What’s Up with Willard’s Taxes?

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John Cassidy speculated as to why Mitt Romney hasn’t released his tax returns for the last 5-10 years in The New Yorker. Here are the reasons he outlined:

1. Extremely high levels of income. According to the tax filings and estimates he released earlier this year, Romney earned about $21.7 million in 2010 and $20.9 million in 2011—most of it from capital gains on investments related to Bain Capital. This is a lot of money, but Romney may well have earned considerably more in earlier years. His ten-year severance agreement with Bain Capital ended in 2009. The terms of it haven’t been revealed, but quite probably it allowed Romney to keep pocketing a substantial portion of the firm’s profits. And the years before 2008 were massively successful ones for Bain and other private-equity firms.
But even if Romney earned fifty million dollars a year in some years, would be that be sufficient reason for him to keep his returns secret? I doubt it. Americans don’t begrudge people a telephone-number income as long as they are perceived to have earned it. And insofar as any private-equity mogul earns the money he makes, Romney earned his. He created Bain Capital and ran it for (at least) fifteen years.
2. More offshore accounts. The Obama campaign has already made much of Romney’s Swiss bank account, his Bermuda-based investment company, and the income he receives from Bain Capital-related trusts that are domiciled in the Cayman Islands. It is perfectly possible that in the years before 2010, Romney and his financial advisers were even more aggressive in their use of overseas investment vehicles and tax shields. Hedge funds and private-equity funds, such as Bain Capital, routinely exploit offshore shell companies, to minimize their tax burdens but also to escape government regulation and oversight.
Here, too, though, I doubt whether this would be sufficient reason to justify not releasing the returns. Thanks to the Obama campaign, Romney’s name is already indubitably linked to offshore accounts. I doubt whether the average American is very shocked. Most people know full well that one of the reasons rich people employ so many fancy accountants and tax lawyers is to shield as much of their income from tax as possible, and that one of the ways they do this is by keeping cash offshore.
3. Politically explosive investments. Over the years, Bain Capital invested in all sorts of companies, including some that helped corporations outsource and offshore some of their operations, and one, a medical-waste-disposal company, that helped family-planning clinics to dispose of aborted fetuses. Romney, even after he left, kept much of his money in investment funds managed by the firm.

Read more http://www.newyorker.com/online/blogs/johncassidy/2012/07/why-wont-romney-release-more-tax-returns.html#ixzz213z42DZE

First I think all think all of these are true, I would like to speculate on point #3. What if his trust made bets against mortgage CDOs in 2007 or 2008 that delivered a huge return? By 2006 and 2007 the investment banks like Goldman Sachs that built the mortgage CDO industry began to bet against them in the form of credit default swaps usually sold by AIG. Goldman Sachs was the biggest of the profiteers at the expense of the American tax payer to the tune of a direct transfer from the treasury of $13.9 billion dollars which backed AIG’s bets at 100 cents on the dollar. If you add in the $8.4 billion AIG transferred in collateral they would transferred over $20 billion in risk that was covered by the US taxpayer. These default swaps would be extremely profitable for banks like Goldman as rates are similar to buying life insurance at a small premium and hoping they die quickly. What if Romney’s trust showed huge income from these sorts of investments while the US taxpayer was withering on the vine and their taxes were being used to bail out Romney’s hedge fund/investment bank ilk who took on extremely stupid risks? Is there a more made for TV political ad? Is this something the Romney campaign could recover from (I doubt it)? Romney released 10 years of records to the McCain campaign in 2008, some of these could have leaked to Obama campaign and they will be willing to spend all of their TV ad dollars until Romney is forced to release them knowing it will kill his campaign.

Eric Schmidt should run the SEC

When Mark Cuban wasn’t winning NBA titles he was predicting exactly what was coming in the stock market on his blog post here. There was also a 60 Minutes piece on it. In essence all of the proprietary trading platforms that make split second trades can cause a market flash crash (or up swing) due to lack of human oversight. The huge influx of capital invested by these platforms and the number of trades they make has created a volatility bubble that is going to drive more and more “regular” people out of the market. How can a retiree or someone close to retirement see swings of 500 or 600 points every day and not panic and pull their money out of the market at a low point? I would go as far as to say this is exactly what Goldman Sachs and the rest of what Cuban refers to as “hackers” want to have happen. They want to create a volatility bubble and buy up securities at a 30-50% discount and then sell them back to all of poor schleps with 401Ks when enough confidence is mustered once the market goes back up 20-30%. So when Cuban asks what business they are in I think I know, their business model is creating bubbles and taking advantage the market swings and in essence working people who are not “in the know”. What can be done from a regulatory perspective? The SEC is useless, I mean Bernie Madoff was the Chairman of the Board of Directors and on the Board of Governors of the NASD for Christ’s sakes. If I were Obama I would put someone like Eric Schmidt in charge of the operation. The argument that he doesn’t have a financial background all the more positive to me, he was the CEO of Google I think he knows enough about finance to get by. What they need is someone who understands extremely complex systems and architecture to decipher what the hell is going on. To prove my point that people get bad advice from people who don’t know shit about finance read this article in the Boston Globe today about investment advisers are like sheep, that may well be true but they aren’t making any of these trades that have caused the volatility over the past week or so. Here are some points Cuban makes in his post:

The only people who know what business Wall Street is in are the traders. They know what business Wall Street is in better than everyone else.  To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible.

The best analogy for traders ? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing.  A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it.  A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market.

Over just the past 3 years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF.  Combine that with the leverage of derivatives tracking companies,  indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game than I feel increasingly less  comfortable playing. It is a game fraught with ever increasing risk.