Wealth International, Limited

Offshore News Digest for Week of August 20, 2007

Note:  This week’s Finance Digest may be found here.


As markets went on a rollercoaster ride last week, our economy is coming close to a day of reckoning for loose credit policies being followed by the Federal Reserve Bank. Simply, foreign banks we have been relying on to buy our debt are waking up to the reality of much higher default rates than predicted, and many mortgage-backed securities have been reduced to “junk” ratings. Wall Street fears the possibility of tightening credit and the tightening of America’s belts. Why, they say, “if Americans spend only what they can afford, think of the ripple effects throughout the economy!” This is the cry, as the call comes for the fed to cut rates and bail out companies in trouble.

More inflation is, however, never the answer to inflation. Business involves risk, and businesses that miscalculate risk should be liquidated, so their assets can be reallocated to businesses that correctly judge risk and make profits. Instead, the Fed has injected $64 billion into the jittery markets, effectively amounting to a bailout that keeps these malinvestments afloat, but eventually they will become the undoing of our economy. Many Americans have taken on too much personal debt owing to exotic mortgage products and artificially low interest rates. Unfortunately, these families are now in the position of losing their homes in unprecedented numbers as the teaser rates expire and the real bills are coming due.

The real answers are, and always have been, found in the principles of the free market. Let the market set the interest rates. If we had been functioning under a true and transparent free market system, we would not be in the mess we are in today. Government, like the American household, needs to live within its means to get back on stable fiscal ground.

We have been headed in the wrong direction since 1971. This week marks the 36th anniversary of Nixon’s decision to close the gold window, which convinced me then to seek public office to call attention to the runaway money train that would come in the aftermath of that decision. The temptation to print and spend money with impunity, like the temptation to max out lines of credit, is too strong to for government to resist. Nixon brokered exclusivity deals with OPEC to prop up demand for the tidal wave of green pieces of paper the Fed pumped into the markets. Now the house of cards Nixon built is now on the verge of collapsing on our heads, and on our children’s heads.

As the dollar weakens, it becomes ever clearer that we need a return to sound, commodity-based money for a secure future. Money based on real value, not empty promises and secretive backroom machinations, is the way to get out of the current calamity without causing even bigger problems.

Link here.


In a credit crunch, it is often said, cash is king. In which case, gold has just been crowned emperor.

At least the weather here in London suits the markets. More like October than August. It is perfect weather for losing your shirt as yet another bubble turns to bust. Just like the Bankers’ Panic of 1907, the Great Crash of 1929, Black Monday in 1987, and the “mini-crash” triggered 10 years later by the Asian Crisis, any trader bored of tanning his hide on the Cote d’Azur can now come home to find October in full swing. And if he is seeking a snow-white pallor for autumn, he can turn white as a sheet within minutes in Mayfair, watching his funds under management shrink with each breath.

August 15 marked the deadline for hedge fund investors to withdraw what is left of their money before the third quarter ends. One fund, Sentinel Management Group, asked its regulators if it could “allow it to halt client redemptions until it can conduct them in an orderly fashion.” No dice, said the CFTC to the puny $1.6 billion fund. A disorderly fire sale might now be expected – which is just what the markets seem to be suffering.

In Canada, two trusts said that they had failed to sell new securities needed to refinance loans that are due for repayment. A bank had also refused to provide liquidity, according to news reports, making August 2007 a real crunch for those trusts, if not yet for all of their peers. “Everyone always waits until the last second to get out, and [August 15] is the last second,” said Mike Hennessy of Morgan Creek Capital. But in fact, redemption notices began “piling up weeks ago,” said Reuters. The proximate cause remains the collapse of Bear Stearns’s two highly geared mortgage bond hedge funds in June.

“The longer this credit crunch goes on, the more likely that gold will attract safe haven buying,” reckons John Reade, head of metals trading at UBS in London. In the short term, “we do not expect institutional buying of gold to trigger any sharp move higher; we suspect that position closing and deleveraging will be the focus of these investors’ attention ... [But] any move to gold will probably come from private investors, and as such, the listed exchange-traded funds (ETFs) in gold will signal this interest.”

Confirming the move into gold by a growing number of anxious private investors, the StreetTRACKS gold ETF reported a record holding of more than 510 tonnes on Tuesday. In London, the gold fund run by ETF Securities saw a trebling of holdings last week alone. According to AFX News, some 200,000 ounces of gold were bought in one day! (Here at BullionVault gold sales are also markedly higher. Gold stored securely in Zurich, Switzerland is proving the most popular choice with new gold owners.)

But it is not only private investors who are choosing solid gold bullion over paper promises right now. The last two weeks have seen a huge surge in gold leasing rates – the price charged by the major members of the London Bullion Market Association to lend out their gold. Put in plain English, the member banks ave become less likely to put their gold at risk by lending it out. After all, in a credit crunch, cash is deemed to be king. In which case, gold owned outright has just been crowned emperor.

Whether or not you hold with the theory that central banks are wantonly quashing the gold price, despite it doubling since 2002, it is clear that the Fed and its friends have plenty to fret about besides bullion right now. The U.S. dollar, after all, is up versus the euro. It is everything else that is down, besides gold, Treasury bonds, and the Japanese yen. Last week’s open market operations by the Federal Reserve saw it accept mostly mortgage-backed bonds – a gift from the Fed that points to how serious this credit crunch is beginning to prove.

To date, the $250 billion in central bank cash lent to the world’s biggest investment houses has failed to prevent the asset-price bubble from hitting a series of air pockets. Here in London, the FTSE 100 has now dropped nearly 650 points – almost that 10% slump deemed to mark a “correction” – inside one month. No wonder, then, that lower interest rates are now priced into bonds.

There is no risk of monetary policy allowing the bubble to burst, in short. Or at least, that is what everyone thinks ... even as the bubble bursts despite super-fast action in central bank policy. “My worry is the Fed will cut too little, too late,” said Nouriel Roubini, NYU professor and a former adviser to Bill Clinton. And besides, if the money markets are freezing up with dollar rates at 5.25%, will anyone become more likely to lend money at just 5% or 4.75% this Christmas?

Now that cash is once again king, and the dollar has seized the throne with its twisted sidekick the yen playing court jester, we think you might do well to keep an eye on the gold price. Even with spot prices ticking sideways amid the sell-off in paper, that is still a sharp break from the strong correlation between stocks and gold bullion seen between 2003 and early 2007. Plainly put, the smart money looks keen to keep hold of its bullion.

Versus the resurgent dollar, the price of gold remains little changed right now from a week or even a month ago. Indeed, it has risen against sterling and euros – a little-reported fact that U.S. investors wanting to take advantage of this spike in the greenback may like to note.

Link here.
The cons of investing in gold – link.


China has been spared the recent turmoil convulsing global markets because of its strict capital controls, local economists say – but it will eventually be forced into a painful adjustment of bubbly asset prices driven by excess liquidity.

China has seemed a mirror image of the developed world in recent weeks, with a soaring local stock market attaining record highs and a central bank draining liquidity from the financial system while their offshore counterparts deliver emergency injections of cash. The stock market has now risen 5-fold in slightly more than two years. Residential property prices in large cities have increased in advance of the rate of growth in economic output for the best part of the last decade. Shares and property have benefited from the wealth generated by China’s economic boom and the privatisation of the housing market during the last 10 years. With few other investment options and only limited ability to place money offshore, both asset classes have also attracted speculators flush with cash trapped inside the country by capital controls.

China has gradually eased capital controls, announcing this week a plan to allow individuals to buy shares overseas, in Hong Kong, for the first time, through the Bank of China. But even if this helps to drain some of the froth from the local market, the underlying credit conditions in China remain weak, says Yi Xianrong, of the Institute of Finance and Banking at the Chinese Academy of Social Sciences. “The quality of housing loans is much worse than the subprime loans in the U.S., because there is no real credit-check system in China,” he said. “The bubble will burst sooner or later, and it is necessary for the bubble to burst as soon as possible.”

Dan Rosen, of China Strategic Advisory, in New York, says the country is “essentially all subprime, in terms of the technical quality of investments and the institutional structure around them. ... But the macroeconomic fundamentals surrounding those investments are very strong, and the ability of government to guarantee the medium-term functioning of the system is robust.”

China’s state investment, however, does not have a substantial direct exposure to the sub-prime market in the U.S. China has more than $250 billion invested in mortgage and asset-backed securities in the U.S. – but all apart from about $10 billion of this money is in highly rated agency and agency-backed securities, says Wachovia, the U.S. bank.

Link here.


Mass migration has spawned an underground economy of staggering proportions.

TIRANA, Albania: Josif Poro pats his new sofa, points with pride to his carpets and runs a wrinkled hand over a gleaming white refrigerator. He and his wife barely scrape by on their $220 monthly pension. They would have to do without many of the items in their cramped apartment if their son, a factory worker in Greece, did not faithfully send home part of his earnings.

Around the world, millions of immigrants are sending billions of dollars back home. One sweaty wad of bills or $200 Western Union moneygram at a time, they form what could be called Immigration, Inc. – one of the biggest businesses on the planet. Experts tracking the phenomenon say they have gotten a much clearer picture since the 9-11 attacks, when authorities trying to cut the flow of cash to jihadists began taking a harder look at how immigrants move their money around. Mass migration, they say, has spawned an underground economy of staggering proportions.

Globally, remittances (the cash that immigrants send home) totaled nearly $276 billion in 2006, the World Bank says. Remittances have more than doubled since 2000, and with globalization increasing the numbers of people on the move, there is no end in sight. If these guest workers incorporated as a company, their migrant multinational would rank #3 on the Fortune 500 list, trailing only Wal-Mart and Exxon Mobil in annual revenue. And unlike the conventional economy, more cash tends to change hands in an economic downturn, political crisis, natural disaster, famine or war.

Counterterrorism officials say al Qaeda and other groups are financed in part through informal money transfer networks called hawalas. Governments and the IMF have been working to regulate those. Other baggage includes fears of brain drains and a vast permanent army of economic exiles, and the untaxed earnings flowing out of host nations. Switzerland watched $13.2 billion trickle out of the country that year. But Giuseppina Iampietro, a Swiss Economics Ministry spokeswoman, says little can be done. “Immigrants have no obligation to invest their money in Switzerland.”

Meanwhile, from Poland to the Philippines, remittances are throwing lifelines to families combating poverty and helping to keep some national economies afloat. “Without the money we get from our son, who lives and works in Austria, my family and I would simply starve to death,” said Jovana Acimovic, a housewife struggling to make ends meet in Belgrade, Serbia. In impoverished Tajikistan, the National Bank says migrant laborers sent home $1.1 billion last year – more than the country’s GDP. Filipinos working overseas sent home a record $13.6 billion in 2005. So much cash is flowing that mobile phone operators make it possible to transfer money over a cell phone.

In Albania, where the average monthly wage is only $250, a third of the population of 3.2 million have left for better jobs in the U.S., Britain, Greece, Italy and elsewhere. Many have no plans to return. But some, underscoring a trend also emerging in other countries – Latvia and Mexico for example – are coming back to buy homes and open businesses. Nearly one in three Albanian real estate transactions involves an expatriate buying property back home. Nazmi Ajazi, 52, spent a few years working in Greece and returned to set up an Internet cafe and a small grocery store on the dusty outskirts of Tirana, the capital.

But some see drawbacks. Much of the world’s migration is illegal, and although many immigrants work at menial jobs, some are doctors, engineers and other professionals. Their departure can mean a brain drain of highly trained personnel and create an immigration culture. Elvin Meka, secretary-general of the Albanian Association of Banks, offers a blunt warning. “We export human beings, and they send us cash,” he said. “Young people are addicted to the idea of leaving. That is the biggest crime in this country. The government is killing their dreams.”

Others do not see a problem. Mugur Stet, spokesman for Romania’s central bank, denies that remittances – which hit $7.3 billion last year – are artificially propping up the ex-communist country’s economy. “We see new homes, new businesses,” Stet said. “When they come back, it is with a capitalist mentality. These Romanians may turn out to be better citizens than those who stay home.”

Link here.

Labor Dumping

The flood of foreign labor pouring into the U.S., the E.U. and other hospitable environs has brought political strains. In the U.S., President George W. Bush and Senator Edward M. Kennedy failed to win passage of an immigration reform bill that the President viewed as legacy legislation. In Europe, France’s new President, Nicolas Sarkozy, has been busy promising to get tough on immigrants and erecting roadblocks to Turkey’s bid for E.U. membership.

These are only the latest shots in a long and ultimately futile debate about immigration policy. There is little chance of stemming migrant inflows, as long as the countries supplying immigrants embrace policies that effectively mandate labor dumping. To understand labor dumping, look at one of its pioneers, Yugoslavia. After Marshal Josef Tito broke ranks with Moscow in 1948, Yugoslavia rejected notions of Soviet-style central planning and created its own brand of socialism. The Yugoslav model mandated that resources be allocated by worker-managers instead of central planners. This socialist setup was doomed. Worker-managers viewed additions to the labor force as competitors for their slice of the pie. Consequently, they hung out “no vacancy” signs and would not hire new employees.

Opening Yugoslav borders, at least by communist standards, provided Tito with the means to dump surplus labor and mask flaws in the paradise of worker-managed firms. In the early 1970s, 11% of the Yugoslav labor force worked in western Europe, and those workers sent home hard-money remittances that amounted to 30% of Yugoslavia’s exports.

Today Mexico is the world’s largest labor dumper and the source of much of the contentious U.S. immigration reform debate. Surprisingly, the political combatants on both sides of the debate fail to mention the source of the problem: Mexico’s statist economy. Like Yugoslavia, Mexico cannot produce enough jobs. Rather than modernize the economy, Mexico’s politicians use Tito’s broom. Mexico’s 47 consulates in the U.S., more than any other country has, facilitate the sweeping by issuing passports and offering assistance when Mexican immigrants run into trouble. Thus 30% of Mexico’s labor force is working in the U.S., and in 2006 they sent home $23 billion, 12% of Mexico’s exports.

Turkey has a similar story. Burdensome laws and regulations put Turkey’s labor market 146th on the ranking from Doing Business 2007. Turkey has swept 5.5% of its labor force into western Europe. Employment in the formal sector, on the official labor rolls, of the Turkish economy accounts for only 22% of total employment. Others who are lucky enough to find work in Turkey toil in the relatively unproductive informal or agricultural sectors of the economy, leaving 11% unemployed.

Poland is another labor dumper, with 7.6% of its labor force at work in foreign countries. Poland’s overregulated economy and overtaxed labor market cannot produce enough jobs. Even with labor dumping the jobless rate is 13%. In Indonesia, says the Doing Business 2007 report, firing a worker costs the employer 108 weeks of wages. As a result, Indonesian companies are extremely reluctant to make legal use of the country’s labor supply, forcing an estimated 70% of the labor force to work in the informal sector of the economy and 10.3% to remain unemployed. As in Mexico, Turkey and Poland, politicians in Indonesia mindlessly favor the same policy – the broom. In addition to enforcing U.S. laws, we must encourage foreign governments to respect their workers and reform their labor markets.

Link here.


A dynamic services sector, a strong investment climate and the Panama Canal expansion program are expected to ensure that economic growth in Panama exceeds last year’s 8.1%. This is the conclusion of Moody’s, which stated that the country’s Ba1 foreign currency government bond rating and stable outlook are supported by “a dynamic service sector that has served to shield the economy from the volatility observed in other countries in the region, and by a favorable debt profile.”

Driven by revenues resulting from the 2005 tax reform, Moody’s observed that the non-financial public sector deficit has moved into surplus for the first time in a decade. However, Moody’s senior analyst Alessandra Alecci cautioned that Panama would not be immune from the dangers of a global economic downturn, given the Central American economy’s sensitivity to the external environment. This, she suggested, would “pose significant challenges to Panama’s performance.”

In June, Moody’s upgraded Panama’s foreign and local-currency country ceilings for bonds to A3 from Baa1, reflecting a decline in risk during a period of relative macroeconomic and political stability, the responsible running of the Panama Canal since the handover from the U.S. in 1999, and the relative smooth running of government affairs despite periods of alternating power between the two main political parties.

Last year, Panama’s construction sector grew by 17.4%, reflecting a continuing property boom, which also perhaps assisted growth of 12.8% in the banking sector. Improving tourism lifted the hotel and restaurant sector by 12.5%. External trade grew by 11.3%. Panama’s finances will be dominated for years to come by the proposed expansion of the canal, anticipated to cost $5.25 billion, with construction expected to be completed in 2014.

Link here.


The Cayman Islands authorities have assured stakeholders in the jurisdiction’s financial services industry that the sector is fully prepared for the potential impact of Hurricane Dean. “On financial services, the Cayman Islands’ financial services sector serves global clientele and is economically very significant. As such, both government agencies and private sector firms have comprehensive business continuity plans in place, and these have all been activated,” Stuart Jack, Governor of the Cayman Islands, announced on Sunday.

He continued, “Our financial services industry, which consists of local and multi-national professional services firms in the legal and accounting fields, as well as branches of regional and global financial services firms in the funds, insurance and banking sectors, is fully committed to continuity of service to our global partners and clients. ... For government agencies that support our financial services industry ... preparedness is critical. Contingencies involve the use of robust business continuity/disaster recovery centers to secure data and ensure fully operational and connected working environments in the event of damage to physical offices.

“Many of the larger professional services firms that are housed in state-of-the-art, secure commercial buildings are utilising their offices as shelters for staff and their families. A number of firms have, as a precaution, moved operations, staff and their families to other sites within their office networks. Others are reserving evacuation for post-event scenarios, depending on the severity of Hurricane Dean’s impact. Similar to the public sector, many private sector firms are also employing business continuity/disaster recovery centers.”

Mr. Jack concluded, “With business continuity plans fully operational it is anticipated that, similar to other storm threats that the Cayman Islands has experienced, our financial services industry will be able to continue to meet the needs of the global markets it serves with minimal disruption.”

Link here.
Cayman Islands escape Hurricane Dean relatively unscathed – link.


For the first time in 15 months, the Swiss franc has broken higher against the euro, reversing its 3-year slide against the common currency. This risks upsetting thousands of Cypriots who in recent years have borrowed heavily in the Swiss currency to take advantage of the low interest rates.

The 200-day moving average on EUR/CHF is now at 1.6290 and if this level is not retained soon, a major down-move may start, with catastrophic consequences for thousand of Cypriot borrowers in CHF. After hitting an all-time high of 1.6686 on July 24, 2007, the CHF has been correcting together with the yen amid expectations that the period of borrowing in cheap currencies and converting the proceeds into higher yielding currencies is coming to an end.

A 4% move down would more than wipe out the interest differential enjoyed by Cypriot borrowers in CHF. A third of foreign currency loans in Cyprus estimated at the equivalent of CYP850 million (€1.45 billion) may be affected by the move. About 55% of foreign currency loans made by Cypriots are in euros while the rest are in yen and dollars. Until recently, those who had borrowed in CHF not only took advantage of low interest rates, but they were also making additional money because of the steep and continued decline in the value of the Swiss franc against the CYP.

UBS analysts think it is only a matter of time before the CHF appreciates from its current strongly undervalued level against the EUR. Economic indicators such as consumer confidence and retail sales show that the economy is still stable and that there is no need for officials to step in and prevent the Swiss currency appreciating versus Europe, its largest trading partner.

Link here.


Multinational companies with subsidiaries in the U.S. have expressed alarm at new legislative proposals that aim to tax companies which use tax treaties to mitigate tax when transferring money from U.S. subsidiaries to foreign parents. The proposal, introduced by Rep. Lloyd Doggett (D-Texas) and added to unrelated measures in an agricultural bill, is intended to stop foreign multinationals from dodging U.S. taxes by structuring transactions via the most favorable of the U.S.’s double tax treaties, a process known as treaty shopping. However, business lobbyists argue that such transactions are a legitimate way of mitigating tax, and have warned that the bill is only serving to reinforce the growing perception that the Democrat controlled U.S. Congress is pro-tax and anti-business.

“These companies are not doing anything illegal,” Rhian Chilcott, the U.S. Director of the Confederation of British Industry, announced in a BBC report. “They are taking advantage of a tax treaty which the U.S. has negotiated.” Chilcott went on to warn that the proposals would “go a long way to undermine people’s confidence in the U.S. as a place to invest.” This was a view shared by an executive at a global company with U.S. factories, who told the Financial Times, “This is another signal that the US is not a friendly place to do business. ... We do not need this. We can go to Canada or Mexico.”

If enacted, the proposal would be most damaging to companies with a presence in the U.S., but which are based in a country which has not signed a double tax avoidance treaty with the U.S. At present many of these companies, such as South Korea’s Samsung, use subsidiaries based in third countries with a favorable tax treaty with the U.S. to reduce tax when transferring out income, but the Doggett bill could see these transfers taxed at 30%. According to the FT, Samsung is able to make tax-free transfers from its U.S. operations to its financing unit in the UK thanks to the terms of the U.S.-UK tax treaty.

In total it is estimated that the new law could cost companies $7.5 billion in extra tax over 10 years. The proposals are due to be considered when Congress returns from its recess next month, but they have also generated much opposition from Republican lawmakers, who contend that the provisions would make the U.S. a less hospitable place to do business, discourage future investment, and drive jobs abroad. Republicans have also suggested that the measure will open the way for retaliation on U.S. companies operating on foreign soil, because they are part of numerous treaties that allow reciprocal treatment on taxes for U.S. companies with foreign subsidiaries to avoid double taxation.

Link here.


Ruling asserted that damages award was a taxable “gain”.

The full U.S. Court of Appeals for the District of Columbia Circuit has been asked to reconsider last month’s decision by a 3-judge panel that reversed itself on a key civil rights tax case. On August 22, 2006, the same panel in the same case held that such taxes were unconstitutional, as compensation for a documented “loss” was not “income” subject to the tax code. In a major reversal, the panel held that “make whole” compensation to restore personal injuries losses are taxable.

The case arose as a result of the Department of Labor ruling in the whistleblower case of Marrita Murphy. In that case, the Labor Department held that Ms. Murphy suffered substantial damages to her health and reputation, and awarded her $70,000 in compensatory damages strictly related to her losses. The IRS taxed Ms. Murphy’s damages and she asked for a refund of the tax on the grounds that her damages were not income.

In an August 22, 2006 decision, Chief Judge Douglas H. Ginsburg, writing for the 3-judge panel, agreed with Ms. Murphy, and found that compensation for actual documented personal injury losses were not subject to an income tax. The IRS argued that the decision was wrong, and the panel agreed to vacate its original decision and rehear the case to consider issues that were never timely raised on appeal by the IRS.

Rather than overrule its prior decision (Murphy v. IRS) holding that taxing Murphy’s damages was unconstitutional, the panel simply held that Congress intended to amend the tax code “by implication” to tax personal injury damages under its authority to create an excise tax on people who use the courts to vindicate their rights. No court in the history of the U.S. has ever upheld such an implied tax. In a remarkable ruling, the Court held that compensation for damages for emotional distress suffered by a whistleblower were not paid to make the employee “whole”, but were instead paid as part of a “forced sale” which Congress could tax under its excise tax authority. The Court reasoned, “Murphy’s situation seems akin to an involuntary conversion of assets; she was forced to surrender some part of her mental health and reputation in return for monetary damages.”

Attorneys for Marrita Murphy have asked the full U.S. Court of Appeals for the D.C. Circuit to reconsider the panel’s holding because it conflicts with Supreme Court and other legal precedent, and it raises questions of exceptional importance. “The Court’s reversal stands reality on its head,” suggested David K. Colapinto, who argued on behalf of Ms. Murphy. “This case marks the first time that a court has interpreted the gross ‘income’ statute, 26 U.S.C. § 61(a), to be amended ‘by implication’ to create a tax not expressly enacted by Congress. Additionally, this is the first time that any court has construed the tax code to imply an ‘excise tax’ on the ‘privilege’ of utilizing the ‘legal system’ to vindicate a federal statutory right.”

“When whistleblowers suffer retaliation, they do not ‘sell’ their mental health. If people are injured in a car accident, they do not ‘sell’ their arms and legs. These are real human losses, and compensation to restore that human loss was never intended to be ‘income’ under our Constitution or the tax code,” Colapinto argued.

Link here.


The contribution by private sector companies to the Indian government in corporate taxes has more than doubled in the last four years, according to a study published by the Associated Chambers of Commerce Industry of India (Assocham). The study claimed that the amount of corporate tax paid by India’s top 50 companies soared by 189% to R89.95 billion ($2.2 billion) in 2004-5. Over the same period, corporate tax payments made by state-owned companies increased by a relatively modest 67%. Total corporate tax paid by all of India’s companies increased by 159%, the study indicated.

Strong economic growth over a 4-year period, coupled with growing demand, rising domestic investment, and greater acquisition activities are thought to be major drivers of the trend. While corporate tax payments have risen across all sectors of the Indian economy, the study noted that there was especially strong growth from firms in the manufacturing sector, which have paid 152% more in corporate tax over the past four years. Companies in the steel and metals industry registered 518% growth in corporate tax payments during this period.

The rate of corporate tax in India is currently 30%. The tax makes up the largest slice of the overall tax revenue pie, accounting for 31% of all revenues. Revenues from excise duties, which until recently were the main contributor to the government’s coffers, have declined by 5% and now account for 25% of all revenues.

Link here.


U.S.-based Lone Star Funds has once again had its office in Seoul raided by the country’s tax authorities, in connection with the sale of stakes in three companies. According to Lone Star, tax investigators spend over 13 hours at the office took away 11 boxes of documents and copies of computer files. It is believed that the tax authorities are interested in Lone Star’s sale of majority stakes in local firms Kukdong Engineering and Construction and Star Lease, in addition to the sale of a 13.6% stake in Korean Exchange Bank, already the subject of ongoing controversy. It is said that the disposal of these shares has earned Lone Star in the region of $1 billion.

Lone Star is currently fighting a back tax bill imposed on earnings derived from the sale of the Star Tower office building. Last month, a South Korean tax tribunal upheld the right of the National Tax Service (NTS) to seek $110 million in tax from the U.S. fund company relating to the sale of the building. Lone Star argued that since the building was held by its Belgian subsidiary, the company was only liable for Belgian taxes under tax treaty terms.

Last year, Lone Star was also raided by investigators after local prosecutors accused the firm of irregularities concerning its acquisition of KEB in 2003. It is alleged by the authorities that Lone Star executives made false statements about KEB’s credit card business to drive down the eventual purchase price of the bank, charges which Lone Star denies. South Korea is also determined to tax the proceeds from Lone Star’s disposal of its 51% stake in KEB, despite the company’s insistence that it owes no taxes to the South Korean government under the terms of the tax treaty with Belgium, where its Star Holdings subsidiary, which conducted the sale, is based.

Link here.


The Czech parliament approved a public finance reform package that would cut corporate tax to 21% next year. The corporate income tax rate would fall by a further 1% in 2009 and 2010. A simplified individual income tax rate of 15% is to be introduced next year, falling to 12.5% in 2009.

The backing for the reform package, albeit by a slim 2-vote majority, was a big victory for prime minister Mirek Topolanek, who faced a backlash by rebel MPs from his own Civic Democrats party led by Vlastimil Tlusty, the former finance minister. Mr. Tlusty had threatened to vote against the bill, arguing it would make many families worse off. Mr. Topolanek had earlier warned that the ruling coalition would collapse if the package was rejected and the government would be unable to prepare a budget with a deficit of less than 3% of GDP, a key criterion for euro adoption. But some analysts said the reforms did not go far enough to rein in public expenditure as the Czech Republic faces a 3.9% public finance deficit this year.

Under the reforms, social benefits including sick pay, long-term unemployment benefit, one-off new baby payments and child benefit would be cut, while the VAT rate for food and medicine would be raised from 5% to 9%. Fees for consulting doctors would also be introduced.

With GDP growth of 6.4% last year and the finance ministry forecasting 5.8% this year, analysts say now is the time to implement wider-reaching spending cuts. Ales Michl, an analyst at Raiffeissenbank, said, “These watery reforms lack vision and ambition and do nothing to solve the deficit. The government should be seriously cutting public expenditure particularly in state orders, the health sector and social benefits.” Pavel Sobisek, an economist at HVB, said that without the reforms euro adoption would be impossible in 2012.

The bill must now be approved by the Senate, where the ruling parties have a majority, and then by President Vaclav Klaus.

Link here.


The Danish government has announced its intention to cut taxes by DKK10 billion (€1.34 billion) per year in 2008 and 2009 in a bid to stimulate the labor market, and improve incentives to work. Under the proposed reforms, the income ceiling for the middle and top income tax brackets will be raised to DKK353,000 per year from DKK304,100, and to DKK381,300 per year from DKK365,000, respectively. The government is also proposing to raise the employment tax deduction, which is subtracted by all working wage earners, to 4.7% from 2.5%.

Some of these tax cuts would take effect on January 1, 2008, with the total tax cut package coming into force on January 1, 2009. In the same announcement, the Danish government also promised that a broad economic plan for the next eight years would not raise any taxes between now and 2015. The economic package also promises DKK50 billion in extra spending to improve Denmark’s welfare system between 2009 and 2018.

A general election is due in Denmark by the end of 2008, when Prime Minister Anders Fogh Rasmussen’s 4-year mandate comes to an end, although the PM is entitled to call an early election. However, it is unclear whether his center-right government will garner enough support to push the reforms through. Its center-left opponents have criticized the tax package for favoring the well-off. However, business interests have urged the government to go further by cutting income tax rates, rather than merely tinkering with tax brackets. To help offset the tax cuts, the government also announced that green taxes on energy consumption would increase from 2008 to match inflation.

Link here.


Part I summary may be found here.

Being a passive investor in local businesses.

If you do not want to manage a business day-to-day, this may be a good option. Keep in mind that some countries seem to specialize in ripping off foreigners. Even big companies find they cannot deal with the local bureaucracy and find their local partners unreliable and more interested in stealing their trade secrets than anything else. China comes to mind. Some countries will not allow you to operate a local business by yourself, but will allow you to be a passive investor in a local business. Several countries in Asia come to mind.

If you have expertise in a particular business field and such businesses exist in the country you have chosen, this can be a very good way to go. It is better not to have too many variables – new country, new home, old business may be better than new country, new home, and new business. Personal relationships rather than written contracts take precedence in much of the world, so it is important to know your local partner(s) extremely well. This option, if done right, can allow you to share in the profits of a growing business, without having to be around all the time. This might also be the easiest way to get ripped off if you deal with the wrong people or do not know what you are doing.

Accurate information is imperative. Particularly accurate accounting information. You have to know the numbers, and how accounting principles locally vary from those in the states. It would pay you to spend some time with a reliable local accountant, to have them explain the local accounting principles. If you have a substantial amount of money at stake in a business, it might pay you to have a local, reliable accountant on retainer. Professionals are normally most loyal to those who pay them. If you pay your own accountant, and you have a good relationship with him, and he is not related to anyone in the company you have invested in, chances are he will be loyal to you.

Another important issue would be to know whether you are permitted to move your profits out of the country without restriction. Most countries allow this, but a few countries have banking restrictions. In countries where it is somewhat difficult to do business and capital is scarce and expensive, being a partner in a local business can be very profitable. You have got a local partner who knows how to deal with the bureaucracy, labor laws, employees and so on, and a very high return since capital is highly rewarded due to its scarcity. It can be a real win-win situation.

Investing in local stock markets.

The easiest way to invest in stock markets overseas would be via a country-specific mutual fund or ETF (exchange traded fund). Barclays Global Investors has a group of ETFs called iShares. They have a number of sector funds, and also a number of country-specific funds in Asia, Latin America, and Europe. ETFconnect.com has a listing of a large number of ETFs, a large number of which are country-specific funds. ETF fees are often lower than mutual fund fees, and there is no minimum holding period. Just because stocks are overseas does not make them a bargain, but 75% of the world economy is outside the U.S. It makes sense to put your money in more than one place. When the U.S. is hurting, other countries may still be growing.

ADR.com has information on foreign stocks which trade as American Depositary Receipts. If you are interested in individual foreign stocks, ADRs can be a good bet. The larger fund groups like Vanguard and Fidelity offer some mutual funds and ETF’s for regions. Vanguard, e.g., has a Pacific fund, which includes stocks from Japan, Australia, Hong Kong and Singapore. Matthews Asia-Pacific specializes in Asian stocks with their mutual funds. Some foreign stocks are also available via the over-the-counter market. Not all U.S. brokers handle OTC trades, so you may need to open an account with a broker who does. Keep in mind that OTC stocks often are less liquid, and may not have the ready market that is available on the larger exchanges.

If you do not mind wading through a lot of data and charts, the book, Anatomy of the Bear by Russell Napier is a great book. It explains how stock markets move from undervaluation to overvaluation and back. Most people have heard the mantra “it doesn’t matter when you buy if you hold for the long term.” It might matter if you buy at the top of the market, and it takes 10 years (or more) just to come back to even money. This happened in the U.S. from 1965 to 1982 and 1929 to 1954.

Economist.com has a lot of information about economic, social and political conditions all over the world. You probably will not find investment ideas, but you might find industries or countries that are up and coming.

If you are in a country and are able to set up a local brokerage account, you may be able to purchase stocks which are not readily available outside the country. Many of these stocks will not be covered by an army of analysts – you will have to do more of your own research. The market may not be so liquid, with sales taking longer and with a bigger spreads between buy and sell prices. The upside is that you may find stocks which are significantly underpriced. If you can buy a stock for 4 times earnings that pays a 10% cash dividend, and has done so consistently over a period of years, then obscurity may not be such a bad thing. Many locally traded stocks will be listed in the larger local newspapers.

Dealing with local professionals.

In most countries, apart from the very poorest, you should be able to find lawyers, accountants, real estate professionals, and investment advisors. A word to the wise - spending money up front on professionals will save you a lot of money later on. Lots of people get in a hurry and scrimp on professional advice, to their later regret. Better to get the best advice before you commit a large sum of money. A good attitude with investing is almost always, “Don’t be in a hurry.” People often underestimate the difficulties and overestimate the returns of a prospective investment.

You can normally find licensed lawyers and accountants, but in many places real estate professionals are unregulated and unlicensed. Buyer beware. Regulation of stockbrokers is also very loose in many countries, particularly developing countries. Many may be honest, but you should investigate who you plan to deal with. In many of the former Communist countries, accounting and law separate from the government are a fairly recent phenomenon. Look for someone with more recent training. You will probably need a local accountant to help you with your local taxes. You will probably need a local attorney at least at first to help when you set up or purchase your business. One of these people should also bring you up to speed on local employment law, if that applies.

In dealing with a real estate professional, it is wise to seek verification of everything you are told. If you buy a property, they have your money and you have the property. In most countries, that is the end of the story. If you were rooked, too bad, you should have done your homework in advance. In most countries, your lawyer will be your right hand man in any real estate transaction. He/she should be able to tell you about any issues related to the title, contract issues, etc. Your lawyer should write the contract for purchase, and should have any relevant papers translated into English, if you are not literate in the local language. He/she or your accountant should also inform you of any tax issues related to the property.

With a stock broker, the main issues would be integrity, and knowledge of local markets, industries, and companies. The right broker can fill you in on opportunities that few people know about. Some important questions to your broker would include who their custodian for trades is, how long it takes to execute trades, the length of the clearing period, commission amounts, etc. Keep in mind that stock brokers are salesmen and not analysts, but they still may have valuable information.

Import-export businesses.

Import-export is basically just moving goods around from where they are worth less, to where they are worth more. This might be as simple as listing things for sale on eBay that you have picked up locally, to moving container loads of manufactured products.

In many developing countries arts and crafts are very cheap, as are most products which are labor intensive. So these may be good candidates for export. Conversely, in many developing countries manufactured products are relatively expensive – making them good candidates for import, provided you can get them through customs and the import duties are not too high. Some things are as basic as ink cartridges for printers or digital music players. You will notice after a while the things which are much more expensive locally than they are back in the States.

I-E has a lot of dimensions. Many Costa Ricans go to Panama to buy things for their shops, since Panama has the Colon Free Trade Zone, and products are much cheaper there. Some people buy crafts on their overseas trips and sell them when they get home. People from Singapore cross over to Malaysia to the various free trade zones to buy alcohol. These are small scale examples, but the same concept applies on a larger scale.

If you have some interest in importing or exporting, find out what the applicable customs duties are for the products you are interested in. You may be able to import or export small quantities in your bags without paying customs duties. The most important thing in I-E is to have a market for your products, at a price that allows you to make a profit. Get a handle on the market and the profit margins before you drop a lot of money on product. Try some test marketing with small quantities first, and see how they sell. Sell something that you can make a profit on. It may or may not be something you “like”. It could be something really mundane that is in short supply or something more unique.


As a U.S. citizen you are supposed to pay tax on any worldwide income earned – although you are allowed to exclude up to a certain amount if you meet certain tests – like spending at least 330 days overseas within a 12 month period. Publication 54 from the IRS is the relevant document to find out the treatment of overseas income. When it comes to doing your return you may want to retain the services of a CPA, at least for the first year.

To deal with taxes overseas you should retain a local accountant. If you have only a small off-the-books income from a business you run casually, taxes may not be an issue. But if you have employees, a business location, or sell to the public, e.g., you do not want to run afoul of the local tax authorities. If you have an income that is difficult to trace, then it is a judgement call.

There is all sorts of information out there on offshore tax havens, about which I will say this: What the IRS may allow them for big companies they may try to disallow for smaller fry. They can slap you hard for back taxes, interest and penalties if they deem that you are evading or otherwise underpaying taxes. Sometimes they attach all your assets if you do not pay up. If you do not mind the risk, fine, but you are warned.

In most countries you will find there are fewer taxes than in the States. In most countries the states and cities do not levy their own separate taxes. For filing and paying your taxes, you may find it easier to e-file. Many tax software programs allow you to e-file and to pay both your annual taxes and estimated taxes electronically. In many countries the mail system is less than reliable, and using e-file is a lot cheaper than a courier service.

Local bank accounts and money issues.

In some countries (like Mexico) you can basically walk in off the street and open up a bank account. In others (like Costa Rica) you have to have residency to open an account. In many countries you will get better service with a private bank than with a state-owned bank, but not always. Ask around locally and visit several banks to get a handle on which would suit your needs best. Private banks may have fewer hoops to jump through in many cases.

If you plan to open or operate a local business, ask about all the business banking services. Ask about credit card merchant fees, cards which are accepted, length of time to clear local and foreign checks, minimum balances, and monthly fees. If you anticipate ever needing to borrow money, check on interest rates, terms, etc. The situation on interest rates in developing countries has changed dramatically in the last few years. In many places local interest rates have dropped drastically. It might be a lot easier to borrow locally than seeking a business loan back in the States, as most banks in the States will not lend on overseas assets.

Evaluating currency risk.

Currency risk is the risk that you receive money in one currency, which weakens against another currency in which you have liabilities. Let us say you borrow money in dollars to invest in a hotel in country X. If country X’s currency then drops 35% against the dollar over a few months, you still owe the dollars, but your hotel is worth 35% less, other things being equal. Currency risk should not be much of an issue unless you are borrowing in one currency to invest in assets tied to a different currency, or if you are doing export/import. If you have a lot of money in a bank in a country with a falling currency it would also be an issue.

In many countries with unstable currencies local interest rates can be very high. That 17% interest you are earning looks great, but if the currency drops 20% a year against the dollar you are actually losing ground. A fairly new phenomenon is the appreciation of many developing country currencies against the dollar.

One other word of advice – the economies of many Latin American countries depend heavily on remittances from workers in the U.S. – in particular Mexico and several of the Central American countries. When the U.S. economy slows down, remittances drop, and the local currency can also drop in value.

Yes does not always mean yes, no is not always no.

Business culture in the States basically dictates that people say yes when they mean yes, and no when they mean no. In many countries this is not considered polite. So people give you an answer to a question out of politeness, even when they have no idea of the right answer. Or they say no to something out of politeness, since the standard is to say no three times before you say yes in some places. This kind of thing will drive you nuts until you figure out the local etiquette.

I have noticed this in many places. In Mexico, I ask four locals for directions to the same place and get four different answers. They might not know the answer, but they were being polite. Most countries do not have “cultural consultants” to tip you off to all the local quirks, so ask other expatriates or even your lawyer, or any local people you are on good terms with. Misunderstandings are easy to clear up if you know what the local cultural forms are.

Developing right relationships.

A large part of your success in any sort of business venture overseas will depend on trusting the right people. And on developing the right relationships with those people you trust. In the U.S. we pay people to be trustworthy and to do business with us. In many parts of the world, money is not the universal language. You have to have a good relationship with people, then you can do business. But not until then.

Often people will not tell you about real problems right away, especially if you do not have a good relationship with them. In many parts of the world, U.S. business culture is considered harsh and uncaring. So it is important not to leave your local employees, customers and suppliers with this impression. If you have a good relationship with them, they will tend to inform you about problems before they become a crisis.

Many people have difficulties in their overseas ventures because they expect things to work the same in other countries as they do at home. They expect people to act in similar ways, even though they consciously know that things are different. If you put some conscious effort into dealing with people on their terms, you may find that it eases your transition into the local economy and society.

Also keep in mind that contracts in other countries do not always have the same effect that they do in the States. Some contracts may be enforceable, some may not be. And regardless, as in the U.S., it may cost too much and take too long to enforce them anyway. The key is to know who you are dealing with, and to have good relationships with them. And watch people like a hawk until you know them well!

Link here.


In an effort to enhance its position in the offshore financial services industry, the Government of Antigua and Barbuda has retained the New York law firm of Rubinstein & Rubinstein, LLP to redraft its asset protection, trust and foundation laws. Rubinstein has already submitted the Antigua International Trust Act, International Foundations Act, International LLC Act and Corporate Management and Trust Service Providers Act to the Antigua Ministries of Justice and Finance for presentation to the Parliament of Antigua.

Rubinstein balanced regulation of trust and corporate service providers with the need for confidentiality. Antiguan trustees and corporate service providers will be carefully regulated, and will be insured and bonded, thus ensuring client security and protection. At the same time, trustees and corporate service providers will be prohibited from disclosing any information about trust, foundation or corporate activities and assets, except pursuant to treaty covering investigation of serious crimes.

The new legislation makes it nearly impossible for foreign creditors to reach assets protected by Antigua trusts or companies. A creditor must first win a foreign judgment, then re-litigate his claim anew in Antigua and pay a fee to the Antigua court prior to commencing his action. Contingency fees are not permitted in Antigua. The new laws include very short statutes of limitations which only allow the creditor to file a claim within two years from his cause of action or one year from execution of the trust or foundation instrument. Finally, the new laws create an onerous standard of proof “beyond a reasonable doubt,” which limits a creditor’s ability to prove claims of fraudulent conveyance.

Most importantly, in the new laws Rubinstein has created strong protections against asset repatriation, along with anti-alienation/spendthrift provisions, which prevent foreign courts and creditors from reaching assets safeguarded in Antigua. Unlike any other jurisdiction, anti-duress provisions are explicitly built into the Antigua statutes, prohibiting an Antigua trustee from honoring any request made pursuant to foreign court order. Thus, a person establishing an Antigua trust will have a defense of “impossibility” to any contempt citation which will not be “self-created”. Moreover, the new laws do not recognize foreign marital rights or forced heirship rights, ensuring that only beneficiaries specifically designated by a client will inherit or otherwise receive assets.

Once the new laws are passed, according to Rubinstein, Antigua and Barbuda will offer the most complete asset protection and asset security in the world, surpassing the Cayman Islands, Nevis, the Cook Islands and all other offshore jurisdictions.

Link here.
How about Jamaica as an offshore financial center? – link.


Consider the plight of Raymond Przybilinski. He saved $521,000 from a lifetime of driving trucks, working overtime when he could, and playing the piano or accordion late into the evenings at weddings, hotel bars, and social clubs. More than half of the family nest egg disappeared on February 2 as state banking regulators seized the bank in which he had deposited his savings, citing “unsafe and unsound” operations. When Mr. Przybilinski tried to take his money out, the man in charge of the bank’s assets informed him that there was only $200,000 left to withdraw – the amount protected by the federal government. Here are some school-of-hard-knocks lessons from Mr. Przybilinski’s misfortune:

  1. If a bank is offering above market rate interest on CDs and deposits, there is a reason behind it. That reason is risk. And with excessive risk comes eventual disaster.
  2. With credit spreads widening, margin calls being issued, and absurd lending to build condos in Florida and other places smack in the face of record inventories, there are going to be more bank failures like this.
  3. Know and understand the FDIC limits, or your life savings can be wiped out.
  4. If you have money in a bank in excess of the FDIC limits, do something about it now, while you can.

On August 14, the USA Today headline read “Sentinel Freezes Assets of $1.5 Billion Fund.” What the headline does not say is that Sentinel is a money market fund. Sentinel Management Group froze assets in a $1.5 billion fund, saying too many investors are trying to withdraw their money. “We have never experienced a situation quite like this one,” Sentinel Management said. “Liquidity has dried up all over the Street.”

If you are looking for the source of the problem, there you go. Sentinel thought that just because it has not seen something yet, it could not happen. This is, in essence, the same thing that happened to the models at Moody’s, Fitch, and the S&P, and various quant models. Sentinel asked the U.S. Commodity Futures Trading Commission for permissions to halt redemptions. The request was denied. There were some interesting frequently asked questions on Sentinel’s Web site.

  1. How can Sentinel consistently earn high yields on short-term investments without taking excessive risk?
  2. How can I be sure my money is safe at Sentinel?
  3. That is history. How can Sentinel ensure that such a record will continue?
  4. Exactly what happens to the cash invested by Sentinel?

Proposed new answers:

  1. We cannot. No one else can, either. That is what risk is all about.
  2. You cannot. Liquidity has dried up and we just got caught. That is why we halted redemptions.
  3. Part of our original answer was, “Sentinel is registered with three regulatory agencies: the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the Congressionally chartered self-regulatory body, the National Futures Association (NFA).” You can easily see that now does not mean much.
  4. Sentinel clients have an indirect, undivided pro rata ownership interest in a pool of high-quality, liquid securities. Sentinel’s Treasury Only Portfolio (TOP) consists of direct obligations of the U.S. Treasury. The 125 Portfolio and Prime Portfolio consist of money market securities issued by U.S. government agencies, corporations, or short-term bank time deposits, all of which meet Sentinel’s requirements for liquidity and low risk. Those most at risk put their faith in the “125 Portfolio”, and that is where the big problems are.

While Sentinel does not like the current bids for the fund’s assets, there is no guarantee (or even likelihood) that the market is going to think more of those assets tomorrow. Should Sentinel have seen this coming? I think so, or at least it should have been alert to the possibility. Instead, it stuck with a now failed model that offers these excuses:

Individual investors need to examine the safety of the investments that they believe to be safe. They need to read the fine print on their “guaranteed” investments. They need to read (or, at least, to understand) the statements on their money market accounts that stipulate in their prospectus very clearly that they can LOSE money and that NAVs (net asset values) can fall below a dollar. Unfortunately, most folks do not care about “the fine print” until it is too late.

Free tips:

Link here.


In late July the Vanguard group sent 170,000 customers a form letter innocuously labeled “Change in beneficiary policy will help you simplify your planning.” A more candid heading would have been “Warning! Unless you act, we are about to change who gets your IRAs when you die.”

Vanguard has decided that, as of mid-September, it will require customers to use identical beneficiaries for all IRAs of the same type. All your IRAs holding money rolled from employer pension plans count as the same type and must have the same beneficiaries. Traditional IRAs, both pretax and aftertax, are a second type. Roth IRAs are a third. If you are one of 170,000 customers who now have different beneficiaries named for separate IRAs of the same type or different beneficiaries for different mutual funds within a single IRA, Vanguard will apply the newest beneficiary form to all your IRAs of one type – unless you contact Vanguard and direct otherwise. If two forms were submitted at the same time, Vanguard will treat the one it processed later as newer. This is crucial, since it is the form – not your will – that determines who gets your IRAs.

Say you have named your older child primary beneficiary of one rollover IRA and your younger child primary beneficiary of another. If you do not read your mail carefully, or were on vacation or in the hospital when the letter came, and you die without contacting Vanguard, one of your kids could be done out of his IRA inheritance. When Forbes showed Vanguard’s letter to IRA experts, they were outraged. “This borders on the unconscionable,” fumed Green Bay, Wisconsin CPA Robert Keebler. “I don’t see how they can change the beneficiaries on your accounts without your consent,” said Boston lawyer Natalie Choate.

Colin Kelton, the Vanguard official who signed the July letter, argues customers are getting adequate advance notice and will get a second letter in September alerting them that the beneficiary change has been made. What if clients pick up the phone and ask to keep different beneficiaries for separate IRAs of the same type? In two customer service calls Forbes was told that was impossible. “There is no way to override the computer,” declared one rep. He added that Vanguard is “a low-cost provider” and permitting different beneficiaries would increase its costs.

The other rep insisted that Vanguard’s competitors would not allow it either. Not so. Fidelity and Charles Schwab said clients can name different heirs for different accounts of the same type. So did American Funds, Citibank, E-Trade, Janus, Merrill Lynch, MFS and Wachovia. Of those we surveyed, only T. Rowe Price does not allow it. Kelton said that Vanguard might make an exception if a customer could show different beneficiaries were needed. But he could not think of any examples where they would be, and those we offered – all cases where lawyers advise it – did not qualify, he said. What if you want to leave one IRA to charity and one to your kids or one to your kids from your first marriage and one to your current spouse? Kelton says a customer should indicate on the form the percentage each heir is to get and the executor of his estate can split the IRA up.

The IRS has allowed such postmortem IRA splits since 2002. But the executor must meet strict deadlines. If, for example, an IRA going partly to charity is not split in time, other heirs lose the ability to stretch out payouts and tax deferral over their own lives. So many advisers recommend establishing separate IRAs for separate beneficiaries before your death.

What if you want to invest IRA funds for different beneficiaries differently, based on their own assets or taste for risk? Will Vanguard allow different beneficiary forms in that case? No, says Kelton, because it could drag Vanguard into family disputes, and curbing litigation is one reason it is changing its policy. The real problem is that Vanguard has allowed an account owner to name one beneficiary for one mutual fund and a different beneficiary for another fund within a single IRA. Later, the beneficiary of a dud fund might argue that when the IRA was set up, his fund had 50% of the money and that the account owner really meant to leave him 50% of the whole account. But that is not a problem with separate beneficiaries for separate accounts. Choate speculates that Vanguard could end up getting sued anyway – by beneficiaries who were accidentally bumped.

Link here.


Claim they all helped “loot” bankrupt company’s assets.

Refco Litigation Trusts have filed a lawsuit in Chicago charging that Refco Inc.’s legal, accounting and financial advisers knowingly assisted Refco insiders in “looting” Refco’s assets. Refco filed for Chapter 11 protection from creditors on October 17, 2006, one week after the firm said former chief executive Phillip Bennett had hidden $430 million of bad debt.

The lawsuit named Mayer, Brown, Rowe & Maw LLP, Grant Thornton LLP, Ernst & Young LLP, PricewaterhouseCoopers, Credit Suisse Securities (USA), Banc of America, Deutsche Bank Securities, certain loan participants, and the Refco insiders as defendants. The lawsuit is seeking over $2 billion in damages and penalties for what it claims is the defendants’ role in committing and aiding the Refco insider fraud, and for alleged breaches of fiduciary duty.

The two Refco Litigation Trusts were created under the Refco Plan of Liquidation. The primary purpose of the Trusts is to pursue all Refco estate claims and claims of certain electing creditors against third parties, with recoveries to be distributed in accordance with the terms of the Refco Plan of Liquidation.

According to a statement released by the Refco Litigation Trusts, “The lawsuit provides a thorough description of the more than seven year conspiracy to conceal Refco’s trading losses, true operating expenses, marginal performance and theft of assets belonging to Refco’s unregulated broker-dealer, Refco Capital Markets, Ltd. The lawsuit alleges that Refco’s fraudulent scheme ‘only could have worked with the active assistance of Refco’s cadre of outside auditors, professionals and advisers’ – a veritable ‘who’s who’ of some of the most trusted names in corporate finance, law and accounting, whose reputations and substantial assistance aided the Refco insiders in stripping out billions of dollars in Refco assets.”

The statement concluded that “[T]he professional defendants orchestrated a massive cash-out, whereby they aided the insiders in cashing-out, while at the same time lining their own pockets with substantial professional fees. The purpose of the entire scheme, the lawsuit alleges, was to allow the Refco’s insiders to sell their interests at fraudulently inflated prices.”

Link here.


Amanda Ajuluchuku sought $5 billion in damages when she sued Bank of America in North Carolina in 2005. Her claim? The bank lost a $200 check, causing her to suffer “panic and anxiety attacks, severe dizzy spells, headaches, and cold chills.” Her rambling complaint described, among other things, her fiancé’s marriage proposal, her love of hotels and her intent to use the proceeds of the lawsuit “to cater to the needs of the underprivileged children globally.”

The bank made the mistake of failing to respond to the suit promptly, opening it to an adverse judgment. So it settled for $3,000. But Ajuluchuku did not go away. She sued the bank three more times in three different states – claiming that when she tried to cash the settlement check, she was thrown out of the bank and subjected to other “acts of discrimination, contempt and terrorism.” Ajuluchuku has filed at least 219 suits in federal courts around the country over the past four years. Ambulance-chasing lawyers are not to blame for this. She represents herself.

Some 27% of all federal suits, and 54% of appeals, are filed by people representing themselves. In the early 1990s cases in which the plaintiff acted as his own lawyer (“pro se”, in courthouse lingo) accounted for 21% of suits filed in 10 federal district courts. In California state courts the number of self-represented litigants has tripled over the past 20 years, according to HALT, a legal reform organization.

Some pro se litigants have solid claims, some do not. A significant fraction of them are nuts. In a study of pro se suits brought between 1995 and 1999 in the federal district court in Manhattan, attorney Jonathan Rosenbloom found that a “disturbing” number of pro se cases were dismissed for asserting claims that were “delusional” or “wholly incredible”. Their filings tend to be voluminous with densely packed writing, full of irrelevancies and liberal use of underlining, capitalization and exclamation marks. And conspiracies exist everywhere to thwart them. You do not want to be in their path. In 2005, 57-year-old Bart Ross killed the husband and mother of Chicago federal judge Joan Lefkow, and later himself, after she had dismissed his pro se suit stemming from a malpractice case against an Illinois medical center.

Eli Lilly has spent close to $1 million defending claims brought by serial pro se plaintiff Holli Lundahl. Lilly had to hire nine litigators and five law firms to draft dozens of briefs, attend multiple court hearings and handle appeals all the way up to the U.S. Supreme Court. In a 22-page handwritten letter, Lundahl says that Lilly targeted her for being a whistleblower and contends she has been “horribly abused through the legal system, not the other way around.”

Defending loony cases can be a financial strain for a small business, says Theodore Frank, head of the American Enterprise Institute’s Liability Project. He cites the infamous $54 million pro se suit (filed by a judge, no less) over a lost pair of pants. It cost Washington, D.C. dry cleaner owners Jin and Soo Chung more than $100,000 to fight the claim.

Often a pro se claim costs more to contest than a lawyer-filed claim because the complaint is incoherent and vague, says New York litigator Steven Cooper. So the defense lawyer has to guess what the plaintiff is getting at, addressing every conceivable argument. Judges tend to bend over backward to ensure that pro se plaintiffs get their day in court. Filing fees are waived in hardship cases. Courts have set up pro se offices to help people file and prepare paperwork. Chrysler assistant general counsel Steven Hantler says these kinds of lawsuits tend to linger on dockets because of judges’ sympathy for pro se plaintiffs, particularly those who are delusional. Corporations, as a result, often make the tactical decision to settle rather than litigate.

Settlements, alas, merely encourage the many pro se plaintiffs who are repeat filers. What might work? Susan Stefan, an expert in mental disability law, suggests that companies apologize for any wrongdoing that may have triggered the plaintiff’s obsessive behavior (20 states now have laws that let doctors apologize for bad outcomes without fear that their words will be used against them in court). Pro se offices could also benefit from training to deal with the mentally ill, says Stefan.

Link here.
A sampling of more outrageous pro se suits – link.


I have now been driving for 50 years. Seven or eight years ago, I got my first ticket. It was for going 40 in a 25 mph school zone. This is allowable when the school is out of session, which I mistakenly thought it was at the end of June. But despite its being deserted, I was trapped. The hard-hearted officer refused any entreaty to keep intact my unbroken skein of police-free and accident-free driving. He was more interested in the $100 fine. He pointed to the wire fence around the empty playground, not yet barbed wire, and warned me that children could climb over it and run into the street in front of demon drivers like me. I bought a radar detector.

Safe driving means adapting to the conditions of the road at the time one is driving. On the same road months earlier, I drove much more slowly because there was a young biker ahead. And a good thing it was. With his earphone supplying him with sound, he was oblivious to my car as he swerved across the road in front of me. I was able to brake safely. He did not even respond to horn blasts.

Great Britain has an extensive camera and speed-monitoring surveillance system on its roads and streets. This amounts to a stealth tax that brings in hundreds of millions of pounds a year. It keeps drivers preoccupied with their speedometers, which diverts their attention from where it belongs, on road conditions. The result of the camera surveillance program has been to stop the long-term downward trend in fatal accidents. As penalties and prosecutions using speed cameras rise, fatalities not only do not drop, they are higher than what they otherwise would have been. The money spent on cameras takes away from money spent on appropriate human monitoring by police and improving roads to make them less accident-prone.

Driving can be a joyful experience, although traffic due to the government’s road mismanagement greatly diminishes the pleasure of it. But knowing that one is being constantly monitored and may suffer a penalty has to erase any residual pleasure from driving. Do social planners consider how much pleasure is curtailed by excessive monitoring of individuals driving their cars? My doubt that they do is monumental, and looking at a selection of Canadian web pages on social planning does nothing to alleviate my doubt. Monitoring individual driving is not simply a tax on driving. It is a tax on the pleasure of living and a tax on the pleasure of privacy.

As anyone who travels by air knows, the out-of-pocket costs of air travel are only the tip of the iceberg. Air travel used to be pleasurable. No longer. It looks as if the Department of Homeland Security means to make automobile travel as unpleasurable as air travel. Eventually, they will get down to internal travel passes as they morph into a homegrown Gestapo.

Is there any doubt that surveillance is a foot in the door leading to a big brother society? Cuba and other totalitarian societies operate with paid informants as well as neighbors and children ratting on parents. In this technological age, the authorities will try to accomplish the same using technology. All dogs and pets will have chips, and then all human beings, unless we stop this now. How do we do that? I guess we will all have to burn our ID cards or snip them in half or pass a strong magnet over them.

Pleasure and privacy are not a matter of teasing out abstruse rights from axiomatic foundations. They may not be there. Nor are they a matter that needs empirical study. Do we need to fund research to show that human beings value privacy and freedom of action? Such a study loses the battle up front because it assumes that we cannot act without studying everything, and that assumes that to study everything we must have a crew of social scientists who will study it for us, and in turn they are assumed to know or be able to measure what is good for us.

Jurisprudence may have trouble discovering a lawful area of privacy, but that does not mean that privacy is not valuable to us. Jesus enjoined privacy in prayer and interacted with his disciples privately on any number of occasions. Privacy is as basic as one’s good name. It is as basic as inhabiting one’s body. We need instinctively and automatically to defend the integrity of all of these from intrusions that threaten them or undermine them: our good name, our privacy, and the safety of our persons.

Link here.


From this point on, you will enjoy no privileges of rank ... no privileges of person. From now on, I will refer to you only as ‘human’. You have no other identity.

I have no way of knowing whether that pronouncement, or something very much like it, was uttered by José Padilla’s captors after he was taken into military custody five years ago. But it certainly summarizes the Bush Regime’s view of Padilla, an American citizen (however disreputable) who has been stripped of all legal protection, not only of his due process rights but also of the basic integrity of his person.

Padilla, we were told in 2002, was the key operative in an al-Qaeda plot to detonate a radiological bomb. The “evidence” against him was provided by two identified terrorists who implicated him after being tortured. A third “witness” likewise named Padilla after being tortured extensively by CIA-aligned thugs in Morocco. Among the methods used to break the “witness” was the expert use of razor blades to make tiny but exquisitely painful incisions all over his body – including his genitals.

After the bloody-handed tyrant who defiles the Oval Office designated Padilla an “unlawful enemy combatant,” the Bush Regime consigned this American citizen to a Naval brig in South Carolina and systematically worked to destroy his will through psychological torture. A “declaration” filed by a political hack named Michael Mobbs was presented as the functional equivalent of a grand jury indictment, and a separate “declaration” by Defense Intelligence Agency head Vice Admiral Lowell E. Jacoby was offered to explain why Padilla could not be permitted due process of any kind, including conventional legal representation.

The key to extracting intelligence from Padilla, said Jacoby, was “creating an atmosphere of dependency and trust between the subject and interrogator. ... Anything that threatens the perceived dependency and trust between the subject and interrogator directly threatens the value of interrogation as an intelligence-gathering tool.”

How are we to know that Padilla was a valuable intelligence source about al-Qaeda, rather than, say, a trivial gang-banger from Chicago whose only serious professional training came at Taco Bell? According to Jacoby, it is enough for us to know that the Grand and Glorious Decider – and let all stand hushed in awe-struck reverence at the mention of his name – has “determined” that this is so.

Until late 2005, the Regime insisted that Padilla had to be held in military custody indefinitely, because permitting him to be tried in our court system would undermine national security. But Bush and his comrades eventually released Padilla for trial when it became clear that the matter was headed for the Supreme Court, and it was possible that the administration could lose. This would imperil the asserted presidential power to designate any U.S. citizen an “enemy combatant” and imprison him in perpetuity. So the Regime condescended to permit Padilla to have a trial – on charges that had nothing to do with any of the matters supposedly verified by their “effective intelligence gathering efforts” – you know, waterboarding, sexual mutilation, that kind of wholesome stuff.

Padilla’s trial in Miami is winding down. There has been no mention of a “dirty bomb” plot. Prosecutors have made no mention of Padilla’s personal involvement in any terrorist plot of any kind. He may be – should be – acquitted. If so, notes the Christian Science Monitor, the Regime may very well “try to return him to the brig”. If that were to happen, armed insurrection for the purpose of extracting Bush and Cheney from power would not be an inappropriate response. After all, what other recourse would remain if our rulers can simply ignore an acquittal, and imprison a citizen found innocent by his peers?

The former – seizure of Padilla despite an acquittal – may happen. The latter – a righteous armed uprising – will not, precisely because it is the course of action that would be chosen in such circumstances by the patriots who created our republic. With a scant handful of precious exceptions, we are not worthy heirs to the Founders’ legacy. As the Monitor observed, “Although civil libertarians protested Padilla’s detention without charge, there was no significant public outcry.”

I have no brief for José Padilla as an individual. He appears to be a standard-issue street thug who got the standard prison-upgrade to minor league Muslim fanatic. But there are gravities of loathsomeness, and Padilla is being used by people immeasurably more evil than he is to accomplish unspeakably vile ends.

Link here.

Padilla jury opens Pandora’s box.

José Padilla’s conviction on terrorism charges on August 16 was a victory, not for justice, but for the U.S. Justice (sic) Department’s theory that a U.S. citizen can be convicted, not because he committed a terrorist act but for allegedly harboring aspirations to commit such an act. By agreeing with the Justice (sic) Department’s theory, the incompetent Padilla Jury delivered a deadly blow to the rule of law and opened Pandora’s box.

Anglo-American law is a human achievement 800 years in the making. Over centuries law was transformed from a weapon in the hands of government into a shield of the people from unaccountable power. The Padilla Jury’s verdict turned law back into a weapon.

The jury, of course, had no idea of what was at stake. It was a patriotic jury that appeared in court with one row of jurors dressed in red, one in white, and one in blue (Peter Whoriskey, Washington Post, August 17, 2007). It was a jury primed to be psychologically and emotionally manipulated by federal prosecutors desperate for a conviction for which there was little, if any, supporting evidence. For the jury, patriotism required that they strike a blow for America against terrorism. No member of this jury was going to return home to accusations of letting off a person who has been portrayed as a terrorist in the U.S. media for five years.

There is little doubt that Padilla’s conviction, and probably also the convictions of the two co-defendants, is a terrible injustice. But the damage done goes far beyond the damage to the defendants. What the red, white, and blue “Padilla Jury” has done is to overthrow the U.S. Constitution and give us the rule of men. The U.S. Constitution and Anglo-American legal tradition prevent indictments, much less convictions, based on a prosecutor’s theory that a person wanted to commit a crime in the past or might want to in the future. Padilla has harmed no one. There is no evidence that he made an agreement with any party to harm anyone – whether for money or ideology or any reason.

The protective features of law had already been seriously eroded prior to the Bush regime’s assault on civil liberty in the name of “the war on terror”. The incompetent “Padilla Jury” has done Americans and their liberty far more damage than will ever be done by terrorists. The Padilla case was the way the Bush Justice (sic) Department implemented its strategy for taking away the legal principles that protect American citizens. Padilla is an American citizen. He was denied habeas corpus and his rights to an attorney and due process. He was tortured in an attempt to coerce him into self-incrimination. In treating Padilla in these ways, there is no doubt whatsoever that the Justice (sic) Department committed far more crimes than did Padilla. Unless the conviction is overturned on appeal, American liberty died in the “Padilla Jury’s” verdict.

Link here.


Could martial law ever become a reality in America? Some fear any nuclear, biological or chemical attack on U.S. soil might trigger just that. KSLA News 12 has discovered that the clergy would help the government with potentially their biggest problem. Us.

Charleton Heston’s now-famous speech before the National Rifle Association at a convention back in 2000 will forever be remembered as a stirring moment for all 2nd Amendment advocates. At the end of his remarks, Heston held up his antique rifle and told the crowd in his Moses-like voice, “over my cold, dead hands.” While Heston, then serving as the NRA President, made those remarks in response to calls for more gun control laws at the time, those words live on. Heston’s declaration captured a truly American value – an over-arching desire to protect our freedoms.

But gun confiscation is exactly what happened during the state of emergency following Hurricane Katrina in New Orleans, along with forced relocation. U.S. Troops also arrived, something far easier to do now, thanks to last year’s elimination of the 1878 Posse Comitatus act, which had forbid regular U.S. Army troops from policing on American soil.

If martial law were enacted here at home, like depicted in the movie The Siege, easing public fears and quelling dissent would be critical. And that is exactly what the “Clergy Response Team” helped accomplish in the wake of Katrina. Dr. Durell Tuberville serves as chaplain for the Shreveport Fire Department and the Caddo Sheriff’s Office. Tuberville said of the clergy team’s mission, “The primary thing that we say to anybody is, ‘let’s cooperate and get this thing over with and then we’ll settle the differences once the crisis is over.’”

Such clergy response teams would walk a tight-rope during martial law between the demands of the government on the one side, versus the wishes of the public on the other. For the clergy team, one of the biggest tools that they will have in helping calm the public down or to obey the law is the bible itself, specifically Romans 13. Dr. Tuberville elaborated, “Because the government’s established by the Lord, you know. And, that’s what we believe in the Christian faith. That’s what’s stated in the scripture.”

Link here.


Hillary Clinton is more and more likely to become the next President of the U.S. The price of her nomination contract on Intrade has jumped to the 60 area, meaning she has a 60% chance of winning the nomination. No one else is even close. The market thinks that Bill Richardson is likely to be her running mate. Speculators think that this ticket will win the election, although they are not as sure of that. They are very sure that Democrats will retain both Senate and House control.

A Clinton II presidency will affect taxes, stock and bond prices, dollar and gold prices, and a great deal else. Speculators and planners will be watching closely her every word in order to discern the material impacts of her possible policies. Long before she is elected, asset prices will begin to move in anticipation of potential legislation and policy changes. There are certain areas that Hillary Clinton is very interested in that will affect many Americans and the portfolios of many Americans. I will briefly summarize a few of Hillary’s currently indicated directions. I also cannot resist offering a few of my own jaundiced reflections. It is extremely difficult to watch multiple American tragedies unfolding before our eyes and not say something about them.

Political government under Hillary will grow larger, just as it has under just about every president ever elected. This process can go on for some time as there is a lot of ruin in a country. When major American establishment figures start talking different games than the ones we have been hearing for the last 100 years, then we will know that some real change is in the air. This has not happened yet.

In the meantime, the only consolation is that the State is running into diminishing returns. We can see this in the projected deficits to fund the government’s programs. We can see it in the difficulties and cutbacks in countries overseas. Economics is a constraint on how far the State can go. Clinton II will be operating under constraints. Unfortunately, they are not yet tight enough to prevent her from continuing the tragic policies of her predecessors and placing her own personal stamp upon them.

Link here.


The First Total War is a study of how France abandoned fraternity to celebrate the art of armed conflict.

Enlightenment thought, conceiving a society built on reason and justice, saw war as barbaric and exceptional. It dreamed of perpetual peace. In the early heady months of the French revolution, this fantastical ideal seemed possible. Robespierre, in a speech to the National Assembly in May 1790, saw “fraternity” as natural and France as the leading exponent of pacifism. Yet, within two years, his country had triggered one of the longest military bloodbaths in history – and, according to David A Bell, the fons et origo of “total war”. To be raised to this dubious rank, war has to mobilize a country’s entire resources, use industrial quantities of hardware, and define the enemy as criminal or sub-human, worthy only of “extermination” (Danton’s word). Bell’s thought-provoking epilogue suggests that George Bush’s self-perpetuating “war on terror” borrows the rhetoric to make virtually anyone the potential enemy.

Like the participants in the Congress of Vienna in 1815, Bell is nostalgic for the ancien régime and its tendency to salute the opposite chaps before galloping at them in silk stockings. Making war was as normal, in the gallant 18th century, as making love. It was still “an indescribable bloody horror,” but kept on a leash. Rather than lose their costly professionals when the odds were poor, generals withdrew them. Civilians were decently treated. If musket, saber or cannonball made the usual mess of soft flesh, there was none of the rabid bloodlust of the previous century’s religious conflicts.

All this, Bell reminds us, was pulverized by the revolution and its sunny faith in humanity. The “military” became separated from the “civilian” sphere. Conscription meant not only an endless cheap supply of cannon fodder but the subordination of civilian values to a superior “militarism” (a new concept). And war was revered as an individual test of worth – most vividly in the person of Napoleon, but also in the memoirs of ordinary soldiers now pouring from the presses. A super-size conflict might even end war itself, it was thought. More controversially, Bell ascribes the revolution’s embrace of perpetual warfare to cultural rather than geopolitical causes (the need to defend itself, for instance).

The Enlightenment regarded warfare as “fundamentally irrational”, with Voltaire calling it “a million assassins in uniform”. It was a primitive “remnant” of barbarism, a social pathology to be eradicated in a Europe where all were brothers – at least in commerce. Bell notes how Immanuel Kant disagreed, seeing the goal of peace as better conforming to moral laws rather than to historical inevitability. Meanwhile, the advocates of war were finding a shadow argument based on classical models: civilization as a disease, war as a vaccine. For these powerful currents of thought to become embodied in political reality, where the pacifist line would undergo a kind of double-helix twist into horror, all that was needed was the destruction of the aristocratic system. In 1789, the French obliged.

However loaded his general thesis, Bell’s account of the early, epoch-changing debates in the stuffy air of the National Assembly’s converted riding arena is clear and gripping. The tumultuous assembly of May 1790 concluded with a declaration of peace, but with the proviso that if France had to fight it would “defend itself with newly righteous fury.” “Out of a toxic mixture of ignorance, wishful thinking and pure, naked ambition,” writes Bell, “the Girondins were pushing France toward wars that would last for 23 years and take millions of lives.”

War was imagined as bringing about, in Bell’s words, “an extraordinary break in human history.” With it came delusional fantasies of romantic self-expression that condemned hundreds of thousands to grisly ends. Total war, as opposed to “limited” war, was born. It was now in the hands of glacial types like Saint-Just, whose savage methods, coupled with France’s demographic advantage, led to the republic’s astonishing string of victories. In 1793, when the Catholic and royalist Vendée area rose up in internal rebellion, the republic’s response was certainly total. An estimated 250,000 men, women and children perished “out of a principle of humanity,” as General Carrier put it during the mass drownings at Nantes. The “hell columns” anticipated the SS by a century and a half – yet Bell points out that the names of some of the worst butchers still adorn the Arc de Triomphe. For Bell, it is the place where total war “was first revealed to its full, gruesome extent.”

The second half of the book is devoted to Napoleon himself, a much more familiar story. Millions died as a direct result of this ruthless little genius. Bell makes clear that the total war that set his career in motion, and which he in turn encouraged and expanded to unique and grisly proportions, had its own infernal logic. In reaction, the trampled German powers were converting the idea of warfare into a sublime act of regeneration – a fantasy that stuck. As Bell reminds us, in his vivid description of the 1812 retreat from Moscow, “Total war ends with an army transformed into a starving, skeletal, lice-ridden, barely human mass, covered in motley rags, its eyes blank and hopeless.”

Link here.
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