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Banks Cash In on Mergers Intended to Elude Taxes

Jamie Dimon, the chief executive of JPMorgan Chase, recently said, "I love America." Lloyd Blankfein, the chief executive of Goldman Sachs, wrote an opinion article saying, "Investing in America still produces the best return."

Yet guess who's behind the recent spate of merger deals in which major United States corporations have renounced their citizenship in search of a lower tax bill? Wall Street banks, led by JPMorgan Chase and Goldman Sachs.

Jamie Dimon
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Jamie Dimon

Investment banks are estimated to have collected, or will soon collect, nearly $1 billion in fees over the last three years advising and persuading American companies to move the address of their headquarters abroad (without actually moving). With seven- and eight-figure fees up for grabs, Wall Street bankers — and lawyers, consultants and accountants — have been promoting such deals, known as inversions, to some of the biggest companies in the country, including the American drug giant Pfizer.

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Just last week, President Obama criticized these types of transactions, calling the companies engaged in them "corporate deserters." "My attitude," he said, "is I don't care if it's legal. It's wrong." He has suggested legislation, and Senator Carl Levin, the Michigan Democrat who is chairman of the Senate Permanent Subcommittee on Investigations, has proposed to make it more difficult for an American company to renounce its citizenship — and tax bill — by merging with a smaller foreign competitor.

What to call the banks enabling them? How about corporate co-conspirators?

So far, on deals completed or pending, Goldman Sachs is estimated to have made $203 million advising on inversion deals since 2011, according to data from the Deal Intelligence unit of Thomson Reuters. JPMorgan stands to collect $185 million, while Morgan Stanley will make $98 million and Citigroup $72 million.

None of the major Wall Street banks, which received help from American taxpayers in the form of hundreds of billions of dollars in loans, appear to have declined on principle to take an assignment from a client seeking to move its corporate citizenship abroad.

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"This is an economic game. There are no virgins anywhere," said Stephen E. Shay, a professor at Harvard Law School and a former deputy assistant Treasury secretary for international tax affairs in the Obama administration. "We can't look to the banks to stop inversions. They will not look at this based on morality. They will look at it on the basis of fees."

All the bankers contacted declined to comment.

Perhaps most troubling, many 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.

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Of course, privately, bankers point out that there is nothing illegal about inversion deals. "This is going to sound cynical, 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," one senior banker told me.

On a conference call with reporters, Mr. Dimon of JPMorgan Chase was asked about inversion deals. His reply?

"You want the choice to be able to go to Walmart to get the lowest prices," Mr. Dimon said. "Companies should be able to make that choice as well."

Mr. Dimon's position is a complicated one. He and his fellow chief executives on Wall Street have been working for the last several years to show their commitment to the United States as they try to rebuild trust after the financial crisis. JPMorgan recently announced plans to invest $100 million in Detroit over the next five years, for example. The firm has also adopted a major program to hire United States military veterans at the bank when they return from service.

And yet, JPMorgan's work on inversion deals, which clearly can't be considered good for the country, contradict the firm's efforts to serve the nation.

At the same time, firms like JPMorgan consistently talk about serving their clients — and there is no question that some of its clients are clamoring to pursue inversion deals. (Some would argue that making American companies more competitive, even if they have a foreign address, is patriotic. I would disagree.)

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Some firms internally rationalize work on an inversion deal by saying they worked for the foreign target, rather than the American buyer, according to several prominent deal makers. For example, Roger Altman, the executive chairman of Evercore Partners and a major supporter of President Obama, worked for the British drug maker AstraZeneca on its defense against an offer from Pfizer. Evercore also worked for Dublin-based Shire, which agreed to be taken over by AbbVie, a spinoff of Abbott Laboratories.

Everyone I spoke to on Wall Street about inversion deals said they wished there were no reason for these deals and that our tax system were more competitive and, therefore, more attractive.

"We have a flawed corporate tax code that is driving U.S. companies overseas," Mr. Dimon said on the conference call. "If government was smart, they'd look at it holistically," he added, suggesting that a moratorium on such deals won't work. "Even if you stop and say, 'Don't invert,' capital will move away." Mr. Dimon insisted, "I'm just as patriotic as anyone.

While an overhaul of the corporate tax system may be the ultimate goal, the gridlock in Washington suggests it is unlikely to come anytime soon. Corporate tax reform is nice in theory, but tough in practice. It most likely requires lower tax rates and the closing of loopholes, which many companies are sure to fight. And whatever new, lower tax rate is determined, there will probably be another country willing to lower its rate further, creating a sad race to zero.

"The dirty secret is that unless the U.S. reduces corporate tax rates to less than 10 percent, a reduction in U.S. tax rates is not likely to have much impact on inversions," said J. Richard Harvey Jr., a professor at Villanova University School of Law and its Graduate Tax Program. "The reason is that even if the U.S. corporate tax rate were somehow reduced to 15 percent, U.S. multinational companies would still invert if they thought it was to their benefit."

In the meantime, more companies are expected to leave the United States. And Wall Street banks will get paid to help them.

By CNBC anchor and New York Times reporter Andrew Ross Sorkin

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