Clinton Tax Return - The Real Story

See two related videos by searching for parishinvestments at youtube.com. The first video is titled “Clinton Tax Scheme” and the second is titled “Missing Clinton Financial Disclosure.” The purpose of this comment is not to disparage the Clinton’s but rather draw attention to the most astonishing tax loophole in 25 years.

Last week the Clinton’s disclosed their tax returns through 2006 yet, remarkably, were not asked the three most important questions in what could be the biggest news story of the Democratic Presidential campaign. The questions are as follows

Question 1) Did former Bill Clinton receive, or should he have received, either a 1099 or W-2 from the partnership with Ron Burkle. This is important because it will reveal weather he was a consultant, employee or passive investor. Bloomberg reported that the partnership has paid Clinton more than $15 million since 2003 and, based upon quotes from the Clinton’s in the press, it does seem clear that at least part of this amount was consulting fees or wages.

Question 2) What have been the total cash and property related distributions from the partnership to the Clinton’s since 2003? This is important because only earnings and profits are taxable when distributions are made to partners. Other distributions of partnership assets such as cash or property are not taxable and never hit the tax return. The youtube video titled “Clinton Tax Scheme” explains how this can work.

Question 3) What is the Clinton’s current investment basis in the partnership? This is important since parters can often forego property distributions in lieu of increasing their basis, ownership interest, in the partnership. For example, if partners decide to distribute excess non-taxable cash from various businesses owned to partners, one partner could opt to not take the non-taxable cash distribution and instead increase their investment basis or stake in the partnership. My analysis indicates this amount could be somewhere between $10 and $150 million.

It is most surprising that Senator Clinton has gotten this far without disclosing these key facts. Perhaps it is also indicative of the medias lack of understanding of basic partnerships. The following are a few partnership basics summarized right from the tax code. Again, do visit youtube and search for “Clinton Tax Scheme” to see how this works.

Partnership Basics, Section 704 of Internal Revenue Service Code:

1) Two types of partners exist, general and limited. General partners, like the Clinton’s, get a share of all key benefits and responsibilities related to the partnership. Benefits include earnings and profits and responsibilities include a share of debt incurred. These are flexible arrangements that can be modified at any time with all partner’s content. For example, one partner gets all the depreciation deductions in lieu of the other getting a larger percent of earnings and profits.

2) Earnings and profits are not the same as cash flow in that only earnings and profits generate a taxable dividend to partners. For example, if the partnership takes out an insurance policy on a key partner, those proceeds or cash flow can then be distributed tax free to the remaining partners. The reason is that these proceeds are not “earnings and profits” but rather distributions of partnership property.

3) The word “basis” has two meanings, one per the IRS and another per the equity in the partnership. Tax basis per the IRS simply recognizes how much an investor has at risk for purposes of calculating the taxable gain once the investment is sold.

Partnership basis, on the other hand, recognizes how much each partner has invested in the partnership for purposes of allocating assets when the partnership is dissolved or wound down. This partnership basis is not taxable since not a taxable dividend but rather a distribution of partnership property.

4) What triggers the recognition of taxable dividends to partners is earnings and profits, as determined by the IRS. Simply put, if there are no earnings and profits, there are no taxable dividends. Put another way, if the partnership generates cash that is not earnings and profits, that cash can be distributed tax free to general partners. It is common for private equity firms to borrow money in their various companies names and then distribute the debt proceeds to partners rather than reinvest in the business.

The smart decision for the Clinton’s in this case would be to forego a cash distribution in lieu of increasing their investment basis in the partnership. For example, if the Clinton’s invest $1 million with Burkle and later are entitled to $5 million in cash flow that is not distributed to them, their basis or equity interest in the partnership becomes $6 million. My analysis indicates that the Clinton’s investment basis in the Burkle partnership could now be anywhere between $10 and $150 million.

5) Most private equity partnerships have ammassed large net operating losses from failed companies that can be used to offset gains from profitable companies merged into the partnership. This effectively means that there are no net earnings and profits and therefore no taxable dividends. In this case distributions of cash and property effectively become tax free. While many CPA’s will argue this can not be done, they are simply not seeing how loopholes can be used to accomplish this. Again, do watch the youtube video titled “Clinton Tax Scheme” by searching for parishinvestments at youtube.com

Press reports indicate that the Clinton’s tax lawyer is Howard Topaz of Hogan and Hartson. Here are two links:

1) American Law article indicating Clinton’s tax lawyer is Howard Topaz of Hogan & Hartson

2) Howard Topaz profile at company Website

Again, there are three very basic questions that the media should ask of Senator Clinton and failure to due so is a great disservice to the American public, both her supporters and detractors. This information based upon original Parish & Company research has been forwarded to Gretchen Morgenson and Floyd Norris of the NY Times.

Economic Advisor Analysis: McCain Clinton and Obama

As the Presidential race narrows, it is worth examining the key economic advisers to each candidate. While John McCain and Hillary Clinton have both enlisted advisors who are largely the source of current market turmoil, Barack Obama is instead supported by a beacon of financial integrity, former Federal Reserve Chairman Paul Volcker.

McCain’s choice of John Chambers and Carly Fiorina is most unusual since they are the “poster children,” for abusive executive compensation and financial engineering, in particular that related to stock options and costly mergers that result in significant job losses and minimal long term benefit.

Hillary Clinton made the surprising choice of Robert Rubin, who waltzed within months from being Treasury Secretary to Vice-Chairman of Citigroup, making a $50 million signing bonus. Rubin was the primary advocate of deregulating the banking sector and is fondly known as the godfather of hedge funds in investment banking circles. Enough said perhaps? See related video at www.youtube.com by searching for parishinvestments.

Vicki Walker Battles Warren Buffett Political Machine in Oregon

NOTE: See chart of Buffett Oregon Lineup at end of this post.

Oregonians have a great choice for Secretary of State this year. Her name is State Senator Vicki Walker and she is a proven courageous leader and advocate for both ordinary Oregonians and businesses alike. Although a Democrat, Walker is also popular with many Republicans based upon her ability to get things done for ordinary Oregonians.

One key Walker accomplishment was closing a loophole that allowed large utilities to charge ratepayers for local, state and federal taxes in their rate structures even though these taxes were never remitted to the taxing authorities. Walker’s opponent Kate Brown sided with Warren Buffett, one of only a few who did, and tried to defeat the measure. Buffett is now using all his political team here in Oregon to support Brown in a desperate attempt to prevent Walker from becoming Secretary of State.

Like many states, Oregon now suffers from out of state predators like Warren Buffett who whimsically purchase their legislative agenda, much to the detriment of both competing firms and local citizens, and control key media outlets via their wide array of firms owned.  In Buffett’s case this ranges from owning key medical malpractice insurance businesses to Sees candies. (Search Buffett for related blog posts). What Oregon needs now are more strong publically traded corporations based in Oregon to reenergize the state. This will begin when the key statewide offices are led by courageous principled competent people like Vicki Walker rather than those that pander to the likes of Warren Buffett.

Hedge Funds, Buffett, Gates and Murdoch Take Down Eliot Spitzer

Today Eliot Spitzer announced his resignation as Governor and perhaps the two most ironic twists are his ill fated pilgrimage to the “Mayflower Hotel” and the name he used to check in, George Fox. George Fox, a hedge fund manager, is his close friend. Clearly Fox and the moral ethical desert embodied by hedge funds was a key driver in Spitzer’s demise. With friends like that, who needs adverseries.

Perhaps even greater than the shame Spitzer should feel is that of the traders at the NYSE that cheered his demise. As if these traders had no regard for Spitzer’s accomplishments and recognition of how many pensions were lost due to their blatantly illegal and criminal activities. They seem instead anxious to return to robbing investors with impunity.

What you won’t read in the press is the fact that Spitzer’s three greatest adversaries were Warren Buffett, Bill Gates and Rupert Murdoch, for reasons detailed below:

Recently four of Buffett’s top executives, including the CEO and CFO, in his most important company, General RE Insurance, were convicted of fraud regarding transactions with AIG, as reported in CFO Magazine. They all face significant fines and long prison terms. During the trial is was made clear that Buffett was completely aware of these transactions yet he was never called to testify, nor charged.

It was Spitzer who took down the AIG CEO Greenburg, who was instrumental in blocking most key accounting reforms, using Conneticut Senator Joe Lieberman as his main political tool. Lieberman even stood up in the Senate on one occasion and threatened to defund the Securities and Exchange Commission if it pursued rules that would have prevented Enron like accounting.

Spitzer also took on Microsoft head on and this anti-trust case was the biggest since Standard Oil in the 1920’s. As noted here, Spitzer led the effort of 19 states in its effort against Microsoft’s abusive practices.

Another key Spitzer adversary was Rupert Murdoch, who now owns the Wall Street Journal, Fox News and various other media outlets. Spitzer exposed corruption in the recording industry, the famous “payola” scandal, which significantly impacted Murdoch’s businesses. Murdoch can now be sure that a lot less attention with respect to media consolidation will occur with Spitzer out of the picture. Murdoch has so little credibility that the owners of the Dow Jones Company even made a proposal to Gazprom, the Russian state energy company, in the hope they would buy it, rather than Murdoch.   Ironically, most Americans don’t know or care much about these vital media interests being owned by a foreigner, Rupert Murdoch.

Just prior to Spitzer’s resignation I put a 6 minute video on youtube with my take on why he should not resign. It can be accessed by searching at youtube.com under the words bill parish spitzer.

YOU TUBE VIDEO SEARCH TERMS: bill parish spitzer

Citigroup Impact: Money Market Accounts, Federal Reserve, Greenspan, Bernanke

As the credit market continues to flush out Wall Street driven excesses, perhaps it is also a good time for the Federal Reserve to address a looming crisis of confidence with respect to money market accounts, beginning with Charles Schwab’s “government security money market.”

Most investors in the Schwab Government Money Market actually believe they are investing directly in government backed securities yet that is simply not true. In its September 30, 2007 summary of holdings Schwab disclosed that 74 percent of this fund was invested in commercial paper at major banks, including Morgan Stanley and others who are central figures in the unfolding subprime debacle. You say, impossible? Here is a an overall snapshot pictured below. Such investments are listed as “other.”

This is one of the big dirty secrets of Wall Street that former Federal Reserve Chair Alan Greenspan promoted. Sadly Greenspan is now talking down the US dollar and working for foreign governments against the interests of the United States.

It is vitally important that the Federal Reserve get on top of this money market truth in labelling endeavor immediately, otherwise, confidence can be lost. Schwab will argue that these investments are secured by underlying government securities at the various financial insitutions yet that introduces a whole new set of undisclosed risk factors. Regarding Citigroup, even its most recent investors in the middle east have stated that they will not bail them out. Why should they when they now hold convertible bonds and in the case of bankrupty these investors can essentially take over the entire organization, leaving ordinary common stock shareholders with nothing.

Fixing this money market situation will also allow a more level competitive field in which fund companies can offer government money markets that do actually contain securities backed directly by the US government, not collateralized investments, and effectively compete with funds that are aggressively marketed by Schwab and others. Schwab is essentially using this money market as a fee mill, charging annual management of expenses of .75 percent, not including other hidden turnover related fees. Fees for such a fund should not exceed .25 percent.

More astute financial watchers might also ask, why are Fannie Mae and Freddie Mac obligaitons listed as government securities when the Treasury has reapeatedly stated that they are not backed by the government. Such holding would be ideal for a regular money market but not a government money market.

Another leading discount broker, TD Ameritrade, uses the following to summarize its “government money market” fund. Note that the benchmark is “Citigroup one month treasury.” How ridiculous is that when Citigroup is clearly bankrupt? In TD’s defense, their government money market is better diversified and charges lower expenses than Schwab’s.

In a previous blog post I noted that Joe Moglia, CEO of TD Ameritrade, should be replaced by Tom Bradley. Bradley is a highly competent person of integrity that came from the TD Waterhouse side. Moglia, on the other hand, like many top execs today is making an obscene level of compensation, tens of millions, and betraying both investors and employees.

Many outstanding TD Waterhouse employees lost their jobs due to Moglia’s greed obsession when the merger with TD Amertrade occurred. Moglia is a stock peddler that should be “dismissed” because he clearly does not have the competence or integrity to run a leading diversified financial firm like TD Ameritrade. In any event, that was my direct comment to his boss, Ed Clark, CEO of Toronto Dominion, TD Ameritrade’s parent organization. Numerous clients maintain accounts at TD Ameritrade.

If we are going to restore integrity and stability to our financial markets, such tough decisions must be made, in my opinion. Do also see related youtube video describing this situation by searching youtube for parishinvestments.

SEC Chair Fired for Pushing Hedge Fund Registration: Former President Clinton and Bill Gates Jr. Now Exploiting This Loophole

In June of 2005 Bill Donaldson was fired at Chairman of the SEC, primarily for advocating for the registration of hedge funds. Donaldson was a loyal Republican, close Bush family friend and former CEO of a major corporation. On his last day in office Donaldson voted with two Democratic nominated commissioners to require that hedge funds register with the SEC, an action that was later overruled by an appeals court. Sadly, Donaldson is one of many competent and effective government officials that have been systematically removed from the current administration. He was replaced by a California congressman who appears to not have either the background or courage to fulfill this most important role.

Here is a photo of Donaldson, whom I met at an institutional investment management conference in 2006. One need only look at the impact of hedge funds on the banking system to see how right Donaldson was. See 5 minute youtube video explaining how both former President Clinton and Bill Gates Jr. are exploiting this loophole.

Oregon PERS To Cash in on Foreclosures - Part II

Please read the previous blog post on January 31, 2008 for important background details regarding this controversial investment in Lone Star. Also view the brief youtube video with ACTUAL SHORT VIDEO CLIPS from the meeting in which Oregon PERS voted unamimously to give Lone Star $600 million to cash in on foreclosures.

After attending the January 30, 2008 monthly Oregon Investment Council meeting, I contacted Ted Sickinger of the Oregonian, who was not at the meeting, and suggested he do a story regarding Oregon PERS plan to invest $600 million in Lone Star. Numerous detailed quotes were provided to Sickinger regarding Grayken’s comments with the hope the paper would get the story right.

One week later on February 6th a Sickinger’s collegue, Ryan Frank, wrote a story titled “Oregon invests in housing’s bad luck.” Rather than respond directly to problems with the story, you be the judge after you view the video. Keep in mind the sound quality is poor and therefore you might need external speakers. Do also note that 5 days “prior” to the Oregonian story a South Korean court convicted Lone Star of stock manipulation and sentenced its President there to 5 years in prison.

While Frank quoted State Treasurer Randall Edwards as indicating this was all politics, my sense is that the executive sentenced to 5 years in prison, a fact not noted in Frank’s article, might think differently. Again, the youtube video is actualo footage from the meeting so you can be the judge. Note the sound quality, although poor, is audible if you adjust your speakers. A few highlights include

1) Chair Richard Solomon asking Grayken if this investment would be in the US. The response by Grayken was yes, particularly subprime.

2) Grayken also notes in the video that banks will be destabilized and present “rescue opportunities.” When we buy their securities portfolios we basically get the rest of the bank for free, it’s cream, he added.

3) State Treasurer Randall Edwards, upon being told the real estate market will likely decline furthur by PERS staff and that this would hurt their existing real estate portfolio, suggested increasing the investment to Lone Star.

4) The only stated candidate for State Treasurer, Ben Westlund, had been attending most monthly meetings yet was unable to attend. As a state legislator he was in Salem putting forth legislation to help people prevent their homes from being foreclosed. Westlund’s efforts have been featured in numerous Oregonian articles recently. Note their is no comment from Westlund in Frank’s article.

5) Lone Star’s Grayken specifically noted the key to getting the big returns and “playing this situation” was gaining control of the underlying collateral. Simply put, Lone Star is a foreclosure machine, and this should at a minimum cause the legislature to discuss this situation with adequate details.

In any event, here is the link but do read the January 31, 2008 blog post prior to viewing this 5 minute video summary. My hope is that the Oregonian do a follow up story and get it right so that legislators and others will have a better chance of shaping the dialogue.

Oregon PERS & Loan Star to Cash In On Foreclosures: John Grayken, Korea Bank, Richard Solomon

Note:  Also see Lone Star Part II, which has link to youtube video of Grayken’s comments before the OIC.

Today Oregon PERS investment arm, the Oregon Investment Council, met and awarded more than $1 billion in investment management contracts at its monthly meeting, including approving $600 million for Dallas based Lone Star and another $400 million for Boston based Grove Street Advisors. Also scheduled but postponed until February due to founder David Bonderman’s illness was another proposed $775 million investment in private equity firm, the Texas Pacific Group.

Lone Star CEO and Founder John Grayken is pictured below making his proposal for Lone Star, after having just returned from testifying at his firms trial over market manipulation in South Korea regarding the Korea Exchange Bank. This is somewhat ironic because in his proposal to the OIC Grayken noted that when his firm buys distressed securities portfolios, they “often get the underlying bank for free.” In the Korean bank’s case they plan to sell the bank to HSBC for $6 billion, if approved by regulators there.

Grayken’s firm is now positioning itself to purchase distressed debt and aggressively foreclose on both residential and commercial real estate properties here in the U.S. “The race is on to play this situation,” he said. Grayken also noted that his firm was not hurt by the subprime meltdown because they only originated the loans, having purchased a “large subprime originator in San Diego.”

Grayken added that this is as good a market we’ve seen for making lots of money in years and the “key is liquidating collateral.” What this means is that their primary strategy is to aggressively foreclose on both residential and commercial property.

Meanwhile, the Oregon legislature is considering meeting to discuss how to deal with the home foreclosure crisis and is making no connection with the PERS investment. A related article by Pulitzer Prize winner Nigel Jaquiss follows.

OIC Council members were so taken by Grayken’s proposal that they increased the proposed approved investment from a planned $400 million to $600 million.

Also on the meeting’s agenda was the proposed divestiture of companies doing business in Iran. Some might ask, why is it so easy for Oregon PERS to debate corporate governance initiatives involving distant nations while in fact much more important governance issues, including the mortgage crisis, develop unchecked in it’s own back yard?

On Saturday the Oregonian printed a story by Ted Sickinger highlighting that Oregon PERS lost $5 billion in January due to the stock market decline. This did not include potential losses in its large private equity portfolio due to the holdings becoming less liquid due to the 0verall market decline and now junk status of many bonds that. Here is an exerpt from the story.

I continue to believe that it is a mistake for Oregon PERS to have 70 percent of its assets in stocks, private equity and real estate and only 30 percent in fixed income. In fact, my clients are now positioned the exact opposite with a maximum of 30 percent in equities and related investments. Foreign fixed income is also a key focus of my client portfolios.

Perhaps this aggressive allocation once again highlights why these council positions should be paid, involve people with investment management experience and higher standards regarding potential conflicts of interest. The current OIC Chair Dick Solomon’s presence on the council and ascendance to Chair was championed by Oregon’s most prominent lobbyist and close political ally of Governor Ted Kulongowski, Len Bergstein. Solomon is pictured below.

Putin Likely to Become Gazprom Chairman and Make Russian Ruble Key Global Reserve Currency: Medvedev, Ruble

During the last 18 months I have made two trips to Russia, the first in August of 2006 and the second in June of 2007, spending a total of 6 weeks there. Now fluent in Russian, it was simply astonishing to note the level of progress Russia made during this brief period. Simple things ranging from painting crosswalk markings on key streets for pedestrians, passing laws making dog owners responsible for their pets, a marked reduction in public drunkenness and overall improved security.

Clearly, glaring problems do still exist, especially in rural areas, yet it is not hard to see why Putin has been so popular. In addition there is a vast untapped pool of workers in the 30-50 year old range who are seriously underemployed. Younger Russians are however now very optimistic regarding their future.

The task for Russia’s new leader will be to push prosperity out of St. Petersburg and Moscow into rural areas, in particular by providing tax free industrial development zones to stimulate necessary job creation, etc. A hefty sales tax on luxury goods might also be popular given the dramatic disperity between ordinary workers and high net worth Russians.  It is rather shocking to see the level of new arrogance and extreme insensitivity many wealthy Russians now display toward their fellow less economically fortunate citizens.

Now that Putin has designated 42 year old Gazprom Chairman Dmitry Medvedev to success him, it would also seem natural for him to return to St. Petersburg and lead the organization that is economically defining Russia’s future, Gazprom. My guess is that part of this role will be to initiate the sale of energy in rubles with the goal of making the ruble one of the global economy’s key reserve currencies. A proposterous idea a few years ago could indeed be an upcoming reality.

For the United States it is about time that we realize Russia should be a key ally and cease the current sword rattling, even though we still have a significant philisophical divide to negotiate.

The investment community in particular needs to get over the nationalization of Yukos and the complete loss to investors. Ironically, that loss could turn out to be a great investment in that it will spawn many more investment opportunities resulting from a stronger and more secure Russia resulting from plowing the nationalized Yukos assets and energy wealth back into the country to fund government services and necessary infrastructure.

Oregon PERS Commits $800 million to European Leveraged Buyouts and Takeovers of American Firms: KKR, CVC Group, Richard Solomon, Len Bergstein, Neil Goldschnmidt

Today, in its monthly meeting, the Oregon Investment Council, which manages Oregon’s $70 billion in PERS and related public assets, continued its commitment to leveraged buyouts by private equity firms, this time in Europe as it provided $500 million to KKR and $300 million to CVC European Equity Partners. Now at 13 percent of total assets, its stated goal is that 16 percent of assets be dedicated to private equity.

Michael Smith of CVC Group, pictured above on left, noted that the future in Europe is consolidation and their key strategy will be to use European based firms to acquire american competitors.

A representative from KKR added that banks were sitting on 6 months of “deal flow” they need to sell to improve their liquidity. And so while most people think that the subprime mortgage crisis is the primary source of liquidity issues in the financial markets, clearly the KKR executive painted the real picture, that being that leveraged buyouts are in fact soaking up much of the new loan dollars. And they are doing these buyouts with mostly public pension dollars.

To summarize, in addition to $350 million approved for private equity by the private equity investment subcommittee at its last meeting, Oregon PERS today also dedicated the $800 million to European buyout firms in addition to another $200 millon for domestic buyouts. A final investment of $50 million was also made to a real estate fund, making the total committed for the month approximately $1.4 billion.

The current Chair of the Oregon Investment Council, a practicing CPA whose business interests clearly intersect with those of the council, is clearly making his mark by accelerating the allocation to controversial private equity and hedge fund investments.

Solomon’s addition to the council and immediate rise to the Chairman position was championed by the State’s most powerful lobbyist on the Democratic side, Len Bergstein. Bergstein, pictured below Solomon on the right, was also instrumental in developing Neil Goldschmidt’s career, pictured on left, and orchestrated Goldschmidt’s successful run for Governor in the 1980’s. Although Goldschmidt is back in Portland, Bergstein is now the “go to” lobbyist on the Democratic side. It is not known what Goldschmidt is now doing yet it is somewhat ironic that given hedge and private equity funds do not disclose their owners or investments, he could theoretically be running such a firm.

The only one of the five voting council members not present was Keith Larson of Intel Capital. Chief Investment Officer Ron Schmidt noted Larson had a scheduling conflict. Interestingly, Larson’s name still does not appear on the Oregon Investment Council website. Noted instead is his predecessor Mark Gardiner whose term expired in September. Clearly, Larson has no business being on the council due to conflicts of interest, as is the case with Solomon. Either’s presence on such a board would have been unthinkable 10 years ago yet the SEC still has no oversight over public pension funds boards.