Is George Soros Shutting Down Because Of Dodd-Frank, Onerous Obama?

Find out why Warren Buffet is not being totally honest when he advocates higher taxes.


George Soros, the billionaire hedge fund manager, benefactor of the Democratic Party and sponsor of MoveOn.com, responded to President Obama’s monetary initiatives by closing his business and most likely laying off some employees. Is Soros closing up shop a nasty microcosm of our economy slowing down and approaching recession?

Tax-hikes and regulation-hikes scared Soros off and he changed course big-time. So much for economists who argue that tax and regulatory policy changes do not affect business and investment behavior. They do.

President Obama has been attacking hedge fund manager tax breaks, carried-interest lower tax rates, which would raise Soros’ tax rate from the 15% long-term capital gains tax rate to the 35% maximum ordinary tax rate. Plus, Soros’ carried-interest compensation would also become subject to self-employment taxes. Meaningfully, the unlimited Medicare tax of 2.9%, scheduled to rise to 3.95% under ObamaCare in 2013.

Many people always say ‘billionaires can afford higher taxes and why should they care?’ Wrong, most are billionaires because they watch every penny more carefully then you and me. Look closer and watch them avoid tax hikes.

What affected Soros more is probably the hikes in regulations applying to the investment management industry. The Dodd-Frank financial regulation law of July 2010 forces all large hedge fund managers to register with the U.S. Securities and Exchange Commission by early next year after a recent extension from the SEC. To date, Soros and his hedge fund businesses have cleverly managed to avoid SEC-registration.

Soros may be ‘too big to fail’ – and he was big enough to shake down the Bank of England in 1992 when he made a cool billion on shorting the pound sterling – but he claims he is not worthy of regulatory oversight now.

How does Soros avoid registration? Using the private adviser exemption and other flimsy loopholes like extended lock up rules. These exemptions and loopholes are ended in Dodd-Frank, so Soros must now register with the SEC, with one remaining exception – closing his business and he chose to do just that.

Why does George Soros, a prolific author - and I like his books – and man of intense scrutiny and media spotlight want to avoid SEC-registration and regulation? I suspect it’s because he doesn’t want to show his portfolio and trades to regulators and the public, which is an element of SEC-registration and oversight.

Soros knows he will suffer a thousand copycat trades and related cuts to his profits. Yes, many managers and billionaires ‘talk their book’, but Soros probably doesn’t want to open his books. Who knows what else lurks behind closed doors?

Soros is resorting to trading his own money, which includes his “family office” money – and that term is being hotly debated as a potential remaining loophole under Dodd-Frank. By returning all client money, Soros can keep his portfolio private as well as continuing to benefit from lower long-term capital gains rate taxes on all of his trading gains. Note, potential repeal of carried-interest tax breaks only applies to client money, not your own money in a fund.

This begs the question. Was the Dodd-Frank law thought out well-enough before passage? Or, like Obamacare and so many other recent bills out of this dysfunctional Congress and administration, was Dodd-Frank more a reflection of populist anger, emotion and politics against Wall Street?

Republicans, the financial services industry and their lobbyists are trying to water down Dodd-Frank before regulators promulgate all the new rules. Many Republicans promise reversal of Dodd-Frank lock, stock and barrel if elected in 2012.

Another important element of Dodd-Frank is forcing privately-traded derivatives to be cleared on exchanges. Dodd-Frank seeks greater transparency, posting of collateral, and a reduction of counter-party risk and systemic risk. I like those goals, but I am not sure of the means.

Billionaire-poster boy Warren Buffett – adviser and friend of President Obama – famously-called derivatives ‘weapons of mass destruction.’ Yet, Mr. Buffett balked at Dodd-Frank’s new requirement to post collateral for derivative trades with exchanges. It turns out that Buffett and his companies are one of the biggest users of derivatives and he doesn’t want to post collateral. Buffett may be right, how can global companies afford collateral on all their hedging transactions? Should they hedge less?

Buffett suggests raising long-term capital gains tax rates from 15% to 20% and perhaps even to a modified (hopefully reduced) ordinary tax rate. But, Buffett rarely sells his stock so he doesn’t pay capital gains taxes anyway. My problem with Mr. Buffett is he does not suggest closing his own-cherished charity tax loophole, where he saves around 13 billion in taxes. The charity deduction scheme involves donating appreciated company stock to your own – or buddy Bill Gates – private charitable foundation. Buffett should donate to charity after-tax, not before-tax.

President Obama loves lining up his billionaire poster-boys in support of his tax-hike and regulatory-hike proposals. The president can then say even millionaires and billionaires agree with him, and some are even on Wall Street too. I respectfully disagree with President Obama, because Soros is closing his business over the president’s own initiatives, and Buffett is raising taxes on other peoples’ money and not his own.

http://www.forbes.com/sites/greatspeculations/2011/08/25/is-george-soros-shutting-down-because-of-dodd-frank-onerous-obama/3/