March 25, 2023

Off the Charts: Ireland’s Turnaround May Not Be So Rosy

Two years ago, even as other troubled European economies continued to deteriorate, some economic statistics seemed to indicate that Ireland’s troubled economy had turned the corner and was growing again.

The government reported that gross national product had grown in 2010 for the first time since the country’s property bubble burst in 2008, and that its current-account balance had turned positive for the first time since 1999. A positive current-account balance was a sign that the country as a whole was already paying down its overseas debt. Since that was clearly not happening to the government’s debt, it indicated a sharp turnaround for the private sector.

Other statistics were not nearly as rosy. Unemployment was continuing to rise, and domestic demand — the total purchases by people and companies in Ireland — was continuing to fall. But the fact that Ireland’s current-account surplus had turned around when nothing similar had happened in such countries as Portugal, Spain and Greece was viewed as a clear sign of success for the country’s economic policies.

Well, maybe not.

John FitzGerald, an economist with the Economic and Social Research Institute in Dublin, pointed out last month that a quirk in the way the statistics are computed, coupled with fears of a tax law change in Britain, had produced unrealistic increases in both the balance of payments and G.N.P. figures beginning in 2009.

The reasons are complicated, but the quirk is retained profits of multinational companies that chose to relocate their nation of incorporation to Ireland, even though they were, in fact, based in Britain. The G.N.P. and balance of payments data allocate those profits to Ireland, he said in a paper, even though “there is no profit to the Irish economy” because they are being held for the benefit of the foreign owners of the companies.

The G.N.P. figure is similar to the more widely known G.D.P. — gross domestic product — but it includes profits only of Irish citizens and companies, regardless of where they were earned instead of profits of companies operating in Ireland. In an interview, Mr. FitzGerald said the Irish statistics office understands why the numbers are misleading, but feels it cannot change them under European rules. He said that European Union taxes on its member countries were based on G.N.P. numbers.

The accompanying charts show the official figures, alongside Mr. FitzGerald’s estimates of the proper ones after adjusting for the foreign-owned profits. By his estimates, the balance of payments did not turn positive until 2012, when the surplus was much smaller than the official figure. Similarly, the G.N.P. did not begin rising until last year.

The International Monetary Fund, in its review of the Irish economy published this week, said Mr. FitzGerald’s numbers appeared to be better. “This adjusted G.N.P. path appears to be more consistent with other economic indicators, most notably domestic demand, which continued to fall in 2009-12,” the I.M.F. report stated.

The I.M.F. forecasts that domestic demand will grow by 1 percent in 2014 after six consecutive years of decline.

Government spending reductions are a major part of that weakness, but so is the country’s failure to fix the financial system. Despite huge bank bailouts that nearly bankrupted the government, the I.M.F. is still worried about the capitalization of the banks and concerned that little money is available for lending. Mortgage problems continue to grow. On Friday the Irish central bank said that 25 billion euros of home mortgages — more than 23 percent of the total outstanding — were behind on their payments at the end of March. Unemployment has declined a little, but remains above 12 percent for adults and more than double that for people under 25.

Floyd Norris comments on finance and the economy at

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DealBook: Hedge Fund Directorships in Caymans Stir Debate

The subject of hedge fund directors has become an industry obsession, headlining conferences, including one in April at the Grand Cayman Ritz Carlton.Mike Nelson for The New York TimesThe subject of hedge fund directors has become an industry obsession, headlining conferences, including one in April at the Grand Cayman Ritz Carlton.

GEORGETOWN, Cayman Islands — Just off the tarmac at the Grand Cayman International Airport, visitors were recently greeted by colorful banners advertising the Caribbean island’s sunny offerings: waterfront seafood restaurants, tax-free shopping — and hedge fund directors for hire.

In the last decade, as hedge funds ballooned in size and number to become a dominant force in the investing universe, directorship services have grown from a cottage industry into a big business on the Cayman Islands. Many funds run by United States money managers have their legal residence here for tax reasons. And because of a quirk in the island’s tax code, these funds must appoint a board.

As a result, dozens of operations have sprouted up on the Caymans to supply directors, from one-man bucket shops to powerhouse law firms. Directors are often Cayman-based professionals: accountants, lawyers and administrators of hedge funds.

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They are rarely investors, though. Ostensibly, directors offer guidance and oversight to the funds. In return, a director is typically paid anywhere from $5,000 to $30,000 a year. With more than 9,000 funds domiciled on the tiny island, business is booming.

And so is a debate. Major investors and others are starting to question the value of offshore directors, especially in light of recent hedge fund frauds, liquidations and missteps. An analysis of thousands of United States securities filings by The New York Times shows that dozens of directors sit on the boards of 24 or more funds in the Caymans, which individually are supposed to be overseeing tens of billions of dollars in assets. Some hold more than 100 directorships, and one particularly busy director sits on the boards of about 260 hedge funds.

“You might as well save your $5,000 and buy a rubber stamp,” said Luke Dixon, a senior investment manager at the British pension fund USS, which oversees more than £32 billion ($50 billion).

Directors have also been the target of lawsuits. A recent fraud case found two directors, who happened to be relatives of the hedge fund manager, liable for $111 million. The subject of directors has become an industry obsession, headlining hedge fund conferences, including one in April at the Grand Cayman Ritz Carlton.

The rise of the director-for-hire business — and the questions that surround it — underscore a transition for hedge funds. As the industry sheds its cowboy culture for a more button-down approach, it is adopting the structure and practices of mainstream investment firms. But even as funds hire compliance officers and marketers, some corners of the industry remain in a state of arrested development.

“The hedge fund industry is still trying to figure out what it wants to be when it grows up,” said Greg Robbins, the chief operating officer at a unit of Mesirow Financial. “Like any industry, it is just going to have to get embarrassed along the way to stop doing the silly stuff it used to do.”

The data for this article was drawn largely from filings made with the Securities and Exchange Commission as part of its new oversight of hedge funds. Yet the filings do not paint a full picture. The directorships cited are only for funds with American investors, omitting thousands of funds that manage strictly overseas money.

Mesirow and other hedge fund investors, including USS and Man Group, have been clamoring for greater disclosure on how many boards directors serve on. They have taken their grievances to the Cayman Islands Monetary Authority, the local regulator, which has so far declined to release the information. Financial services are the island’s lifeblood, accounting for more than 35 percent of its gross domestic product and employing about 15 percent of the work force, according to a 2008 study by Oxford Economics, an economics consultancy.

At the heart of the hedge fund business here is Don Seymour, who has financed a mini-empire on the island with his directorship services company, DMS Management. Mr. Seymour, a onetime hedge fund auditor at PricewaterhouseCoopers, declines to say how many boards he sits on, though he says he selectively tells investors. A review of the S.E.C. filings shows Mr. Seymour occupies roughly 180 board seats, according to the Foundation for Fund Governance.

Mr. Seymour likens his work as a hedge fund director to that of a top doctor, who can see hundreds of patients a year. Just as every patient is not equally sick, every directorship is not equal, he says. He points to proprietary computer systems that track information about the hedge funds served by DMS directors. And associate directors at his firm handle much of the day-to-day responsibilities.

The growing debate, Mr. Seymour says, is driven by competitors eager to snag a share of his business.

“We have a bit of a Goldman Sachs problem,” he reflected from his company’s offices at DMS House, a slate-colored stucco building resembling the White House. “We are the worldwide leader in fund governance.”

A rival firm, IMS, also serves a large swath of the hedge fund industry. Its founder, Paul Harris, says focusing on numbers won’t tell investors whether a director can fulfill his responsibilities.

“Sometimes two boards are too much,” said Mr. Harris, who does not require his directors to disclose how many boards they serve on.

Mr. Seymour served as the head of investment services at the Cayman Island Monetary Authority, starting in 1998. While at PricewaterhouseCoopers, he says he audited the funds of the investor George Soros.

“I’m the guy that actually created the regulatory framework for hedge funds here,” he said in a wood-paneled conference room at DMS House, flanked by nearly a dozen staff members. Outside, a rooster crowed in the distance.

While in that post, Mr. Seymour recognized there was a huge business opportunity in staffing boards, and in 2000, he left the regulator to start DMS.

Mutual funds also have directors, charged with responsibilities similar to those of their hedge fund brethren. And they, too, have also come under fire for failing to protect investors. But while some directors oversee dozens of funds, those funds are typically operated by the same mutual fund company.

With hedge funds, directors sit on the boards of dozens of distinct hedge fund managers. And directors face far fewer requirements than mutual fund directors.

Some large hedge fund firms don’t even bother with outsiders for their Caymans funds board, choosing to stock their boards with people who work for the hedge funds or their lawyers.

In addition to firms like DMS and IMS, law firms like Ogier on the Cayman Islands offer hedge funds director services. That has raised questions about the dual role they can play, representing the hedge fund as counsel, and the investors of the same fund as directors.

Citing in part those potential conflicts of interest, the prominent law firm Walkers recently sold its directorship business. Before that, two Walkers directors had come under scrutiny for their oversight of two collapsed hedge funds of Bear Stearns Asset Management, which the law firm also counted as a legal services client.

“There is a trend toward complete independence,” said Ingrid Pierce, a partner at Walkers. “I think we’ll see more of that.”

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Tax Breaks From Options a Windfall for Businesses

Now, the corporations that gave those generous awards are beginning to benefit, too, in the form of tax savings.

Thanks to a quirk in tax law, companies can claim a tax deduction in future years that is much bigger than the value of the stock options when they were granted to executives. This tax break will deprive the federal government of tens of billions of dollars in revenue over the next decade. And it is one of the many obscure provisions buried in the tax code that together enable most American companies to pay far less than the top corporate tax rate of 35 percent — in some cases, virtually nothing even in very profitable years.

In Washington, where executive pay and taxes are highly charged issues, some critics in Congress have long sought to eliminate this tax benefit, saying it is bad policy to let companies claim such large deductions for stock options without having to make any cash outlay. Moreover, they say, the policy essentially forces taxpayers to subsidize executive pay, which has soared in recent decades. Those drawbacks have been magnified, they say, now that executives — and companies — are reaping inordinate benefits by taking advantage of once depressed stock prices.

A stock option entitles its owner to buy a share of company stock at a set price over a specified period. The corporate tax savings stem from the fact that executives typically cash in stock options at a much higher price than the initial value that companies report to shareholders when they are granted.

But companies are then allowed a tax deduction for that higher price.

For example, in the dark days of June 2009, Mel Karmazin, chief executive of SiriusXM Radio, was granted options to buy the company stock at 43 cents a share. At today’s price of about $1.80 a share, the value of those options has risen to $165 million from the $35 million reported by the company as a compensation expense when they were issued.

If he exercises and sells at that price, Mr. Karmazin would, of course, owe taxes on the $165 million as ordinary income. The company, meanwhile, would be entitled to deduct the $165 million as additional compensation on its tax return as if it had paid that amount in cash. That could reduce its federal tax bill by an estimated $57 million, at the top corporate tax rate.

SiriusXM did not respond to repeated requests for comment.

Dozens of other major corporations doled out unusually large grants of stock options in late 2008 and 2009 — including Ford, General Electric, Goldman Sachs, Google and Starbucks — and soon may be eligible for corresponding tax breaks.

Executive compensation experts say that barring another market collapse, the payouts to executives — and tax benefits for the companies — will run well into the billions of dollars in the coming years. Indeed, of the billions of shares worth of options issued after the crisis, only about 11 million have thus far been exercised, according to data compiled by InsiderScore, a consulting firm that compiles regulatory filings on insider stock sales.

“These options gave executives a highly leveraged bet that stock prices would rebound from their 2008 and 2009 lows, and are now rewarding them for rising tides rather than performance,” said Robert J. Jackson Jr., an associate professor of law at Columbia who worked as an adviser to the office that oversaw compensation of executives at companies receiving federal bailout money. “The tax code does nothing to ensure that these rewards go only to executives who have created sustainable long-term value.”

For some companies, awarding stock options can seem like a tempting bargain, since there is no cash outlay and the tax benefits can exceed the original cost.

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Bucks: Plan Cuts Reverse-Mortgage Counseling

One casualty of the latest federal budget deal: Funds for counseling older Americans seeking reverse mortgages, or loans that let those 62 and over tap their home equity.

The latest proposal for the current fiscal year, which is scheduled for final votes in Congress imminently, cuts $88 million from the Department of Housing and Urban Development’s budget for loan counseling programs, including for reverse mortgages, a HUD spokesman confirmed Thursday. Some $9 million of that total is reserved for reverse mortgage counseling, which helps borrowers understand the benefits, costs and risks, of such loans, says Barbara Stucki, vice president for home equity initiatives at The National Council on Aging.

The cuts mean that unless groups like the NCOA, which use HUD grants to offer the counseling free to potential borrowers, can raise other funds, they will have to charge for the service. The counseling is mandatory under federal regulations, so borrowers would still have to get it before getting their loan. But they may have to shell out their own money, Ms. Stucki says.

Funds for counseling remain available through September, Ms. Stucki says. Because of a HUD budgeting quirk, NCOA and other such outfits actually are financng current counseling sessions with money from the prior federal fiscal year budget. So cutting the money out of this year’s budget, which is fiscal 2011, actually stops the flow of funds for the next fiscal year, which starts Oct. 1.

Peter Bell of the National Reverse Mortgage Lenders Association says it’s unlikely any effort to restore the funds will succeed at this point because “this bill is moving way too fast.” The move, he said, “has taken everyone by surprise,” since overall funds for housing counseling had recently increased due to the fallout form the housing crash.

The upshot is that borrowers are likely to have to pay for counseling. HUD does allow its approved counseling agencies to charge fees — previously they were capped at $125, but that limit was recently lifted, says Mr. Bell. But agencies getting HUD grants generally don’t charge for it. In fact, the agencies can’t charge certain low-income borrowers, so it’s unclear how those applicants will receive counseling unless the counseling agency eats the cost.

Lenders themselves are prohibited from financing counseling, since they have an incentive to make the loan. It’s possible that the counseling fee could be rolled into the loan, if the borrower ultimately ends up getting one. But Ms. Stucki says she doesn’t think that’s such a great idea; the whole premise of counseling, after all, is that some homeowners shouldn’t borrow the money in the first place, and won’t complete an application.

Counseling for reverse mortgages is especially important because they are marketed to people 62 and older, who are vulnerable to wrecking their nest eggs if they run into trouble with the loans. Unlike a home equity loan, where you have to pay the money back, with a reverse mortgage the bank pays you, either in a lump sum or in monthly payments. Once you no longer live in the home, you or your executor (if you’re dead) sells it and pays the bank back.

Advocates for the elderly have been lobbying hard for better and broader reverse mortgage counseling. A case in point: Recently, the loans have been a subject of a lawsuit brought against HUD by the AARP Foundation and others because some older borrowers who weren’t listed on the loan documents ended up in foreclosure proceedings. After their spouses died, they were unable to get a new loan in their own name, or sell the house for enough money to pay off the loan. Requiring both spouses to attend counseling could help avoid such situations, advocates argue.

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