Wall Street's largest investment banks are both peddling and profiting from the latest corporate craze known as "inversion mergers" in which large U.S.-based companies sell themselves off to foreign companies or subsidaries in order to further insulate themselves from paying taxes in their home country.
According to a story in the New York Times on Tuesday, banks like J.P Morgan, Goldman Sachs, Morgan Stanley, and Citigroup are closing in on gathering nearly $1 billion in fees alone—collected over the last three years—as they advise corporate clients on how to off-shore their ownership structure.
The Times' Andrew Ross Sorkin reports that "with seven- and eight-figure fees up for grabs, Wall Street bankers — and lawyers, consultants and accountants — have been promoting such deals [...] to some of the biggest companies in the country, including the American drug giant Pfizer."
Wider reporting indicates that Wall Street has showed new urgency in initiating and completing such deals given the "inversion" trend has now received the attention of Congress and following recent remarks by President Obama who indicated he agreed with those who call the practice "un-patriotic" and damaging to the overall economy.
"It's legal, but it's not right," Obama said last week, addressing the issue while in California. "They're technically renouncing their U.S. citizenship," he said of the companies. "They're declaring they are based someplace else even though most of their operations are here. You know, some people are calling these companies corporate deserters."
According to Reuters:
The Obama administration has proposed legislation that would severely restrict the ability of US companies to invert, and while the effective date is January 1 2015, US Treasury Secretary Jack Lew has called for the law to be made retroactive to May 2014.
Last week US Senate Finance Committee chairman Ron Wyden further fuelled the debate by accusing bankers of being in an "inversion feeding frenzy" and alluded to as many as 25 more possible tax-motivated M&A deals in the pipeline.
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Threats of retroactivity have led bankers privately to urge corporates to get deals at least signed before the end of December this year.
"We are certainly encouraging clients not to waste any time if they are considering deals that include an inversion angle," said a global head of mergers and acquisitions at one of the world's largest banks.
As Sorkin notes, neither the public shaming from the president or other lawmakers, nor the growing uproar among regular individual tax-payers is likely to change the behavior of the Wall Street titans or their corporate clients both of whom see large potential profits for themselves even as the nation's tax base will suffer greatly in the years ahead.
Wall Street banks are aggressively promoting these transactions to major corporations, arguing that such deals need to be completed quickly before Washington tries to block them. The proposals by President Obama and Senator Levin, neither of which appear to be gaining traction, seek to prevent inversion deals retroactively.
These deals are expected to sap the United States Treasury of $19.46 billion over the next decade, according to the Joint Committee on Taxation. And that figure doesn’t take into consideration any future inversions. Nor does it account for the possible loss of jobs and revenue that will ostensibly move overseas over time.
“This is going to sound cynical," one senior banker told the Sorkin, "but as much as I may hate these deals and the ramifications for our country, if I don’t do the deal, my competitor across the street will be happy to do it.”
And as Jamie Dimon, CEO of JP Morgan said on a conference call with reporters as he defended the practice, “You want the choice to be able to go to Walmart to get the lowest prices. Companies should be able to make that choice as well.”