Wall Street banks helped hedge funds become huge tax dodgers, Senate investigators claimed in a report released Monday.
The banks colluded with hedge funds to avoid billions in taxes by using exotic financial instruments for about 15 years, according to the Senate Permanent Subcommittee on Investigations.
“These banks and hedge funds used dubious structured financial products in a giant game of ‘let’s pretend,’ costing the Treasury billions and bypassing safeguards that protect the economy from excessive bank lending for stock speculation,” Sen. Carl Levin (D-Mich), who leads the subcommittee, said in a statement.
Barclays and Deutsche Bank together made about $100 billion in trades using so-called basket options, a kind of derivative on a group of assets, the 93-page report claims.
There were 13 hedge funds on the other side of the trades, including Renaissance Technology and George Weiss Associates. Renaissance alone avoided a $6 billion tax bill, the report said.
The options gave hedge funds highly-levered trades in accounts held in the banks’ names, allowing them to skirt federal leverage limits and pay lower taxes, the report said.
The banks deny that they have run afoul of the law. “Barclays has been fully compliant with the law, has cooperated with the committee and looks forward to continuing that cooperation at the hearing,” spokesman Mark Lane said.
Renee Calabro, a Deutsche Bank spokeswoman, said the bank was “fully compliant with applicable laws, regulations and guidance. Moreover, they were a niche offering to a small number of clients over a discrete period of time which we completely ceased offering in 2010. ”
The Senate subcommittee is holding a hearing on the issue Tuesday.