Submerging Markets™

John McCain has long since admitted that he has a great deal to learn when it comes to economics.  But it turns out that his own chief economic advisor,  former US Senator Dr. Phil Gramm, has also needed rather extensive retraining lately. Unfortunately this has been acquired mainly at the expense of millions of US home buyers, honest taxpayers, former Enron employees, and would-be enforcers of our (bank-driven,  loophole-ridden) anti-money laundering laws.

GRAMM CRACKERS

Gramm, a somewhat goofy-looking, deceptively slow-talking business economist from Georgia, spent 12 years teaching economics at Texas A&M before getting elected to Congress as a conservative Democrat in 1978. By 1982 he'd switched sides, joining the Reagan Revolution to become one of the Republican Party's most outspoken champions of deregulation, tax cuts, and spending controls -- so long as this didn't affect his pet interest groups.

In the next two decades,  Dr. Gramm was perhaps the Senate's leading proponent of  financial services deregulation, weakened restrictions commodity trading, credit cards, consumer banking, and predatory lending practices, in addition to leading the fight against Hillary Clinton's health insurance reforms. As chairman of the Senate Banking Committee from 1996 to 2000, he was a key author of legislation that eliminated most of the legal barriers between US banks, brokerages, investment banks, and insurance companies that had been in place since the 1930s.

Phil was also a determined opponent of tougher IRS tax enforcement, and a principal author of a 2000 law that exempted companies like Enron from regulation for online energy trading activities. Of course this made sound economic sense. After all, Phil's wife Wendy was a member of Enron's board, and Enron was Phil's largest corporate contributor in the 1990s.

In 2000-2002, both before and after 9/11, Phil also became the key opponent of tougher anti-money laundering regulations, and -- not coincidentally-- one of the largest recipients of contributions from the powerful financial services lobby. Among independent journalists, all this helped to make him known by a variety of sobriquets, including "Foreclosure Phil," "Slick Philly," and "The Personal Representative of the Bank of Antigua."

U-BS-er

This track record stood Dr. Gramm in good stead when it came time to seek new employment in 2003, after the Republicans lost control of the Senate.  Naturally enough,  he gravitated toward his friends in the global private banking industry, whose noble calling it is to gather the assets of the world's wealthiest people and protect and conceal them from taxes, regulation, and expropriation, not to mention  embittered family members, ex-lovers and business partners,  and each other.   

Since 2002, Dr. Gramm has served as Vice Chairman of UBS Investment Bank, which is owned by UBS AG, the largest Swiss bank, the world's 16th largest commercial bank,  and the world's largest private asset manager, with more than 80,000 employees and offices in 50 countries.

Even after joining McCain's campaign during the summer of 2007, Dr. Gramm continued to serve as a registered Washington lobbyist for UBS from 2004 until April 2008, lobbying Congress to maintain weak restrictions on sub-prime lending and predatory lending.

BAD TIMING

In hindsight, Dr. Gramm's recent crusade for even more financial freedom turned out to be  ill-timed,  for several reasons.

First, this was hardly the moment for even more financial deregulation than the US had already digested in the 1990s. After 2002, on Dr. Gramm's watch, UBS became one of the most world's aggressive banks, helping to foment and finance the sub-prime lending crisis that has already cost nearly three million Americans their homes, generated more than $250 billion in bank losses, and driven a $7.7 trillion hole in global equity markets.

Since November 2007 UBS alone has written off $37 billions in mortgage-related assets, the largest write-off for any bank.  In July 2007, UBS's McKinsey-trained CEO, Peter Wuffli, was forced to resign, and in April 2008 its $24 million -per-year Chairman, Marcel Ospel, was given the toe. Since then its stock price has plummeted more than 70 percent,  to its lowest level since 2002.

Meanwhile, the bank also revealed itself to be curiously insensitive to US financial regulations. For example, in May 2004, it was fined $100 million by the US Federal Reserve for violating an embargo on funds transfers to countries like Iran and Cuba. 

Finally, it now turns out that Dr.Gramm's  colleagues at the bank have also been up to their eyeballs in yet another dubious business:  helping up to 20,000 wealthy American tax cheats hide their wealth offshore and commit outright tax fraud, cheating the IRS out of tens of $billions in tax revenue.

SWISS CHEESE

Late last month, Bradley Birkenfield, a senior private banker who'd worked with UBS from 2001 until 2006 out of Switzerland, and then continued to service their clients out of Miami,  pleaded guilty to helping dozens of his wealthy American clients launder their money. His name had originally surfaced when  a Southern California billionaire property developer, Igor M. Olenicoff, had been discovered by the IRS to be paying much less income tax than his status on the Forbes 400 list status warranted.

With the help of Birkenfield and other UBS private bankers, Olenicoff, who'd first established offshore accounts as early as 1992, succeeded in parking at least several hundred million of unreported assets offshore.(Download bankers-indicment-in-florida.pdf)

Ultimately Olenicoff settled with the IRS for $52 million in back taxes, one of the largest tax evasion cases in Southern California history. He also agreed to repatriate $346 million that he had parked in Switzerland and Liechtentstein.

In theory he also faced up to 3 years of jail time, but in practice -- following the standard US practice of going easy on big-ticket tax evaders with no priors -- his maxmum exposure was just six months under standard US sentencing guidelines. Indeed, ultimately Olenicoff only got two years probation and 3 weeks of "community service."   

One also gets the sense that this case was a bit like the cat pulling on the sweater yarn. According to Forbes, Olenicoff reported that many of his other foreign accounts were controlled by Sovereign Bancorp Ltd., a Bahamian company that he claimed had been set by former Russian Premier Boris Yeltsin.

In any case, in the process of making up for lost time with the IRS,  Olenicoff also gave up his two UBS private bankers, Birkenfield, and According to Birkenfield, he was just one of more than 50 UBS private bankers who visited the US out of Switzerland each quarter. This case,  the first US prosecution of a foreign private banker ever, signals that even the Bush Administration has become fed up with the estimated $100 billion per year in lost tax revenues that such practices are costing, and has decided to make an example of Dr. Gramm's employers.

UBS'  sin was that it took "you be us" a step too far.  Like other major global banks, UBS AG had signed a "qualified intermediary" agreement with the US Treasury in 200(x), giving its corporate word that it would either insure that its clients were not US citizens, or withhold appropriate taxes. But when UBS AG's American clients refused to go along with such arrangements, UBS just caved in and lied to the US Government. 

As a result, despite his cooperation, Birkenfield, the former UBS private banker,  is likely get serious jail time this August. Meanwhile, the DOJ has just  issued a "John Doe" summons to UBS AG, requiring it to turn over the identify of its entire list of wealthy American clients. The head of UBS AG's Global Private Banking business unit has been arrested and detained in the US on "material witness" charges, pending resolution of this dispute.  The private banker's wealthy clients are experiencing the tender mercies of the IRS's tax fraud department as we speak -- not only from this US case, but also from the recent scandal involving Liechtenstein's largest bank, where many UBS clients were also channeled.  UBS's shareholders all over the globe must be quaking in their boots, fearing the bank could be subject to massive fines or even a corporate indictment that would prevent it from doing business in the US ever again.

QUESTIONS FOR DR. PHIL

The questions for Dr. Gramm arising out of these scandals are many.   

• First,  was Dr. Gramm completely unaware that UBS AG had organized this massive illicit global campaign to elicit capital flight from the US and other "honest-tax" jurisdictions,  conceal it in low-tax havens like Liechtenstein,  and completely shelter it from the taxes that ordinary taxpayers have little choice but to pay?

• Second, are any of these 20,000 wealthy tax cheats from Texas?  Does Dr. Phil know any of them personally? 

• Third,  what kind of changes, if any,  in laws pertaining to "qualified intermediaries," offshore havens, private banking, and international tax havens does Dr. Gramm believe are necessary? Would he, for example, support the reform bill on foreign havens and "qualified intermediary" rules that Senators Levin and Obama have co-authored? Precisely when will John McCain sign up to endorse that legislation?
  

• Fourth, what else has Dr. Phil learned from all these cases?  Has he changed any of his views on the morality of tax dodging, money laundering, and predatory lending?  Is all this just a matter of "sauve qui peut" -- of whatever we can all get away with, especially the rich?  Does John McCain agree with him on such matters?  What then remains, alas, of "patriotism" and "national sacrifice," two of McCain's favorite leitmotifs?
  

• Finally, given that John McCain really does need sound advice on economic issues like the mortgage crisis, taxation, and money laundering from a "qualified intermediary" of his own,  does all this experience really qualify Dr. Phil Gramm to fill the bill?

(c) SubmergingMarkets 2008

July 1, 2008 at 08:41 PM | Permalink

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