Excerpted from Whitney Tilson’s email to investors.
1) I don’t win many friends among my fellow hedgies by continuing to say this (I’ve been public with my views for years), but the carried interest loophole that we all benefit from is absurd, outrageous and unfair. Thus, it’s good to see these developments, even if I have to hold my nose about the source (Trump, who has used every tax dodge in the book).
Give Donald Trump credit for this: The Republican presidential candidate has done more to put a stake in the heart of the carried-interest tax loophole in the last month than the Obama administration has in the last six and a half years.
Michael Mauboussin: Here’s what active managers can do
That’s not for want of trying by the White House. President Obama has proposed closing the loophole in his budget proposals. He has tried to get rid of it as part of bargains on tax reform and budgets. There have also been efforts to kill it in Congress.
Yet it lives on, lining the pockets of billionaire financiers and hedge fund and private equity managers by giving them preferential tax treatment on a large portion of their compensation.
To understand the unfairness of this loophole, consider a guy who sells shoes in a department store who earns a base salary of $40,000 plus gets a $10,000 bonus at the end of the year based on how many shoes he sells. Obviously, both the $40,000 and the $10,000 are taxed as regular income.
Now let’s consider a hedge fund or private equity/venture capital manager with a $1 billion fund who, after collecting 2% ($20 million) in management fees, earns a 15% return ($150 million) for his investors in a particular year. Of this, he takes 20% as his promote/performance allocation ($30 million), which is no different than the shoe salesman’s performance-based bonus and should be taxed the same way: as the regular income that it is (generally 39.6% instead of 23.8%).
The fact that the manager has some of his own money invested in the fund is irrelevant. That capital account is simply treated like any other LP’s, receiving a K-1 that reflects interest and dividend income and realized short- and long-term gains. Nor is it relevant that hedge funds and private equity funds might be good for our markets or economy. The statement from the Private Equity Growth Capital Council that closing this loophole could spell the end of “decades of America’s commitment to fostering entrepreneurial risk-taking” is laughable.
I don’t begrudge investment managers for their success – I celebrate them and try to learn from them! Nor am I a socialist or engaged in class warfare against myself and my friends – but I am concerned that this kind of nonsense makes it easier for others to wage class warfare against us.
2) Roger Lowenstein with some common sense on stock buybacks:
In defense of stock buybacks
By Roger Lowenstein June 15, 2015
Stock buybacks are suddenly controversial, with critics arguing that they are hurting the American economy, killing jobs, and manipulating stock prices and therefore must be banned. Bernie Sanders, the Vermont senator running for president, has made slamming buybacks a theme of his campaign. And William Lazonick, an economics professor at UMass Lowell, has asserted that banning buybacks is key to reviving the middle class.
3) I just finished reading (actually, listening to – I no longer read books, but rather listen to them using Audible.com at 3x speed – discovering this earlier this year has truly been life-changing!) Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice by Bill Browder of Hermitage Capital. It’s a heck of a thriller – and it’s all true! It also underscores why I think Russia is uninvestable.
Here’s a summary:
A real-life political thriller about an American financier in the Wild East of Russia, the murder of his principled young tax attorney, and his dangerous mission to expose the Kremlin’s corruption.
Bill Browder’s journey started on the South Side of Chicago and moved through Stanford Business School to the dog-eat-dog world of hedge fund investing in the 1990s. It continued in Moscow, where Browder made his fortune heading the largest investment fund in Russia after the Soviet Union’s collapse. But when he exposed the corrupt oligarchs who were robbing the companies in which he was investing, Vladimir Putin turned on him and, in 2005, had him expelled from Russia.
In 2007, a group of law enforcement officers raided Browder’s offices in Moscow and stole $230 million of taxes that his fund’s companies had paid to the Russian government. Browder’s attorney Sergei Magnitsky investigated the incident and uncovered a sprawling criminal enterprise. A month after Sergei testified against the officials involved, he was arrested and thrown into pre-trial detention, where he was tortured for a year. On November 16, 2009, he was led to an isolation chamber, handcuffed to a bedrail, and beaten to death by eight guards in full riot gear.
Browder glimpsed the heart of darkness, and it transformed his life: he embarked on an unrelenting quest for justice in Sergei’s name, exposing the towering cover-up that leads right up to Putin. A financial caper, a crime thriller, and a political crusade, Red Notice is the story of one man taking on overpowering odds to change the world.
4) I’m really looking forward to seeing this (even though one reviewer said there’s not much new from those who’ve read Walter Isaacson’s magnificent book, Steve Jobs).
Nearly four years after Steve Jobs died, a debate is still raging.
Does Jobs deserve to be so admired?
That’s the underlying question that emerged in a new documentary released over the weekend by Alex Gibney in “Steve Jobs: The Man in the Machine.” It is also a question that lies beneath the surface of the coming biopic by Aaron Sorkin, “Steve Jobs,” which had its premiere at the Telluride Film Festival this weekend and will open on Oct. 9.
Steve Jobs was a complicated leader: brilliantly creative and obsessive about details yet so maniacal that he could make his colleagues cry and, yes, he created his own truth at times. (That’s the polite way of putting it.)
Best of all, you don’t even have to go to the theater to watch this – it’s on Amazon Video and cable companies’ video on demand for ~$7.
5) Jesse Eisinger with an in-depth look at a brave whistleblower’s nearly decade-long fight against Halliburton:
It’s a story of what it takes to be a whistleblower in America – and what it takes out of you.
Many whistleblowers come undone after they launch their fights. They have trouble keeping their jobs, their marriages, their sobriety. Even friends who are sympathetic often see them as pains in the ass. They are forever marked by a scarlet “W.” And while whistleblowers naturally start off more skeptical than the average, the experience pushes some into often justifiable paranoia. If you want to know why whistleblowers can seem a little crazy, it’s because anybody who is not a little bit crazy would back away from the ordeal of confronting a corporate behemoth or grinding government bureaucracy.
There’s nothing crazy about Menendez, however, beyond an optimism that persists even when the facts don’t warrant it. Throughout the whole struggle, he just knew that somehow, sometime, the world would come around to seeing he was right about Halliburton.
I’ve studied the often-arcane issue of revenue recognition – which accounts for about half of accounting fraud cases – because I teach it as part of a seminar entitled, An Introduction to Financial Statements, and I think it’s likely that Menendez was right and Halliburton was (and maybe still is) cooking its books.
6) A heck of an interesting article about the Susan T. Buffett Foundation’s support for IUDs/birth control. Kudos!
Almost all women—and therefore men—use a form of birth control at some point in their lives, yet contraception is so politically and legally radioactive that legislators and pharmaceutical companies avoid funding it. So it’s no coincidence that the money behind the Colorado initiative, the St. Louis study, and Liletta all came from an unnamed philanthropic source—they all were from the same discreet foundation. Very few people will discuss The Anonymous Donor on the record, but tax filings, medical journal disclosures, and an archived interview with a foundation official show the funds come from Warren Buffett, the chairman and chief executive officer of Berkshire Hathaway, and his family.
“You can’t send out a press release, and you can’t talk about, ‘We got Buffett money’ ”
Named for Buffett’s first wife, the Susan Thompson Buffett Foundation is the third-largest family foundation in the country, behind only the Bill & Melinda Gates and Ford foundations. In 2013, the most recent year for which tax filings are available, it gave away almost half a billion dollars, largely to organizations dedicated to reproductive health. It barely maintains a website, studiously avoids press, and has about 20 people on staff. The foundation and Buffett didn’t respond to requests to comment for this article.
But in a January 2008 interview for a reproductive health oral history project that hasn’t previously been made public, Judith DeSarno, the Buffett Foundation’s former director for domestic programs, was candid about the foundation’s giving.
By the way, this article only talks about the Susan T. Buffett Foundation’s work in the U.S., but the foundation is also hugely impactful on this issue in the developing world as well.