Bloomberg's Opaque Investments and the Future of Democracy

We all know Bloomberg’s political mantra: “not beholden to special interests.” Of course, some of us also know that he IS the special interest to which all are or soon will be beholden.

While the politicians and the press exploit the American public’s exquisite ability to train its sights on the near-rich (Wall Street bankers’ bonuses as low as $50,000 would be taxed at 25% under some proposals) while letting the obscenely rich go scot free (John Paulson and other hedge fund managers will not be subject to the special tax since there’s no bonus component to their income, which gets taxed at the lower capital gains rate to boot), Mayor Mike has been quietly assembling his little empire—mostly at the expense of taxpayers.

Today’s New York Observer has a long and admirably researched article on Bloomberg’s Offshore Millions. For those who get a migraine at the mere mention of tax rules so shortly after April 15, or who don’t have the time to follow the many twists and turns, I have taken the liberty of summarizing the key points. (my comments in italics; quotes from the article in plain text)

On December 26, 2007—the same day that the city’s Conflicts of Interest Board opened the door for Mr. Rattner’s firm to manage the foundation’s money— the foundation immediately sent $210 million to a new fund—“QAM Select Investors (Offshore) Ltd.”—based in the Cayman Islands.

Why would Bloomberg’s foundation—a tax-exempt entity-- move money offshore?

Nonprofits like the Bloomberg Family Foundation are tax-exempt, but some investments that aren’t related to an organization’s core mission can be subject to a levy called the Unrelated Business Income Tax (UBIT, for short). So to avoid more than 40 percent in federal and local taxes on unrelated businesses, nonprofits use a legal loophole, routing investments through offshore tax havens.

The foundation’s tax returns indicate that Mr. Rattner’s team migrated much of its money to large hedge funds with ostensible island charters, including several in the Caymans, two of which list an address at P.O. Box 309 of the Ugland House, a building that “houses” an estimated 12,000 to 18,000 foreign businesses.

This is how it works and it’s perfectly legal, although it smells an awful lot like money laundering:

“It cleanses the unrelated business taint from the total return,” Harvey Dale, of the N.Y.U. School of Law, told The Observer. “You invest in the same thing through an offshore entity. You are making the same investment; you are just putting an intermediary entity in the middle. Instead of investing directly in the hedge fund, you invest in the foreign entity, which, in turn, invests in the hedge fund.”

“Is (using the loophole) allowable under the law? Yes,” said tax expert Dean Zerbe, a former staffer at the Senate Finance Committee. “Is it something that is a best practice, particularly by an elected official? I think they should look very hard when they are engaging in this kind of activity. What does it say to the average New Yorker?”

Gee, I don’t think it says anything to the average New Yorker because he/she hasn’t a clue and the media—who zealously pursue inconsequential improprieties such as the gift of Yankees tickets and sexual peccadilloes—somehow lose their investigative nerve when it comes to the big stuff. And then there’s Obama himself.

Of that very same Ugland House that ostensibly houses the Bloomberg Family Foundation along with 12,000-18,000 other foreign companies, candidate Obama famously said: “Now, that’s either the biggest building in the world or the biggest tax scam in the world….and I think we know which one it is.”

President Obama, however, seems content to score cheap political points by fulminating against greedy insurance companies and “bankers” while doing absolutely nothing to close tax loopholes that net some investors and their money managers billions (remember, it’s these kinds of folks who are investing heavily in charter schools and other education reform projects favored by Obama and his buddy Arnie Duncan).

With all the money it saves by not paying taxes on unrelated business income, you’d think the Bloomberg Family Foundation could afford to hire its own staffers and buy its own paper clips. Well, a penny saved is a penny earned after all, and Bloomberg Scrooge McDuck can save a lot of pennies because his friends (technically, appointees—but let’s not quibble) on the Conflicts of Interest Board look out for him:

[In January 2008], the foundation was given clearance to allow two city workers to use municipal time and resources on foundation work—on the assumption that the charity would “ultimately serve the city” and “further the interests and purposes of the city.”

The Bloomberg Family Foundation didn’t need an office or staff because there are lots of city employees who just love to spend their spare time helping their boss, which is the same as helping the city, according to the Conflicts of Interest Board:

In spite of the flurry of investments, it appears that for years, Mr. Bloomberg’s foundation had no office, phones, staff, Web site or public brochures. In late 2007, the mayor wrote a second letter to the Conflicts of Interest Board, looking for another blessing: Some of his staffers at City Hall, he argued, were asking him, “unsolicited,” if they could help with his foundation. Saying that the foundation would “ultimately serve city goals,” the board approved. At least three of his staffers were even allowed to use government resources, like office space, phones and Internet service, for foundation work.

No one loves to help Mayor Mike more than Deputy Mayor Patricia Harris, who somehow can help run a big city by day and a big foundation in her spare time. Not that she needs much spare time: Mayor Mike trusts her so much that she—the sole officer of the Bloomberg Family Foundation—manages to give away millions on its behalf while working a mere fifteen minutes per week:

One of the staffers was Deputy Mayor Patricia Harris. Aside from Mr. Bloomberg, Ms. Harris was the sole officer listed on his foundation’s tax return. A longtime Bloomberg loyalist, Ms. Harris worked at Bloomberg LP before joining the mayor at City Hall. On foundation tax returns, Mr. Bloomberg and Ms. Harris each claimed to have spent .25 hours, or 15 minutes, per week on the charity—as it gave away tens of millions. Last month, the mayor announced that Ms. Harris would take on even more duties at the foundation, although it is unclear if she will increase her time commitment.

If you want to know more about the foundation, you’ll have to ask James Anderson, who runs its press office (naturally, he’s a former mayoral aide; possibly, one of the city employees who help the city by working for the foundation on city time). Given his job, Mr. Anderson is curiously mum: since Mayor Bloomberg must remain in the dark about specific investment decisions “in order to avoid conflicts,” Mr. Anderson“[is] not in a position” to discuss foundation business.

There’s a lot more in the Observer article, including details on some of the funds’ world-wide travels. At least one expert thinks the Bloomberg Family Foundation’s extraordinary opacity makes it a unique beast in the non-profit world ( the Bill and Melinda Gates Foundation reportedly does not invest in offshore vehicles, whose “profit model is centrally tied to corporate activity that they find egregious”):

Compared with those of the great foundations of America, the Bloomberg investment strategies stand out. “I’ve never seen anything like it. It’s about as opaque set of investments as you can find,” said Rick Cohen, who covers foundations and charities for Nonprofit Quarterly, and who agreed to review the foundation’s tax return. “This involves extensive investments in hedge funds offshore, where the motivation and purpose is not discernible, so you can’t tell what kind of activity it is or who is going to benefit from the investments.”

However, the former head of New York State’s Charities Bureau, who agrees that the Bloomberg Family Foundations’ tax forms reveal next to nothing, does not consider it extraordinary among the new breed of foundations:

“The Bloomberg foundation is not that significantly different from the foundations of other individuals who come out of the investment world.”

This should be very alarming to anyone who cherishes democratic principles and open government. As big money is increasingly being made in the investment world—whether by private equity or hedge funds—and governmental functions are increasingly being fulfilled by public-private “partnerships”, we the people are losing control of our own government. It’s especially galling that we, the taxpayers, are essentially funding our own subjugation by the clever use of tax-exempt “non-profit” entities by the likes of Mike Bloomberg.