Wednesday, August 24, 2016

George Weiss doesn't mind using massive leverage and illegal tax avoidance

"Representatives of global banks and major hedge funds were questioned on Capitol Hill Tuesday over a Senate report that found the institutions participated in complex financial transactions that enabled the funds to avoid paying billions of dollars in taxes.

...the banks were able to provide the hedge funds as much as $20 in loans for each dollar put up by the funds...

A margin call occurs after an investor borrows to purchase investments 
while using current investments as collateral 
and the brokerage firm who lent the money asks for more 
if the account's value declines below required levels
which Say Yes money may be involved in. 

...transactions enabled Renaissance and 12 other hedge funds not only to avoid taxes but evade federal borrowing limits on brokerage accounts over a 15-year period.

Most brokerage firms allow from two to five days to meet the call. 

If an investor purchases $100,000 worth of securities
with an initial investment of $50,000
and a loan of $50,000 with a 30% "maintenance" requirement
and the account falls below $80,000, the investor should receive a margin call.

So $79,999 = 29,999 (less than 30% of the $100,000) in equity
and $50,000 owed = a maintenance call.

...banks sold "basket options" to the hedge funds that allowed the funds to report trading profits as long-term capital gains for tax purposes — even though 97% of the assets were held for less than six months, the report found.

If the investments go up before the money is due 
usually somewhere between two and five days, 
meaning if the account rises above $80,000 above the 30%, 
the margin call is considered to have been met
and the investor doesn't have to sell or supply more money.

...George Weiss Associates, a hedge fund cited in the subcommittee report, said in a statement before the hearing that it terminated its involvement with the options transactions in May 2010 "because of increasing market volatility." It added, "basket options are lawful financial instruments often used to obtain leverage."

Is Weiss utilizing leverage for student scholarships?

...the trades were made in the banks' accounts so that the hedge funds would not be subject to leverage limits that prevent banks from lending more than $2 for every dollar put up by the hedge funds... The funds, however, controlled all assets, executed all the trades and reaped the profits, the subcommittee said.

...the hedge funds "stretched two key elements of the tax law," and said the IRS should challenge the financial arrangements.

If the the $100,000 falls under $80,000,
and the investor still owes $50,000 plus interest 
and the account doesn't go back up in time
the investor has to either sell enough to bring the account into compliance
or inject more money into the account to bring the equity back up over 30%.

If the investor doesn't act, the brokerage firm usually does
as the brokerage has the right to sell securities to increase an account's equity
until it rises above the maintenance margin.

...the trades should have been part of a normal brokerage account, and the funds should have been paying an ordinary income tax rate for short-term gains, which is as high as 39%, instead of a 15% or 20% rate for long-term capital gains."

If Weiss is using leverage to invest Say Yes money,
it could be wiped out by an adverse event inside a week