Romney Campaign Should Look At Public Accounting - Where The Really Incredibly Boring White Guys Are

Originally published on forbes.com. This post came out during the 2012 election before Romney had selected a running mate.

 I just read that David Petraeus is being seriously considered as Romney's running mate.  Based on his biography, he might make a pretty good president.  I just don't think he qualifies for running mate by the citeria that are being cited.  According to this story:

One Republican official familiar with the campaign’s thinking said it will be designed to produce a pick who is safe and, by design, unexciting — a deliberate anti-Palin. The prized pick, said this official: an “incredibly boring white guy.” (IBWG)

If that is what you want guys, General Petraeus just doesn't cut it.  I don't want to run through the whole biography again, because it depresses me too much.  He is about 10 months younger than me and has accomplished considerably more.  I'm sensitive about that.  Two things from his biography strike me though.  Two months after graduation from West Point, he married Holly Knowlton.  Now getting married two months after graduating from college is pretty IBWG, but Holly Knowlton was the daughter of the Superintendent of West Point, which means he was dating her while he was a cadet.  That is just not boring.  Then there was the time he was shot in the chest by an M-16 during a live fire execrcise.  Within days he was released from the hospital after doing fifty push-ups without resting.  I'm sorry, if you want someone boring, it just can't be somebody who volunteers to jump out of a perfectly functioning airplane.

The Romney campaign does not have to look far to find an untapped source of IBWGs.  I think they should start by interviewing Daniel Feheley. Mr. Feheley is the current presumptive pick to try to unseat Michael Solheim as First Accountant.  That is right.  If the Presidential race turns into a 1040 smackdown, it will be Daniel Feheley of PWC, who signs Romney's tax return versus Michael Solheim of Wineberg Solheim Howell & Shain who signed the President's return.  Mr. Solheim already did his bit by getting the President's return in without asking for an extension.  I have no doubt that Romney would have been better off politically if he had not extended, but it is literally impossible for someone who is a partner in partnerships that are probably themselves partners in partnerships to not extend.  The only strategy I could think of was for Romney to file using estimated numbers that were too high and then not bother to amend when the correct lower numbers came in.  Deliberately overpaying your income tax would probably seem like a mortal sin to a Bain Capital guy, which is one strike against that plan.  The other is that there would probably be required disclosures that were not included.

My meager investigative skills have not been able to uncover whether Mr. Feheley is himself an IBWG.  I don't like stereotyping but if you put a gun to my head and told me I had to give you a percentage chance that somebody at PWC who is a thought leader in the field of private equity taxation is an IBWG, I would grit my teeth and say high nineties.  I don't feel this calling to go into the inner city to inspire little kids to learn the incticacies of the 704(b) capital account maintenance, but from my own observation of the people you run into at seminars and the like it is an area lacking in diversity.  And boring ?  Don't get me started.  Mr. Feheley, if not the man himself, will be able to provide the campaign staff with numerous IBWGs.  The smart thing will be to stick with PWC.  The rest of the Big Four has that whole ugly tax shelter thing from the nineties to live down and someone from a regional firm is likely to have at least a couple of really colorful clients.

There are some other advantages to looking at CPAs.  Those in the appropriate age bracket only needed a bachelors degree, which could be in anything, to sit for the exam.  So a lot of CPAs are first generation college graduates, who might be able to offset Romney's born with a silver spoon problem, a little. No matter which party wins, it seems that comprehensive tax reform is in the wind, so having a VP who could visualize how all the proposals would actually translate into returns would be good.  He might also be able to anticipate how whatever the new system is will be gamed.  The reason that this will not be happening is kind of ironic.  They say they want an IBWG and the motherlode of IBWGs is sitting right there in front of them, but actually tapping into it is an out of the box idea.

You can follow me on twitter @peterreillycpa.

Could Refinancing All Student Loans Be A Free Lunch For The Taxpayers ?

Originally published on forbes.com on May 2, 2012

Before I met with John Remondi, President and COO of Sallie Mae, I combed through Sallie's 10-K to see what they were worried about. One thing they say they are worried about is that the cost of college will go down. That would be bad for their business. When I asked Mr. Remondi about that he kind of smiled and said that was the type of thing they had to mention to their shareholders, but he didn't really think it was all that likely. Then there is this other thing they are worried about:

For instance, during the fourth-quarter 2011, the Administration announced a Special Direct Consolidation Loan Initiative that provides a temporary incentive to borrowers who have at least one student loan owned by ED and at least one held by a FFELP lender to consolidate the FFELP lender’s loans into the DSLP program by providing a 0.25 percentage point interest rate reduction on the FFELP loans that are eligible for consolidation. We currently do not foresee the initiative having a significant impact on our FFELP Loans segment. However, the initiative is an example of how the Administration and Congress could detrimentally affect future estimated cash flows and profitability from our FFELP Loan portfolios through their actions.

The FFELP program was one of those public private partnerships. The federal government guaranteed most of the interest and principal, but it was financial institutions making the loans. President Obama thought that the piece going to the financial institutions was really a waste of money, since they were not taking any risk. There are no new FFELP loans being made, but the exisiting loans will be around for a long time. Sallie Mae is transitioning to making non-guaranteed loans, but they expect to be making money off the FFELP loans for the next 20 years.

They are even buying more of them from other institutions.  It does not require a lot of capital for them to do that.  The federal guaranty makes the portfolios gilt edged.  Sallie can securitize the loans with instituional investors getting something like LIBOR +1, while Salle gets LIBOR +2.  Doesn't seem like that much of a spread but it can add up.

As I noted, the consolidation program outlined above worries them a little.  Well, here is what I am thinking.  Maybe we the taxpayers need to encourage our President and his likely opponent to propose a program that would worry Sallie a lot.  It is our guaranty that makes the debts of those kids (and many of them are not kids anymore) a valuable financial asset, that the capital markets can play with for the next 20 years.  Why don't we just offer to refinance the whole lot at a reasonable rate ?  That includes the loans that are not performing that well.  We are already stuck with the downside on them because of the guaranty.  If we want to be nice guys, we could do things like put in bankruptcy protection for the really desperate.  But even, if we want to be hardnosed about, it is the taxpayers who are at risk that should be making the profits on the loans for the next twenty years.

It is too bad that we don't have a Presidential candidate that can think like a venture capitalist and make that kind of move on behalf of the American people.