressional scrutiny. "Previous reports have focused on problems the agency had in collecting millions of dollars owed to the Treasury," the newspaper says. As the Guardian points out, "the accounts of the partying atmosphere under the Bush administration's oversight of the MMS ... could prove politically sensitive, given the prominent role of energy as an issue in this election year."

On Wednesday, Lehman Brothers unveiled what may be its last best hope of survival by "selling most of its prized asset management unit and spinning-off $30 billion-worth of troubled property assets," the FT reports. Lehman's plan to shrink the 158-year-old firm may already be too late, the WSJ writes in a detailed profile of the bank's problems. Nonetheless, CEO Richard Fuld Jr. vowed that by selling off real-estate assets and its investment-management division and by slashing the dividend 93 percent, Lehman would "emerge clean." Investors weren't buying the message. They sent shares in Lehman down a further 7 percent Wednesday as the bank faces a "race against time," the NYT reports, leading off its business coverage.

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Lehman critics appear to have lost faith in Fuld. The WSJ lists the grievances from anonymous critics who claim Fuld waited too long to sell off the real-estate assets and that he mistakenly believed the "Federal Reserve bank-lending facilities would buffer the firm from continuing pain." Fuld's biggest problems may be internal. Details of the firm's closed-door dealings, including failed negotiations for a capital injection by the Korean Development Bank, have been leaking onto the Street regularly. Rumors bedeviled Fuld, too, leading him to grouse to his associates, "I feel like I'm playing whack-a-mole every day."

A contentious $35 billion contract for new aerial refueling tankers was put on hold by the Defense Department on Wednesday and will not be granted now until a new administration enters the White House next year, Business Week reports. The delay, WSJ says, is being scored as a victory for Boeing, which lobbied hard this summer—employing, in the process, "political allies who decried awarding the deal to a team that included a foreign company"—to have the original contract overturned; initially, the DoD awarded the deal to rivals Northrop Grumman and European Aeronautic Defense and Space Co.

The FT calls the about-face "a fresh blow to EADS." The Franco-German group has become a victim of "highly charged" U.S. political environment, the newspaper says. Defense Secretary Robert Gates acknowledged a "cooling off" period was required before a winner could be named. That won't happen until after November, he adds.

What good is a cartel if the biggest member defies its peers? OPEC will soon find out. Saudi Arabia, the cartel's most influential member, on Wednesday said it would not go along with agreed upon oil-production cuts struck at its latest meeting this week, the NYT reports. The dissention sent crude prices down, unheard of following an OPEC cut in output.

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Bernhard Warner has covered the ups and downs of the biggest companies, industries, and economies of North America and Europe. Today, he is a director of Custom Communication.
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