Some Government Workers Will Get Pay Raises in Wisconsin

From State troopers who protect Governor given $4 an hour pay raise:

Just after Republican lawmakers announced they were rejecting raises for rank-and-file state troopers, Gov. Scott Walker’s administration granted $4-an-hour raises to the State Patrol officers
responsible for protecting the governor.

The pay bump will cost the state about $36,500 and comes at a time
when the Republican governor is routinely traveling out of state — with the officers for security — to attend what amount to campaign events leading up to a presidential run.

The top two Republicans in the Legislature announced Feb. 17 they would not allow a 17% pay boost for state troopers that Walker’s
administration had negotiated. Those pay raises can’t go into effect without the approval of lawmakers.

A separate pay raise took effect five days later for the troopers belonging to the State Patrol’s Dignitary Protection Unit who are responsible for protecting the governor 24 hours a day, State Patrol spokeswoman Peg Schmitt said Monday. That pay increase does not require legislative approval.

WKOW-TV in Madison first reported on the raise, which reportedly will go to 10 troopers.

These funds will come from the Department of Transportation. The WKOW report observes that “DOT officials estimate they are facing a budget shortfall of $680 million heading into the 2015-17 biennium.”

55 thoughts on “Some Government Workers Will Get Pay Raises in Wisconsin

  1. Rick Stryker

    When I read stories like this, I have to chuckle at how much trouble Democrats are going to have with squeaky clean Scott Walker.

    That’s the charge–that he gave a $4 dollar an hour raise to 10 members of his state police security patrol? Really? Well, that charge ignores that those state troopers very often work overtime and are paid overtime for any work over 60 hours, with a cap. But now, they will not be paid for their overtime work. Also, that charge ignores that the cost of the troopers is split between the taxpayers and the Walker campaign, depending on the purpose of the trip.

    It’s both amusing and instructive to constrast with the other side. I remember another governor who had a much more entertaining use for the state troopers who guarded him. That governor ended up having to settle with one Paula Jones. And I remember that that governor’s wife around that time turned in perhaps the most impressive investing record in history, turning $1000 into $100,000 by invariably buying and selling commodities at just the right time.

    Actually, that governor’s wife may well be Walker’s opponent. Recently, new accounts noted her use of a private email account while Secretary of State and donations from foreign governments to her foundation.

    1. Menzie Chinn Post author

      Rick Stryker: Do other state troopers do overtime? If so, wouldn’t the same argument apply to them as well?

      The State Patrol spokesperson indicates that there will be an incremental cost to the measure, by the way.

      1. Rick Stryker


        To be more precise, the State Patrol said that “costs would actually rise slightly.” And that was my point: this is hardly a pay raise. It’s basically just a wash.

        And I don’t think the argument applies to the other state troopers. Walker wanted to give them a clear pay raise but his Republican colleagues in the legislature said no. I don’t think there was any tit for tat that the troopers would have to give up overtime pay in exchange for a pay raise.

    2. baffling

      rick, you have a problem with hillary making money on futures trades, and paying taxes on them, but you have no problem with romney acquiring $20 to $100 million dollars in an ira with $5k yearly contribution limits? wonder what jeb bush was doing while his alcoholic brother was snorting cocaine before becoming president? saint reagan was a follower of astrology. you want to start the political hit jobs, fine. my bet is your squeaky clean walker is a bit dirtier than you imply. let the games begin.

      1. Rick Stryker


        Reader AS, who dealt with IRAs on a professional basis, tried very hard to explain to you why there is nothing suspicious about Romney’s IRA. He grew exasperated when you refused to learn.

        However, you can’t really say that there is nothing suspicious about the cattle futures profits. Some economists felt a bit suspicious too, and studied those amazing profits, concluding that the odds of generating returns like that during the 1978-79 market were 1 in 31 trillion.

        1. baffling

          rick, there is something far more suspicious about a $100 million dollar ira than a $100k profit on futures. deal with it.

          “there is nothing suspicious about Romney’s IRA.” and i am exasperated at your refusal to learn-but not your political blinders. by the way, has that reference ever been cited by any other journal article?

          1. Rick Stryker


            Yes, you keep asserting that about Romney’s IRA even though AS went to great pains to educate you as to why that’s not the case. He pointed out that you can roll over pension assets into a traditional IRA. I’ve done that myself. And he pointed out that Romney must disburse the IRA money and must pay income taxes at ordinary income tax rates on it, so he’s not escaping taxes.

            AS took the trouble to explain in more depth some details about a news story that your not going to get elsewhere. That’s one of the nice things about the comments section in econbrowser. Why hang out at econbrowser if you are not willing to learn anything?

          2. Joseph

            Stryker: “He pointed out that you can roll over pension assets into a traditional IRA.”

            That is just hand waving for distraction. There are limits to contributions to pension plans just like there are limits to contributions to an IRA. You still have to explain how one could acquire $100 million in tax deferred compensation by whatever means.

            It’s not the illegal stuff that is a problem. It is the legal stuff that shouldn’t be, allowing the wealthiest 0.01% to pay lower tax rates than the middle class.

  2. Rick Stryker


    Well, it’s between $20 and $102 million. That’s all that’s been disclosed.

    As AS explained a while back in answer to my own question about how it is possible, he saw situations as a professional tax advisor in which a consultant who worked on helping a company turn around has taken out-of-the-money stock options as partial payment and put them into a defined benefit pension plan. That practice aligns incentives since the consultant gets compensated if his work on the company pays off and not otherwise. If his work on the company did pay off, the value of those options could increase dramatically. One reason to roll them over into an IRA is to decrease administrative costs of keeping a defined benefit pension plan. However, the consultant will still have to pay tax on distributions at the ordinary income tax rates, just like everybody else. In Romney’s case, he will pay taxes at the highest marginal rate once the funds are (and must begin to be by age 70.5) disbursed.

    1. baffling

      rick, you implied the probability of hillary making the correct moves in futures to make $100k was minuscule. but romney also had to make the perfect choices in putting the correct assets into that ira, because there are nevertheless finite limits to the values of assets that can be placed into a sheltered account. why do you not question romney’s ability to perfectly time and allocate those investments to the tune of tens of millions of dollars?

      1. Rick Stryker


        Romney was not speculating in the commodities markets. He was not predicting from day to day which way volatile cattle futures prices would go. She took $1,000 to $100,000, for a 9,900% return. People celebrate if they can make a 15% return, which would imply taking $1,000 to $1,150. Even if she made a 30% return, going to $1,300, that would have been a spectacular performance, but no one would have questioned it. But a 9,900% return?

        There is a long history of this kind of stuff. She’s in the news now for, amazingly enough, running a private email server out of her house and using that to conduct official business while Secretary of State. The editorial board of the Washington Post correctly concluded that this policy was designed to shield the emails from disclosure and scrutiny required by policy and law.

        People at the State Department and the Administration had to know. It must have been a serious violation of policy and maybe a few laws, not to mention a serious security risk. And yet when FOIA requests went in, people were just told that there were no relevant emails, with the little detail omitted that a government email address didn’t actually exist.

        This is how the Administration rolls. But I’m sure you’ll defend this behavior.

    2. Fred Fnord

      Um. First of all, it’s pretty hilarious, you trying to explain this, when you don’t even know the difference between a ‘defined-benefit’ and a ‘defined-contribution’ retirement plan. (Hint: you don’t ‘put things’ into a defined-benefit plan.)

      Second of all, it’s illegal to take compensation-in-kind (such as stock options) that is due to you and put it into a retirement plan. This is precisely because you can use such a strategy to avoid taxes on huge amounts of income. It’s illegal for the same reason that, and due to the same law and tax regulation as, it is illegal to create a fake company, purchase a 100% interest in it using money from your IRA, and then buy the company out at 10000% of its nominal value, and then shut it down and claim that as a tax loss.

      If ‘AS’ believes that this is legal, then he is either a very unethical professional tax advisor, or he is simply a liar.

      1. Rick Stryker

        If you knew the difference between a defined benefit and defined contribution plan, you would not be claiming that you can avoid taxes on huge amounts of income. A defined benefit plan has limits on the benefits that can be paid, which is $210,000 in 2015. There are therefore limits on contributions and limits on the tax advantage you can take. You can’t make your tax savings arbitrarily large as you imply. To set up a defined benefit plan, you need the services of an actuary to make sure that your funding strategy meets the benefit target, assets must be valued at FMV, etc. and other rules must be followed.

  3. Joseph

    It’s always amusing to listen to Rick and Ed and Ricardo pontificate about running a business and paying taxes with complete ignorance or experience of either.

    Here we have Rick tossing out a lot of unrelated jargon about stock options and aligned incentives and defined benefits that have nothing to do with the subject. Stock option incentive plans have nothing to do with defined benefit plans. The phrase “defined benefit” should give you a clue that it’s not an “option” benefit. You can’t put incentive stock options in a tax-deferred retirement plan. As for aligned incentives, that has nothing to do with paying your taxes, so why did you even bring it up other than it is some catchy jargon you heard on CNBC.

    Keep in mind that when Romney put the assets in his IRA, capital gains tax rates where much higher than today, so he had a good reason for finding a tax deferral loophole. But even if he pays ordinary tax rates at withdrawal, he has had the benefit of deferred taxation of tens of million of dollars for decades. If only we mere mortals were so lucky as to defer all of our income tax until the last decade of life. Romney can defer all taxes until age 70 and then only has to withdraw and pay tax on 3.6% of the IRA total, with the rest gradually doled out over the next 30 years or so. Of course if he dies before he turns 100, all the remaining millions in the IRA pass to his heirs as a continuing IRA, allowing them to also defer taxes over their entire lifetimes.

    1. Rick Stryker


      Well if you would read a bit more carefully you would see that I wasn’t pontificating but rather just repeating what AS had told me in his answer to my question to him. AS taught tax so it was an opportunity for me to learn something, an opportunity you and Baffles never seem interested in.

      What are your qualifications in this regard? Do you advise people on the tax consequences of rollovers? If not, then it is you who are pontificating, since you make blanket statements without backing them up. I was citing someone else who has expertise in this area, which I freely admit I don’t have.

      I didn’t mention incentives because I heard it on CNN. Rather, I mentioned them in case people might wonder why someone would take compensation in stock options. That would be a natural arrangement for a consultant who is advising a company to try to turn it around.

        1. baffling

          interesting article. it is the same thing i explained to rick stryker, but he refuses to acknowledge this type of opportunity-as did AS. of course as usual rick pontificates that this obviously cannot be correct, and simply doubles down on his wrongness. simply admit it rick, romney placed undervalued assets in his ira as a shield against taxes.

          1. Rick Stryker


            You still don’t understand the fair market value requirement that AS tried in vain to explain to you. You can’t “undervalue” assets.

          2. bjssp

            The answer to these things isn’t always obvious, especially to people who aren’t expects in the field, which includes most of us. I could easily be missing something about this, but it seems likely that Romney took advantage of a loophole that worked out handsomely for him yet was too embarrassed or politically afraid to admit it. If he had a simple explanation, why not offer it up? If there was a simple yet politically hard explanation, why didn’t any of his supporters make the case, so that it wouldn’t have to come from the top?

        2. Rick Stryker


          I’m no tax professor either, but even I know that the crucial claim in that article is completely wrong. The article alleges that people can put “undervalued” assets into IRAs, a surprisingly ignorant misunderstanding for a economics journalist to spread. No, the IRA custodian is responsible for valuing all assets at fair market value (FMV), which is the best estimate of the price at which the asset can be transacted on the market. That may be a difficult task for illiquid investments, but the custodian, who is different from the IRA owner, is obligated to make the best estimate possible. Moreover, the IRS, as reader AS already pointed out in separate thread, is free to challenge that valuation of FMV at the time it is made or after the fact. If the asset has appreciated substantially, for example, the IRS could claim that the original FMV was too low, and disallow much of the tax benefit on the grounds that IRA contribution limits were exceeded. The IRS is filled with smart, competent people who are very aware of the requirement for an estimate of FMV that is as accurate as possible.

          The article also misleads by failing to explain the risk-reward profile of these investments that resemble out-of-the-money options. The nature of these investments is that they have a high probability of a low or zero payout and a low probability of a large payout. When you look at the relatively small number of winners, you also have to look at all the losers who ended up with nothing before you use phrases like “sweetheart deal.”

  4. Joseph

    Rick Stryker: “The IRA custodian is responsible for valuing all assets at fair market value (FMV), which is the best estimate of the price at which the asset can be transacted on the market.”

    Sheesh, when you’re in a hole stop digging. You are just making yourself look foolish.

    A custodian does not determine fair market value. That’s the big loophole exploited by people like Mitt Romney. They make their own determination of FMV or hire a friendly accountant. That’s how they can put millions of dollars of assets in a tax deferred account that has contribution limits, by severely undervaluing their contributions.

    From the Retirement Industry Trust Association: “A Directed Custodian only reports (and does not determine) the valuations it receives from the investment sponsor/issuer (or the investment’s agents) or an independent valuation submitted by the account owner, and does not guarantee the accuracy of any valuation it reports.”

    1. Rick Stryker

      Joseph, the nattering nabob of nitpicking, strikes again.

      From IRS instructions for box 5 of form 5498:

      “Caution: Trustees and custodians are responsible for ensuring that all IRA assets (including those not traded on established markets or with otherwise readily determinable market value) are valued annually at their fair market value.”

      Custodians can discharge this responsibility in a number of ways. They can require that the account owner provide an independent third party valuation from someone with the expertise to perform the valuation–the usual way. Or they can pay someone directly with that expertise to do the valuation. But the account owner is a “disqualified person” and can’t do the valuation.

      As always, your nitpicking does not challenge the central point, which is that assets must be valued at FMV and the IRS has the ability to disagree with the valuation before or after the fact and disallow tax benefits. As a consequence, people who place these investments in IRAs have a strong incentive to provide a serious FMV that they can back up with evidence. The idea that you can blithely undervalue assets is just wrong.

      Yours, Baffles, and others’ arguments about Romney’s IRA rest on the completely unsubstantiated claim that there is some kind of fraud going on here that the IRS is strangely oblivious to, despite the reports of these IRAs in major newspapers. There is sleepy custodian-wink, wink, wink, and a friendly accountant–wink, wink, wink–and IRS agents who don’t notice very large valuations in IRAs that must be reported to them by custodians, wink, wink, wink, probably because of the influence and backscratching of the rich, wink, wink, wink.

      You don’t have a shred of evidence for any of this. You are making up the facts yet again as you guys on the Left are wont to do. But you will not question someone who made a 9900% percent return trading cattle futures as long as she agrees with you.

    2. Joseph

      Rick, just stop. You keep making yourself look dumber and dumber with your obstinacy. Form 5498 requires the custodian to report the fair market value. The custodian does not determine the fair market value for non-tradable assets. Seriously, do you think that Vanguard or Fidelity has a bunch of appraisers who sit around and evaluate private equity stocks? No, they don’t. For non-traditional assets they report the fair market value provided by the client (e.g. Romney), who must submit that information to the custodian by December 31. Custodians themselves have no legal responsibility for determining that the fair market value reported by the client for non-traditional assets is correct. They rely on what the client or the client’s accountant told them. That piece of paper from the client is all the custodian needs for compliance in the FMV report.

      As for the IRS, they are just now finally getting around to applying more scrutiny to IRA valuation abuse. Starting in 2014 there is a new box 15 on Form 5498 in which the value for non-traditional assets must be singled out. In the past the IRS had no way of telling if an IRA contained non-traditional, self-valued assets. Now they do. The IRS made this change in 2014 specifically because of undervaluation abuse in IRAs.

      From the IRS: “The use of these new codes [in box 15 of Form 5498] will make it easier for the IRS to identify and target these transactions for audit to make sure an appropriate value was reported for taxation purposes.” Hey, it seems that the Romney campaign publicity had some positive effect!

      1. Rick Stryker


        Despite the fact that I corrected your misinterpretation of my statement in my previous comment and made very clear to you that custodians don’t generally do the FMV themselves but rather take an FMV commissioned by the client and done by a independent and competent third party or in fact hire a competent third party themselves, you continue to nitpick about whether custodians do the FMV themselves. I can understand why you want to engage in these sorts of diversionary tactics: you are just another progressive burdened with a weak progressive argument. But your tactics won’t work with me. I’m going to keep you on point.

        1) You claim that Romney put undervalued assets into an IRA, despite the requirement to value assets at FMV. Do you have any evidence for this claim at all? Anything, other than a conspiracy involving the Koch brothers? Anything?
        2) Can you explain how putting these assets into IRAs is some kind of loophole, given the requirement to value them at FMV, and given the IRS’s ability to challenge and disallow the tax benefits if they were not valued at FMV and contribution limits were therefore exceeded?
        3) Can you explain how someone with no prior experience in financial markets started trading in a highly specialized area in commodities, cattle futures, and generated a 9,900% return?
        4) Can you explain why you have no interest in question 3?

        If you can’t or won’t answer these questions, it is you who look dumber and dumber.

      2. Joseph

        “Can you explain how someone with no prior experience in financial markets started trading in a highly specialized area in commodities, cattle futures, and generated a 9,900% return?”

        Sounds like very long odds, but based on raw numbers significantly better than the odds of turning $5000 worth of stock into $100 million.

        1. Rick Stryker


          You didn’t attempt to answer questions 1 and 2. Good. We can dispense then with the false argument that there is some kind of loophole that Romney exploited. We’re making progress. Now let’s look at your answer to question 3.

          The first thing we need to do to get to a correct answer is get you straight on the facts. You are assuming that Romney’s contribution limits were on the order of $5000 as is consistent with standard IRAs. But that’s wrong, a mistake that many progressives including Paul Krugman made. Romney actually had a SEP-IRA during the 15 years he was at Bain, with an annual contribution limit of 30K per year, or 450K in total contributions if he maxed it out. You also (just like Krugman) keep repeating as a fact that the IRA is worth $100 million when we only know that it is worth between $20 and $100 million.

          We also know that Bain employees could co-invest in the private equity deals in their IRAs and had access to subordinated equity instruments which had payoffs similar to out of the money options. Over a 15 year period, it’s easy to see how a few payoffs in the 5 to 10 range, when compounded tax free, could get you in the ballpark. (eg. Y1 30K, Y2 60K, 5X60K=300K, Y3 330K, 10X330K =$3.3 million, Y4 $3.3million, 5X3.3million= 15 million, Y5 $15.03 million, 5X 15.03 million = $75 million, Y6 75 million, etc ). In fact, a compounded annual return of about 50% per year, with a 30K invested every year over 15 years, gets you to about $40 million. That’s a high rate of return for sure, but this was during the biggest bull market in history perhaps (please don’t nitpick this statement–it’s irrelevant to the argument) and accomplished by a professional investor who was probably the best in his industry. The WSJ noted that Bain investors were achieving 50 – 80% returns during the Romney era so it’s all consistent. You don’t need to postulate shenanigans to explain the IRA results.

          Now let’s go back to question 3. Here we have an investor who has no previous experience trading cattle futures whatsoever and no informational advantage, who was essentially day trading a highly volatile market. To such a trader, realization of cattle futures prices day to day can only be random variables. And yet this investor achieved not a 50% return, but 9,900% return. Obviously, there is no parallel between the two cases as you tried to suggest. You will need to try another answer to question 3.

        2. Joseph

          My, my Rick. That’s quite the shaggy dog story there. All you have to do is imagine 50% returns compounded annually for 15 consecutive years. However your little scenario contains an internal contradiction — if these investments were consistently returning 50% annually, how could their fair market value be so low? Gee, what a lucky happenstance. It just turns out that these shares put into the IRA each year weren’t so risky after all. Over and over again, year after year in your scenario, they would magically double in value as soon as they put them in their IRA. Who could have known?

          Did you even read the article you posted? It stated that Bain was valuing their IRA special shares at only 1/9 of equity value while the industry standard was 1/3 or 1/4. So, yes, it’s clear Romney was taking advantage of undervaluation of shares to hide his income in tax deferred accounts.

          Not that anyone really cares about all this, except the way it illustrates how the 0.01% craft the laws to their own financial advantage then have the audacity to whine about the “takers.” Romney is a three time loser and thankfully we will never have to trouble ourselves about him again.

          1. Rick Stryker


            Of course I read the article. But you need to learn to read more carefully. Here is what the article said:

            “Andrew Smith, president of Houlihan Capital, a Chicago firm that performs valuations of private-company shares, said a typical dual-class structure these days might use a 3:1 or 4:1 ratio, ascribing 75% to 80% of a company’s equity value to the safer share class and the rest to the risky ones. Mr. Smith said that firms were less conservative a decade ago—sometimes using 6:1 or 8:1 ratios—but even then, a 9:1 ratio would have been “pushing the envelope.””

            Look carefully: “these days” the ratio might be 3:1 to 4:1. This article was published in 2012, so these ratios refer to 2012 pricing. The article referred to pricing in the 6:1 to 8:1 range a decade ago. But that would have been 2002. However, the Romney era at Bain capital was between 1984 and 1999. Back in those days, private equity was new and it would have been entirely reasonable for the market to demand a higher risk premium than would obtain today or a decade ago, consistent with typical prices during the Romney era being lower than the range a decade ago.

            Moreover, these are just typical ranges. Individual deal pricing can and does vary according the details of the trade, the riskiness, risk premium demanded by the market, etc. Unless you look at the specific deals in question and the evidence for the pricing, you really can’t comment at all.

            You also make the outlandish claim that 50% returns demonstrates that trade pricing is too low. It would be amusing to watch you try to defend that statement. I’m amazed by how you guys just make dogmatic assertions without feeling any responsibility to back them up. High risk premiums will also lower prices of risky investments. Have you measured the risk premiums of mid-80s to 90s private equity investments and determined that they can’t explain the pricing? Do you have evidence on where these trades priced in the market? If not, you are just speculating like everyone else.

            There is nothing in that article that provides any evidence whatsoever that Romney’s valuations were too low. You still need to revise your answer to question 3 by the way.

          2. Rick Stryker

            By the way Joseph, I didn’t just imagine 50% returns as you said. The article stated that returns during the Romney era averaged between 50% and 80%. I took the more conservative end of the range.

  5. Rick Stryker


    You ask if Romney had a simple explanation, why didn’t he offer it up? Yes, his supporters asked that question many times. Romney was so dramatically superior intellectually, in terms of leadership, and in so many other dimensions, why doesn’t he just explain it? But like most people who really can accomplish great things in the real world, he wasn’t a great politician. He allowed his political enemies to define him and didn’t aggressively fight back. He should have corrected the IRA charge, as it fed into the false image of the plutocrat that people wanted to hang on him. He also never differentiated Romneycare from Obamacare, allowing the false charge to stand that Romneycare and Obamcare, having been allegedly invented by the Heritage Foundation, were the same thing. In letting that falsehood stand, he sacrificed a powerful weapon during the 2012 campaign. Romneycare and Obamacare were dramatically different and Romney should have weaponized Obamacare and dropped the big one on the Dems.

    Plato wanted philosopher kings to rule– the wisest and the best. But Plato never saw that the wisest and the best are very often defeated by fast talking if not ruthless politicians. The wisest and the best rarely have the political skills they need to win in such a contest. That’s why most conservatives start with an inherent disadvantage.

    1. baffling

      rick, do you really believe all the narratives you post on this site? if the truth was looking you square in the eye, would you even recognize it? discussing something with you is like being in a fight with a cheat-always at a disadvantage because the element of truth does not seem to matter to you. obamacare and romneycare are basically the same thing-only real difference is size. romney placed undervalued assets into an ira to shield it from taxes-because he could. would you support an audit of his taxes and not cry political foul play? there is certainly reason to question the financial performance of a $100 million tax sheltered ira. but then again, you will simply create another narrative about how stryker jr worked on the romney financial statements and he can assure us the investments were fair and anybody could have achieved the same results if they only took the risk. you are certainly baffling!

      1. Rick Stryker


        You keep saying “romney placed undervalued assets into an ira to shield it from taxes-because he could.” When I point out the problems with that statement, FMV requirements, IRS review, and I demand that you produce some evidence to support your claim, you don’t provide any evidence. You just keep repeating your charge over and over.

        On the contrary, truth doesn’t matter to you.

      2. Rick Stryker


        You seem to think I don’t know truth when I see it and I’m truly baffling. Well let me offer you a baffling proposal involving truth.

        There are two contracts, A and B.

        contract A: Rick Stryker is to make a statement. If if is true, then Baffles pays Stryker exactly 1 dollar. If it is false, the Baffles pays Stryker either less than 1 dollar or more than 1 dollar, but not exactly 1 dollar.

        contract B: Stryker is to make a statement. Whether it is true or false, Baffles pays Stryker in cash the value of Romney’s IRA.

        I propose that we sign these contracts subject to contract C, which says Stryker gets to choose whether contract A or contract B applies. Once the choice of which contract applies is made, I make my statement and we then make the payoff.

        However, to make it interesting, Stryker will also sign contract D, which says that Stryker will pay Baffles $10,000 and Baffles instead of Stryker can choose whether contract A or B applies before we play the game.

        I believe I can get you to pay me the value of Romney’s IRA if you enter this deal with me. Are you game?

        1. baffling

          rick, i don’t strike deals with used car salesmen and i won’t strike deals with games defined by yourself. primarily because we apparently cannot even agree on what constitutes a factual truth-you are pretty arbitrary in your definition.

          1. Rick Stryker


            OK then. Let’s let Menzie referee. Menzie can decide whether my statement is true or false. But in that case, I’d want to lower my payment to you if you elect contract D to $100.

  6. Rick Stryker

    Fred Fnord’s comment and so many others from other progressives have convinced me that it is possible to write an AI program that can pass the Turing test for progressive comments on blogs. The program I have in mind would be called ProgressoBot.

    First, ProgressoBot would start a paragraph somewhere with something condescending, like “Um.” (Krugman does that frequently). Then ProgressoBot will make up some facts without any supporting evidence, which makes it much easier to pass the test. At some point in the comment, of course, ProgressoBot will need to hurl a few ad hominems such as calling people the program disagrees with “unethical” or a “liar.” I’d be interested in other conservatives’ ideas on what features to put in the program.

    Why not just have a computer program comment for the Left on blogs? Progressive comments seem to follow a set pattern so it would be more efficient.

  7. baffling

    rick, you do realize your defense of romney boils down to the claim that since we have auditors and regulators (irs), romney could not have done wrong so pretty please just leave him alone. of course auditors and regulators never miss their mark, at least for your argument to exist. and yet we have had plenty of cases, such as olympus, world com, enron, arthur anderson, … the list goes on and on. just because romney was not caught does not mean he did not break the rules. but in reality that is your entire defense. if we had an AI bot for conservatives, the first thing it would do is deny reality!

    1. Rick Stryker

      No Baffles. I am disputing your claim that Romney put undervalued assets into his IRA. You have zero evidence that he did that. I’m not arguing that fraud can’t happen but just arguing that you have no basis for alleging fraud. You are must making up the facts.

      1. baffling

        rick, this line of discussion began because you made unsubstantiated claims about hillary and her futures investments, and i challenged you on it. you know absolutely nothing about the trades that she made, you simply don’t like the outcome that she made money and so you allege fraud. so who is making up facts here? i point out if you think there are irregularities in her investments, then you should also examine the irregularities in the romney investment. but you refuse to acknowledge this. you come off as an ideological hypocrite in this situation.

        rick, you are great a presenting narratives of your argument, and talented at distorting facts to favor your argument. your spins on obamacare are fantastic theater. but your narratives clash with reality most of the time. it is unfortunate you waste your talent distorting the truth rather than searching for the truth.

        1. Rick Stryker

          No, Baffles, I and others know a lot about those trades. They have been extensively studied by many people, including the economists whose paper I originally linked to. It was you who tried to draw a false analogy between Romney’s IRA and the cattle futures trades, in order to distract attention. However, as I have extensively demonstrated, it’s apples and oranges. You are desperately trying to avoid talking about the cattle futures. Why?

  8. baffling

    rick, like i asked before, has that study been cited in any other reputable journals? is it really that crappy that it has never been cited? and i would like you to clearly state what hillary did that was wrong, other than make some money? the clintons were not even in the governors mansion at the time. she was up and down in one of the strongest cattle futures markets on record at the time, guided by an expert in the futures market. she had trading losses over $26k in 1978 and over $36k in 1979. so exactly what is your problem with hillary? and yet you are confident romney made his money is a legal and ethically sound manner. hillary’s financial dealings have been released to the public and regulators have said there is nothing of interest there. you cannot say the same thing about romney and his ill gotten ira.

    again rick, at some point it would be nice if your narratives had some element of truth to them.

    1. Rick Stryker


      I’ve spent enough time on Romney, to no avail with you it seems. For the cattle futures case, I’d have to go to a lot of trouble trying to explain to you how futures markets work so you could see the problems with what happened. But I know from experience that you wouldn’t learn anything and would end up just repeating your same point over and over again. So, it’s a waste of time for me.

      I gave you an interesting logic puzzle which didn’t seem to baffle you much. You seemed to think it was a serious proposition but it wasn’t serious at all: I was merely changing the subject to baffling statements about truth. The puzzle is related to Godel’s theorem actually, since it involves self-referential statements.

      The statement I would make for contract A, in case someone might be interested, is “You will neither pay me exactly one dollar nor exactly the value of Romney’s IRA.”

  9. Joseph

    Uh, oh. Rick is throwing around financial buzzwords he knows nothing about again.

    Risk premiums have nothing to do with the way Bain structured their stock. Bain created two share classes that are completely arbitrary because all investors had to buy the same proportion of each share class. In other words, every investor got 100% of the returns for their money regardless if the two share classes were in the ratio 3:1, 6:1 or 9:1. For any $10,000 investment, every investor got exactly the same total return when you sum up the two share classes that each investor held in the same ratio. The only difference is an arbitrary ratio, selected by Bain, of how much of their total return fell into each bucket of the two share classes.

    So basically, Bain could assign an arbitrary price to each share class, as long as the sum equaled the total investment price, and then arbitrarily assign profits to the two share classes, as long as the sum equaled the the total profits. This didn’t affect the price of the investment or the amount returned to each investor at all. In sum, it was identical regardless of the chosen ratio of share classes. But what it did allow was to favorably assign the two share buckets so that one of them had an artificially low price and an artificially high return. This low cost, high return bucket was conveniently placed in the tax deferred IRA account.

    Risk premiums had nothing to do with the relative prices placed on the two share classes. It was a completely artificial construct allowing investors to partition one single investment into two different buckets that they could treat differently for tax purposes.

    1. Rick Stryker


      You are flirting with absurdity in your desperation to avoid admitting that there is no issue with Romney’s IRA.

      Each share class has its own risk-return characteristics and therefore its own market price, which will, of course, be a function of the prevailing risk premium. To establish FMV of each class, it is necessary to price each class according to the best estimate of its transaction price on the marketplace. The ratio of the prices is hardly arbitrary.

  10. baffling

    rick stryker
    “You are flirting with absurdity in your desperation to avoid admitting that there is no issue with Romney’s IRA.”
    it is simply baffling that somebody could identify no issues with romney’s ira, considering you have already admitted you know nothing about the content history of the ira. you simply assert since it is romney it is ok. foolish and baffling logic. rick this is why it is simply frustrating to deal with folks like you who troll on the internet. an issue is raised about problems with romney’s ira, and you immediately defend romney, no questions asked. your defense of romney is completely vacuous-you have absolutely no evidence there are no issues with romney’s ira-and yet you insist that is a fact. it really is a shame you don’t seek the truth but rather defend your preconceived notion of reality. but i will continue to slap your wrists every time you make your false narratives, as you really do need to be held accountable for your deceit.

    1. Rick Stryker


      You’ve finally made the standard of the Left apparent with “you have absolutely no evidence there are no issues with romney’s ira.” I also don’t have any evidence that Romney is not a space alien from the planet Zod. And I don’t have any evidence that Romney did not secretly vote for Obama in 2012. I thought a different standard applied : I thought that if you are claiming that there is a problem with Romney’s IRA you need to provide the evidence. I guess that’s my conservative bias showing.

      All you did was to assert that Romney exploited a loophole in which he put undervalued assets into his IRA, an idea you got by uncritically reading some political hit pieces in the press. I pointed out to you that there is no such loophole as there are FMV requirements and IRS review. You provided no additional argument other than to continue to dogmatically state the same point over and over again.

      The false narratives and deceit come from you baffles, since you pretend that no argument happened and you continue to make the same charge over and over. Your claim about Romney’s IRA is demonstrably false.

      Part of the problem, I think, is that you don’t follow the discussion that goes on here. Do you have any idea why my statement for contract A works for example?

      1. baffling

        “Your claim about Romney’s IRA is demonstrably false.”
        and they are false because you have proof? NO! you have no proof. nobody does, which is the problem. we had a candidate running for president, and he has a suspiciously large amount of money in a tax sheltered account, and we cannot ask questions about how that money got there? an easy solution would have been for romney to provide details of the account-but we got nothing. even president obama provided a copy of his birth certificate-although deniers still exist in that case. but am i not allowed to question a $100 million dollar ira? on the other hand, you claim absolutely to know that romney has no ill gotten gains in an ira you have no knowledge about. i cannot provide proof of romney’s ira because he has not released the contents. but i do have the right to question how a $100 million dollar ira is acquired by a candidate for president of the united states of america. if he shows that his gains are legitimate, i haven’t another word to say on the topic. but the question is unanswered. and i really feel bad for those who continue to defend that unanswered question.

  11. Joseph

    Rick: “Each share class has its own risk-return characteristics and therefore its own market price, which will, of course, be a function of the prevailing risk premium. To establish FMV of each class, it is necessary to price each class according to the best estimate of its transaction price on the marketplace. The ratio of the prices is hardly arbitrary.”

    Rick, just give it up. You are way out of your depth and looking dumber each day.

    Bain is a partnership running a private equity firm. It is not a public corporation. It has no “market price” because shares are not traded in a market. The word “private” should be a clue. What you wrote above makes no sense. You are just babbling unrelated nonsense you picked up on CNBC or such and sounding stupid.

    Bain has a small number of wealthy investors who contribution funds for investment. Each investor’s share of profits is proportional to their contribution. Each investor gets the same proportion of the two share classes. The proportion of their profits attributed to each share class is an arbitrary choice determined by Bain because the total profit is the same either way. Likewise, Bain can arbitrarily assign whatever proportion of what it determines to be fair market value to each share class — 3:1, 6:1, 9:1.

    Look you’ve come a long way from your original incorrect assertion that IRA custodians determine the fair market value of non-traditional assets. You should have quit after admitting that error but you just keep making up more nonsensical gobbledegook cobbled together from random financial buzzwords and embarrassing yourself.

    1. Rick Stryker


      If you think “risk-return characteristics” and “risk premium” are terms you pick up on CNBC, you have not been watching a lot of CNBC. These are terms financial economists use. The fact that you think they are gobbledegook cobbled together from financial buzzwords makes it clear that you don’t know much about economics. And it is you who are embarrassing yourself in front of economists who read this blog when you make statements like that.

      Let’s review your many mistakes and misconceptions in your vain attempt to defend the Romney IRA Left Wing talking point:

      1) You mis-interpreted my remarks about custodians and FMV to imply that custodians do the FMV themselves. Of course, it’s obvious to anyone that custodians can’t and don’t do FMV evaluation themselves in general because they won’t have the expertise in house. I quoted the IRS instructions to clarify what I meant and pointed out to you that it’s irrelevant anyway who does the FMV. The essential point is that there is a legal requirement to do an FMV and IRS review.

      2) You attempted to raise questions about the magnitude of Romney’s returns by claiming that his IRA contribution limits were $5,000. I corrected your mistake by informing you that Romney had a SEP-IRA with a 30K annual contribution limit. I also showed that a 50% compounded annual return on such an IRA would end up at about $40 million after 15 years.

      3) You then asserted incorrectly that I “imagined” the 50% return. I corrected you that the 50% came from the lower range of returns reported by the WSJ article that you claimed to have read.

      4) You then incorrectly asserted that Romney’s shares were undervalued because the WSJ article said share class ratios were 3:1 or 4:1. I corrected your mistake by pointing out that those ratios are for 2012 average pricing while Romney’s tenure was 1984 – 1999.

      5) Getting more desperate, you then asserted that a 50% return implies that the underlying assets must have been undervalued, a howler to economists. I corrected your misunderstanding by pointing out that risk premia explain returns–there is no necessary connection between returns and financial fraud.

      6) Not knowing what to do with the risk premium argument, you then claimed the the risk premium doesn’t matter since somehow the ratio of the prices of the share classes are indeterminate. Now you have veered into comical absurdity, having contradicted your previous argument that share prices were undervalued. Share prices can’t be undervalued if they are indeterminate and can be set arbitrarily. Which is it–are they undervalued or can you not tell the value? You also contradicted your previous argument that the ratios are 3:1 or 4:1, now claiming that they can by anything. This is also a ridiculous comment from a financial economics perspective, but, with no apparent background in economics, you don’t understand that point, thinking that it’s gobbledegook from CNBC.

      7) Finally, you got back to your nattering nabob of nitpicking strategy by alleging that I said that the shares should be marked at market prices when there is no market. But given what you tried to do with my custodian remark, I was very careful to word it precisely, saying “the best estimate of its transaction price on the marketplace.” As I have explained to you many times, there is a legal requirement to do this estimate, even if there is no ready market. If you disagree, I invite you to explain your view to the private equity pricing specialists and tax lawyers (e.g., like the people cited in the WSJ) or to the IRS. They have a very different view.

      Joseph, you’ve peppered me with factual mistakes, misconceptions, and misinterpretations. Now you hope that if you are loudly insulting about how I’m “embarrassing myself” and “sounding stupid” people won’t notice. Don’t kid yourself that they don’t notice.

  12. baffling

    “The essential point is that there is a legal requirement to do an FMV and IRS review.”
    did the IRS do a review and approval specifically on the romney ira? no. but more importantly, would you approve of tax laws which eliminate this type of tax sheltering on high value ira’s?

    at the end of the day romney was embarrassed to admit how he was able to lower his tax bills through the use of tax lawyers and loopholes. i am not interested in throwing the man in jail, he had the money and paid the tax lawyers to save himself a bundle of money. fine. but he knew this issue presented a lack of integrity characteristic and thus kept quiet. not the quality of a leader. it’s a lesson many of us learned in high school sports, how you win the game is as important as winning the game itself. he was not proud of how he won the game.

    1. Rick Stryker

      After I finish progressobot, I’ll need to spend just a little bit of time on bafflebot. bafflebot should be really easy to write. First, I just need a list of left wing talking points and a random number generator that selects one from the list. Then, the program will go into a loop and will repeat the same talking point back in reply to each comment that contains certain conservative key words. This one should easily pass the Turing test.

      1. baffling

        i was going to build an ideologically conservative virtual reality machine, but then i found one already existed called stryker.

        but as i said, if romney was proud of the way he gamed the system, he would not remain silent about his ira. again, for most of us how you play the game matters.

  13. Joseph

    Look, you throw around financial terminology completely out of context which makes you look silly. Risk premiums have nothing to do with the relative pricing of the two share classes at Bain.

    I’ll try to explain this to you one more time. Read carefully but try to keep up.

    When you invest in a private equity fund, your shares have the value of your investment. Let’s say $10,000. When you want to sell your shares you get back your $10,000 (plus undistributed capital gains). There is no market price because the shares cannot be traded. You can only sell them back to Bain, no one else. The fair market value of your shares is a simple computation — the amount invested (plus undistributed capital gains). Risk-return and risk premiums have nothing to do with the fair market value of Bain shares. There are no traders that bid up or down the share price based on future prospects. You get back what you paid in. That’s its fair market value.

    Most private equity funds have only one share class. Two share classes are completely unnecessary and perform no function except tax avoidance, and that is the path Bain chose. So for your $10,000, Bain gives you one share valued at $9,000 and another share valued at $1,000. These are completely arbitrary numbers chosen by Bain and have nothing to do with risk. They could have chosen any other ratio, but by choosing a high ratio, they create a class of shares that have a very low value for IRA purposes.

    Next, Bain decides how to allocate profits between those two share classes. Again it is arbitrary, but lets say that the expensive share class gets all of the first $1 million of profits and the cheap share class gets 90% of all subsequent profits.

    Now note that there is no risk involved in the share classes. The investor owns equal shares of the expensive and cheap shares. Whatever profits don’t go to their expensive shares go to their cheap shares and whatever profits don’t go to their cheap shares go to their expensive shares. There is no difference in total risk to the investor. They get 100% of the profits no matter the share ratio. It is the same return they would get if they had only one share class. You don’t create risk by simply splitting one investment into two investments. The investor still owns the combined investment.

    So it is completely arbitrary (and totally irrelevant) what price Bain assigns to the two shares and completely aribitrary (and totally irrelevant) how much profit Bain assigns to the two share classes. No matter what, the investor gets the same total return. You can’t claim a risk premium when there is no difference in total return. The two share classes are totally unnecessary and most private equity funds don’t even bother.

    But it does make a difference if your intent is to avoid taxes. Bain has artificially split a single investment into two different investments, both of which are owned by the investor. Bain has artificially created a cheap share class that gets the bulk of the investment returns, which they can place in an IRA.

    But in reality, the two share classes are really just one investment. You can only buy or sell the shares to Bain. There is no other market for the shares. And you can only buy and sell the two share classes together. You can’t separately buy one share class so the idea of a risk premium separating them makes no sense. You buy or sell both or nothing. It is simply a financial engineering trick to avoid taxes.

    1. Rick Stryker


      I read your comment really, really slowly. I tried to keep up but there are such difficult concepts in there that I had to read it 3 times. I’m a conservative after all and not as bright as you guys. But I think I finally got it. Let’s see if I have it right.

      I start with 10K. I have 2 share classes A and B and since I’m investing 10K I can divide that 10K up arbitrarily. So I can assign 9K to class A and 1K to class B. It’s my choice.

      Hmmm. Let me play with this a bit. Let’s say A pays me the first $1 million of the profits. And B pays me any profits above $1 million. My financial analysis suggest that the probability of the B share paying above $1 million is 90%. But that information is irrelevant. This is all arbitrary. So I can assign 9K to class A and 1K to class B. It’s my choice.

      But, then let’s mix it up. Let’s say I define A to pay me a 10% rate plus the first $50 million in profits. And I define B to pay me anything over $50 million. Even though it doesn’t make any difference, I run some financial analysis which suggests that the probability that B pays anything above $50 million is 1%. But since it’s my choice, and it’s all arbitrary, I assign 7K to class A and 3K to class B.

      Now, you might think that’s irrational, since I’m assigning a lower value to class A shares in the second case when the expected payoff is much higher than in the first case. And I’m assigning a higher value to class B shares in the second case when the payoff is much lower than in the first case. But the beauty of this is–it doesn’t matter. It’s my choice.

      And if ran this by a pricing specialist or tax lawyer they’d say “Go crazy with this. It’s your choice–be creative.” And the same is true at the IRS. They won’t ask me for supporting evidence of cash flow analysis, analysis of debt, pricing of similar instruments in the market place, volatility, risk levels, or anything like that to support the pricing choice I made when I put the B shares into a tax advantaged account. They don’t really care about the probability of realizing different levels of cash flows from the B shares. That’s all irrelevant. The IRS has a well-know “live and let live attitude.” They know that this strategy is a tax cut for the 0.01% and they don’t want to spoil the party. Fair market value is whatever I say it is.

      In fact, they don’t care if I price the A shares at $9,999.99 and the B shares at a penny. They realize I might have to do that if I want to swell my traditional IRA that has only a $5000 contribution limit. And it’s my choice. They have nothing to say about it.

      Thanks very much Joseph for your brilliant pricing analysis. As I said, it was tough, and I had to read it slowly several times, but I finally got your point.

Comments are closed.