Farewell on this channel
Dear readers - I'm afraid this is it for The Company Beat, which is being retired this week. But it's not the end of my blogging. I'm hopping over to Political Economy, the blog home for breaking news and commentary from the Post's formidable financial desk. On that channel, I'll continue weighing in the corporate tax debate, regulation, and all things related to the intersection of business and Washington.
So thanks for reading here. I'll see you at Political Economy.
Wall Street takes notice of foreclosure troubles
The stock market hasn't reacted much to the growing furor over foreclosures -- until today, with Bank of America, Citigroup and Wells Fargo all dropping sharply more than 4 percent.
Problems in the foreclosure process have been brewing for weeks, and there weren't any big news developments today (for a change).
So why now?Continue reading this post »
What's good for U.S. multinationals ...
Lobbyists for U.S. companies with sprawling operations overseas have spent months now trying to fend off higher taxes on foreign profits. Democrats say these firms are shipping jobs overseas and hurting American workers.
But according to a recent report by the McKinsey Global Institute (registration required), these companies pull more than their weight in contributing to the health of the country's economy. Three-quarters of U.S. real GDP growth since 2000 has been driven by these companies.
Says the report: "U.S. multinationals represent less than 1 percent of all U.S. companies, yet they contribute disproportionately to the U.S. economy's growth and health in many ways. U.S. multinationals accounted for 23 percent of U.S. private sector GDP (or value added) in 2007. However, they contributed 31 percent of the growth in real GDP and 41 percent of U.S. gains in labor productivity since 1990. U.S. multinationals' outsized contributions to productivity growth matter greatly because productivity increases have delivered nearly three-quarters of U.S. real GDP growth since 2000, with the rest coming from employment gains -- the reverse of the situation 30 years ago."
As you can see from the table below, they've contributed hugely to productivity, which juices companies' profits because they can make more money with less labor. But they've contributed only 11 percent of gains in employment.
The Senate takes on outsourcing this week
Senate Democrats have changed the subject from Bush tax cuts to outsourcing with a new bill this week designed to stem the flow of jobs going overseas. Their proposed method: tweaking the corporate tax code.
Can changing the tax code alter corporate behavior when it comes to hiring outside the U.S.?
I checked in this morning with Doug Shackelford, a tax professor at the University of North Carolina, to get his thoughts on the latest Democratic proposal. He's skeptical.
The plan would raise taxes on firms that move jobs to other countries to make products -- and then import those products back to the United States.
But this is becoming an uncommon scenario, according to Shackelford, who says companies these days are more often building plants in other countries because that's where their customers are. Markets are growing faster overseas than in this country, so that's where companies want to go.
He added that politicians have not fully grasped that the U.S. economy -- and by extension, U.S. tax policy -- no longer dominates the world the way it used to.
"We're still talking like it's the 1950s or some time period back when we controlled the world," he said. "Increasingly, we don't have the power in Washington to make modifications that are going to alter the way the world works. ... The average politician believes if we change our tax system it'll reverberate around the world."
There is a way, however, that some tax experts say the code can be changed to help the U.S. economy. My colleague Michael Fletcher and I wrote an article over the weekend about the estimated $1 trillion being held by U.S. multinationals overseas. Former Service Employees International Union president Andy Stern now thinks that companies should be allowed a tax holiday on their foreign profits that would encourage them to bring some of that money back to the United States and potentially hire workers.
Stern's solution has the opposite premise of the Democrats' plan: A company making bigger profits overseas isn't the enemy. In fact, it can help the U.S. economy, if it brings some money back home.
Who is Anne Mulcahy?
Former Xerox CEO Anne Mulcahy's name is in the news today as a possible successor to Larry Summers to lead the National Economic Council. The White House reportedly wants to pick a woman and someone with corporate experience.
Mulcahy is a widely respected star in corporate America known for engineering a remarkable turnaround at Xerox, which was near bankruptcy when she took over in 2001. Fortune dubbed her "the accidental CEO" because she was never groomed for the position. She was the long shot after her predecessor lasted only 13 months while the company was headed straight into a ditch. In 2000, the stock fell from $63.69 a share to $4.43.
She worked side by side with Ursula Burns -- now one of the White House's go-to executives for policy advice -- to bring the company back from the dead. Within two years, every business division was profitable. When Mulcahy handed the CEO reins to Burns in 2007, it was the first time a woman chief executive of a Fortune 500 company was succeeded by another woman.
Mulcahy, who's known for being brutally honest, also knows her way around corporate boardrooms. She sits on the boards of Target, Johnson & Johnson and The Washington Post Co.
The only issue for the administration is that Mulcahy doesn't have much Washington experience, aside from her perch on the President's Economic Advisory Board. But this is someone used to jumping into tough straits and showing off an incredible learning curve.
From the Fortune article, which highlights Mulcahy's typical honesty:
"Nothing spooked me as much as waking up in the middle of the night and thinking about 96,000 people and retirees and what would happen if this thing went south," she says. "Entire families work for Xerox" -- including her own: her husband, who retired in 1998 after a 35-year career in sales; and her brother Tom Dolan, a senior vice president who joined Xerox six years before she did. When Mulcahy got her big offer, duty and loyalty compelled her to take it, despite zero preparation. She now believes her lack of training was a good thing. She had no preconceived notions, no time to develop bad habits. "There was no time for development classes," she says. "There really was no shade from day one."
Tax Reform Class of 1986: A reunion
As the country's tax code takes center stage politically, more people are taking a trip back to 1986, the year the most recent federal overhaul of the tax code passed. On Thursday, Senate Finance Committee Chairman Max Baucus (D-Mont.) is holding a hearing about lessons from the Tax Reform Act of 1986, and he's reuniting some key figures from that time.
Witnesses will include former representatives Dick Gephardt and Bill Archer, who both served on the House Ways and Means Committee at the time; Buck Chapoton, former assistant secretary of the Treasury for tax policy under President Ronald Reagan; and Randall Weiss, who was an economist at the Joint Committee on Taxation between 1977 and 1989.
Two central figures from that time who won't be appearing: former senator Bill Bradley, who sponsored the bill, and the late Dan Rostenkowski, who was chairman of the House Ways and Means Committe.
So what are the chances for a repeat of 1986 in 2011? A few months ago, I posed this question to longtime tax lobbyist Ken Kies, who appears in the book "Showdown at Gucci Gulch" (the must-read classic on the Tax Reform Act of 1986). He said it's unlikely, given that the groundwork for the last wave of reform took years to lay and he hasn't seen a similar effort in the works. That bill also required massive cooperation between a Republican White House, a Democratic-controlled Congress and the business lobbying community. It was an unlikely feat then -- and perhaps even more unlikely now.
The private equity name game
The Private Equity Council announced earlier this week it is now the Private Equity Growth Capital Council.
"Our new name better conveys what private equity is all about: growing companies," said PEGCC President Douglas Lowenstein in a statement.
That's not what many lawmakers thought during the peak of the buyout boom a few years ago when the industry was able to take advantage of cheap debt, scoop up companies and make huge profits -- even if the companies they took over didn't fare so well.
The New York Times' Julie Creswell wrote a terrific story last year about the unfortunate fate of Simmons, the mattress company, which generated huge profits for the firm Thomas H. Lee even as it descended into failure.
A disproportionate number of the companies that were acquired during that frenzy are now struggling with the enormous debts. More than half the roughly 220 companies that have defaulted on their debt in some form this year were either owned at one time or are still controlled by private equity firms, according to analysts at Standard & Poor's. Among them are household names like Harrah's Entertainment and Six Flags, the theme park operator.
With this new name, the industry comes much closer to rebranding itself as "growth capital," which sounds pretty close to "venture capital." The VC industry, unlike the PE world, has enjoyed a better reputation in Washington by telling a compelling story about how it's aligned with the interests of the U.S. economy. Just look at John Doerr's influence on green policymaking.
And as concerns deepen over how to grow the U.S. economy faster, calling yourself "growth capital" isn't a bad idea politically. The timing is right, too. The debate over how to tax the incomes of private equity partners has resurfaced.
Lastly it's worth noting that "private equity" is itself a fairly new term. A lot of these firms were known primarily as leveraged buyout shops, but that name has fallen out of favor in recent years as their activities have expanded. And even before LBO, I've been told the practice was known as "bootstrapping."
JPMorgan Chase pledges not to spend cash on election ads
Companies can now spend as much as they want on political advertising, thanks to the Supreme Court's landmark decision in the Citizens United case from January. But some are pledging to pass on their new powers.
JPMorgan Chase has become the latest company to promise New York City Public Advocate Bill de Blasio it will not spend treasury money on election ads. The bank joins a list that already includes Dell, Goldman Sachs, IBM, Microsoft and Wells Fargo.
JPMorgan's political contributions policy states: "In the Citizens United Case, the United States Supreme Court extended the ability of corporations to make independent campaign expenditures at the federal level. The Firm has no plans to change our political contributions policies as a result of this decision."
Why would a company opt out of using its new rights?
Citizens United was not a popular decision among Americans. Polling showed 8 in 10 opposed the ruling.
There's already been backlash against companies who give money to pay for political ads. Target wrote a $100,000 check to a pro-business Minnesota political group supporting a candidate who wants to lower corporate taxes -- but who also opposes gay marriage. Consumer groups and gay rights advocates quickly launched a boycott against Target when the retailer's donation came to light. The company's CEO apologized.
But it was practically a fluke that anyone found out about Target's donation. The state of Minnesota has unusually strict campaign finance rules that required the pro-business group to disclose its financial sources. In many other states, Target's contribution would never have been discovered.
There's no uniform, nationwide requirement that a company disclose when it's spending money on a political ad. So it's very hard to track who's active and who's not -- promise or no promise.
What happened to the bank tax?
With Congress back this week, battle lines are being drawn over taxes. Just don't expect anyone to mention the bank tax.
Back in January, Democrats thought the tax would play well with voters, especially if they could portray their Republican opponents as defending Wall Street. President Obama proposed hitting large banks by taxing their liabilities at a rate of 0.15 percent.
During the financial reform debate, there was at one point a $19 billion bank tax included the bill, but Senate Republicans balked and the tax was dropped.
Then when it looked like Congress was finally on the verge of approving the financial regulation bill, Obama pressed lawmakers to next set their sights on passing a bank tax.
But Democrats may have overestimated how much political support existed for such a tax. The signing of the Dodd-Frank bill "sucked the oxygen out of the room," as one lobbyist said to me. The focus shifted to how to create jobs and keep the deficit in check -- and now how to deal with the expiring Bush tax cuts.
Lobbyists also have been quick to point out that most banks have been paying back TARP funds, undercutting Obama's stated reason for the tax in the first place -- "to recover every single dime the American people are owed."
At this point, it looks like there are not many political points left to score for going after Wall Street, even though Americans like the financial overhaul. In fact it's the only one of the five major accomplishments by Congress that gets a thumbs up from more than half of those polled by Gallup.
Meanwhile European Union finance ministers are still kicking around the bank tax idea, according to this story by the Wall Street Journal's Charles Forelle. But they're split on what to do, making it unlikely anything will happen on this front anytime soon.
Obama's tax plan for business: Will companies start spending?
The White House is rolling out a plan that's the strongest attempt yet to jump-start the economy through policies aimed at business.
Under the plan, businesses would write off 100 percent of their new investment expenses through 2011. Businesses now deduct these expenses over years.The Obama administration would let them deduct immediately.
The puzzle that no one has been able to solve yet is how to get companies to spend, rather than hoard their cash. Would this plan do it?
As Harvard economics professor Greg Mankiw points out, the deduction idea is like "giving firms a zero-interest loan if they invest in equipment." But, he adds, because interest rates are already near zero, the value of the tax change isn't much better than what firms can already get.
A story from Bloomberg last week explained that companies are borrowing at extremely low rates.
Johnson & Johnson sold $1.1 billion of bonds at the lowest interest rates on record for 10- and 30-year corporate securities on Aug. 12, according to Citigroup Inc. data going back to 1981. The New Brunswick, N.J.-based drugmaker issued $550 million of 2.95 percent notes due 2020 and the same amount of 4.5 percent bonds maturing 2040, data compiled by Bloomberg show.
International Business Machines Corp., the world's biggest computer-services company, raised $1.5 billion in the bond market on Aug. 2. The 1 percent rate for the three-year notes paid by the Armonk, N.Y.-based company was the lowest of the more than 3,400 securities in the Barclays Capital U.S. Corporate Index of investment-grade company debt.
The other looming question here is how the administration hopes to pay for this deduction, along with a permanent extension of the research and development tax credit. It could come from the pockets of business, based on this nugget from The Post's story Monday by my colleagues Anne Kornblut and Lori Montgomery, who write: "It would be paid for by closing other corporate tax loopholes, said the official, speaking on condition of anonymity because the policy has not yet been unveiled."
I'm trying to read political code here, but the piece of corporate tax policy most frequently described as containing "loopholes" is the convoluted section that deals with taxing multinational companies -- the giants of corporate America, such as GE, Intel, Microsoft and IBM. The White House earlier proposed closing off ways that companies claim foreign tax credits, and they might trot out those proposals again.
If they do, they could set up more internecine battles within the business community over whether to support the plan. On one side, companies such as Intel are already on the record supporting r&d tax credits. On the other, IBM flatly opposes limiting foreign tax credits, given how much of its operations are overseas.