Taxpayers set to lose $15 Billion on auto bailout

The U.S. Treasury is accelerating its sell-off of stock in General Motors Co., which likely will be free of the moniker “Government Motors” by spring.

The pace of the sell-off has picked up: The government sold an average of 19 million shares in the early part of the year, but since May has sold more than 25 million a month — plus a one-time special sale of 30 million in June, worth more than $1 billion, to coincide with GM’s return to the S&P 500.

U.S. taxpayers acquired 912 million shares of GM in exchange for a $49.5 billion bailout that began in 2008, under President George W. Bush, and mushroomed the following year under his successor, President Barack Obama.

“We remain on track to complete our exit from GM by early next year,” Tim Massad, the Treasury’s assistant secretary for financial stability, said Tuesday.

GM’s stock closed Tuesday at $36.71. At current trading prices, the government’s remaining stake is worth about $3.7 billion. From previous stock sales, the Treasury has recovered $35.4 billion of its GM bailout, and at current stock prices, taxpayers would have lost about $10 billion on the bailout.

The Treasury estimates taxpayers will have lost $15 billion on their $85 billion auto industry bailout, which also included aid to bankrupt Chrysler. Auburn Hills-based Chrysler has repaid its debt. Read more >>

Re-Default: Up To 46% Of Bailed Out Homeowners Can’t Pay Their Mortgage (Again)

The Treasury Department and managers of the Home Affordable Modification Program (HAMP) are scrambling to figure out why homeowners who used the government’s bailout mechanism to save their homes are re-defaulting on their payments.

The program, originally designed to assist homeowners who were facing foreclosure following the 2007 sub-prime crisis, has reportedly saved 1.2 million people from losing their homes, but a report from the Special Inspector General who oversees the government’s Troubled Asset Relief Program (TARP) says that the loan modifications that were supposed to get American families back on their feet aren’t working as well as expected.


If your mortgage payment is $1500 monthly, and you just lost your job and are collecting $800 in unemployment insurance monthly, then it is impossible for you to make good on your loan. Even if the government helps to reduce your mortgage payment to $850 monthly and provides you with emergency funds to cover all of your other expenses like food, health insurance and utilities, you still can’t service your debt.

It’s that simple. Read more >>

GM bailout: Taxpayers still $18.1 billion in the hole

General Motors stock would have to sell for $95.51 per share for taxpayers to break even on bailing out the company, according to a government watchdog's report released Wednesday. That price is about three times what GM shares are selling for now, even after a 25 percent increase in the price so far this year.

"There's no question that Treasury, the taxpayers, are going to lose money on the GM investment," Special Inspector General Christy Romero, author of the July quarterly report to Congress, said in an interview.

GM needed the $49.5 billion bailout to survive its trip through bankruptcy restructuring in 2009. Since emerging from bankruptcy, the restructured company has piled up $17.2 billion in profits. In exchange for the bailout, the government got 61 percent of GM's stock. It cut that to 33 percent in GM's November 2010 initial public offering.

The government has gradually been selling off the rest of the stock, with the goal of exiting the investment by April of next year. As of June 6, it still owned 189 million shares, or about 14 percent of the company, according to the report. Taxpayers are still $18.1 billion in the hole on the $49.5 billion bailout, including interest and dividends, according to the report.

If the government sells its remaining shares of GM for the current stock price of $36.61, it would get just over $6.9 billion, meaning taxpayers would lose about $11.2 billion on the bailout. Read more >>

Gold crush: U.S. ready to shut down gold sales to Iran

The U.S. is trying to stop the gold rush to Iran in a bid to undermine the Islamic Republic's plummeting currency, but critics say the move is more likely to hurt ordinary citizens than the rogue regime's leadership.

A top Treasury Department official told lawmakers that, starting July 1, the U.S. plans to crack down on all transfers of gold to the Iranian government or its citizens. The move appears aimed largely at banks and gold brokers in Turkey and the United Arab Emirates.

Companies operating from within those nations have shipped large amounts of gold to Iran as Tehran attempts to stabilize its currency, the rial, amid increasing international economic isolation.

"We have been very clear with the governments of Turkey and the UAE and elsewhere, as well as the private sector that is involved in the gold trade, that as of July 1 all must stop, not just the trade to the government," Treasury Undersecretary for Terrorism and Financial Intelligence David Cohen told members of the Senate Foreign Affairs Committee last week. Read more >>

Obama to let spy agencies scour Americans' finances

The Obama administration is drawing up plans to give all U.S. spy agencies full access to a massive database that contains financial data on American citizens and others who bank in the country, according to a Treasury Department document seen by Reuters.

The proposed plan represents a major step by U.S. intelligence agencies to spot and track down terrorist networks and crime syndicates by bringing together financial databanks, criminal records and military intelligence. The plan, which legal experts say is permissible under U.S. law, is nonetheless likely to trigger intense criticism from privacy advocates.

Financial institutions that operate in the United States are required by law to file reports of "suspicious customer activity," such as large money transfers or unusually structured bank accounts, to Treasury's Financial Crimes Enforcement Network (FinCEN).

The Federal Bureau of Investigation already has full access to the database. However, intelligence agencies, such as the Central Intelligence Agency and the National Security Agency, currently have to make case-by-case requests for information to FinCEN. Read more >>

Postal Service Prepares for Second Default in Two Months

The U.S. Postal Service will default this week on a $5.6 billion congressionally mandated obligation to pre-fund retiree health benefits, marking the second time in two months the cash-strapped agency has done this.

The Postal Service last month failed to pay $5.5 billion for its fiscal 2011 prepayment obligation, which originally was due in September 2011 but was deferred by Congress until Aug. 1. That was the first time it ever defaulted on a payment to the Treasury Department. The $5.6 billion due this week, on Sept. 30, represents this fiscal year’s obligation.

Before this year, Congress helped USPS defer pre-funding payments required by a 2006 congressional mandate. Postal reform has challenged this Congress. Lawmakers warn that when they revisit the issue after the November election they likely won’t reach agreement on as major an overhaul as some deem necessary. USPS lost $5.2 billion in the third quarter of fiscal 2012, $2.1 billion more than during the same time period in 2011. Read more >>

General Motors Is Headed For Bankruptcy -- Again

President Obama is proud of his bailout of General Motors.  That’s good, because, if he wins a second term, he is probably going to have to bail GM out again.  The company is once again losing market share, and it seems unable to develop products that are truly competitive in the U.S. market.

Right now, the federal government owns 500,000,000 shares of GM, or about 26% of the company.  It would need to get about $53.00/share for these to break even on the bailout, but the stock closed at only $20.21/share on Tuesday.  This left the government holding $10.1 billion worth of stock, and sitting on an unrealized loss of $16.4 billion.

Right now, the government’s GM stock is worth about 39% less than it was on November 17, 2010, when the company went public at $33.00/share.  However, during the intervening time, the Dow Jones Industrial Average has risen by almost 20%, so GM shares have lost 49% of their value relative to the Dow. Read more >>

Taxpayers lost $833 million on food supplied by Amtrak

Amtrak was created to take over the shattered passenger rail system in the early 1970's 

Source
Taxpayers lost $833 million over the last decade on the food and beverages supplied by Amtrak, which managed to spend $1.70 for every dollar that received in revenue.

“Over the last ten years, these losses have amounted to a staggering $833.8 million,” said Rep.John Mica, R-Fla., in a statement previewing a House hearing today.  “It costs passengers $9.50 to buy a cheeseburger on Amtrak, but the cost to taxpayers is $16.15.  Riders pay $2.00 for a Pepsi, but each of these sodas costs the U.S. Treasury $3.40.”

Amazon.com is currently selling 24-packs of 12 ounce Pepsi cans for $8.94 -- which averages to about 75 cents per can.

Amtrak President Joe Boardman tried encourage House investigators by telling them that last year's losses represent an improvement over previous years. "Our ongoing programs have certainly delivered measurable financial efficiencies," Boardman told Congress in his written testimony today. "In 2006, our food and beverage service recovered 49 percent of their costs. In 2011, these services recovered 59 percent of their costs," he testified.

The food service is legally obligated to break even, but Amtrak lost $84 million just last year. “The rail service’s food and beverage operation has 1,234 employees, and taking into account Amtrak’s $84.5 million loss last year, that’s $68, 476 per employee," Mica said.

Obama’s New Free Speech Threat

An Executive order seeks to punish U.S. citizens even for "indirectly" obstructing dictatorial rule in Yemen

Salon - Glenn Greenwald
There is substantial opposition in both Yemen and the West to the new U.S.-backed Yemeni President, Abed Rabbo Mansour Hadi. Hadi was the long-time Vice President of the Yemeni dictator Ali Abdullah Saleh, and after Saleh finally stepped down last year, Hadi became President as part of an “election” in which he was the only candidate (that little fact did not prevent Hillary Clinton from congratulating Yemen “on today’s successful presidential election” (successful because the U.S. liked the undemocratic outcome)). As it does with most U.S.-compliant dictators in the region, the Obama administration has since been propping up Hadi with large amounts of money and military assistance, but it is now taking a much more extreme step to ensure he remains entrenched in power — a step that threatens not only basic liberties in Yemen but in the U.S. as well:

President Obama plans to issue an executive order Wednesday giving the Treasury Department authority to freeze the U.S.-based assets of anyone who “obstructs” implementation of the administration-backed political transition in Yemen.
The unusual order, which administration officials said also targets U.S. citizens who engage in activity deemed to threaten Yemen’s security or political stability, is the first issued for Yemen that does not directly relate to counterterrorism.

 Unlike similar measures authorizing terrorist designations and sanctions, the new order does not include a list of names or organizations already determined to be in violation. Instead, one official said, it is designed as a “deterrent” to “make clear to those who are even thinking of spoiling the transition” to think again. . . .

 The order provides criteria to take action against people who the Treasury secretary, in consultation with the secretary of state, determines have “engaged in acts that directly or indirectly threaten the peace, security or stability of Yemen, such as acts that obstruct the implementation of the Nov. 23, 2011, agreement between the Government of Yemen and those in opposition to it, which provides for a peaceful transition of power . . . or that obstruct the political process in Yemen.”

In other words, the U.S. Government will now punish anyone who is determined — in the sole discretion of the U.S. Government — even to “indirectly” obstruct the full transition of power to President Hadi. More...

U.S. lost $14B on auto bailout

Image via WikipediaIncluding the $1.3 billion loss on its Chrysler investment, announced Thursday, the United States government has lost about $14 billion on the auto industry bail-out. GM is now mostly owned by the U.S. Treasury. Chrysler is mostly owned by the United Auto Workers union and Italian automaker Fiat SpA, which controls the Auburn Hills, Mich., automaker. Read more...

Tarp Repayments a Farce - Banks Pay Back TARP Funds by Borrowing from Treasury

Image via WikipediaMost of the big banks have repaid the government funds they received under the Capital Purchase Program (CPP), the pillar of TARP under which Treasury bought preferred shares in the nation's banks. Enough so that, combined with dividends and sales of warrants, Treasury has declared that taxpayers have earned a profit on the CPP. Thus far, $245 billion has gone out, and $255 billion in repayments, interest and warrants has come back, yielding a profit to taxpayers of $10 billion. And there's several billion more where that came from.

Many of the small banks that took relatively small chunks of capital have been slower to exit. Last week, however, there was a mini stampede. The transactions are reported here. Eight banks paid back their funds on July 14. They were:

Eagle Bancorp of Bethesda, MD: $23.235 million
First California Financial, Westlake Village, CA: $25 million
Cache Valley Bank, Logan, UT: $4.77 million, plus $263,000 to buy back preferred shares granted to Treasury in lieu of warrants
Security Business Bancorp, San Diego, CA: $5.8 million, plus $290,000 to buy back preferred shares granted to Treasury in lieu of warrants
BOH Holdings of Houston, Houston, TX: $10 million, plus $500,000 to buy back preferred shares granted to Treasury in lieu of warrants
BancIndependent, Sheffield, AL: $21.1 million, plus $1.055 million to buy back preferred shares granted to Treasury in lieu of warrants
York Traditions Bank, York, PA: $4.871 million, plus $244,000 to buy back preferred shares granted to Treasury in lieu of warrants
Centric Financial, Harrisburg, PA: $6.056 million, plus $182,000 to buy back preferred shares granted to Treasury in lieu of warrants

That adds up to a total of $103.3 million.

But sometimes there's less than meets the eye. Generally, banks that repaid CPP funds did so with cash raised from earnings, or by raising new outside capital. In finance and banking you always have to read the fine print. And if you go back to the report, you'll notice that the fine print accompanying the entries for each of the above exits makes reference either to Footnote 49 or Footnote 50. Footnote 49 reads: "Repayment pursuant to Title VII, Section 7001(g) of the American Recovery and Reinvestment Act of 2009 using proceeds received in connection with the institution's participation in the Small Business Lending Fund." Footnote 50 reads: "Repayment pursuant to Title VII, Section 7001(g) of the American Recovery and Reinvestment Act of 2009 — part of the repayment amount obtained from proceeds received in connection with the institution's participation in the Small Business Lending Fund."

All of which is to say that these banks repaid cash owed to a program run by the Treasury Department by. . . borrowing from another program run by the Treasury Department. More...

Sen. Sanders' 10 worst corporate income tax avoiders

Image via WikipediaVia Bernie Sanders

Sen. Sanders' 10 worst corporate income tax avoiders.
1)      Exxon Mobil made $19 billion in profits in 2009.  Exxon not only paid no federal income taxes, it actually received a $156 million rebate from the IRS, according to its SEC filings.  (Source: Exxon Mobil's 2009 shareholder report filed with the SEC here.)
2)      Bank of America received a $1.9 billion tax refund from the IRS last year, although it made $4.4 billion in profits and received a bailout from the Federal Reserve and the Treasury Department of nearly $1 trillion. (Source: Forbes.com here, ProPublica here and Treasury here.)
3)      Over the past five years, while General Electric made $26 billion in profits in the United States, it received a $4.1 billion refund from the IRS. (Source: Citizens for Tax Justice here and The New York Times here.  Note: despite rumors to the contrary, the Times has stood by its story.)
4)      Chevron received a $19 million refund from the IRS last year after it made $10 billion in profits in 2009.  (Source: See 2009 Chevron annual report here.  Note 15 on page FS-46 of this report shows a U.S. federal income tax liability of $128 million, but that it was able to defer $147 million for a U.S. federal income tax liability of $-19 million)
5)      Boeing, which received a $30 billion contract from the Pentagon to build 179 airborne tankers, got a $124 million refund from the IRS last year. .  (Source: Paul Buchheit, professor, DePaul University, here and Citizens for Tax Justice here.)
6)      Valero Energy, the 25th largest company in America with $68 billion in sales last year received a $157 million tax refund check from the IRS and, over the past three years, it received a $134 million tax break from the oil and gas manufacturing tax deduction. (Source: the company's 2009 annual report, pg. 112, here.)
7)      Goldman Sachs in 2008 only paid 1.1 percent of its income in taxes even though it earned a profit of $2.3 billion and received an almost $800 billion from the Federal Reserve and U.S. Treasury Department.  (Source: Bloomberg News here, ProPublica here, Treasury Department here.)
8)      Citigroup last year made more than $4 billion in profits but paid no federal income taxes. It received a $2.5 trillion bailout from the Federal Reserve and U.S. Treasury. (Source: Paul Buchheit, professor, DePaul University, here, ProPublica here, Treasury Department here.)
9)      ConocoPhillips, the fifth largest oil company in the United States, made $16 billion in profits from 2006 through 2009, but received $451 million in tax breaks through the oil and gas manufacturing deduction.  (Sources: Profits can be found here.  The deduction can be found on the company's 2010 SEC 10-K report to shareholders on 2009 finances, pg. 127, here)
10)  Over the past five years, Carnival Cruise Lines made more than $11 billion in profits, but its federal income tax rate during those years was just 1.1 percent.  (Source: The New York Times here)

Govt to lose $14B of auto bailout funds

Image via WikipediaThe Obama administration said Wednesday that the government will lose about $14 billion in taxpayer funds from the bailout of the U.S. auto industry.

In a report from the president's National Economic Council, officials said that figure is down from the 60 percent the Treasury Department originally estimated the government would lose following its $80 billion bailout of Chrysler and General Motors in 2009.

The report's release coincides with the administration's efforts to tout the bailout's role in the revitalization of the U.S. auto industry after last week's announcement that Chrysler is repaying $5.9 billion in U.S. loans and a $1.7 billion loan from the Canadian government. Those payments cover most of the federal bailout money that saved the company after it nearly ran out of cash in and went through a government-led bankruptcy. More...

Social Security Is in Far Worse Shape Than You Think

Image via WikipediaFor years, politicians and policymakers have reassured the American public that the Social Security system, which sends monthly checks out to 53 million beneficiaries, is safely solvent -- and will be for decades to come. But federal spending and income data from the Treasury Department reveal that the Social Security program is already deep in the red, with outlays exceeding payroll tax revenues by $76 billion in 2010 alone.

This stunning shortfall calls into question the rosy fiscal forecasts made by the Social Security Administration (SSA) about the program's future solvency.

The annual report of the Social Security Trustees, published in August 2010, forecast that the primary Social Security program, the Old Age and Survivors Insurance Trust Fund (OASI), would not exceed its tax receipts until 2018. Unfortunately, it happened in fiscal 2010, which ended in October. Read more...

Social Security to start cashing Uncle Sam's IOUs

Image via Wikipedia

The retirement nest egg of an entire generation is stashed away in this small town along the Ohio River: $2.5 trillion in IOUs from the federal government, payable to the Social Security Administration.

It's time to start cashing them in.

For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year.

Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more.

Sounds like a good time to start tapping the nest egg. Too bad the federal government already spent that money over the years on other programs, preferring to borrow from Social Security rather than foreign creditors. In return, the Treasury Department issued a stack of IOUs — in the form of Treasury bonds — which are kept in a nondescript office building just down the street from Parkersburg's municipal offices.

Now the government will have to borrow even more money, much of it abroad, to start paying back the IOUs, and the timing couldn't be worse. The government is projected to post a record $1.5 trillion budget deficit this year, followed by trillion dollar deficits for years to come. More...

Behind closed doors, AIG employees have contempt for taxpayers

Transcript reveals anger of AIG employees toward politicians, public
Brady Dennis
Washington Post Staff Writer
Thursday, March 4, 2010; A16

During the national furor that erupted last year after American International Group paid more than $165 million in bonuses, the voices of those vilified for receiving the payments remained silent, at least in public.

But behind closed doors, employees at AIG's Financial Products division -- the very unit whose trading had hastened the insurance giant's collapse -- were defiant, saying they were merely getting what they were due, recoiling at public accusations that they were behind their capitalizing on the company's massive taxpayer bailout.

"I will stand behind every action I have taken in this company from Day One," one employee said, according to a newly obtained transcript of a conference call the division's head held last March with some of his staff.

But when another employee asked whether the staff would be getting a second round of bonuses promised for March 2010, his colleagues burst into laughter, apparently considering this a preposterous notion amid the public outrage.

Yet they did see that money, at least most of it. Last month, under a deal in which employees agreed to take a cut in their upcoming retention bonuses in return for an accelerated payment, AIG paid out about $100 million to employees at the firm. AIG is scheduled to pay the last of the bonuses this month.

Even so, neither time nor money has softened the employees' feelings of wrongful persecution and their anger over becoming the subjects of scorn and ridicule. Seldom was that sense of victimhood more clear or more visceral than in the conference call of March 23, 2009.

Gerry Pasciucco, who had been hired to wind down Financial Products after the AIG bailout, was in Wilton, Conn., broadcasting his image and his voice to shaken, frustrated and furious employees in London, Paris and Hong Kong. Pasciucco quickly encountered a buzz saw of complaints over demands that they forgo the bonuses they were due. Emotions were running especially high in the London boardroom, where scores of staffers had gathered around a large table.

"I think it violates everything I believe in, and it's un-American," one employee said that day, according to the transcript of the call.

"This country is supposed to stand on due process," said another. The names of the staff members were redacted from the transcript obtained by The Washington Post.
'Missing the point'

The employees said that the corporate leaders who had driven the firm into the ground were already gone from the company. Those who had remained behind to help clean up the mess and repay the taxpayer bailout were due their compensation, they told Pasciucco.

"You made a commitment to us, and we made a commitment to you. And for anybody to look beyond that, as the politics and the media are at the moment, is missing the point," said an employee. "You can't expect us to just roll over and ignore that commitment because there is a bunch of immoral bigots that intend us to do something different. It's not going to happen."

Another was even more irate, lashing out at the public for scapegoating AIG employees. "To be honest with you, I really hope it blows up. I think the U.S. taxpayer deserves to lose a trillion dollars over this thing for the way they have behaved."

And then he turned on politicians who had joined the anti-AIG posse. "They only care about the next election, just like we only care about the next bonus. Well, none of them cares about the country, none of us cares about the institution," he said, adding: "They really don't care, and I really don't care. And frankly, if a trillion dollars gets lost, fine."

The AIG retention bonuses have rankled many in the public because the company has received a federal rescue package of about $180 billion in loans, stock investments and other commitments from the Federal Reserve and the Treasury Department. Closing down AIG Financial Products' trading portfolio has been vital to stemming further losses and repaying the public money.

As the employees were confronting Pasciucco last spring, lawmakers in Washington were contemplating a 90 percent tax on the bonus payments. AIG's chief executive, Edward M. Liddy, had been berated on Capitol Hill. Employees had received anonymous threats, some violent.
'Is this blackmail?'

Pasciucco wanted to assuage their angst that day. But he also had another goal: persuading them to return 50 percent of the bonus money in hopes that New York Attorney General Andrew M. Cuomo would not make their names public, as he was threatening. Employees fumed, accusing Cuomo of "blackmail" and "extortion." They complained that they were being forced to pay "protection money."

"Is this blackmail? To a certain extent, it is," Pasciucco told employees that morning. "If the only reason you would give money back is because you are afraid for your family and you are afraid for your safety, then it is."

He agreed that the manner in which some Washington officials had responded to the furor was despicable. "I think it's distasteful. It's unfair. It's unjust. I agree with you, it's not American. It is McCarthy-ite. . . . It will be viewed as a horribly dark period."

Still, he tried to offer a dose of realism. The retention payments might have been guaranteed by contract, he said, but Financial Products had made bad bets that cost taxpayers billions of dollars. Although the decision to return part of their money was voluntary, he said, such a pledge might help employees defuse some of the public anger.

"I am not laying this out that it's the right, moral thing to do, but I am telling you that you are naive if you think that you can ignore the political reality around this as you make your decision," he said, adding: "I am just going to caution you that if you are not lionized and . . . garlands of roses are not put around your shoulders, you shouldn't be surprised."

Threats Against IRS Employees on the Rise

Image via Wikipedia

In the past four years, there appears to have been a "steady, upward trend" in the number of threats against IRS employees, said an official with the Treasury Department's Inspector General for Tax Administration. That assessment, offered in response to an inquiry from Dow Jones Newswires, is based on preliminary data, the official cautioned. More...

Keeping Precious Metals Offshore

Mark Nestmann

An increasing number of Americans are concerned enough about the threat of precious metals confiscation to want to store gold or silver overseas. But laws in effect in 21 states may stand in their way.

I learned about these laws last year when one of my subscribers in Arizona called.

He wanted to buy gold from a foreign dealer for storage offshore, but the dealer refused to sell to him. The reason: the Arizona Model Commodities Act. After some research, I learned that 21 states have enacted the MCA or some variation of it: Arizona, California, Colorado, Georgia, Idaho, Indiana, Iowa, Maine, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oregon, Utah, and Washington.

I looked into the Nevada law, which a lawyer in that state told me was typical of MCAs in other states. Basically, residents of Nevada can purchase “commodities” only under circumstances which effectively exclude having precious metals delivered a non-U.S. storage facility.

The MCA came into existence in the 1980s, after a series of commodities scams in the 1970s.

One of the most notorious ones was International Gold Bullion Exchange (IGBE). Beginning in 1979, William and James Alderdice built their tiny jewelry business in Fort Lauderdale into a multi-million-dollar enterprise with over 1,000 employees.

IGBE advertised in The Wall Street Journal, Barron’s, and many other respected financial publications. In exchange for discount prices, customers waited three months or more for delivery. But many customers never received anything. When authorities finally caught up with IGBE, much of the gold supposedly stored for customers turned out to be railroad ties painted gold. In the end, customers lost millions of dollars.

With this background, it’s not surprising that states acted to protect their residents from commodities scams. But the laws appear to prohibit commodities purchases for delivery overseas.

Fortunately, companies that sell precious metals for storage overseas have developed some creative ways to deal with these laws. One option is for the buyer to use the address of a friend or family member in a non-MCA state. Another is to purchase the metals through an IRA with a custodian in a non-MCA state. A third is to sell the metals to an offshore structure that the buyer controls or is a beneficiary of.

Ultimately, though, the lesson of IGBE and similar scams is “buyer beware.” Wherever you buy, if you don’t take physical possession of precious metals you purchase, make sure that the company you’re dealing with is storing real gold, silver, platinum, or palladium—not railroad ties painted to look like the real thing.

Now, Here’s How to Report Them…

Unfortunately, neither the IRS nor the U.S. Treasury has provided direct guidance on how to report metals held offshore. As a result, I generally recommend that my clients report such ownership, although there appear to be some exceptions.

First, a little background…

U.S. citizens and residents have an annual obligation to report the existence of all “foreign bank, securities or ‘other’ financial accounts” if the aggregate value of those accounts exceeded US$10,000 at any time during the preceding year. Those failing to do so face a fine up to US$250,000, imprisonment up to five years, or both. (In an earlier blog entry, I described how non-U.S. persons have the same obligation if they are “in or doing business” in the United States.)

The report, which the Treasury Department cleverly calls Form TD F 90-22.1, is due by June 30 of the following year. Thus, you must file this form by June 30, 2009, if you had any reportable foreign account relationships anytime in 2008.

You have a separate obligation to disclose any “reportable” foreign accounts on Schedule B of Form 1040. Hopefully, you already made that acknowledgment when you filed your 2008 tax return. If not, you should file an amended return and make the required disclosure (check “yes” on line 7a of Schedule B).

The Treasury Department and the IRS construe the term “financial account” very broadly. The definition unquestionably includes bank, securities, and other accounts that hold financial instruments. However, it does not include individual bonds or stock certificates. This is an important distinction. If you have a foreign brokerage account that contains stock, this is a foreign financial account. If you hold individual shares of the stock directly, it is not reportable.

By analogy, the same rules would presumably apply to gold or other precious metals held offshore. If you hold the metals in a safety deposit box or private vault, without opening a bank or other financial account, you don’t appear to have any reporting obligation. (However, at many foreign banks, you must open an account in order to rent a safety deposit box.) On the other hand, if you purchase the metals through a foreign bank account and the bank stores the metals in its vault as part of your account holdings, the relationship would be reportable.

What if you arrange for a company to purchase gold or other metals on your behalf and that company stores those metals on your behalf in a foreign bank’s vault? While nothing is certain in life (other than death and taxes) a strong case can be made that this is not a “foreign financial account” if the following conditions apply:

• The company does not itself sell the metals but only brokers purchases and sales

• The metals are held together in a designated area of the foreign bank’s vault

• Each bar or coin is identified by a unique, certified number.

• The bars or coins in the vault are individually packaged and labeled so that it they are readily identifiable as your property.

• You can take physical possession of the metals at any time.

Naturally, the IRS might disagree with this analysis. And if you enter into such an arrangement, I highly recommend confirming my interpretation with your own tax advisor.

Taxpayer losses from Fannie and Freddie top $400 billion

Bloomberg
Taxpayer losses from supporting Fannie Mae and Freddie Mac will top $400 billion, according to Peter Wallison, a former general counsel at the Treasury who is now a fellow at the American Enterprise Institute.

“The situation is they are losing gobs of money, up to $400 billion in mortgages,” Wallison said in a Bloomberg Television interview. The Treasury Department recognized last week that losses will be more than $400 billion when it raised its limit on federal support for the two government-sponsored enterprises, he said.

The U.S. seized the two mortgage financiers in 2008 as the government struggled to prevent a meltdown of the financial system. The debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks grew an average of $184 billion annually from 1998 to 2008, helping fuel a bubble that drove home prices up by 107 percent between 2000 and mid-2006, according to the S&P/Case- Shiller home-price index.

The Treasury said on Dec. 24 it would provide an unlimited amount of assistance to the companies as needed for the next three years to alleviate market concern that the government lifeline for Fannie Mae and Freddie Mac, the largest source of money for U.S. home loans, could lapse or be exhausted.

Lax regulation of Fannie Mae and Freddie Mac led to the mortgage companies taking on too many risky loans, Wallison said.

“It turns out it was impossible to regulate them,” he said. “They were too powerful.” He said no one knows how much will be needed to keep the companies solvent.

From 1990 to 1999, Wallison served on the board of directors of MGIC Investment Corp., the largest U.S. mortgage insurer, including a stint on the audit committee, according to Bloomberg data and company filings.

The continued government support of Fannie Mae and Freddie Mac makes buying their debt a good investment, Wallison said.

“It was always safe to buy these notes,” he said. The U.S. government was always going to stand behind them. They’re as good as Treasury notes.”

CIT Bankruptcy Sticks Taxpayers With $2.3 Billion Loss

John Carney
The lifeline extended by Carl Icahn to CIT on Friday may as well be a noose around the neck of taxpayers.

The company said Friday that Icahn to support its prepackaged bankruptcy plan. Icahn, who wanted to push CIT into liquidatio had attempted to persuade other bondholders to derail CIT's restructuring plan. When that attempt failed, Icahn agreed to support the prepack.

The company received $2.3 billion in taxpayer support under TARP. In exchange, the government got preferred securities and warrants for common stock.

Under the bankruptcy plan, which may be filed as early as this weekend, senior bondholders would take a 30 cent haircut on their debt, which will also have its maturity pushed out into the future. The senior bond holders will also get 92.5% of the equity in the company. Junior bondholders will get seriously crunched down the capital structure: the debt will be converted to the remaining 7.5% of the equity.

Current equity holders, including the US taxpayer will be wiped out.

Why did the US taxpayers wind up in a riskier part of the capital structure than billionaire investors like Icahn? Because the US Treasury insisted on "rescuing" financial firms without forcing the existing creditors to accept equity for debt swaps, which would have recapitalized the companies while keeping the taxpayer money in a safer senior position.

CIT was repeated turned down this summer when it sought additional bailout money. This is to the credit of Tim Geithner and the Obama administration, which must have been at least tempted to extend government aid to a company that lends to so many small and medium sized businesses. But this is a cold comfort to taxpayers looking at a $2.3 billion loss: it could have been worse.

With $71 billion in assets, CIT will be the fifth-largest bankruptcy filing in U.S. history, trailing only those of Lehman Brothers, Washington Mutual, Worldcom and General Motors. But apparently the Treasury has decided financial system can survive the CIT bankruptcy. Which raises the question: why did they get any bailout at all?