Editor's Pick
MAY 21, 2009 2:14PM
Rate: 5
from the WSJ
Payout time for the deferred otherworldly bonus to Mr. Bank Executive? No worries. Sadly, some past key employee will die soon enough to cover that one. Want to collect on your pension old retired bank manager? Good thing Janie Doe in accounting died last week, isn't it?! Over some decades hence, major banks (Hello Bank of America) will receive about a $400 Billion payout for life insurance for dead executives and other employees. Whether these individuals currently work for the bank or not, once the social security death index indicates that the (former) employee has died, the banks receive a lucrative payout. Tax free. And that is how the retired bank manager and the current bank exec get their (IOU) money.
In a practice that is just about as swarmy as derivative math, the banks, as well as other major corporations, as part of deferred compensation for executives, take out life insurance policies on key individuals. Before 2006 they were allowed to take out life insurance policies on more than key executives, just about anyone from the janitor on up. The benefits are payable to the bank, not the employee's family.
"The insurance policies essentially are informal pension funds for executives: Companies deposit money into the contracts, which are like big, nondeductible IRAs, and allocate the cash among investments that grow tax-free. Over time, employers receive tax-free death benefits when employees, former employees and retirees die." (WSJ)
Because of the current tax rules, how they account for the deferred compensation never shows up in the bottom line as a liability agaisnt earnings.
"Companies don't use the policies as piggy banks to pay for compensation and benefits. Rather, they benefit from keeping the money in the contracts: Thanks to accounting rules for life insurance, gains on the investments -- from stocks, hedge funds, bonds and the like -- aren't just tax free, but are reported as income each quarter. Otherwise, companies couldn't add gains from securities as income until they sold them, and they would be taxed.
This income reduces the drag that executive IOUs have on earnings. (Banks owe interest on the deferred pay; and like any other kind of debt, the interest on executive debt lowers earnings.) " (WSJ)
Makes one wonder, doesn't it? Which is worse? Our overdone and convoluted tax system, or the rules of accounting that allow this kind of magic? Or perhaps they were schooled by the Donald Trumps of the world on how to detail value? Comments
So if the bank is hurting for cash do they hasten the demise of those who they hold policies on? There's a Grisham style thriller here.
What's to stop these companies from murdering their employee pool for profit? A classic example of profit from death. In the desire to keep a company well financed it is apparently kosher to farm your workers into death. Seems like a type of black magic accounting.
If you hadn't provided links to reputable news outlets, I would have sworn this was lifted from The Onion. Incroyable!
Yuck. No wonder reforming health care is such a nightmare.
So, I guess there's even more incentive to work their employees to death...
so they have these accounts where they set aside money, allotted to a particular employee and set up based on their lifespan in order to take account of tax benefits set aside for life insurance. Yet, it's not really life insurance because 1) the employee plays no role in it and 2) it does not provide benefits to the bereaved or those who would suffer directly from the person's loss.
So they're cheating the system by not just having a savings account like the rest of us. My question is - how do I take out such a policy on my landlord, my insurance agent, my pizza delivery guy, and the waitress at the Chinese restaurant? Because I want tax-free interest on my savings and I would actually suffer from their untimely demise (sort of, maybe, more than banks do with lost employees)
So they're cheating the system by not just having a savings account like the rest of us. My question is - how do I take out such a policy on my landlord, my insurance agent, my pizza delivery guy, and the waitress at the Chinese restaurant? Because I want tax-free interest on my savings and I would actually suffer from their untimely demise (sort of, maybe, more than banks do with lost employees)
This does not surprise me at all. Every day that goes by that more people hear about credit card companies, bank practices, the dealings of congress and refuse to descend upon Washington and DEMAND an overhaul to just about every "system" we have in place, does.
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