[A-List] US economic "miracle"

["Keaney Michael" <Michael.Keaney@xxxxxx>]

Forwarded from Lou Proyect. Not only is this worthwhile in its own
right, but a careful eye on the activities, past and present, of Dick
Cheney seems in order.

-----

(Another two articles from the front page of the NY Times business
section. 
Juxtaposed against one another, they illustrate how class society
operates. 
Based on obvious editorial discretion around these sorts of questions
and 
nervousness over the impending war with Iraq, one gets the sense that a 
division in the ruling class is opening up.)

Shriveling of Pensions After Halliburton Deal
By MARY WILLIAMS WALSH
New York Times, September 10 2002

n June, puzzling letters began appearing in the mailboxes of hundreds of
employees of the Dresser-Rand Company, saying that they had become
eligible for retirement benefits even though they were still working.

To request their money, they were told to call the Halliburton Company,
which acquired Dresser-Rand in 1998.

Over the summer, many of the employees had done so and concluded that
what the letters portrayed as an early payment of benefits was actually
a reduction, brought on by the Halliburton merger and a spinoff less
than two years later. Halliburton has given the workers 90 days, which
ends later this month, to sign up for a much smaller payment than
promised earlier, or forfeit their right to a lump sum forever.

In addition to the current employees who got those notices, some recent
retirees received letters saying that they had been paid too much and
should return thousands of dollars in pension money to Halliburton.
After comparing notes, a few of the employees and retirees have
estimated that the group is being stripped of $25 million in benefits,
reflecting roughly $50,000 on average for about 400 people.

While Halliburton appears to be within its legal rights as the current
sponsor of the workers' pension plan, its handling of their retirement
benefits contrasts starkly with its treatment of Vice President Dick
Cheney, who was chief executive of Halliburton during the acquisition
and then the spinoff. The Dresser-Rand workers have lost their early
retirement provision, and must now work until 65 to qualify for their
full benefits.

When Mr. Cheney left in August 2000 to become the Republican Party's
vice presidential candidate, Halliburton's board voted to award him
early retirement - even though he was too young to qualify under his
contract. That flexibility enabled him to leave with a retirement
package, including stock and options, worth millions more than if he had
simply resigned. 

Pension experts who have looked at the Dresser-Rand case say it shows
how the corporate impetus to acquire and divest can wreak havoc on
workers. The Dresser-Rand employees were participants in a
defined-benefit pension plan - the traditional kind that is virtually
impervious to stock market downdrafts and which is insured by the
federal government in case of corporate bankruptcy. But even with such
bedrock protections, employees can lose pension benefits as a
consequence of corporate mergers and spinoffs.

"It's scandalous," said Norman Stein, a pension expert and a visiting
professor at the University of Maine law school. "It's treating the
assets of the plan as corporate assets that can be bought or sold."

By law, defined-benefit pension assets are to be used only for the
benefit of participating employees. The rules, though, are highly
complex and open to interpretation. The federal agencies that enforce
them are not eager to press too hard, lest companies decide not to offer
pension plans. 

For Dresser-Rand employees, the problem arose because Halliburton sold
the unit 17 months after acquiring its parent, Dresser Industries.
Halliburton booked a gain of $215 million from the sale.

Dresser-Rand makes compressors and turbines for the oil and chemical
industries; Halliburton is an oil field equipment and services company.
Halliburton said the unit had hurt profits in late 1999, and Mr. Cheney
announced its sale in October of that year, saying that the deal at an
attractive price was in the best interests of shareholders. 

After the spinoff, Halliburton continued to administer the Dresser-Rand
employees' pension plan. For pension purposes, Halliburton treated the
workers as if they had resigned. The plan's assets and liabilities were
merged into one of its own, smaller pension plans. Hewitt Associates, a
big benefits consulting firm based in Lincolnshire, Ill., advised
Halliburton on these steps.

Hewitt declined to discuss any aspect of the case, citing its policy not
to comment on client affairs.

Halliburton responded to questions with a statement, saying that the
Dresser-Rand employees who had turned 55 before the unit was sold would
still receive all their pension options and benefits, as if the
acquisition and spinoff had never happened. Officials had considered
preserving the younger workers' benefits as well, Halliburton added, but
decided not to, because "it would be, in effect, paying for service with
Dresser-Rand" after the employees had begun working for the company that
had bought the unit. The buyer was Ingersoll-Rand, an industrial
conglomerate that has its headquarters in Woodcliff Lake, N.J., and is
incorporated in Bermuda.

Halliburton said about 140 workers would get full benefits and about 300
workers were affected by the change. According to Halliburton, it "would
have been entirely up to Ingersoll-Rand" to establish a new pension plan
for the workers under 55, matching the benefits they had lost as a
result of the spinoff. 

Paul Dickard, a spokesman for Ingersoll-Rand, disagreed. "This really
remains a Halliburton obligation," he said. "It's very clear."

The finger-pointing between Halliburton and Ingersoll-Rand is only part
of the employees' problems as they struggle to sort out what happened to
the money they were repeatedly told they had coming.

Compounding the confusion, their retirement benefits actually consist of
three different pensions, two set up years ago by Dresser-Rand's parent,
Dresser Industries. The third was established when Dresser-Rand was
created. Many Dresser-Rand employees have been with one entity or the
other for more than 25 years, and have participated in all three plans.
They have received letters and memos over the years, telling them that
their retirement benefits would consist of money from each.

Even more vexing, Dresser Industries has ceased to exist as a result of
the Halliburton transactions. Today there is a Dresser Inc., as well as
Dresser-Rand, each of which has told the employees it has nothing to do
with their pensions. The Prudential Insurance Company of America is also
involved, having sold Dresser Industries an annuity contract to finacnce
the obligations of the first pension plan.

Finally, the employees say that when they call a toll-free number they
are told is for the Halliburton Benefits Center, they talk to people
from Hewitt Associates.

Kathleen Joy-Kirkendall, a 51-year-old senior product design engineer
who, like many of the Dresser-Rand employees, works at a unit in Olean,
N.Y., describes just how hard it has been to get information. In August,
she got a statement from Halliburton giving her 90 days to sign up for
an immediate lump-sum payment of $15,021. This was less than half of the
$31,691 that she was told in 1995 would become available when she turned
55.

"I started asking questions," she said. "Why am I getting this letter?
I'm only 51. I'm not ready to retire." She wanted in particular to know
the formula Halliburton had used to arrive at the smaller payment.

She remembered her annuity certificate and called Prudential. Prudential
told her to call Halliburton, she says. The person at Halliburton told
her to call Dresser Inc. 

The Dresser Inc. representative took her Social Security number and said
he would look into the matter, but never called back. So she called
Prudential again. This time, she was instructed to call Hewitt and ask
for someone named Jackie Schneider. She did, and was told Ms. Schneider
no longer worked for the consulting firm.

"The conversation just stopped right there," she said. "So far, all dead
ends."

Ms. Joy-Kirkendall and other employees produced letters dating back to
the mid-1980's promising that their pensions, once earned, could never
be taken away or modified. Of course, until they reached the retirement
ages described in their letters, Dresser and Halliburton could make
changes in their benefits.

"As with any benefit plan, Dresser retains the right to
amend/modify/terminate the plan," a letter dated 1986 said. But "you
will not lose your pension benefits."

Part of the employees' problem arises because these older pension
documents - in particular, the ones that told them to expect larger
amounts - were calculated on the assumption that they would continue
working until they turned 55. That was the plans' official
early-retirement age. And many of the employees have kept on working,
often at the same desks, until they were within a few years or even
months of turning 55.

But when Halliburton sold Dresser-Rand, it treated the employees as if
they had resigned and gone to work for Ingersoll-Rand.

As for the retirees who were billed for an "overstated amount,"
Halliburton said in a letter to them that there was an administrative
error uncovered in an audit. The error appears to have affected people
who retired after the spinoff.

Haliburton and Hewitt appear to be abiding by their fiduciary duties to
recover the money. 

"The trustee is obligated to protect the existing plan participants,"
said Rebecca Miller, a managing director with RSM McGladrey, a
business-consulting and tax-services firm owned by H&R Block. "So if
they paid people too much, the trustee is almost obligated to say, `Give
the plan back the money.' To the extent that the people don't give it
back, what happens is the plan has fewer assets, and the employer will
have to kick in the difference."

With their 90-day clock soon to run down, the Dresser-Rand employees are
contemplating a lawsuit.

If they do sue, it will not be the first complaint filed in connection
with Halliburton's acquisition of Dresser-Rand and Dresser Industries,
once called the high point of Mr. Cheney's career at Halliburton.

The merger saddled Halliburton with legal claims by people who say they
were injured by asbestos in products made by companies that became part
of Dresser. The litigation has driven down the price of Halliburton's
stock. 

Ms. Joy-Kirkendall said that even as she and her co-workers mulled legal
action, some have gone ahead and taken their lump sums "even if they
were low."

"Their reasoning was that if Halliburton can do this now, Halliburton
might think up another legal loophole to get at any money" under its
control, she said.

====

A Tax Break for the Rich Who Can Keep a Secret
By DAVID CAY JOHNSTON
New York Times, September 10 2002

hen most Americans sell stock they must pay taxes on their profits by
the following April 15. But a few Americans are delaying taxes on their
stock profits for years or decades - or, in some cases, never paying at
all. 

It's all perfectly legal - but only if you have $5 million of stocks and
bonds. And only if you promise to keep it secret. It's one example of
how the tax laws currently grant certain favors only to the very
wealthiest.

The deals work this way: Executives and investors with $5 million of
stocks and bonds contribute at least $1 million of their stock in a
single company to a pool into which others in the same situation
contribute their own shares. In return they receive shares of a
partnership that owns the pool.

When they are ready to withdraw from the pool, the partnership gives
them not their original shares or cash but instead shares of a variety
of stocks held by the pool. As a result, someone with too much money in
one stock can quickly diversify into a more balanced portfolio. But
unlike other investors, who have to pay taxes on profits when they sell
a stock, no taxes are owed on the profits of the shares contributed to
the pool.

If investors stay in the pool for seven years, the stocks they get when
they withdraw their investment do not incur the tax on investment
profits that other investors must pay. Only if the investors then sell
the various stocks they received from the pool are they supposed to pay
taxes.

Those taxes are by law owed on their investment profits all the way back
to the time they bought the stock that they put into the pool. But
cheating is easy because the investors can merely report only the profit
made since they took back the stocks from the pool. An Internal Revenue
Service auditor would have to know about the pool, and do a lot of work,
to determine the full profit made on the original stock contributed to
the pool.

The Eaton Vance mutual fund company in Boston and the Goldman Sachs
investment house are by far the biggest operators of investment pools
based on this tax avoidance technique, with at least $18 billion of
stocks in what are known in the investment business as exchange funds or
swap funds. Smaller exchange funds are operated by investment firms that
include the Bessemer Trust, Credit Suisse First Boston, Merrill Lynch
and the Salomon Smith Barney brokerage unit of Citigroup. 

To get in on these tax avoidance deals, investors must sign statements
promising never to disclose the terms to anyone except their financial
advisers. 

But the confidential offering for one such deal was provided to The New
York Times by one investor and separately by two Washington tax experts
to whom the document was leaked. They said they were offended by tax
avoidance available only to the very rich.

One of these people said he was also upset by advice in promotional
literature for the Eaton Vance funds that shows executives how to
disclose these transactions in a way that is legal but that investors
who track sales by company executives are less likely to notice. Some
investors pay close attention when executives buy or sell shares of
their company as a signal for the likely direction of the stock price. 

The confidential offering provided to The Times shows that investors
have contributed to Eaton Vance's exchange funds pool shares of more
than 700 corporations, including almost every company in the Standard &
Poor's 500.

Fewer than one in 1,900 Americans qualify for exchange funds according
to current rules, said Professor Edward Wolff, a New York University
expert on wealth.

The exchange funds are but one of a variety of techniques available only
to the very wealthy to delay or escape taxes on their investment
profits. Other techniques include certain kinds of insurance and
offshore trusts.

Exchange funds have been around for decades. But they used to be open to
everyone. Congress tightened the rules in 1967, 1976 and 1997 to
gradually exclude all but the wealthiest investors. The 1997 change,
detailed partly in a tax bill and partly in a securities bill, created a
new class of investors, known as qualified purchasers, whom the
Securities and Exchange Commission defined as people with more than $5
million of investable assets. 

To meet the 1997 requirements, the operators of exchange funds must form
partnerships that are not offered to the general public, only to
qualified purchasers. Other tax and S.E.C. rules require that the
partnerships be treated as private placements, rather than a public
offering to investors, so no advertising is allowed and prospective
investors must sign confidentiality agreements.

Why limit qualified purchasers to people with $5 million in stocks and
bonds? The rationale is that exchange funds are considered suitable only
for people who do not need to touch the money for 7 to 15 years - in
short, only for people wealthy enough to afford the risk of such a
long-term investment. A lot of early withdrawals make the fund
unmanageable.

Eaton Vance sells its exchange funds under similar names. One is called
Belrose Capital and funds created since 1997 are called Belair,
Belcrest, Belmart, Belport and Belvedere.

Most of the exchange fund investors are longtime shareholders, including
heirs of families that own large stakes in a single company. About 10
percent to 15 percent are executives of the companies whose stock they
are contributing to the exchange fund, investment executives at Eaton
Vance and other firms said. 

The funds benefit more than just their investors. They also generate
lucrative fees for both the firms that organize them and the outside
brokers who find investors for them. 

Brokers who sell Eaton Vance funds are paid 2 percent of the value of
shares their clients contribute to the exchange fund. Individual brokers
typically share a portion of this fee with the firm that employs them.
The brokers also get, and split with their firms, an annual fee of
one-quarter of 1 percent of their client's investment. Because most
clients stay in an exchange fund for seven years the broker and his firm
stand to collect at least 3.75 percent of his client's account.

Investors pay Eaton Vance total annual fees of a little under 1 percent
of their investment, about the same fee charged by a mutual fund that
actively trades, even though exchange funds rarely incur commissions to
buy or sell securities.

Some years ago the exchange funds came to the attention of
Representative Richard E. Neal, a Massachusetts Democrat. He introduced
legislation to stop them. But the legislation never went anywhere.

Eaton Vance, in a report to Mr. Neal last year, said its exchange funds
"are not tax shelters" and "benefit our markets and our society" because
they provide "risk reduction that otherwise would not be achieved."

Two Eaton Vance executives, in background talks, said that rather than
further restrict or even shut down the funds, Congress should allow
anyone to invest in them.

"Why should the guy with a $1,000 gain not be allowed in?" said one
Eaton Vance executive, who the company insisted not be identified. 

Not everyone agrees with that approach. Mark Seaman, a vice president
with the Legg Mason Wood Walker brokerage firm in Baltimore, a
securities dealer that markets the Eaton Vance funds, said that because
people were expected to stay in an exchange fund for seven years the
funds were not appropriate for people who might need access to their
cash.

And if all investors were allowed to use exchange funds, government tax
revenues would plummet, Mr. Neal said.

"We have individual retirement accounts where you can trade stocks
without immediate taxes," he said, "but they are limited by Congress."
Also, when investors in I.R.A.'s withdraw their money, they must pay
taxes at ordinary income rates, which are higher than, and sometimes
almost double, the capital gains rates on investment profits.

No one knows how much exchange funds cost the government in taxes
because no official study of their costs has been made. But the Eaton
Vance and Goldman Sachs exchange funds alone represent as much as $3.6
billion of deferred capital gains taxes at current rates.

The Congressional Joint Committee on Taxation, without any supporting
data, has written Mr. Neal to say that no revenue would be raised by
closing exchange funds because "the class of investors engaging in swap
funds" would find other ways to avoid the tax.

Mr. Neal said he pressed Mark A. Weinberger, who until recently was the
chief tax policy official at the Treasury Department, about why the Bush
administration would not shut down exchange funds as loopholes, which
the administration had said it opposed on principle.

Mr. Weinberger, the congressman said, replied that the Bush
administration "is not for or against swap funds, but we are against
taxes on capital gains in general and so we will not take any action
against the funds."

Mr. Weinberger, who has returned to the Ernst & Young accounting firm,
and is now its vice chairman, said that he recalled making much
less-definitive remarks, but did confirm that he said that the
administration had not developed a position on exchange funds.

A Treasury spokeswoman, Tara Bradshaw, said the Bush administration was
not currently considering any action on exchange funds and therefore had
no policy position on them.



Louis Proyect
www.marxmail.org



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