Geithner: 1040 Good Buddy

Tim Geithner is Obama's pick for Treasury Secretary. Tim has been the President of the Federal Reserve Bank of New York since 2003. Prior to that, Tim had worked at the Treasury Department. Tim also once worked at the International Monetary Fund. Tim can't figure out his own taxes.

This is just too precious. The man who has been working side by side with Paulson and Bernanke to "save" our financial system apparently wasn't aware that you have to pay your Medicare and Social Security taxes if you work for an employer that does not. The "discrepancy" arose during his time at the I.M.F.

According the the New York Times:

The I.M.F., as an international organization, does not withhold payroll taxes for Social Security and Medicare from its American employees’ paychecks. Those workers are required to pay the roughly 15 percent tax themselves, as if they were self-employed.

However, the I.M.F. does pay its American workers an amount equal to an employer’s half of the payroll taxes, with the expectation that they will use that to pay the I.R.S. The organization also gives them quarterly wage statements that include United States tax liabilities.

Mr. Geithner fully paid his state and federal income taxes. In failing to pay his payroll taxes, he in effect kept the money the I.M.F. had contributed toward his liability. However, Mr. Geithner’s accountant told him he was exempt from self-employment taxes, according to Obama transition officials.

To be fair, I am no fan of the U.S. tax code. It is ridiculously overburdening and complicated. Hire ten different accountants to do your taxes, and you'll get ten different answers. At the same time, I'm self-employed and have to pay my own Social Security and Medicare taxes. It's not that difficult. Tim could have shelled out less than $100 on TurboTax and got this right. The I.M.F. even gave him a quarterly statement that included this tax liability! Still, Mr. Geithner and his accountant (hopefully ex-accountant) thought that he was exempt for some reason. I hope there was better rationale than, "Hey, Tim. You're rich and powerful, so you don't have to pay that. Taxes are for losers."

Does anyone remember Zoe Baird? Bill Clinton nominated her for attorney general back in 1993, but she was shot down because she hired some illegal aliens and neglected to pay their social security taxes. Tim may not have hired any illegals (though someone should verify the status of his accountant), but the situation is pretty similar. This time, however, Congress is rushing to Tim's defense and proclaiming this matter is "a lot to do about nothing." This guy is up for Treasury Secretary! The IRS falls under the purview of the Treasury Department. The guy who will likely run the whole shebang doesn't know what taxes he owes or what constitues child care (see article). Poor Zoe was born 15 years too early.

I have a strong feeling our economy would be better off in the years to come if we just turned it over to TurboTax.

The full article can be read here.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Auto Industry: Special Loan Financing!

What do you do with an industry that has been losing billions of dollars, has an uncompetitive cost structure, is struggling to raise enough cash to fund itself, and is slow to innovate?

a) Short the stock, and wait for the bankruptcy announcement.

b) Hire an arsonist to torch the place in hopes of collecting some insurance money.

c) Lend it a huge amount of money at a ridiculously low interest rate.

If you chose A, you are of above-average intelligence and think quickly on your feet. You're well-liked, held in high esteem by your friends, and are very attractive. You're also wrong.

If you chose B, you are either a criminal, a pyromaniac, an aspiring Mafioso, or you work at the Federal Reserve. You are also wrong and should stay well away from my house and family.

If you chose C, you are correct. Unfortunately, you are either a village idiot, a U.S. Congressman, or an auto industry executive. You are not good with numbers, investments, ethics, or the truth. You think you are well-liked, but behind your back people are constantly mumbling, "Wow. I feel sorry for the village that idiot comes from."

The socialization of America continues to run amok. With the nation busy quibbling over the relatively insignificant foreign and economic policy differences between McCain and Obama and with the distraction provided by the teetering of the global financial markets, the mere $25 billion that our U.S. Congress just approved in loans to the auto industry may slip through the cracks.

Remember the widespread consternation over the $29 billion "rescue" of Bear Stearns? Just a few months ago, $20-something billion was considered a substantial amount of money and caused quite a tizzy. Ah, the good old days. Since then, we've had an $85 billion "rescue" of AIG and are now facing an impending $700 billion bailout of the financial industry. In this brave new world, $25 billion is practically quaint. It's the change between the cushions of Uncle Sam's sofa.

Nevertheless, let's put that $25 billion in perspective. Our entire annual federal education budget is $56 billion. Homeland security is getting $34.3 billion this year. $25 billion is greater than the annual federal budget for each of the following agencies: Agriculture, Commerce, Energy, Interior, Justice, Labor, Transportation, Treasury, EPA, Judicial Branch, NASA, and the National Science Foundation. I'm not saying we should spend more on these departments -- just providing some perspective.

The combined market value of Ford and General Motors is $16 billion. Raising significant equity capital would, if even possible, result in massive dilution. No private bank in the world will loan them a dime, and let's not naively blame that solely on the banking crisis. Banks weren't rushing to loan the U.S. auto industry any money before the meltdown either. The capital markets simply don't deem them worthy of investment.

Our legislators, however, always think they know better, so they've rushed in to supply the industry with $25 billion that no other sane institution/investor would provide. To add a touch more insult to the U.S. taxpayer, this loan is not accompanied by an equity stake in the participants, and these loans are coming at a below-market interest rate. According to a Detroit Free Press article:

Under the loan program, automakers and suppliers could borrow at interest rates close to what the U.S. Treasury does -- roughly 5% -- rather than the 15% they would have to pay on financial markets. On a loan of $1 billion, that's a savings of $100 million.

That, of course, is $100 million less that the U.S. taxpayer will make from this "investment," and that 5% interest rate is lower than even our best companies can get in the market. Let's remember this the next time we read how our U.S. officials are complaining about foreign tariffs, subsidies, trade barriers, and unfair trade practices. This is no different.

Why is the government intervening to prop up these companies? As I detailed in my article "General Motors - It's Your Money Demand Better", GM has lost a cumulative $33 billion since 1993. Shouldn't it be clear by now that the U.S. has no competitive advantage in auto manufacturing? Is the auto industry really vital to the US? If our ambition is to solidify our position as a leader in the manufacture of inferior and unprofitable products, then by all means, this loan package is a master stroke.

I don't know about you, but I don't need GM, Chrysler, or Ford. There are plenty of foreign-owned car manufacturers making a better product at a better price who are eager to sell to me. Furthermore, many of these competitors have been opening up manufacturing facilities and creating jobs in the U.S. over the years. They have the cost structure and manufacturing know-how to produce profitably, and some of them have been leaders in the development of more fuel efficient vehicles. This loan supports those who have failed and is a slap in the face to every strong competitor.

Clearly, the only reason the government is making this loan is to stem the loss of thousands of jobs that would result from the failure of the industry. It's all politics, all the time. Where do we draw the line? Nokia and Research In Motion have better cell phones than Motorola, and Motorola has had to cut jobs. Why don't we give Motorola a sweetheart deal? Our U.S. furniture manufacturing industry has suffered due to low cost Chinese competition. Let's throw billions at them. And what about our Swiss Army knife manufacturers? The Swiss are killing us! Let's give them some cash so they can compete!

Disclosure: The Rubbernecker is long the Bankruptcy Code and short arsonists.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.