Saturday, March 31, 2012

Bain Scheme Results in $100,000,000 IRA for Next Rethug President; Nice Gift to Staff Too

Well, Rmoney is certainly my financial hero. The only real problem with this long, loving look at how Rmoney's was spread around to both him and his company is its legality. The Wall Street Journal, of course, makes no call on this. And to think, he started out just a poor Governor's son (also ex-American Motors Corp. President/Chairman of the Board's son, but who's counting?).

March 29, 2012

Bain Gave Staff Way to Swell IRAs by Investing in Deals

(WSJ's Mark Maremont examines methods used by Bain Capital (under Mitt Romney's leadership) that permitted employees to take part in dual-class share structures of acquired companies that grew their IRAs. Photo: REUTERS/Sean Gardner)

Just after Philippe Wells took a job in 1998 at Bain Capital, then run by Mitt Romney, he recalls hearing an unusual boast from a partner. The man's individual retirement account had jumped tenfold in five years.

Mr. Wells soon learned how this was possible. Bain, like many other private-equity firms, allowed employees to co-invest in its takeover deals. This posed a risk they could lose their whole investment, as they sometimes did. But because of the firm's success during the Romney era, employees ended up able to share in returns for Bain investors that averaged 50% to 80% annually.


Associated Press

GOP presidential candidate Mitt Romney, who formerly ran Bain Capital, co-invested in Bain deals via his IRA.

Bain added a couple of unusual twists that made co-investing even more rewarding. It allowed employees to co-invest via tax-deferred retirement accounts, and to do so by buying a special share class that cost little but yielded much larger gains than other shares when deals proved successful, according to former employees and internal Bain documents analyzed by The Wall Street Journal.

In one particularly successful deal, Bain increased the equity value of a company it had acquired by 36-fold in 20 months. But some Bain employees saw a 583-fold increase over the same period on IRA money they invested in the special share class of that company. Being in an IRA, the gain could then be rolled over, without initially subtracting taxes, into fresh Bain deals, for years of compounding.

Bain's co-investment arrangements, not previously reported in detail, offer a possible explanation of the large size of Mr. Romney's IRA: between $20.7 million and $101.6 million, according to his finance disclosures. It is unusual for such an account, a vehicle devised to help workers save for retirement and one to which contributions are limited, to grow so large.

Documents analyzed by the Journal show that Mr. Romney co-invested in Bain deals via his IRA, although they don't show whether he used the special share class to direct more of his gains into the tax-deferred account.

In any case, swelling the IRA to the size Mr. Romney's reached has "created a tax problem" for the former Massachusetts governor, said a Romney campaign official. Tax-law changes since Mr. Romney's Bain tenure mean that long-term capital gains in regular accounts now are taxed at 15%. But IRA gains are taxed at ordinary-income rates upon withdrawal, which for Mr. Romney, under current law, would be 35%.

"Who wants to have $100 million in an IRA?" said the campaign official.

Various legal means are available to upper-income earners to reduce their tax bills. The Journal's analysis of Bain's co-investment plan provides only a limited window on Mr. Romney's finances.

But it does show that the firm Mr. Romney ran until 1999 provided its employees with tax-planning options not widely available, even within its own industry. Several tax lawyers who work with private-equity firms said it was rare for such firms to let employees co-invest in deals via tax-deferred accounts, and even rarer to let them do so using a special share class.

Victor Fleischer — a tax-law professor at the University of Colorado who has advocated stiffer taxation of private-equity executives' compensation — said the arrangement at Bain allowed for "the sort of aggressive tax planning" not available "to ordinary taxpayers."

Mr. Romney said at a January debate that he pays what he owes in taxes, and no more. Two years of tax returns he released show he paid a relatively low rate, because he had primarily investment income. But some commentators have said Mr. Romney didn't appear to take advantage of certain breaks that would have further minimized his taxes.

One news item, cited approvingly on Mr. Fleischer's blog, said Mr. Romney didn't appear to be engaged in an aggressive strategy to use charitable contributions of stock to lower his taxes. Mr. Romney gave $4 million to charity last year, exceeding his tax bill.

In a statement, Bain cited its record of "growing great companies and improving their operations," and said: "Bain Capital's interests have always been uniquely aligned with investors because our employees are the largest single investor in every investment the firm makes, and in every fund we raise." Among Bain's clients in the Romney era, ex-employees said, were university endowments and wealthy families.

The tax-deferral opportunity stemmed from the way Bain often chose to structure the shares of companies after taking them over.

Even if the companies had only one share class, Bain frequently gave them two classes, usually called Class L and Class A, according to former employees, Bain internal documents and securities filings. Because Bain controlled the companies, it had flexibility in assigning values to the classes.

Class L shares, akin to preferred stock, were safer and had a higher initial value. They had priority if the company paid dividends, and holders of these shares were the first to receive proceeds from a sale or liquidation. The shares also accrued interest, often at 10% to 12%.

Bain assigned a much lower value to Class A shares, which were riskier but potentially more profitable.

If Bain sold or liquidated a company it had taken over for less than was owed to Class L shareholders, the Class A shares lost all of their value.

But once Class L shareholders got their money, Class A shareholders received the bulk of additional gains, often as much as 90% of them, according to the documents and former employees. In successful deals, the A shares could skyrocket.

Bain employees who achieved big payouts had skin in the game, with their investment money at risk. Still, the chance to co-invest with Bain was considered so attractive, former employees say, that they sometimes borrowed from relatives or friends to do so.

"I was just co-investing every dime I could get my hands on," said Sarma Melngailis, who was a Bain associate for a short time in the late 1990s. She said she even borrowed on her credit card to fund co-investments. She said co-investing "turned out to be a very good idea."

Overall, Bain employees participated in their employer's deals to a high degree for a private-equity firm, according to experts on such firms. In a few cases, securities filings show, employees provided more than 25% of the capital.

The dual-share structures used by Bain aren't common at private-equity firms, but some others do use them. Often the main purpose, lawyers say, is to create a class of shares with a low initial value but high potential that can be given or sold to executives of an acquired company as an incentive to enhance its value.

For Bain employees, the structure also provided tax-planning opportunities. Some senior executives put the high-upside shares into family trusts for estate-planning purposes, where the potential appreciation would occur outside their estates, ex-employees say. Others donated greatly appreciated Class A shares to charity.

Employees couldn't choose which share class to buy; all who invested — Bain employees and outside investors alike — received the same proportion of L's to A's. But employees were free to allocate the different share classes among their accounts.

Several former employees said a common strategy in the 1990s was to invest in the inexpensive, risky but potentially lucrative shares in a tax-deferred IRA, and the safer but lower-upside shares through a taxable account.

One reason was the contribution limits on retirement accounts.

Bain in the Romney era had what's known as a SEP-IRA — a plan somewhat akin to a 401(k) but involving only employer contributions — which had contribution limits before 2001 of $30,000 a year. Putting in low-price A shares, said former employees, gave them a shot at building substantial tax-deferred accounts despite the contribution limits.

A deal for Sealy Corp. shows how this could work if all went well. Bain led a group that took over the mattress maker in 1997. One junior Bain employee invested about $30,000 in Sealy, documents reviewed by the Journal show, putting a few thousand dollars of IRA money into the risky, low-price A shares. Ninety percent of the employee's investment went into the safer shares, which were placed in a taxable account.

In 2004, after Sealy's value had been sharply raised by Bain and its partners, they sold most of Sealy for a large gain. The employee's approximately $30,000 investment grew to about $160,000.

Three-quarters of the gain was in the inexpensive A shares stashed in the employee's IRA account. Their value rose 34-fold. The L shares, in the taxable account, merely doubled.

Former Bain staffers said the firm didn't recommend this tax strategy, and opinions were divided on its wisdom. Some employees chose, instead, to put the risky but high-potential shares into regular taxable accounts, where gains could be withdrawn at any age without penalty.

Tax experts say the strategy of placing the high-upside A shares into an IRA made more sense during the 1990s, when maximum tax rates on long-term capital gains were higher than today — 28%, for much of the period, versus today's 15%. The higher tax rate increased the attractiveness of deferring taxes and thus permitting gains to compound, unimpeded, year after year.

Mr. Romney's financial-disclosure forms show he was among those who co-invested in the firm's deals through an IRA. Such investments weren't made directly, but through Bain vehicles called "BCIP Trust Associates," internal Bain documents show. As of August, Mr. Romney's IRA continued to hold investments in entities by that name.

Mr. Romney was one of two Bain executives overseeing these IRA-money vehicles in the late 1990s, securities filings show.

One of Bain's biggest successes under Mr. Romney involved a business called Wesley Jessen Visioncare. Bain purchased the money-losing company in 1995, mostly with debt, turned it profitable, and later took it public. The deal ultimately produced a more than 46-fold return for Bain's outside investors, according to a 2004 offering document.

It proved even better for some Bain employees' IRAs.

The employees, of course, didn't know at the outset that Wesley Jessen was going to prove a spectacular success for Bain. It could have gone bust. Even so, securities filings show Bain employees used the dual-class share structure to direct most of any possible future gains into their tax-deferred retirement accounts.

They put the majority of their riskier but higher-potential shares—in this case called "common" shares—into IRAs, and put the bulk of their safer L shares into taxable accounts.

In total, Bain employees purchased $23,581 of Wesley Jessen common shares in their IRAs. By the time Bain took Wesley Jessen public in an IPO 20 months later, those shares were worth $13.75 million, filings indicate. That was 17 times what the initial investment would have grown to had there been no dual-class share structure, the Journal's analysis shows.

Employees didn't sell their Wesley Jessen shares at the IPO; by the time they did sell, the IRA money they invested in common shares had multiplied 1000-fold, to more than $23 million.

Gains of such magnitude raise a fundamental tax question, lawyers said: Was Bain properly valuing Wesley Jessen common shares, or other low-price Class A shares, when it created the dual-share structures in the companies? In the Wesley Jessen case, Bain valued the common shares in the aggregate at less than 6% of the company's equity, despite the large portion of gains they stood to be entitled to if the deal proved successful.

Under tax laws, valuations are supposed to reflect fair-market value. The IRS often challenges valuations of various kinds. For instance, if shares put in an IRA are undervalued, the IRS can determine there have been excess contributions to the account.

Valuing shares that aren't public is an art, not a science, tax lawyers said, and involves complex assumptions. The lawyers said they knew of no instance in which the IRS had challenged the valuation of private-equity investments held in IRA accounts, at Bain or elsewhere.

Bain often ascribed 90% of the equity value of a company it had taken over to the safer shares and just 10% of the value to the risky shares—in other words, a 9:1 ratio of all of the L shares to all of the A shares.

Some tax lawyers and private-equity experts said that was a low valuation for the A shares, particularly by today's standards. Andrew Smith, president of Houlihan Capital, a Chicago firm that performs valuations of private-company shares, said a typical dual-class structure these days might use a 3:1 or 4:1 ratio, ascribing 75% to 80% of a company's equity value to the safer share class and the rest to the risky ones. Mr. Smith said that firms were less conservative a decade ago—sometimes using 6:1 or 8:1 ratios—but even then, a 9:1 ratio would have been "pushing the envelope."

Jason R. Factor, an attorney at Cleary Gottlieb Steen & Hamilton who advises private-equity firms, said, "I personally would be careful about using a ratio as high as nine to one," because an aggressive valuation can "create issues" in any kind of IRS audit.

Bain itself used a more conservative, 4:1 ratio in a recent deal, when it bought retailer Gymboree Corp. in 2010, giving the Class A shares 20% of the company's equity value.

David S. Miller, a tax attorney at Cadwalader, Wickersham & Taft in New York, said that while setting the value of private shares entails inherent uncertainty, if the IRS did challenge such valuations it could use hindsight, such as how large a gain ultimately flowed to the shares, as a weapon. "The IRS would try to show the tax court judge that a 30-times return for the common shares means that the common should have been valued a lot higher and the preferred shares a lot lower," he said.

How about some violins?

Ex-Soviet KGB Chief Found "Suicided?"

This can't be good news.

Another top boss "suicided?"

What is going on (or getting ready to be announced) that these type people want nothing to do with?

(And doesn't he look an awful lot like one of the agents in Smiley's People?)

Former Soviet KGB spy chief commits suicide
Ex-Soviet KGB foreign intelligence chief Leonid Shebarshin was found dead in his Moscow apartment on March 30 in an apparent suicide, Russian investigators said.

Former Soviet KGB Spy Chief Commits Suicide

Yesterday at 19:31| Reuters

MOSCOW - Ex-Soviet KGB foreign intelligence chief Leonid Shebarshin was found dead in his Moscow apartment on March 30 in an apparent suicide, Russian investigators said.

Shebarshin, 77, who headed the First Chief Directorate, a foreign intelligence service within the KGB during 1989-1991, appeared to have committed suicide, the Investigative Committee said on its website A gun, which he was awarded upon retirement, was discovered near his body.

Police also found a suicide note on the scene, Interfax news agency quoted a police official as saying.

The ex-spy, fluent in Urdu, worked on assignments in Pakistan, India and Iran in the 1950s-1970s. He was appointed deputy chief of foreign intelligence in 1987, and promoted to head the service in 1989.

Shebarshin briefly occupied the KGB's top post after the failed August 1991 hardline coup, intended to halt president Mikhail Gorbachev's reforms paved the way for the collapse of the communist party, the end of the Soviet Union and the creation of the present-day Russian state.

He resigned from active service shortly after the coup.

The KGB fragmented after the collapse of the Soviet Union. Its once-mighty foreign intelligence service, crippled by underfinancing and corruption in the 1990s, suffered damage to its reputation in a number of embarrassing spy failures abroad.

The U.S. intelligence services exposed a group of 10 Russian spies operating on their territory in 2010, which was followed by a Cold war era-type spy swap between the two ex-foes.

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All information of the Interfax-Ukraine news agency placed on this web site is designed for internal use only. Its reproduction or distribution in any form is prohibited without a written permission of Interfax-Ukraine.

Design & Development by MEMO.UA

Thanks to Paul Krugman's blog for this Friday night (now Saturday morn) moving suggestion:

Friday, March 30, 2012

Good Night, America, and Good-Bye - An Unknown History (To MSM, Anyway) of U.S. Economic and Military Adventures

I always was a big fan of Edward R. Murrow's reporting (and George Clooney's movie), but this is a horse of a different color (so to speak, a small horse, perhaps). (Try to ignore Scalia's ass until the second essay - I know, it's hard.)

Good Night, America, and Good-Bye

Philip Giraldi

March 29, 2012


It is interesting to note just how well this imperialism thing has worked for the American people. At the end of last year the U.S. was kicked out of Iraq after spending some trillions of dollars and producing the deaths of hundreds of thousands of Iraqis and Americans. Al-Qaeda, which was not present in Iraq when the U.S. arrived, has lately been responsible for bomb attacks that have killed hundreds of Iraqis, mostly civilians. As a result of the ham-handed American intervention, Iraq’s closest friend now is not the U.S. It is Iran.

Appalled by the excesses of the U.S. military, Afghan President Hamid Karzai has followed suit, initially demanding that the U.S. restrict its soldiers to their bases, a move that would mean that the American presence in Afghanistan could well end in short order after the loss of another trillion dollars and the deaths of some tens of thousands of coalition soldiers and Afghan civilians. Even if Karzai accepts a continued U.S. presence that is more managed by his own “sovereign” government, the writing is on the wall, and all that is needed is a firm departure date. Oh, and the Taliban will definitely be coming back in one form or another.

Meanwhile, in neighboring Pakistan, the parliament is debating ending all cooperation with the United States because of the continuing drone campaign, which, true to pattern, kills mostly civilians. Pakistan is nuclear-armed and actually has real terrorists roaming its tribal regions. The departure of Pakistan from the game enables the manifest waste of the past 11 years to become completely clear, with Washington leaving Central Asia in far worse shape than it was when the U.S. Army and the CIA arrived.
How can a great nation with vast intelligence and diplomatic resources be so tone deaf and absolutely clueless? An article in last week’s Washington Post illustrates perfectly the utter futility of the Obama administration’s foreign policy. The article begins:

President Obama delivered his annual message to the Iranian people on Tuesday, using a far more confrontational tone than usual to say that he will seek ways to break through the electronic curtain that Tehran has thrown over the Internet and other forms of communication. “I want the Iranian people to know that America seeks a dialogue to hear your views and understand your aspirations,” Obama said in his message to mark Nowruz, the Persian new year.

“The United States will continue to draw attention to the electronic curtain that is cutting the Iranian people off from the world” he said. “And we hope that others will join us in advancing a basic freedom for the Iranian people: the freedom to connect with one another and with their fellow human beings.” Since taking office, Obama has used his Nowruz message to speak directly to Iranians in an attempt to stake out common ground between the United States and the Islamic republic.
Unfortunately, the Iranian people do not control Iran’s foreign policy, their government does. President Obama’s concern for their aspirations is as phony as his claimed desire to deliver genuine statehood to the Palestinians. Does he understand what is going on inside Iran or is he really speaking to some domestic audience? 
And talking about freedom of the Internet is the utmost in hypocrisy, as there is no nation that meddles more in cyberspace than the United States of America. And a more accessible Internet does not necessarily impede the march toward a war, particularly at a time when both the Israelis and Congress seem to be intent on violent confrontation no matter what Iran does. 
Unwillingness to talk directly to the officials who actually can make a difference is what the White House is all about because Obama intends to get re-elected and he is not about to rock the boat with the Israel Lobby. It means that nothing will happen this year, unless Israel decides to drop the first bomb. No war, no peace is precisely what the administration desires. 
Who but the gaggle of foreign policy experts surrounding the three leading Republican presidential candidates, all of whom are salivating for war, can deny that America is in steep decline? If generally reliable client states such as Iraq and Afghanistan can summon up the courage to pull the plug on Obama, anyone can.
Indeed, everyone should, following the model of the Egyptians, who imprisoned the usual crowd of National Endowment for Democracy activists intent on bringing the American form of government to the rest of the world. Russian President Vladimir Putin would agree with the Egyptians, wondering why there are so many American and European NGOs running around in his country telling his people what kind of pastel revolution they need to vote him out of office. 
U.S. democracy is just what the world needs, apparently, judging from Attorney General Eric Holder’s rationalizations for killing citizens overseas and his explication of the niceties of drone warfare. And then there is the National Defense Authorization Act’s declaration that the entire world is a battlefield and anyone can become an enemy combatant. 
Or the recent executive order from the White House that will enable the government to take control of all national resources in a state of emergency. And who decides when there is an emergency? The White House, of course!
When everyone finally figures out that they don’t really need what former Secretary of State Madeleine Albright dubbed the “necessary nation” that “sees far,” they will be able to take steps to put their own houses in order. 
A Middle East without meddling from Washington would mean that the Israelis and their neighbors might actually have to talk to each other and establish a modus vivendi. Afghans and Pakistanis would have to work things out. Iran might even decide that no one is threatening it anymore and lose some of its paranoia. Likewise for the North Koreans. 
Americans could go back to doing what they used to be really good at: making things, being inventive and inclusive, and living decently without having to invade anyone or tell a government or two how to behave. It would be good-bye to all the things we don’t need and good night, America, finally in a good sense. 
(Philip Giraldi, a former CIA officer, is a contributing editor to The American Conservative and executive director of the Council for the National Interest.)

I'd like to give a shout to Whiskey Fire which has some really terrific opera buffo reporting on Tony Scalia's retirement commencement. Charles Pierce (who evidently needs a lesson in "Cornhusking Kickbacks") does the honors (and, no, Althouse has none):

It is plain now that Scalia simply doesn't like the Affordable Care Act on its face. It has nothing to do with "originalism," or the Commerce Clause, or anything else. He doesn't think that the people who would benefit from the law deserve to have a law that benefits them.

And to end on a happy note, here's the infamous Bill Hicks monologue, given just a few months before his death from pancreatic cancer, that David Letterman later apologized to Hicks' mother for censoring.