Risk Rap

Rapping About a World at Risk

A Taxing Situation

irs-and-capitol2President Obama announced his intention to curb the use of offshore tax havens for multinational corporations.  The Treasury Department is looking to raise tax revenues and believes that by closing the use of offshore tax shelters it will be able to raise over $200 bn over the next ten years.  According to the New York Times,  firms like Citibank, Morgan Stanley, GE and Proctor and Gamble utilize hundreds of these type structures to shelter revenue from being taxed by the IRS.  It has effectively driven down the tax rates these companies pay and has been a key driver in maintaining corporate profitability.

This move should come as a surprise to no one.  The Treasury Department needs to find sources of tax revenues to cover the massive spending programs necessitated by the credit crisis and the global economic meltdown.  The TARP program designed to revitalize banks has  expenditures that amounted to $700 bn.  Amounts pledged for economic recovery through EESA, PPIP and ARRA will push Treasury Department expenditures targeting economic stimulus projects and programs to approximately $2 tn.  These amounts are over and above routine federal budget expenditures that is running significant deficits as well.

The planned move by the Treasury Department to rewrite the tax code may be an intentional effort to close budget deficits but it also represents a significant rise in tax audit risk.   For the past two years the IRS has been developing a practice strategy and organizational assets to more effectively enforce existing tax laws.  Private sector expertise, practices and resource has significantly out gunned the IRS’s ability to detect and develop a regulatory comprehension of the tax implications of the sophisticated multidomiciled structured transactions flowing through highly stratified and dispersed corporate structures.  The IRS is looking to level the playing field by adding to its arsenal of resources required to engage the high powered legal and accounting expertise that corporate entities employ.

The IRS has hired hundreds of new agents  and has developed risk based audit assessment guidelines for field agents when examining corporations with sophisticated structures and business models.  As such investment partnerships, global multinational corporations and companies utilizing offshore structures can expect to receive more attention from IRS examiners.

The IRS had developed Industry Focus Issues (IFI) to be used as an examination framework to guide audit engagements for sophisticated investment partnerships and  Large and Mid-size Businesses (LSMB).  The IFI for LSMB has developed three tiers of examination risk.  Each tier has comprises about 12 examination issues that will help examiners focus attention of audit resource on areas the agency considers as high probability for non-compliance.  Clearly the audit risk factors risk

To respond to this challenge, Sum2 developed an audit risk assessment program to assist CFO’s, tax managers, accountants and attorneys conduct a through IFI risk assessment.  The IRS Audit Risk Program (IARP) is a mitigation and management tool designed to temper the threat of tax audit risk.   A recent survey commissioned by Sum2 to measure industry awareness of IFI risk awareness indicated extremely low awareness of tax audit risk factors.

Sum2’s IARP helps corporate management and tax planners score exposure to each IFI risk factor.  It allows risk managers to score the severity of each exposure, mitigation capabilities, mitigation initiatives required to address risk factor, responsible parties and mitigation expenses. The IARP allows corporate boards and company management to make informed decisions on tax exposure risk, audit remediation strategies, arbitration preparation and tax controversy defense preparation.

The IARP links to all pertinent IRS documentation and information on each tax statute and IFI audit tier.  The IARP links to pertinent forms and allows for easy information retrieval and search capabilities of the vast IRS document libraries.  The IARP also has links to FASB to have instant access to latest information on accounting and valuation treatments for structured instruments.

The IARP is the newest risk application in the Profit|Optimizer product series.  The Profit|Optimizer is a enterprise risk management tool used by SME’s and industry service providers.

The IARP is available in two versions.

The IRS Audit Risk Program for investment partnerships (IARP)

Buy it on Amazon here: IARP

The Corporate Audit Risk Program (CARP)

Buy it on Amazon here: CARP

Sum2’s Audit Risk Survey results are here: IFI Audit Risk Survey

You Tube Video: Chairman of the Board, Pay to the Piper

May 7, 2009 Posted by | business, commerce, economics, EESA, FASB, government, hedge funds, IRS, off shore, Profit|Optimizer, regulatory, SME, TARP, Tax, taxation, Treasury | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

IRS Has Hedge Funds in its Crosshairs

irs_logo-bwThe earths axis seemed to have tilted way off course last year. The global capital and credit markets crashed. Venerated banking institutions moved dangerously close to insolvency forcing mergers with better capitalized banks. The bulge bracket investment banking institutions disappeared. Some were acquired by traditional banks, others converted to a bank holding company structure; while others declared bankruptcy. In response the Federal Reserve, Treasury Department and SEC initiated unprecedented concerted interventionist actions. The passage of EESA legislation and the implementation of the $750bn TARP program are the first in many expected moves by the government to maintain the solvency of the banking system as a national economic security issue. In addition to these initiatives the government has also passed a massive $750bn economic stimulus bill to kick start the economy. All told over $1.5 trillion dollars has recently been appropriated by the federal government to address the economic crisis. This massive capital infusion has ratcheted up the federal budget deficit. It will be incumbent on the Treasury Department and the IRS to make a concerted effort to uncover new sources of revenue to finance these massive spending programs.

Hedge funds, private equity firms, CTA’s and other corporations that utilize elaborate corporate structures, engage in sophisticated transactions and recognize uncommon forms of revenue, losses and tax credits will increasingly fall under the considered focus of the IRS. Times have changed and so has the posture and practice of the IRS. The agency is transitioning its organizational posture by moving away from a benign customer service resource and assuming the form of an activist body that is intent on assuring compliance and enforcement of US tax laws. In particular it is building up its expertise and resource to more effectively address the audit challenges the complexity and sophistication hedge funds present.

The IRS has developed its industry issue competencies. It has developed a focused organizational structure that assigns issue ownership to specific executives and issue management teams. This vertical expertise is further enhanced with issue specialists to deepen the agencies competency capital and industry issue coordinators that lends administrative and agency management efficiency by ranking and coordinating responses to specific industry issues. Clearly the IRS is building up its portfolio of skills and industry expertise to address the sophisticated agility of hedge fund industry tax professionals.

To better focus the resources of the agency the IRS has developed a Three Tiered Industry Issue Focus. Tier I issues are deemed most worthy of in depth examinations and any fund management company with exposure in these areas need to exercise more diligence in its preparation and response. Tier I issues are ranked by the IRS as being of high strategic importance when opening an examination of hedge funds and other sophisticated corporate structures. This is followed by Tier II and Tier III focus areas that include significant examination issues but are ranked according to the agencies strategic significance of the market vertical. Clearly the IRS is investing significant organizational and human capital to address an industry that will no longer fly beneath the agencies radar. This institutional investment will be called upon to generate a considerable return on the investment in the hopes that the discovery of lucrative tax revenue streams will help to pay down the massive spending deficits of the federal government.

This development has clearly raised the tax compliance and regulatory risk factors for hedge funds and other fund managers. Significant tax liabilities, penalties and expenses can be incurred if this risk factor is not met with well a well considered risk management program. In response to this industry threat, Sum2 has developed an IRS Audit Risk program that allows a hedge fund CFO to quickly ascertain its IRS risk exposures within the Three Industry Focus Tiers.

The IRS Audit Risk program provides a threat scoring methodology to ascertain level of risk within each Tier item and aggregates overall Tier exposures. The product also uses a scoring methodology to determine your level of preparedness to meet the audit risk, mitigation actions required and potential exposures of the risk. The IRS Audit Risk calculates expenses associated with mitigation initiatives and assigns mitigation responsibility to staff members or service providers. The IRS Audit Risk links to issue specific IRS resources and documentation that will help you determine if the issue is a audit risk factor for your firm and the resources you will need to addresses it.

The IRS Audit Risk for Hedge Funds product is a vertical application of Sum2’s Profit|Optimizer product series. The Profit|Optimizer is a C Level risk management tool that assists managers to uncover and mitigate business threats and spot opportunities to maintain profitability and sustainable growth.

The IRS Audit risk for Hedge Funds product is available for down load on Amazon.com.

The product can be purchased here: Sum2 e-commerce

You Tube Music Video: Beatles, Taxman

Risk: tax liability, penalties, reputation

March 3, 2009 Posted by | compliance, EESA, hedge funds, IRS, legal, off shore, private equity, regulatory, reputational risk, risk management, SEC, TARP | , , , , | Leave a comment

Do You Know Where Your TARP Money Is?

Obama wants Congress to authorize the release of the second $350 Bn in TARP money authorized under EESA. Apparently he has called his good buddy Bush and asked if he would be kind enough to pull the trigger and release the funds. Perhaps Obama is concerned about the ability of Citicorp to make good on its separation agreement for his key adviser Robert Rubin?

When Paulson envisioned the TARP, I guess they figured that if they just threw a TARP (Troubled Asset Relief Program) of money over the banking problem everybody would forget that our banking system is broken. I believe this a a kind of ostrich strategy. Just suggest to all American taxpayers that all they have to do is stick their heads in the sand and pretend that the TARP money is saving our crashing banking system. All should be oakie dokie.

During the holidays I welcomed a little respite from the real time news feeds of the capital market carnage that the credit crisis has wrought. The daily bulletins that our investment portfolios and 401K’s are worthless and that our home equity nest egg is gone with the wind seemed to have abated. But now that the holidays are over the sad news concerning our nations economic health is starting to trickle in again. Today two little news items came across our desk arousing our curiosity about the $350 Bn Paulson, Kashkari and the rest of the crew at the Treasury Department has been throwing at US banks and bank wannabe’s.

The first item elevated my comfort level a couple of notches. The FDIC is requesting that banks receiving TARP program monies need to improve reporting on how the provision of credit products and lending is being enhanced through the participation in the program. WOW what a thought. The Treasury Department dolls out $350 Bn and as an after thought is now setting reporting requirements as to how the taxpayers capital is being used for lending to restore the economic vibrancy of the stalled economy.

If taxpayers and politicians remain unsure as to how the TARP monies are being put to good use by the banks one doesn’t have to look further then the news items concerning Morgan Stanley’s interest in purchasing Citibank’s investment banking arm. Citibank owner of the remaining vestiges of Salomon Brothers and Smith Barney have been under investor pressure for years to divest its brokerage divisions. The transformation of the banking industry as a result of the credit crisis will accomplish this feat. Citibank continues to require major capital infusions. So far, Citibank has received almost $45 Bn in TARP and federal assistance monies. It still requires substantial capital to remain solvent, Mr. Rubin’s separation package notwithstanding. Morgan Stanley flush with at least $10 Bn in TARP money will put it to good use by acquiring Citi’s brokerage unit on the cheap. This asset for cash swap exchange is a telling example as to how TARP funds are being deployed by its recipients.

I can’t believe that many American taxpayers are feeling too good about their money being used to enrich the shareholders of Morgan Stanley and to protect the threatened equity capital of our countries once largest banking institution. In a capitalist economy you need institutions that are allowed to fail. If capitalists are protected from the possibility of failure they can’t be rightfully called a capitalist. Given all that the capitalists have been through with the credit crisis, recession and bank failures; we cannot allow our financiers to experience an identity crisis as well. That would be cruel.

You Tube Video: Grateful Dead, US Blues

Risk: banks, market, credit

January 13, 2009 Posted by | banking, Bush, credit crisis, EESA, Obama, Paulson, TARP | , , , , , | Leave a comment

Viceroy for Life

The Colossus
Francisco Goya

I like Mike. Michael Bloomberg has been a wonderful mayor for the City of New York. I am in awe of his accomplishments as a businessman and as a political leader. As a person, from what I have been able to observe through the lenses of the media I like his temperament, sensibility and believe him to be a good man. I feel a strange kinship with the man. He seems honest, direct is beholden to no one and seems to be a man of his word in whom I can trust. I also believe Mr. Bloomberg to be a man of integrity and his dedication to public service is borne from a desire to serve and to give back to society some of the bounty that society has richly conferred on him. Yes, he is a billionaire and I guess it is at this point that my kinship with the man takes diverging paths. Yet I believe Mr. Bloomberg is one of the best and most capable persons ever to sit in the NYC mayoral office. So it is with regret that I cannot support Mr. Bloomberg’s desire to change the election laws so he can run for a third term in office.

Democracy in the United States is imperiled. The United States once seen by the world as the great laboratory of participatory democracy with the constitution and a citizens Bill of Rights as its guarantor is quickly losing that honored designation. The passage of FISA by our legislative branch of government is a clear and present danger to The Bill of Rights. And during the eight years of the Imperial Presidency of George W. Bush, at times he and his lieutenants seemingly treated the Constitution as an occupational nuisance and an unfortunate cost of doing business for America Incorporated.

The ascending power of the US Treasury threaten unfettered markets operating free from government control. Unilateral interventionist actions into the capital markets and the tremendous power that EESA confers on Cabinet officials to throw a TARP on toxic assets, is a transformational event in how our economy functions and is controlled by the influence of appointed government officials.

The continued war posture of our country and the seeming abrogation of the executive branch’s responsibility to decide strategy, direction and manner of how to prosecute the Iraq war to General David Petraeus’s discretion is a dangerous surrender of civilian control of the military branches.

The judicial branch of our government is also complicit in the dismantling of the great experiment of American democracy. Their autocratic decision to sanction the Florida election that gave Mr. Bush the presidency was based on no precedence nor will it carry the weight of precedent for future cases heard before the court. Bush may have won the election but the protection of voter rights and a respect for the electoral process was the clear loser.

I believe that these represent serious challenges to a free and democratic society and the institutions that support it. That is why I cannot sanction Mr. Bloomberg’s desire to change the law so that he can run for election.

If I recall correctly Bloomberg’s first mayoral primary election was scheduled for 9/12/01. That is a day after that transformative event that continues to inform and direct Americans political consciousness. Though we didn’t vote on the 12th, New Yorkers eventually went to the polls and brought this great mayor into office. I am glad that New Yorkers had the wisdom and foresight to elect Mr. Bloomberg.

But the election process and protocol was respected and continued. Mr. Giuliani wanted to run for a third term but thankfully he did not run. This opened the door for Mr. Bloomberg. I remember at the time thinking that whoever takes office under these conditions will be severely tested by the adverse economic and political conditions of the time. Mr. Bloomberg has conquered and mastered the adversity and his constituents are the better for it. Thank you Mr. Bloomberg.

But you can do one more great service to New York and to our country Mr. Bloomberg by stepping down in deference to democracy. During the next four years you can work to get the law changed so you may assume the office you so richly deserve.

Honor the existing term limits law that were enacted to protect against the abuse of power. Honor a crumbling remnant of our rapidly evaporating democratic culture. Your honor is at stake.

Thank you for your service Mr. Bloomberg.

You Tube Video: Johnny Cash, I Am The Nation

You Tube Video: Be Like Mike

Risk: term limits, representative democracy, elections, laws

October 22, 2008 Posted by | Bush, EESA, elections, folk, politics, TARP | , , , , , , , , , , | Leave a comment

People’s Guide to Recovery Acronym’s

Carl Sandburg
“The People, Yes!”

The economic recovery program is creating new acronyms faster then Hank Paulson can spend a $100 billion of taxpayers money.

This is an modest attempt to develop a glossary of acronyms so taxpayers can keep track of where, how and who is spending the dough.

EESA: Emergency Economic Security Act

TARP: Toxic Asset Recovery Program

VEPP: Voluntary Equity Purchase Program

LIBOR: London Interbank Overnight Rate

FDIC: Federal Deposit Insurance Corp

SEC: Security Exchange Commission

The US passed EESA to legalize TARP and VEPP to lower LIBOR so the FDIC and SEC can help banks get us out of this xo#*!&^ mess.

Got it?

You Tube Video: Carl Sandburg: The People Yes!

Risk: language, communication, humanity

October 14, 2008 Posted by | EESA, Paulson, poetry, SEC, TARP | , , , , , , , , | Leave a comment

Level Three Sinks Lower at GS

Interesting piece at CFO magazine concerning fair value deterioration of Level Three Assets at Goldman Sachs during the month of August. Goldman Sachs reports that valuation of Level Three Assets dropped by 13%. It would be interesting to understand the impact of this collateral erosion had on GS’s largest counter-party AIG?

Was this the trigger that precursors the radical interventionist moves by the Treasury to purchase a controlling stake in AIG?

This insight will become most constructive as the Treasury begins its purchase program of toxic level three assets. Hammering Hank has hired Neel Kashkari one of his mentees from GS to head up the repurchase program. Mr. Kashkari is said to be a quantitative wiz kid and a real life rocket scientist to buy Level Three Assets from GS and other banks and create and manage a portfolio of toxic assets on behalf of the American taxpayers.

The CFO article can be viewed here.

You Tube Video: Goof Troop Level Three

Risk: collateral valuation, counter-party default,

October 8, 2008 Posted by | banking, credit crisis, EESA, FASB, soundtrack, TARP, Treasury | , , , , | Leave a comment

Lender of Last Resort

Now that the Federal Government has entered the commercial paper market and will serve as a lender of last resort to all types of corporations; we are a bit taken aback by the sweep and scope of power that EESA has conferred on our Treasury Department.

In the Federalist Papers, Publius is very clear about the need for Treasury to raise revenues through the power of taxation. Don’t see anything about going into the commercial lending business. I wonder how this will encourage the private sector to begin lending again?

Music Video: Dean Martin Three Coins in the Fountain

Risk: state monopoly, managed economy

October 7, 2008 Posted by | credit crisis, EESA, pop, TARP | , , , | Leave a comment

Bollywood Blockbuster: Wach & Wells

What may be a surprise to Citi’s CEO Vikram Pandit, his new bride Wach has left the nest and is now snuggled safely in the loving arms of its free market hero the west coast banking giant Wells. Apparently Citi’s arranged marriage with Wach was never consummated and looks like it’s heading for an annulment.

This one’s got all the drama of a Big Bollywood blockbuster. The young and troubled Wach is forced by her desperate father FedSec to submit to a loveless arranged marriage to Citi. FedSec has offered a worthless and mysterious dowry it calls EESA whose origins, authenticity and value is highly questionable.

Citi is one of the last vestiges of the crumbling rule of a decrepit Credit Markit Raj. The New York based Citi whose Brahmin’s family lineage is long past its prime is now desperate for the favors of FedSec’s EESA dowry. Citi believes that EESA can prop up the Credit Markit Raj and prolong its position of power and privilege.

Wells the fine looking paramour from California is rumored to have slain gigantic sub-prime mortgage monsters spawned by the evil excesses of Credit Markit Raj. Wells has recovered nicely from its battles and purportedly has a quality balance sheet and size that is preferred by Wach. Apparently size does matter and Wach may have found the true love with Wells it will never have with Citi.

Wells issued $20B in new securities as an example of it’s free market might and demonstration of love for Wach. Wach’s self-esteem has suffered throughout this entire drama. Wach was troubled by the public perception of her intrinsic worth. This past Monday when FedSec announced the arranged marriage to Citi, the marketplace said her value was the equivalent of $.75 per share. But Wells value and sense of self worth rose with Wells attention. As of this morning Well’s affection has raised Wach’s value to over $6.00 per share.

Wells capture of Wach’s affection may threaten FedSec’s mastery and attempted control of the Credit Markit Raj with the offering of the EESA dowry. Ultimately the riches promised by the EESA dowry may not materialize. A governing group of petite demigods called SENCONS may confiscate the dowry and abscond back to their ivory tower hideout.

Lawsuits and high highfalutin philosophizing by the SENCONS about an activist FedSec and letting free markets prevail assures that theater goers will enjoy many sequels of the Wach & Wells story of true love and capital market freedom. Stay tuned.

You tube music video: Bollywood Mix

Risk: EESA

October 4, 2008 Posted by | banking, EESA, SEC, soundtrack, TARP, Treasury | , , , , , , , | Leave a comment

Second Time the Charm for EESA

USS Constitution

EESA went to the house for a second time. It has passed and will now be signed into law. The Emergency Economic Stabilization Act is loaded with earmarks and special provisions so that congressmen can go home to their districts and brag about bringing home the bacon. It is an unpopular bill. To quote W “I appreciate their leadership.”

I suspect that some congressmen may be dismayed that they received too little for their vote. I wonder what future generations will feel about the value they receive from the passage of this bill? In times of national crisis the price of a senators integrity rises or falls in proportion to its severity. Lets see how the USS EESA performs. Lets see if it raises the our nation from the depths of a looming recession.

We are in this thing together. Everyone has just been impressed as a crewmen on this national ark of economic salvation. I just hope no mutinies occur as we journey through rough seas that are sure to come.

See Risk Rap post: Our Ship of State

I hope that the big suspendered bankers aren’t snickering about the fast one they just pulled. I have visions of them snapping towels at each other in the locker room at some fancy country clubs after a day of hard golf. They’re joking about the fast one Paulson pulled over the country, pulling their cookies out of the fire and keeping the good times rolling.

I hope not. I pray for success, peace and prosperity for everyone.

God Speed.

Music Video: BB King, Bobby Blue Bland, Let The Good Times Roll

Risk: depression, credit market stabilization,

October 3, 2008 Posted by | banking, blues, credit crisis, economics, EESA, TARP | , , , , , , , | Leave a comment

Conference Call with Hank

National Federation of Independent Business (NFIB) members had an opportunity to participate in a conference call with Secretary of the Treasury Henry Paulson. Mr. Paulson was keen to solicit the support of NFIB members for the passage of the Emergency Economic Stabilization Act, (EESA).

NFIB members are small business owners who are generally very conservative, free market advocates who vigorously support tax relief, oppose regulatory oversight and large governmental spending programs. NFIB member firms are the entrepreneurs, shopkeepers, service providers and small business risk takers who populate the small stores and office space on Main Street USA.

Small business owners are a politically vocal and influential constituency whose support proponents need to gain passage of EESA. Last night EESA passed the Senate. It will now return to the House of Representatives for a vote. Secretary Paulson asked NFIB members to contact congressmen, senators and media to urge support of EESA passage.

Key points raised were as follows:

FDIC deposit insurance limit was raised to $250,000

EESA Bill included riders with tax cuts and other rebate incentives

EESA has a recoupment provision “put” that allows Treasury to sell assets back to banks at a previously agreed upon price

Failure of EESA will curtail community bank lending activity to small businesses

Large businesses and municipalities dependent on credit markets for short term funding will scale back purchases with small businesses

Current Treasury tools are not sufficient to deal with problem

EESA funding (Federal Budget program cuts) will need to be addressed in next budget cycle

Regulatory frameworks of financial services industry need to be streamlined, strengthened and reformed

Mark to Market of toxic bank assets will help to temporarily address bank solvency and capitalization ratios

Music Video: Blondie, Hangin on the Telephone

Risk: bank solvency, credit, interest rates, recession

October 2, 2008 Posted by | credit crisis, EESA, Paulson, pop, TARP, Treasury | , , , , , , | Leave a comment