| WASHINGTON, July 21
WASHINGTON, July 21 The head of a powerful U.S.
Senate panel has accused Deutsche Bank AG and
Barclays Plc of helping hedge funds avoid taxes,
calling for tougher action from the authorities.
The banks sold complex option products to Renaissance
Technology Corp that saved it and other hedge funds
billions of dollars in taxes, Democratic Senator Carl Levin, who
heads the U.S. Senate Permanent Subcommittee on Investigations,
said on Monday.
"Ordinary Americans had to shoulder a tax burden of billions
of dollars, a burden that was shrugged off by these hedge
funds," Levin told a news conference.
"And those same Americans will pay the price as the excess
risk from massive over leveraging once again destabilizes our
economy as it has in the past."
Levin's committee presented the findings of a year-long
probe into so-called basket options, which Levin said can be
misused to lower taxes, and plans to grill representatives from
the banks and Renaissance in a public hearing on Tuesday.
The hearing by one of the Senate's most high-profile panels
comes less than a month after New York's attorney general filed
a fraud lawsuit against Barclays, accusing the British bank of
giving an unfair edge to high-frequency traders.
And Deutsche Bank, facing an array of investigations into
the conduct of its staff that includes the Libor benchmark rate
scandal, has set aside another 1.8 billion euros ($2.43 billion)
to pay fines after already paying more than 5 billion euros over
the past two years.
But Levin stopped short of accusing either bank or the hedge
funds of doing something illegal, and Deutsche said the option
products it offered were "at all times fully compliant with
applicable laws, regulations and guidance."
A Renaissance spokesman said: "We believe that the tax
treatment for the option transactions being reviewed by the
(panel) is appropriate under current law. These options provide
Renaissance with substantial business benefits."
Barclays also said it had been fully compliant with the law,
and that it had cooperated with the committee.
The two banks enabled at least 13 hedge funds to conduct
over $100 billion in securities trades, the panel said. The
profits were taxed as long-term capital gains, even though the
positions were often held for only seconds. In the case of
Renaissance alone, the fund paid an estimated $6.8 billion less
in taxes because short-term trading profits are taxed at a much
higher rate, the report said.
The products offered by the banks were styled as options in
an account that was nominally held by the bank, but was in fact
controlled by the hedge funds, which bought and sold the assets,
and profited from the trading, the report said.
The hedge fund then paid the lower tax rate on long-term
capital gains, arguing that profits came from exercising the
option, rather than from the underlying trades. But the options
were fictional, the panel found.
The U.S. tax authority, the Internal Revenue Service, said
in 2010 that basket options do not function like an option and
should not be treated as such, but that opinion has no status as
an official rule, and the IRS has not pressed any cases.
Renaissance has been debating the issue with the IRS for six
years, the spokesman said. The two banks have now stopped
offering the products, the panel said.
Levin's panel issued a number of recommendations from the
report that were largely targeted at the IRS, urging it to audit
hedge funds that used basket options, and calling for a change
in legislation to make it easier to look at large partnerships
such as hedge funds, which go largely unaudited.
"The IRS hasn't completed their review. It's about time they
do. It's long overdue," Levin said.
Another problem with basket options was that they enabled
funds to take on more debt than otherwise possible, potentially
posing a risk to the overall financial system, the report said.
Renaissance used basket options to borrow 20 times as much
money as was put in the accounts. The fund had been unable to
achieve such so-called leverage levels in other settings under
federal rules, the report added.
($1 = 0.7397 Euro)
(Reporting by Douwe Miedema. Editing by Andre Grenon)