Tuesday, April 01, 2014 - Murderers and Cheats

Financial Review with Sinclair Noe

DOW + 74 = 16,532
SPX + 13 = 1885
NAS + 69 = 4268
10 YR YLD + .04 = 2.76%
OIL – 1.99 = 99.59
GOLD – 5. 00 = 1280.80
SILV un = 19,86

Congratulations Mary Barra, you’ve been named CEO of General Motors, one of the biggest companies in America; now head on over to Capitol Hill to take the blame for the people who used to run the company.

Barra’s appearance before a subcommittee of the House Energy and Commerce Committee represented a significant new phase in the company’s crisis since it issued recalls that began in February for 2.6 million Cobalts and other vehicles. The problems with the cars involve faulty ignition switches; GM repeatedly failed to fix faulty ignition switches, despite conducting multiple internal studies of the problem since 2001, and 13 people died in the defective vehicles.

Members of Congress and the families of people killed in GM cars are urging Barra to declare the cars unsafe to drive until new ignition switches are installed. So far, GM has said the vehicles are safe to operate as long as there are no objects attached to the ignition key.  GM conducted several internal investigations of the switch problems, dating back as far as 2001. Company engineers learned that the key in the ignition could be inadvertently bumped into the off or accessory position, causing the engine to lose power and disabling air bags.

Documents show that GM approved the switch for installation in its compact cars in 2002, despite data from its supplier, Delphi that the key turned too easily in the ignition. Meanwhile, the National Highway Traffic Safety Administration knew of problems but did not order earlier recalls. The automaker rejected changes to the switch in 2004 and 2005 despite becoming aware of consumer complaints. In July 2005, the company and the National Highway Traffic Safety Administration learned of a fatal accident in Maryland that killed a young woman. It was the first of what would become a series of incidents in which vehicles suddenly lost power and air bags failed to deploy in a crash.

GM and Delphi changed the switches in 2007, but the new switches were also defective. Federal safety regulators made an internal recommendation to open a formal defect investigation in 2007 after receiving information about four fatal crashes involving air bags that failed to deploy, but the agency declined to pursue a formal investigation because, it said, it “did not identify any discernible trend.”

Last night, Barra met privately with 22 family members of accident victims at GM's offices in Washington. There is nothing that would indicate that Barra was involved in the past problems; she will be very much involved in resolving those problems. There needs to be compensation for families of the victims. And they will have to find out what went wrong, and how it could continue to go wrong for so long. There are still cars on the road with faulty switches. They will have to deal with that and fast. At this point, any more deaths would be tantamount to murder. Maybe we’ve already hit that point.

The executives at GM knew for 13 years that their cars had a defective ignition switch that could and did kill people. They did a "cost-benefit analysis" and concluded that paying off the deceased's relatives was going to be cheaper than having to install a $10 part per car. They then covered up their findings and continued to let millions drive around with the defective part in their cars. There would be no recalls. People died; parents had to bury their children.

Also today in Washington, the Senate Permanent Subcommittee on Investigations released a report on Caterpillar, the company that makes heavy construction and mining equipment. According to the report, Caterpillar paid its tax consultant and auditor, PricewaterhouseCoopers to help set up the transfer of $8 billion in profits to a Swiss subsidiary between 1999 and 2012. The transfers had no economic substance and were made solely to take advantage of the lower tax rate Caterpillar negotiated with Switzerland, which ultimately resulted in about $2.4 billion in tax savings. And even though the tax scheme was just a way of shuffling paper to avoid taxes, the report did not draw any conclusions about whether this was illegal. It will likely result in the introduction of new legislation to make it tougher to skirt tax laws, but then that legislation would have to pass, and there will be armies of lobbyists on the case.

Over the past two years, GE has deployed more lobbyists than any other company to argue for a tax loophole that lets businesses deduct interest earned from overseas lending, according to a new report by Americans for Tax Fairness. This particular tax break will likely cost the US government $62 billion in revenue over the next decade.

GE lobbyists made contact with lawmakers or their staffs at least 863 times over a two-year period between 2011 and 2013 to argue for the loophole, known as the "active financing exemption." Congress is expected to extend the exemption again soon, with bipartisan support. The company paid its lobbyists $63 million to advocate for the exemption and other tax-related interests over that time. Citigroup, the next-busiest company, sent lobbyists half as often to push for the deduction and spent less than $15 million.

All told, the top 30 companies and trade organizations that lobbied for the exemption; major Wall Street banks and other big multinational companies with financing arms, such as GE and Ford; made more than 4,000 contacts with Congress to press for an extension of the exemption. They paid lobbyists $586 million over that time. The tax break essentially lets businesses indefinitely shield from US tax authorities interest they earn from lending money overseas.

It's not clear how much the loophole benefits each individual company, in terms of tax savings. It also can't be determined from lobbying records how much money GE or other companies spent specifically to push for the active financing exemption because companies often lump together spending totals for several issues together. But GE wrote in its 2012 annual report that if the provision were not renewed, "we expect our effective tax rate to increase significantly."

Congress technically did away with the active financing exemption as part of a tax-code overhaul in the 1980s. At the time, lawmakers said it was too easy for companies to cut their tax bill artificially by making it seem as if profits earned in the US were instead earned overseas. Yet Congress reintroduces the exemption every year, as part of a giant package of more than 50 tax breaks known as tax extenders, which the Congressional Budget Office calculates could cost the government $700 billion over the next decade.

Support for the extenders is typically bipartisan. The last round expired at the end of 2013, and Congress is now considering a package that would apply the tax breaks retroactively to the beginning of 2014.

The companies who have pushed hardest for the extension of the tax loophole are among those that are the most criticized for exploiting US tax laws in order to shelter huge amounts of revenue overseas. Though the US corporate tax rate is technically 35%, the companies that employ the active financing deduction and other tax-sheltering mechanisms pay a far lower effective rate.

General Electric, according to some calculations, pays an effective rate of less than zero in many years. GE claimed a tax benefit of $3.1 billion, meaning it claims it overpaid by that much, between 2008 and 2012 on $27.5 billion in profits

According to a new report from ISI Research, US S&P 500 companies now have $1.9 trillion parked outside the country. Some of that is just multinational corporations profits overseas; welcome to globalization; a big part of it is tax avoidance. Apple figured out a way to legally avoid paying corporate income tax on $30 billion of overseas profits. Apple set up a shell company, an Irish subsidiary that didn’t owe Irish taxes because it was managed and controlled from the US, but it didn’t owe US taxes because it was incorporated abroad. Brilliant.

Except, sometimes a big multinational like Apple might want to bring that money back to America, at which point the government taxes the difference between what companies pay in corporate income tax abroad and what they would have paid here. So, if they ever want to get the money out of international limbo, there shouldn’t be any advantage to this kind of tax avoidance scheme. Unless, the government does something stupid, like rewarding this bad behavior, with a tax repatriation holiday; a brief window of amnesty to bring capital back onshore at a fraction of the tax rate, pennies on the dollar. So, all Apple has to do is be patient and wait for the tax repatriation holiday.

And why would the government offer such a gift to tax dodgers? The thinking is that it brings in fresh money, which will be put to productive purpose, spurring economic growth. We tried it in 2004, and it doesn’t work. Growth and investment didn't increase. Even though corporations weren't supposed to use these funds for share buybacks or dividends, they did. That was good news for stock owners; bad the economy and even worse news for workers. Some of the companies that brought the most money back actually laid people off.