Did Obama Administration Help Delphi Evade U.S. Taxes?

by J.Emerson
did obama administration help delphi evade u s taxes

From Bloomberg’s Zachary Mider comes a new allegation regarding the restructuring of (formerly) American parts maker Delphi: the Treasury Department under Obama helped the company re-incorporate in England as part of a tax avoidance strategy. If that’s true, it’s an embarrassing revelation for a President who recently condemned American companies that incorporate abroad as “corporate deserters.” Like many things in the financial world, however, appearances are often deceiving.

As Mider explains, Delphi was spun off from GM in 1999 in an attempt to diversify the part’s division’s clientele and make it more globally competitive. The move didn’t pan out; by 2005 Delphi was in bankruptcy court, where it scraped along until the 2009 financial crisis. The Great Recession made Delphi’s situation acute; if GM collapsed, the parts company had no hope of surviving. Conversely, GM needed the company to keep supplying it with crucial parts. After the bailout package for GM was approved in the waning days of the Bush Administration, Treasury officials understood that Delphi would need to be recapitalized as well. Steven Rattner, the Wall Streeter appointed by President Obama to oversee the bailout of GM, helped broker a deal to “fix” Delphi by getting the company out of bankruptcy court.

Initially, the hedge fund Platinum Equity LLC of Los Angeles agreed to divvy up Delphi’s assets with GM, with the newly Treasury-backed carmaker providing the majority of the financing (Treasury money) for the deal. However, the agreement with Platinum fell through when another one of Delphi’s creditors, the hedge fund Elliot Management, objected to the terms of the deal. Elliot and the firm Silver Point Capital partnered to put together their own bid for Delphi, which GM agreed to. GM invested $1.7 billion into Delphi’s equity, and bought out its steering parts business and a few factories for a further $1.1 billion. All of this money came from an escrow account filled with $16 billion in bailout money set up after GM emerged from bankruptcy, and all the spending required Treasury Department approval before it could go forward. There was one small catch in the fine print of the deal: GM and the hedge funds would reincorporate Delphi in some foreign country, ostensibly to obtain a better tax position. Mider explains that this practice, known as “inversion,” is becoming increasingly common amongst U.S.-based companies seeking a more favorable tax climate. Delphi was incorporated in England for that purpose, and the money was disbursed from the Treasury escrow account after the reincorporation was complete. The original agreement with Platinum didn’t contain language about foreign reincorporation, although it later emerged that the fund’s lawyers had set up two paper companies in Luxembourg for that purpose.

The deal between Elliot, Silver Point, and GM to rescue Delphi turned out to be a great investment for all parties involved. After Delphi went public again in 2011, the stock price surged. GM sold its stake back to Delphi for a $1.6 billion profit, and Elliot Management booked $1.3 billion on an initial investment of $300 million. At this point, GM was under no obligation to pay the Treasury anything. The terms of the bankruptcy meant that all of the Treasury’s debt had been swapped for equity in the “new” carmaker. The U.S. Government wouldn’t see a dime of GM’s profits from the Delphi deal, besides any increase in the market value of its equity stake. And it had been cut out of a large chunk of the tax revenue from Delphi, which was now headquartered in England under more favorable rules.

The question becomes who knew what, when, and how much leverage the Treasury had to exert on the terms of the deal with Elliot and Silver Point. The time window for the agreement is key. GM’s bankruptcy proceedings concluded on July 10, 2009. Steven Rattner and the rest of the bailout task force stepped aside, believing their jobs were finished. But the collapse of the Platinum deal happened soon afterwards, because some of Delphi’s creditors weren’t satisfied with the terms. The deal between Elliot, Silver Point, and GM was inked on July 26. When interviewed by Bloomberg, Rattner claimed to have no knowledge of any plan to incorporate Delphi in a foreign locale at the time of the original negotiations. Even if he had, it’s not likely that he would have been able to stop it. Because the Treasury never technically held a direct stake in Delphi (unlike its assumption of equity in GM’s case), it was only an indirect party to the final settlement of Delphi’s bankruptcy proceedings. Rattner had denied a $150 million cash infusion from GM to Delphi previously, when it became clear that transfer wouldn’t end Delphi’s bankruptcy proceedings. The Treasury could have rejected disbursement of funds for GM’s investment in the parts maker after the reincorporation of Delphi in England. But that would have iced the deal and put Delphi’s future in jeopardy, which in turn would have been counterproductive to the purpose of the bailout in the first place. Even so, it’s not a proud moment in the management of the bailout by any stretch of the imagination.

The other factor to consider is that Rattner and the bailout task force may have believed that Delphi’s reincorporation wouldn’t affect its tax position after all. Mider reports that in September of 2009, the IRS notified Delphi that it was still considered a U.S. company and would be subject to U.S. corporate income tax rates. As a justification, the IRS cited a 2004 law meant to prevent exactly what Delphi had done: the creation of paper “surrogate foreign corporations” for the purposes of evading taxes. The IRS dispute with Delphi in this case is ongoing. If the company loses its appeal, it would owe about 20 percent more a year in taxes than it pays now (as well as any assessments for back taxes). If that’s the case, then the “inversion” of Delphi will be a moot point.

The broader takeaway from the whole saga is that any intervention by government in the spaces normally served by private equity is bound to have some unpleasant side effects. Simultaneously trying to manage, regulate, and tax a business is bound to produce more than a few conflicts of interest. At the very least, the Delphi deal embarrasses an Administration which has recently sought to turn up the heat on companies moving their headquarters abroad. It’s unlikely to change many minds about the wisdom of the bailout; those lines were drawn firmly some time ago. But the curious case of Delphi’s “inversion” will undoubtedly be cited in future debates about corporate tax reform in America, from both a left and a right-wing perspective.

Join the conversation
3 of 17 comments
  • Redav Redav on Aug 07, 2014

    Excellent article.

  • AlfaRomasochist AlfaRomasochist on Aug 07, 2014

    Yep, the Elliott vultures running Delphi bent the Obama administration over a barrel and made BANK on their initial investment. "You want to rescue GM? Give us what we want or have fun building cars without steering columns." The administration caved completely. These are the same guys currently holding Argentina hostage over their defaulted bonds. And in a delicious little bit of serendipity, a certain Mrs. Ann Romney had a big investment in Elliott during this time, meaning that Ann and Mittens likely made millions on the bailout. This was likely one of the reasons Mitt refused to release all his tax returns. Google "Mitt Romney's Bailout Bonanza" for more detail.

    • 319583076 319583076 on Aug 07, 2014

      The fundamental rule of mankind is: "The strong do as they please while the weak accept what they must." -Courtesy of Thucydides account of the Melian Dialogue.

  • Max So GM will be making TESLAS in the future. YEA They really shouldn’t be taking cues from Elon musk. Tesla is just about to be over.
  • Malcolm It's not that commenters attack Tesla, musk has brought it on the company. The delivery of the first semi was half loaded in 70 degree weather hauling potato chips for frito lay. No company underutilizes their loads like this. Musk shouted at the world "look at us". Freightliners e-cascads has been delivering loads for 6-8 months before Tesla delivered one semi. What commenters are asking "What's the actual usable range when in say Leadville when its blowing snow and -20F outside with a full trailer?
  • Funky D I despise Google for a whole host of reasons. So why on earth would I willing spend a large amount of $ on a car that will force Google spyware on me.The only connectivity to the world I will put up with is through my phone, which at least gives me the option of turning it off or disconnecting it from the car should I choose to.No CarPlay, no sale.
  • William I think it's important to understand the factors that made GM as big as it once was and would like to be today. Let's roll back to 1965, or even before that. GM was the biggest of the Big Three. It's main competition was Ford and Chrysler, as well as it's own 5 brands competing with themselves. The import competition was all but non existent. Volkswagen was the most popular imported cars at the time. So GM had its successful 5 brands, and very little competition compared to today's market. GM was big, huge in fact. It was diversified into many other lines of business, from trains to information data processing (EDS). Again GM was huge. But being huge didn't make it better. There are many examples of GM not building the best cars they could, it's no surprise that they were building cars to maximize their profits, not to be the best built cars on the road, the closest brand to achieve that status was Cadillac. Anyone who owned a Cadillac knew it could have been a much higher level of quality than it was. It had a higher level of engineering and design features compared to it's competition. But as my Godfather used to say "how good is good?" Being as good as your competitors, isn't being as good as you could be. So, today GM does not hold 50% of the automotive market as it once did, and because of a multitude of reasons it never will again. No matter how much it improves it's quality, market value and dealer network, based on competition alone it can't have a 50% market share again. It has only 3 of its original 5 brands, and there are too many strong competitors taking pieces of the market share. So that says it's playing in a different game, therfore there's a whole new normal to use as a baseline than before. GM has to continue downsizing to fit into today's market. It can still be big, but in a different game and scale. The new normal will never be the same scale it once was as compared to the now "worlds" automotive industry. Just like how the US railroad industry had to reinvent its self to meet the changing transportation industry, and IBM has had to reinvent its self to play in the ever changing Information Technology industry it finds it's self in. IBM was once the industry leader, now it has to scale it's self down to remain in the industry it created. GM is in the same place that the railroads, IBM and other big companies like AT&T and Standard Oil have found themselves in. It seems like being the industry leader is always followed by having to reinvent it's self to just remain viable. It's part of the business cycle. GM, it's time you accept your fate, not dead, but not huge either.
  • Tassos The Euro spec Taurus is the US spec Ford FUSION.Very few buyers care to see it here. FOrd has stopped making the Fusion long agoWake us when you have some interesting news to report.