John Aloysius Farrell stories from The Center for Public Integrity

Tax gift to the rich

2012-01-01T06:00:01-05:00

Todd Dagres, a prominent venture capitalist and independent movie producer, earned $3.5 million in 2003, and paid not a cent in federal income tax.

The IRS challenged the math, and sent Dagres a bill for $981,980 in back taxes, plus $196,369 in penalties.

So Dagres lawyered up. His attorneys waived one lucrative tax break to exploit an even better one, and claimed victory in the case in March.

In the course of the dispute, Dagres offered five years of his tax returns as evidence in U.S. Tax Court. His testimony, tax forms and other documents offer a rare glimpse of how wealthy Americans work the angles to keep from paying taxes.

Dagres earned $58.5 million over those five years — ranking him among the richest 0.1 percent of Americans. During that stretch, the statutory rate for taxpayers in his income bracket was as high as 39.6 percent. But because of an array of tax breaks, Dagres paid 20 percent of his total income.

Dagres, 51, is not alone. While American working families earning under $100,000 pay, on average, about 35 percent of their taxable income in payroll and income taxes their wealthier counterparts — those who earn above $1 million a year — pay less than 30 percent.

The trend has gotten quite pronounced in recent years, especially for the very, very rich who, like Dagres, earn most of their income from investing and can exploit the low rates on capital gains. The average tax rate for the 400 wealthiest Americans was 29.3 percent in 1993, but dropped to 18.1 percent in 2008, according to the latest IRS statistics.

During that time, the combined taxable income of the top 400 soared from $16.3 billion to $91 billion. The richest 10 percent of Americans now control 70 percent of the country’s wealth.

In an era of rising income inequality, mammoth budget deficits and proposed cuts in defense and federal assistance programs, the taxes paid by rich folks like Dagres are a topic of national debate. Billionaire Warren Buffett fueled the controversy when he publicly deplored that his office receptionist and other employees pay taxes at higher rates than he does. Buffett didn’t release his tax returns, but said his annual tax rate, including payroll taxes, is 17.4 percent.

Federal taxes are “regressive,” the Congressional Research Service reported in an October study. “The average tax rate decreases as taxable income increases.”

“A large proportion of millionaires pay a smaller percentage of their income in taxes than a significant proportion of moderate-income taxpayers,” the CRS concluded.

There is more than revenue at stake. Since the days of Woodrow Wilson, Americans have used progressive income and estate taxes as leveling forces to preserve economic opportunity and forestall the formation of a homegrown plutocracy. But the recent concentration of wealth at the top, and a decline in economic mobility in America, has revived concerns that the American Dream is fraying.

In 2008, the Pew Charitable Trusts assembled a nonpartisan task force to assess the economic promise of America. Analysts from liberal think tanks like the Brookings Institution and the Urban Institute joined conservative scholars from the Heritage Foundation and the American Enterprise Institute. “The view that America is `the land of opportunity’ doesn’t entirely square with the facts,” the Pew report concluded. “Inequalities of income and wealth have clearly increased, [and] the opportunity to win the larger prizes being generated by today’s economy has not risen … and has, if anything, declined.”

In neighboring Canada, or countries like Sweden, Denmark, France and Germany — poster children of the European welfare state — a young man or woman, starting out with pluck and a dream, has a better chance of claiming success than in the United States, the scholars found.

Wrinkle in the Tax Code

At the heart of the Dagres case is a $2 billion-a-year wrinkle in the tax code known as the “carried interest” tax break. It permits wealthy hedge fund operators, venture capitalists and other private equity managers to treat their pay, for tax purposes, as a return on an investment instead of as a salary.

By doing so, they pay taxes at the 15 percent capital gains rate instead of the 35 percent rate on ordinary income. It is one way that millionaires like Dagres end up paying taxes at the same rate as struggling middle class families.

“This nonsensical loophole is deeply unfair at a time when working families are struggling,” said Sen. Carl Levin, D-Mich., in a speech to the Senate in June. “If you are a hedge fund manager, your job is to manage a hedge fund. The income you receive for that job is no different than the income a waitress receives for waiting tables, or a janitor receives for scrubbing floors. The idea that the income of millionaire fund managers should be taxed at a lower rate than that of their staff or other workers is an absurdity.”

After graduating from Trinity College in 1982, and picking up a master’s degree in business at Boston University, Dagres joined and prospered in the fast-growing financial services industry. He was one of thousands of bright young Americans lured to the sector, which more than doubled its share of U.S. corporate profits since 1980, from 15 percent to a high of 33 percent in 2003, and now employs 6.5 million people.

The capital in the private equity market — where managers raise funds to buy or invest in new and existing businesses — soared from roughly $5 billion to $1 trillion in this period. At the same time, thousands of new hedge funds — private entities using complex trading strategies — sprang into existence, managing another $1 trillion.

On Wall Street, firms increasingly focused on the creation, sale and trading of complex financial products. Bonuses and other compensation soared — the average almost doubling that of the nonfinancial sectors in the American economy.

As a venture capitalist, Dagres fulfilled a classic economic purpose, raising money from investors to bankroll entrepreneurs and incubate new firms. The rewards could be spectacular: in 2000, Dagres earned $44 million while a partner in a Boston venture capital firm, Battery Ventures. He had a network of knowledgeable sources in the booming tech sector, and a keen eye for talent and a promising idea.

Dagres was an early investor in Twitter and struck gold with hot new firms like Akamai Technologies Inc. and Qtera Corp. In the Qtera deal, he later told the Tax Court, he made $800 million for his investors, off a $15 million investment. He was listed on the Forbes “Midas” list of the top venture capitalists in America, and branched off into the movie business, as a producer of the films “Transsiberian” and “Pretty Persuasion.” The vanity license plate on his luxury Mercedes s55, the Boston Globe reported, read “VENCHA.”

The compensation plan at Battery was typical of private equity firms. Dagres acted as a “general partner.” He would work his sources, spot an opportunity, conduct research and solicit money from wealthy clients, who came together as “limited partners” in a venture he managed and administered. Battery collected management fees, big enough to give Dagres a multi-million dollar salary, but the big payoff came if the investment succeeded. Then Dagres and his firm would get 20 percent — the “carry” or “carried interest” — of the profits.

“It’s a performance-based business,” Dagres told the court, when his case came to trial in 2009. “If we perform well, we’re compensated well. If we don’t perform well, we’re not.”

The treatment of carried interest is a legacy of 20th century partnership law, crafted with small businesses in mind in the years before the financial services industry became a behemoth. Today, it represents a significant loss of tax revenue. Closing the carried interest loophole would yield $20 billion over the next decade.

It certainly saved Dagres hundreds of thousands of dollars. In his 2000 tax return, Dagres listed $40,579,415 in capital gains and $3.6 million in salary, interest and dividends. The Bush tax cuts, which reduced the capital gains tax from 20 to 15 percent, had not yet taken effect, so his total effective tax rate was 21 percent — about that of a middle class family.

Defenders of the carried interest tax break say that the work of hedge fund managers and other investment managers, in raising and allocating capital, makes a vital contribution to the American economy. Eliminating the tax break “would likely inflict large damage on the finance, insurance and commercial real estate sectors, diminish their entrepreneurial talent pool, and harm overall economic efficiency,” claimed Douglas Holtz-Eakin, a former congressional budget director, in a paper for the American Action Forum, a pro-business group led by prominent Republicans, in 2010.

When the Obama administration and members of Congress tried to do away with the carried interest loophole in the wake of the 2007-2008 financial crisis, the financial services industry fought back, and prevailed, and has continued its successful resistance even as lawmakers cast about for potential sources of revenue during the ongoing federal budget debate.

A Lobbying Juggernut

The industry is a political and lobbying juggernaut on Capitol Hill. Over the last two decades the finance-insurance-real estate sector, whose principals are the most likely to profit from the carried interest tax break, has been the single leading source of campaign funds for federal candidates, according to the Center for Responsive Politics. Donors from the sector have given more than $2.7 billion in that period to candidates for Congress and the presidency, favoring Republicans by a 55 to 45 percent ratio.

And when it comes to lobbying, the financial sector shares the lead with the health care sector, each of which has spent more than $4.7 billion lobbying in Washington since 1998, according to the Center.

In the Senate, the Democrats from New York and Connecticut have faithfully represented, and been rewarded by, their Wall Street constituents. New York Sen. Charles Schumer has raised $18.7 million from the financial sector over the last two decades, while former Sen. Chris Dodd, who helped write the latest financial regulatory legislation, collected almost $14.5 million.

The giving persists in the current election cycle, according to the Center, with more than $135 million already donated to candidates and groups in the 2012 election. Topping the list of individual donors are familiar, politically well-connected firms like Goldman Sachs (having given $2 million) and Bain Capital (with almost $1.8 million in donations). Democratic Sen. Kirsten Gillibrand, the newcomer from New York, has wasted no time tapping Wall Street for funds, collecting $1.9 million.

In the House, the financial sector has strong ties to the Republican leadership. Speaker John Boehner (having collected more than $1.2 million in the 2012 cycle), Majority Leader Eric Cantor ($903,000), Majority Whip Kevin McCarthy ($455,000), GOP Conference Chairman Jeb Hensarling ($525,000) and House Ways and Means Chairman Dave Camp ($527,000) are all favorites of the industry.

Cantor, who has collected $5.8 million — more than any House leader — from the financial sector in the last dozen years, is a particular champion of the carried interest tax break. His wife is a former Goldman Sachs vice president, and now works as a partner in a Wall Street private equity fund.

“If the deal goes bust: no money,” Cantor said, defending the carried interest tax break in September. “If the deal is successful there is a return [and] you pay the capital income tax. That is fundamental tax law in partnership tax law in this country. I’m not for changing that because I think that the capital gains tax … distinguished from ordinary income, is the essence of what we believe is an entrepreneurial-based free market economy. We want to provide incentives for investors and entrepreneurs to put capital at risk so we can create jobs.”

But critics of the loophole ask why a fund manager should be given the same low tax rate as an investor, who shoulders the risk of losing money and puts up the actual cash.

Lawyers who work for contingency fees don’t get a carried interest tax break. Nor do Hollywood actors who take a piece of the box office for their performance in a motion picture. Nor do authors or songwriters who rely on royalties. Nor do professional athletes, whose contracts include performance-based incentives. Nor do other business executives, whose compensation packages may include performance bonuses and stock options. Nor do bankers, stockbrokers, or financial planners.

“Most economists … would view at least part and perhaps all of the carried interest as performance-based compensation for management services,” then congressional budget director Peter Orszag testified before Congress in 2007. It should be taxed, therefore, “as ordinary income, as most other performance-based compensation is currently treated.”

Flip-flop

In a startling turn, with potentially far-reaching effects for the hedge fund and private equity industries, Dagres joined the critics of the carried interest loophole in 2003. When a business deal turned sour, and his financial circumstances changed, Dagres and his lawyers found it preferable to argue that carried interest was indeed mere compensation — and not an investment. The venture capitalist, in effect, sought to have his cake and eat it too.

The triggering event was the dot-com crash of 2000. One of the biggest and most spectacular casualties was William Schrader, the pioneering CEO of PSINet, who was known as “the father of the commercial Internet” for the fiber-optic network and Web-hosting centers that he built. Overextended, with his company collapsing around him, Schrader asked Dagres for a loan. The two had done business throughout the Internet boom years, trading information and sharing prime investment opportunities.

“It was very hard for me. I don’t ask people for favors,” Schrader told the Tax Court. “But I did it. And I told him it was hard. And he said that I could count on him for $5 million.”

Dagres was motivated by more than friendship. “I had spent a lot of time and effort building him up into a significant resource,” Dagres testified. “I didn’t want to lose him …. I felt that, if I loaned him the money, he would be indebted to me …. I was also concerned that somebody else might make the loan and gain his favor.

“I never imagined that he wouldn’t have $5 million to pay me back,” said Dagres.

But the loan didn’t save Schrader, and as time passed he found it difficult to keep up with the payments he owed to his friend Dagres. In August of 2003, lamenting in an email that he could not “keep working under the emotional weight of the unpaid and unresolved loan,” Schrader asked if there wasn’t a way for Dagres to forgive the remaining balance — more than $3.6 million.

Perhaps Dagres “can use the tax write-off,” Schrader suggested. He would give Dagres first shot at good deals in the future, he vowed. “This is just a rationalization, of course,” he conceded, “so that I don’t feel guilty that I end up becoming a pile of mush.”

Dagres agreed to forgive the $3.6 million, and his accountants and attorneys went to work to deduct the loss as an ordinary business expense. To reap the maximum write-off for the bad loan, his lawyers had to reposition Dagres as a businessman, not an investor. And here they faced a significant hurdle: the IRS, under the carried interest theory, had been giving Dagres the cut-rate treatment due an investor.

In 2000, because his income was taxed as a capital gain on an investment and not as ordinary business income, Dagres had saved $7.9 million in federal taxes, the IRS argued. He could not have it both ways.

“These activities are all investment activities and earned petitioner and his colleagues investment returns,” the government argued. “Investing is not a trade or a business.”

The government hit Dagres with a $1.1 million bill for back taxes and penalties. He decided to fight it out in court.

Dagres was a “professional,” not an investor, his lawyers contended. He was in a competitive business, and was paid “for the many services” he performed for the real investors. He was working just like a lawyer, for a contingency fee.

“A carry can be fantastically lucrative,” his lawyers acknowledged, but “none of this gain was attributable to petitioner’s own invested capital.” The risk had been borne by his “customers.

“Professional venture capitalists are service providers,” said attorney Joel Carpenter, when the case was heard in June 2009. The carried interest was merely compensation. “It’s that compensatory element, in the absence of significant personal investment, that distinguishes his business from the activities of an investor.”

Carpenter was persuasive. Dagres won his case. But the ruling by Judge David Gustafson must have sent a shiver through many a hedge fund manager, since it buttressed the arguments made by critics of the carried interest loophole.

Money management was a business, the judge declared, and the gains and losses could be treated as ordinary income. The decision seemed to open a door: Might the IRS or another federal judge reclassify the gains of carried interest as ordinary business income, subject to a higher rate of taxation?

“An activity that would otherwise be a business does not necessarily lose that status because it includes an investment function,” Gustafson wrote. “Bankers, investment bankers, financial planners and stockbrokers all earn fees and commissions for work that includes investing or facilitating the investment of their clients’ funds. Selling one’s investment expertise to others is as much a business as selling one’s legal expertise or medical expertise.”

Gingrich earned twice as much as previously disclosed from ethanol lobbying group

2012-01-23T17:15:27-05:00

Newt Gingrich earned some $600,000 as a consultant to a major ethanol lobbying group, not the $312,500 that the organization, called Growth Energy, disclosed last spring.

When quizzed by iWatch News in April, Growth Energy spokesman Chris Thorne said Gingrich’s contract ended after 2009. Attributing the mistake to an internal miscommunication, Thorne now says that Gingrich remained on the payroll through 2010 and earned an additional $262,500.

Thorne said that Gingrich continued to work for Growth Energy for the first few months of 2011 as well, but he could not say how much the former Speaker was paid.

Growth Energy was founded in late 2008 by the world’s top ethanol producer — the South Dakota based POET group — and other fuel companies to promote the use of the alternative fuel. According to the company’s Web site, Gingrich was paid to offer advice on “strategy and communication issues” and to “speak positively on ethanol related topics to the media.”

Gingrich’s ties to the industry have been a boon, no doubt, to his presidential campaign in a farm state like Iowa. But his embrace of federal ethanol subsidies has irritated some conservatives, who believe that government intervention in the economy violates free-market principles.

Gingrich got into a well-publicized spat with the editorial page editors of the Wall Street Journal — they called him “Professor Cornpone” — a year ago, compelling him to declare, “I am not a lobbyist for ethanol.”

A Gingrich campaign spokesman declined to comment on the recalculated totals, which were disclosed in a recent story in USA Today.

Senate committee finds most 'trapped' offshore income is already in U.S.

United States — 2011-12-15T06:00:01-05:00

A select group of U.S. multinational corporations have been furiously lobbying for a tax holiday, they say, to bring more than a trillion dollars in so-called “trapped” foreign earnings back home and invest it in the American economy.

But a Senate report released Thursday shows the money is anything but trapped. Some of the richest firms have already brought hundreds of billions of dollars back to America, without paying U.S. taxes, and invested it in US banks, bonds, stocks and other assets.

The Senate Permanent Subcommittee on Investigations surveyed some of the best known U.S. multinationals and found that 27 of the cash-flush firms, including Apple, Google and Microsoft, had invested almost $250 billion in the United States.

“Those foreign earnings are not trapped or locked offshore at all,” said Sen. Carl Levin, the Democrat from Michigan who chairs the subcommittee. “About half of the so-called offshore funds were actually onshore.”

Some of the firms leading the lobbying for a tax holiday, Levin noted, have brought home almost all their “trapped” funds. Apple, Google and Microsoft, for example, have brought back from 76 to 100 percent of their offshore earnings, the subcommittee found.

As the Center for Public Integrity has reported, the multinational firms are lobbying for a tax holiday because the US has a higher corporate income tax than many foreign countries. Under current law, when a foreign subsidiary returns its earnings to the American parent company, it must pay the difference between the tax of the country in which it conducts operations, and that charged in the United States.

Rather than pay the U.S. corporate income tax, as domestic companies must do, many multinational firms leave the money on the books of their foreign subsidiaries. If they could return their earnings to their parent corporation without paying the U.S. tax, they contend, more money would be invested in new research and development and jobs here at home.

“The fact that foreign subsidiaries of U.S. companies have deposits in U.S. banks or in U.S. bonds does not mean that their American parent companies are able to deploy those funds in the US economy, said Abigail Gardner, a spokeswoman for WIN America, a coalition of firms pushing for the tax break.

Wall Street and government analysts estimate that US corporations carry some $1.4 trillion on the books of their foreign subsidiaries — and some $2 trillion on their books at home.

“They have gobs of cash,” Levin said. With bulging corporate coffers and low interest rates, said the senator, there is no rationale for giving a small segment of American firms a tax break that could cost the US Treasury from $40 billion to $80 billion.

Obama channels Roosevelt, seeks "fair shot" for Americans struggling in tough economy

2011-12-06T16:46:14-05:00

Seeking to channel the spirit of Teddy Roosevelt, President Obama skewered his ideological foes Tuesday for abetting and condoning a new Gilded Age of greed, economic inequality and vanishing opportunity for the working families of America.

“This is the defining issue of our time,” Obama told a crowd in Osawatomie, Kan., where Roosevelt laid out the progressive agenda in his “New Nationalism” speech of 1910. “This is a make or break moment for the middle class….At stake is whether this will be a country where working people can earn enough to raise a family, build a modest savings, own a home and secure their retirement.”

Obama deplored how forces like globalization and computerization have combined with political gridlock to leave workers with lost jobs and less pay, while the top 1 percent has disproportionately prospered.

“The rungs on the ladder of opportunity have grown farther and farther apart,” Obama said. In the years after World War II, a child born into poverty had a better-than-even chance of climbing into the middle class. Today those odds have shriveled to one-in-three. “For most Americans, the basic bargain that made this country great has eroded.”

Republican National Committee spokeswoman Kirsten Kukowski told the Associated Press that the president was “desperately trying new slogans and messages to see what sticks because he can’t figure out how to sell his last three years of high unemployment and more debt.”

Indeed, the president placed the blame for the stagnant economy on avarice, Republican obstructionism and laissez-faire policies—not on any failures of his own economic policies during three years in office.

The “big banks” and “billionaires” and a “certain crowd in Washington” exploit leaky campaign finance laws, take advantage of tax loopholes and buy the services of lobbyists who work against the interests of average citizens, Obama said. He urged Americans to rebuild the economy “based on fair play, a fair shot, and a fair share.”

Fair play, fair shot, fair share: these are Obama’s terms for what Roosevelt called the Square Deal. The Center for Public Integrity’s iWatch News is investigating the Raw Deal that working class families have gotten at the hands of policymakers in Washington and big banks on Wall Street.

A few of CPI’s Raw Deal stories to date describe:

How wealthy corporations with a trillion dollars stashed offshore are lobbying for a “tax holiday.”
How the Republican candidates’ flat tax plans would affect struggling families.
An unemployed construction worker in North Carolina who couldn’t pay the orthodontist bill and removed his son’s braces with pliers.

Pain persists for the jobless, like the unemployed father who removed his son's braces with a pliers

2011-12-02T12:54:13-05:00

Dave Esmay made a good life for his family as a construction superintendent in North Carolina, managing commercial projects worth $15 million to $30 million.

Then came the Great Recession. In North Carolina, and many other states, the construction industry collapsed. And Esmay lost his job.

His family life was wracked by “stress ... from not having any money,” Esmay recalls. He cashed in his retirement account and sold his truck, and when the Esmays could not make the payments on their mortgage, they lost their home.

A daughter postponed plans for post-graduate study, and took work as a waitress.

Esmay couldn’t afford to keep paying the orthodontist, so he took his son’s braces off himself, with a pair of pliers.

For folks like Esmay, today’s federal unemployment report contains a mix of good and bad news.

Things are certainly not as awful as they were. Unemployment, overall, dropped from 9 percent to 8.6 percent. For Americans with college and post-graduate degrees, it stands at only 4.4 percent.

But the news from the construction sector, where Esmay saw signs of life this fall, was just slightly less tragic than it has been. Since peaking at the decade-high rate of 24.7 percent last year, the unemployment rate in the industry has decreased to 13.1 percent.

And for some classes of America — teenagers, minorities, and those without a high-school diploma — the specter of double-digit unemployment remains a stubborn presence in their lives. Indeed, unemployment among African-Americans actually rose in the last month, from 15.1 percent to 15.5 percent.

The welcome drop in the unemployment rate was fueled, moreover, by the despair of many job seekers. The Labor Department reported that 315,000 Americans stopped looking for work and simply left the workforce in November. The percentage of the population in the workforce is at a sorry rate of 58.5 percent.

Meanwhile, the number of long-term unemployed, those jobless for 27 weeks and over, “was little changed at 5.7 million and accounted for 43 percent of the unemployed,” the department said.

For working families, “America’s economic security is under challenge more than at any time in the last 25 years,” says Yale professor Jacob Hacker.

Hacker and a team of scholars studying economic insecurity for the Rockefeller Foundation reported last week that the percentage of Americans experiencing a major economic loss without an adequate financial safety net has leaped from 14.3 percent in 1986 to 20.5 percent today.

After months of scanning the Internet for openings, and watching even low-pay retail jobs go to younger men because, the companies said, he was over-qualified, Esmay finally got some promising job interviews this fall.

But the Great Recession has forever affected the lives of Esmay and his wife and four children.

“I’m 50 years old and back at zero,” Esmay says. “I could not have imagined this five years ago.”

It’s been three years, he says, “of hell.”

Nixon to grand jury: $100,000 cash contributions and rewarding donors with ambassadorships

2011-11-10T18:05:34-05:00

Richard Nixon’s grand jury testimony, with tales of the sale of government appointments; harassment of political opponents; illicit wiretapping and fat envelopes of cash delivered to the White House by furtive millionaires, is a graphic reminder of how politics was played in the Watergate era.

Now that many of those reforms have been dismantled by Congress and the U.S. Supreme Court, fundraising for the 2012 election will be conducted under the kind of unbridled and secretive tactics not witnessed since Watergate. The testimony of Nixon, who resigned in disgrace, could serve as fair warning.

“It is time for us to recognize that in politics in America…some pretty rough tactics are used,” Nixon told the members of the grand jury in 1975. “Not that our campaign was pure…but what I am saying is that having been in politics for the last 25 years, that politics is a rough game.”

“I was subjected to some of the most brutal assaults,” Nixon said. “I have given out some too.”

The release of Nixon’s testimony by the National Archives failed to solve one mystery. In his two-day appearance before the grand jury, he testified that “I practically blew my stack” after learning of an 18-and-a-half-minute gap in a presidential tape recording subpoenaed by Watergate prosecutors, and ordered his staff to “find out how this damn thing happened.”

In the end, “I don’t know how it happened,” Nixon said. He suspected that his secretary, Rose Mary Woods, accidentally erased the tape.

Nixon denied that he played any role in listening to, and then altering, incriminating evidence on the tape. “I have never heard this conversation…this so-called 18-and-a-half minute gap,” he said under oath. “I don’t recall at any time that anybody brought this tape to me to listen to.”

The testimony provided vintage glimpses of Nixon, a proud man who nursed his insecurities and gnawed long on grievances and was one of the most polarizing figures in modern history.

In a long discussion about the sale of ambassadorships during his administration, Nixon insisted that, at least for the plum positions, there was never a quid pro quo with campaign donors. For ambassadors to important allies like France or Great Britain, “the most important thing to me was that he had to be qualified,” Nixon testified.

But there was another class of nations, like Luxemburg or El Salvador, that were not vitally important to the national interest, he said. And there he followed the traditional American practice of naming rich donors to the posts.

“Some of the finest ambassadors…have been non-career ambassadors who have made substantial contributions,” Nixon argued, parrying the prosecutors’ charges that he and his aides sold the prized foreign postings for campaign cash.

“Perle Mesta wasn’t sent to Luxemburg because she had big bosoms,” said Nixon, of one well-known socialite who served during the Truman administration. “Perle Mesta went to Luxemburg because she made a good contribution.”

It was important to dispatch businessmen and other amateur statesmen overseas, said Nixon, because the elite professionals at the U.S. State Department could not be trusted. “As far as career ambassadors, most of them are a bunch of eunuchs,” said Nixon. “They aren’t for the American free enterprise system.”

“We had just too many…who were educated…at Harvard, Yale, Columbia,” Nixon said.

Nixon described an age, like today’s, when political contributions were largely unregulated, and often secret. He told the grand jury, in detail, how his closest friends and aides discussed, solicited and collected secret $100,000 contributions from leaders of industry like the mysterious billionaire Howard Hughes, and Dwayne Andreas, the head of the giant agribusiness, Archer Daniels Midland. Andreas delivered his $100,000 donation in cash, said Nixon, in an envelope to Woods, who stashed the money in a White House safe and then slipped her boss a note confirming its arrival.

When Nixon was asked about a notorious White House discussion of hush money, in which he assured an aide, “You could get a million dollars. And you could get it in cash. I know where it could be gotten,” he was simply stating a fact, the ex-president said.

“I had a number of friends who are very wealthy, who if they believed it was a right kind of cause would have contributed a million dollars, and I think I could have gotten it within a matter of a week,” said the unapologetic former president. “We decided not to do it.”

At times Nixon was his combative self. He accepted President Gerald Ford’s pardon with mixed feelings, he insisted.

“The presidential pardon…was terribly difficult for me to take, rather than stand there and fight it out,” said Nixon, “but I took it.”

He griped about the “clowns” on his staff who undermined his cause during the scandal that cost him his office, and the “amateur Watergate bugglers — burglars — well, they were bunglers” who started Nixon’s downfall when they were caught trying to wiretap the Democratic Party’s national headquarters in the Watergate building in June 1972. And the former president sneered at his personal roster of “enemies” — Ivy League graduates, liberals in the press corps and “the Georgetown social set” — who contributed to his downfall.

When he was running for governor of California in 1962, Nixon said, his campaign offices had been bugged. And in 1968, he testified, the Nixon campaign airplanes were the targets of illicit FBI eavesdropping by the Johnson administration. The late FBI director, J. Edgar Hoover, “told me that they did,” said Nixon. “Put them to the same test you have put us,” Nixon said of his Democratic foes. “You would find that we come out rather well.”

Nixon said that he mishandled the Watergate investigation, and the subsequent scandal, in part because he was preoccupied with foreign policy.

“It is one of the weaknesses I have and it is a strength in another way: I am quite single-minded,” Nixon said. “Some people can play cards and listen to television and have a conversation at one time. I can’t. I do one thing at a time, and in the office of the Presidency I did the big things and did them reasonably well and screwed up on the little things.”

“We made our mistakes, we have to pay for them,” said Nixon, who resigned in disgrace to avoid an impeachment trial in August 1974. With a tinge of bitterness, he said, “All have paid a heavy price. I am paying mine.”

The grand jury declined to indict Nixon in 1974 but listed him as an “unindicted co-conspirator” in the Watergate prosecution.

As they lobby for a tax holiday, some big multinational players say they've got plenty of cash on hand

United States — 2012-01-04T12:39:51-05:00

As select U.S. multinational corporations push for a tax holiday on a trillion dollars parked overseas, their own recent financial reports undermine the arguments they are making for preferential treatment on Capitol Hill.

Proponents of the tax break for “repatriated” overseas earnings say that bringing the money home will give U.S. corporations an infusion of cash, stimulating investment and creating jobs.

But an iWatch News survey of some major players in the tax repatriation debate found that corporations, far from being cash-starved, are sitting on billions of dollars of liquid assets. In new filings with the Securities and Exchange Commission and conference calls with Wall Street analysts, some big players flatly say they don’t need the tax holiday.

Firms like Microsoft and Oracle, Google and Apple have tens of billions in cash stashed offshore, and lots more here at home.

“We currently do not intend nor foresee a need to repatriate these funds,” the Microsoft Corp. said in its latest quarterly report. “We expect existing domestic cash, cash equivalents, short-term investments, and cash flow from operations to continue to be sufficient.”

Microsoft said it had $57.4 billion in cash and other liquid sources on hand, with $51 billion of that kept overseas.

Though it rests in offshore accounts, the lion’s share of Microsoft’s money is already invested in U.S. assets. The firm says it has socked 83 percent of the billions it holds offshore in U.S. government securities, U.S. corporate bonds and U.S. mortgage-backed securities.

The story was much the same at Google Inc., which reported its corporate coffers held $42.6 billion, with $20.2 billion of that stashed overseas.

“Our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them,” Google said. “Our sources of funding will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months.”

Google and Microsoft are members of WIN America, a coalition of US multinationals and trade groups pushing for the tax break. The holiday could cost the U.S. Treasury as much as $80 billion, one reason why its prospects are mixed as Washington remains inundated by a lake of red ink. Yet 80 members of Congress, both Republicans and Democrats, have signed up as co-sponsors.

Some 70 of those co-sponsors have received almost a million dollars in campaign contributions from WIN-affiliated companies since the start of 2009. WIN and its members have spent millions lobbying Congress, and employ dozens of lobbyists, to press for the tax break, iWatch News has reported.

Need aside, the payoff could be huge. A similar tax holiday in 2004 cut the 35 percent corporate tax rate to 5.25 percent for repatriating companies.

American firms face a 35 percent corporate income tax at home, but money earned overseas is taxed only by the country of origin until it is returned to the United States, at which time an additional tax is levied to make up any difference and restore the rate to 35 percent.

If the rate was dropped to 5 percent, “the amount of corporate cash that would come flooding into the country could be…used for creating jobs, investing in research, building plants, purchasing equipment and other uses,” wrote John Chambers, the CEO of Cisco Systems, and Safra Catz, the president of Oracle Corp., in an op-ed last year in The Wall Street Journal.

However, after a number of deductions and tax breaks are employed, the effective tax rate for U.S. corporations is often much lower.

And critics of the repatriation proposal, pointing to a previous tax holiday in 2004, say that the influx of cash will not create jobs, but will be spent instead to benefit shareholders and corporate executives, via higher dividends and stock repurchasing plans.

“They should use the cash they already have here at home to invest in America rather than ask for still another break,” Sen. Carl Levin, D-Mich., chairman of the Senate Permanent Subcommittee on Investigations, told iWatch News.

U.S. firms are flush with cash, analysts from the Heritage Foundation noted last month, and can easily borrow at bargain rates if they need to raise funds.

“The repatriation holiday would have little or no effect on investment and job creation, the key to the whole issue, simply because the repatriating companies are not capital-constrained today,” the Heritage report said. “Any investment, any action that they would deem worthwhile today can be and is being financed by current and accumulated earnings.”

Apple Inc. is a prime example. In its latest annual report, filed on Oct. 26, Apple noted record sales and profits, and plans to expand its network of retail stores and its lines of iconic products.

But Apple does not need a tax break to finance its plans for expansion. The firm’s report shows that it is sitting on some $81 billion in cash and cash equivalents, up 60 percent during 2011.

America’s education system, not taxes, is what keeps Apple from employing more Americans, according to a new biography of the late Apple founder Steve Jobs. Author Walter Isaacson recounts that Jobs told President Obama that the company employed 700,000 workers in China, instead of the United States, because of a lack of qualified American engineers.

Other cash-rich firms have been acquiring new subsidiaries and letting go “redundant workers,” or distributing wealth to shareholders and corporate executives.

Another prominent member of the WIN America coalition is Pfizer, the pharmaceutical firm that manufactures such popular products as Lipitor and Viagra. Speaking to Wall Street analysts on Tuesday, the firm’s executives were focused on slimming down its workforce, and buying back shares – not creating jobs.

“We are…focused on shareholder value,” CEO Ian Read told the analysts. The company hopes to boost its dividends, and has spent $6.5 billion this year repurchasing shares of the company’s stock as part of an ongoing buyback program that it hopes will reach $9 billion this year.

Meanwhile, the Pfizer executives said they cut 4,100 jobs in 2011, as part of an ongoing company-wide purge of redundant positions from recent acquisitions.

Pfizer was the single biggest benefactor of the 2004 tax holiday, when it took advantage of a cut-rate “one time” 5.25 percent tax rate to bring back $37 billion from overseas.

In a paper for the nonpartisan New America Foundation, cited by WIN America, economist Laura D’Andrea Tyson and two Berkeley associates say that the trickle-down effects from rewarding stockholders could be significant.

Tyson and her colleagues acknowledge that 74 percent of the money brought back to the US in a tax holiday would probably be distributed to shareholders in the form of dividend payments or stock repurchases. But for every dollar returned to a stockholder, Tyson says, from 25 to 40 cents will be used by higher-income Americans to go shopping. The boost to the economy, when combined with direct hiring and investment, could ultimately lead to the creation of between 1.3 million and 2.5 million jobs.

Tyson serves on the board of directors of Kodak, a member of the WIN America group. Eric Schmidt, the executive chairman of Google, serves as chairman of the New America Foundation.

WIN America, when asked to comment, declined.

Microsoft also rewarded shareholders. It spent $1 billion in the 90 days prior to its Sept. 30 report buying 38 million shares as part of its ongoing stock repurchase program.

A similar tale was told by software giant Oracle.

“Our current cash…will be sufficient to meet our working capital, capital expenditures and contractual obligation requirements,” Oracle reported to the SEC. And “we could fund any future acquisitions, dividend payments and repurchases of common stock or debt with our internally available cash, cash equivalents and marketable securities, cash generated from operations, additional borrowings or from the issuance of additional securities.”

Oracle is in the midst of an $8 billion stock repurchase program, and purchased 27.5 million shares for $823 million in the three months ending Aug. 31. It is paying dividends and has its own robust merger and acquisition strategy, which in recent years has led to thousands of layoffs.

Though not as flush as Apple, Cisco Systems reported that it held $44 billion in cash, with $39.8 billion of that stashed overseas.

The company used $6.8 billion last year to benefit shareholders in the latest stage of a long term $82 billion stock repurchasing plan.

At the same time, Cisco said, it was paring its workforce by 6,500 employees to beef up its bottom line.

Requests for comment, by phone to Microsoft and Pfizer and by email to Google, were not returned.

8 in 10 unemployed Americans say they'd take any job they can get

2011-12-06T16:44:29-05:00

As hard times linger, unemployed workers are grappling with shame, anxiety and depression. They are cutting costs, losing health care coverage and worried about retirement. They fear their children’s generation will be worse off than theirs.

Yet they still believe in the American dream.

Those are the findings of a new poll of out-of-work Americans conducted by The New York Times and CBS News. When asked if they think it is still possible “to start out poor in this country, work hard and become rich,” a robust 67 percent of the unemployed said yes— just a few points less than the 75 percent of all Americans who replied in the affirmative.

The jobless workers’ faith in America, however, does not extend to its political and economic systems, or to their current cast of elected leaders. When asked who is to blame for the nation’s high unemployment rate, one out of five jobless workers chose “politicians.” It was the leading explanation, more than double the rate given by out-of-work Americans just two years ago.

Some 60 percent of the unemployed disapprove of President Obama’s handling of the economy, and his efforts to create jobs. More than a third believes the Democratic president favors the rich.

But 81 percent disapprove of Congress, and just 15 percent think that congressional Republicans have a clear plan for creating jobs. And 82 percent of the unemployed think Republicans favor the rich. Only 5 percent believe that the GOP’s policies help the middle class.

The American dream may still be a viable promise for these folks, but 77 percent think the distribution of money and wealth in the United States is unfair.

Their feelings echo the latest scholarly finding, by the Congressional Budget Office, of growing economic inequality in America.

According to the CBO study, average real after-tax income in the last three decades grew “much faster” for the richest 20 percent of Americans than for the other four-fifths of the population—so much so that “the after-tax income receive by the 20 percent of the population with the highest income exceeded the after-tax income of the remaining 80 percent” combined.

And the very rich profited immensely. The CBO found that the top 1 percent of Americans saw their incomes grow by a whopping 275 percent in that period, as federal tax and benefits laws increasingly favored the wealthy. Middle class incomes over those same three decades grew by less than 40 percent.

Which could explain why, in the Times-CBS poll of the unemployed, 74 percent of the jobless said it was a bad idea to lower taxes on big corporations. An even greater number— 87 percent—endorses public spending on bridges, airports, schools and other infrastructure.

How are folks getting by? On unemployment insurance payments or charity or a spouse’s paycheck. Many get help from their families, or move in with a relative. Only 35 percent of all Americans are very worried that someone in their household might be out of work in the next 12 months, but 75 percent of the unemployed are extremely anxious about the possibility.

None of the respondents listed “racism” as a reason for not being hired, but 9 percent listed “ageism.” The most frequent explanation for not getting work was the number of rival applicants (21 percent) and a lack of experience or skills (16 percent.)

Half of the unemployed said they were embarrassed or ashamed at not working, and 54 percent said they experienced emotional or mental health issues, like anxiety or depression.

Forty percent of the unemployed agreed with the suggestion that unemployment benefits reduced a person’s motivation to look for work. But when it came to accepting a job offer, 78 percent said they personally would take any work they could get.

How candidates' tax plans would affect one struggling family

2011-10-27T09:53:11-04:00

Until 2008, Darrell Seela owned a home in Las Vegas where he and his wife worked and raised three children. After the crash, he lost his job as a draftsman and industrial engineer for a major homebuilding company. The Seelas lost their home soon after.

The family moved to Ridgecrest, Calif., where Darrell found work. But his wife hasn’t been able to land a new job as a mortgage administrator. “With two incomes we might be able to make it fairly well,” Seela says, “but with one income it’s killing us.” Seela now makes $57,000 a year. His oldest daughter is 18, attends college and works; his 13- and 16-year-olds still live at home.

“We’re used to a certain type of life, and we’re getting that taken away from us,” he says.

When Seela votes for president next fall, he will vote for an economic strategy, as well.

As part of their plans to revive the economy, several presidential candidates have offered innovative prescriptions to reform the U.S. tax system.

For the Seelas and millions of other American families, there is no status quo: if Congress does not act on President Obama’s proposals, the Bush-era tax cuts are scheduled to expire, with powerful repercussions. The charts here show a sampling of the tax proposals, and what would happen if the Bush tax cuts expire.

In a nutshell, Obama wants to end the Bush tax cuts for the wealthiest Americans, while retaining them for working and middle-class families.

Mitt Romney’s plan would preserve the Bush tax cuts for the rich as well, and cut taxes on wealthy estates and corporations.

Texas Gov. Rick Perry’s proposal for a new flat tax, and Herman Cain’s 9-9-9 plan, offer more radical change.

Perry wants to slash taxes on individual Americans and businesses, and offer taxpayers a flat tax rate of 20 percent, with generous deductions.

Cain would scrap the current income tax and payroll tax system, in favor of a 9 percent tax on income, a 9 percent tax on business income, and a 9 percent national sales tax.

Millionaires would fare well under any plan but Obama’s. To avoid massive deficits, Perry’s plan would require huge cuts in the federal budget.

Campaign tax plans don’t become law without considerable alterations in Congress. But a candidate’s approach gives voters a glimpse of his or her economic priorities, willingness to consider drastic change, and political values and temperament.

In these tables, iWatch News has taken the Seela family financial information and calculated what its taxes would be under various proposals. We assigned them standard deductions and exemptions, and included only wages – not investment income.

Seela, a political independent, is not impressed by the promises of the Republican challengers. They all, he says, favor the rich. Even under Perry’s plan, says Seela, the wealthiest Americans would benefit at the expense of working families once the cuts in benefits that families like his rely upon are considered.

“None of the Republicans will raise taxes on the rich no matter what,” he says, “not even if it means hurting the poor and middle class even more than we are already hurting by eliminating our safety nets like Social Security and Medicare. To me, that is just plain crazy and heartless.”

Wealthy corporations with a trillion dollars stashed offshore lobby for a 'holiday' from U.S. taxes

United States — 2011-12-14T17:58:00-05:00

Goaded by battalions of corporate lobbyists, members of Congress are working to give a select group of U.S. multinational firms like Apple, Oracle and Pfizer a lavish tax break on a trillion dollars stashed offshore.

The avowed goal is to generate jobs and investment, but the offshore tax holiday was tried before, in 2004, and the lion’s share of the benefits went not to unemployed workers and their families, but to corporate shareholders and executives.

With today’s high unemployment, and soaring costs for college, health care and other family essentials, critics are asking why an elite class of corporations and their shareholders should get a huge tax break on overseas profits.

The proposed tax holiday could cost the Treasury from $40 billion to $80 billion over the next decade, and the high cost of the measure is one reason that its prospects for passage are mixed.

But 73 members of Congress, both Republicans and Democrats, have signed up as co-sponsors. And cash-rich mega corporations are pushing hard for the tax break.

A number of trade groups and corporations that would benefit have joined in a coalition called WIN America. New lobbying disclosure reports show that the group and its member firms have spent millions of dollars, and employed dozens of lobbyists, to press for the tax break, according to an analysis by iWatch News.

The current rules for tax repatriation, as the process is called, are a thorn for U.S. firms that make money overseas. American companies face a 35 percent corporate income tax. Money earned offshore is taxed only by the country of origin until it is “repatriated” to the U.S., at which time an additional tax is levied to make up any difference and bring the rate to 35 percent.

The 2004 holiday allowed U.S. firms to bring their offshore profits back and pay a rate of only 5.25 percent.

“The repatriation tax break created a competitive disadvantage for domestic businesses that chose not to engage in offshore operations or investments and provided a windfall for multinationals in a few industries without benefiting the U.S. economy as a whole,” said the Democratic staff of the Senate Permanent Subcommittee on Investigations, in its Oct. 11, 2011 report, done in response to the new push for another tax holiday.

“I want them to pay their taxes like the rest of us,” said Sen. Carl Levin, the Democrat from Michigan whose committee compiled the report. Michigan’s unemployment remains among the highest in the country. “The rest of us don’t get a tax holiday.”

Benefitting the Few

There are 27 million businesses in America, and almost 10,000 have foreign subsidiaries and could qualify for the tax break. Yet only 843 of these firms took advantage of the bargain tax rates set by the 2004 law, the IRS says.

Those 843 companies brought around $362 billion home from overseas. More than half the benefits went to only 15 firms. And just five — Pfizer, Merck, Hewlett-Packard, Johnson & Johnson and IBM — retrieved $88 billion, a fourth of the funds returned.

Two sectors profited disproportionately. Drug companies brought home some 29 percent of the repatriated funds; the computer and electronics industry another 19 percent, according to an IRS analysis.

The holiday also rewarded those who were using offshore funds to dodge taxes in the first place. Among the firms most likely to participate in the tax holiday were many that regularly stash their earnings in tax havens. The countries of incorporation with the largest percentage of repatriated funds under the 2004 law included the Netherlands, Switzerland, Bermuda, Ireland, Luxembourg and the Cayman Islands.

In many cases, the money was moved through shell companies, often just mailbox drops, that had no employees or physical assets.

Intel and Coca-Cola, the Senate inquiry determined, used shell companies in the Cayman Islands. Proctor & Gamble used a holding company in Bermuda that had no physical office and no full-time employees. Eli Lilly used Switzerland and the British Virgin Islands. Oracle employed an Irish subsidiary.

Many firms used the “repatriated” money, as it is known, to launch stock buy-back efforts, boosting the value of their shares and — via stock awards to senior managers — hiking executive compensation rather than investing the money in new jobs or research and development, as the bill intended.

Because of the law’s lax safeguards, firms that took advantage of the tax break in 2004 “did not … significantly increase employment or research and development,” Dhammika Dharmapala, an expert on tax policy, and one of the authors of a National Bureau of Economic Research (NBER) study of the 2004 holiday, told iWatch News.

Then, as now, the bill’s proponents insisted that they had included safeguards to guarantee that the benefits of the tax break would be used to create jobs and spur investment. But in the 2004 law, these measures were easily dodged.

The language of the law expressly forbade companies from using repatriated funds for stock buybacks or executive compensation. But that did nothing to keep companies from doing so. “Estimates imply that firms returned almost all of the repatriated cash to shareholders — a use that was explicitly not permitted,” the NBER study concluded. The NBER is a nonpartisan organization whose ranks of current and former members are salted with Nobel Prize-winning economists.

The NBER study of all companies that cashed in on the holiday calculated that 60 percent to 92 percent of the money repatriated was used for payouts to shareholders.

“Stock repurchases and executive compensation climbed at the largest repatriating corporations, while hiring stagnated or declined,” according to the Senate committee’s study of 15 leading firms that profited from the tax break.

Drug giant Pfizer, which repatriated the single largest chunk of cash — $37 billion — announced that it was laying off thousands of employees in 2005. Yet from 2004 through 2006, according to the Senate inquiry, Pfizer repurchased over $17 billion of its stock, and awarded its five most highly compensated executives with shares worth $30 million.

“If you’re looking for straight up, direct job creation, the evidence isn’t there,” says Michael Mundaca, until this summer the Assistant Treasury Secretary for Tax Policy in the Obama administration.

Lobbying Hard

The financial return for lobbying in the 2004 debate was indicative of why firms have once more embraced the goal. According to one University of Kansas study, companies reaped $220 in tax benefits for every $1 spent on lobbying — a 22,000% return.

WIN spent the first 9 months of this year actively lobbying for a repatriation bill in Congress. It spent $380,000 to hire two firms (Cauthen Forbes & Williams and Capitol Counsel LLC) and target lawmakers with a total of eight lobbyists. Among the lobbyists hired directly by WIN are several people with strong ties to Congress:

Jim McCrery, a former Congressman who represented Louisiana’s 4^th district until 2009.
Drew Goesl, who served as chief of staff for Rep. Mike Ross and communications director for Sen. Blanche Lincoln; Ross is a co-sponsor of the House bill.
Tucker Shumack, a former legislative assistant for Sen. John Isakson, a co-sponsor of the Senate bill.
Dena Battle, a former legislative director for Rep. Dave Camp, who as head of the powerful Ways and Means Committee has sway over tax policy in the U.S.
Jeff Forbes, a former staff director on the Senate Finance Committee.
Libby Greer, a former chief of staff for former Rep. Allen Boyd.

All told, 58 organizations and companies listed “repatriation” on their disclosure forms as an issue they were lobbying on through the first nine months of 2011. While these companies spent at least $71.2 million on lobbying during this period, due to the way lobbying is disclosed it is impossible to tell exactly how much was spent on what issue. If these groups spent a conservative estimate of 10 percent of their money on this issue, that would still be over $7 million. And it is likely to be more — companies and organizations could be lobbying on the issue but simply list it as “taxes” or “funds”.

WIN affiliated companies such as Pfizer ($7,340,000 overall), Qualcomm ($3,880,000 overall), Microsoft ($3,592,000 overall), Apple ($1,350,000 overall) and Oracle ($1,150,000 overall), among others, spent at least some money to lobby the issue.

The 2004 tax break was advertised and sold as a one-time deal, but the affected firms correctly perceived that after a few years had passed they could demand another round of relief, and they have stockpiled hundreds of billions of dollars overseas in anticipation of the next holiday.

While he doesn’t expect any of the bills to pass, citing the need for Congress to find offsets for the $40 billion to $80 billion it would initially cost, Mundaca sees serious dangers in having the repatriation holiday. “I think a holiday every few years is unsustainable,” he told iWatch News.

“You can’t have an important part of your tax system subject to the whims of the legislative process. I think there needs to be a decision whether this is a good idea or not, for all time, not whether it’s a good idea once every five years.”

New Proposals for Congress

There are now several tax holiday proposals, embraced by both Democrats and Republicans. The Foreign Earnings Reinvestment Act, for example, is sponsored by Democratic Sen. Kay Hagan of North Carolina and Republican Sen. John McCain of Arizona. It would reduce the tax on repatriated earnings to 5.25 or 8.75 percent, depending on the size of a firm’s payroll.

Under the Hagan-McCain bill, firms that add workers would be rewarded and those that exploit the holiday and then lay off workers would be penalized — a new wrinkle designed to meet the criticism that several big firms which took advantage of the 2004 holiday proceeded to cut, rather than expand, their work force.

Still, the tax holiday’s defenders hail its potential as a new stimulus act.

Economist Douglas Holtz-Eakin, who headed the Congressional Budget Office for two years during the Bush administration, acknowledged in a paper for the U.S. Chamber of Commerce that the 2004 act had poor safeguards, which complicates any calculation of its effects. “There is no official report on how the repatriated earnings were actually spent,” he writes, since the law “did not require companies to trace or segregate their use of repatriated funds.”

But even if the bulk of the money was spent rewarding shareholders, a trickle-down effect should have benefited everyone, Holtz-Eakin argues. Payouts to shareholders “put resources in the hands of other economic actors — firms, households, pension plans, investors, etc. — who continue the chain of real purchases and financial transfers.”

“Thus the ultimate test is not the decisions made by individual firms,” he writes. Though “the various uses of repatriated earnings may each impact the economy differently, it’s safe to say that there is no option that does not result in some degree of stimulus.”

Mundaca says there hasn’t been a deep enough analysis of the secondary impacts of buybacks and stock purchases to rule out the possibility that those helped the economy.

In a paper for the nonpartisan New America Foundation, economist Laura D’Andrea Tyson and two Berkeley associates estimate that 74 percent of the money brought back to the U.S. in a tax holiday would be distributed to shareholders in the form of dividend payments or stock repurchases, and only 26 percent used for hiring and other corporate investments.

But for every dollar returned to a shareholder, Tyson says, from 25 to 40 cents will be used by high-income consumers to go shopping. This boost to the economy, when combined with direct hiring and investment by companies, could ultimately lead to the creation of between 1.3 million and 2.5 million jobs.

“Even if a large proportion of the repatriated cash is distributed to shareholders in the form of dividend payments or stock repurchases, there will be a significant increase in private spending and economic activity,” Tyson says.

And even the cut-rate taxes paid by firms repatriating money should yield enough short-term cash to let Congress finance other measures to stimulate the economy, like the infrastructure bank included in President Obama’s job package, Tyson notes. Democratic Sen. Charles Schumer of New York has reportedly tested Senate sentiment for a deal along those lines.

Tyson is a former chair of the White House Council of Economic Advisers under President Bill Clinton. She also serves on the board of directors of Kodak, a member of the WIN Coalition. Eric Schmidt, the executive chairman of Google, serves as chairman of the New America Foundation board, for whom Tyson and her colleagues did the study.

The tax break proposals are predominantly sponsored by Republicans, but three Democratic Senators and 10 Democrats in the House have signed on as co-sponsors of the two main bills. Among those Democrats who are supporting the bill are representatives from districts with high-tech and software industries, in states like Utah and Colorado. Reps. Zoe Lofgren and Anna Eshoo, whose districts encompass California’s Silicon Valley, and California Sen. Barbara Boxer, for example, support the bill.

“The Great American Jobs Act Caper”

In the world of tax economists, the 2004 tax holiday is notorious as “The Great American Jobs Act Caper,” as tax expert Charles Kingson christened it, in a 2005 edition of the Tax Law Review.

It “rewards those who have beaten the tax system,” Kingson wrote. The safeguards to guarantee job creation were just “political cover.”

“The Act is a caper, but not a funny one,” Kingson wrote. “Policy is a contest among taxpayers, and what Intel or GE or Pfizer does not pay, other people or their children will.”

Many companies that make products in America and sell them overseas could suffer in another tax holiday, according to the Congressional Research Service, if a tide of money stashed overseas in foreign currencies was converted to dollars. It could drive up the price of the dollar and “U.S. net exports may decline,” the CRS warned.

Repatriation is so tailored for a relative few, and more likely to help shareholders rather than workers seeking jobs, that four U.S. corporate chieftains urged the House Ways and Means committee to abandon the idea at a hearing in May. The American tax system is in dire need of a major overhaul, said the chief financial officers of the United Technology Corp., the Kimberly-Clark Corp., Zimmer Holdings Inc. and Caterpillar Inc., but tax breaks like the repatriation holiday could give tax reform a bad name. Or, as a Goldman Sachs advisory said last month, “passage of a standalone repatriation provision could reduce momentum behind broader reform.”

The proposals for a new tax holiday have been greeted with skepticism, as well, by some conservative economists who otherwise deplore high taxes.

The Heritage Foundation, in an Oct. 3, 2011, report, concluded that “this sequel to a similar 2004 holiday would, like its predecessor, have a minuscule effect on domestic investment and thus have a minuscule effect on the U.S. economy and job creation.” American companies are already awash in cash, noted Heritage scholars J.D. Foster and Curtis S. Dubay. And “for those rare instances in which outside financing is needed, interest rates remain at historic lows.”

After a thorough review of the academic literature, “I have not seen an article that says this does create jobs,” Dubay to iWatch News.

The Heritage report sparked a retort from Grover Norquist at Americans for Tax Reform, another conservative group, who praised the stock buybacks and higher dividends that followed the 2004 law and asked: “What’s wrong with increasing shareholder value?”

But even Norquist conceded that “Foster and Dubay are probably correct.” American firms “already have trillions of dollars in cash sitting on their balance sheets, ready to be deployed at no additional tax cost. Even companies that don’t have this liquidity could borrow at rates approaching 0 percent after inflation,” he said. “It’s unlikely that repatriation will be just what companies have been waiting for on the margin to build that next factory or invest in that new technology. They can today, and they are not.”

A People's History of the Great Recession

2013-01-23T13:01:38-05:00

Reporter Arthur Delaney, who is working with us on the Raw Deal project, has written Huffington Post's first published e-book: A People's History of the Great Recession.

Delaney specializes in "putting flesh and blood on the statistics" of economic calamity, as his news site says. In his book you will find the voices of people like Bob Poropatich, of Pittsburgh, who was working part-time as a barista after losing his job as a manager for a major clothing retailer during the recession.

Porapatich had been with the company for six years, had a master's degree, and 30 years experience in the field. When Delaney interviewed him last spring he was making lattes, earning about $180 a week.

Porapatich told Delaney that the worst day he had to endure was when his ex boss, the one who laid him off, came in and ordered a venti mocha. "It didn't faze him at all," Porapatich recalled. "I felt like I was two inches tall. I wanted to say, `Excuse me,' and run into the bathroom."

Poropatich landed a second job stocking shelves at a grocery store. "Together both jobs pay me not even close to a third of what I made when I had just one job," he told Delaney.

Like many of those that Delaney has interviewed, Porapatich believed that his age—he was in his late fifties when he lost his job—was held against him when he applied for work. After a while, he began offering prospective employers a deal: if they hired him, he wouldn't sign up for health insurance.

But "nobody is impressed," he said.

Delaney has come up with "rules" faced by job searchers these days. Don't Be Old. Don't Be Unemployed. Don't Expect To Make More Money At Your Next Job.

The numbers are grim. Yesterday, the Kaiser Family Foundation published a study on health care costs which showed that, even in times when many working families have one or more breadwinners out of work, the average annual premium for family coverage offered by employers rose by 9 percent in the last year, to $15,073. That cost has roughly doubled since 2001.

In response to soaring costs, more firms are charging higher premiums, or offering their employees policies with bigger deductibles and co-payments.

As part of the Raw Deal project, Delaney is working on a story about changes in the bankruptcy law. His colleagues are working on income inequality, tax fairness, offshoring, minority health care and other issues.

If you have a story you would like to share, contact us at RawDeal@publicintegrity.org. We would like to hear from you.

Emails show wireless firm's communications with White House as campaign donations were made

SkyTerra Communications, Inc. — 2011-11-03T18:01:24-04:00

Wireless firm LightSquared pressed its case for government approval of a new national broadband network in numerous contacts with presidential aides, at times citing its fundraising for Democratic causes and President Obama, White House emails show.

On the day that LightSquared CEO Sanjiv Ahuja made a $30,400 contribution to the Democratic Party, two of his deputies appealed to the White House for meetings with top technology advisers to Obama, according to emails obtained by iWatch News.

“Hi Aneesh!” LightSquared representative Dave Kumar wrote to Aneesh Chopra, the president’s chief technology adviser on Sept. 23, 2010. “I touched base with my client Sanjiv Ahuja and he expressed an interest in meeting with you…He is going to be in DC next week for a fundraising dinner with the President.”

Earlier that same day, LightSquared lawyer Henry Goldberg wrote to James Kohlenberger, then chief of staff for the White House Office of Science and Technology. His email said:

“You may recall that you met with Sanjiv Ahuja about a year ago, with Phil Falcone of Harbinger, as Phil & Sanjiv were finalizing their plans for a new wireless broadband network…

“Sanjiv will be at a fund-raiser dinner with the President on September 30 and would like to visit with you, perhaps Tom Kalil, and Aneesh Chopra, if at all possible.”

Falcone, a New York hedge fund manager, is the principal owner of LightSquared and Ahuja its CEO. Kalil is deputy director for policy in the White House Office of Science and Technology Policy. Chopra is the White House Chief Technology Officer.

LightSquared won initial Federal Communications Commission approval for its broadband network despite concerns it could disrupt vital communications and navigation systems. The Virginia company drew on influential Washington lawyers and personal friendships, as it sought to set up meetings with key administration officials, as evidenced in emails and other records obtained by iWatch News through the Freedom of Information Act.

LightSquared promises to create thousands of jobs and provide broadband wireless service to more than 260 million Americans. But its critics contend that the $14 billion venture could cripple Global Positioning Systems, or GPS, gear and threaten aviation safety, disrupt military and rescue operations—and even interfere with high-tech farming equipment and cell phones in certain parts of the country.

Terry Neal, LightSquared’s senior vice president of communications, said White House officials routinely meet with firms such as his to discuss advances in technology.

“Because we are the only company on the horizon that can quickly help the federal government meet its stated objective of near universal wireless coverage for all Americans, it was natural that LightSquared have meetings with the administration. LightSquared’s network promises to expand access to wireless broadband, increase competition in the marketplace, give consumers new choices, and, ultimately, lower prices. We acknowledge we wanted to discuss that with administration officials,” Neal said in a statement.

Republicans in Congress have tried for months—without success—to probe the firm’s contacts with administration officials, including FCC chief Julius Genachowski, an Obama campaign “bundler,” whose agency has given conditional approval to LightSquared. The FCC chief is set to testify at a hearing Thursday before a House Armed Services subcommittee.

The FCC has promised it will compel the company to resolve the GPS interference issue before making a final decision.

300 pages of documents released

LightSquared’s ties to major Democratic campaign contributors and Obama staff and supporters—and the large donations its majority owner Falcone has made to Democrats—were detailed by iWatch News in July. White House officials downplayed those ties and argued they have no sway over the FCC.

“The FCC is an independent agency with its own standards and procedures for reviewing these types of decisions and we respect that process,” said White House spokesman Eric Schultz.

But emails and other records reveal that LightSquared’s reach into the administration was more extensive than officials have acknowledged. The records also show that White House technology officials were advised of serious concerns among GPS proponents over the possible threat to air traffic control and other critical emergency responders.

Though White House officials redacted significant portions of more than 300 pages of emails and other records, the documents richly illustrate how big industries can power their way into government corridors in Washington.

After its initial lobbying, the company received a nod of support from the White House technology office as Falcone launched his ambitious plan.

On July 20, 2010, Goldberg emailed Kohlenberger a news release trumpeting LightSquared’s launch with the note: “It’s happening. Thanks for your help and encouragement. As we bolt together the network, we’ll come in with details.”

In response, Kohlenberger emailed back his congratulations, adding: “very exciting.”

Company spokesman Neal said no specific “help and encouragement” had been requested other than assistance in setting up meetings with White House officials.

On Sept. 22, 2009, Falcone and LightSquared CEO Ahuja had met with Kohlenberger, then chief of staff for the Office of Science and Technology. Eight days later, Falcone and his wife Lisa each gave $30,400 to the Democratic Senatorial Campaign Committee, the maximum allowed.

On Wednesday, Falcone told iWatch News by email that he made the 2009 contribution after “an approach” by New York Democratic Sen. Charles Schumer, adding that the donation had “absolutely nothing to do with LightSquared.” Schumer’s office did not return a call seeking comment.

LightSquared’s representatives weren’t shy about mentioning the firm’s support for Obama as they tried to line up their meetings with the president’s staff.

Kumar, a Washington lawyer representing the company, reached out to Chopra in the Sept. 23, 2010 email.

On that same day, campaign finance records show Ahuja gave $30,400 to the Democratic National Committee. On Oct. 28, 2010, he gave the same amount to the National Republican Congressional Committee.

In the second exchange that same day, LightSquared attorney Goldberg wrote to Kohlenberger seeking meetings and noting that the CEO would be in Washington attending the Sept. 30 fundraiser with the president. Kohlenberger wrote back to Goldberg saying that he kept hearing “great things” about LightSquared and would try to set up a meeting.

LightSquared spokesman Neal acknowledged that Goldberg mentioned the fundraiser “to imply that Sanjiv was sympathetic to the president’s program.”

Obama attended the $30,400-a-person fundraising dinner for the Democratic National Committee at the Washington home of a former White House health care aide on Sept. 30.

In at least one case, personal friendship appears to have greased the wheels. Monish Kundra, an investment banker with Columbia Capital who specializes in the wireless communications industry and once worked at LightSquared, sent an email on Jan. 2, 2011 to his “close friend,” White House technology officer Chopra.

Kundra asked Chopra to meet with Drew Caplan, then a senior adviser to LightSquared. Chopra and Caplan set the meeting for Jan. 5, 2011, about three weeks before the FCC approval of the waiver, records show. Kundra could not be reached for comment.

Chopra sent emails to other government officials, inviting them to the meeting and noting he had set up the meeting “at the recommendation of a dear friend.”

The White House did not release records indicating the agenda and in several cases redacted portions of emails and attachments.

The GPS issue

LightSquared didn’t just press its case at the White House. CEO Ahuja met on Jan. 5, 2011 with Lawrence E. Strickling, Assistant Secretary for Communications and Information at the National Telecommunications and Information Administration. The agency helps assess possible harm to GPS.

In a letter sent to Strickling the day after the meeting, LightSquared CEO Ahuja stressed how important FCC approval was. He called it an “essential building block of our network that requires quick favorable action so that we may continue to roll out our network and meet the rigorous construction timetable that the FCC has made a condition of our authorization.”

Ahuja committed up to $20 million to fund a group of experts that would “consider both short-term and long-term technical solutions to the issue” of interference with the GPS systems.

But Strickling didn’t appear mollified. In a letter on Jan. 12, 2011 to FCC chief Genachowski, Strickling said the LightSquared proposal “raises significant interference concerns that warrant full evaluation.” He said the departments of Defense, Transportation and Homeland Security favored the FCC deferring action “until these interference concerns are satisfactorily addressed.”

The FCC approved a “conditional waiver” on Jan. 26, adding that it wouldn’t take final action until it was satisfied that “potential interference concerns regarding GPS” have been resolved.

But the decision has pitted GPS users, ranging from boaters to farmers and emergency responders, against the company. Both sides have jockeyed for political advantage and public sympathy in what’s becoming an increasingly rancorous showdown.

Though LightSquared has suggested the GPS problem is exaggerated, at least one top government technology official sharply disagreed.

Peter L. Levin, the chief technology officer for the Department of Veterans Affairs, didn’t mince words in an explicit warning he sent via email to White House technology official Chopra and two other senior White House aides on March 26, 2011. Levin described a “catastrophe” from GPS interference.

Levin attached a March 2011 PowerPoint slide presentation called “Unintended Consequences” by Stanford University Emeritus Professor Bradford Parkinson, a retired Air Force officer and expert in the field. In his presentation, Parkinson said LightSquared should bear the burden of proving that its transmitters would not cause interference with GPS and said officials should “withdraw or indefinitely postpone (a) decision” on the plan. He doubted such a fix was possible.

Parkinson ended with the comment: “We believe this is potentially a very serious embarrassment to the current administration.”

Levin urged the White House officials to heed the professor’s warnings: “The first tests, based upon what we do know, indicate catastrophe,” Levin wrote. “We all share a common interest to protect national assets like GPS from deliberate intrusion, or in this case, unintentional and avoidable interference,” he wrote.

Company spokesman Neal disputed Parkinson’s findings, saying: “Testing has shown that there are fixes for every category of receiver, including highly sensitive precision receivers. ‘’

On April 28, 2011 a meeting described in White House emails as the “Lightsquared interference meeting,” was set at Jackson Place conference center, a short stroll from the White House. The names of the people invited are blacked out in the records released under FOIA. Holding meetings in the Jackson Place complex has drawn the ire of Republicans who argue that the Obama administration has done so to keep from having to disclose names—especially those of lobbyists—in the White House visitors’ logs.

Sen. Charles Grassley, the ranking Republican on the Senate Judiciary Committee, has asked the FCC for a list of all contacts between LightSquared, Falcone, the White House and FCC.

“There’s wide agreement that expanding broadband is a worthy goal. But the problems with the FCC’s fast-tracking of LightSquared raises questions about whether the government is rushing a broadband project at the expense of all kinds of other things, including national security and everyone who uses GPS, from agriculture to emergency medical technicians,” Grassley said in a statement to iWatch News.

“If the FCC would just release the documents I’ve requested on LightSquared, I’d have more confidence that the agency’s handling of broadband expansion is in the best public interest,” Grassley said.

LightSquared’s roots go back more than a decade, when a broad group of investors anticipated the skyrocketing demand for wireless communication and broadband coverage, and acquired FCC licenses for slices of radio spectrum. Over the years, the corporate structure underwent many changes, with investors joining or dropping out, and companies merging and changing names.

LightSquared pleaded its case at a Sept. 8 hearing of the House Committee on Science, Space and Technology.

Jeffrey Carlisle, a LightSquared executive vice president, in written testimony said that LightSquared expects to invest $14 billion over the next eight years to build a nationwide wireless broadband network.

The investment promises over 15,000 jobs a year for each of the five years that it will take to build the network, which he said would provide fast wireless broadband service to more than 260 million people.

“LightSquared’s network promises to increase competition in the marketplace, give consumers new choices, broaden access to broadband, increase public safety and emergency response, and, ultimately, lower prices,” Carlisle said.

The administration remains fully behind broadband. Buried deep in the $450 billion jobs plan President Obama outlined in speech to Congress on Sept. 8 is $10 billion to pay for a massive expansion of broadband internet service.

LightSquared says all it wants is an impartial and honest evaluation of its plans from regulators and politicians. “The idea that we are trying to get politics to trump technology here is ridiculous,” said Neal, the company’s spokesman.

Big payday for U.S. ambassador with stake in go-go wireless Internet firm

SkyTerra Communications, Inc. — 2011-09-15T14:00:21-04:00

Donald Gips, the top Obama aide who became ambassador to South Africa, cashed in his stock options for LightSquared, a new wireless Internet firm, for as much as $500,000 ten days after the company won a favorable decision from the Federal Communications Commission, newly released documents show.

Gips, a friend and major campaign fundraiser of President Obama, was the White House personnel chief until being appointed ambassador to South Africa in 2009.

In his 2009 personal financial disclosure form, Gips reported owning stock options for 176,250 shares of the wireless firm. At the time, the FCC was weighing a request by hedge fund billionaire Philip Falcone to take over the company, then known as SkyTerra.

According to the proxy statement filed with the Securities and Exchange Commission, Falcone offered the owners of SkyTerra stock $5 a share. The sale was subject to several conditions, including FCC consent.

The FCC staff gave Falcone its approval on March 26, 2010.

Gips’ 2010 financial disclosure, newly obtained by iWatch News, shows that he sold his shares on April 5, 2010—ten days after the FCC okayed the merger. Gips reported earning between $250,000 and $500,000 from the sale.

iWatch News recently reported that LightSquared’s ties to Obama’s supporters and the administration’s policy interests run deep and that several major Democratic campaign contributors and longtime Obama supporters have held investments in the company and its affiliates during its tangled decade of existence.

Obama installed one of his biggest fundraisers, Julius Genachowski, a campaign “bundler” and broadband cheerleader, as chairman of the FCC, which granted LightSquared a special waiver to operate.

Sen. Charles Grassley, R-Iowa, said Friday the FCC should make public all documents showing how the LightSquared decision was reached.

"The new details about the political and financial relationships between the administration and the principals behind LightSquared make the case for transparency even stronger than before,” Grassley said in a statement.

“The more that’s revealed, the more questions there are. Without transparency, the public can’t know whose interests the FCC is pursuing and so can’t trust the agency’s work. The FCC should comply with my request for information to uphold the public’s trust,” Grassley said. He is one of 34 senators questioning the FCC decisions on LightSquared.

In a statement to iWatch News in June, relayed by the White House, Gips said “I never communicated with anyone in the administration or at the FCC at any point about LightSquared’s plans,” and “I have never met Phil Falcone and have no knowledge of any visits he made to the White House.”

Gips served on the Obama transition team with Genachowski before they were appointed to top administration positions.

Genachowski has lauded LightSquared’s potential to provide wireless broadband service which, the chairman says, “would result in billions of dollars of new private investment and the creation of tens of thousands of jobs.” But LightSquared’s efforts have proven to be controversial, as tests have shown that its wireless signals create interference for GPS devices. GPS users ranging from the Pentagon to boaters oppose the new wireless network, as well as a third of the Senate.

To meet concerns, the company has offered to reduce the power of its signals, move them to a part of the spectrum away from the GPS signals, and help pay for a technical fix that will shield GPS devices.

The FCC is now weighing LightSquared’s proposal.

Politically-connected LightSquared pushes wireless Internet plan despite GPS concerns

SkyTerra Communications, Inc. — 2011-10-06T12:36:02-04:00

When the Federal Communications Commission granted LightSquared Inc. expedited approval to launch a new wireless Internet service, some powerful voices in Washington expressed alarm, including the Pentagon and one-third of the U.S. Senate.

LightSquared’s bold $14 billion plan, its detractors said, could cripple GPS systems and threaten aviation safety, disrupt military and rescue operations and interfere with high-tech farming equipment and the everyday navigation devices used by millions.

LightSquared says it has pursued its case through official channels. But little gets done in the nation’s capital without some kind of political connection, and in this regard, LightSquared’s bloodline is particularly rich. Its ties to President Obama’s supporters and the administration’s policy interests run deep, explaining the company’s ability to do battle with powerful entrenched interests:

Several major Democratic campaign contributors and longtime Obama supporters have held investments in the company and its affiliates during its tangled decade of existence. They include Obama’s good friend and political donor Donald Gips, his former White House personnel chief, who now serves as U.S. ambassador to South Africa. Records show that Gips maintained an interest, worth as much as $500,000, as the FCC was weighing LightSquared’s request.
Obama himself was an early investor and came to the presidency a firm believer in expanding broadband. He remains close to other early investors, like Gips and investment manager George W. Haywood, inviting some to luxe social events at the White House and more intimate gatherings like a night of poker and beer.
Obama installed one of his biggest fundraisers, Julius Genachowski, a campaign “bundler” and broadband cheerleader, as chairman of the FCC, whose staff granted LightSquared a special waiver to operate.
LightSquared’s current majority owner, hedge fund manager Philip Falcone, made large donations to the Democratic Party while his broadband request was pending before the FCC. He and LightSquared executives met with White House officials. Neither Falcone nor the White House would comment on what was discussed.
LightSquared employs lobbying firms that wield formidable Democratic firepower: Ed Rendell, former governor of Pennsylvania and onetime chair of the Democratic National Committee, as well as the firm of former House Majority Leader Richard Gephardt.
Jeffrey J. Carlisle, the company’s vice president for regulatory affairs, served with Genachowski and Gips on Obama’s transition team.

LightSquared insists it has found a way for its technology to coexist with GPS systems. But as lawmakers and technology experts wrestle over the conflicting claims, some in Congress suspect the FCC of favoritism in its haste to decide the matter.

“It is a textbook example of Washington at work,” Ken Boehm, the chairman of the National Legal and Policy Center, told iWatch News. The conservative public interest group is pressing Congress to investigate.

Sen. Charles Grassley, R-Iowa, said he has been trying, without success, to get the FCC to disclose basic information about LightSquared’s investors and their relationships to the White House. The agency’s “lack of transparency,” he says, has raised his suspicions.

“Are there ties between the investors and the administration that might lead to the perception that the administration is biased toward approval?” Grassley said in a statement to iWatch News. “In the absence of transparency, the perception might be that the FCC is rushing the public’s business to help a friend in need, regardless of the consequences for the public and the economy.”

LightSquared is a privately-held firm that does not have to publicly disclose its owners. The company says that none of the Obama friends and donors currently retain any financial interest in the firm, and regulatory affairs chief Carlisle dismissed the notion that the company’s success at the FCC resulted from political influence.

“LightSquared participates in numerous proceedings in front of the FCC and other regulatory authorities,” said Carlisle. “We trust that regulatory decisions in these proceedings are made on the merits of the case, and believe that they have been.”

White House officials echoed that. “The Federal Communications Commission is an independent agency with its own standards and procedures for considering these types of decisions and we respect their process,” said White House spokesman Eric Schultz.

But the controversy draws attention to the sway of campaign donors on the administration, a sensitive topic given Obama’s campaign promise to limit the clout of special interests in Washington. iWatch News recently reported that nearly 200 of Obama’s bundlers have landed plum government jobs and advisory posts, won federal contracts worth millions of dollars for their business interests or attended numerous elite White House meetings and social events.

FCC chairman Genachowski, a friend of Obama since they attended Harvard law school, bundled more than $500,000 for the 2008 Obama campaign. He also has made dozens of trips to the White House, leading some Republicans in Congress to complain that the regulatory chief is too cozy with the administration.

The FCC’s backing of LightSquared is especially controversial because of concerns that the new network could interfere with such a broad range of government, commercial and personal GPS systems. GPS, which stands for global positioning system, is a space-based technology that, since being adapted for civilian use in the 1990s, has allowed objects to be tracked in motion. Half a billion GPS devices are in use in North America, the industry says.

The Department of Defense and Federal Aviation Administration have invested more than $38 billion in the technology and expect to spend billions more in coming years, while private industry has sunk at least $2 billion more in the systems. The defense department argues that the FCC did not give adequate consideration to its concerns over possible GPS interefence.

In two rulings, the FCC gave its blessing to Falcone’s purchase of the company on March 26, 2010, and for a waiver of FCC rules on Jan. 26, 2011, which will allow the firm to transform what was originally conceived as a satellite-based network to one that relies primarily on some 40,000 radio towers. The signals from towers are far more powerful than space-based ones, and could dot the country with dead zones for GPS users, unless some sort of filtering system can be designed and deployed.

GPS proponents were dismayed. “The whole process has been highly unusual,” said Dale Leibach, a spokesman for the industry group Coalition to Save Our GPS. “The FCC typically doesn’t act quickly on matters before them, and they acted with great haste and lightning speed” on LightSquared.

The FCC rulings came even though the potential downside was well known in the telecom industry — and was especially worrisome to aviation interests. One of LightSquared’s lobbyists, Gephardt Group Government Affairs, has focused its efforts on “potential aviation communications interference,” according to lobbying reports filed with the Senate.

In all, seven Washington lobbying firms it retains reported $240,000 in fees during the first three months of this year.

Critics of LightSquared have marshaled their forces. “GPS is integral to the functioning of our economy, and is essential for public safety,” wrote 33 senators, including eight Democrats, in a letter to Genachowski on May 19. Until the company can prove that its wireless system does not affect GPS use, “we request the Commission rescind LightSquared’s waiver.” (A 34^th senator has since joined them.) On June 23, the House Appropriations Committee passed a resolution to halt FCC expenditures on the LightSquared project until there are assurances it won’t disrupt GPS signals.

Grassley noted that Falcone is facing an ongoing investigation by the U.S. Securities and Exchange Commission over some of his hedge fund dealings. Falcone has publicly denied any wrongdoing. But Grassley asked Genachowski in an April 27 letter why the FCC did not “proceed with caution rather than step on the gas.”

“Should the government cede a valuable public resource to a hedge fund that’s subject to multiple SEC investigations?” Grassley said, in a statement to iWatch News.

Grassley, the ranking Republican on the Senate Judiciary Committee, also has asked the FCC for a list of all contacts between LightSquared or Falcone and the White House or FCC.

In a May 31 letter, Genachowski replied: “The FCC has proceeded in an open, thorough and fair way. The Commission … will not permit LightSquared to provide commercial service until it is clear that potential GPS interference concerns have been resolved.”

The evolution of LightSquared

Under FCC rules, LightSquared, as a privately-held company, is not required to publicly disclose all of its investors and the value of their holdings, though it has identified Falcone’s Harbinger hedge fund as the current majority owner. But iWatch News found that several investors in the company and its affiliates have had ties to Obama.

According to SEC records, Falcone was an early investor in the company. So was Haywood, who helped steer Obama toward investing in the firm, which was then known as SkyTerra. Obama briefly held up to $50,000 in stock in the company, according to his 2005 Senate financial disclosure form. The dealings surfaced during the 2008 presidential campaign.

“After I got my ($1.9 million) book contract, I had money to invest,” Obama said in 2007. He purchased a home and invested in mutual funds, and set up a blind trust, designed to take “a more aggressive strategy than the normal mutual funds.”

“I thought about going to Warren Buffett and I decided it would be embarrassing with only $100,000 to invest to ask his advice,” Obama told reporters. Instead, Haywood recommended a UBS stockbroker, who bought more than $50,000 in stock in SkyTerra.

Another investor was Jared Abbruzzese, a partner of John J. Gorman, an early Obama donor and a “bundler” of at least $200,000 in donations in the senator’s 2008 campaign for the presidency. Gorman is bundling again for the president’s 2012 re-election effort, the campaign revealed last week.

Abbruzzese got caught up in a messy New York political scandal and, in 2009, he was a witness in the corruption trial of New York state Sen. Joseph L. Bruno, the Senate majority leader. On the stand, Abbruzzese described how Bruno had been paid $20,000 a month in 2005 to serve as a consultant to SkyTerra’s corporate affiliates, Motient and TerreStar, and build “credibility” for the satellite scheme in Washington and at the FCC.

“You employ ‘em to stand there and lend credibility, the halo effect, and…you know, make a phone call,” Abbruzzese testified. “Joe provided good aura.”

Bruno was convicted on two felony counts of fraud.

Abbruzzese eventually left the satellite group.

Of early investors, Haywood and Gorman have remained close to the president. They and their wives were guests at Obama’s first state dinner, which the president hosted for the prime minister of India, on Nov. 24, 2009. Haywood and his wife also joined the president at the Super Bowl party at the White House this year.

And on the evening of Feb. 20, 2011, Haywood and Genachowski arrived at the White House for an event set up earlier that day. First lady Michelle Obama and the couple’s two daughters were away in Colorado on a ski trip, and a White House spokesman said the two men watched the NBA All-Star game with Obama and some of his staff in the White House residence quarters.

“That was a poker game,” said Haywood. “It was poker, pizza, beer and the…game.”

It was a gathering of friends, and a night for the president to relax, said Haywood. “Trust me, there is no business discussed at the poker game,” he said.

The FCC agreed. "The social gathering on Feb. 20 was just that, an informal gathering among friends and acquaintances. No issues relevant to the LightSquared proceeding before the FCC was ever discussed, directly or indirectly," according to an FCC statement.

Haywood, who according to SEC records, owned 400,000 shares of SkyTerra as recently as September 2008, said in an interview that he has since sold all his interest.

“I have had zero to do with it” since Falcone bought the company, said Haywood. “No one has, or would have any reason, to ask me to lobby anybody.”

Haywood added that the number of Obama campaign donors involved in LightSquared’s history was coincidental. “When you raise money from loads and loads of people there are bound to be some who have an interest in something,” he said.

Gips is another major Obama campaign donor and adviser who was an investor in the SkyTerra plan. He is a Harvard-educated Illinois native who, along with Genachowski, worked at the FCC during the Clinton administration. At the FCC, and as a domestic policy adviser for then Vice President Al Gore, Gips acquired an expertise in spectrum issues.

Gips left government during the Bush years, and worked in private industry at a Colorado telecommunications firm known as Level 3 Communications. But he kept his hand in politics, donating to Obama’s 2004 Senate campaign and signing up as a bundler for the 2008 presidential race. Gips and two other Level 3 executives bundled more than $650,000 for the Obama campaign.

After the election, Gips was named to the Obama transition team, along with Genachowski, another $500,000 bundler. Carlisle worked as a consultant for the transition team on broadband issues, but not with Gips and Genachowski, he said.

When Obama took office, Gips went to work at the White House as director of presidential personnel. Genachowski was named to chair the FCC, an independent regulatory agency. Carlisle was hired by LightSquared.

In June 2009, Obama named Gips ambassador to South Africa. In his financial disclosure forms, Gips said at that time that he owned stock options in SkyTerra worth between $250,000 and $500,000.

According to Genachowski’s office calendar, obtained by iWatch News via a Freedom of Information Act request, Gips met with the FCC chairman at the State Department on November 3, 2010—two weeks before LightSquared formally applied for a waiver. On Nov. 5, according to the calendar, Genachowski had an appointment to talk by telephone with the LightSquared CEO, Sanjiv Ahuja.

In its statement, the FCC said the LightSquared matter was not discussed when Gips met with Genachowski, and that the FCC chairman was not lobbied by White House officials on behalf of LightSquared.

Gips said that he recently disposed of the stock options, and that he spoke to no one in the FCC or the administration about LightSquared.

“I never communicated with anyone in the administration or at the FCC at any point about LightSquared’s plans or plans of its predecessor companies. I do not own the options anymore. I have never met Phil Falcone and have no knowledge of any visits he made to the White House,” Gips wrote in an email response to questions posed by iWatch News.

“I am not aware of any contact,” between LightSquared and Gips, said Carlisle. “I didn’t even know he had an ownership interest until you brought it up.”

The big LightSquared player

Falcone, a Minnesota-born one-time hockey player, joined the SkyTerra investors in 2006. Over the years, he acquired a controlling interest.

Falcone is a Harvard graduate whose decision to take a short position on the housing bubble earned him and his investors billions of dollars in the wake of the financial crisis in 2007 and 2008. Through a spokesman, he declined comment for this article.

At two points during the LightSquared regulatory process, according to the White House visitor logs, Falcone was cleared to meet with members of Obama’s staff. In the months before and after those meetings, he and his wife and the CEO for LightSquared donated more than $90,000 to Democratic Party committees.

On Sept. 22, 2009, as he was completing the takeover of SkyTerra, Falcone and LightSquared CEO Ahuja met with James Kohlenberger, chief of staff for the Office of Science and Technology. On Sep. 30, 2009, Falcone and his wife Lisa each gave $30,400 to the Democratic Senatorial Campaign Committee, the maximum allowed. On Sept. 23, 2010, Ahuja gave $30,400 to the Democratic National Committee; on Oct. 28, 2010, he gave the same amount to the National Republican Congressional Committee.

Falcone has previously written checks mainly to Republicans, or split his donations. For instance, in June 2008, he and his wife, Lisa, each gave $28,500 to both the Republican and Democratic Senate campaign committees. That was the maximum allowed at the time.

Falcone and LightSquared attorney Henry Goldberg were cleared for a Jan. 21, 2010, White House complex appointment made through the Office of Science and Technology director’s office, according to White House logs. A White House spokesman said the meeting did not occur.

The National Legal and Policy Center has called on the House Committee on Oversight and Government Reform to investigate LightSquared and its White House ties.

“The ramifications of the FCC’s favoritism are enormous,” Boehm, the group’s chairman, wrote, in a Feb. 2, 2011 letter to the committee. “Mr. Falcone … gained access and influence to the Obama administration and Democrats through well-timed White House visits and contributions.

“Since then, at virtually every step of the way, Mr. Falcone has received favorable treatment and expedited consideration for his plans,” Boehm wrote.

The dueling priorities

LightSquared hopes to capitalize on the Obama administration’s push to extend broadband coverage — and especially wireless broadband coverage — to more than 200 million people throughout the country. In its advertisements, the company cites Obama’s goal of providing 98 percent of Americans with access to a 4G high-speed Internet network. With the explosion of smart phones, tablet computers and other devices that rely on wireless broadband for messaging, video and other data services, demand is climbing and expected to soar.

Genachowski, has led the charge for the president. “If we want to lead the world in the 21st century, we must put broadband at the top of our agenda,” he said, in a speech in March. “The clock is ticking.”

In his May 31 letter to Grassley, Genachowski wrote, “I remain focused on ensuring that the Commission takes full advantage of the incredible economic opportunities that underutilized spectrum presents. This includes the opportunity presented by LightSquared, which if successfully realized would result in billions of dollars of new private investment and the creation of tens of thousands of jobs.”

Given the Obama administration’s interest in promoting broadband, said Carlisle, it should come as no surprise that LightSquared’s requests won quick approval from Genachowski’s staff.

The stakes were high. “We very explicitly asked for expedited treatment,” Carlisle explained. “If we didn’t funding was going to dry up and this company was going to blow away.”

“I don’t think that was a result of favoritism, don’t think this was a result of anything untoward,” said Carlisle. “This is something the FCC has been very clear it supports.”

Carlisle notes, as well, that the interference problem with GPS systems has been known for years by the navigation industry, and stems from highly-sensitive GPS instruments picking up signals from outside the GPS spectrum. LightSquared has offered to move its signal within its allotted spectrum, away from the GPS band, and to help pay the cost of filtering to protect GPS devices.

But critics argue the price could be too high if it comes at the expense of GPS, especially industrial or military applications, which demand great precision.

“We have substantial concerns that LightSquared’s proposal places an unacceptable risk to public safety,” the senators wrote to Genachowski in May. LightSquared’s signal could interfere with GPS receivers used in aviation, public safety, agriculture, construction, maritime navigation and national defense systems, the senators said.

LightSquared has responded with a public relations counterattack, buying full-page ads in The Washington Post, and banners and billboards in the Washington, D.C., subway system. The company says it will invest $14 billion building a high speed national wireless broadband network, and promises to create 15,000 jobs in each of the next five years.

But pot-boiling criticism at the June 23 hearing of two House Transportation and Infrastructure subcommittees suggests the plan faces an uphill climb unless it can lay to rest myriad concerns over its impact on GPS systems.

“Billions of dollars of public and private funds have been invested in these sectors,” Roy W. Kienitz, under secretary for policy with the U.S. Department of Transportation, testified at the hearing. “Their challenges may be the most difficult to resolve.”

Teresa M. Takai, Department of Defense chief information officer, noted that the Pentagon had “raised concerns” with the FCC prior to the agency’s decision to grant the wavier. In her testimony, she said the defense department “takes it stewardship role for GPS very seriously. We do so for the sake of our soldiers, sailors, marines and airmen who use the system daily and rely upon its essential military capabilities for our national defense and preparedness.”

CORRECTION: The Genachowski-Gips meeting took place just before LightSquared filed for a waiver, not while it was pending, as the earlier version said.