Pope Francis has apparently been running a hedge fund with the faithful’s donations

I’ve never been one to follow Vatican intrigue, but I do love forensic accounting and outing clever financial frauds. Pope Francis’ Vatican has been a “rich” source of material on both accounts lately.

When Pope Francis was inaugurated in 2013, he was widely celebrated for maintaining a modest lifestyle – like his namesake, my patron saint, St. Francis of Assisi – even behind the walls of the glitzy Vatican. He emphasizes helping the poor and has made the plight of refugees worldwide a special mission of the Church.

As Catholics have grown weary of personally bankrolling settlements for the victims of predatory priests – I wrote about the staggering cost of the abuse scandal and the dozens of US dioceses that have filed for bankruptcy – the Vatican seems to be in a state of financial free fall. This is partly because of the collapse in donations. But it is mostly because the socialist pope has been running a hedge fund.

We are learning many new details about how the Vatican invested $200 million in swanky London real estate in recent years. Money that parishioners globally sent to the Vatican for the purpose of helping the poor instead was funneled into a 183,000-square-foot luxury apartment building in Chelsea. And this isn’t even close to the only posh “cause” Francis’ Vatican has backed with the assistance of networks of investors and sleazy middlemen who are under investigation by financial regulators.

Of course, the faithful are only learning about these investments because they bombed financially as the property values for luxury flats sank after the Brexit vote and that has caused both strife and leaks at the highest levels of the Church.

The Vatican under Pope Francis’ leadership has not published a budget since 2015 and has been without an auditor for more than two years now.

Much of the information that has surfaced about how Francis & Co. have been looting the faithful has been the result of unauthorized leaks of thousands of confidential documents – a sort of Panama Papers for the Vatican, if you will.

These leaks come from two well-known Italian journalists, Emiliano Fittipaldi and Gianluigi Nuzzi. Francis tried to silence the journalists back in 2015 by pressing charges against them for leaking the information. They were eventually absolved for lack of jurisdiction and the Vatican decided to handle its finances completely in the dark.

This week, Fittipaldi and Nuzzi resumed blowing up Francis’ black budget, with a vengeance. The two leaks, taken together, present a very damning picture of the Church at present.

Fittipaldi explained the following scheme in the Italian magazine L’Espresso (summary by the Catholic newspaper Crux Now):

The Secretariat of State, the Vatican’s ultra-powerful coordinating department, controls roughly $725 million in funds off the books related to the annual “Peter’s Pence” collection, which is designed to allow individual Catholics to contribute to the pope’s charitable activities.

In fact, according to Fittipaldi’s report, most of those funds are instead diverted into “reckless speculative operations,” with 77 percent of the Peter’s Pence collections entrusted to Credit Suisse, the multinational financial services and investment company founded in Switzerland.

L’Espresso cites Vatican investigators charging that the use of those funds, roughly $560 million, has been marked by “garish irregularities” and “worrying scenarios.”

In addition, Fittipaldi’s report also suggests that an ongoing internal investigation of those irregularities may be motivated less by an honest desire to get to the truth and impose transparency, and more by a desire to settle accounts and alter the balance of power within the Vatican, especially with regard to the Financial Information Authority, an anti-money laundering watchdog unit created under Pope emeritus Benedict XVI. [For the uninitiated, this is the pope that was driven out of the Vatican, with no explanation, which brought us Francis.]

The director of the Financial Information Authority, Italian layman Tommaso di Ruzza, was one of five Vatican employees recently suspended amid the unfolding investigation that also led to the resignation of the powerful commander of the Vatican gendarmes, Domenico Giani, following a leak of a memorandum on the probe prepared by Giani to the Italian media.

Sunday’s report details the affair involving the London apartment building, which has its origins in 2012 when an Italian financier named Raffaele Mincione was approached about investing $200 million on behalf of the Vatican in an oil company in Angola. According to Fittipaldi’s account, the operation was the idea of then-Monsignor Angelo Becciu, at the time the number two official in the Secretariat of State and a former papal ambassador in Angola.

Becciu is today a cardinal and the prefect of the Vatican’s Congregation for the Causes of Saints.

Eventually, however, the Angola project fell apart, leading Mincione to propose investing the $200 million in a London real estate deal instead, involving the purchase of a former warehouse for Harrod’s and converting it into luxury apartments. Mincione, based on Italian media reports, is a well-known corporate raider whose 12-meter private sailboat is named Bottadiculo, which is idiomatic for “lucky break” but literally means “slap on the butt.”

The deal went ahead, with the Vatican purchasing 45 percent of the property. A Brexit-induced downturn in the London real estate market, however, resulted in returns being less than projected, and in 2018, under the Secretariat of State’s new number two, Venezuelan Monsignor Edgar Peña Parra, the Vatican decided to pull out of the Athena Capital Global fund administered by Mincione and based in Luxembourg.

The exit strategy, however, involved the Vatican purchasing the remaining 55 percent of the property, in a deal signed in November 2018 by Monsignor Alberto Perlasca, at the time a key official in the Secretariat of State who was appointed in July by Pope Francis as the Promoter of Justice, or prosecutor, in the Vatican’s highest court, the Apostolic Signatura.

Fittipaldi asserts that between the original 2012 investment and the 2018 purchase, Mincione cleared almost $170 million in income. According to Fittipaldi, he still defends the investment: “I didn’t want to pull out, they asked me to,” he said. “It’s still an optimal operation: All that has to be done is to get going on the renovations and sell the apartments,” Mincione said.

According to the report, it was the director general of the Institute for the Works of Religion, the so-called “Vatican bank,” Italian layman Gian Franco Mammì, who objected to the 2018 transaction and triggered an investigation. While that may seem to make Mammì a whistleblower, Fittipaldi quotes unnamed Vatican insiders claiming that his actual motive was to wrest control of the Peter’s Pence funds away from the Secretariat of State for the Vatican bank.

In any event, a formal complaint was lodged with the Vatican’s Promoter of Justice on July 2, leading to the suspension of the five employees and Giani’s ouster.

In the meantime, according to Fittipaldi, the Vatican gave control over its London investment to another Italian financier named Gianluigi Torzi, who is himself under investigation by Italian authorities for an incident in which he allegedly changed the locks on a property near his seaside villa without authorization.

In effect, the Vatican did not directly acquire the remaining share of the London property through the Administration of the Patrimony of the Apostolic See (APSA), the Vatican’s central financial clearinghouse that generally administers its real estate holdings, but worked through another Luxembourg financial company run by Torzi.

Also involved in the deal as an “absolute protagonist,” according to Fittipaldi, was Italian Monsignor Mauro Carlino, a longtime aide to Becciu who was promoted by Francis to become the head of information and documentation at the Secretariat of State over the summer.

Despite Di Ruzza’s suspension, Fittipaldi quotes unnamed sources suggesting that the Financial Information Authority actually signaled the London deal as a suspicious transaction to authorities both in the UK and Luxembourg and tried to block the transaction.

That background, according to Fittipaldi, has generated suspicions that the raid on Di Ruzza and his suspension is actually an attempt to neutralize the Financial Information Authority with regard to the Secretariat of State.

“Judicial papers risk being used to settle accounts within the sacred walls,” Fittipaldi wrote.

And that brings us to Nuzzi’s bombshell:

Worldwide donations to the Catholic Church have plunged in the wake of sex abuse scandals that have eroded faith in the Vatican, a new book claims.

The Church’s finances are in such a dire state – a result of a toxic mix of incompetence, internal wrangling and corruption – that the Vatican risks a default by 2023, according to the expose.

The amount of money donated by ordinary Catholics to the Church, known as Peter’s Pence, has plummeted from €101 million [$112 million] in 2006 to €70 million [$77 million] in 2016 and may now be less than €60 million [$67 million].

Only a fifth of the total goes to helping the poor and needy, with the rest held in bank accounts or used to plug gaps in the finances of the Curia, the Vatican’s governing body.

The revelations are based on scrutiny of 3,000 confidential documents obtained by an Italian investigative journalist, Gianluigi Nuzzi.

In his book, Universal Judgment, which was published on Monday, he portrays the Vatican as a viper’s nest of jealous cardinals, warring departments and avaricious officials who are adept at parallel book-keeping.

“If the pontificate of Frances fails, it won’t be because of the attacks of conservative Catholics or the crisis in vocations or because of the declining number of faithful,” Mr Nuzzi writes. “It will be because of the financial collapse that is coming ever closer.”

The Vatican deficit is “like a voracious and insatiable parasite, attacking wealth that was accumulated over the centuries from the pious offerings of the faithful.”

The precipitous decline in contributions has coincided with a crisis of faith for millions of Catholics, who have been appalled at the multiple sex scandals involving priests and cardinals.

Thousands of prelates have been accused of raping or molesting children and the Vatican’s former finance chief, Australian cardinal George Pell, is in prison after being convicted of sexually abusing teenage boys in the state of Victoria.

So not only are dioceses across America filing for bankruptcy, the Vatican itself appears to be a default risk.

Vatican officials quickly pushed back against these reports, but naturally they did not push back with any numbers on the financial health of the Church or by denying that they were buying up luxury real estate with charity funds. Instead they characterize the journalists’ work as part of some shadowy effort to discredit Francis.

I think one thing is clear about Francis at this point: Far from being a reformer, he is helping keep the worst actors in positions of authority in the Church. Some of his most trusted allies have been outed as rapists as he feigns ignorance. Altar boys were even getting assaulted at St Peter’s only two years ago. He had a cardinal who said global warming is more important than child abuse organizing his summit on abuse. And now all this. The decline of the Church under this one individual is beyond insane.

Florida is getting its own Wall Street thanks to tax reform

When I was a government economist, the orthodoxy in microeconomics was that people rarely ever moved over taxes. This has always struck me as incorrect, and I used to get into so many fights about it. I finally get to be proven right as people see the consequences of tax reform. (Yes, I am enjoying that.)

One of the pieces of evidence folks on the other side would cite is the willingness of very wealthy people to live in high-tax states like California, Illinois, or New York. To them, it was “proof” that lifestyle factors would outweigh less sexy things like taxes.

Getting this right is a pretty big deal to economists, because part of your job is “scoring” tax plans, or making predictions about how much new tax revenue a tax increase would bring in. If you thought people would roll over and pay the additional taxes, then a tax increase could be counted on to fund a bunch of new spending priorities. If you thought a tax increase would make them change their behavior, then you had a bit of a problem balancing your budget. It’s also a very big deal if your state or local government is taking on bonded debt to finance public works or infrastructure projects. You need to know that your tax revenue will be secure for decades to pay for public investments like those.

My argument to that has been that it’s the federal tax code that insulates high-tax states from their fiscal realities. Until last year, celebrities living in mansions in Malibu could push some of the tax costs for their lifestyle onto steelworkers in Philadelphia. That is to say, they weren’t being forced to decide between taxes and their lifestyle. You were paying their state and local taxes for them. Aren’t you nice?

In the upside-down world that Democrats now live in, the old federal tax code protected the middle class and tax reform is subsidizing wealthy people. This is an objectively false claim – most federal taxpayers don’t even itemize, and the legislation literally doubled the standard deduction – that can be directly refuted by looking at actual Treasury data. (Don’t count on 25-year-old journalism majors to sift through economic data though. Brainlessly repeating their favorite politicians is so much easier.)

But there is an anther piece of empirical evidence that suggests the old tax regime was largely benefiting rich people: rich people are now deciding to leave high-tax states, and they are doing it in droves. And they are taking their businesses with them. As I mentioned in my earlier piece, extreme wealth is extremely portable.

They now finally have to pay what they owe to live there. They can’t shift that burden to you. You aren’t being nice and subsidizing their Hamptons lifestyle anymore with the income you earn at your 9-to-5 gig. And being rational economic actors, rich people are now choosing to become taxpayers in states with more fiscally responsible governments.

Thanks to evil conservatives enacting tax reform and New York’s punitive tax system, Florida (specifically Miami) is getting its own Wall Street now. Billionaire investor Carl Icahn is moving his New York hedge fund to Florida next year. He is offering his employees $50,000 each to relocate to Florida with him. (Those who stay get fired with no severance.) He’s following several other hedge fund billionaires, including David Tepper, Paul Tudor Jones, and Eddie Lampert. And where the money managers go, traditional corporate headquarters will probably follow. See the fight over Amazon’s second headquarters for guidance on how jobs follow tax strategies.

This is an interesting shift in our country. You have younger generations relocating en masse to states with lavish government spending. You have the wealth moving away from them. This means state and local governments that are financially and politically dysfunctional now will probably only become more so.

You have younger generations that are skeptical of capitalism and trying socialism on for size. They have politicians who likely do know better selling them on the idea that they can successfully take wealth from people like Carl Icahn and use it to fund health care entitlements and student loan relief. But you can watch in real time how that won’t happen.

(You couldn’t raise tens of trillions of dollars taxing these folks even if they did just roll over and pay higher taxes. Biden and Klobouchar tried to point that out to an unwilling audience last night. Democratic spending proposals can now be measured in multiples of GDP, rather than fractions of GDP. (I keep telling Millennial friends that they should worry about how they are unlikely to see a dime of Social Security or pension income, let alone receive “free” health care. There isn’t a single entitlement program in this country that is solvent over the medium term.)

It’s bizarre to think about, but our nation is essentially sorting itself into numerate and innumerate populations over taxation and economic resentment. And the two groups are going to have wildly different qualities of life.

The problem of underemployed college grads

I know I promised everyone that I would use this as my personal blog and not geek out about economic data, but I can’t help myself when it comes to education.

Articles questioning the value of a college education have practically become their own genre in journalism. The media tend to cover this topic with the same hysterical tone with which they write articles about brain-eating amoebas in the drinking water supply. At the end of the day, parents don’t know what to believe as they consider wiping out their home equity so Junior can get a degree.

The Wall Street Journal has a fascinating, if depressing, article today that gets into Federal Reserve data on the wage performance of college graduates. The data suggest that college graduates are not underperforming previous generations as a monolithic group, but are starkly divided into haves and have-nots.

Here are some statistics from the article (which is unfortunately only available to WSJ subscribers):

  • The share of Americans between the ages of 25-29 with a bachelor’s degree has risen to 37% from 29% in 2000.
  • College and graduate school tuition have risen at three times the rate of inflation since 2000.
  • Student borrowers leave college with $30,000 of debt on average.
  • An increasing percentage of student borrowers are leaving college with more than $50,000 in student debt.
  • The wage premium for college graduates is at an all-time high: “Americans with a bachelor’s degree—but not a graduate degree—earned an average $77,239, nearly $32,000 more than the average earnings of workers with only a high-school diploma.” College graduates are also more likely to be employed than high school graduates. (Though I am not sure how useful that statistic is in an economy where unemployment in general is so low that there are more job listings than people searching for work for the first time in American history.)
  • But the *average* earnings for college graduates has become a somewhat meaningless number because roughly 4 in 10 college graduates currently have jobs that have historically been done by people with only a high school diploma (and that competition artificially depresses wages for people who only graduated from high school as well).

So 40% of college graduates are underemployed relative to their level of education and are working in lower wage jobs and the other 60% is responsible for driving the wage premium to a record high. Clearly, the question should not be “Is college worth it?” but “For whom is college worth it?”

Then there is the issue of wealth (net worth) of college graduates vs folks with a high school diploma. This is what is really shocking:

College graduates still have more wealth than nongraduates, as they have had for decades. In 2016, the typical household headed by someone with a bachelor’s degree but no graduate degree had more than twice as much wealth as the typical household headed by a nongraduate, according to a St. Louis Fed paper released in January, which analyzed data from the Fed’s Survey of Consumer Finances.

But that wealth premium has declined substantially for younger generations of college graduates, particularly those born in the 1980s. Among some demographic groups, there is little or no wealth advantage at all.

The typical black family headed by someone with a college degree—but no graduate degree—born in the 1970s and 1980s barely had any more wealth than the typical black household headed by a nongraduate. Hispanic households of the same age groups have only a small wealth premium.

The paper concludes: “Among families born in the 1980s, the college wealth premium weakens to the point of statistical insignificance with the single exception of white bachelor’s-degree holders, which remains positive but much smaller than that enjoyed by previous cohorts.”

Many news reports push the cliche of the millennial liberal arts graduate with six figures of student debt that is working as a Starbucks barista. But looking at the data, it would seem that many of the college graduates that are taking lower wage jobs are minorities, not privileged hipster philosophy majors. That’s a far more difficult problem to solve.