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 said.
WASHINGTON, July 21 (Reuters) - 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.
Concerns had been raised months before the New York attorney general alleged in June that Barclays lied to clients about the extent of predatory trading activity on the electronic trading venue,The Wall Street Journal reported on Monday.
Stocks in Barclays slid as sources told the newspaper that trading firms and employees had voiced worries about the high-speed traders at the bank well before New York Attorney General Eric Schneiderman's complaint.
The sources said some big trading outfits noticed their orders weren't getting the best treatment on the dark pool and that the firms had grown concerned that the poor results resulted from high-frequency trading.
Dark pools allow large blocks of shares to be traded anonymously without informing the market until completion to minimise the risk of the price moving to the disadvantage of an investor should the market find out about the trade before it is finalised.
Schneiderman's lawsuit, filed on June 25th, claims that Barclays lied to clients and gave high-frequency traders an unfair advantage.
Shares closed down 0.76% at 210.20p following the news.
So come on Barcs- what will you do to help your supporters? If a ticking off, then ensure that all others implicated receive their share of the blame- but for your share holders...can you afford a share buy back after that massive cash call a few months back...at 275p?
'Close your eyes and ears and do not listen to the analysts' Have you looked at the broker ratings? ..not one targets a lower SP than the current, thats ridiculous when you think about it. This could easily go either way based on the current predicament, yet none predict a further drop .... crazy.
Chumba, Let's pray that there are no more ... Anyway, they make some much money from the European banks, so, why would they want to destroy them ! Last year it was Standard Chartered and their dealings with Iran, this year it was BNP, Barclays and Deutsche Bank....
Finding wrong doings is a profitable business for some ! Let's hope that they get their money and let Barclays recover until they can impose their next fine !!! There are so many other banks they can turn against !!!
Hi Sarantos...I have been in and out of Barcs for eons!! But thank the Lord I have never held long term!! Of the Big 4 I thought this was the RR; sadly not. But you suggest that once the judgement is made, then the sp will rise? Yeah, until the next misdemeanour is announced. Our friends across the pond have it in for the Brits for getting rid of Mr Diamond...quote CNBC 2 years ago.
Like the volume today, quiet - vols been dropping for the last 4 sessions, maybe the calm before the storm!? Expecting a better day tomorrow, at least some news is coming out now and NTSE:BCS lost less ground than LSE:BARC - different market conditions obviously but still - the less uncertainty the better IMO. Bunks.
It is unlikely that Barclays avoids a fine. Even if they are not guilty of the accusations... However, we should not expect any move up, not before the fine is announced.
It does not matter how much the fine wil be. Whether 100 million or 5 billion, the market will receive the end of the uncertainty well and then and only then we can expect barc.l to move up to 300p.
Then, as it usually happens with the market analysts and "experts" the same fools that recommend us to sell at 210 because it is moving down to 170, will recommend us to buy at 260 and 300 because it is moving to 400 !!!
Close your eyes and ears and do not listen to the analysts. They know no more than we do. If they did, they would not be analysts or bloggers or journalists writing stupidities for 10 pounds per article, but multimillionaires...
It is only in the mind of bankers that blatant cheating, swindling, defrauding, theft, robbing, mugging and larceny are taken 'out of context'! - - When you invite FTS and the Flashboys into your dark pool, it's no different from inviting staring pigs into a cesspool of corrupted veggies!
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