Buy. Borrow. Die.

Richard Kramer: Welcome to Bubble Trouble conversations between independent analyst, Richard Kramer, that's me and the economist and author Will Page where we lay out some inconvenient truths about how financial markets really work. Today, we're treading deep in some chicken shit with the author of the Chickenshit Club, our very special guest, Jesse Eisinger author of a book by the same name and more importantly center stage in leading an expose last year about how little taxes are paid by America's richest individuals.

Will Page: We are thrilled to welcome a post, prize winning journalist and author of The Chickenshit Club. Jesse Eisinger. Who's had a longstanding effort digging into why prosecutors and the politicians seem to go easy on the white collar crime. So now we do what we always do with our guests, which is the toss them the mic to get them to introduce themselves, not just themselves, their work, their chickenshit, I guess. And, but also where our listeners can follow your work as well. That's the key thing, because we wanna introduce you to our audience.

Jesse Eisinger: My name's Jesse Eisinger. I'm a senior editor and reporter at ProPublica, which is a non-profit that does investigative journalism. I've been a business and financial reporter for decades. Uh, it used to be at the Wall Street Journal before I joined ProPublica. And you can follow me on Twitter at Eisinger J. Many, many years ago, um, which, uh, he probably would like to forget as much as I would. I tossed a few frisbees with Richard Kramer on the lawn of Columbia College. So, uh, we go way back.

Will Page: Grand stuff. And, uh, you come to the present with the event in July of last year. Richard, do you wanna take it away with our first question?

Richard Kramer: Jesse, can you give us a bit of background on what brought you to write your fantastic book, The Chickenshit Club, about the unwillingness of federal prosecutors to take, uh, this malfeasance seriously and take executives to task and throw them in jail is that they always hear back to this well, the market will solve for things. And do you think we've finally run its course with this sort of free market religion? Are regulators still fully captured by the firms they oversee or, or are we still in, in chickenshit territory where everybody's too afraid to offend the powers that be in big companies?

Jesse Eisinger: Yeah. It's a, it's a complex question. Uh, I think that 2008 was a, had a catastrophic event in discrediting neoliberal ideology, which had been embraced by Bill Clinton and the Democratic party, uh, as well as the Republican party in the United States. Uh, this idea that markets worked best when they were the least regulated. And as I say, even the kind of liberal left liberal in the American use of the term embraced this ideology, and it was fully discredited after 2008 and it was discredited both in the lead up to the crisis, which was a kind of catastrophic failure of deregulation of the financial markets. And in the wake of it, there were two terrible problems with the Obama administration's response. And the Obama administration had a kind of neoliberal response to this one was that it failed utterly to bail out average people in the, the housing market, even though it had bailed out wall street.

And the second failure was in bailing out Wall Street. There were so few consequences for it. I mean, there's one thing to flood the market with money, to invest in the banks, to shore them up, to prevent a banking and financial system and capital markets collapse. And I actually believe that the fed and the government should have done something like that, but without any consequences. And the thing that I ended up focusing on for my book was that there was no punishment. It's an extraordinary surprise to me, um, especially because, uh, I'd done a series of stories about the CDO business, Collateralized Debt Obligation business, the business of putting mortgage securities into mortgage securities, into mortgage securities and packaging them up. And we had exposed a hedge fund that had called Magnetar that had packaged those up and then sold off pieces. And it actually, it says secretly designed them to fail.

And then the investment bank sold them to unwitting investors and everybody knew what was going on except those investors. And we thought, well, we've exposed some wrongdoing and people should probably go to prison, and nothing happened. And that puzzle led me eventually to the book where I examine the failure to prosecute corporate crime and why it happened. And one of the main reasons it happens is that there is this capture of regulators and prosecutors, and there's a kind of revolving door. They just don't like to make things awkward for wealthy and important and intelligent and, uh, well educated people. It they're kind of ashamed of their job and ashamed of civil service. We, it turns out that it was much more worse than I had thought and depicted in the book, 'cause we get Trump into office and Trump exposes that it's not just bankers and corporate crime, but their whole swaths of the American economy, uh, that go, unpoliced like commercial real estate where Trump applied his trade for decades, corporate lobbying, tax and so on and political giving.

Uh, and so we know we've had a catastrophic failure to enforce the white collar criminal laws for going on two decades now, we've never really had a golden age of prosecuting these things, but we have done better in the past. So now you're asking me, has this changed? And my argument is, yes, um, the kind of neoliberal ideology, hands off ideology has been almost fully discredited in the eyes of Democrats. So, so they Biden administration, there's no longer this kind of wholesale, quasi-religious belief in the power of markets. And there is a greater belief in the power of government and the need for government, but you've got the forces of resistance. Um, so you've got big companies still resisting. You've got lobbyists, you've got the revolving door and you have the courts, um, that really is against antitrust. And so you see this push and pull. So I would say they're not fully captured anymore, but there has been very little progress against the kind of neoliberal order that we have.

Will Page: Those points about the neoliberal ideology, I mean, firstly, it translates well over here. I think around the time of Tony Blair coming to power five years after Clinton labor had moved way over to the right hand side of the political spectrum to believe in essentially the same free market ideology that the conservators took us through in the nineties, in the eighties, I wanted to pick up on the words, unelected permanent governing class in your book that jumped out at me when I was reading up ahead of this podcast. So I just wanted to sort of throw something at you on the syntax of those words. So in Russia, you've got the oligarchs and in US and UK, you've got the plutocrats, in Russia, the people are beholden to the regime. You hear that term regime a lot these days. In the US and the UK, we're beholden to the unelected permanent governing class to what you described earlier. Would you agree that we're dealing with two countries separated by a common language?

Jesse Eisinger: [laughs]. With the UK and the US not, uh, the US and Russia, I assume you were saying, I guess there are two, um, unelected government classes. There's the kind of oligarchic class, and then there's the civil service. Trump railed about the deep state and the civil service and what you get there is a series of regulators who are both interested in the revolving door. So they're biting their time before they can go to the private sector and gaining lots of important expertise in regulation. But the primary purpose of that expertise is to go help the regulated, help the large corporations when they go to law firms or accounting firms or consulting firms after they're stint in, in government. Uh, and so there's a kind of permanent under, uh, civil service there, that's kind of been warped because it's not permanent enough. It's not valued enough.

As a career, we don't pay people enough either in money or in prestige enough to do that for their whole lives. And so they want to go make more money and, and work for corporations. And then you've got, uh, the other meaning of that, which is a kind of rise of this oligarchic class. And yes, I think we're flirting with oligarchy in America and plutocracy in America where we've had such an extraordinary expansion of wealth, inequality, income, inequality too, but wealth inequality is much more pronounced and more important. And that has, I think, captured our politics in, uh, a great degree and there are countervailing forces to it, but it's sort of now we've get these kind of countervailing, billionaire fights, billionaire versus billionaire violence.

Will Page: [laugh].

Jesse Eisinger: You, you've just kind of stripped the average American voice of any ability to affect our politic.

Richard Kramer: From the very sort of 10,000 foot level, where we might think about the correcting mechanisms being revolutions in another era or being people rising up and voting the bums out of office, which doesn't seem to happen given all the money in American politics, on the ground as a reporter, when you've talked to those bureaucrats and civil servants that are well meaning and, and the ones that are responsible for, for bringing large companies, billionaires, whomever to account for things that from the outside seems so obviously wrong. What is their response to you when you present them with their failure to act? I know there's the sense that now the zeitgeist is gonna change and we're gonna get tough. But what have they said to you in the past to explain away why no one went to jail after the financial crisis? Because you were, you were sitting in the room with them and you could have those conversations and you could present the facts and say, well, you know, this company clearly misrepresented things and we're ending up as taxpayers paying the bill. Why isn't anyone doing the perp walk for it?

Jesse Eisinger: I have had many conversations with prosecutors and regulators and put that question to them in challenge. It's a tough thing, nobody wants to be called a failure. You come up with elaborate rationales for why they didn't fail in their particular case. A lot of people will say, well, overall, somebody should have gone to prison or, uh, we should have done a better job, but I didn't do a poor job. I looked at the things that I was supposed to look at and I didn't see crimes. And how can you hold me personally accountable when I did the best job that I could and I didn't see crimes. And to some extent I'm sympathetic to that excuse because there needed to be a kind of overall leadership top down effort to make it safe, to try and fail in bringing cases. The title of my book is The Chickenshit Club.

And it alludes to a speech that Jim Comey who becomes the attorney general, but he's, he's the US attorney in the Southern district of New York, the district in Manhattan that oversees the financial center of, and beating heart of the United States, and it's the most important office in the country for the department of justice. And they're supposed to be the highest skilled prosecutors and they police white collar crime most aggressively. And he gives a speech in the early 2000s saying, "How many of you have never lost a case?" And, uh, a bunch of these little go-getters, 'cause they're, uh, gone to the best schools, you know, raise their hands, 'cause they're so proud of their undefeated record. And he says, "Well, you're The Chickenshit Club because you're taking on the low hanging fruits. You're not going after the most ambitious cases and the biggest wrongdoers. And so you need to be told you need leadership and the Obama administration did not give them any leadership. And then of course the Trump administration wanted to undermine it completely. And so that leads to chickenshittery, because the individuals say, "Well, I tried my best within the system, but I, my hands are tied. I can't bring a case that I can't prove." You need a cultural change and you need, uh, resources and time and support.

Richard Kramer: And, and for a long time, certainly in Europe, those career bureaucrats were to some degree, the corrective mechanism, they were the, the guardrails that were supposed to have this sort of hidden source of power that would keep things within check. And it feels like in the US, those guardrails were abandoned for a long enough period of time that they've spiraled somewhat out of control. So it's literally any sector of the US economy that you'd put the prefix big in front of, whether it's big cable or big tech or big pharma or big media or too big to fail banks. And there was no sense at any point that you needed to sort of have some of those longstanding civil servant restraints on bigness. Do you think that's fair?

Jesse Eisinger: Right. It became unseemly to, uh, regulate, it became unseemly to prosecute. It became seen as kind of crass to charge people criminally. Um, it seemed unsophisticated. Uh, instead what you should do is address systemic problems at an institution by having them settle with an institution wide settlement, you give a lot of money and then you promise to ameliorate. And then there was a wholesale rejection of antitrust was because again, antitrust seemed to be crude and, uh, unsophisticated because they didn't understand that large companies could deliver lower prices to consumers. Um, and the, there was a takeover of economists and a, uh, auster of the lawyers in the 1980s and 1990s in antitrust. And that was explicitly designed to revive this notion that big companies would be better. And so we got, uh, the natural result of that was concentration in almost every corner of the American economy. And only now are we waking up to the realization that this is, uh, full of malign consequences?

Richard Kramer: I mean, I think that that is where we are. We are in a world of malign consequences and by the way, on almost all international measures, many things in the US just cost a hell of a lot more than they cost in a lot of European markets.

Jesse Eisinger: Yeah. I, you know, I, I don't even think we realize how much more we're paying and you know, on its own argument that the consumer welfare standard is supposed to be about prices, is supposed to have concentrated corporations delivering lower prices to consumers. And on that alone, we're paying more. So it's not even a question of the secondary issue of political power from large concentrated industries or the secondary issue of, you know, your data being exploited and a lack of privacy. In fact, what's happening is the consumers turns out to be paying more even Bok, if he were, uh, to come out of his grave might say, "Uh, what have I done?"

Will Page: I think part one's been a really solid grounding in the problem in the unelected permanent governed class. From the grounding, part two, we're gonna go to the grenade that you dropped in this world last summer. So we'll be back in a moment.

Richard Kramer: Welcome back to part two of Bubble Trouble with Jesse Eisinger. And we're talking about the role of the civil service in keeping big companies to heal in America and Jesse, as an investigative journalist had a phenomenal scoop last summer when he got an IRS whistleblower to help get behind the filings of the top 10 billionaires in the US household names like Bloomberg, Buffet, Bezos, and Musk, and surprisingly, or not found that they paid ludicrously low tax rates. And aside from how clearly unfair that is, I guess the question I've got for Jesse is how did we get to this system of borrow, buy and die? This Frankenstein monster of tax code that's come into being in America. And is this another example of the regulators being asleep at the wheel, or simply realizing that they're biting their time until they get to take a lucrative job as a tax consultant, figuring out how to avoid all those taxes?

Jesse Eisinger: Yeah, it, it's all the above. So, um, I'll just give the listeners a quick summary. We obtained a vast trove of tax information on the wealthiest Americans, uh, team at ProPublican. And I have been working on tax stories since then, tax, it's certainly the largest amount of tax information ever obtained by any news organization in the United States. It's probably the single largest private dump of information, uh, from the confidential information from the government day in the history of the United States, actually.

Richard Kramer: It's the Panama papers moment for the IRS.

Jesse Eisinger: I, I, uh, like to think of it that way, or even possibly the Pentagon papers, uh, moment. And we have information on the wealthiest of the wealthiest. So there's sort of the 1% of the 1%, thousands of Americans, but not plumbers or waitresses, but not even doctors or lawyers, just really kind of the billionaire class. Uh, we have going back, uh, more than 15 years and you can learn a lot from this. Now, we're not saying, um, where it came from, and so anybody who makes any supposition about the source of sources is, uh, simply speculating. Um, we're not discussing that at all in order to protect the source of sources. The first article that we wrote and we've written a series of articles, but the first article we wrote, looked at the wealthiest Americans, the top 25 Americans in what they paid in taxes. And the first finding was the astonishing thing that some of the richest Americans, uh, richest people in the, in the world, the richest people in the history of the world, like Jeff Bezos and Elon Musk and Michael Bloomberg were able to pay in recent years, zero in federal income tax, for, uh, some of the wealthiest people in the history of the world.

And the second thing that we looked at was that it turns out that income really is not the appropriate measure for judging taxes for the ultra wealthy. We are taxed on income in the United States. It's pretty common way that most of the world taxes people. And it's the amount of income that is defined by the IRS that you bring in. But what it excludes primarily is all of the unrealized gains, all of the amount of wealth that you have accumulated in a given year. So when Amazon stock goes up to the extent that Jeff Bezos sells, he has to pay income tax on the amount that he's gained in that sale, guess what? He hardly ever sells. And so if you hardly ever sell, your wealth accumulates, but you're not realizing any gains to pay income tax, what do they do instead? Well, you alluded to it and it's called buy, borrow, die, and it's the technique of the ultra wealthy. And what they do is they buy or build their asset. They build Tesla, they build Berkshire Hathaway, they build Amazon, then they do not sell. They borrow against their holdings and, you know, some do just larger and some do the lesser extents.

Um, but we've seen that Elon Musk borrows to the billions and billions of dollars and they pledge their assets as collateral. He's pledged Tesla stocked as collateral and borrowing is not taxable. And in fact, it's a nice thing to the extent that you pay a little bit of interest and it's business related, it's tax deductible. [laughs]. And you, uh, it's a nice little trick. So you are realizing money that you then express your power and influence and fund your lifestyle and purchase your toys like Twitter through borrowings. And you're not paid, uh, income tax on that. You're not paying income tax on that.

We calculated the, what we call the true income tax rate of the 25 richest billionaires in America. And the average American who's making, you know, typical working American making about 60 or $70,000 is paying roughly 15 or 20% in federal income tax depending. And these people are paying 3% wealth growth for the ultra wealthy is really income. And that's been defined as income by economists for a long time, but we do not tax that in the United States. We only tax income. And if you avoid income, you avoid income tax. So this is by design. This is, uh, perfectly legal. It's not particularly sophisticated. It does not require offshore holdings. It doesn't require, uh, fancy lawyers or accountants. It is very easy to implement. So that is the essence of ultra wealthy tax avoidance in the United States.

Now we got into a lot of loopholes and it got into a lot of abuses later, and Paul Kiel and I, my partner, um, wrote a series of stories before this series about the gutting of the IRS. And the IRS has been stripped of money and resources to appropriately enforce the tax laws. That's a kind of different story. And we wrote some of those stories, but the essence of ultra wealthy tax avoidance is incredibly simple and it's all legal and that's really, the scandal is what's legal here. I mean, it's really hard to choose your favorite loophole. Um-

Will Page: [laughs]. This could be a game show.

Jesse Eisinger: ... there's so many choices that, uh, they're completely outrageous, but possibly the most outrageous loophole in the United States is that, um, and this is goes to buy, borrow, die. I talked about buy, I talked to about borrow, and then the die portion of this, if you have all of these accumulated unrealized gains that all gets wiped out at death, and then no one ever pays capital gains, you get to take that mass of money and, uh, give it to your heirs or, uh, donate it to charity, put it in your foundation, and no one pays capital gains on that. It gets wiped out at death. It's called this step up and basis, and it's just a complete mistake. It was not intended for this back in the 1920s, when it was first codified, it was kind of a way to give assets to your wife without having your wife, because most of the assets were, um, generated by men. Then, uh, if they died, it was a way to, uh, transfer assets to your, your spouse. And then it's become this extraordinary expansion.

And it probably is the single greatest loophole that, and most economists and tax experts say it serves no purpose, no economic purpose, noneconomic losses in the tax code that continue to pay dividends to you in the form of being able to write off, uh, at- uh, against income. And, uh, the biggest loophole there is depreciation for commercial real estate, the, uh, billionaire owner of the Miami Dolphins who developed the Hudson Yards Complex in Manhattan, well, he has gone most of the last 20 years reporting negative income. He tells the IRS that he's losing literally hundreds of millions of dollars a year. 2018, he told the IRS, he lost $400 million a year, even though what's happening is his buildings are appreciating in value, you get to tell the IRS that they're losing money, that they're depreciating. So he got a stimulus check and he has paid zero in federal income taxes. Most of those, the last 20 years, Charlie Kushner the father of Jared Kushner, who was the son-in-law of the president. He didn't pay any income tax paid zero in federal income tax, most of the last 25 years. And it's because they get to take non-cash depreciation of their buildings. So the tax code says, a building is losing money, even though in the real world, the building is both throwing off money, it's throwing off income, and it is appreciating in value.

Older buildings are worth more than newer buildings. I could never understand that. Yes. I mean, not, it's not an iron law of economics, but it is most of the time for prestige commercial real estate buildings appreciate in value. Sports teams appreciate in value. So one of the things we found was my reporters, uh, Robert Federici and Justin Elliot wrote a story about sports owners. And what we found was Steve Ballmer made his fortune in Microsoft. Now he owns a professional NBA team, a national basketball association team, and he gets to write that off on his taxes. And the result of that, even though, by the way, the professional team is appreciating value, he gets to write it off on his taxes every year, and it reduces his tax bill and has lowered his tax rate so that he has a lower tax rate than LeBron James. He have lowered tax rates than the stadium worker, that works in the stadium making roughly 15, $20,000 a year. She paid a higher tax rate than either of those two.

Will Page: That's fascinating.

Richard Kramer: And at, at the heart of this, Jesse, one of the things that I feel like is so ingrained in American thinking is, and, and I guess I regard the original sin of the US tax code as tax deductibility of interest. That the more that you can borrow, the more you can write off against your taxes, the more debt people are willing to lend to you, the less tax you would have to pay. That's behind the entire private equity industry, that's behind a lot of the behavior of the-

Jesse Eisinger: Yeah.

Richard Kramer: ... the billionaires that you've studied in these Exxon articles. And it was really initially designed as an incentive for people to take risk, but it spiraled into a, a tactic for mass scale tax avoidance. So rather than declaring income, I just borrow against my income and write it off against the interest costs. Is there any discussion about resetting or, or putting ceilings around that? You know, there's nothing wrong with buying stuff, but the borrowing. Borrowing money so that it creates a liability that then gets set against your tax. Is there any discussion focused on rolling that back?

Jesse Eisinger: That's an aspect of the tax code that gets very little discussion in the United States. It's mostly at the corporate level, 'cause you can't write off personal income, uh, personal interest costs on your taxes, except that if you're somebody like Carl Icahn, and Carl Icahn literally does this, he, uh, is this big investor who the way he's organized his business, it all flows through to him personally. And because of that, he has massive borrowing and he has massive borrowing to amplify his returns, right? He's leveraged to amplify his returns and the more he borrows to amplify those returns, the more he pays in interest costs, and the more interest he has, he can write off on his income. And so he, uh, is in recent years, paid zero in federal income tax because of his borrowing. Um, so in good years he makes a ton of money because the leverage and in bad years, um, he pays no taxes because he's paying all that interest and writing it off on his taxes.

That's a major problem in the tax code. And then, you know, I would go back and say that the fundamental problem with the tax code besides not taxing unrealized gains is that we have this labor capital disparity. That capital is taxed at a much more gentle rate than labor. And it results in working people paying more in taxes and the working rich like LeBron James paying much more in taxes than the asset rich like Steve Ballmer. And that's a giant problem for the tax code. And it has not resulted in kind of boom in investment or the underlying justification for it is that we're going to have all of this great economic growth from all this investment. Now what we calculated in our most recent story, Paul Kiel and Jeff Ernsthausen, and I looked at the highest earners and we looked at the benefit that George Bush's reform to lower the tax rate on dividends was.

So for the first time in history, George W. Bush made the tax rate on dividends the same as the long term capital gains rate. And it had for decades, dividends had been paid taxed at the highest ordinary rates and lowering that meant literally billions of dollars into the pockets of Bill Gates, whose Microsoft started paying dividends, and Walmart heirs are some of the biggest earners in America. They're all over both the Forbes billionaire list and the highest earners in America, three generations after Sam Walton built the company, because they're still living off, um, the earnings from Walmart, including dividends, and the dividend cut literally resulted in hundreds of millions of dollars to Walmart heirs.

Richard Kramer: So Jesse, one of the things we love to do on Bubble Trouble is ask our guests to do a little smoking and of, of the entirely elicit variety, and-

Jesse Eisinger: [laughs].

Richard Kramer: ... ask them, what are the things you look out for the phrases that when you talk about tax or inability to prosecute corporate malfeasance, really get your hackles up that billionaires say, well, I, we pay all the appropriate taxes we're required to, or, uh, when people talk about reforming tax policy, they give some, uh, wooly phrases that are designed to foster the conversation. Can you give us a couple things that when you hear that you just go, "Uh-huh," we should watch out?

Jesse Eisinger: I, you, again, you know, you've just got such a, uh, it's hard to choose from all these justifications. We had Warren Buffet respond to us and he said, it's better that I donate my money to charity, uh, and never pay tax on it than to give it to the government so that they can take my money and pay, uh, interest on all of their debt. That was a pretty astonishing admission from him.

Richard Kramer: [laughs].

Jesse Eisinger: It turns out I have great ideas about how the federal government should allocate tax dollars. In fact, my ideas are the best of everybody's probably most people think their ideas are even better than mine. Um, but that's not the way we allocate money in the democratic society. We allocate it democratically, um, except for Warren Buffet who gets to stand aside from that. The other most extraordinarily goal in, um, tax loophole that we didn't touch on is what's called the carried interest loophole, where private equity firms primarily get fees from investors to manage the money, and then they say those fees are actually me taking investment risk, and because I can deem that as me taking investment risk, instead of a fee for my performance, I get to have a long term capital gain. I have a preferential treatment on that. So if you're a real estate broker and you get a fee for selling an apartment, you just have ordinary income, but if you are a private equity manager and you get a fee, you get to magically call that carried interest and keep that loophole. Those are two that are just kind of the mind boggling loopholes that come to mind.

Will Page: Jesse, an honor to get you on the podcast. I think in part one, you gave us a, a grounding on the unelected permanent governing class for in part two, we got to grips of the grenade of the investigative Jesse and the IRS to tax bond that we dropped last summer. So it means to me, so on behalf of myself, Eric Nuzum, Richard Kramer, thank you for coming on podcast. And I really hope we can get you back to deliver this topic forever.

Jesse Eisinger: Well, thank you very much.

Will Page: If you are new to Bubble Trouble, we hope that you'll follow the show wherever you listen to your podcast. Bubble Trouble is produced by Eric Nuzum, Jesse Baker and Julia Net at [inaudible 00:34:18]. You can learn more at bubbletroublepodcast.com. Until next time, I'm Will Page.