The Irish Independent reports that the airline, which runs eight daily flights from Dublin to Heathrow, has been in talks with the Shannon Airport Authority (SAA) about starting Shannon/Heathrow flights since Aer Lingus announced plans to axe its Shannon/Heathrow service.
It is understood that the talks are still at an early stage, with BMI sources suggesting the route is "possible more than probable".
BMI is primarily concerned with its ability to attract the necessary passenger numbers to support the route, rather than the charges deal offered by Shannon Airport.
"We didn't think for a second that Shannon weren't going to offer us a brilliant deal, the issue is whether the route can provide the revenue," as one senior BMI source put it.
"The really creative way to do it would be some form of risk sharing and profit sharing, that way if the passengers just don't turn up it's not just us who's out of pocket."
That profit sharing arrange-ment could be between the BMI and the SAA or between BMI and local business interests, the source added. However, it is understood that BMI has yet to talk to either the SAA or local interests about any possible profit share.
Before finalising any plans to launch new services from Shannon, BMI also plans to consult extensively with local businesses.
"Once we have costs in place we'll go out there and talk to the top 12 or 15 businesses and ask them do they really want this," said one senior source. "Protests are fine and good, but we'll be looking for pledges."
If BMI does decide to launch flights between Shannon and Heathrow, the airline would base at least one plane in the Co Clare airport, as well as crew and a flight deck.
"It would be a new base and that would need a lot of thinking and investment," said one source. "We wouldn't just try it for a season, we'd do it properly."
The Irish Independent also reports that strong early gains in Anglo Irish Bank shares, after the business bank forecast earnings for the year ending September 30 will beat the consenus in the market by 4pc, were completely eroded on a poor day for bank stocks right across Europe.
The stock soared almost 4pc to touch €14.7 in the morning, its best level since July 19, but support quickly evaporated as tightness in money markets hurt UK mortgage lenders in particular and prompted investors to cash in on a five-day rally.
Upbeat
It was a question of unlucky timing for Anglo which had posted a better-than-expected trading update ahead of 2006/07 financial results, due out in November.
The bank told the market it anticipated earnings per share will exceed current estimated market consensus of 124c by 5c, suggesting EPS of 129c a share.
The brokers are now expected to follow the bank's guidelines and upgrade their forecasts, leaving the stock trading on a 2007 PE of 10.8, falling to just 9.2 times for 2008 and looking reasonable value.
Anglo's upbeat message is based on its ability to continue delivering high quality loan growth across its markets in Ireland, the UK and US.
"We anticipate customer lending balances to increase in the mid 30pc range for the full year,'' yesterday's statement said.
"Most importantly, asset quality is robust while interest margins remain stable,'' the bank added.
Work-in-progress has become the market's favourite yardstick for projecting lending growth going forward.
Anglo did not update this figure in the trading review but the market seemed satisfied with the comment that "lending work in progress continues to replenish and is expected to exceed the level reported at March 2007."
Neither did the statement touch on the subprime crisis and what, if any, exposure Anglo may have had as a result of it.
Given the tightening of liquidity in capital markets, as a result of subprime issue, funding might have been considered a worry.
However, the bank said its treasury division had another strong period, with growth in customer funding close to €15bn year to date -- an increase of some 40pc.
"This performance, together with the group's consistent strategy of raising capital market funding ahead of requirements, contributes to the bank's excellent liquidity position,'' the bank added.
Uncertainty
The group raised over €1.8bn in additional capital during the year leaving it in a strong position.
Chief executive David Drumm commented: ¨We believe that the current uncertainty in markets demonstrates the attractiveness of our unique relationship driven model.
''Accordingly, we are fully committed to our proven strategy and are confident that it will continue to deliver high quality growth in 2008 and beyond."
The Irish Times reports that Irish investments worth more than €220 million held through contracts for difference (CFDs) have been liquidated by broker Cantor Fitzgerald in the past month.
The value of contracts held in Irish equities by the US broker - one of the largest providers of CFDs in the Irish market - tumbled by almost 25 per cent in just one month.
The move will have left a significant number of Irish investors supporting major losses.
With the Iseq nursing losses of 8 per cent in the first half of August alone, Cantor Fitzgerald tightened rules on CFDs. Investors were told they would have to double the "margin" (or upfront deposit) that they put down for their CFD holdings to 20 per cent of the value of the contracts from 10 per cent previously.
The move during the peak holiday season caught many unawares. Those who missed the deadline for increasing the cash margin on their accounts had their positions sold.
Turbulent market conditions had already seen a number of clients face "margin calls" - obliging them to top up their CFD account to offset adverse price movements on the underlying shares.
CFDs are reported to account for more than a third of equity business conducted of the Irish Stock Exchange, with Cantor Fitzgerald accounting for a large proportion of the trade.
Only a handful of Irish companies have seen Cantor Fitzgerald clients increase their holdings in recent months.
While the number of shares held through CFDs by Cantor in building materials groups Kingspan and Grafton fell by nearly half last month, there was an 18 per cent rise in the number of CRH stock held.
Similarly, business in Aer Lingus has risen, though not on the scale of the positions sold in Ryanair, where Cantor CFDs now account for 29 million shares compared to 49 million at the start of August.
The August sell-off saw Cantor close all positions on drinks group C&C and food company Greencore, both of which were also heavily sold in July. C&C has suffered successive profit warnings as adverse summer weather hit cider sales.
Cantor holdings of Irish equities in CFDs now stands at about €680 million, down from almost €1.1 billion at the start of August.
Industry sources last night said that despite the sell-off, the Irish market still appears to be highly leveraged, especially once the CFD holdings of other brokers such as IG Markets are taken into account.
"It also leaves the local market vulnerable if there is another downturn given that many of the positions must be near margin call requirements given the Irish market performance so far this year."
As of last night, the Iseq was trading 11.6 per cent weaker than at the end of 2006, following a fresh 2.3 per cent slide yesterday - a decline that has seen the Irish market underperform its global peers. For the last few years, the Iseq has consistently been one of the strongest markets globally, a factor that has encouraged business in CFDs.
CONTRACTS FOR DIFFERENCE: how they work
A contract for difference (or CFD) is a derivative product that allows an investor to speculate on movements in share prices without having to own the actual shares.
CFDs can be either "long" (where the investor anticipates the underlying share price will rise) or "short" (where the punter bets on a fall in the price).
In general, CFDs are taken out for amounts of €10,000 upwards.
Purchasers of CFDs will only pay a fraction of the face price of the deal up front as a deposit or "margin" - most brokers require between 10 and
20 per cent of the value of the transaction.
They also pay commission although this tends to be charged at lower rates than commission on conventional trades.
Gains are subject to capital gains tax.
The nature of margin trades means that gains are magnified - because you receive the gain on the full value of the contract, not just of the margin.
However, losses are similarly magnified. If you have bet on a share price gain and the stock suffers a sudden fall in price, your broker may require you to lodge additional money against the contract.
A delay in doing so can see your account sold before prices have a chance to recover leaving you with the bill for the resultant losses.
The Irish Times also reports that EU internal market commissioner Charlie McCreevy yesterday attacked credit-rating agencies such as Moodys and Standard & Poor's (S&P) for their role in the subprime mortgage crisis, but he issued a robust defence of the hedge-fund industry against demands for tighter regulation.
The commissioner, who is responsible for drafting pan-European financial legislation, hit out in particular at the rating agencies' conflicts of interest: "On the one hand, they act as advisers to banks on how to structure their offerings to get the best mix of ratings. On the other, credit-rating agencies provide ratings that are widely relied upon by investors."
Mr McCreevy called for "clear, robust and methodological rules and principles" to be rigorously applied. His comments came as Moodys downgraded or started to review its ratings on three Dublin funds which have suffered in the subprime fall-out.
The agency downgraded two of its ratings on IFSC-based Cheyne Finance and placed another two on review for possible downgrade. Receivers have been appointed to the fund after it was last week forced to sell off assets to meet its debts.
Moodys also said it may downgrade ratings on Dublin-based Kestrel Funding, citing "the potential impact of crystallised losses following asset sales". Kestrel is managed in New York by WestLB. Another downgrade threat hangs over Rhinebridge, a Dublin-registered fund which is managed in London by IKB.
Ratings agencies have come under fire on both sides of the Atlantic for their slow response to the crisis. Moodys and S&P started downgrading their ratings of mortgage-backed securities only this spring, many months after banks had first warned about the potential crisis.
Mr McCreevy also tried to take some of the heat off the hedge-fund industry, dismissing the growing chorus of critics urging tougher rules and more transparency requirements for the funds.
The Irish Examiner reports that an Irish company is financing a $300 million (€220m) property deal in Beverly Hills in Los Angeles.
First Equity Group, which finances property deals worldwide, has acquired two sites in Beverly Hills in a deal with American real estate firm HDS Group.
First Equity said the sites are located at 9200 Wilshire Boulevard and 450-460 North Palm Drive and are premium residential and mixed-use developments on some of the last remaining undeveloped sites in downtown Beverly Hills.
First Equity Group is now raising $60m (€44m) in mezzanine finance from its investor group to underwrite the deal.
This investment will offer investors a return of 30% a year over a maximum period of three years.
The likely investment time horizon is two years.
First Equity managing director Alan Barry said that the company has been active in the property market in the US for a number of years and the latest deal brings the value of its developments to more than $600m (€440m).
He added: “First Equity Group has a proven track record of delivering attractive returns and we believe that this unique development will again deliver superior returns for our investor group.”
HDS said new construction in Beverly Hills is limited and the two acquired sites have full planning permission for development.
First Equity Group was established by Tom Dowling in 1995 and provides equity finance and mezzanine funding for property development worldwide.
The total gross development value of deals completed since 1999 is in excess of €2 billion.
The Financial Times reports that central bankers in Europe on Wednesday intensified efforts to quell the turmoil in global money markets as evidence emerged that tighter borrowing conditions might be denting parts of the US economy.
Demand for homes in the US fell to a six-year low in July, according to figures released by the National Association of Realtors. Economists had expected pending home sales to fall 2 per cent, but instead they dropped 12.2 per cent in the month.
Meanwhile, the US Federal Reserve beige book survey of economic conditions showed that most regions of the US saw “tighter lending standards for residential mortgages”, which the report said were having a “noticeable effect on housing activity.”
Several regions also reported that the tightening of credit conditions had spilled over into residential real estate. But the beige book said that outside real estate there were only “limited” reports of market turmoil affecting the economy.
The pressure on housing will probably reinforce the belief among top Fed officials that it may have to cut interest rates on September 18.
But the lack of evidence of spillovers outside real estate – and the fact that almost every region reported “at least modest increases in employment” over the period – which ended August 27 – highlights the difficulty of this decision.
Concern over the economic damage from money market pressures shook equities. At midday in the US, the S&P 500 index was down 1.4 per cent at 1,469.08. Earlier, the FTSE Eurofirst 300 index had closed 1.7 per cent down while the FTSE 100 retreated 1.7 per cent in the UK.
The falls came as the Organisation for Economic Co-operation and Development warned of the US economy being likely to face a “quite significant” slowdown this year because of the subprime crisis, and said it could warrant an early interest rate cut.
Home builders met Ben Bernanke, the Fed chairman, to discuss the problems facing their industry.
Money markets also suffered another day of mounting pressure that saw the Bank of England abandon its “business-as-usual” stance towards commercial banks and announce its willingness to offer more cash to banks in its regular monthly money markets operations.
This move, which could result in an additional £4.4bn (€6.51bn) worth of funds being placed in the markets next week, is intended to encourage banks to start lending more freely to each other.
Separately, the European Central Bank announced it was ready to conduct a fresh round of liquidity-boosting operations today if volatility in the euro money market continued to rise. “Should this persist . . . the ECB stands ready to contribute to orderly conditions in the euro money market,” it said, shortly before the ECB and Bank of England each convened their regular committees to discuss monetary policy.
The British Bankers Association welcomed the Bank’s move, saying it brought “better liquidity to the market.”
Yet, private sector bankers in London suggested the Bank’s actions were far too timid, given the paralysis in money markets. Although the Bank said it hoped to reduce the rate of borrowing in overnight sterling markets, it ruled out acting in the three-month money markets.
The Bank’s actions helped lower the overnight sterling borrowing rate to 5.90625 per cent, from 6.11 per cent on Tuesday. The three-month money rate rose to 6.8 per cent – a nine-year high – as banks hoarded cash because of fears they would face liquidity calls in the next few days.
In the euro-denominated markets, overnight and three-month money rates also rose. In the US, three-month money was trading at 5.72 per cent, an abnormally high level.
The pressure on central banks to alleviate the funding squeeze is being fuelled by signs that the financial problems may now be contributing to new stress in the real economy.
“The data is a less than gentle reminder that the current crisis is more than a financial sector phenomena but already has a strong real economy component,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.
The FT also reports that Silicon Valley’s annual coming-out season for tech start-ups is about to turn into a stampede.
In the next few weeks, the wraps will be removed from some 150 new companies and products at a handful of events in California competing to identify the tech industry’s Next Big Thing.
The race to find the Valley’s hottest new idea reflects growing investor interest triggered by the high prices paid for recent internet start-ups such as YouTube, as well as the increasingly fierce Darwinian struggle among the newcomers to get noticed.
The large number of companies formed around hot trends such as web search, social networking and online video has added spice to the importance of the autumn events, according to entrepreneurs and venture capitalists.
“At this stage of the frothiness, it’s extremely difficult to get attention,” says Munjal Shah, founder of Like.com, an image search engine.
“The capital cost of starting a business today is very low,” says Chris Shipley, producer of Demo, one of the first tech events. “We’re seeing a lot of ideas make it from the spare bedroom to a showcase or the marketplace very quickly.”
Like.com was the sole start-up featured two years ago at a party thrown by Mike Arrington, whose widely read TechCrunch blog has made him the Valley’s latest kingmaker.
For his first formal conference this month, Mr Arrington has just doubled the number of companies presenting to 40 because, according to his website, there are “just too many strong start-ups”.
Other events that hope to unveil hot companies and products in the coming weeks include the Web 2.0 conference, the event that gave its name to the latest wave of online innovation, and Demo, which has expanded to two events a year.
The scramble for attention is another symptom of Silicon Valley’s latest start-up boom. The amount of venture capital being invested in the US is at its highest level since 2001 and it has led to a rash of “me-too” companies.
The flood of copycat companies is a sign of the over-heated phase of the investment cycle, according to observers.
However, for most of those that make it to the big showcase events, the attention from being in the spotlight is likely to be fleeting.
Being named “the coolest, hottest thing” can produce a “drug-induced traffic high” as users rush to try out the latest websites.
Once that initial surge of interest falls off, the hard work of building a lasting business really begins.
The New York Times reports that stocks fell yesterday as investors were unsettled by reports that showed the troubles in the housing market were deepening even as a Federal Reserve survey of regional conditions found little evidence of the turmoil’s having damaged other parts of the economy.
The sell-off briefly intensified as the release of the Fed’s beige book, which summarizes anecdotal reports about the economy from business executives across the country, led some investors to conclude that Fed policy makers would be less inclined to cut interest rates after their meeting on Sept. 18, given the relatively benign report.
When Fed officials next meet, they are widely expected to reduce the key lending rate from 5.25 percent to 5 percent or perhaps even less, but analysts are divided over how aggressively the Fed might pursue further rate cuts later this year.
The Standard & Poor’s 500-stock index closed down 1.2 percent, or 17.13 points, to 1,472.29; it had fallen by as much as 1.5 percent after the beige book was released in the early afternoon. The Dow Jones industrial average closed down 143.39 points, or 1.1 percent, to 13,305.47.
Treasury prices jumped, as investors sought safety in debt backed by the federal government. The yield on the 10-year Treasury note, which moves in the opposite direction from the price, fell to 4.47 percent, from 4.55 percent on Tuesday, hitting its lowest level since early December.
Early yesterday, an index that tracks signing of contracts for sales of existing homes tumbled 12.2 percent for July, to its lowest level in more than six years, the National Association of Realtors reported. The trade group said its members were reporting that buyers of homes were having a tougher time obtaining financing.
Pending home sales dropped by nearly 21 percent in the West, which has been hit hard by a spike in interest rates on jumbo mortgages — those for amounts higher than $417,000.
“The fact is that housing troubles are still building,” said Marc D. Stern, chief investment officer at Bessemer Trust, an investment firm in New York. “To say that we have bottomed is very much premature. The effect on economic activity will grow in the second half of the year and into 2008.”
The Fed report released yesterday said that the credit crisis had made it more difficult for people to obtain mortgages and that “the weakness in the housing market deepened” in most of the Federal Reserve districts. But it also said that credit remained readily available for most consumer and business borrowers and that, outside of real estate, the convulsions in financial markets had had “limited” effects on economic activity.
In a speech Friday at the Fed’s annual symposium in Wyoming, the chairman, Ben S. Bernanke, said the central bank would place more weight than usual on anecdotal reports because the incoming statistical data might not be timely enough to measure a broad economic impact of the credit crisis that began with failing subprime loans.
But Fed officials made it clear last week that they were very worried about the housing market, where the news was gloomy, and the readings from other areas were mixed rather than buoyant.
“They are going to take the beige book statement that it’s limited only to the housing area with a grain of salt,” said Joshua Shapiro, chief economist at MFR Inc., a research firm in New York. “There is only one wound on the body, but how big is the wound and what impact does it have on the rest of the body?”
Mr. Shapiro’s firm expects the Fed to cut its benchmark interest rate, now at 5.25 percent, by 0.25 percentage point later this month and by a total of 0.75 percentage point by the end of the year. That forecast is in line with trading in the futures market.
There have been only a few signs that the housing market’s problems are spilling into the economy as a whole.
The beige book reported that retail sales were “modest to moderate” in most of the country, but inventory was “at or above desired levels” in districts that mentioned it. “Several retailers reported that they planned to or had already heavily discounted merchandise to move inventory,” the report said.
A crucial reading on the economy that is likely to play a big role in the Fed’s decision on interest rates will come tomorrow when the Labor Department releases employment figures for August. Yesterday, a privately compiled payroll report from Automatic Data Processing showed that corporate payrolls grew by just 38,000 in August, down from 41,000 in July and 143,000 in June.
Many forecasters say the economy will be able to weather a surge in mortgage defaults and falling home prices if jobs remain plentiful and wages continue rising. Experts acknowledge, however, that employment is a lagging indicator of the economy’s health and that many corporate sectors would be hurt if consumer spending deteriorated significantly.
“The job market has been a stalwart of strength,” said Mr. Stern of Bessemer Trust, who does not expect a recession. “We are dependent on companies continuing to create jobs.”
Among the S.&P. 500 stocks, 422 fell, 76 rose and 2 were unchanged; all but 3 of the 30 Dow companies fell. Financial stocks accounted for more than a third of the losses in the S.&P. 500. Information technology, industrial and consumer discretionary stocks accounted for a third of the decliners.
Citigroup and Bank of America led the financial sector down as concerns mounted about big institutions’ involvement in off-balance-sheet borrowing in the short-term debt markets and investments in assets like mortgage bonds.
A Securities and Exchange Commission official testifying before Congress said the commission was looking into such structured investment vehicles, which have had an increasingly hard time borrowing money by selling commercial paper, a type of short-term debt.
Technology shares were led down by Apple, which cut the price of its new iPhone by $200 and stopped selling a lower-end version of the device just two months after introducing it. Shares of Apple fell 5.2 percent, and shares of AT&T, the service provider for the phone, lost 1.4 percent.
More broadly, the beige book noted that manufacturing activity expanded, except in automobiles and building materials. But demand for business loans was either steady or declining in the New York, Cleveland, Chicago and St. Louis districts.
Given the turmoil and volatility in the financial markets in the last month and a half, some market specialists say the Fed may be forced to be freer with a rate cut than it normally would be.
“It would be psychological,” said Bruce Bittles, chief market strategist at Robert W. Baird & Company. “It would leave room for further rate cuts if needed. There is no guarantee that lower rates will help this housing situation. The important thing is that it stabilizes other areas like the stock market.”
The NYT also reports that Eli Broad, a billionaire businessman, has given away more than $650 million over the last five years, to Harvard and the Massachusetts Institute of Technology to establish a medical research institute, to the Los Angeles County Museum of Art and to programs to improve the administration of urban schools and public education.
The rich are giving more to charity than ever, but people like Mr. Broad are not the only ones footing the bill for such generosity. For every three dollars they give away, the federal government typically gives up a dollar or more in tax revenue, because of the charitable tax deduction and by not collecting estate taxes.
Mr. Broad (rhymes with road) says his gifts provide a greater public benefit than if the money goes to taxes for the government to spend. “I believe the public benefit is significantly greater than the tax benefit an individual receives,” Mr. Broad said. “I think there’s a multiplier effect. What smart, entrepreneurial philanthropists and their foundations do is get greater value for how they invest their money than if the government were doing it.”
It is an argument made by many of the nation’s richest people. But not all of them. Take the investor William H. Gross, also a billionaire. Mr. Gross vigorously dismisses the notion that the wealthy are helping society more effectively and efficiently than government.
“When millions of people are dying of AIDS and malaria in Africa, it is hard to justify the umpteenth society gala held for the benefit of a performing arts center or an art museum,” he wrote in his investment commentary this month. “A $30 million gift to a concert hall is not philanthropy, it is a Napoleonic coronation.”
Elaborating in an interview, Mr. Gross said he did not think the public benefits from philanthropy were commensurate with the tax breaks that givers receive. “I don’t think we’re getting the bang for the buck for gifts to build football stadiums and concert halls, with all due respect to Carnegie Hall and other institutions,” he said. “I don’t think the public would vote for spending tax dollars on those things.”
The billionaires’ differing views epitomize a growing debate over what philanthropy is achieving at a time when the wealthiest Americans control a rising share of the national income and, because of sharp cuts in personal taxes, give up less to government.
Familiar Recipients
A common perception of philanthropy is that one of its central purposes is to alleviate the suffering of society’s least fortunate and therefore promote greater equality, taking some of the burden off government. In exchange, the United States is one of a handful of countries to allow givers a tax deduction. In essence, the public is letting private individuals decide how to allocate money on their behalf.
What qualifies for that tax deduction has broadened over the 90 years since its creation to include everything from university golf teams to puppet theaters — even an organization established after Hurricane Katrina to help practitioners of sadomasochism obtain gear they had lost in the storm.
Roughly three-quarters of charitable gifts of $50 million and more from 2002 through March 31 went to universities, private foundations, hospitals and art museums, according to the Center on Philanthropy at Indiana University.
Of the rest, the Bill and Melinda Gates Foundation accounted for half on the center’s list. That money went primarily to improve the lives of the poor in developing countries. Valuable as that may be, it also meant that the American public effectively underwrote several billion dollars worth of foreign aid by private individuals, even though poll after poll shows Americans are at best ambivalent about using tax dollars in such assistance.
In contrast, few gifts of that size are made to organizations like the Salvation Army, Habitat for Humanity and America’s Second Harvest, whose main goals are to help the poor in this country. Research shows that less than 10 percent of the money Americans give to charity addresses basic human needs, like sheltering the homeless, feeding the hungry and caring for the indigent sick, and that the wealthiest typically devote an even smaller portion of their giving to such causes than everyone else.
“Donors give to organizations they are close to,” said H. Art Taylor, president and chief executive of the BBB Wise Giving Alliance. “So they give to their college or university, or maybe someone close to them died of a particular disease so they make a big gift to medical research aimed at that disease. How many of the superrich have that kind of a relationship with a soup kitchen? Or a homeless shelter?”
Philanthropists like Mr. Broad say that looking at philanthropy solely as a means of ameliorating need is too narrow. “If you look historically at what Carnegie did with creating a library system and the Rockefellers in creating Rockefeller University, I think it does a lot more for society than simply supporting those in need,” Mr. Broad said.
About 2 percent of the money Mr. Broad has given away through his two foundations over the last five years, or $15 million, went to support organizations like the United Way and the United Jewish Fund, which serve needy people as well as the middle class. The foundations also have given money to groups that help homeless children, and the International Rescue Committee.
Still, Mr. Broad dedicates his biggest gifts to areas he thinks lack government support, like the $25 million he gave to the University of Southern California last year to found an institute for integrative biology and stem cell research, or the tens of millions he dedicated to complete the new Disney concert hall in Los Angeles.
Like many major philanthropists, Mr. Broad said he considered such gifts an illustration of the Chinese proverb: “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.” The argument is that simply taking care of the poor does nothing to eliminate poverty and that they will ultimately benefit more from efforts to, say, find cures for the diseases that afflict them or improve public education.
As for Mr. Gross, despite his uncharacteristically fiery criticism of what he calls “philanthropic ego gratification,” some of the large gifts he and his wife, Sue, have made are not so different from those made by other billionaires. He has given millions to a local hospital, for example, and for stem cell research.
And in 2005 the couple gave roughly $25 million to Duke, Mr. Gross’s alma mater.
But the Duke gift illustrates Mr. Gross’s priorities. The money is almost exclusively for scholarships.
“Universities have their own thing going — they want to build infrastructure and endowments and perpetuate their system, which isn’t necessarily in the social interest,” Mr. Gross said. “Scholarships get a little more down to the ground level.”
Taking Aim at the Tax Code
The investor Warren E. Buffett also voices strong feelings about how donations are used.
When Mr. Buffett pledged $30 billion to the Gates Foundation, he included a little-noted requirement that the foundation spend each increment of the gift he hands over, in addition to its own annual legally mandated spending. If Mr. Buffett transfers $1.3 billion of stock to it, it must spend every nickel within a year.
“I wanted to make sure,” he said, “that to the extent I was providing extra money to them, it didn’t just go to build up the foundation size further but that it was put to use.”
The Gates Foundation’s work is largely international, although a portion of its spending supports efforts to improve urban education and access to college, so Mr. Buffett’s money is unlikely to be used to address basic needs in this country.
“I think the government ought to make sure that all the people here who drew short straws have a decent minimum,” Mr. Buffett said. “We moved toward that with Social Security, but we could go a lot further now.”
He does not regard his gift as charitable and expects no tax benefit from it, in part because he has credit for past donations that he has not used.
Rather, he calls his sister, Doris Buffett, the “real philanthropist” in the family. Ms. Buffett runs an organization, the Sunshine Lady Foundation, that helps the needy pay for college, medical expenses, mortgages, glasses and cars.
Mr. Buffett recently has brought attention to himself as a critic of inequities in the nation’s tax system, which offers the wealthy better tax breaks for charitable giving than it does the average taxpayer. Deductions for charitable giving can be claimed only by the fewer than half of all taxpayers who itemize, and those falling in higher tax brackets get bigger deductions for cash gifts.
The charitable deduction cost the government $40 billion in lost tax revenue last year, according to the Joint Committee on Taxation, more than the government spends altogether on managing public lands, protecting the environment and developing new energy sources.
Rob Reich, an assistant professor of political science and ethics in society at Stanford, goes so far as to say that the tax code promotes inequities through the breaks it provides for charitable giving.
Take schools. The Woodside Elementary School in Woodside, Calif., where the median family income is $196,505, raised $7,065 a pupil in 1998 from charitable contributions to a foundation it created, according to Professor Reich’s research. Across the San Francisco Bay, a similar foundation to support the Oakland Unified School District, where the median family income is $44,384, raised $138 a pupil that year.
In effect, the government is subsidizing a system that enhances inequities between poor and wealthy public schools, Professor Reich said.
Raising Questions
Legislators, regulators and others are asking more questions about exactly what charities do with the money they are given.
“When foundations, corporations and individuals give money to the opera,” said Xavier Becerra, a California Democrat on the House Ways and Means Committee who represents a district in Los Angeles populated largely by young working-class immigrant families, “my folks are very unlikely to benefit from those forgone tax dollars that could have been used for health care, for after-school programs for kids, for help in getting access to college education.”
Yet Mr. Becerra himself is a beneficiary of one of the country’s wealthiest charities, Stanford, which has a $15.2 billion endowment and gave him a scholarship. “There is no way my parents could have afforded for me to go there without the generous financial aid the university gave me,” he said.
At the other end of the political spectrum, Grover G. Norquist, whose Americans for Tax Reform lobbies for lower taxes, suggests taxing nonprofit hospitals that cannot demonstrate that they provide significant care for the poor.
“I’m not aware of anything they do that a for-profit hospital doesn’t do in terms of providing free care,” Mr. Norquist said.
Like other billionaire philanthropists, Thomas M. Siebel, founder of Siebel Systems, has given his largest gifts to his alma mater, the University of Illinois at Urbana-Champaign. In 1999, he donated $32 million for a computer science center bearing his name, and he pledged $100 million this year to support basic research that he hopes will reduce dependency on carbon-based fuels.
But when the university suggested using some of that gift to put up another new building named for him and hire new professors, he said no.
“I told them to use the basement of an existing building and some of the really smart people they already have,” Mr. Siebel said.
Attracting philanthropic support to fight substance abuse is one of the biggest challenges in fund-raising, but Mr. Siebel has donated more than $15 million to the Meth Project, an organization he created. “I think we’ll save a lot of lives in the end,” Mr. Siebel said. “Isn’t that what philanthropy is supposed to be about?”
He has also given the Salvation Army more than $18 million over the last six years, mostly to support services for the homeless. He said he gives to the organization because of its low administrative costs and lack of frills.
“When I first started doing this, I made a contribution to some organization, Harvest something or other, I think, that was working on homelessness,” Mr. Siebel said. “The next thing I knew, I got a plaque in the mail and an invitation to an awards ceremony.”
He added: “I never gave them another nickel. What we
The Irish Independent reports that the airline, which runs eight daily flights from Dublin to Heathrow, has been in talks with the Shannon Airport Authority (SAA) about starting Shannon/Heathrow flights since Aer Lingus announced plans to axe its Shannon/Heathrow service.
It is understood that the talks are still at an early stage, with BMI sources suggesting the route is "possible more than probable".
BMI is primarily concerned with its ability to attract the necessary passenger numbers to support the route, rather than the charges deal offered by Shannon Airport.
"We didn't think for a second that Shannon weren't going to offer us a brilliant deal, the issue is whether the route can provide the revenue," as one senior BMI source put it.
"The really creative way to do it would be some form of risk sharing and profit sharing, that way if the passengers just don't turn up it's not just us who's out of pocket."
That profit sharing arrange-ment could be between the BMI and the SAA or between BMI and local business interests, the source added. However, it is understood that BMI has yet to talk to either the SAA or local interests about any possible profit share.
Before finalising any plans to launch new services from Shannon, BMI also plans to consult extensively with local businesses.
"Once we have costs in place we'll go out there and talk to the top 12 or 15 businesses and ask them do they really want this," said one senior source. "Protests are fine and good, but we'll be looking for pledges."
If BMI does decide to launch flights between Shannon and Heathrow, the airline would base at least one plane in the Co Clare airport, as well as crew and a flight deck.
"It would be a new base and that would need a lot of thinking and investment," said one source. "We wouldn't just try it for a season, we'd do it properly."
The Irish Independent also reports that strong early gains in Anglo Irish Bank shares, after the business bank forecast earnings for the year ending September 30 will beat the consenus in the market by 4pc, were completely eroded on a poor day for bank stocks right across Europe.
The stock soared almost 4pc to touch €14.7 in the morning, its best level since July 19, but support quickly evaporated as tightness in money markets hurt UK mortgage lenders in particular and prompted investors to cash in on a five-day rally.
Upbeat
It was a question of unlucky timing for Anglo which had posted a better-than-expected trading update ahead of 2006/07 financial results, due out in November.
The bank told the market it anticipated earnings per share will exceed current estimated market consensus of 124c by 5c, suggesting EPS of 129c a share.
The brokers are now expected to follow the bank's guidelines and upgrade their forecasts, leaving the stock trading on a 2007 PE of 10.8, falling to just 9.2 times for 2008 and looking reasonable value.
Anglo's upbeat message is based on its ability to continue delivering high quality loan growth across its markets in Ireland, the UK and US.
"We anticipate customer lending balances to increase in the mid 30pc range for the full year,'' yesterday's statement said.
"Most importantly, asset quality is robust while interest margins remain stable,'' the bank added.
Work-in-progress has become the market's favourite yardstick for projecting lending growth going forward.
Anglo did not update this figure in the trading review but the market seemed satisfied with the comment that "lending work in progress continues to replenish and is expected to exceed the level reported at March 2007."
Neither did the statement touch on the subprime crisis and what, if any, exposure Anglo may have had as a result of it.
Given the tightening of liquidity in capital markets, as a result of subprime issue, funding might have been considered a worry.
However, the bank said its treasury division had another strong period, with growth in customer funding close to €15bn year to date -- an increase of some 40pc.
"This performance, together with the group's consistent strategy of raising capital market funding ahead of requirements, contributes to the bank's excellent liquidity position,'' the bank added.
Uncertainty
The group raised over €1.8bn in additional capital during the year leaving it in a strong position.
Chief executive David Drumm commented: ¨We believe that the current uncertainty in markets demonstrates the attractiveness of our unique relationship driven model.
''Accordingly, we are fully committed to our proven strategy and are confident that it will continue to deliver high quality growth in 2008 and beyond."
The Irish Times reports that Irish investments worth more than €220 million held through contracts for difference (CFDs) have been liquidated by broker Cantor Fitzgerald in the past month.
The value of contracts held in Irish equities by the US broker - one of the largest providers of CFDs in the Irish market - tumbled by almost 25 per cent in just one month.
The move will have left a significant number of Irish investors supporting major losses.
With the Iseq nursing losses of 8 per cent in the first half of August alone, Cantor Fitzgerald tightened rules on CFDs. Investors were told they would have to double the "margin" (or upfront deposit) that they put down for their CFD holdings to 20 per cent of the value of the contracts from 10 per cent previously.
The move during the peak holiday season caught many unawares. Those who missed the deadline for increasing the cash margin on their accounts had their positions sold.
Turbulent market conditions had already seen a number of clients face "margin calls" - obliging them to top up their CFD account to offset adverse price movements on the underlying shares.
CFDs are reported to account for more than a third of equity business conducted of the Irish Stock Exchange, with Cantor Fitzgerald accounting for a large proportion of the trade.
Only a handful of Irish companies have seen Cantor Fitzgerald clients increase their holdings in recent months.
While the number of shares held through CFDs by Cantor in building materials groups Kingspan and Grafton fell by nearly half last month, there was an 18 per cent rise in the number of CRH stock held.
Similarly, business in Aer Lingus has risen, though not on the scale of the positions sold in Ryanair, where Cantor CFDs now account for 29 million shares compared to 49 million at the start of August.
The August sell-off saw Cantor close all positions on drinks group C&C and food company Greencore, both of which were also heavily sold in July. C&C has suffered successive profit warnings as adverse summer weather hit cider sales.
Cantor holdings of Irish equities in CFDs now stands at about €680 million, down from almost €1.1 billion at the start of August.
Industry sources last night said that despite the sell-off, the Irish market still appears to be highly leveraged, especially once the CFD holdings of other brokers such as IG Markets are taken into account.
"It also leaves the local market vulnerable if there is another downturn given that many of the positions must be near margin call requirements given the Irish market performance so far this year."
As of last night, the Iseq was trading 11.6 per cent weaker than at the end of 2006, following a fresh 2.3 per cent slide yesterday - a decline that has seen the Irish market underperform its global peers. For the last few years, the Iseq has consistently been one of the strongest markets globally, a factor that has encouraged business in CFDs.
CONTRACTS FOR DIFFERENCE: how they work
A contract for difference (or CFD) is a derivative product that allows an investor to speculate on movements in share prices without having to own the actual shares.
CFDs can be either "long" (where the investor anticipates the underlying share price will rise) or "short" (where the punter bets on a fall in the price).
In general, CFDs are taken out for amounts of €10,000 upwards.
Purchasers of CFDs will only pay a fraction of the face price of the deal up front as a deposit or "margin" - most brokers require between 10 and
20 per cent of the value of the transaction.
They also pay commission although this tends to be charged at lower rates than commission on conventional trades.
Gains are subject to capital gains tax.
The nature of margin trades means that gains are magnified - because you receive the gain on the full value of the contract, not just of the margin.
However, losses are similarly magnified. If you have bet on a share price gain and the stock suffers a sudden fall in price, your broker may require you to lodge additional money against the contract.
A delay in doing so can see your account sold before prices have a chance to recover leaving you with the bill for the resultant losses.
The Irish Times also reports that EU internal market commissioner Charlie McCreevy yesterday attacked credit-rating agencies such as Moodys and Standard & Poor's (S&P) for their role in the subprime mortgage crisis, but he issued a robust defence of the hedge-fund industry against demands for tighter regulation.
The commissioner, who is responsible for drafting pan-European financial legislation, hit out in particular at the rating agencies' conflicts of interest: "On the one hand, they act as advisers to banks on how to structure their offerings to get the best mix of ratings. On the other, credit-rating agencies provide ratings that are widely relied upon by investors."
Mr McCreevy called for "clear, robust and methodological rules and principles" to be rigorously applied. His comments came as Moodys downgraded or started to review its ratings on three Dublin funds which have suffered in the subprime fall-out.
The agency downgraded two of its ratings on IFSC-based Cheyne Finance and placed another two on review for possible downgrade. Receivers have been appointed to the fund after it was last week forced to sell off assets to meet its debts.
Moodys also said it may downgrade ratings on Dublin-based Kestrel Funding, citing "the potential impact of crystallised losses following asset sales". Kestrel is managed in New York by WestLB. Another downgrade threat hangs over Rhinebridge, a Dublin-registered fund which is managed in London by IKB.
Ratings agencies have come under fire on both sides of the Atlantic for their slow response to the crisis. Moodys and S&P started downgrading their ratings of mortgage-backed securities only this spring, many months after banks had first warned about the potential crisis.
Mr McCreevy also tried to take some of the heat off the hedge-fund industry, dismissing the growing chorus of critics urging tougher rules and more transparency requirements for the funds.
The Irish Examiner reports that an Irish company is financing a $300 million (€220m) property deal in Beverly Hills in Los Angeles.
First Equity Group, which finances property deals worldwide, has acquired two sites in Beverly Hills in a deal with American real estate firm HDS Group.
First Equity said the sites are located at 9200 Wilshire Boulevard and 450-460 North Palm Drive and are premium residential and mixed-use developments on some of the last remaining undeveloped sites in downtown Beverly Hills.
First Equity Group is now raising $60m (€44m) in mezzanine finance from its investor group to underwrite the deal.
This investment will offer investors a return of 30% a year over a maximum period of three years.
The likely investment time horizon is two years.
First Equity managing director Alan Barry said that the company has been active in the property market in the US for a number of years and the latest deal brings the value of its developments to more than $600m (€440m).
He added: “First Equity Group has a proven track record of delivering attractive returns and we believe that this unique development will again deliver superior returns for our investor group.”
HDS said new construction in Beverly Hills is limited and the two acquired sites have full planning permission for development.
First Equity Group was established by Tom Dowling in 1995 and provides equity finance and mezzanine funding for property development worldwide.
The total gross development value of deals completed since 1999 is in excess of €2 billion.
The Financial Times reports that central bankers in Europe on Wednesday intensified efforts to quell the turmoil in global money markets as evidence emerged that tighter borrowing conditions might be denting parts of the US economy.
Demand for homes in the US fell to a six-year low in July, according to figures released by the National Association of Realtors. Economists had expected pending home sales to fall 2 per cent, but instead they dropped 12.2 per cent in the month.
Meanwhile, the US Federal Reserve beige book survey of economic conditions showed that most regions of the US saw “tighter lending standards for residential mortgages”, which the report said were having a “noticeable effect on housing activity.”
Several regions also reported that the tightening of credit conditions had spilled over into residential real estate. But the beige book said that outside real estate there were only “limited” reports of market turmoil affecting the economy.
The pressure on housing will probably reinforce the belief among top Fed officials that it may have to cut interest rates on September 18.
But the lack of evidence of spillovers outside real estate – and the fact that almost every region reported “at least modest increases in employment” over the period – which ended August 27 – highlights the difficulty of this decision.
Concern over the economic damage from money market pressures shook equities. At midday in the US, the S&P 500 index was down 1.4 per cent at 1,469.08. Earlier, the FTSE Eurofirst 300 index had closed 1.7 per cent down while the FTSE 100 retreated 1.7 per cent in the UK.
The falls came as the Organisation for Economic Co-operation and Development warned of the US economy being likely to face a “quite significant” slowdown this year because of the subprime crisis, and said it could warrant an early interest rate cut.
Home builders met Ben Bernanke, the Fed chairman, to discuss the problems facing their industry.
Money markets also suffered another day of mounting pressure that saw the Bank of England abandon its “business-as-usual” stance towards commercial banks and announce its willingness to offer more cash to banks in its regular monthly money markets operations.
This move, which could result in an additional £4.4bn (€6.51bn) worth of funds being placed in the markets next week, is intended to encourage banks to start lending more freely to each other.
Separately, the European Central Bank announced it was ready to conduct a fresh round of liquidity-boosting operations today if volatility in the euro money market continued to rise. “Should this persist . . . the ECB stands ready to contribute to orderly conditions in the euro money market,” it said, shortly before the ECB and Bank of England each convened their regular committees to discuss monetary policy.
The British Bankers Association welcomed the Bank’s move, saying it brought “better liquidity to the market.”
Yet, private sector bankers in London suggested the Bank’s actions were far too timid, given the paralysis in money markets. Although the Bank said it hoped to reduce the rate of borrowing in overnight sterling markets, it ruled out acting in the three-month money markets.
The Bank’s actions helped lower the overnight sterling borrowing rate to 5.90625 per cent, from 6.11 per cent on Tuesday. The three-month money rate rose to 6.8 per cent – a nine-year high – as banks hoarded cash because of fears they would face liquidity calls in the next few days.
In the euro-denominated markets, overnight and three-month money rates also rose. In the US, three-month money was trading at 5.72 per cent, an abnormally high level.
The pressure on central banks to alleviate the funding squeeze is being fuelled by signs that the financial problems may now be contributing to new stress in the real economy.
“The data is a less than gentle reminder that the current crisis is more than a financial sector phenomena but already has a strong real economy component,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.
The FT also reports that Silicon Valley’s annual coming-out season for tech start-ups is about to turn into a stampede.
In the next few weeks, the wraps will be removed from some 150 new companies and products at a handful of events in California competing to identify the tech industry’s Next Big Thing.
The race to find the Valley’s hottest new idea reflects growing investor interest triggered by the high prices paid for recent internet start-ups such as YouTube, as well as the increasingly fierce Darwinian struggle among the newcomers to get noticed.
The large number of companies formed around hot trends such as web search, social networking and online video has added spice to the importance of the autumn events, according to entrepreneurs and venture capitalists.
“At this stage of the frothiness, it’s extremely difficult to get attention,” says Munjal Shah, founder of Like.com, an image search engine.
“The capital cost of starting a business today is very low,” says Chris Shipley, producer of Demo, one of the first tech events. “We’re seeing a lot of ideas make it from the spare bedroom to a showcase or the marketplace very quickly.”
Like.com was the sole start-up featured two years ago at a party thrown by Mike Arrington, whose widely read TechCrunch blog has made him the Valley’s latest kingmaker.
For his first formal conference this month, Mr Arrington has just doubled the number of companies presenting to 40 because, according to his website, there are “just too many strong start-ups”.
Other events that hope to unveil hot companies and products in the coming weeks include the Web 2.0 conference, the event that gave its name to the latest wave of online innovation, and Demo, which has expanded to two events a year.
The scramble for attention is another symptom of Silicon Valley’s latest start-up boom. The amount of venture capital being invested in the US is at its highest level since 2001 and it has led to a rash of “me-too” companies.
The flood of copycat companies is a sign of the over-heated phase of the investment cycle, according to observers.
However, for most of those that make it to the big showcase events, the attention from being in the spotlight is likely to be fleeting.
Being named “the coolest, hottest thing” can produce a “drug-induced traffic high” as users rush to try out the latest websites.
Once that initial surge of interest falls off, the hard work of building a lasting business really begins.
The New York Times reports that stocks fell yesterday as investors were unsettled by reports that showed the troubles in the housing market were deepening even as a Federal Reserve survey of regional conditions found little evidence of the turmoil’s having damaged other parts of the economy.
The sell-off briefly intensified as the release of the Fed’s beige book, which summarizes anecdotal reports about the economy from business executives across the country, led some investors to conclude that Fed policy makers would be less inclined to cut interest rates after their meeting on Sept. 18, given the relatively benign report.
When Fed officials next meet, they are widely expected to reduce the key lending rate from 5.25 percent to 5 percent or perhaps even less, but analysts are divided over how aggressively the Fed might pursue further rate cuts later this year.
The Standard & Poor’s 500-stock index closed down 1.2 percent, or 17.13 points, to 1,472.29; it had fallen by as much as 1.5 percent after the beige book was released in the early afternoon. The Dow Jones industrial average closed down 143.39 points, or 1.1 percent, to 13,305.47.
Treasury prices jumped, as investors sought safety in debt backed by the federal government. The yield on the 10-year Treasury note, which moves in the opposite direction from the price, fell to 4.47 percent, from 4.55 percent on Tuesday, hitting its lowest level since early December.
Early yesterday, an index that tracks signing of contracts for sales of existing homes tumbled 12.2 percent for July, to its lowest level in more than six years, the National Association of Realtors reported. The trade group said its members were reporting that buyers of homes were having a tougher time obtaining financing.
Pending home sales dropped by nearly 21 percent in the West, which has been hit hard by a spike in interest rates on jumbo mortgages — those for amounts higher than $417,000.
“The fact is that housing troubles are still building,” said Marc D. Stern, chief investment officer at Bessemer Trust, an investment firm in New York. “To say that we have bottomed is very much premature. The effect on economic activity will grow in the second half of the year and into 2008.”
The Fed report released yesterday said that the credit crisis had made it more difficult for people to obtain mortgages and that “the weakness in the housing market deepened” in most of the Federal Reserve districts. But it also said that credit remained readily available for most consumer and business borrowers and that, outside of real estate, the convulsions in financial markets had had “limited” effects on economic activity.
In a speech Friday at the Fed’s annual symposium in Wyoming, the chairman, Ben S. Bernanke, said the central bank would place more weight than usual on anecdotal reports because the incoming statistical data might not be timely enough to measure a broad economic impact of the credit crisis that began with failing subprime loans.
But Fed officials made it clear last week that they were very worried about the housing market, where the news was gloomy, and the readings from other areas were mixed rather than buoyant.
“They are going to take the beige book statement that it’s limited only to the housing area with a grain of salt,” said Joshua Shapiro, chief economist at MFR Inc., a research firm in New York. “There is only one wound on the body, but how big is the wound and what impact does it have on the rest of the body?”
Mr. Shapiro’s firm expects the Fed to cut its benchmark interest rate, now at 5.25 percent, by 0.25 percentage point later this month and by a total of 0.75 percentage point by the end of the year. That forecast is in line with trading in the futures market.
There have been only a few signs that the housing market’s problems are spilling into the economy as a whole.
The beige book reported that retail sales were “modest to moderate” in most of the country, but inventory was “at or above desired levels” in districts that mentioned it. “Several retailers reported that they planned to or had already heavily discounted merchandise to move inventory,” the report said.
A crucial reading on the economy that is likely to play a big role in the Fed’s decision on interest rates will come tomorrow when the Labor Department releases employment figures for August. Yesterday, a privately compiled payroll report from Automatic Data Processing showed that corporate payrolls grew by just 38,000 in August, down from 41,000 in July and 143,000 in June.
Many forecasters say the economy will be able to weather a surge in mortgage defaults and falling home prices if jobs remain plentiful and wages continue rising. Experts acknowledge, however, that employment is a lagging indicator of the economy’s health and that many corporate sectors would be hurt if consumer spending deteriorated significantly.
“The job market has been a stalwart of strength,” said Mr. Stern of Bessemer Trust, who does not expect a recession. “We are dependent on companies continuing to create jobs.”
Among the S.&P. 500 stocks, 422 fell, 76 rose and 2 were unchanged; all but 3 of the 30 Dow companies fell. Financial stocks accounted for more than a third of the losses in the S.&P. 500. Information technology, industrial and consumer discretionary stocks accounted for a third of the decliners.
Citigroup and Bank of America led the financial sector down as concerns mounted about big institutions’ involvement in off-balance-sheet borrowing in the short-term debt markets and investments in assets like mortgage bonds.
A Securities and Exchange Commission official testifying before Congress said the commission was looking into such structured investment vehicles, which have had an increasingly hard time borrowing money by selling commercial paper, a type of short-term debt.
Technology shares were led down by Apple, which cut the price of its new iPhone by $200 and stopped selling a lower-end version of the device just two months after introducing it. Shares of Apple fell 5.2 percent, and shares of AT&T, the service provider for the phone, lost 1.4 percent.
More broadly, the beige book noted that manufacturing activity expanded, except in automobiles and building materials. But demand for business loans was either steady or declining in the New York, Cleveland, Chicago and St. Louis districts.
Given the turmoil and volatility in the financial markets in the last month and a half, some market specialists say the Fed may be forced to be freer with a rate cut than it normally would be.
“It would be psychological,” said Bruce Bittles, chief market strategist at Robert W. Baird & Company. “It would leave room for further rate cuts if needed. There is no guarantee that lower rates will help this housing situation. The important thing is that it stabilizes other areas like the stock market.”
The NYT also reports that Eli Broad, a billionaire businessman, has given away more than $650 million over the last five years, to Harvard and the Massachusetts Institute of Technology to establish a medical research institute, to the Los Angeles County Museum of Art and to programs to improve the administration of urban schools and public education.
The rich are giving more to charity than ever, but people like Mr. Broad are not the only ones footing the bill for such generosity. For every three dollars they give away, the federal government typically gives up a dollar or more in tax revenue, because of the charitable tax deduction and by not collecting estate taxes.
Mr. Broad (rhymes with road) says his gifts provide a greater public benefit than if the money goes to taxes for the government to spend. “I believe the public benefit is significantly greater than the tax benefit an individual receives,” Mr. Broad said. “I think there’s a multiplier effect. What smart, entrepreneurial philanthropists and their foundations do is get greater value for how they invest their money than if the government were doing it.”
It is an argument made by many of the nation’s richest people. But not all of them. Take the investor William H. Gross, also a billionaire. Mr. Gross vigorously dismisses the notion that the wealthy are helping society more effectively and efficiently than government.
“When millions of people are dying of AIDS and malaria in Africa, it is hard to justify the umpteenth society gala held for the benefit of a performing arts center or an art museum,” he wrote in his investment commentary this month. “A $30 million gift to a concert hall is not philanthropy, it is a Napoleonic coronation.”
Elaborating in an interview, Mr. Gross said he did not think the public benefits from philanthropy were commensurate with the tax breaks that givers receive. “I don’t think we’re getting the bang for the buck for gifts to build football stadiums and concert halls, with all due respect to Carnegie Hall and other institutions,” he said. “I don’t think the public would vote for spending tax dollars on those things.”
The billionaires’ differing views epitomize a growing debate over what philanthropy is achieving at a time when the wealthiest Americans control a rising share of the national income and, because of sharp cuts in personal taxes, give up less to government.
Familiar Recipients
A common perception of philanthropy is that one of its central purposes is to alleviate the suffering of society’s least fortunate and therefore promote greater equality, taking some of the burden off government. In exchange, the United States is one of a handful of countries to allow givers a tax deduction. In essence, the public is letting private individuals decide how to allocate money on their behalf.
What qualifies for that tax deduction has broadened over the 90 years since its creation to include everything from university golf teams to puppet theaters — even an organization established after Hurricane Katrina to help practitioners of sadomasochism obtain gear they had lost in the storm.
Roughly three-quarters of charitable gifts of $50 million and more from 2002 through March 31 went to universities, private foundations, hospitals and art museums, according to the Center on Philanthropy at Indiana University.
Of the rest, the Bill and Melinda Gates Foundation accounted for half on the center’s list. That money went primarily to improve the lives of the poor in developing countries. Valuable as that may be, it also meant that the American public effectively underwrote several billion dollars worth of foreign aid by private individuals, even though poll after poll shows Americans are at best ambivalent about using tax dollars in such assistance.
In contrast, few gifts of that size are made to organizations like the Salvation Army, Habitat for Humanity and America’s Second Harvest, whose main goals are to help the poor in this country. Research shows that less than 10 percent of the money Americans give to charity addresses basic human needs, like sheltering the homeless, feeding the hungry and caring for the indigent sick, and that the wealthiest typically devote an even smaller portion of their giving to such causes than everyone else.
“Donors give to organizations they are close to,” said H. Art Taylor, president and chief executive of the BBB Wise Giving Alliance. “So they give to their college or university, or maybe someone close to them died of a particular disease so they make a big gift to medical research aimed at that disease. How many of the superrich have that kind of a relationship with a soup kitchen? Or a homeless shelter?”
Philanthropists like Mr. Broad say that looking at philanthropy solely as a means of ameliorating need is too narrow. “If you look historically at what Carnegie did with creating a library system and the Rockefellers in creating Rockefeller University, I think it does a lot more for society than simply supporting those in need,” Mr. Broad said.
About 2 percent of the money Mr. Broad has given away through his two foundations over the last five years, or $15 million, went to support organizations like the United Way and the United Jewish Fund, which serve needy people as well as the middle class. The foundations also have given money to groups that help homeless children, and the International Rescue Committee.
Still, Mr. Broad dedicates his biggest gifts to areas he thinks lack government support, like the $25 million he gave to the University of Southern California last year to found an institute for integrative biology and stem cell research, or the tens of millions he dedicated to complete the new Disney concert hall in Los Angeles.
Like many major philanthropists, Mr. Broad said he considered such gifts an illustration of the Chinese proverb: “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.” The argument is that simply taking care of the poor does nothing to eliminate poverty and that they will ultimately benefit more from efforts to, say, find cures for the diseases that afflict them or improve public education.
As for Mr. Gross, despite his uncharacteristically fiery criticism of what he calls “philanthropic ego gratification,” some of the large gifts he and his wife, Sue, have made are not so different from those made by other billionaires. He has given millions to a local hospital, for example, and for stem cell research.
And in 2005 the couple gave roughly $25 million to Duke, Mr. Gross’s alma mater.
But the Duke gift illustrates Mr. Gross’s priorities. The money is almost exclusively for scholarships.
“Universities have their own thing going — they want to build infrastructure and endowments and perpetuate their system, which isn’t necessarily in the social interest,” Mr. Gross said. “Scholarships get a little more down to the ground level.”
Taking Aim at the Tax Code
The investor Warren E. Buffett also voices strong feelings about how donations are used.
When Mr. Buffett pledged $30 billion to the Gates Foundation, he included a little-noted requirement that the foundation spend each increment of the gift he hands over, in addition to its own annual legally mandated spending. If Mr. Buffett transfers $1.3 billion of stock to it, it must spend every nickel within a year.
“I wanted to make sure,” he said, “that to the extent I was providing extra money to them, it didn’t just go to build up the foundation size further but that it was put to use.”
The Gates Foundation’s work is largely international, although a portion of its spending supports efforts to improve urban education and access to college, so Mr. Buffett’s money is unlikely to be used to address basic needs in this country.
“I think the government ought to make sure that all the people here who drew short straws have a decent minimum,” Mr. Buffett said. “We moved toward that with Social Security, but we could go a lot further now.”
He does not regard his gift as charitable and expects no tax benefit from it, in part because he has credit for past donations that he has not used.
Rather, he calls his sister, Doris Buffett, the “real philanthropist” in the family. Ms. Buffett runs an organization, the Sunshine Lady Foundation, that helps the needy pay for college, medical expenses, mortgages, glasses and cars.
Mr. Buffett recently has brought attention to himself as a critic of inequities in the nation’s tax system, which offers the wealthy better tax breaks for charitable giving than it does the average taxpayer. Deductions for charitable giving can be claimed only by the fewer than half of all taxpayers who itemize, and those falling in higher tax brackets get bigger deductions for cash gifts.
The charitable deduction cost the government $40 billion in lost tax revenue last year, according to the Joint Committee on Taxation, more than the government spends altogether on managing public lands, protecting the environment and developing new energy sources.
Rob Reich, an assistant professor of political science and ethics in society at Stanford, goes so far as to say that the tax code promotes inequities through the breaks it provides for charitable giving.
Take schools. The Woodside Elementary School in Woodside, Calif., where the median family income is $196,505, raised $7,065 a pupil in 1998 from charitable contributions to a foundation it created, according to Professor Reich’s research. Across the San Francisco Bay, a similar foundation to support the Oakland Unified School District, where the median family income is $44,384, raised $138 a pupil that year.
In effect, the government is subsidizing a system that enhances inequities between poor and wealthy public schools, Professor Reich said.
Raising Questions
Legislators, regulators and others are asking more questions about exactly what charities do with the money they are given.
“When foundations, corporations and individuals give money to the opera,” said Xavier Becerra, a California Democrat on the House Ways and Means Committee who represents a district in Los Angeles populated largely by young working-class immigrant families, “my folks are very unlikely to benefit from those forgone tax dollars that could have been used for health care, for after-school programs for kids, for help in getting access to college education.”
Yet Mr. Becerra himself is a beneficiary of one of the country’s wealthiest charities, Stanford, which has a $15.2 billion endowment and gave him a scholarship. “There is no way my parents could have afforded for me to go there without the generous financial aid the university gave me,” he said.
At the other end of the political spectrum, Grover G. Norquist, whose Americans for Tax Reform lobbies for lower taxes, suggests taxing nonprofit hospitals that cannot demonstrate that they provide significant care for the poor.
“I’m not aware of anything they do that a for-profit hospital doesn’t do in terms of providing free care,” Mr. Norquist said.
Like other billionaire philanthropists, Thomas M. Siebel, founder of Siebel Systems, has given his largest gifts to his alma mater, the University of Illinois at Urbana-Champaign. In 1999, he donated $32 million for a computer science center bearing his name, and he pledged $100 million this year to support basic research that he hopes will reduce dependency on carbon-based fuels.
But when the university suggested using some of that gift to put up another new building named for him and hire new professors, he said no.
“I told them to use the basement of an existing building and some of the really smart people they already have,” Mr. Siebel said.
Attracting philanthropic support to fight substance abuse is one of the biggest challenges in fund-raising, but Mr. Siebel has donated more than $15 million to the Meth Project, an organization he created. “I think we’ll save a lot of lives in the end,” Mr. Siebel said. “Isn’t that what philanthropy is supposed to be about?”
He has also given the Salvation Army more than $18 million over the last six years, mostly to support services for the homeless. He said he gives to the organization because of its low administrative costs and lack of frills.
“When I first started doing this, I made a contribution to some organization, Harvest something or other, I think, that was working on homelessness,” Mr. Siebel said. “The next thing I knew, I got a plaque in the mail and an invitation to an awards ceremony.”
He added: “I never gave them another nickel. What were they spending money on plaques for?”
