A12
KS K
KLMNO WASHINGTON BUSINESS
Fannie, Freddie overhaul moving ahead gingerly
by Zachary A. Goldfarb The Obama administration on
Tuesday tiptoed closer to over- hauling Fannie Mae and Freddie Mac, announcing a conference next month to begin a public dis- cussion on how to remake the na- tion’s system for funding home loans. In a departure from the bold
declarations that accompanied the unveiling of its proposed overhaul of financial regulations, the administration has been tak- ing an incremental approach to housing reform. Administration officials say
they fear that any specific pro- posal could rattle the extremely fragile housing and mortgage markets, which today are sup- ported to a great extent by gov- ernment programs. “It’ll be very irresponsible of us to jump out with some bold declaration of where we want to be if that were going to result in large segments of the market- place panicking,” said an admin- istration official who spoke on the condition of anonymity be- cause the discussions are still preliminary. “We’re not that re- moved from a time when the market was in panic, and we have to be extra guarded . . . to make sure we don’t get back to that place.” But whatever officials might think about the timing, the ad- ministration faces a looming deadline of January 2011, im- posed by the new financial reg- ulatory reform law, to come up with a clear plan for overhauling housing finance. Three months ago, the Trea-
sury and Department of Housing and Urban Development re- leased seven broad questions to guide thinking on how to re- shape housing finance. They re- ceived more than 300 comments by last week’s deadline. The housing conference, scheduled for Aug. 17 at the Trea- sury, will bring together aca- demics, consumer and commu- nity groups, industry representa- tives and other stakeholders for discussions on housing reform. “The future of our housing fi- nance system is critical not only to our economic recovery, but also to millions of American homeowners in every corner of our country,” said Treasury Sec- retary Timothy F. Geithner, who will lead the effort with HUD
Secretary Shaun Donovan. Since 2008, the federal govern- ment has committed hundreds of billions of dollars to keep the housing market afloat and en- sure that borrowers can get loans. Fannie Mae and Freddie Mac, the mortgage-finance giants seized by the government in Sep- tember 2008, and the Federal Housing Administration have been nearly the only sources of backing for new loans. Now the Obama administra- tion is starting to look for ways to slowly unwind the huge govern- ment programs supporting homeownership and to restore the traditional role of the private sector. But it is not an easy tran- sition. “We want the private sector back in,” said another adminis- tration official, who also spoke on the condition of anonymity. “There are signs, but it’s very mi- nor, I have to say.” Jeffrey Goldstein, under secre-
tary for domestic finance at the Treasury, wrote in an essay on the White House Web site Tues- day that it will be very difficult to totally unwind the government’s role in covering losses related to the housing crisis. “The losses that the federal
government has had to backstop are virtually all attributable to bad loans that Fannie and Fred- die took on between 2005 and 2007 — during the height of the housing bubble,” he wrote. “Un- fortunately, we still need to man- age the continuing consequences of those poor credit choices.” Although officials are just get- ting started with the overhaul, some subtle shifts are already be- coming clear. The administration is pursu- ing a policy overhaul that could break from the emphasis on homeownership embraced by previous administrations. The Obama administration has a narrower view of who should own a home and what the government should do to sup- port homeowners. For example, the administration might seek to wind down some government backing for home loans and in- crease the focus on affordable rentals. Geithner has said he favors
government support of home- ownership in general and of low- income borrowers in particular.
goldfarbz@washpost.com
KKR leaders get a tax deal most of us can only dream of
t’s human nature to want to pay as little in taxes as possible and to have someone else pick up the tab for the taxes we do have to pay. For most of us, alas, that’s just a fantasy. But to the folks who run America’s biggest and most prominent buyout funds, it’s reality. Sounds like I’m being unfair,
I
doesn’t it? But watch as I combine a recent filing by KKR with the debate in Washington about how to tax buyout barons’ piece of their investors’ profits. The KKR filing, part of its recent move to have its partnership units traded on the New York Stock Exchange rather than on an obscure British exchange in Guernsey, shows how the investing public subsidizes the insiders’ tax bills. It works like this: KKR (formerly Kohlberg Kravis Roberts) has set up a corporate subsidiary that can increase the stated value of its assets based on the gain realized by insiders who sell some or all of their stake in the company. This written-up value is tax- deductible to the corporation over 15 years, with the tax savings flowing through to the partnership. (It’s what tax techies call a 754 election.) This nifty little move reduces
the partnership’s taxes. Does KKR distribute those savings to its owners equally? Nope. It
DEALS Allan Sloan
passes on 85 percent of its savings to the selling insiders, even if it has to borrow the cash to make the payments. (I should say “will pass on”; insiders haven’t yet sold any units.) These tax-sharing payments are serious money. Even if you assume that only half the insiders’ gains turn into tax deductions for the firm — KKR declined to comment, so this is my best guess — the payments about equal the cost of the insiders’ taxes. Pretty sweet. Here’s the math. Let’s say
Henry Kravis sells $1 million of units, generating $1 million of taxable income. He pays $150,000 in federal taxes, assuming all his proceeds are long-term capital gains. Let’s say half that gain — $500,000 — becomes deductible to KKR’s corporation at a 35 percent rate. This saves KKR $175,000 in taxes over 15 years. Of this, $149,000 — the aforementioned 85 percent — goes to Kravis. The payments to
Kravis beget further deductions for KKR, begetting further payments to Kravis, and so on. You end up with about $206,000 in payments to Kravis. Adjust for the fact that they’re spread over 15 years, and they’re equivalent to about $150,000 today. So the public firm would be giving Kravis tax-sharing payments roughly equivalent to his tax bill, assuming, as I said before, that all his profits are capital gains. (KKR declined to discuss Kravis’s tax situation.) Kravis would have to pay income tax (at ordinary rates) on his tax- sharing payments, poor baby. But he’d still be getting a helluva deal on his gain, compared with what regular folks pay. To be fair, this is an established (albeit public- investor-unfriendly) technique. Blackstone Group, as I wrote three years ago, has a similar deal, as do Pzena, Och-Ziff, DreamWorks Animation and Lazard. Tax expert Robert Willens of Robert Willens LLC, who helped me with some of the math, says this tax goodie shows how the real world works. “The thesis,” he told me, “is
that the partnership’s tax savings wouldn’t increase the price people were willing to pay for the units, and the tax-sharing agreements wouldn’t decrease the prices people were willing to pay for the units. So the insiders
might as well keep the bulk of the savings.” However, even though this game is both legal and disclosed to investors, it has a stiff — and non-visible — cost attached. It enraged congressional representatives and staffers, helping spur the move to raise taxes on the buyout boys’ share of their investors’ profits, known as the carry. The carry is currently taxed at the low long- term capital gains rate, provided that the investors’ profits are long term. In a rational world the carry would be treated as a fully taxable incentive fee, which is what it is.
When the dust finally settles, the buyout boys will probably pay more taxes on their carry (and maybe on sales of their piece of the firm) than they do now — but will still pay a lower overall rate than upper-middle- income people pay on similar income. And upper-middle- income people don’t have publicly traded partnerships sending them tax-sharing payments. For us, then, having low taxes and getting outside help in paying them is only a dream. For the buyout boys, it’s a dream come true.
asloan@fortunemail.com
Allan Sloan is Fortune magazine’s senior editor at large.
WEDNESDAY, JULY 28, 2010
Lockheed gets boost from census work; earnings rise 12%
by Marjorie Censer Capital Business Staff Writer
Lockheed Martin, the world’s
largest defense contractor, said Tuesday that its second-quarter profit rose 12 percent as sales in- creased in all of its operating groups. The Bethesda company report- ed earnings of $825 million ($2.22 a share) in the three months ended June 27, up from $734 million ($1.88) a year earli- er. Revenue rose 3 percent, to $11.44 billion. Company officials said the re- sults were bolstered by Lock- heed’s work on civilian govern- ment projects, particularly the 2010 U.S. Census. Lockheed’s chief financial offi-
cer, Bruce L. Tanner, said in a conference call with investors that the census contract as well as work for the Energy Department
Monitor your investments at
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Daily Stock Market Performance Index
Dow Jones Industrial Average
11,250 10,500 9750 9000
Nasdaq Composite Index
2650 2400 2150 1900
S&P 500 Index 1220 1170 1120 1070 1020 970
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propelled the information sys- tems and global solutions busi- ness unit, which posted 6 percent sales growth. Tanner also praised the space systems division, which logged a 9 percent gain in operating profit in the second quarter and is now expected to produce higher earn- ings than previously forecast. “Space had a terrific year last
year, they’re having a terrific year this year,” Tanner said in an inter- view Tuesday. Overall, the company raised its full-year forecast for per-share earnings from continuing opera- tions by 15 cents a share to a range of $7.15 to $7.35, up from $7 to $7.20. In its aeronautics division, the
Joint Strike Fighter — also known as the F-35 Lightning II — “remains our program of greatest opportunity and greatest chal- lenge,” said chief executive Rob- ert J. Stevens.
THE MARKETS
Industry Group Electric Utilities
Commercial Banks Auto Components Metals & Mining
Wireless Telecomm Svcs Life Sciences
Building Products
S&P 500 Industry Group Snapshot Daily
Computers & Peripherals Power Prodct & Enrgy Trdr Multi-Utilities
%Chg 1.79 1.50 1.49 1.48 0.98
–2.45 –2.60 –2.72 –6.74 –11.73
International Stock Markets Daily
Americas
Brazil (Bovespa) Canada (S&P/TSX Comp.) Mexico (Bolsa) Europe
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Asia Pacific A S O N D J
Company 3M
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AmExp AT&T BoA
Boeing
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Exxon Mobil GE
Dow Jones 30 Industrials Daily
Close 86.80
11.21
44.55 26.15 14.19 68.62 69.18 75.30
Cisco Systems 23.30 Coca-Cola DuPont
55.05 40.38 60.81 16.18
Home Depot 28.58 HP
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DJ Total Stock Market Index 11,623.98 Russell 2000
662.17
Post-Bloomberg DC Area Index 189.77 CBOE Volatility (VIX)
23.19 F M A M J
Company IBM
Intel J&J
JPMorgCh Kraft Foods
Microsoft P&G Co Pfizer
Travelers
United Tech Verizon
Wal-Mart Walt Disney
Close 128.63
21.58 58.10 40.69 29.88
McDonald's 70.40 Merck
35.18 26.16 63.08 15.27 50.58 71.09 28.59 50.96 34.28
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5.9 1.3 7.0
Australia (ASX 200) China (CSI 300) Hong Kong (Hang Seng) Japan (Nikkei)
4497.40 2795.72
20,973.39 9496.85
Cross Currency Rates EU €
US $
US $ per EU € per
Japan ¥ per Britain £ per Brazil R$ per
Canada $ per Mexico $ per
0.7697
87.9300 114.2400 0.6415 1.7687 1.0362
0.3
–0.5 0.6
–0.1 Japan ¥
1.2993 0.0114 0.0088
0.8335 0.0073 2.2980 0.0201 1.3463 0.0118
12.6925 16.4907 0.1440
Interest Rates Consumer Rates
Money market funds 6-Month CDs 1-Year CDs 5-Year CDs New car loan Home-equity loan
0.76 0.81 1.15 2.45 6.17 7.37
Britain £
1.5588 0.5654 1.1997 0.4352
Brazil R$ Canada $ Mexico $ 0.9651 0.0788 0.7428 0.0606
137.0600 49.6920 84.8600 6.9270 0.3625
2.7578 1.6151
0.5854
0.6191 0.0505 1.7084 0.1393 0.0816
19.7866 7.1760 12.2509 Close
66,674.44 11,716.69 32,695.31
258.11
3666.40 6207.31 5365.67
%Chg 0.3
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Commodities Futures
Copper Corn
Crude Oil Gold
Natural Gas $3.2050
Close %Chg –0.6
Daily
$3.6275 –0.3 $77.50
$1158.00 $4.67
Orange Juice Silver
–1.9 –2.1 +1.4
Value of $1000 invested for the past: Daily
0% +25%
Exchange-Traded (Ticker) %Chg Coffee (COFF.L) Copper (COPA.L) Corn (CORN.L) Cotton (COTN.L) Crude Oil (CRUD.L) Gasoline (UGAS.L) Gold (BULL.L)
–1.4 –1.1 0.3 1.3
Natural Gas (NGAS.L) Silver (SLVR.L)
Gainers PrivateBancorp
–2.0 –2.4 –1.9 1.1
–2.9
Gainers and Losers from the S&P 1500 Index Daily
Close %Chg $12.09 14.1
Wilshire Bancorp Integr Device Tech Energizer Holdings Amedisys Inc Medcath Corp Hologic
Lexmark Intl Nautilus Inc FirstMerit Arctic Cat Osteotech
$7.77 10.8 $6.22 10.5 $60.72 9.9 $25.69 9.3 $8.27 9.1 $15.04 8.7 $37.76 8.5 $1.91 7.9 $19.98 7.4 $10.17
7.1
Affiliated Managers $73.35 6.1 Ruth's Hospt Group IPC The Hospitalist HainCelestialGroup Pinnacle Financial
$3.54 6.3 $4.65 5.9
$25.99 5.3 $21.82 4.4 $10.58
4.2
Cathay Gen Bancorp $12.28 4.0 Umpqua Holdings Capella Education
0.48% 0.25% 3.25%
Bank Prime Federal Funds LIBOR 3-Month
3.19% 4.09% 4.61%
10-year note Yield:
30-Year fixed mortgage 15-Year fixed mortgage 1-Year ARM
5-year note Yield:
3.05 1.79
4:30 p.m. New York time.
$12.75 3.9 $94.50 3.8
Losers
Intrct Intelligence Carlisle Cos
Wausau Paper Corp Masco Corp
Thermo Fisher Sci Plantronics Patriot Coal Chico's FAS Parexel Intl
Jacobs Engineering Penford Corp
Range Resources Office Depot
Omnicare Inc Guess?
NCI Building Sys Stepan
2-year note Yield:
6-month bill Yield:
0.63 0.20
Note: Bank prime is from 10 major banks. Federal Funds rate is the market rate, which can vary from the federal target rate. LIBOR is the London Interbank Offered Rate. Consumer rates are from Bankrate. All figures as of
Close %Chg $16.03 –14.7
Daily
$34.12 –12.8 $7.01 –12.0 $10.53 –11.7 $46.17 –9.5 $30.21 –9.4 $12.40 –9.3 $9.40 –9.1 $22.67 –7.9 $37.09 –7.2 $5.97 –7.0 $37.24 –7.0 $4.40 –7.0
Dime Community Bncs $13.33 –6.7 Massey Energy US Steel
$29.65 –6.6 $45.76 –6.4 $24.82 –6.2 $36.20 –6.1 $9.81 –6.0 $65.82 –6.0
Treasury Performance Over Past Three Months
Soybeans Sugar Wheat
$900
Stevens was upbeat, acknowl- edging that the Pentagon is re- viewing the program and that some of the aircraft’s components have reliability issues, but stress- ing that production costs are coming down and that the com- pany continues to see interna- tional interest. The results come as Lockheed continues to pursue cost-cutting measures. Besides launching a voluntary early-exit program for executives, Lockheed scaled back its participation in the Farnbo- rough International Airshow, a major industry event, and has cut its advertising budget and travel expenses, Stevens said. Lockheed is also moving for- ward with the divestiture of two business units, its Enterprise In- tegration Group (EIG) and Pacific Architects and Engineers (PAE). The company has said it will shed EIG because some of that unit’s work could pose a potential
conflict of interest with other Lockheed businesses under pending Defense Department ac- quisition guidelines. It plans to sell PAE because its work sup- porting operations at facilities such as embassies and base camps does not align with Lock- heed’s broader strategy.
censerm@washpost.com
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Data and graphics by
Close %Chg $1.4670 +0.6 $17.62
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$9.9800 $0.1842 $5.9500
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