Archive for the ‘Subsidies’ Category

Manufacturing McJobs at Nissan and Elsewhere

Thursday, May 12th, 2016

Bring back manufacturing jobs: For years this has been put forth as the silver bullet that would reverse the decline in U.S. living standards and put the economy back on a fast track. The only problem is that today’s production positions are not our grandparents’ factory jobs. In fact, they are often as substandard as the much reviled McJobs of the service sector.

The latest evidence of this comes in a report by the UC Berkeley Center for Labor Research and Education, which has issued a series of studies on how the growth of poorly paid jobs in retailing and fast food have burdened government with ever-rising social safety net costs. Now the Center shows how the same problem arises from the deterioration of job quality in manufacturing.  The study estimates that one-third of the families of frontline production workers have to resort to one or more safety net program and that the federal government and the states have been spending about $10 billion a year on their benefits.

What makes these hidden taxpayer costs all the more galling is that manufacturing companies enjoy special benefits in the federal tax code and receive lavish state and local economic development subsidies, the rationale for which is that the financial assistance supposedly helps create high-quality jobs.

The Center’s analysis deals in aggregates and thus does not single out individual companies, but it is not difficult to think of specific firms that contribute to the vicious cycle. A suitable poster child, it seems to me, is Nissan. It is one of those foreign carmakers credited with investing in U.S. manufacturing, though like the other transplants it did so in a pernicious way.

First, it tried to avoid being unionized by locating its facilities in states such as Mississippi and Tennessee that are known to be unfriendly to organized labor. After the United Auto Workers nonetheless launched an organizing drive, the company has done everything possible to thwart the union.

Second, while boasting that its hourly wage rates for permanent, full-time workers are close to those of the Big Three domestic automakers, Nissan has denied those pay levels to large chunks of its workforce. Roughly half of those working at the company’s plant in Canton, Mississippi are temps or leased workers with much lower pay and little in the way of benefits.

It is significant that in the Center’s report, Mississippi — which has also attracted manufacturing investments from other foreign firms such as Toyota and Yokohama Rubber — has the highest rate of participation (59 percent) in safety net programs by families of production workers. The Magnolia State may have experienced a manufacturing revival, but many of those new jobs are so poorly paid that they are creating a burden for taxpayers.

At the same time, Mississippi is among the more generous states in dishing out the subsidies to those foreign investors. My colleague Kasia Tarczynska and I discovered that the value of the incentive package given to Nissan in 2000 will turn out to cost $1.3 billion — far more than was originally reported. Toyota got a $354 million deal in 2007, and Yokohama Rubber got a $130 million one in 2013.

There’s a lot of talk these days about bad trade deals and resulting job losses. We also need to worry about what happens when we gain employment from international investment but the jobs turn out to be lousy ones.

The Wrongs of States’ Rights

Thursday, April 14th, 2016

The publication of the Panama Papers is a bombshell, though the fallout is being felt much more in countries such as Iceland than in the United States. It’s true that the revelations about offshore tax havens have mentioned domestic counterparts such as Delaware, Nevada and Wyoming, but officials in those states don’t seem to think that any action needs to be taken. As the headline of an article in the BNA Daily Tax Report put it: STATES GIVE GROUP SHRUG TO PANAMA PAPERS.

One reason for the tepid reaction is that the criticisms have been heard before. As BNA points out, a 2006 report from the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) listed the three states as being especially appealing to those seeking to create shell companies.

Another basis for complacency by the states is that their practices are part of a long and unfortunate tradition in the United States politely called federalism, but which is really a race to the bottom when it comes to oversight of corporations and the wealthy.

This trend dates back to the 19th Century, when the efforts of tycoons such as John D. Rockefeller to create vast industrial empires came up against the fact that state laws governing corporate charters put restrictions on the size and scope of a corporation’s activities, including the ownership of out-of-state companies. Rockefeller’s flagship firm Standard Oil of Ohio tried to get around this by creating the Standard Oil trust, in which affiliates were nominally independent but were actually controlled by a centralized board chosen by Rockefeller. Similar trusts were created in a variety of other industries.

Standard Oil’s transparent effort to circumvent state law was eventually struck down by the Ohio Supreme Court, but by that time Rockefeller and other robber barons had a new tool at their disposal: the willingness of some states to water down their chartering regulations to make them more attractive to big business.

The pioneer of this practice was New Jersey, which adopted a series of legislative measures from the 1870s through the 1890s to make its regulations more business-friendly. During this period, New Jersey became the destination of choice for trusts looking to legitimize themselves by reincorporating in a state that had no problem with bigness. That position was reinforced after Standard Oil made the Garden State its new base of operations. Muckraker Lincoln Steffens took to calling New Jersey the “traitor state.”

Other states sought to get in on this action. In 1899 Delaware adopted a corporation law that was even looser than New Jersey’s and had lower incorporation fees and franchise taxes. After New Jersey later changed course and went back to stricter corporation laws, it was Delaware that became the new mecca of corporations and has remained so to the present day.

Looser chartering procedures not only helped large corporations get larger but also made it easier for both businesses and wealthy individuals to set up the kind of shell companies highlighted in the Panama Papers. The ability and willingness of states to compete with one another to offer the most corporate-friendly practices goes well beyond company formation and governance.

Two areas in which the effects have been most pernicious are economic development and labor relations. Starting in the 1930s but especially during the past few decades, states have been willing to hand over larger and larger “incentive” packages to corporations to lure investments.  For example, in 2014, following a multi-state competition, tax haven Nevada gave away nearly $1.3 billion in taxpayer revenue to get Tesla Motors to locate an electric-car battery plant in the state.

Some states also lure companies with the promise of weak or non-existent labor unions. Ever since the Tart-Hartley Act of 1947, states have had the right to enact laws outlawing union security provisions in collective bargaining agreements. These so-called right-to-work laws tend to weaken the ability of unions to organize while saddling existing unions with lots of free riders who don’t contribute to the cost of running the organization.

It’s widely understood that the notion of states’ rights is often a smokescreen for racial discrimination, but it’s also part of what enables other retrograde practices such as union-busting, corporate welfare and tax dodging.

Trump: The Art of the Tax Deal

Thursday, March 24th, 2016

Donald Trump is famous for making high-profile deals using other people’s money. Sometimes those other people are not his business partners or lenders but rather the taxpayers. For a figure who is seen to epitomize unfettered entrepreneurship, he has been relentless in his pursuit of government financial assistance.

Trump’s first major  project, the transformation of the old Commodore Hotel next to New York’s Grand Central Station into a new 1,400-room Grand Hyatt, established the pattern. Trump arranged to purchase the property from the bankrupt Penn Central railroad and sell it for $1 to the New York State Urban Development Corporation, which agreed to award Trump a 99-year lease under which he would make gradually escalating payments in lieu of property taxes. The resulting $4 million per year tax abatement was criticized as excessive but was approved by the Board of Estimate in 1976. The deal also provided for profit sharing with the city. The total value of the abatement has been estimated from $45 million (Wall Street Journal, January 14, 1982) to $56 million.

In 1981 the New York Department of Housing Preservation and Development denied Trump’s request for a ten-year property tax abatement worth up $20 million on his project that replaced the old Bonwit Teller department store building with the glitzy Trump Tower. The decision came amid an effort by the city to rein in its abatement program, especially with regard to luxury projects. Trump, who in order to qualify had to argue that the property was underutilized as of 1971, filed suit and got a state judge to overrule the city and allow the abatement.

A state appeals court reversed that decision, pointing out that in 1971 the Bonwit Teller store on the site had gross sales exceeding $30 million and thus was not underutilized. Trump did not give up. He appealed to the state’s highest court, which in 1982 ordered the city to reconsider the application.  When the city turned him down again, Trump went back to court and got a judge to order the city to grant the abatement.

Trump sought extensive tax breaks for his planned Television City mega-development on the Upper West Side of Manhattan that was designed to provide a new home for the NBC network, but in 1987 the city rejected the request. Mayor Ed Koch said: “Common sense does not allow me to give away the city’s Treasury to Donald Trump.” NBC decided to remain in Rockefeller Center.

Trump kept pushing for subsidies, and in 1993 he began withholding his tax payments to pressure officials to comply with his demands for tax breaks and state-backed financing. “I’ve always informed everyone that until such time that we get zoning and the economic development package together, to pay real-estate taxes would be foolish,” Trump told a New York Times reporter. A day later he said he had changed his mind and would pay the $4.4 million in back taxes he owed.

Trump later sought assistance for the project, renamed Riverside South, from the U.S. Department of Housing and Urban Development in the form of federal mortgage insurance, but he was rebuffed.

After Trump took over Washington’s Old Post Office Pavilion in 2012 to turn it into a luxury hotel, his company asked the DC government to forgo property taxes but it refused.

When Trump does not receive tax breaks he sometimes creates do-it-yourself subsidies by challenging the assessed value of his real estate holdings in order to lower his property tax bill. He has used this practice, which is employed by many other large corporations and property owners, in places such as Palm Beach. Trumped bragged that he got a great deal when he bought  the 118-room Mar-a-Lago mansion in 1986 for $10 million (but only $2,812 of his own money, according to a June 22, 1989 article in the Miami Herald), implying it was worth much more. But when Palm Beach County assessed the property at $11.5 million, Trump appealed, seeking an $81,000 reduction in his taxes. A judge ruled against him (UPI, September 28, 1989). Trump later challenged an increased assessment and got a $118,000 reduction for one year but not for the next (Palm Beach Post, December 9, 1992).

In 1990 Trump won an assessment fight with New York City concerning his then-undeveloped waterfront property on the Upper West Side. He gained a $1.2 million savings in his 1989 taxes (Newsday, July 6, 1990).

More recently, Trump has been seeking a 90 percent reduction in property taxes on his Trump National Golf Club in Westchester County, New York. Trump listed the club as having a value of more than $50 million in the financial disclosure document he released as part of his presidential bid, yet his assessment appeal claims it is worth only $1.4 million.

It’s not hard to guess which figure is used when Trump wants to justify his claim of being worth $10 billion.

Business Fights FASB on Corporate Welfare Disclosure

Thursday, February 18th, 2016

Time Magazine

Large corporations spend a lot of time complaining about their obligations to government, such as paying taxes and complying with regulations, while saying very little about what they get from taxpayers in the form of financial assistance. The organization that sets corporate accounting standards now wants to see the magnitude of that assistance disclosed in financial statements, and the business world is howling in protest.

In November, the Financial Accounting Standards Board (FASB) issued a proposal that would require publicly traded corporations to disclose details on a wide range of government assistance — such as tax incentives, cash grants, and low-interest loans — when that help is the result of an agreement between a public agency and a specific firm, as opposed to provisions in tax codes that any business can claim. The proposal mirrors the one adopted by the Governmental Accounting Standards Board (GASB) that will require state and local government agencies to disclose the amount of revenue they are losing as a result of tax incentive deals.

The FASB proposal has some flaws, such as the decision not to require companies to provide estimates of the value of multi-year subsidy deals and a lack of clarity on the degree to which the information would have to be disaggregated. Still, it would be a major advance in financial transparency, giving investors and others important information on the extent to which companies are dependent on the public sector.

The business world sees it differently. During a recently completed three-month comment period, about two dozen trade associations and large corporations submitted statements on the proposal that were overwhelmingly negative.

At the center of the backlash are the U.S. Chamber of Commerce and the National Association of Manufacturers, which submitted joint comments arguing that the scope of the accounting standard is “overly broad,” that compliance costs would be “significant,” and that companies could place themselves in “legal jeopardy” by disclosing the information proposed by FASB.

The big-business-sponsored Council on State Taxation also invoked the privacy rights of corporate taxpayers and warned that the disclosures would “assist those who wish to harass a company regarding credits or incentives received pursuant to an economic development agreement.” Similar objections were presented by the American Banking Association, which represents entities that received trillions of dollars in assistance from the Federal Reserve and the U.S. Treasury in the wake of the financial meltdown that some of those same entities brought about.

Perhaps most infuriating are the negative comments submitted by large companies that are among the biggest recipients of public assistance. We know who they are because numerous government agencies already reveal a substantial amount of company-specific subsidy data, which my colleagues and I at Good Jobs First have collected for our Subsidy Tracker search engine. Although we’ve gotten a lot from the agency disclosure, having more information in the financial reports of all public companies would allow us to make Subsidy Tracker even more complete.

Several of the corporations commenting against the FASB rule have received more than $1 billion each in federal, state and local subsidies, including two whose totals put them among the top ten recipients: General Motors ($5.7 billion) and Ford Motor ($4 billion). These totals do not include the tens of billions they received in loans and loan guarantees, whose value after repayments is difficult to calculate.

GM, which survived only after being taken over by the federal government, whines that the FASB disclosure proposal “would be costly and difficult to prepare given the complexity of global entities and the wide variations of such arrangements” and claims that the information could be “misleading” or could benefit “special interest groups questioning tax incentives offered by governments as perceived abuses of the current taxation system.”

In what might be a dig at its competitor, Ford Motor, which did not require a federal takeover, suggests that FASB limit its disclosure requirement to bailouts and exclude “incentives” that are offered in exchange for a commitment to invest or create jobs.

IBM, which has been awarded some $1.4 billion in subsidies, asserts that the costs of the disclosure would outweigh the benefits and says that if FASB moves ahead with the new standard it should “not require disclosure of specific terms and conditions, which may include confidential or proprietary information for both governments and entities.” In other words, make it as vague as possible.

In case there was any doubt, these comments confirm that big business is in favor of transparency only when what is to be disclosed puts a company in a favorable light. Let’s hope FASB stands fast and joins with GASB in bringing corporate welfare out of the shadows.

California Schemin’

Thursday, June 4th, 2015
la stadium (2)

Rendering of proposed Rams Inglewood stadium

Guest Blog by Thomas Mattera

Most of the hot air released at last month’s National Football League owners meeting in San Francisco had nothing to do with ball deflation. Instead, the hyper-exclusive club, with three dozen members and a cumulative net worth of $77,000,000,000, discussed something much more important long-term than a month without Tom Brady’s chiseled jaw: the possible move of several teams to the Los Angeles area as early as the 2016 season.

The star-struck franchises in question, the St. Louis Rams, Oakland Raiders, and San Diego Chargers, have each ramped up their efforts in the last few months. The Rams have wasted no time imploding historic structures to make room on a plot of land in suburban Inglewood recently acquired by team owner Stan Kroenke. Meanwhile, the Raiders and Chargers are proposing a joint $1.7 billion stadium in nearby Carson, to be paid for largely by a certain vampire squid’s creative accounting.

These maneuvers are nothing new. Threatening to move your team to Los Angeles is as ubiquitous in the NFL as unpunished domestic violence and long term tax dodging. Since the league left the City of Angels in 1995, an owner claiming to be interested in moving there has become a perennial event, with more than half of the league’s franchises using the football-vacant city as leverage at one point or another. The playbook at this point is tried and true:

  1. Claim your current stadium is too old to compete for paying customers and is fast becoming structurally unsound.
  2. Insist taxpayers bear the cost of a new stadium or large-scale repairs to your old one.
  3. If demands are not immediately met, float the possibility of moving to Los Angeles.
  4. Champion the idea that a new stadium will bring much needed economic development to a struggling area. Pay no mind to the overwhelming evidence debunking this theory.
  5. (optional) If local officials still wont capitulate, fly in a theoretically impartial high ranking NFL official to seal the deal.
  6. When area politicians inevitably cave, announce that you will be staying because of your undying loyalty to the hardworking fans of (insert city here).
  7. Reap the near instant private rewards as the value of your team skyrockets while the city deals with the decades-long impacts of unforeseen construction costs and hundreds of millions in public debt.

The owners of the Rams, Raiders, and Chargers have shown no interest in deviating from this well-worn gameplan. Kroenke, a billionaire six times over who built his empire by marrying into the Walton family and developing shopping centers (many of them subsidized projects anchored by Walmarts), has yet to even sit bother to sit down with officials in St. Louis to try to broker a compromise. Yet this has not stopped the cash-strapped city from offering a new stadium deal replete with public financing.

Not to be outdone, the owners of the Chargers and Raiders recently announced in a joint statement that “If we cannot find a permanent solution in our home markets, we have no alternative but to preserve other options to guarantee the future economic viability of our franchises.” Unlike the Rams, however, both current California teams face fierce pushback against public funding for new stadiums from legislators and residents. These cities are indicative of how American municipalities are slowly realizing the error of their ways and beginning to demand an end to subsidized billion-dollar boondoggles.

If the people of Oakland and San Diego stay organized in their resistance, the owners of the Rams and Chargers may be forced have to skip all the way down to the fine print at the bottom of the owners playbook:

  1. If you cannot sufficiently extort a wildly favorable deal from your current city, just move to Los Angeles.

After all, teams do occasionally follow through on their threats and actually relocate. Case in point: The Rams left L.A. for St Louis 20 years ago, in large part because of the construction of the Edward Jones Dome, a building for which Missouri taxpayers still owe millions a year in annual maintenance payments for the next decade, even if the Rams move back West.

Additionally, there is an obvious reason teams have and continue to make the L.A. threat even if, for them at least, it is almost always an idle one. America’s largest traffic jam is the nation’s No.2 media market and in the past has shown it will support professional football. Moving there may be the best way for NFL owners to support their real favorite team: The Greenbacks.

These factors are not lost on the Rams, Raiders, or Chargers. Any of the three could ultimately decide to move past hypotheticals and formally propose a move at the next owners’ meeting in August. It is here where they will face a group significantly less generous than a bunch of local political pushovers. Any move to L.A. needs to be approved by 24 of the NFL’s 32 franchises, which figures to be a tall order. After all, with the L.A. vacancy filled what will the rest of the owners do the next time they feel the hankering for a shiny new stadium? Negotiate in good faith? Or..gasp..actually pay for it themselves?

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Uncle Sam’s Favorite Billionaires

Thursday, April 2nd, 2015

william-erbey_416x416Inequality is becoming so pronounced that presidential hopefuls of all ideological persuasions are acknowledging that something needs to be done. One issue they should consider is the extent to which the federal government itself contributes to the problem.

It’s clear that the federal tax code is structured in a way that favors wealthy individuals and corporations. But it turns out that Uncle Sam is also providing direct financial assistance to the billionaire class. The extent of that assistance can be estimated from the data my colleagues and I at Good Jobs First assembled for Subsidy Tracker 3.0, which we released recently.

We compiled 164,000 company-specific entries for federal grants, allocated tax credits, loans, loan guarantees and bailout assistance provided through 137 programs overseen by 11 cabinet departments and six independent agencies. These were added to 277,00 state and local awards in the database. Since 2000 the grants and allocated tax credits have amounted to $68 billion; the face value of the loans and bailouts, which we tally separately, have run into the trillions.

Along with the release of Tracker 3.0, we published a report called Uncle Sam’s Favorite Corporations that described the extent to which large corporations dominate federal subsidies. Some of those companies are owned in whole or in part by the country’s wealthiest individuals and families.

I subsequently matched the big federal subsidy recipients to the companies linked to members of the Forbes 400 list of the richest Americans. This exercise was an extension of an analysis my colleagues and I performed on state and local data for our December 2014 report Tax Breaks and Inequality.

Of the 258 companies controlled by a member of the Forbes 400, 39 have received federal grants and allocated tax credits. Their awards total $1.3 billion. The richest of the billionaires linked to these firms is Warren Buffett, whose Berkshire Hathaway conglomerate accounts for $178 million of the subsidies.

Two of the other companies are worth examining more closely, because they have also been embroiled in controversies over their business practices.

At the top of the list is Ocwen Financial, which received $434 million in subsidies through a provision of the Home Affordable Modification Program (a part of the TARP bailout) that provided incentives to mortgage servicers to revamp loans to homeowners whose properties were underwater or otherwise unsustainable.

Ocwen, which made extensive use of that program, was founded by William Erbey (photo), whose net worth was estimated at $1.8 billion in the most recent Forbes list, published when he was still chairman of the company. Subsequently, Erbey had to step down as part of a settlement the company reached with New York State financial regulators to resolve allegations of improper foreclosures and other abusive practices. Ocwen also had to provide $150 million in assistance to those whose homes had been foreclosed. It is also paying a smaller amount under a settlement with California regulators.

While Erbey is no longer running Ocwen, he may still be a major shareholder. As of last year’s proxy statement, he held the largest stake in the company (15 percent); this year’s proxy is not out yet.

The second largest subsidy recipient linked to a member of the Forbes 400 is SolarCity, which has received $326 million in grants and allocated tax credits, mostly through Section 1603 of the Recovery Act, which provides cash payments to companies installing renewable energy equipment. The chairman of SolarCity is Elon Musk, better known for his role in the electric car company Tesla Motors (which, by the way, got a $465 million federal loan and later repaid it). Musk, whose cousins Lyndon and Peter Rive are the top executives at SolarCity, has a net worth estimated by Forbes at $11.6 billion. Tesla Motors has business dealings with SolarCity.

It was recently reported that SolarCity is being investigated by Oregon prosecutors in connection with allegations that it used solar panels made by federal prisoners in renewable energy projects at two state university campuses for which it received $11.8 million in state tax credits designed to promote local employment.

Assuming the allegations turn out to be accurate, it is difficult to know where to begin in stating all that is wrong with this situation. A company chaired by the 44th richest person in the country that has received hundreds of millions of dollars in federal subsidies used prisoners paid less than a dollar an hour to install solar panels so that it can collect millions more in state subsidies.

Subsidies, whether federal or state, are by no means the largest contributor to inequality, but policymakers should try to find some way to limit their use by billionaires, especially those linked to shady business practices.

Uncle Sam’s Favorite Corporations

Tuesday, March 17th, 2015

UncleSam_WebTeaserIt’s said that the partisan divide is wider than ever, but there is one subject that unites the Left and the Right: opposition to the federal business giveaway programs popularly known as corporate welfare.

These programs include cash grants that underwrite corporate R&D, special tax credits allocated to specific firms, loan guarantees that help companies such as Boeing sell their big-ticket items to foreign customers, and of course the huge amounts of bailout assistance provided by the Treasury Department and the Federal Reserve to major banks during the financial meltdown. The costs to taxpayers is tens of billions of dollars a year.

Back in 1994 then-Labor Secretary Robert Reich gave a speech arguing that it was unfair to cut financial assistance to the poor while ignoring special tax breaks and other benefits enjoyed by business. Reich inspired a strange bedfellows coalition led by public interest advocate Ralph Nader and then-House Budget chair John Kasich (now governor of Ohio). Ultimately, the effort was stymied, as every business subsidy’s entrenched interests lobbied back. The subsidy-industrial complex emerged largely unscathed.

Nonetheless, the anti-corporate welfare movement has continued up to the present, with the latest battled being waged mainly by some Tea Party types against the Export-Import Bank.

Throughout these two decades of subsidy analysis and debate, the focus has been on aggregate costs, either by program, by industry or by type of company. Except for bailouts, very little analysis has been done of which specific corporations benefit the most from federal largesse.

My colleagues and I at Good Jobs First have just completed a project which will allow those on all sides of the debate to identify the companies enjoying corporate welfare. Today we are releasing Subsidy Tracker 3.0, a expansion to the federal level of our database which since 2010 has provided information on the recipients of state and local economic development subsidy awards.

We have collected data on 164,000 awards from 137 federal programs run by 11 cabinet departments and six independent agencies. Much of the data, covering the period from FY 2000 to the present, is extracted from the wider range of content on USA Spending, which also covers non-corporate-welfare money flows such as federal grants to state and local governments and federal contracts. We also tracked down about 40 other sources from a variety of lesser known reports and webpages. Farm subsidies are excluded as they are already ably covered by the Environmental Working Group’s agriculture database.

Our data does not cover the full range of federal business assistance, given that most tax breaks are offered as provisions of the Internal Revenue Code that any qualifying firm can claim. We include only the small number of tax credits (mostly in the energy areas) that are allocated to specific firms. But we’ve got plenty of company-specific grants, loans, loan guarantees and bailouts.

Today we are also releasing a report, Uncle Sam’s Favorite Corporations, that analyzes the federal data. While we don’t endorse or critique any of the wide-ranging programs themselves, we do find some remarkable patterns among the recipients.

The degree of big business dominance of grants and allocated tax credits is comparable to what we previously found for state and local subsidies. A group of 582 large companies account for 67 percent of the $68 billion total, with six companies receiving $1 billion or more.

At the top of the list with $2.2 billion in grants and allocated tax credits is the Spanish energy company Iberdrola, whose U.S. wind farms have made extensive use of a Recovery Act program designed to subsidize renewable energy.

Mainly as a result of the massive rescue programs launched by the Federal Reserve in 2008 to buy up toxic securities and provide liquidity in the wake of the financial meltdown, the totals for loans, loan guarantees and bailout assistance run into the trillions of dollars. These include numerous short-term rollover loans, so the actual amounts outstanding at any given time, which are not readily available, were substantially lower but likely amounted to hundreds of billions of dollars. Since most of these loans were repaid, and in some cases the government made a profit on the lending, we tally the loan and bailout amounts separately from grants and allocated tax credits.

The biggest aggregate bailout recipient is Bank of America, whose gross borrowing (excluding repayments) is just under $3.5 trillion (including the amounts for its Merrill Lynch and Countrywide Financial acquisitions). Three other banks are in the trillion-dollar club: Citigroup ($2.6 trillion), Morgan Stanley ($2.1 trillion) and JPMorgan Chase ($1.3 trillion, including Bear Stearns and Washington Mutual). A dozen U.S. and foreign banks account for 78 percent of total face value of loans, loan guarantees and bailout assistance.

Other key findings:

  • Foreign direct investment accounts for a substantial portion of subsidies. Ten of the 50 parent companies receiving the most in federal grants and allocated tax credits are foreign-based; most of their subsidies were linked to their energy facilities in the United States. Twenty-seven of the 50 biggest recipients of federal loans, loan guarantees and bailout assistance were foreign banks and other financial companies, including Barclays with $943 billion, Royal Bank of Scotland with $652 billion and Credit Suisse with $532 billion. In all cases these amounts involve rollover loans and exclude repayments.
  • A significant share of companies that sell goods and services to the U.S. government also get subsidized by it. Of the 100 largest for-profit federal contractors in FY2014 (excluding joint ventures), 49 have received federal grants or allocated tax credits and 30 have received loans, loan guarantees or bailout assistance. Two dozen have received both forms of assistance. The federal contractor with the most grants and allocated tax credits is General Electric, with $836 million, mostly from the Energy and Defense Departments; the one with the most loans and loan guarantees is Boeing, with $64 billion in assistance from the Export-Import Bank.
  • Federal subsidies have gone to several companies that have reincorporated abroad to avoid U.S. taxes. For example, power equipment producer Eaton (reincorporated in Ireland but actually based in Ohio) has received $32 million in grants and allocated tax credits as well as $7 million in loans and loan guarantees from the Export-Import Bank and other agencies. Oilfield services company Ensco (reincorporated in Britain but really based in Texas) has received $1 billion in support from the Export-Import Bank.
  • Finally, some highly subsidized banks have been involved in cases of misconduct. In the years since receiving their bailouts, several at the top of the recipient list for loans, loan guarantees and bailout assistance have paid hundreds of millions, or billions of dollars to U.S. and European regulators to settle allegations such as investor deception, interest rate manipulation, foreign exchange market manipulation, facilitation of tax evasion by clients, and sanctions violations.

 

Subsidies and Bad Actors

Thursday, March 12th, 2015

coalashAre corporate subsidies a right or a privilege? Should a company’s accountability track record be a factor in determining eligibility? These questions take on increased relevance in light of two new developments.

The first is that utility giant Duke Energy is being fined $25 million by environmental regulators in North Carolina. The penalty, the largest in state history, relates to the contamination of groundwater by coal ash from Duke’s Sutton power plant near Wilmington. Federal prosecutors are reportedly pursing a separate and broader case against Duke in connection with its large spill of toxic coal ash from another plant into the Dan River.

The other development is that my colleagues and I at Good Jobs First are about to make public a new version of our Subsidy Tracker that for the first time extends coverage to the federal level (the release date is March 17). Without giving away too much ahead of time, I can say that Duke Energy is among the ten largest recipients of grants and allocated tax credits (those awarded to a specific company) for the period since 2000, with a total in the hundreds of millions of dollars.

Duke got about half of its subsidies in the form of grants from Energy Department programs designed to promote renewable energy and smart grid development. The other half came from a Recovery Act provision that allows companies to receive cash payments for the installation of renewable energy equipment.

Like other large utilities, Duke has taken steps in the direction of renewables while still deriving most of its power from fossil fuels and nuclear. Are federal subsidies helping to wean Duke off dirtier forms of energy, or are they simply enriching a company that is still committed to dirty energy and has shown some serious lapses in its management of its fossil fuel facilities?

Duke is hardly the only major subsidy recipient with a tainted track record. Previously, I discussed the fact that both U.S. banks and foreign banks that received huge amounts of bailout assistance later had to pay billions of dollars to settle allegations on issues such as currency market manipulation and abetting tax evasion.

Federal officials may argue that they were not aware of these practices when the bailouts happened (though these banks hardly had spotless records as of 2008), or they may claim that they had no choice but to bail them out, since they were too big to allow to fail.

Yet the list of large federal subsidy recipients includes other major corporate miscreants. Take the case of BP, which the new database will show as having receiving more than $200 million in federal grants and allocated tax credits. Much of that money postdates its 2010 catastrophe in the Gulf of Mexico, and even more came after the 2005 explosion at its Texas City, Texas refinery that killed 15 workers and for which the company $60 million in fines to the EPA and $21 million to OSHA.

In the wake of the Deepwater Horizon disaster, BP was barred from receiving federal contracts, though the debarment was later lifted. Perhaps an even stronger case can be made for disqualifying regulatory violators from receiving federal subsidies, since they are more akin to gifts than payment for goods or services rendered. This is not likely to happen anytime soon, but the release of the new Subsidy Tracker will make it a lot easier to identify which bad actors have been enjoying Uncle Sam’s largesse.

Bailouts and Bad Actors

Thursday, March 5th, 2015

moneybagsontherunNewly released transcripts of the 2009 meetings of the Federal Reserve’s open market committee show that monetary policymakers were still agonizing over whether they were doing enough to stabilize the teetering global financial system.

These documents have a special interest for me because, as I discussed in last week’s Digest, my colleagues and I at Good Jobs First recently collected a great deal of data about the Fed’s special bailout programs in 2008 and 2009 as part of the extension of our Subsidy Tracker database into the federal realm. The Fed’s info is part of the more than 160,000 entries we have amassed from 137 federal programs of various kinds. Subsidy Tracker 3.0 will go public on March 17.

In last week’s post I mentioned that the Fed programs involved the outlay of some $29 trillion (yes, trillion) and that the totals for several large banks (Bank of America, Citigroup, Morgan Stanley and JPMorgan Chase ) each exceeded $1 trillion. I pointed out that these totals referred to loan principal and did not reflect repayments (information on which is not readily available).

What I also should have pointed out is that some of the Fed lending consisted of relatively short-term loans that were often rolled over. In other words, the actual amount outstanding at any given time was considerably lower than the eye-popping trillion dollar figures. That’s not to say that the amounts were chicken feed. It’s safe to say that the loan totals were in the hundreds of billions of dollars, and here again company-specific amounts are not available.

This is still high enough to justify the point I was making about the bailout amounts far outstripping the sums these banks have been paying out in settlements with the Justice Department to resolve allegations about investor deception in the sale of what turned out to be toxic securities in the run-up to the financial meltdown. And the amounts still justify anger at the current crusade by the big banks to weaken the Dodd-Frank regulatory safeguards adopted by the same government that bailed them out.

What is also worth pointing out is that the bad actor-bailout recipients are not limited to the big U.S. banks. Large totals also turn up for major European banks that have been involved in their own legal scandals in recent years. The biggest foreign recipient of Fed support turns out to be Barclays, which has an aggregate loan amount (including rollover loans and excluding repayments) of more than $900 billion. Next is Royal Bank of Scotland with more than $600 billion and Credit Suisse with more than $500 billion.

In 2012 Barclays had to pay $450 million to U.S. and European regulators to settle allegations that it manipulated the LIBOR interest rate index. The following year Royal Bank of Scotland had to pay $612 million to settle similar allegations. In 2014 Credit Suisse had to pay $2.6 billion in penalties to settle Justice Department charges that it conspired to help U.S. taxpayers dodge federal taxes. This was a rare instance in which a large company actually had to plead guilty to a criminal charge.

The frustrating truth is that the global financial system is dominated by big banks that seem to have little respect for the law and for financial regulation, but they do not hesitate to turn to government when they need to be rescued from their own excesses.

Banks Bite the Hand that Rescued Them

Thursday, February 26th, 2015

moneybags_handoutInvestment bank Morgan Stanley has disclosed that it will pay only $2.6 billion to settle U.S. Justice Department allegations that it deceived investors in the sale of toxic securities in the run-up to the financial meltdown.

I say “only” because the amount is substantially lower than the figures paid by Bank of America ($16.7 billion), JPMorgan Chase ($13 billion) and Citigroup ($7 billion) in similar cases. Thanks to the efforts of groups such as U.S. PIRG, we know that these amounts are less onerous than they appear because the companies are often allowed to deduct the payouts from their corporate income tax obligations.

My colleagues and I at Good Jobs First have been assembling data that does more to put the payouts in perspective. As part of an expansion of our Subsidy Tracker database to the federal level, we obtained information on the massive bailout programs implemented by the Federal Reserve in 2008 to stabilize the teetering financial system by purchasing toxic assets on the books of financial institutions and by serving as a lender of last resort.

These programs, with esoteric names such as the Term Auction Facility, the Term Asset-Backed Securities Loan Facility and the Term Securities Lending Facility, are not as well known as the Treasury Department’s Troubled Asset Relief Program, but the amounts involved are eye-popping. A 2011 paper by James Fulkerson of the University of Missouri-Kansas City estimates that the Fed made bailout commitments worth a total of more than $29 trillion. Yes, that’s trillion with a t.

We’ve been going through the recipient lists the Fed (reluctantly) made public for 11 bailout programs to match the entities to their parent companies. We’re not quite done with that process, but it appears that the totals for a few large banks, including Bank of America, Citigroup and JPMorgan Chase as well as Morgan Stanley, will end up being in excess of $1 trillion each (excluding repayment amounts). Our final figures will be released March 17, both in what we are calling Subsidy Tracker 3.0 and in an accompanying report.

It’s already clear that the settlement amounts paid by the banks (especially in after-tax terms) have been easily absorbed as costs of doing business. The Fed bailout data shows that another reason the banks have been little fazed by their legal expenses is that they received government assistance worth a thousand times more during their time of grave vulnerability in 2008 and 2009 — vulnerability that was largely of their own making due to reckless securitization of subprime mortgages and consumer loans.

After Lehman Brothers collapsed in 2008, the Fed was apparently willing to spare no expense in rescuing the other big financial players. Its efforts ensured the survival of the big banks that are riding high today. Perhaps the top executives of these banks should keep this fact in mind before criticizing the modest regulations put in place to save them (and us) from their excesses.

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