The Dodd-Frank effect, unions and private equity, and Newt’s expenses

By Steven Brill
January 31, 2012

1. The Dodd-Frank effect: Good, bad or both?

Although the Consumer Financial Protection Bureau, the mega-agency created by the Dodd-Frank financial regulatory bill, has only been in existence for about six months, all of the Republican presidential candidates and GOP congressional leaders have slammed the agency and called for its abolition. Their central charge is that the regulations it has already promulgated are strangling the financial system and disabling banks from making the kinds of loans to small businesses and potential homeowners that would reignite the economy.

For example, in the Jan. 23 Republican presidential debate Mitt Romney said he had spoken to a banker in New York who said he had “hundreds of lawyers” tied up trying to navigate the new regulations.

Some sophisticated financial reporter, or team of reporters, needs to dig into that – with specifics. What exactly is the new agency requiring that is gumming up the works? What new rules are drawing the most persuasive complaints? How burdensome are they? How many lawyers and others are actually involved who were not working on the same types of regulations before? What abuses are the new rules intended to prevent? Which ones, if any, really do seem indefensible and which ones, if any, seem smartly crafted and worth the extra burden?

The best way to do a story like this is to go to one big bank and ask for full, on-the-record access to those working in the trenches on compliance. Jamie Dimon of JPMorgan Chase, who has been a lead complainer, would be my first candidate; ask him to show us the trauma. Then enlist a community bank in the same show-and-tell. Dig in to every single detail, with no preconceptions. Either way, it’s a great story about how what happens in Washington affects Wall Street and Main Street.

2. Private equity and blue-collar workers:

The controversy over Bain Capital and Mitt Romney’s defense against charges that Bain is guilty of “vulture capitalism” call for a broader story about one of the most interesting ironies in American finance and business: As Romney has pointed out, private equity funds draw much of their investment dollars from – and make much of their money for – pension funds. And among the biggest of these pension funds are those whose beneficiaries are the most liberal-leaning, 99-percenter unions, particularly those representing teachers and other public employees. The same is true of venture capital funds, which, because they focus more on startups than private equity funds do, are perhaps more likely to fund businesses that threaten to disrupt an industrial status quo that unions might want to preserve.

I know of at least one venture fund that is so sensitive to its union pension fund investors that it requires the companies it invests in to pledge not to oppose efforts by unions to organize the companies’ workers. But most operate as conventional, profit-seeking businesses. So how about a story that focuses, with specifics, on private equity or venture funds whose investors are progressive unions but whose investments run counter to the values and positions of those unions? For example, suppose a fund has major teachers’ union pension funds but supports high-tech distance learning companies — which the teachers’ unions adamantly oppose because they fear technology or distance learning will lessen the need for teachers in the classroom. Or what about a fund backed by blue-collar union pension funds that has investments in outsourcing services or in FedEx, Wal-Mart or other, smaller companies that have opposed unionization?

3. Newt’s taxes, chapter two:

As the Associated Press recently reported, it’s not clear that all of the issues related to Newt Gingrich’s income taxes were resolved with his release of his and Callista Gingrich’s personal joint return on Jan. 20, which showed that they paid taxes of 31.5 percent on $3.1 million in income. That’s because the return reveals that most of their income came from his corporation, Gingrich Holdings Inc — which apparently took in the money from his various books, documentaries, and consulting, and most of his speeches. His company is a kind of personal holding corporation with “subchapter S” status (making it for tax purposes almost one and the same with the individuals who operate it), and that is why the income from it flows directly to Gingrich and shows up as one big number on line 17 on the IRS 1040 personal tax return. Because only Newt and Callista Gingrich’s personal return was disclosed, we only know the amount in profit, after the personal holding company’s “expenses,” that flowed to them personally; what we don’t know is what kinds of expenses Gingrich Holdings paid on Newt’s and Callista’s behalf before that profit was calculated. What amounts for meals or luxury hotels, for example, were picked up by the personal holding company and therefore became a pre-tax benefit not subject to income tax? What about cars, or even clothing, or rent on an apartment somewhere? Suppose, for example, that that $3.1 million in income was net of, say, $2 million in these kinds of expenses? Then, the tax rate would arguably have been 19 percent, not 32 percent.

Nor, of course, do we know who paid Gingrich Holdings for what.

So, assuming Gingrich stays in the race for a while, who’s going to be the first reporter to ask for the Gingrich Holdings tax return?

PHOTO: James Dimon, CEO of JPMorgan Chase, arrives at a business forum of the German daily Die Welt in Berlin, January 11, 2012. REUTERS/Thomas Peter

8 comments

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After the Titanic mess Frank and Dodd made out of housing I don’t understand why they heven’t been booted out of Washington or even more appropriately rotting in jail? It’s hugely insulting to the American people that they’ve been allowed to regroup and form an agency to allegedly correct the mistakes that they knowingly fostered. How any American citizen can actually think these guys are still good for the Country is a very sad state of affairs. OK, some of you hate Republicans, I GET that, but for the love of your children take off the blinders already. Not EVERY Democrat is a better choice than the alternative.

Posted by GLK | Report as abusive

This my friend is tax accounting. the Holding Tax return is a separate return and the personal tax return is based on items that qualify as personal income. Trying to say his effective tax was anything else than what is reported begs a different question – why are these expenses not personal. Again just like Romney – because we have given tax advantages to these areas. This is the soft money that greases all politicians. Why not write an article on all the money schemes that grease our political system and has corrupted the political and government processes – to the point where money is the object – not government. I will be glad to help with the article.

Posted by xit007 | Report as abusive

Anything Mitt Romney says in the morning will be reversed by noon, not good quoting mitt, anless you like “variable” quotes

Posted by Dyota | Report as abusive

We have been run by incompetents, corrupts, liars, and plain robbers, to the ground. And more corrupt, incompetent, liars, and robbers are coming as candidates.

I’d better stop reading or I’ll get sick and with my insurance raising their deductible and copays I’ll have to spend even more money than we are already spending…

Posted by ecogabriel1 | Report as abusive

The GOP has a point re. business impact of DODD-FRANK. With the shenanigans permissible prior to enactment, the Act will hopefully stay non-retail banks from participating in the consumer business sector. Retail banks were boring places to do business in the 50′s and 60′s, but I recall that a passbook savings account came with a 1-2% return and a toaster.

Posted by SanPa | Report as abusive

Who cares. Gingrich was history before he began running. Nothing but a narcissistic sociopath. The problem with controllers is that they can’t lose, if they do, they get terribly depressed and overeat.

Posted by myownexperience | Report as abusive

This maybe be of interest to some of you.. a paper on the impact of complexity risk

http://www.fedfin.com/images/stories/cli ent_reports/complexityriskpaper.pdf

Posted by nickalee76 | Report as abusive

GLK, Dodd left the Senate last term and Frank has announced he’s not running again; try to keep up. For 70 years we went without another major depression because of the Glass-Steagall Act which was overturned by a veto-proof majority in the GOP Congress with the Gramm-Leach-Bliley Act, and all the derivative trading was made legal and deregulated with the Commodity Futures Modernization Act, likewise passed by a GOP Congress by a veto proof majority. If you want to put blame for the current economic straits anywhere, put it there. I remember getting a guaranteed 5.25% rate on my passbook savings at my local S&L (remember them? also destroyed by GOP deregulation) when I was a kid. You should have seen Bill Moyers’ program last night; he interviewed a former Wall Street bankster who had a change of heart and Senator Dorgan who was one of the few people in either house of Congress who knew exactly what would occur with bank deregulation.

Posted by borisjimbo | Report as abusive