In recent years, the Senate Permanent Subcommittee on Investigations, which I chair, has exposed tax avoidance by profitable corporations and wealthy individuals. We also have examined reckless behavior that has put the stability of the financial system – and by extension, the U.S. economy – at risk. In late July, we released a report and held a lengthy hearing on a situation that combines those two important issues.
We focused on how two banks and a handful of hedge funds developed a complex financial structure to engage in highly profitable financial market trading while claiming an unjustified lower tax rate and avoiding limits on risky trading with borrowed money. This structure worked well for the banks, which earned hundreds of millions of dollars in fees. It worked well for the hedge funds, which made billions of dollars in profits. But it didn’t work for average taxpayers, who had to shoulder the tax burden these hedge funds shrugged off with the aid of the banks. And it didn’t work for the financial system, which is ill-equipped to withstand another shock from risky deals gone wrong.