Regulation? Hardly! Try Speculation!

Deep Speculation -- from Harper's Weekly 2/11/1865

Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity or currency. Market manipulation is prohibited in the United States under Section 9(a)(2) of the Securities Exchange Act of 1934...The Act defines market manipulation as transactions which create an artificial price or maintain an artificial price for a tradeable security. --- from Wikipedia

Advocates of free markets like to point out that government regulation strangles and upsets the equilibrium that laissez-faire capitalism provides and requires in order to maintain pricing that reflects the true value of goods and services. Libertarians are staunch believers of totally unfettered capitalism, although the majority of conservatives are its primary cheerleaders also. Or so it seems.

Certainly all the saber-rattling from the United States, and Israel (the tail-that-wags-the-dog), against Iran is having an unnerving affect on the oil commodity markets around the world. Add to this the declining value of the U.S. Dollar, which dominates and is linked to the value of each barrel of crude, and not to mention manipulation by unscrupulous producers that invokes shortages and drives prices upward. Of course, as would be expected, Republicans are jumping on the bandwagon and are more than happy to blame this on the Obama Administration. But there are definitely other factors involved -- factors that have had a long-term influence on steadily rising gasoline prices over the last few years. These are factors that are unrelated to consumer demand, since demand is currently at its lowest mark in the United States since 1997.

Many people are only vaguely aware that oil prices are set by commodities traders -- speculators -- who buy and sell futures contracts on the world's commodities exchanges. These are agreements to buy or sell oil at a specific date in the future at a specific price. Buyers will use these to avoid the risks associated with the price fluctuations of oil, while sellers will attempt to lock in a price for their products. As with all financial markets, speculators use such contracts to gamble on price movements. Commodities traders can create a self-fulfilling prophecy by bidding up oil futures prices (or bidding down, selling short, and still getting rewarded handsomely). This practice adds up to 30% to the cost of a barrel of oil without adding any value to the barrel. Once this starts, it can create an asset bubble. (Sound familiar?) Unfortunately, the one who pays for this bubble -- the artificially-created pricing -- is the consumer. That's you...and that's me!

The other night Cenk Uygur of The Young Turks had a segment on his nightly cable television show about the fluctuating pricing of oil and gasoline, which raised a ton of questions (and answered a ton more) about how speculators in oil have been able to manipulate market pricing to the detriment of us all. Here's the reason for it all: In 2004, commodity investment in oil speculation was a hefty $13 billion. By 2009, only five years later, that investment skyrocketed to $300 billion! Coincidentally, or not, in July of 2004 the market price for crude oil was around $31/barrel; by July of 2008 the price escalated to over $137/barrel. In the United States, that translated to $1.93/gallon (in 2004) and $4.09 (in 2008) at the pump. Granted, pricing dropped after those high-marks, but have since steadily increased and now approach those record levels -- with higher levels expected as we move deeper into the year.

"The cost of gas is expected to rise this spring and summer — but no matter how hard conservative pundits try to blame a potential threat of an oil cutoff from Iran, it’s just not the whole story. Speculation on oil futures — by big banks such as Golden Sachs, JP Morgan Chase and others — contributes to the rising cost. 'They make money if the price zooms up,' Cenk says. In 2011, the average American household paid $600 more out of pocket as a result of that speculation. 'It isn’t supply and demand. It isn’t the free market. It’s because these guys are playing with the market — so that they can make more money. They have got to love what is happening with Iran.' "

As Uyger points out, last year each family in America paid an extra $600 in fuel costs due to oil speculation -- an extra $600 that isn't related to supply and demand market forces or because of free-market competition. It was, pure and simple, just another example of how monopolistic capitalism manipulates market pricing, creating bubbles of artificially high pricing for the benefit of a few and to the detriment of the many. It is, by no other definition, market manipulation -- despite the Dodd-Frank Bill passed by the Democratic Congress that was supposedly designed to limit such abuses.

Here's an older video from last year, again by Cenk Uygur, that explains this subject even more thoroughly. It's happening again.  

 

Corporations Don't Pay Fair Share

Currently, many multinational corporations avoid paying U.S. taxes on revenue from foreign subsidiaries by reinvesting the money overseas, either by parking cash in various accounts or by plowing it back into foreign operations. Under existing laws, companies with operations overseas pay U.S. taxes only if they bring the profits back to the United States. If they keep the profits offshore, they can defer paying taxes indefinitely. President Obama, almost two years ago (May, 2009), proposed a plan that would have taken effect this year, and which would change that.

In a statement from that time, the White House said that in 2004, multinational corporations only paid an effective tax rate of 2.3 percent in the United States because of such allowances. Aides said that was the most recent year available for analysis, and they also indicated this situation was indefensible. Nothing was mentioned about this again until January, during Obama's most recent State of the Union address, when he indicated he wanted to close the loopholes.

Understandably, much of these deductions are legal methods of tax avoidance, many of which this administration has addressed in its tax loophole closure plan, but so much comes under the category of tax evasion, which means the deliberate misrepresenting or concealing of the true state of their affairs to tax authorities in order to reduce their tax liability, and includes, in particular, dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or overstating deductions, etc.). 

Within the last few days, National People's Action issued a report which was prepared for them by Public Accountability Initiative, a non-profit and non-partisan watchdog organization that focuses on corporate and government accountability. This report affirms the tax avoidance and evasion practices of the banking industry in general, and six banks in particular, over the last few reported tax years. It's a glaring and indicting exposé of how Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo used foreign subsidiaries to offshore and understate their revenues, in addition to incorporating offshore tax havens to further reduce their tax liability to the country that issued their corporate charter and where they base their corporate headquarters.

With all the talk of austerity programs, particularly from the Republican Party and other conservative outlets, the question I always have is why? Why are they always leading the charge to cut not only discretionary items, but also non-discretionary items? As I mentioned in my previous post, from March 6th, they're always looking at just one side of the ledger sheet -- the "austerity side". They never consider making corporations pay their fair share (not to mention, but I will anyway, making cuts in the biggest wasters of tax dollars, also intimately tied to and backed by international banking and multinational corporate interests, the Department of Defense).

Read Big Bank Tax Drain. Read it and get even more angry than you are now. Then, make copies and send it to your U.S. representative and both senators. Ask them why; why do We the People have to continue paying for the sins of corporate America -- first during the financial meltdown and subsequent raid on our treasury, and now because corporations refuse to pay taxes like you and I do, every year, year-in-and-year-out, and we have to suffer the burden of less government services so they, corporate America, can amass great profits without paying their fair share. Ask them today.

Big Bank Tax Drain 

How Big Bank Speculation and Tax Avoidance are Starving Public Revenues and Sticking American Taxpayers with the Bill

Executive Summary

Wall Street banks caused the economic crisis that has left millions unemployed, foreclosed on, and without prospects in the worst economy since the Great Depression. This crisis has, in turn, caused massive tax revenue shortfalls for the federal government and for state governments across the country: nearly $300 billion combined for 50 states in the years since the crisis began. To deal with these budget woes, politicians are cutting public spending: laying off teachers, attacking public sector workers, raiding pensions, closing hospitals, and eliminating essential services for children, veterans, and the elderly. Raising revenue from the wealthy, bailed-out banks that caused the crisis would be a far more sensible way to address these budget woes. This report analyzes data from the latest financial filings by the six big banks – Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, Goldman Sachs, and Morgan Stanley – to expose the ways in which they continue to avoid taxes and contribute to tax revenue shortfalls, rather than pay for an economic recovery that will put people to work, keep people in their homes, and preserve the safety net – for people, not corporations.

Key findings:

This year Bank of America is receiving the “income tax refund from hell” – $666 million for 2010, according to its annual report filed in late February 2011. This is following a $3.5 billion refund reported in 2009. Bank of America’s federal income tax benefit this year is roughly two times the Obama administration’s proposed cuts to the Community Development Block Grant program ($299 million).

• Six banks – Bank of America, Wells Fargo, Citigroup, JPMorgan Chase, Goldman Sachs, and Morgan Stanley together paid income tax at an approximate rate of 11% of their pre-tax US earnings in 2009 and 2010. Had they paid at 35%, what they are legally mandated to pay, the federal government would have received an additional $13 billion in tax revenue. This would cover more than two years of salaries for the 132,000 teacher jobs lost since the economic crisis began in 2008.

• Wells Fargo reportedly received a $4 billion federal income tax refund on $18 billion in pre-tax income in 2009, and paid 7.5% of its pre-tax income of $19 billion in 2010 in federal taxes. Its net federal income tax benefit for 2009 and 2010 combined, $2.5 billion, is equal to the Obama administration’s proposed cuts of 50% to the Low-Income Home Energy Assistance Program.

• Banks use a variety of mechanisms to avoid corporate income taxes, including offshore tax shelters. 50% of the six banks’ 1871 foreign subsidiaries are incorporated in jurisdictions that have been identified as offshore tax havens, such as the Cayman Islands.

• Bank of America operates 371 tax-sheltered subsidiaries, more than any other big bank studied, and 204 subsidiaries in the Cayman Islands alone, according to its latest regulatory filings. 75% of Goldman Sachs’s foreign subsidiaries are incorporated in offshore tax havens.

• The banks’ private banking arms also protect the wealth of rich clients from taxation through offshore investment strategies. Bank of America’s wealth management arm encourages clients to register their yachts in foreign jurisdictions for tax reasons.

• Closing special tax loopholes on the financial sector and implementing sensible revenue-raising initiatives such as the Financial Speculation Tax could generate over $150 billion in federal tax revenue each year.

I. Big Bank Speculation & Budget Shortfalls  

The federal government and state governments across the country are facing significant budget shortfalls due to lost tax revenue and increased relief spending during the recession. The breadth and depth of the recession owes to a decade of reckless speculation, fraudulent lending, lax regulation, and low interest rates pursued by the largest banks and compliant politicians, culminating in an unprecedented housing bubble.

The bubble economy rewarded Wall Street with record profits and executive bonuses, but its collapse wiped out $9 trillion in property value nationwide, destroyed the construction industry, bankrupted millions of homeowners, and plunged the entire US economy into its sharpest downturn since the Great Depression. The direct impact of this collapse on local and state tax revenues and relief spending has been disastrous and accounts for most of the states' current funding troubles.

 

• Collectively, states lost approximately $297 billion in tax revenues from late 2008 to 2010 due to the housing bubble collapse. Unlike cities and the federal government, states cannot borrow money to finance operating costs and must choose between tax increases, spending cuts, or a combination of the two to plug budget holes.

• As a result of lost tax revenues and projected losses, states face a combined budget deficit of $125 billion for fiscal year 2012, and have already dealt with deficits of $423 billion for 2009, 2010, and 2011 combined.

(View and download the full report here...)