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Archive for the ‘Oregon-PERS’ Category

See two related videos by searching for parishinvestments at youtube.com.

The first video is titled “Clinton Tax Scheme” and the second is titled “Missing Clinton Financial Disclosure.” The purpose of this comment is not to disparage the Clinton’s but rather draw attention to the most astonishing tax loophole in 25 years.

Last week the Clinton’s disclosed their tax returns through 2006 yet, remarkably, were not asked the three most important questions in what could be the biggest news story of the Democratic Presidential campaign. The questions are as follows

Question 1) Did former Bill Clinton receive, or should he have received, either a 1099 or W-2 from the partnership with Ron Burkle. This is important because it will reveal weather he was a consultant, employee or passive investor. Bloomberg reported that the partnership has paid Clinton more than $15 million since 2003 and, based upon quotes from the Clinton’s in the press, it does seem clear that at least part of this amount was consulting fees or wages.

Question 2) What have been the total cash and property related distributions from the partnership to the Clinton’s since 2003? This is important because only earnings and profits are taxable when distributions are made to partners. Other distributions of partnership assets such as cash or property are not taxable and never hit the tax return. The youtube video titled “Clinton Tax Scheme” explains how this can work.

Question 3) What is the Clinton’s current investment basis in the partnership? This is important since parters can often forego property distributions in lieu of increasing their basis, ownership interest, in the partnership. For example, if partners decide to distribute excess non-taxable cash from various businesses owned to partners, one partner could opt to not take the non-taxable cash distribution and instead increase their investment basis or stake in the partnership. My analysis indicates this amount could be somewhere between $10 and $150 million.

It is most surprising that Senator Clinton has gotten this far without disclosing these key facts. Perhaps it is also indicative of the medias lack of understanding of basic partnerships. The following are a few partnership basics summarized right from the tax code. Again, do visit youtube and search for “Clinton Tax Scheme” to see how this works.

Partnership Basics, Section 704 of Internal Revenue Service Code:

1) Two types of partners exist, general and limited. General partners, like the Clinton’s, get a share of all key benefits and responsibilities related to the partnership. Benefits include earnings and profits and responsibilities include a share of debt incurred. These are flexible arrangements that can be modified at any time with all partner’s content. For example, one partner gets all the depreciation deductions in lieu of the other getting a larger percent of earnings and profits.

2) Earnings and profits are not the same as cash flow in that only earnings and profits generate a taxable dividend to partners. For example, if the partnership takes out an insurance policy on a key partner, those proceeds or cash flow can then be distributed tax free to the remaining partners. The reason is that these proceeds are not “earnings and profits” but rather distributions of partnership property.

3) The word “basis” has two meanings, one per the IRS and another per the equity in the partnership. Tax basis per the IRS simply recognizes how much an investor has at risk for purposes of calculating the taxable gain once the investment is sold.

Partnership basis, on the other hand, recognizes how much each partner has invested in the partnership for purposes of allocating assets when the partnership is dissolved or wound down. This partnership basis is not taxable since not a taxable dividend but rather a distribution of partnership property.

4) What triggers the recognition of taxable dividends to partners is earnings and profits, as determined by the IRS. Simply put, if there are no earnings and profits, there are no taxable dividends. Put another way, if the partnership generates cash that is not earnings and profits, that cash can be distributed tax free to general partners. It is common for private equity firms to borrow money in their various companies names and then distribute the debt proceeds to partners rather than reinvest in the business.

The smart decision for the Clinton’s in this case would be to forego a cash distribution in lieu of increasing their investment basis in the partnership. For example, if the Clinton’s invest $1 million with Burkle and later are entitled to $5 million in cash flow that is not distributed to them, their basis or equity interest in the partnership becomes $6 million. My analysis indicates that the Clinton’s investment basis in the Burkle partnership could now be anywhere between $10 and $150 million.

5) Most private equity partnerships have ammassed large net operating losses from failed companies that can be used to offset gains from profitable companies merged into the partnership. This effectively means that there are no net earnings and profits and therefore no taxable dividends. In this case distributions of cash and property effectively become tax free. While many CPA’s will argue this can not be done, they are simply not seeing how loopholes can be used to accomplish this. Again, do watch the youtube video titled “Clinton Tax Scheme” by searching for parishinvestments at youtube.com

Press reports indicate that the Clinton’s tax lawyer is Howard Topaz of Hogan and Hartson. Here are two links:

1) American Law article indicating Clinton’s tax lawyer is Howard Topaz of Hogan & Hartson

2) Howard Topaz profile at company Website

Again, there are three very basic questions that the media should ask of Senator Clinton and failure to due so is a great disservice to the American public, both her supporters and detractors. This information based upon original Parish & Company research has been forwarded to Gretchen Morgenson and Floyd Norris of the NY Times.

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As the Presidential race narrows, it is worth examining the key economic advisers to each candidate. While John McCain and Hillary Clinton have both enlisted advisors who are largely the source of current market turmoil, Barack Obama is instead supported by a beacon of financial integrity, former Federal Reserve Chairman Paul Volcker.

McCain’s choice of John Chambers and Carly Fiorina is most unusual since they are the “poster children,” for abusive executive compensation and financial engineering, in particular that related to stock options and costly mergers that result in significant job losses and minimal long term benefit.

Hillary Clinton made the surprising choice of Robert Rubin, who waltzed within months from being Treasury Secretary to Vice-Chairman of Citigroup, making a $50 million signing bonus. Rubin was the primary advocate of deregulating the banking sector and is fondly known as the godfather of hedge funds in investment banking circles. Enough said perhaps? See related video at http://www.youtube.com by searching for parishinvestments.

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NOTE: See chart of Buffett Oregon Lineup at end of this post.

Oregonians have a great choice for Secretary of State this year. Her name is State Senator Vicki Walker and she is a proven courageous leader and advocate for both ordinary Oregonians and businesses alike. Although a Democrat, Walker is also popular with many Republicans based upon her ability to get things done for ordinary Oregonians.

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One key Walker accomplishment was closing a loophole that allowed large utilities to charge ratepayers for local, state and federal taxes in their rate structures even though these taxes were never remitted to the taxing authorities. Walker’s opponent Kate Brown sided with Warren Buffett, one of only a few who did, and tried to defeat the measure. Buffett is now using all his political team here in Oregon to support Brown in a desperate attempt to prevent Walker from becoming Secretary of State.

Like many states, Oregon now suffers from out of state predators like Warren Buffett who whimsically purchase their legislative agenda, much to the detriment of both competing firms and local citizens, and control key media outlets via their wide array of firms owned.  In Buffett’s case this ranges from owning key medical malpractice insurance businesses to Sees candies. (Search Buffett for related blog posts). What Oregon needs now are more strong publically traded corporations based in Oregon to reenergize the state. This will begin when the key statewide offices are led by courageous principled competent people like Vicki Walker rather than those that pander to the likes of Warren Buffett.

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Please read the previous blog post on January 31, 2008 for important background details regarding this controversial investment in Lone Star. Also view the brief youtube video with ACTUAL SHORT VIDEO CLIPS from the meeting in which Oregon PERS voted unamimously to give Lone Star $600 million to cash in on foreclosures.

After attending the January 30, 2008 monthly Oregon Investment Council meeting, I contacted Ted Sickinger of the Oregonian, who was not at the meeting, and suggested he do a story regarding Oregon PERS plan to invest $600 million in Lone Star. Numerous detailed quotes were provided to Sickinger regarding Grayken’s comments with the hope the paper would get the story right.

One week later on February 6th a Sickinger’s collegue, Ryan Frank, wrote a story titled “Oregon invests in housing’s bad luck.” Rather than respond directly to problems with the story, you be the judge after you view the video. Keep in mind the sound quality is poor and therefore you might need external speakers. Do also note that 5 days “prior” to the Oregonian story a South Korean court convicted Lone Star of stock manipulation and sentenced its President there to 5 years in prison.

While Frank quoted State Treasurer Randall Edwards as indicating this was all politics, my sense is that the executive sentenced to 5 years in prison, a fact not noted in Frank’s article, might think differently. Again, the youtube video is actualo footage from the meeting so you can be the judge. Note the sound quality, although poor, is audible if you adjust your speakers. A few highlights include

1) Chair Richard Solomon asking Grayken if this investment would be in the US. The response by Grayken was yes, particularly subprime.

2) Grayken also notes in the video that banks will be destabilized and present “rescue opportunities.” When we buy their securities portfolios we basically get the rest of the bank for free, it’s cream, he added.

3) State Treasurer Randall Edwards, upon being told the real estate market will likely decline furthur by PERS staff and that this would hurt their existing real estate portfolio, suggested increasing the investment to Lone Star.

4) The only stated candidate for State Treasurer, Ben Westlund, had been attending most monthly meetings yet was unable to attend. As a state legislator he was in Salem putting forth legislation to help people prevent their homes from being foreclosed. Westlund’s efforts have been featured in numerous Oregonian articles recently. Note their is no comment from Westlund in Frank’s article.

5) Lone Star’s Grayken specifically noted the key to getting the big returns and “playing this situation” was gaining control of the underlying collateral. Simply put, Lone Star is a foreclosure machine, and this should at a minimum cause the legislature to discuss this situation with adequate details.

In any event, here is the link but do read the January 31, 2008 blog post prior to viewing this 5 minute video summary. My hope is that the Oregonian do a follow up story and get it right so that legislators and others will have a better chance of shaping the dialogue.

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Note: Also see Lone Star Part II, which has link to youtube video of Grayken’s comments before the OIC.

Today Oregon PERS investment arm, the Oregon Investment Council, met and awarded more than $1 billion in investment management contracts at its monthly meeting, including approving $600 million for Dallas based Lone Star and another $400 million for Boston based Grove Street Advisors. Also scheduled but postponed until February due to founder David Bonderman’s illness was another proposed $775 million investment in private equity firm, the Texas Pacific Group.

Lone Star CEO and Founder John Grayken is pictured below making his proposal for Lone Star, after having just returned from testifying at his firms trial over market manipulation in South Korea regarding the Korea Exchange Bank. This is somewhat ironic because in his proposal to the OIC Grayken noted that when his firm buys distressed securities portfolios, they “often get the underlying bank for free.” In the Korean bank’s case they plan to sell the bank to HSBC for $6 billion, if approved by regulators there.

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Grayken’s firm is now positioning itself to purchase distressed debt and aggressively foreclose on both residential and commercial real estate properties here in the U.S. “The race is on to play this situation,” he said. Grayken also noted that his firm was not hurt by the subprime meltdown because they only originated the loans, having purchased a “large subprime originator in San Diego.”

Grayken added that this is as good a market we’ve seen for making lots of money in years and the “key is liquidating collateral.” What this means is that their primary strategy is to aggressively foreclose on both residential and commercial property.

Meanwhile, the Oregon legislature is considering meeting to discuss how to deal with the home foreclosure crisis and is making no connection with the PERS investment. A related article by Pulitzer Prize winner Nigel Jaquiss follows.

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OIC Council members were so taken by Grayken’s proposal that they increased the proposed approved investment from a planned $400 million to $600 million.

Also on the meeting’s agenda was the proposed divestiture of companies doing business in Iran. Some might ask, why is it so easy for Oregon PERS to debate corporate governance initiatives involving distant nations while in fact much more important governance issues, including the mortgage crisis, develop unchecked in it’s own back yard?

On Saturday the Oregonian printed a story by Ted Sickinger highlighting that Oregon PERS lost $5 billion in January due to the stock market decline. This did not include potential losses in its large private equity portfolio due to the holdings becoming less liquid due to the 0verall market decline and now junk status of many bonds that. Here is an exerpt from the story.

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I continue to believe that it is a mistake for Oregon PERS to have 70 percent of its assets in stocks, private equity and real estate and only 30 percent in fixed income. In fact, my clients are now positioned the exact opposite with a maximum of 30 percent in equities and related investments. Foreign fixed income is also a key focus of my client portfolios.

Perhaps this aggressive allocation once again highlights why these council positions should be paid, involve people with investment management experience and higher standards regarding potential conflicts of interest. The current OIC Chair Dick Solomon’s presence on the council and ascendance to Chair was championed by Oregon’s most prominent lobbyist and close political ally of Governor Ted Kulongowski, Len Bergstein. Solomon is pictured below.

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Today, in its monthly meeting, the Oregon Investment Council, which manages Oregon’s $70 billion in PERS and related public assets, continued its commitment to leveraged buyouts by private equity firms, this time in Europe as it provided $500 million to KKR and $300 million to CVC European Equity Partners. Now at 13 percent of total assets, its stated goal is that 16 percent of assets be dedicated to private equity.

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Michael Smith of CVC Group, pictured above on left, noted that the future in Europe is consolidation and their key strategy will be to use European based firms to acquire american competitors.

A representative from KKR added that banks were sitting on 6 months of “deal flow” they need to sell to improve their liquidity. And so while most people think that the subprime mortgage crisis is the primary source of liquidity issues in the financial markets, clearly the KKR executive painted the real picture, that being that leveraged buyouts are in fact soaking up much of the new loan dollars. And they are doing these buyouts with mostly public pension dollars.

To summarize, in addition to $350 million approved for private equity by the private equity investment subcommittee at its last meeting, Oregon PERS today also dedicated the $800 million to European buyout firms in addition to another $200 millon for domestic buyouts. A final investment of $50 million was also made to a real estate fund, making the total committed for the month approximately $1.4 billion.

The current Chair of the Oregon Investment Council, a practicing CPA whose business interests clearly intersect with those of the council, is clearly making his mark by accelerating the allocation to controversial private equity and hedge fund investments.

Solomon’s addition to the council and immediate rise to the Chairman position was championed by the State’s most powerful lobbyist on the Democratic side, Len Bergstein. Bergstein, pictured below Solomon on the right, was also instrumental in developing Neil Goldschmidt’s career, pictured on left, and orchestrated Goldschmidt’s successful run for Governor in the 1980’s. Although Goldschmidt is back in Portland, Bergstein is now the “go to” lobbyist on the Democratic side. It is not known what Goldschmidt is now doing yet it is somewhat ironic that given hedge and private equity funds do not disclose their owners or investments, he could theoretically be running such a firm.

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The only one of the five voting council members not present was Keith Larson of Intel Capital. Chief Investment Officer Ron Schmidt noted Larson had a scheduling conflict. Interestingly, Larson’s name still does not appear on the Oregon Investment Council website. Noted instead is his predecessor Mark Gardiner whose term expired in September. Clearly, Larson has no business being on the council due to conflicts of interest, as is the case with Solomon. Either’s presence on such a board would have been unthinkable 10 years ago yet the SEC still has no oversight over public pension funds boards.

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On November 14, 2007 Nigel Jaquiss of The Willamette week, pictured above on left, wrote a story titled “Gambling with Kids Future.” Jaquiss recently won the Pulitzer Prize for investigative journalism, a remarkable achievement for a local weekly publication. Pictured on right are Ron Schmitz, PERS Chief Investment Officer, and Jay Fewel, Portfolio Manager. Schmitz and Fewel have ridden the private equity wave to solid returns with big investments in KKR and TPG, among others, even though these investments are mostly illiquid and are valued by the private equity firms themselves. Publications like Plan Sponsor that heavily pander to hedge and private equity funds and, well, obscene fees, didn’t miss the opportunity.

What makes the venture capital investments unsusual is that Venture Capital, which account for 25 percent of the emergency fund, can be illiquid for long periods of time.

Oregon indeed does need to plan more carefully with respect to education, not only investment strategies yet also a more stable funding base given that the source of this “emergency fund’s” assets is lottery proceeds.

While Oregon parents are increasingly concerned about kids becoming addicted to dangerous drugs, their drug of choice for funding thier children’s basic education is lottery proceeds. Oregon is one of a couple states with no sales tax. Parish & Company supports the creation of a schools specific sales tax provided such proceeds go directly to schools, including higher education.

In Oregon this debate over the lottery and related casino gambling is now controlled by lobbyists representing Indian casino interests, most notably Len Bergstein on the Democratic side.

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