Sharing the Clean-Car Prize

John McCain’s suggestion yesterday that the federal government offer a $300 million prize for the development of a next-generation battery for plug-in hybrids or electric cars is being derided in some quarters as bringing a “game-show ethos to American politics.” It is also awkward that Daniel Yergin’s definitive account of the oil industry’s quest for domination was entitled The Prize.

The idea of offering a cash award for a technological innovation is hardly unprecedented. Such bounties, however, are usually offered by private entities such as the X Prize Foundation. What McCain is forgetting is that when a prize is offered by government—that is, when taxpayer money is the source of the reward—the public should get some direct benefit for its “investment.” A benefit, that is, beyond the fact that the new technology would be available for sale.

This is the principle behind the proposal put forth by people such as James Love of the Consumer Project on Technology to replace privately financed drug research with taxpayer-funded prizes. Pharmaceutical researchers would get substantial sums for the creation of new treatments that create demonstrable improvements in health conditions. This does not, however, create windfalls for the winners. Drugs that receive the prize—which was incorporated into a bill introduced last fall by Vermont Sen. Bernie Sanders—would not have patent protection and thus would be widely available at a cheap generic price.

There’s no indication that McCain has this trade-off in mind. He presumably would want the winners of the battery competition to be rewarded twice—with the prize as well as the patent.

Until prizes and other “carrot” approaches succeed in bringing about cleaner cars, some government “sticks” will remain necessary. One disclosure-based version of the latter is being introduced in California. The state’s Air Resources Board announced last week that, beginning next January, every new car put on sale in California will be required to carry a label informing potential buyers of the vehicle’s environmental impact. The label will rate the car based both on its emissions of greenhouse gases and its contribution to smog. The Board already has a website that provides data on the cleanest, most fuel efficient cars on the market.

Compared to his dismaying embrace of expanded offshore oil drilling last week, McCain’s clean-battery-prize idea is not completely foolhardy. But he shouldn’t forget that the role of government is to put a check on business shortcomings—if only through mandated disclosure—rather than fostering more winner-take-all “solutions.”

Prosecuting Individual Fraudsters is Fine, But What About Their Employers?

If there were an index showing the status of the financial profession in U.S. society, today would be recorded as a plunge. Three separate legal developments together convey the message that asset management, mortgage banking and private banking are all riddled with corruption.

In New York, two previously high-flying hedge fund managers at Bear Stearns were arrested by the FBI, handcuffed, subjected to a humiliating perp walk and indicted on criminal charges of fraudulently misleading investors about their exposure to subprime mortgage-backed securities.

In Washington, Deputy Attorney General Mark Filip announced that a nationwide investigation of mortgage fraud has resulted in the filing of charges against more than 400 individuals.

In Fort Lauderdale, Bradley Birkenfeld, a former official in the private banking operation of Swiss bank UBS, pleaded guilty to charges of conspiring to help wealthy U.S. clients evade taxes by concealing assets. There have been reports that Birkenfeld may divulge the names of thousands of other clients who also cheated Uncle Sam.

Apart from corruption, what these cases have in common is that prosecutorial zeal is being directed at individuals alone and not the institutions whose interests they were serving. Prosecuting bad apples is all well and good, but the Justice Department needs to be reminded that in many cases the barrel itself is corrupt.

In the case of mortgage fraud, at least, the FBI may be on the right track. Director Robert Mueller announced today that the bureau is investigating some “relatively large companies,” including mortgage lenders, investment banks, hedge funds, credit-rating agencies and accounting firms.

Let’s hope this investigation is for real—and that it results in some serious charges rather than deferred-prosecution-agreement slaps on the wrist. Maybe then the financial sector will begin to clean up its act.

Republicans’ Offshore Drilling Plan Would Expand Dysfunctional System

The response to the politically opportunistic call by the Bush Administration and John McCain to expand offshore oil drilling is being framed primarily in environmental terms. The drilling, which would do nothing in the short term to address soaring gasoline prices, would indeed create serious risks for the coastlines of Florida and California and would worsen global warming.

Yet there is another compelling reason to oppose the plan: the federal system of offshore leasing has been characterized by gross mismanagement that has allowed big oil companies to avoid paying billions of dollars in royalties. There is no reason to doubt that an expansion of drilling leases would bring more of the same.

For those who missed this particular scandal, here is some background. Commercial offshore oil drilling was pioneered in the late 1940s by Kerr-McGee Corp. While little thought was given to environmental issues at the time, there were disputes between the federal government and coastal states over which should control the leasing process. The 1953 Outer Continental Shelf Lands Act gave the states control over the first three miles (more for Texas and the Gulf Coast of Florida), and the feds took over after that up to the 200-mile territorial limit.

There wasn’t much controversy over offshore drilling until 1969, when an undersea well off the coast of Santa Barbara, California suffered a blowout and leaked 200,000 gallons of oil that contaminated 35 miles of coastline. This led to state and federal restrictions on offshore drilling in new areas. Periodically over the past 30 years, the oil & gas industry and its allies in Congress have tried to ease the limits but were shot down.

Defeated in its effort to get access to more offshore areas, the industry sought to make its existing drilling more profitable by pressing for reductions in the royalties it had to pay the federal government through the Interior Department’s Minerals Management Service (MMS). In the mid-1990s, when energy prices were relatively low (oil was at about $16 a gallon barrel), Congress gave in to industry pressure and passed legislation in 1995 providing “royalty relief.”

The law contained safeguards to prevent a windfall for drilling companies by terminating the relief when oil prices rose above a certain level, but Clinton Administration officials failed to include those provisions in some 1,000 deepwater leases it signed in 1998 and 1999.

That oversight would come to haunt the federal government. As oil prices rose in 2004 to the point at which royalty relief should have ended on those leases, the cost to the Treasury in lost revenue rose to billions of dollars. Once the situation became publicly known, thanks to reporting by Edmund Andrews of the New York Times, some oil companies agreed to renegotiate the leases, while others such as Exxon Mobil and Chevron refused.

Complicating the situation, Kerr-McGee (now part of Anadarko Petroleum) later brought a legal challenge against the safeguards, making the dubious argument that Congress never intended to give MMS the authority to impose them. Last year the drillers received a favorable ruling in the case, prompting the Government Accountability Office to estimate recently that, if the decision is upheld, the loss of revenue from leases signed from 1996 through 2000 could be as high as $53 billion.

The federal government is also likely being cheated on leases signed after 2000. In 2006, several MMS auditors publicly charged that they had been pressured by their superiors to terminate investigations of underreporting of royalties related to leases not subject to royalty relief.

This is the dysfunctional system that the Republicans want to expand. One is tempted to ask: Is this really about increasing oil supplies—or creating another giveaway for Big Oil?

Piercing the Corporate Veil of Secrecy

Congratulations to Wikileaks, Wal-Mart Watch and a handful of other web resources for being chosen by Portfolio magazine as the “top anti-corporate sites.” Specifically, the magazine is featuring sites that have done the most to distribute confidential—and often embarrassing—corporate documents or otherwise publicize material that companies want kept quiet. “From anonymous whistle-blowers who post secret documents online to fan sites that spill trade secrets,” Portfolio writer Kim Zetter says, “websites and their owners can be a major thorn in the side of corporations that find comfort behind a veil of secrecy.”

Wikileaks is focused on piercing that veil. The site was at the center of controversy a few months back when Swiss bank Julius Baer tried to get it taken offline after it posted documents that purportedly showed how the bank’s Cayman Islands branch helps wealthy clients hide assets and launder money. Much of the web community rallied to the defense of Wikileaks, and the censorship move was defeated.

Wal-Mart Watch, of course, is one of two national campaigns aimed at reforming the giant retailer. Aside from producing its own critiques of the retailer (including one to which I contributed), the group has used its site to publicize internal company documents leaked to it. Among these was a memo in which the company discussed controlling health care costs by methods such as making physical activity part of every job, apparently so that those in poorer shape would not apply.

The other sites singled out by Portfolio are:

* Mini-Microsoft, a anonymous blog written by a Microsoft employee who skewers management and highlights waste and inefficiency at the software behemoth.

* Brenda Priddy and Company, a automobile outfit that is not necessarily critical of carmakers but which manages to take clandestine photographs of their prototype vehicles and sell them to other websites and magazines for distribution well before the companies are ready to go public.

* Farmers Insurance Group Sucks, a site produced by a disgruntled customer who now publicizes lawsuits against the company, complaints to state insurance agencies, and unflattering insider testimonials.

* HomeOwners for Better Buildings, a site that exposes the shortcomings of the residential construction business, especially KB Homes. It is filled with homebuyer horror stories and has an “Implode-O-Meter” that tracks companies in the industry experiencing bankruptcy or other forms of distress.

* AppleInsider and MacRumor, which make it their business to report on new Apple products and features being developed by the secretive company.

Zetter has only scratched the surface, and she seems to realize it. She says to her readers: “If you have suggestions for other pesky sites that are a reliable source for inside information about a company or industry, please let us know. We’ll write about the best ones in a follow-up article.” So go ahead and let Zetter know about the wider world of the corporate-critical web.

McCains: Is this Bass for You?

John McCain and his wife Cindy must be thinking a lot about beer these days. Earlier this week, while speaking to the National Federation of Independent Business, the presumptive Republican nominee had a slip of the tongue and said “I will veto every beer” (when he meant to say “bill”). This came amid intense rumors, which turned out to be true, that Belgian-Brazilian brewing giant InBev intended to make a takeover bid for iconic American beer company Anheuser-Busch (A-B). InBev sells scores of beer brands such as Bass, Beck’s and Stella Artois.

For McCain this is not just an abstract issue of globalization. His wife Cindy McCain controls Hensley & Co., one of the largest A-B distributorships in the United States, and together with her children holds some $1 million in A-B stock.

The mayor of St. Louis, where A-B is based, is opposing a foreign takeover of the beer giant, and concern about the deal has been expressed by Missouri’s two U.S. Senators—one a Democrat and the other a Republican. There are even signs of a grassroots and netroots movement to keep A-B out of foreign hands.

At this point, it’s difficult for me to get too worked up about the prospect of a takeover. InBev is claiming it won’t downsize A-B, and the Teamsters union, which represents more than 8,000 of the company’s workers, would hopefully be in a position to enforce that commitment. Moreover, the beer industry has been embroiled in an international consolidation wave for years. The second most prominent U.S. brand, Miller, was swallowed by South Africa Breweries back in 2002. The merged company, SABMiller, is in the process of combining its U.S. operations with those of Molson Coors, itself the merger of another famous U.S. brand with a Canadian brewer. A-B has struggled precisely because it has not played the merger game.

Observers are wondering where John McCain will position himself on the issue—or whether he will sidestep it entirely. His wife, who insists her finances are completely separate from his, could benefit from the deal by selling her shares at a handsome premium. On the other hand, distributorships such as hers may not want to give up the comfortable relationship they have with A-B.

No matter what, the deal will focus new attention on Cindy McCain’s business dealings. At least some of this will presumably mention the controversial history of her late father, who left her the business. According to a 2000 article by John Dougherty and Amy Silverman in SF Weekly, James Hensley received a wholesale liquor license in the mid-1950s, despite the fact that he and his brother Eugene were convicted of violating federal liquor laws in 1948. Like many other beer distributorships, Hensley & Co. was a frequent contributor to political candidates, including John McCain.

So how does the Christian Right feel about the prospect of having a beer dealer—and daughter of a reputed bootlegger—as First Lady and of having a President whose political career was launched by the proceeds of that business?

Peeking at a Company’s Pay Rates

Company-specific compensation data is one of those rare areas in which more is known about people at the top of the social pyramid than those at the bottom. Publicly traded corporations are required to file proxy statements each year that disclose down to the last dollar what top executives are paid in salary, bonuses, long-term compensation, stock options and perks. We know what the big boss earns but generally not what the company pays its middle managers or hourly workers.

Glassdoor, a new website launched this week in beta form, starts to fill that information gap. The site was created by Rich Barton, the former Microsoft executive who founded Zillow, a popular website containing data on real estate values. Whereas Zillow is based at least in part on government data, Glassdoor relies on voluntary submissions by users who anonymously reveal their own salaries, along with information on vacation time, medical coverage and retirement benefits. Users are asked to specify their length of experience and geographic location, so that salary variations can be evaluated. Those who do not wish to name their employer can specify the size of the company and the industry sector.

As the site is just getting off the ground, Glassdoor’s data are far from comprehensive. But there are already, for instance, 60 salary reports covering computer networking giant Cisco Systems. The site also provides anonymous company evaluations by current and former employees, including one in which a former product manager at Cisco complained: “They will try to work you to death.”

While we wait for Glassdoor to grow into a richer source, it should be noted that there are some limited sources for company-specific wage and salary data on those who are not top executives. For example:

* A few states that disclose the economic development subsidies they give to companies ask those firms to report on the wages of the jobs they create. The best example is Illinois, which has a database of reports filed by companies with job creation statistics, including average salaries.

* Some jurisdictions that have enacted living wage laws require employers to file periodic reports that may become part of the public record either automatically or as the result of freedom-of-information requests.

* The U.S. Department of Labor has an online archive of collective bargaining agreements—which typically include wage rates and other conditions of employment—arranged by employer. (The Bureau of Labor Statistics has data by industry but not by specific company.)

* Companies in some regulated industries have to report payroll expenses. For example, airlines must disclose this and other operating and financial data on Form 41, which is submitted to the Bureau of Transportation Statistics. The BTS system is cumbersome to navigate, but the Airline Data Project at MIT has used it to compile handy summary tables of wage and salary rates by job category for each of the major carriers going back to 1995.

* And finally, you can always check want ads and job postings to look for salary figures offered by those companies that don’t hide behind the statement that the pay rate “depends on experience.”

Tax-Avoidance Gimmicks, Secret Bank Accounts at Risk

Jesse Drucker, the Wall Street Journal reporter who broke the story about Wal-Mart’s use of captive real-estate investment trusts to avoid an estimated $2.3 billion in state corporate income taxes, had another piece in the Journal Monday illustrating how the rich and powerful don’t seem to feel an obligation to pay their fair share of taxes.

The subject of the new article is Philip Anschutz, the professional sports tycoon whose net worth was pegged at $7.6 billion in the last Forbes 400 list. Anschutz is dueling with the Internal Revenue Service in U.S. Tax Court over $143.6 million the feds say he owes in capital-gains taxes in connection with the transfer of shares in Union Pacific (obtained by selling the company several railroads he had accumulated) and in Anadarko Petroleum (which purchased Union Pacific Resources, an oil properties subsidiary of the railroad).

Anschutz claims capital gains taxes do not apply because the deals were technically not completed stock sales. Instead, they are what the tax-avoidance lawyers call “variable prepaid forward contracts.” They involve an agreement to sell a block of shares to an investment bank at a future date. In the interim, the individual lends the same number of shares to the bank and receives an up-front payment. On paper, ownership of the shares has not changed, so it is claimed that no capital gains are due until the actual sale some time in the distant future.

It turns out, Drucker writes, that these arrangements are quite common and are being used by executives at companies such as Starbucks, Costco and Tyson Foods. The only encouraging part of the story is that the IRS is cracking down on these deals and in some cases may be seeking substantial penalties.

Wealthy U.S. tax avoiders are also nervous these days about possible revelations by Swiss bank UBS about accounts that the IRS believes are being used to hide as much as $20 billion in assets and to dodge some $300 million in taxes. The New York Times reported on Friday that UBS is being pressured by federal investigators to divulge information that until now has been strictly guarded by Swiss bank secrecy laws. Some account details have already come to light in cases such as the prosecution of property developer Igor Olenicoff, a UBS client.

UBS, which for so long helped rich Americans cheat Uncle Sam, may now be forced to implicate its own clients. It is refreshing to see the affluent, wondering when the IRS may lower the boom, experience some of the insecurity usually felt only by the likes of undocumented workers anticipating an immigration raid.

Obama and McCain Agree on Transparency

Although he’s been busy with some other matters, Sen. Barack Obama found time this week to introduce legislation that would expand the amount of information made available to the public on federal procurement contracts. The measure was introduced with Sen. Tom Coburn (R-Okla.), who had joined Obama in a previous bipartisan initiative that resulted in the 2006 passage of legislation creating the USA Spending database. The original co-sponsors of the new bill (S.3077) are Senators John McCain (R-Ariz.) and Tom Carper (D-Del.).

S.3077 calls for an expansion of the data provided via USA Spending, the creation of which also needs to be credited to OMB Watch, which built its own contract database, FedSpending, on which the federal resource ended up being based.

As summarized by Obama’s office, the bill would add to USA Spending:

– A copy of each Federal contract in both PDF and searchable text format.

– Details about competitive bidding, the range of technically acceptable bids or proposals, and the profit incentives offered for each contract.

– The complete amount of money awarded, including any options to expand or extend under a contract.

– An indication if the Federal award is the result of an earmark.

– Information about government lease agreements and assignments in the same manner that information is reported for contracts, grants, and other assistance.

– An assessment of the quality of work performed on Federal awards.

– Information about Federal audit disputes and resolutions, terminations of Federal awards, suspensions and debarments, and administrative agreements involving Federal award recipients.

– Information about any civil, criminal, or administrative actions taken against Federal award recipients, including for violations related to the workplace, environmental protection, fraud, securities, and consumer protections.

– Information about Federal tax compliance by Federal award recipients.

– Information about parent company ownership that will be made accessible, along with other data on USASpending.GOV, through application programming interfaces.

– Links to publicly available Government reports.

Legislation covering the bullet point about disclosure of the legal track record of contractors—along the lines of the Project On Government Oversight’s Federal Contractor Misconduct Database—has already passed the House.

It is not clear whether the new Obama-Coburn bill would do anything to address a problem highlighted by Secrecy News—the fact that intelligence agencies such as the Defense Intelligence Agency and the National Geospatial-Intelligence Agency have been refusing to submit data on even their unclassified contracts to USA Spending. As noted in the last issue of the Digest, the intelligence agencies are outsourcing more and more of their work, so disclosure of those contracts becomes all the more important.

Over the Counter Intelligence

Tim Shorrock, a veteran investigative journalist and a longtime subscriber to the Dirt Diggers Digest, has just come out with a book called Spies for Hire: The Secret World of Intelligence Outsourcing. Shorrock describes how an activity that used to be handled by spooks on the federal payroll has been steadily transformed into a $50 billion Intelligence-Industrial Complex.

Thanks to the contracting scandals surrounding Halliburton and its former subsidiary Kellogg, Brown & Root, the public learned of the extent to which the Pentagon has turned over routine functions to private military companies. The outrageous behavior of Blackwater has highlighted the use of mercenaries to protect U.S. diplomats and other VIPs in Iraq.

Shorrock shines a light on another group of corporations that are carrying out a more sensitive function that most people have no idea is being handed over to the private sector. Careful readers of the revelations concerning abuses at the U.S.-run Abu Ghraib prison in Iraq would have learned that interrogators alleged to have abused detainees included civilians employed by a company called CACI. But that is only the tip of a lucrative iceberg, Shorrock shows.

For example, he writes, more than half the people working at the super-secret National Counterterrorism Center in Virginia are employees of companies such as Science Applications International Corporation (SAIC), BAE Systems and Lockheed Martin. The Center’s terrorist database is maintained by The Analysis Corporation, which subcontracted collection activities to CACI.

Since 9/11, Shorrock says, the Central Intelligence Agency has been spending 50-60 percent of its budget (or about $2.5 billion a year) on contractors—both individuals and companies. At the CIA and its sister spook agencies: “Tasks that are now outsourced include running spy networks out of embassies, intelligence analysis, signals intelligence (SIGINT) collection, covert operations, and the interrogation of enemy prisoners.”

Shorrock devotes an entire chapter to Booz Allen Hamilton, known to most people as a management consultant for large corporations but which pioneered the intelligence outsourcing industry (though it recently agreed to sell its federal business to the Carlyle Group). When Mike McConnell, a former Booz Allen executive, was named by President Bush as Director of National Intelligence, it was the first time, Shorrock notes, that a contractor was put in charge of the country’s entire spy apparatus.

Spies for Hire has much more to offer that cannot be adequately summarized here. I recommend that you read it in full. But let me let also note that profiles of some of the intelligence contractors discussed by Shorrock—such as CACI and ManTech International—can be found on the Crocodyl wiki to which I contribute. Also note that the updated edition of Jeremy Scahill’s valuable book Blackwater, recently issued in paperback, has a discussion (p.453 forward) on the mercenary company’s move into another form of privatized intelligence—a product called Total Intelligence Solutions that is designed to bring “CIA-style” services to Fortune 500 companies.

Where the Revolving Door Spins Fastest

The movement of federal officials through the revolving door into lucrative private-sector positions is a well-known story, but a new report by the Government Accountability Office provides some quantification of the phenomenon and names companies that are most frequently involved.

GAO focused its research on the Defense Department, which seems hell-bent on outsourcing as many of its functions as possible, thereby intensifying the desire of contractors to hire ex-officials with the right contacts. The agency found that in 2006, 52 major contractors were employing a total of 86,181 individuals who had left military or civilian positions with DOD since 2001.

Special attention was paid to those individuals whose former positions made them subject to the limited restrictions on post-government activity that exist in federal law. GAO found that, as of 2006, the 52 companies employed “2,435 former DOD senior and acquisition officials who had previously served as generals, admirals, senior executives, program managers, contracting officers, or in other acquisition positions” to which the rules apply.

Not surprisingly, GAO found that the companies employing the largest number of former DOD senior and acquisition officials are the top military contractors, especially the following seven:

  • – Science Applications Intl. Corp. (263 former key officials employed)
  • – Northrop Grumman (260)
  • – Booz Allen Hamilton (243)
  • – L-3 Communications (241)
  • – Lockheed Martin (221)
  • – General Dynamics (207)
  • – Raytheon (146)

(Booz Allen has announced it is selling its federal business.)

Together, these seven employed 1,581 former key DOD officials, or 65 percent of the total found by GAO. The report notes that the numbers reported to GAO by the contractors themselves substantially understated  the former DOD officials on their payrolls. GAO got more accurate figures by checking confidential Internal Revenue Service data.

GAO also helpfully notes that the seven top employers of former officials received DOD contract awards worth some $61 billion in fiscal year 2005. With that amount of money at stake, it is no wonder that the companies like to invest in the revolving door.

For an overview of revolving-door issues, see the 2005 report of the Revolving Door Working Group (in which yours truly wrote the section on the reverse revolving door—the movement of lobbyists and corporate executives from the private sector to public positions). Also see the revolving-door section of the Open Secrets database.