Dumb Tourists

Pam Martens of Wall Street on Parade reports today on the first day of testimony before the Senate's Permanent Subcommittee of Investigations. I don't know what the scope of the investigations are, but this one is about hedge funds and high frequency trading.  The subject is extremely complex and, in her mind, very likely not quite kosher; she calls those not on the inside - her and us - "dumb tourists".

First, you've got a situation where the banks with whom the funds deal can leverage these deals as high as 20-1. Yet, Federal law has something called Regulation T, which says that a bank or broker-dealer cannot extend more than 50 percent margin on a stock account. Then, you've got something called a basket option, which defines all these trades (which last minutes) as long-term transactions and, thus, subject to a lower tax rate. The Senate report says that one firm may have engaged in "tax avoidance of more than $6 billion". It is also questionable as to whether the books and records say who is the true owner of an account.

Another interesting excerpt from the Senate report:

“Large partnerships – which include hedge funds, private equity funds, and publicly traded partnerships – are some of the most profitable entities in the United States.  According to a 2013 preliminary report issued by the U.S. Government Accountability Office (GAO), ‘[i]n tax year 2011, nearly 3.3 million partnerships accounted for $20.6 trillion in assets and $580.9 billion in total net income.’ That GAO report also found that the IRS was failing to audit 99% of the tax returns filed by large partnerships with assets exceeding $100 million.”

The hearing continues on Wednesday.