One of the odd elements of the Obama administration's management of the immigrant investor (EB-5) program is the way Republicans use it to make out like bandits.
The most recent example of this bit of bipartisanship-for-profit is taking place, according to the Philadelphia Inquirer, in connection with fixing an old, old infrastructure problem — the lack of a direct connection between the granddaddy of super-highways, the east-west Pennsylvania Turnpike, and the north-south I-95. The two routes cross in Pennsylvania near Trenton, N.J., but it is difficult to get from one to the other.
The EB-5 program is about to be used to help finance a $420 million linkage between the two super-highways, with the apparent blessing of the Obama administration, but to the profit of well-connected Republican operatives in Pennsylvania.
Sure to lose money on the deal are 400 (probably Chinese) families who will put up $565,000 or so each, and who will collect about 1,200 green cards in exchange. The Chinese are expected to invest $500,000 each and to pay $65,000 each in fees; that will cover $200 million of the costs of the new connection, with another $220 million expected from domestic sources.
Why are the Chinese sure to lose money on this, and local Republican middlemen going to going to reap $26 million in fees? It is because of the way that both the EB-5 and the turnpike operations are structured.
The turnpike, which is controlled by local Republicans, can raise money in any number of ways for its construction needs (moneys to be repaid, ultimately, by tolls). Typically, this is done by selling bonds to investors via Wall Street, but this does not produce much in the way of benefits for one's friends, as bond placement fees are depressed by competition among the bond firms.
On the other hand, there is the EB-5 route. The turnpike, as the developer, has selected as its exclusive EB-5 broker the Delaware Valley Regional Center, a for-profit entity closely tied to, but separate from, the Swarthmore Group, which according to the Inquirer is "a Philadelphia investment-management firm headed by James E. Nevels, a prominent Republican donor and fund-raiser."
The only way for a foreign investor to get a set of visas by way of this deal is to work with DVRC.
An Examination of Those Fees. Meanwhile, the all-too-tolerant Department of Homeland Security does not even try to regulate the fees that its regional centers, such as DVRC, charge to aliens, so that entity is able to, and does, charge each investor $50,000 in fees plus another $15,000 in legal fees.
These fees — $65,000 — come to 13 percent of the investment. I decided to see how much it would cost an investor to simply buy $500,000 in turnpike bonds on the open market. I figured it would be 1 or 2 percent, say $5,000 to $10,000.
I was wrong. I called Scottrade's local office here in Arlington and asked what the commission would be if I bought one hundred of the $5,000 turnpike bonds, totaling $500,000. The answer was $100!
Given the low quote, I asked my contact to check with the corporation's bond traders and she called me back half an hour later saying that the commission would, indeed, be $100, but that I probably should buy in $50,000 units, not $5,000 units.
The bottom line is that the Turnpike Commission could raise the money at something like $100 per investment, or $65,000 per investment, in terms of charges to the investors; but those costs would not be borne by the turnpike — so why not let the turnpike's friends rake in the millions?
I wrote above that the Chinese were sure to lose money on these arrangements. Part of the reason for this is that there is no repayment of the $65,000 in fees. The other part is more complex.
According to the Inquirer:
The deal is structured so the Turnpike Commission can repay the foreign investors after five years with cash or with a municipal bond. The bond pricing will be set on the date the loan is made, which means the bond could be worth considerably less than $500,000 in five years if interest rates rise.
Again, all the costs are being borne by the alien investors, and the Obama administration is supposed to be immigrant-friendly!
I disagree with the Inquirer on its math regarding savings for the turnpike, which I think it overstates. According to the paper:
The turnpike will get cheap money, saving about $35 million over traditional borrowing costs over five years. The turnpike will pay a 2 percent annual interest rate, about half the current rate for municipal-bond borrowing.
No, with rates for a this kind of bond running at 3.5 percent, the savings by borrowing at 2 percent are 1.5 percent a year, or 7.5 percent over five years, which, times $200 million, equals $15 million, not $35 million.
Meanwhile in South Dakota, another group of Republicans ran rough-shod over the EB-5 program, with tens or perhaps scores of millions of investor funds gone missing, as we have described in previous blogs, such as this one.
In the turnpike situation, within the casual standards of the EB-5 program, no laws seem to have been broken and all the players are still alive. In contrast, in South Dakota where numerous investigations are being made, a former state cabinet official and one of the main players was found dead, shot in the stomach by a shotgun. Another GOP cabinet officer, the attorney general, ruled that the death was a suicide, but has refused to release the detailed autopsy findings.
It is anticipated that Chinese investors will participate in the program in large numbers; aliens from other countries may do so, but the pattern in EB-5 has become one of Chinese domination.