Tuesday :: May 3, 2005

Instant Karma's Gonna Get You, Poppy!


by pessimist

The Carlyle Group - largely a collection of former American government officials and which includes former president Bu$h (Ah! doesn't that sound nice!) - is extremely interested in the conduct of the 'War on Terra' being conducted by the current squatter at 1600 Pennsylvania Avenue. It's how they make their money.

They do very well by their efforts, and reported in February 2005 that Carlyle Group investors earn $5.3 billion.

One would think that they could afford to pay their taxes, no matter that most of the Carlyle Group are Republicans. So what's with this story?


Korea Invades Carlyle Group Office

The rising tide of resentment in Asia over non-tax paying, U.S.-based private equity firms has reached Korea.

Korea's National Tax Service announced last week that it is investigating several U.S.-based private equity firms, following several prominent and lucrative exits in the country. Firms identified by the Korean Herald as under investigation include Newbridge Capital, The Carlyle Group, Lone Star Funds and CitiGroup, among others.

Ah! If only such a tale could be told about Enron!

But I digress - the troubles for Carlyle don't end there:

Sookja Han-You, executive director of Korean Technology Investment Corp., Korea's oldest domestic venture firm, says that while Korean firms have had their hands tied when investing in the country, "foreign firms have been able to rake dollars out of our economy without even paying taxes." She says this has caused a widespread resentment against foreign financial firms in the country.

Ah! So! Similar outrage against freeloading corporations should be running rampant in America!

Han-You also says that most people in [Korea] agree with their tax authorities taking an aggressive stance against tax free profit taking by foreign investors.

One source told PE Week that tax authorities "invaded" Carlyle's offices in Seoul last week, demanding access to documents and seizing files, as part of an investigation to determine whether the firm qualifies as a permanently domiciled investment company in Korea. If so, the firm may be held liable to pay taxes on deals, such as its lucrative $2.7 billion sale last year of KorAm Bank to Citigroup. Carlyle had invested in KorAm Bank in 2000 and again later in a consortium with JPMorgan Partners for a total investment of $435 million, which means the exit created a 6X return.

Seeing The Consequences OF Bad Decisions

Part of the reason for the rising resentment over the success of U.S. private equity firms was caused by Korea itself.

Until recently, the government allowed only foreign firms to invest in private equity within Korea. In December, the government began to reverse that trend as Korea instituted a regulation that allowed domestic firms to invest in private equity within the country for the first time.

As was reported (see PE Week, 11/22/04), the new regulation was intended to encourage the development of the domestic private equity industry, which has seen foreign buyouts firms, such as Carlyle, come into the country and do quite well for more than five years.

However, of the five Korean funds established under the new regulation, only two have been successful in raising capital thus far. Some have speculated, therefore, that the government has started the latest crackdown on investigating foreign firms, because local firms haven't been able to take advantage of the new regulations.

The intention was for the creation of a domestic private equity industry, yet the multinational vultures of foreign lands are the ones who benefitted the most.

The fact that Korea has chosen to act in such a swift manner bodes ill for these vultures, for it means that they had to have been caught unaware. There will certainly be embarassing information in the seized files, and that isn't going to help them much in the future, as they are looking at something like this hapening again:

Similar scenarios are taking place in Japan and China. Both countries are looking at forming new tax regulations that would impact U.S. private equity firms doing business in these countries. The push for the tax measures are largely due to the many profitable deals being made by U.S.-based private equity firms.

Isn't it ironic that the countries which hold so much of our national debt instrumnets are the ones expecting American companies to pay taxes when they get away with paying such little amounts at home?

Such a moral dilemma is beginning to cause a stirring.

It is assumed by most of us progressives that, for all intents and purposes, the Radical Republican Religious render all economic thought unto the Krawford Kaiser. That may not be necessarily so:


The question of our national debt

Beyond seeing the debt as an economic and political problem, there is a fundamental question of how to deal with the debt in terms of the common good and social justice.

Questions include: What is bought with money spent in excess of revenues, causing deficits and increased debt, and does it promote the general welfare? Do these programs deal appropriately with the neediest people? Do the priorities in the annual budget accurately reflect the needs of the most vulnerable people? Does the government have the right to hide the financial reality of the debt from the people? Is fiscal accountability important morally? Is permitting an enormous, growing and apparently unpayable debt similar to damaging the environment, to the detriment of our grandchildren's welfare? What is the moral responsibility of citizens, through education, to become good judges of the morality of public policy?

Are we carrying out God's will when we promote economic expansion as the solution to all our problems?
Our nation's debt is an important economic and political issue with serious moral dimensions.

On Dec. 31, that debt totaled $7.6 trillion. About 60 percent ($4.4 trillion) is public debt held by domestic and foreign investors, and 40 percent ($3.2 trillion) is in trust fund bonds held by the Treasury Department. Every man, woman and child now living in the United States owes $14,928 to the public investors, and owes another $10,853 to the Treasury Department, payable when the time comes for the Treasury Department to cash in those trust fund bonds.

That's $25,781.

Each. Per person. Right now as of publication of this article.

God isn't going to provide that kind of capital!

The problem of $4.4 trillion in publicly held debt may be manageable, but what about the $3.2 trillion in "trust" funds held by the Treasury Department? Those trust funds represent money paid by wage earners who expect to be repaid in future benefits. Past Congresses have already spent that money for unrelated purposes, and when it comes time to convert the trust fund bonds to cash, the government must borrow new money, raise taxes or print more money to raise the cash to pay them off.

Worse yet is the fact that $3.2 trillion is woefully inadequate to cover future payments owed under currently authorized social programs - primarily Social Security and Medicare. The federal government has an archaic cash accounting system, which legally hides these massive off-the-books future liabilities. The Comptroller General of the United States says that "If you include promised but unfunded Social Security and Medicare benefits along with explicit benefit and other commitments, the federal government's obligations, current liabilities and unfunded fiscal commitments are over $43 trillion and rising...

"The current burden for every American works out to more than $145,000."

Each. Per person. Right now as of publication of this article.

The problem will develop gradually, year by year, and those who hold public debt will increasingly fear inflation and increasingly hold back on buying new bonds. This will cause interest rates to go up even faster, further increasing our debt service costs and slowing our economy. Home mortgage rates will increase. New car financing will become more costly. Borrowers, already stretched thin by credit card debt, could face bankruptcy.

And, of course, The Be$t Government Corporate Campaign Contribution$ Can Buy reacted to this crisis by making bankruptcy impossible for individuals and allowing credit card debtors to become, effectively, slaves. No similar actions were taken against businesses.

Just how Christian is that?

This is where the Korean raids upon Carlyle and the others becomes significant with this religious man's view of economics:

China, India and other developing countries will be bigger players in global markets and may take business from American firms. High deficits and an increasing national debt will cause interest rates to rise, increasing our federal debt service costs.

As foreigners reduce their holdings of U.S. bonds, the dollar will drop on foreign exchange markets. Our goods will be more competitive, but higher priced imports will increase inflationary pressures. Foreign economies will be hurt if they sell less to the U.S. and this will weaken the markets for our exports. The downward spiral initiated by a loss of confidence in the U.S. dollar and U.S. government bonds could send the global economy into deep depression from which it could take decades to recover.

To avoid loss of confidence and a run on the dollar, debt holders, both domestic and foreign, must be assured that our government has a valid plan to restructure our nation's looming future obligations.

Considering that each of the Asian countries cited above has recently made comments concerning the reduction of holdings of dollars in their reserve accounts, the intentions of these nations to see to it that foreign (esecially American) corporations pay taxes for business done in their lands indicates that they have little faith that they aren't going to be stuck with the tab should the world economy collapse through the profligate spending habits of America in general and Bu$hCo in particular.

As quoted above, the majority of Koreans are in favor of their government's actions. It would explain why now, based on the following observation:

Politicians will not face up to these future problems unless there is real pressure from fearful constituents, which could come from updating the federal accounting system to surface the true facts.

It looks as if the Korean constituents are already up in arms, and it sounds like those in Japan and China aren't far behind.

We are certainly living in interesting times.


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