Offshore News Digest for Week of December 24, 2007

2008: YEAR OF RECKONING?

The remarkable expansion in World output since 2003 has existed in tandem with so-called global imbalances – huge current account deficits in the U.S. matched by surpluses practically everywhere else. Foreigners have invested in dollar-denominated assets, and this inflow of money has financed Americans’ expenditure in excess of income, which is reflected in the U.S. current account deficit. This enlarged expenditure, along with the dynamism of the emerging economies, it has served to propel vigorous global demand and growth.

Admittedly, the American propensity to swallow other people’s savings – its role as the chief engine of global growth notwithstanding – has troubled many analysts. But for every apprehensive view of global imbalances, there have been one or more explanations of why those imbalances are not only good but also sustainable. These endorsements have relied on a host of theories;; the global savings glut, the U.S. as indispensable world banker, superior U.S. productivity and return on capital, the might of financial globalization, and even the “dark matter” in the U.S. international asset position. These theories all assume that because of its size, flexibility and institutional arrangements, the U.S. economy is capable of offering investors – foreign and domestic – a huge menu of assets with unbeatable risk-adjusted returns. Thus, the U.S. could maintain a substantial current account deficit for many years, and the global economy, to keep expanding, could count on the powerful U.S. engine.

Recently, however, the basic assumption underlying this belief has been called into question, as market confidence in a wide array of assets offered in U.S. financial markets abruptly collapsed. The meltdown of the subprime mortgage market, big banks moving huge, exotic assets onto their balance sheets and looking desperately (and expensively) for fresh capital, and the Federal Reserve cutting interest rates and seeking new ways to inject liquidity into markets are all part of the credit-crunch drama.

Recklessness on the part of some financial intermediaries and ratings agencies may have helped create the current mess, but we should not ignore the turmoil’s primary macroeconomic causes. Lax monetary and fiscal policies played into the U.S. economy’s seemingly insatiable absorption of the vast pool of foreign savings, which in turn was made possible by key rigidities in the other major countries’ economic policies. The underpricing of risky assets in which markets indulged themselves was the end result of too much liquidity chasing too few sound investment opportunities.

The questions now are, is the correction of the imbalances firmly under way, how far can it go, and what effect will it have on U.S. economic growth and the global economy? It seems clear that the adjustment has started, but there is much uncertainty over its likely extent and the cost it will impose in the short term on world economic activity. For one thing, we do not yet know how badly hurt the U.S. financial system really is. There could well be more skeletons in the banks’ and other intermediaries’ closets. In addition to watching the mortgage-backed security markets, we should pay close attention to the credit card and auto loan sectors. Keep in mind that owing to the dismal situation in the real estate market, consumers can no longer obtain liquidity from home equity. In fact, reputable experts fear that home prices could plunge an average of 15% or more before they start to recover.

A slowdown in the U.S. economy for 2008 now appears inescapable. And the probability of a serious recession cannot be ignored. At this point the best possible scenario would be one in which a mild reduction in GDP growth – in conjunction with a cheaper but not collapsed dollar brings about a sufficient correction in the U.S. current account deficit, without investors running away from dollar assets en masse. The fundamental policy challenge for the U.S. and others will be to avoid a more traumatic adjustment.

American authorities will have a tough job, considering that their policy margins are truly narrow. There is only so much that can be done with monetary policy without risking serious undesirable consequences, such as fueling inflationary expectations or creating severe moral hazard. Furthermore, calls to loosen fiscal policy in order to reduce the likelihood of a recession should be resisted. That course of action would worsen, not improve, the already weak national savings rate in the U.S., which is at the root of the ongoing tribulations.

The task will prove equally daunting in other places. It is not true that other significant economies have been decoupled from the American economy. Thanks to globalization, national economies have become more interdependent. This has been positive for growth but has also entailed downsides and has exacerbated policy challenges. Chief among these is the need for more, not less, macroeconomic policy coordination – an undertaking that unfortunately has been stubbornly resisted by today’s economic powers. Had the U.S. acted earlier to fix its fiscal deficit and raise domestic savings, had the EU and Japan made more progress in adopting pro-growth reforms, and had China boosted consumption and allowed more flexibility in its exchange rate, we would, with reasonable certainty, be cheering in a prosperous new year instead of fearing that 2008 will be a year of reckoning.

THE COMING COLLAPSE OF THE MODERN DAY BANKING SYSTEM

Staring into the abyss.

The stock market is now lurching downward into a “primary bear market”. There has been a steady deterioration in retail sales, commercial real estate, and the transports. The financial industry is going through a major retrenchment, losing more than 25% in aggregate capitalization since July. The real estate market is collapsing. California Gov. Arnold Schwarzenegger announced that he will declare a “fiscal emergency” in January and ask for more power to deal with the $14 billion budget shortfall from the meltdown in subprime lending.

Economists are beginning to publicly acknowledge what many market analysts have suspected for months – the nation’s economy is going into a tailspin. Morgan Stanley’s Asia Chairman, Stephen Roach, made this observation in a New York Times op-ed:

This recession will be deeper than the shallow contraction earlier in this decade. The dot-com-led downturn was set off by a collapse in business capital spending, which at its peak in 2000 accounted for only 13% of the country’s GDP. The current recession is all about the coming capitulation of the American consumer – whose spending now accounts for a record 72% of G.D.P.

Most people have no idea how grave the present situation is or the disaster the country will face if trillions of dollars of over-leveraged bonds and equities begin to unwind. There is a widespread belief that the stewards of the system - Bernanke and Paulson – can somehow steer the economy through this “rough patch” into calm waters. But they cannot, and the presumption shows a basic misunderstanding of how markets work. The Fed has no magical powers and will not allow itself to be crushed by standing in the path of a market-avalanche. As foreclosures and bankruptcies increase, stocks will crash and the fed will step aside to safety.

In the last few weeks, Bernanke and Paulson have tried a number of strategies that have failed. Bernanke’s 3/4 point cut to the Fed’s Funds rate has been a flop from start to finish. All it has done is weaken the dollar and trigger a wave of inflation. In fact, government figures now show energy prices are rising at 18.1% annually. Bernanke is apparently following Lenin’s supposed injunction – although there is no conclusive evidence he actually said it – that “the best way to destroy the Capitalist System is to debauch the currency.”

On December 12, the Federal Reserve initiated a “coordinated effort” with the Bank of Canada, the Bank of England, the European Central Bank, the and the Swiss National Bank to address the “elevated pressures in short-term funding of the markets.” Bernanke is trying to loosen the knot that has tightened Libor (London Interbank Offered Rate) rates in England and reduced lending between banks. The slowdown is hobbling growth and could send the world into a recessionary spiral. Bernanke’s “master plan” is little more than a cash giveaway to sinking banks.

Unfortunately, the Fed bailout has achieved nothing. Libor rates – which are presently at 7-year highs – have not come down at all. This is causing growing concern among the leaders of the Central Banks around the world, but there is really nothing they can do about it. The banks are hoarding cash to meet their capital requirements. They are trying to compensate for the loss of value to their (mortgage-backed) assets by increasing their reserves. At the same time, the system is clogged with trillions of dollars of bad paper which has brought lending to a halt. The huge injections of liquidity from the Fed have done nothing to improve lending or lower interbank rates. It has been a flop. The market is driving interest rates now. If the situation persists, the stock market will crash.

One of Britain’s leading economists, Peter Spencer, issued a warning, “The Government must suspend a set of key banking regulations at the heart of the current financial crisis or risk seeing the economy spiral towards a future that could make 1929 look like a walk in the park.”

Spencer is right. The banks do not have the money to loan to businesses or consumers because they are trying to raise more cash to meet their capital requirements on assets that continue to be downgraded. (The Fed may pay $0.85 on the dollar, but investors are unwilling to pay anything at all.) Spencer correctly assumes that the reason the banks have stopped lending is not because they “distrust” other banks, but because they are capital-strapped from all their “off balance sheets” shenanigans. If the Basel regulations are not modified, money markets will remain frozen, GDP will shrink, and there will be a wave of bank closings. The banks simply do not have the resources and there is going to be a day of reckoning.

Pimco’s Bill Gross put it like this: “What we are witnessing is essentially the breakdown of our modern day banking system.” Gross is right, but he only covers a small portion of the problem.

The economist Ludwig von Mises is more succinct in his analysis:

There is no means of avoiding the final collapse of a boom brought on by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

The basic problem originated with the Federal Reserve when former Fed chief Alan Greenspan lowered interest rates below the rate of inflation for 31 months straight which pumped trillions of dollars of low interest credit into the financial system and ignited a speculative frenzy in real estate. Greenspan has spent a great deal of time lately trying to avoid any blame for the catastrophe he created. He is a first-rate “buck passer”. Greenspan tiptoes through the well-documented facts of his tenure as Fed chief to absolve himself of any personal responsibility for the ensuing disaster.

Greenspan is a very sharp man. It is crazy to think he did not know what was going on. This is basic economic theory. Of course he knew why stocks and housing prices were skyrocketing. He was the one who put the dominoes in motion with the help of his printing press. But Greenspan’s low interest credit is only part of the equation. The other part has to do with way that the markets have been transformed by “structured finance”.

Structured finance allows the banks to create credit “out of thin air”, stripping the Fed of its role as controller of the money supply. David Roache explains how this works in an excerpt from his book New Monetarism which appeared in the Wall Street Journal:

[T]o redefine liquidity under what I call New Monetarism, one must add, to the traditional definition of broad money, all the credit being created and moved off banks’ balance sheets and onto the balance sheets of nonbank financial intermediaries. This new form of liquidity changed the very nature of the credit beast. What now determined credit growth was risk appetite: the readiness of companies and individuals to run their businesses with higher levels of debt.

The banks have been creating trillions of dollars of credit (by originating mortgage-backed securities, collateralized debt obligations and asset-backed commercial paper) without maintaining the proportional capital reserves to back them up. That explains why the banks were so eager to provide mortgages to millions of loan applicants who had no documentation, no income, no collateral and a bad credit history. They believed there was no risk, because they were making enormous profits without tying up any of their capital. It was, quite literally, money for nothing.

Now, unfortunately, the mechanism for generating new loans (and fees) has broken down. The main sources of bank revenue have either been seriously curtailed or dried up entirely. Also, the securitization of mortgage-backed securities is DOA. The market for MBSs and CDOs and other complex bonds has followed the Pterodactyl into the history books. The same is true of structured investment vehicles (SIVs) and other “off balance sheet” swindles which have either gone under entirely or are presently withering with every savage downgrade in mortgage-backed bonds. The mighty juggernaut that was grinding out the hefty profits (“structured investments”) has suddenly reversed and is crushing everything in its path.

The banks do not have the reserves to cover their downgraded assets and the Federal Reserve cannot simply “monetize” their bad bets. There is no way out. There are bound to be bankruptcies and bank runs. “Structured finance” has usurped the Fed’s authority to create new credit and handed it over to the banks. Now everyone will pay the price.

Investors have lost their appetite for risk and are steering clear of anything connected to real estate or mortgage-backed bonds. As the downgrades on CDOs and MBSs continue to accelerate, there will likely be a frantic “flight to cash” by investors, just like the recent surge into U.S. Treasuries. This could well be followed by a series of spectacular bank and non-bank defaults. The trillions of dollars of “virtual capital” that were miraculously created through securitzation when the market was buoyed-along by optimism will vanish in a flash when the market is driven by fear. The equity bubble has already been punctured and the process is well underway.

CYPRUS AND MALTA COUNT DOWN TO EURO INTRODUCTION

Will bring number of countries in eurozone to 15.

From January 1st 2008, Cyprus and Malta will adopt the euro, bringing the number of EU countries that share the same currency to 15. The final practical preparations are well under way, and banks, retailers and consumers seem to be ready for the changeover. Banks and enterprises have been receiving supplies of euro banknotes and coins, in order to be able to handle transactions in euro as from the new year. Euro coin mini-kits have also been available for citizens since early December, to help them familiarize themselves with their new currency before “€-day”.

Starting January, the euro area will include 15 out of the 27 EU countries and a population of 320 million out of the EU’s total of 495 million. 2008 will mark the second enlargement of the euro area since 2002 – Slovenia having already adopted the single currency on 1 January 2007.

BAHRAIN’S GULF FINANCE HOUSE PLANS TO BUILD NORTH AFRICA’S FIRST FINANCIAL CENTER

GFH, one of the Middle East’s major investment banks, is planning to set up a $3 billion offshore financial center in Tunisia, according to a company statement. Called Tunis Financial Harbor (TFH), it will be built at Tunis Bay marking GFH’s entry into Tunisia and it becoming one of the major investors in that country. It will also be the first financial center in North Africa.

GFH Chairman Esam Janahi noted that Tunisia, a WTO member, has one of the highest per capita GDPs in Africa mainly because of direct foreign investment. Tunisia is also the most competitive African economy with an average growth of 5% per annum since 1987. “This growth along with progressive and proactive government has made Tunisia a very attractive investment destination for us,” Janahi said, adding that TFH will make a significant contribution to the long-term growth of the Tunisian economy.

Peter Panayiotou, acting CEO of GFH, said his company is expanding globally with a focus on emerging markets with stronger growth potential such as those in the Middle East and North Africa. “Having successfully developed and launched a world-class financial district in Bahrain, we were confident of replicating this success in North Africa,” he said, noting the availability of human resources in Tunisia, which devotes high investments in higher education.

He said that TFH would comprise four key clusters in addition to hosting a world-class business school and a wide array of professional and other support service firms. These clusters include a corporate centre, an investment banking and advisory center, an insurance and Shariah-compliant insurance centre and an exchange.

GFH has launched $12 billion worth of economic infrastructure development projects and investments over eight years while its net income for the 3-year period as of end-2006 reached $211.6 million. Its shares are listed on the Dubai Financial Market, Bahrain Stock Exchange, Kuwait Stock Exchange and the London Stock Exchange.

INSTABILITY IN INDIAN OCEAN ARCHIPELAGO ISLAND SPELLS DECLINE

The prospects for a peaceful resolution to the deepening political impasse between Anjouan, one of three semi-autonomous islands that make up the Indian Ocean archipelago of Comoros, and the Union government, are becoming ever less likely.

Individual island elections in June reignited hostility between Anjouan and the other two islands in the group, Grande Comore and Moheli. Anjouan forces had killed two national soldiers trying to enforce a constitutional court decision ordering Mohamed Bacar to step down as Anjouan’s president. Efforts by the African Union (AU) to negotiate a deal and the imposition of sanctions targeting the freedoms and financial assets of Anjouan’s leadership since then have failed to break the deadlock.

Mohamed Bacar dismissed the threat of armed Union forces landing on Anjouan. “[National president Ahmed Abdallah Mohamed] Sambi does not know anything concerning the military, but if I had to advise him I would say that it is not the solution. The first time [1997] the army came we kicked them out. The second time [May 2007] the army came we kicked them out. That means that if they try to come a third time we will kick them out,” he told IRIN.

The archipelago’s complex electoral system provides for a semi-autonomous government and president for each island – Anjouan, Grand Comore and Moheli – with a rotating presidency for the over-arching Union government.

The system was brokered in 2001 by the Organization of African Unity, predecessor of the AU, in the wake of Moheli and Anjouan seceding from Grand Comore in 1997, when an attempt by the government to reestablish control over the rebellious islands by force failed.

Sanctions plus years of conflict deepen poverty.

Anjouan is the poorest of the three islands. In the short term, the population of Anjouan may experience shortages of basic necessities like imported food items and fuel. “There are reports of people leaving the island either to escape economic hardship or political persecution. We have contingency plans in place to handle a rapid deterioration of the situation,” said UN Resident Coordinator in the Comoros, Opia Kumah.

Kumah pointed out that “many donors, as well as potential investors, have expressed frustration with the never-ending conflict and have adopted a wait-and-see attitude towards effective engagement.” According to the OECD, Official Development Assistance (ODA) to the Comoros has been falling. ODA plunged from around $60 million a year in 1990 to $ million in 2005. “It is clear that most Comorans, from all islands, would like to see a speedy end to the crisis so that the country can focus its energies on developing the country.”

Mohamed Bacar acknowledged that the crisis was hindering efforts to overcome poverty. “Since independence Comoros has never had a significant period of stability - we will never have development without democracy and respect for the law.” Independence from France in 1975 led to 19 attempted or successful coups in 30 years and a steady decline in the standard of living. Comoros is burdened with debt of $297 million, representing 63% of its GDP. “For over 30 years since independence, the economy of Comoros has stagnated,” Kumah warned. “In many areas it has actually regressed.”

OFFSHORE FIRMS BRING IN $5.22 MILLION IN ANNUAL FEE INCOME TO BRUNEI COFFERS

Offshore companies registered in Brunei bring in about $5.22 million every year to the sultanate’s coffers in the form of licensing and registration fees, according to a provider of international corporate and trust services.

Ocra (Brunei) Limited said there are over 8,000 foreign firms, or so-called, Brunei International Business Companies, currently set up there by registering agents licensed by the Brunei International Financial Center, bringing in national income yearly while benefiting local professional services. The firms are charged by the government about $500 in their first year of operations and then an annual fee of $400. To date, there are around 10 registered agents who help such offshore firms set up in Brunei. One of these agents is Ocra (Brunei) Limited, which provides a full set of corporate services for incorporation and administration of offshore and international companies.

“In one way it promotes Brunei, putting it on the map as a foreign destination where international companies or high network individuals can see Brunei as a tax haven,” said Weui Chua, Ocra business development manager. Brunei’s time zone, he said, also attracts companies because it is the same as the growing economies of Taiwan, Hong Kong and China. “Being tax free is a big advantage for businesses, while being widely known for its rich and stable economy as well as possessing a respectable, good routine financial record.”

With a zero-tax regime, the sultanate has become one of the fastest growing offshore destinations in Asia, also offering advantages such as client confidentiality laws and low tax system, according to Ocra. The company said offshore firms in Brunei do not pay income tax, capital gains tax, stamp duty or other direct tax. Ocra’s Brunei clients include professional intermediaries, expatriates, entrepreneurs and high net worth individuals.

NEW SOUTH KOREAN PRESIDENT TO SLASH TAXES

President-elect of Korea Lee Myung-bak, who will be inaugurated in February, has proposed large tax cuts and other market-friendly policies for his new administration. The existing administration has not been particularly business-friendly, as many foreign investors have found to their cost. Lee, a former chief executive of Hyundai Construction and Engineering, has vowed to put a priority on reinvigorating the economy, promising 7% economic growth by stimulating domestic and foreign investment.

Lee has pledged 12.6 trillion won in tax cuts, lowering the maximum corporate tax rate by stages to 20% from the current 25% and lowering oil-related taxes by 10%, paying for it by reducing government expenditures by as much as 20 trillion won. He also promises reductions in real-estate taxes.

Lee says he will ease rules that restrict industrial groups from controlling banks. The current law bans industrial firms from owning more than 5% of a bank. He will also privatize major swathes of state-owned economic sectors, he said. Lee’s party is in opposition in the legislature, although it is expected to win elections due in April, 2009, leaving four years in which Lee can implement his policies.

NO MORE BIG TAX CUTS, WARNS CANADIAN FINANCE MINISTER

Canadian Finance Minister, Jim Flaherty, has warned Canadian taxpayers not expect significant tax cuts in the coming year beyond those already announced, citing the weakening U.S. economy and the ongoing international credit crunch as factors in this decision.

What we anticipate is some softening of the economy because of the weakness in the U.S. economy, which means that there will be less manoeuvrability in the budget,” the Finance Minister announced. “People ought not to expect substantial tax cuts in this budget. We have to be realistic: The times are getting more difficult.”

However, the Canadian Finance Minister reportedly hinted at some further movement on personal income tax, particularly for taxpayers on higher incomes.

IRS WINS BATTLE OVER “SON OF BOSS” TAX SHELTER

Judge finds the transaction lacked economic substance.

Ruling on December 21, the U.S. Court of Federal Claims found in favor of the IRS, announcing that the so-called “Son of Boss” tax shelter was an abusive scheme, and that any deductions claimed under it should therefore be disallowed. The closely-watched case involved Jade Trading, which in 2003 took legal action against the U.S. tax authority after it ruled that millions of dollars in artificial tax losses were not valid.

Delivering her verdict on the matter earlier this month, Judge Mary Ellen Coster Williams suggested that the losses being claimed by Jade Trading’s principal, Robert Ervin and his brothers, who were his business partners at that time, were “purely fictional”.

“In sum, this transaction’s fictional loss, inability to realize a profit, lack of investment character, meaningless inclusion in a partnership, and disproportionate tax advantage as compared to the amount invested and potential return, compel a conclusion that the spread transaction objectively lacked economic substance,” the Judge was quoted by Reuters.

The decision is expected to have implications for other, similar cases, including one involving Deutsche Bank.

IRS UNVEILS PROCEDURE FOR SNITCHING ON TAX LAW VIOLATORS

The IRS has outlined ways in which informants can report violations of U.S. tax law, and possibly claim a reward based on the amount of additional tax, penalties and interest that is owed.

“Since Congress enacted new procedures increasing award amounts last year, informants have come forward with information on alleged tax noncompliance amounting to tens of millions of dollars, and in some cases hundreds of millions of dollars,” explained Stephen Whitlock, Director of the Whistleblower Office. Since the Whistleblower Office was created in December 2006, the IRS has received about 80 claims, half of those submitted in just the last 2 1/2 months.

To make a claim, an informant must file new Form 211, “Application for Award for Original Information”, which asks informants to provide an estimate of the tax owed, the pertinent facts in the case, and an explanation of how the informant obtained the information. The IRS’s Whistleblower Office will make the final determination about whether an award will be paid, and the amount of the award, for claims that it processes. Awards will be paid in proportion to the value of information furnished voluntarily with respect to proceeds collected.

Under the new procedures, the amount of award will be at least 15% – but no more than 30% – of the collected proceeds in cases in which the IRS determines that the information submitted by the informant substantially contributed to the collection of tax. The award percentage may be reduced in some circumstances.

To be eligible for an award under the new procedures, the tax, penalties, interest, additions to tax, and additional amounts in dispute, must exceed $2 million for any taxable year and, if the taxpayer is an individual, the individual’s gross income must exceed $200,000 for any taxable year in question. All awards will be subject to normal tax reporting and withholding requirements.

U.S. FILING SEASON BEGINS ON TIME FOR ALL EXCEPT AMT TAXPAYERS

The IRS announced on December 27 that the tax season was expected to start on time for everyone except certain taxpayers potentially affected by late enactment of the Alternative Minimum Tax “patch”.

Following extensive work in recent weeks, the IRS expects to be able to begin processing returns for the vast majority of taxpayers in mid-January. However, as many as 13.5 million taxpayers using five forms related to the AMT legislation will have to wait to file tax returns until the IRS completes the reprogramming of its systems for the new law. The IRS has targeted February 11 as the potential starting date for taxpayers to begin submitting the five AMT-related returns affected by the legislation. It will take approximately seven weeks from the approval of the AMT patch to update IRS processing systems completely.

HMRC CRACKS DOWN ON MONEY LAUNDERING AND VAT FRAUD

Revenue & Customs officers investigating a suspected £20 million VAT missing trader and money laundering fraud conducted early morning raids this week, making six arrests in Scotland. Codenamed Operation Vaulter, the recent action was the result of a 24-month long investigation, and followed the arrest of 17 people in North West England last September. Last week, four men and two women were arrested and four premises – three domestic and one commercial – were searched.

Chris Harrison, Director of Operations, Criminal Investigations, for HM Revenue & Customs (HMRC) announced, “Tackling missing trader fraud is HMRC’s top priority. We have a duty to protect the revenue given the scale and nature of the attacks we are seeing. This week’s arrests are the result of a lengthy investigation by dedicated officers who work tirelessly and diligently, fighting criminal attacks on the tax system.

“The sophistication of the organized crime gangs behind these frauds means that our investigations are increasingly complex ... This is not victimless crime, it’s organized crime that causes real harm.”

Those arrested are believed to have been part of an organized crime group operating a network of companies that “carouseled” large quantities of mobile phones and other low volume, high value goods, buying them VAT-free from European Union, and then selling them on to businesses in the UK, then defaulting without paying the VAT due.

ERNST AND YOUNG PUBLISHES TRANSFER PRICING SURVEY

Key profits transfer mechanism comes under increasing scrutiny.

According to the results of a survey published earlier this month by accounting firm, Ernst & Young, 87% of multinational enterprises (MNEs) believe that transfer pricing is a risk when managing their financial statements, as compliance requirements have increased due to developments in financial reporting.

Commenting on the publication of the biennial “Global Transfer Pricing Survey”, John Hobster, Ernst & Young’s Global Accounts Leader, Transfer Pricing, explained, “Risk mitigation is a key priority for MNEs, and transfer pricing has increasingly moved into board rooms and audit committees. As convergence of customs and tax authorities continues, tax authorities collaborate more and more across borders, and new regulations come into place, MNEs want to ensure that transfer pricing is compliant with tax laws.”

The degree of perceived transfer pricing-related financial-statement risk varied significantly by industry, reflecting the inherent complexity of the underlying transfer pricing issues of those industries, according to Ernst & Young. In particular, 53% of parent company respondents in telecommunications, 48% in pharmaceuticals, and 45% in the biotechnology industry reported that transfer pricing posed the largest financial risk they face.

“Companies need to manage their financial risks with greater precision, as enhanced transfer pricing documentation requirements have intensified the responsibilities of MNEs to actively report and justify the impact of their tax position. This is particularly tough at a time when there is a greater chance that transfer pricing policies and practices will be audited,” Hobster continued.

Over half of the survey respondents (53%) said that their transfer pricing compliance costs had increased. This was a significant increase on the 2005 survey results, where only 29% of parent companies mentioned a rise in costs as a result of financial reporting and regulatory developments.

The survey further showed that 19% of parent respondents have had their customs valuations challenged where they have been based on their transfer prices for the same goods, or vice versa. In 44% of these cases, increased customs valuations (and costs) have not resulted in corresponding adjustments (and credits) to corporate income taxes.

Transfer pricing was found to be the single most important issue for 76% of parent respondents in the pharmaceutical sector, which was an increase of 19% on the 2005 survey. Pharmaceutical companies are nearly twice as likely as companies in any other industry to experience an adjustment of transfer prices, and parent respondents in the pharmaceutical sector said that 56% of transfer pricing examinations since 2003 resulted in adjustments.

20-YEAR FIGHT OVER $MILLIONS IN OFFSHORE MONEY IS NOT OVER YET

A long-running legal battle over offshore money is heating up again in Florida’s federal courts, with new international intrigue coming to light.

Aventura options trader Stephan Jay Lawrence spent six years in jail for allegedly defying a bankruptcy judge. Now, he is pursuing a lawsuit against everyone who had a role in his jail sentence, including famous private investigator Juval Aviv and a bevy of South Florida attorneys. The 20-year-old dispute and 11-year-old bankruptcy case also have highlighted serious legal issues.

The trustee in Lawrence’s bankruptcy, Alan Goldberg, has not given up on the offshore accounts, once estimated at $7 million. Turnaround expert Goldberg and his attorneys are pressing separate legal action in federal appeals court to put Lawrence back in jail.

Contempt remedy finally works after 6 1/2 years.

Martin Armstrong defrauded Japanese investors out of hundreds of millions of dollars in relations to his Princeton Economics International Ltd. The investors sued Armstrong in a civil case, and the judge ordered Armstrong to cough up $14.9 million in gold bars and rare coins. When Armstrong claimed that he did not know where those gold bar and rare coins had disappeared to, U.S. District Judge John Keenan ordered him to jail. This was in January 2000.

Finally, on August 17 of this year, Armstrong pled guilty to criminal securities fraud charges and faces possibly another five years in prison. The judge has not yet indicated whether Armstrong’s contempt time will count against his sentence for securities fraud.

Armstrong’s 6 1/2 years set the record for the longer federal contempt incarceration (there used to be a theory going around that a federal judge could only hold somebody in jail for contempt for 6 months). Now who is shooting for the record? You guessed it – former options trader Stephen Jay Lawrence was put in jail in August 2000 when he refused to provide information about an offshore trust that he had created to avoid a debt to securities clearinghouse Bear Stearns on a simple margin call.

Recovering and seizing assets in Mauritius.

Stephan Lawrence was recently released from prison in Florida [article written March 2007] after spending more than 6 years for being found in contempt of court for refusing to turn over assets in a trust established in Mauritius. Imprisonment for contempt was not a viable vehicle to obtain assets in Maritius, but could efforts in Mauritius have been more successful? Possibly.

Mauritius has its own rules of court, but does seek guidance from English common law. The Mauritian Supreme Court in Moraby v. Dodger de Speville and Co. and anor, 1982 MR 40, noted that Mauritian rules do not provide for inspection or discovery of documents in the hands of a third party. But, the court commented that if a party “wanted to have a document existing but not available to them, they should have made the necessary application to a Judge in Chambers by extra judical process to see or inspect the document.” Such an application would most likely follow the doctrine established in England in Norwich Pharmacal Company v. Comm. of Customers and Excise, 3 W.L.R. 164 (H.R.1973), where pre-action discovery of bank records, company or trust information, corporate records, etc. was allowed in order to discover the identity of the wrongdoers.

But, since it is difficult to predict whether a Norwich Pharmacal application-type order would be successful, litigants should consider the use of a Mareva Injunction that does exist under Mauritius law. The English remedy made popular in the case Mareva Compania Naviera S.A. v. International Bulk Carriers S.A, 1 A.L.L E.R. 213 (1980), allows for an injunction to freeze the dissipation of assets where there are issues of flight, asset secretion and asset movement, even before a plenary lawsuit is pending.

The injunction does not create rights in property, but merely freezes the assets until subsequent adjudication. Litigants in Mauritius must satisfy onerous conditions in order to obtain an injunction, including whether it is just and convenient to grant the injunction. Significantly, a Mareva injunction allows for a complimentary discovery order requiring the defendant to provide an affidavit of assets and liabilities and authorizing the claimant to inquire of banks and brokerage houses, etc. about the details of the assets sought to be enjoined. This asset discovery, unlike a Norwich Pharmacal application, must be narrowly focused.

Thus, litigants in the U.S. are not limited to compelling the production of information or the turnover of assets through U.S. laws. Courts in Mauritius may be a more successful alternative.

USING ALTERNATIVE DISPUTE RESOLUTION TO PREEMPT INTERNATIONAL ASSET RECOVERY OBSTACLES

U.N. treaty overrides “parochial” values of domestic courts.

I am a big fan of Alternative Dispute Resolution (“ADR”), especially in matters involving cross-border business transactions. Among other reasons, ADR provisions can be used to preempt many of the obstacles that arise in seeking recognition and enforcement of foreign judgments internationally. One would think that it would be easier to enforce a judgment from a court than an arbitral award issued by a private arbitration panel. This is not the case when a party is seeking a recovery across borders.

Incredibly, because no treaty exists for the enforcement of foreign judgments between the U.S. and any other country, a foreign arbitral award is generally more easily enforceable than the judgment of a foreign court. See U.S. Department of State, Bureau of Consular Affairs, Enforcement of Judgments (link), Accord, David J. Levy, International Litigation: Defending and Suing Parties in U.S. Federal Courts at 176, 361 (2003, American Bar Association).

In contrast, more than 120 countries have entered into the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature, June 10, 1958, 21 U.S.T. 2517, T.I.A.S. No. 6997, 330 U.N.T.S. 38 (known as the “New York Convention”). The New York Convention requires that we[e]ach Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon ...” The goal of the New York Convention “was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries.” Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n. 15 (1974); Bautista v. Star Cruises, 396 F.3d 1289, 1299-1300 (“In pursuing effective, unified arbitration standards, the Convention’s framers understood that the benefits of the treaty would be undermined if domestic courts were to inject their ‘parochial’ values into the regime.”) Based on this reasoning, “the enforcement of international arbitral awards enjoys relatively widespread acceptance ...” in courts worldwide. See Kam-Tech Systems Ltd. v. Yardeni, 774 A.2d 644, 648 n.3 (N.J. Super. Ct. App. Div. 2001).

COLLECTING DEBTS FROM BANKRUPT FOREIGN COMPANIES

Creditors of bankrupt foreign companies may have an alternative remedy in U.S. courts for recovering their debts. A recent case in the Southern District of New York, Osanitsch v. Marconi PLC, 363 B.R. 361 (S.D.N.Y. 2007), addressed the procedure for filing claims against foreign companies that have declared bankruptcy in a country other than the U.S.

When a foreign company files bankruptcy in its home country, often it will file an ancillary proceeding in the U.S. under Section 304 (now Chapter 15) of the Bankruptcy Code. The purpose of such ancillary proceeding is to “facilitate centralized liquidation of the debtor’s estate according to the rules of the debtor’s home country.” (Osanitsch v. Marconi PLC.) In an ancillary proceeding, as in Osanitsch, the foreign debtor can request and the U.S. court can grant an injunction prohibiting creditors from filing or continuing various lawsuits against the debtor.

Such an ancillary proceeding also gives the U.S. bankruptcy court jurisdiction to hear actions that preserve, protect or recover property of the foreign debtor. However, in Osanitsch, the district court found that section 304 (now chapter 15) does not necessarily give the U.S. bankruptcy courts jurisdiction to hear actions brought by U.S. creditors that are unrelated to preservation or recovery of the debtor’s property. Thus, if a court has granted a broad sweeping injunction prohibiting the creditor’s claims and the bankruptcy court does not have jurisdiction to hear the claim, a U.S. creditor then has limited means within the U.S. by which to recover its debt.

However, the court in Osanitsch held that if a U.S. creditor wishes to recover a debt against a foreign bankrupt, it may be able to seek a modification of the injunction and ask the court to allow it to pursue its claim in other U.S. courts. Consequently, requesting a modification of the injunction to allow the creditor’s claims may provide an alternative avenue for recovering debts from a foreign debtor.

STAY OUT OF JAIL FOR $52 MILLION?

“The billionaire with the empty pockets” finally admits his control over offshore entities and financial accounts.

Forbes 400 member Igor M. Olenicoff pleaded guilty to a federal tax felony and has paid $52 million in back federal taxes, interest and civil fraud penalties to settle charges that he lied for years about his ownership of accounts in the Bahamas, Switzerland, Liechtenstein and Britain. He has also agreed to move all his offshore money back to the U.S.

During a half-hour hearing in a windowless federal courtroom in Santa Ana, California, the 65-year-old, Russian-born Olenicoff looked composed and dapper in a gray, pinstriped suit. The single felony he pleaded to – filing a false 2002 tax return – is punishable by up to three years in prison. But Olenicoff’s deal with the government makes it highly unlikely he will get more than six months, and he could get off with home detention or probation. He is scheduled to be sentenced on April 14, the day before 2007 tax returns are due.

After the hearing, Olenicoff described the deal as “an excellent outcome” after 13 years of investigation by the IRS. But, he added, “anything I tell you, you will seek to find the doom in it.” Asked by the judge who took his plea if he had had drugs or alcohol in the previous 72 hours, Olenicoff said he had attended a company Christmas party in Florida the night before, and “I had a couple of drinks.”

In his plea agreement, Olenicoff acknowledged that he lied on his 1998 through 2004 personal tax returns when he answered “no” to a question asking if he had ownership, signature or other authority over a financial account in a foreign country. The $52 million Olenicoff has paid settles the IRS claims against him for those years.

Assistant U.S. Attorney Brett A. Sagel told the judge that Olenicoff will need permission before sentencing to travel abroad to close out his accounts. It is unclear how much he has offshore, although in previous court filings, the IRS alleged that Olenicoff had given a bank a statement showing that one offshore entity he controlled had $270 million in assets as of 1996.

As Forbes detailed last year in “The Billionaire With The Empty Pockets”, for years Olenicoff had told the IRS and some private parties suing him that the Olen real estate empire he founded in 1973 was actually owned by offshore companies in which he had no interest.

In the plea deal, however, Olenicoff, who arrived in the U.S. at 15 with his parents, and few possessions, admitted he is the owner of Olen Properties Corp. Forbes had concluded as much, estimating Olenicoff’s net worth at $1.7 billion and ranking him 286th on our 2007 list of the 400 richest people in America. Olen owns 6.4 million square feet of commercial space and 11,800 residential units in California, Nevada and Florida.

The plea agreement Olenicoff affirmed appears to repudiate numerous factual assertions Olenicoff and his lawyers have made, some under oath, in fighting the government and creditors. The plea agreement states that he owned and controlled various offshore accounts, including those of Sovereign Bancorp Ltd. and National Depository Corp. (NDC), both of the Bahamas.

The IRS had disallowed deductions for interest payments Olenicoff’s companies made to Sovereign, on the grounds that they were a sham and that Olenicoff controlled Sovereign. But Olenicoff had insisted that Sovereign was independent and had been set up by Russian banks and a Russian investment fund created by Boris Yeltsin. To support that claim, Olenicoff even submitted a sworn affidavit from an individual who Olenicoff said had been a high-ranking officer in the Russian Air Force and produced the man for an interview with IRS agents. According to an e-mail Olenicoff sent Forbes last year, he helped interpret when the man was interviewed by the IRS.

Some of Olenicoff’s offshore dealings have seemed designed to dodge creditors as much as the IRS. In 1992, after a former business partner won a $3.3 million judgment against him, he moved $60 million in corporate cash out of the U.S. to NDC and disposed of U.S. assets in his own name. The next year, in a deposition, he said he did not even have a U.S. bank account and paid bills with cash withdrawn from a Russian account.

After three companies Olenicoff controlled filed for bankruptcy in 1992, Prudential Insurance, which was owed $143 million by one of the companies, tried unsuccessfully to block Olenicoff’s reorganization plan. Prudential claimed he had shown “bad faith” by moving a portfolio of secured notes to Sovereign and failing to disclose the true ownership of various entities.

Olenicoff’s guilty plea serves as a reminder to individuals who have an interest or ownership of foreign financial and securities accounts that they must accurately report their foreign financial accounts to the IRS, said Catherine D. Tucker, acting special agent in charge, Los Angeles field office.

Olenicoff is hardly the first Forbes 400 list member to be convicted of a tax crime. Leandor P. Rizzuto, who co-founded Conair and ranks 371st on the 2007 list, pleaded guilty to tax evasion in 2002, admitting that he had deposited millions in kickbacks from suppliers into foreign bank accounts. He did 27 months in the federal pen.

Leona Helmsley, who spent 10 years on the rich list before her death this past August, was convicted in 1989 after a trial in which a former housekeeper quoted her as saying, “We don’t pay taxes. Only the little people pay taxes.” (For more details on Forbes 400 members’ convictions, see “Criminally Rich”.)

CAYMAN ISLANDS MONETARY AUTHORITY LAW CHANGED

Way eased for foreign regulatory bodies to obtain information from the CIMA.

An amendment to the Monetary Authority Law passed in the Legislative Assembly Monday will make it easier for foreign regulatory bodies to obtain information from the Cayman Islands Monetary Authority.

In presenting The Monetary Authority (Amendment) Bill, 2007, Financial Secretary Kenneth Jefferson noted that the bill was being expedited – with the suspension of several Standing Orders – “because it is in the interest of the Cayman Islands that this bill be enacted in a timely manner.”

The need to change the law rises from CIMA’s desire to become a member of the International Organization of Securities Commission (IOSCO). “IOSCO is regarded as the international standard setter in the area of securities regulation,” Mr. Jefferson said. “Some 183 regulators in the world are now members of IOSCO, including leading members such as the United States’ Security and Exchange Commission and the United Kingdom’s Financial Services Authority, as well as regulators from our offshore competitors such as Jersey, Isle of Man, Singapore, Hong Kong, Bermuda, the Bahamas, Dubai, and more recently, the British Virgin Islands.” CIMA applied for IOSCO membership in 2002 but the application “stalled since 2003 because of doubts by some leading IOSCO members about the adequacy of the existing provisions in the Monetary Authority Law for providing assistance to other securities regulators.”

The provisions of section 50 of the Monetary Authority Law are the ones affected by the changes made. Prior to the change, Section 50 did not enable CIMA to independently consent to the use of information provided to other securities regulators in criminal investigations and proceedings for contraventions of securities laws or regulations.

“In order to address this concern, the bill, as reflected in Clause 50(3), would allow CIMA to consent to the use of information provided by CIMA to an overseas regulatory authority for the purposes of criminal investigations and proceedings related to the violation of laws and regulations administered by a requesting authority without the need to obtain approval from any third party authority,” Mr. Jefferson said. “This is in addition to its existing ability to provide information for civil and administrative investigations and proceedings.”

Speaking afterward, Mr. Jefferson said the old Monetary Authority Law was not fully in adherence with the IOSCO Multilateral Memorandum of Understanding. “What IOSCO has said is that there was the potential for the Attorney General and myself to frustrate the ability of an overseas regulatory authority to be able to obtain information from CIMA on a timely basis,” he said. “In real terms, there haven’t been any delays, but the potential was there.”

Other changes to section 50 of the Monetary Authority Law make it clear that requests for assistance by an overseas regulatory authority will be treated as confidential and are subject to disclosure only through established gateways existing in the law. Also, that CIMA will not require a specific, separate undertaking of confidentiality from a requesting overseas regulatory authority when “the Authority has satisfied itself that the intended recipient authority is subject to adequate legal restrictions on further disclosure.”

Mr. Jefferson spoke about the urgency of getting the amendments to the law passed immediately. If not approved in June 2008, the next time the application could be approved would be June 2009, Mr. Jefferson said. “In the interim, the jurisdiction stands to suffer reputational damage and be put at a competitive disadvantage.” Mr. Jefferson explained afterwards that elements of Cayman’s private sector had said some of this jurisdiction’s competitors use their IOSCO membership as a marketing tool to show they have adopted all the latest compliance standards.

WE ARE ALL PRISONERS NOW

At Christmas time it has been my habit to write a column in remembrance of the many innocent people in prisons whose lives have been stolen by the U.S. criminal justice (sic) system that is as inhumane as it is indifferent to justice. Usually I retell the cases of William Strong and Christophe Gaynor, two men framed in the state of Virginia by prosecutors and judges as wicked and corrupt as any who served Hitler or Stalin.

This year is different. All Americans are now imprisoned in a world of lies and deception created by the Bush Regime and the two complicit parties of Congress, by federal judges too timid or ignorant to recognize a rogue regime running roughshod over the Constitution, by a bought-and-paid-for media that serves as propagandists for a regime of war criminals, and by a public who have forsaken their Founding Fathers.

Americans are also imprisoned by fear, a false fear created by the hoax of “terrorism”. It has turned out that headline terrorist events since 9-11 have been orchestrated by the U.S. government. For example, the alleged terrorist plot to blow up Chicago’s Sears Tower was the brainchild of a FBI agent who searched out a few disaffected people to give lip service to the plot devised by the FBI agent. He arrested his victims, whose trial ended in acquittal and mistrial.

Raising doubts among Americans about the government is not a strong point of the corporate media. Americans live in a world of propaganda designed to secure their acquiescence to war crimes, torture, searches and police state measures, military aggression, hegemony and oppression, while portraying Americans (and Israelis) as the salt of the earth who are threatened by Muslims who hate their “freedom and democracy”. Americans cling to this “truth” while the Bush regime and a complicit Congress destroy the Bill of Rights and engineer the theft of elections.

Freedom and democracy in America have been reduced to no-fly lists, spying without warrants, arrests without warrants or evidence, permanent detention despite the constitutional protection of habeas corpus, torture despite the prohibition against self-incrimination – the list goes on and on.

In today’s fearful America, a U.S. Senator, whose elder brothers were (1) a military hero killed in action, (2) a President of the U.S. assassinated in office, (3) an Attorney General of the U.S. and likely president except he was assassinated like his brother, can find himself on the no-fly list. Present and former high government officials, with top-secret security clearances, cannot fly with a tube of toothpaste or a bottle of water despite the absence of any evidence that extreme measures imposed by “airport security” makes flying safer.

Elderly American citizens with walkers and young mothers with children are meticulously searched because U.S. Homeland Security cannot tell the difference between an American citizen and a terrorist. All Americans should note the ominous implications of the inability of Homeland Security to distinguish an American citizen from a terrorist. When Airport Security cannot differentiate a U.S. Marine General recipient of the Medal of Honor from a terrorist, Americans have all the information they need to know.

Any and every American can be arrested by unaccountable authority, held indefinitely without charges and tortured until he or she can no longer stand the abuse and confesses. This predicament, which can now befall any American, is our reward for our stupidity, our indifference, our gullibility, and our lack of compassion for anyone but ourselves.

Some Americans have begun to comprehend the tremendous financial costs of the “war on terror”. But few understand the cost to American liberty. Last October a Democrat-sponsored bill, “Prevention of Violent Radicalism and Homegrown Terrorism”, passed the House of Representatives 404 to 6. Only six members of the House voted against tyrannical legislation that would destroy freedom of speech and freedom of assembly and that would mandate 18 months of congressional hearings to discover Americans with “extreme” views who could be preemptively arrested.

What better indication that the US Constitution has lost its authority when elected representatives closest to the people pass a bill that permits the Bill of Rights to be overturned by the subjective opinion of members of an “Extremist Belief Commission” and Homeland Security bureaucrats? Clearly, Americans face no greater threat than the government in Washington.

ANGRY POPULACE BURNING BRITISH SURVEILLANCE CAMERAS

“A Summer of MADness?”:

Motorists Against Detection, the vigilante anti-speed camera group have announced a summer of MADness which will see them target for destruction all speed cameras in the UK. It’s now going to be a period of zero tolerance against all speed cameras, said their campaigns director Capt Gatso. (((A remote descendant of General Ludd, I reckon.)))

The group claims speed cameras are just money-making machines and they have given the authorities long enough to prove their worth. The first camera to fall in the summer campaign is in south east London on the A2 at the Sun in the Sands roundabout on-slip heading northbound towards the Blackwall Tunnel.

Capt Gatso, the group’s campaigns director, (((he’s a multitalented guy))) said: “In many areas the cameras have not saved one life – the statistics for road deaths haven’t gone down. In some areas they have actually gone up – in Essex, for instance, which has a high density of cameras there are more people being killed. We are now planning to target any and all cameras until the Government sees sense and rethinks its road safety policy. Before we had speed cameras we had the safest roads in Europe - since their introduction this is no longer true.”

The announcement will surprise many in road safety circles since the group has publicly declared it would not attack cameras outside schools or on high streets. But Capt Gatso said: We need to focus attention on what the cameras are about. We’ve said we wouldn’t attack the ones in built up and urban areas but that’s not where most of the cameras are. There are a lot of frustrated people among our members who have seen the number of cameras increase while road safety levels have fallen. Indeed, the only thing the cameras have done successfully is to reduce the number of traffic officers patrolling our roads and lose a lot of decent people their driving licences and their livelihoods. (((Giving them lots of spare time to wander around with big jugs of petrol and huge flammable tires to be flung round the necks of videocams.))) ...

[MAD’s] membership who are normally law-abiding people – vary in numbers but there is a hard core of around 200 people throughout the UK who use Internet chat forums, encrypted email and pay as you go phones to keep in touch and plan campaigns.

“The group says it has perfected a new and quick way of destroying speed cameras which will enable them to destroy a roadside camera in just a few seconds. ...”

ANOTHER MILESTONE ON THE ROAD TO SERFDOM

Very rarely, I read a press account and see the footprint of a new world – there it is, lurking amidst the smudged black ink in the thin column. Sometimes it is a technological breakthrough that promises to make life easier, safer, or longer. But sometimes it is a redefinition of the parameters of human society. And sometimes it is downright frightening. Time to pull it out of the banality of that newsprint and think.

And it happened on Sunday morning, December 16. The article is by Eric Lichtblau, James Risen and Scott Shane, and it is called “Wider Spying Fuels Aid Plan for Telecom Industry.” Take the time to read this article carefully. Here are a few key grafs:

For months, the Bush Administration has waged a high-profile campaign, including personal lobbying by President Bush and closed-door briefings by top officials, to persuade Congress to pass legislation protecting companies from lawsuits for aiding the National Security Agency’s warrantless eavesdropping program. But the battle is really about something much bigger. At stake is the federal government’s extensive but uneasy partnership with industry to conduct a wide range of secret surveillance operations in fighting terrorism and crime.

The N.S.A.’s reliance on telecommunications companies is broader and deeper than ever before, according to government and industry officials, yet that alliance is strained by legal worries and the fear of public exposure.

To detect narcotics trafficking, for example, the government has been collecting the phone records of thousands of Americans and others inside the United States who call people in Latin America, according to several government officials who spoke on the condition of anonymity because the program remains classified. But in 2004, one major phone carrier balked at turning over its customers’ records. Worried about possible privacy violations or public relations problems, company executives declined to help the operation, which has not been previously disclosed.

What Lichtblau, Risen and Shane are describing is the dawn of a new National Surveillance State in the U.S., a public-private partnership. And the object of this partnership – which emerges as a criminal conspiracy, quite literally, between telecom companies and the Bush Administration – is to watch and listen to you and everything you do. Of course, they will say it is about “terrorists,” or about “narcotics traffickers.” And indeed every authoritarian and wannabe totalitarian system from the dawn of time has cast its snooping on citizens in just these terms. No problems with the honest citizen, they say, it is the criminals and the enemies we are after. We need your cooperation. But the technology used makes no such distinction – it is snooping on everyone.

So the U.S. intelligence agencies in cahoots with major telecom providers are intercepting and reviewing your communications. This is occurring without warrants. And the legal community is in accord – it was criminal conduct. And that is why the Bush Administration is frantically pushing right now for immunity, to ensure that its collaborators face no adverse consequences from their criminal acts. What kind of society does this sound like?

Now tack on one further extremely disturbing fact. One telecom company said “No.” It was Qwest. The Qwest response to overtures was simple: “We would love to work with you on this. But you do need to change the law so we can do it legally.” Apparently as soon as that happened, Qwest lost a series of important government contracts. And the next thing you know, the Justice Department was feverishly working on a criminal investigation looking at Qwest’s CEO on insider trading allegations – amidst very strange dealings between the Justice Department and the federal judge hearing the case. Of course, this is all the purest coincidence. Or maybe not. What kind of society does this sound like?

This is not the America we used to live in. It is not a nation that stood as a bulwark for civil liberties. It is a nation with an executive who is drunk on power. An executive who refuses to respect the legal constraints established by the Constitution, and even the criminal law. What the Bush Administration and the telecoms did was wrong, and both should be held to account for their wrongdoing. That is the way a state committed to the rule of law works.

THE GULAG STATE, TAKE TWO: JUSTICE BREYER PROPOSES AN AMERICAN “LAW OF SUSPECTS”

... A law that arose out the French Revolution’s bloodiest phase.

“For several centuries we had a proverb: ‘Don’t fear the law, fear the judge.’ But, in my opinion, the law has outstripped people, and people have lagged behind in cruelty. It is time to reverse the proverb: ‘Don’t fear the judge, fear the law.’” ~~ Alexander Solzhenitsyn, The Gulag Archipelago

There are occasions when I wonder if the world-historic purpose of the Soviet Union’s 74-year existence was to provide a first draft for the terror state our own rulers are constructing. Oral arguments early this month regarding the suspension of habeas corpus – in particular, a colloquy between Justice Stephen Breyer and Solicitor General Paul Clement – was one such occasion.

Breyer, a veteran of the ACLU, is regarded by GOP-aligned conservatives to be a near-perfect specimen of left-wing judicial activism. Yet in discussing the case of Boumediene v. Bush, which challenges the open-ended detention, without trial, of several foreign nationals at Gitmo, Breyer appeared amenable to a legislative solution, rather than determined to impose the will of the High Court. Indeed, according to Newsweek’s account, Breyer all but begged Congress to intervene, indicating three times “that it would be possible for Congress to enact a law that would provide the basis for holding the detainees indefinitely without trial.”

Breyer’s specific suggestion to Clement was that “long-term detention might pass muster with the Supreme Court under ‘some special statute involving preventive detention and danger, which has not yet been enacted.’”

Apparently, it is not enough that the Military Commissions Act (MCA) eviscerated the habeas corpus guarantee, which is the indispensable foundation of the Anglo-Saxon system of individual liberty under law. It is insufficient for the Bush Regime to embrace a despotic vision under which the Chief Executive can consign specific individuals to prison in perpetuity, with no prospect of parole.

Breyer is suggesting that Congress needs to refine this crude pre-medieval practice into a system of pure totalitarian tyranny by institutionalizing preventive detention – and that the Court would be amenable to such a solution. Do not be surprised if Congress acts on that suggestion.

What Breyer seems to be seeking is a measure permitting the government to seize, and imprison forever, anyone it deems to be “dangerous.” The MCA already codifies the supposed authority of the president to detain individuals designated terrorists or “unlawful combatants.” Under a measure of the sort suggested by Breyer, the threshold for imprisonment would be much lower, and mass incarceration of “dangerous” people would become an acute possibility.

The notion of preventive detention of “dangerous” people is entirely foreign to the American concept of law, which is rich in impediments – such as the Constitution’s proscription of bills of attainder and expropriations based on “corruption of blood” – to arbitrary incarceration or punishment of people who have broken no laws.

Breyer’s suggestion – which was made in all apparent seriousness, and with some urgency – is inspired by a more “modern” legal tradition with its origins in the bloodiest phase of the French Revolution. What Breyer seems to have in mind is a contemporary version of the 1793 “Law of Suspects” enacted by France’s ruling junta at the depth of the revolutionary terror, or Article 58 of the Soviet Basic Penal Code.

The decree permitted the wholesale imprisonment of six classes of people deemed enemies of the State. Promulgation of the Law of Suspects is generally recognized as the beginning of the Revolution’s most radical phase. It “brought forth both the levee en masse [general conscription] and the Terror,” points out David A. Bell in his new book, The First Total War: Napoleon’s Europe and the Birth of Warfare as We Know It.

The Law of Suspects was central to a system of “laws” intended to legitimize such systematic murder. It was enforced by a Committee of General Security, which acted through local Committees of Surveillance and enforced its rulings through a Revolutionary Tribunal (and its local appendages). In the Vendee – a conflict that began after the traditional Catholic residents of that region rebelled against the conscription of their sons to fight against other Catholics abroad on behalf of an anti-clerical government – counterrevolutionaries, whether militia or civilians, were often subject to summary execution as unlawful combatants by military commissions.

It is hardly coincidental that Lenin and his squalid little clique of murderers and perverts drew inspiration from the Jacobin campaign against the Vendee. In 1922 the Bolsheviks created their own Law of Suspects by creating a Commission on “exiles” – meaning people to be deported to the embryonic Gulag Archipelago – and then issuing a law against “socially dangerous persons” in Article 58 of the Basic Penal Code. Article 58 was the legal foundation for the Gulag state created under Lenin, perfected under Stalin, and that remains, in residual form, today in post-Soviet Russia.

If Congress acts on Justice Breyer’s urgent advice to enact a law for the preventive detention of “dangerous” people, America will have completed its legal transition to a Soviet-style gulag state. It will only be a matter of time before the camps are built and filled with “socially dangerous” people.

Consider this. There are roughly 120,000 people who are either on the Regime’s “No-Fly List”, or subject to detention and additional scrutiny at airports. These are “dangerous” people who are already subject to a form of preventive detention, albeit of an annoying, rather than potentially lethal, variety.

Consider also that under a July 17 executive order, the Wee Emperor claimed the right to expropriate the property of those individuals that he and his subordinates believe are interfering with the war effort in Iraq. Shocking as this is, it falls well short of the powers Justice Breyer’s proposal would confer. But summary expropriation occupies the same continuum as summary imprisonment, and outlawing domestic political opposition by decree is unmistakably akin to the logic of the Law of Suspects.

Bush and Breyer appear to be working from different paragraphs on the same page – or on different sections of the same totalitarian blueprint. If you want a peek at what their project will look like when it is done, you had better brush up on your Solzhenitsyn.

OBJECTIVIST GOOSE-STEPPING

No one except perhaps cave-dwellers can fully ignore the atrocious elements of fascism in America (not to mention communism). Clips on YouTube and other websites document rights violations committed by government’s employees on a daily basis. Fortunately, in concert with the growing grass-roots of liberty-lovers who comprise the “Ron Paul rEVOLution”, some are directly challenging and educating us about ongoing statist aggressions.

Governmental power grabs in the name of “security” have become commonplace. Bad ideas about the nature of government give rise to such actions. Bad ideas essentially foster a society that tolerates tyranny. Rationalizing bad ideas and bad behavior is the oldest game in the book of governmental power. The trick is to convince people that certain things are not bad for them, but are rather for their own good – especially when it comes to the safety of their community or “homeland”. Whether or not people are fully convinced by the relentless propaganda in these matters, real or ideological goose-stepping typically follows.

Goose-stepping is of course best done with the right frame of mind. First, one must empty it of logical thought. Then, one must march, literally or ideologically, to whatever fuels one’s emotions. Needless to say, a terrorist attack on American soil can serve as a potent marching fuel. What better way to demonstrate that “Islamofascists” are hell bent on destruction of our lives and property than a band of them killing approximately 3,000 Americans on 9-11-2001?

With this in mind, the intellectuals at the Ayn Rand Institute (ARI) desire to take us to the land of rationality, freedom, peace, prosperity, and respect for individual rights. However, in order to do this, they apparently believe it is necessary to compromise some principles. Namely, we must use the tools of the State to conquer our enemies, those radical mystics who hate us, the fellows at ARI allege, solely because of our freedoms (stemming from our enlightened Western worldview). “We” must wage war on “them” in an unrelenting fashion, disregarding any collateral damage (e.g., civilian casualties), because “we” are moral and “they” are evil. This is no laughing matter, after all.

The “we” here is used (wittingly or not) to conflate all Americans with the actions of the U.S. government, its military, and its more clandestine and even more unaccountable coercive organizations such as the CIA , NSA, DHS, ICE, FBI, etc. The ARI fellows believe that the U.S. government should not appease other countries by apologizing for its assertions of power in the Middle East. It should not make concessions. It should not be diplomatic. It should not lose face. And, it should not cut and run. They also believe that even though “we” should not be in Iraq , “we” should fight to “win”, nevertheless. Additionally, the U.S. government should not be “selfless” by trying to institute freedom or democracy or stability in the Middle East. Nope, the fellows at ARI see such policies as self-sacrificial. Rather, “we” must destroy the enemies of reason, egoism, and individualism who threaten us until they are all wiped off the planet, or until they so tremble in fear at the mere mention of “America” that they would not even think about being aggressive. (Curiously, war-mongering intellectuals seldom practice exactly what they preach. Given what they have helped sow and reap lately, it is little surprise that being air-dropped into Baghdad to do patrol for a year is not on their things-to-do-for-liberty list.)

These are the ideas I heard during ARI’s public lecture in Costa Mesa, California on the 6th anniversary of 9-11. Instead of rational arguments, I heard arguments for preemptive strikes and collective punishment of entire countries of people. Because the ARI fellows believe that terrorists are motivated by no political grievances, but rather by their sheer lust to impose Sharia or death upon all of us, how could the fellows ever analyze the facts and be objective? By trying to meld an ethics of rational self-interest (egoism) and psychology of self-esteem (self-confidence and self-respect) with the premises of collectivism and statism, they have clearly rendered their particular Taggart Transcontinental locomotive unfit for traveling on a logical track Rearden metal.

Yet Rearden metal has substantive problems too. The political branch of Objectivism, as Ayn Rand devised it, entertains a sizable contradiction. It holds that a monopolistic organization of people called government is necessary to protect everyone within its coercively and arbitrarily imposed boundaries. Therefore, in Objectivism, government is viewed as an institution that is, or at least can or should be, efficacious – despite all evidence and logic to the contrary.

While Objectivism’s ethical branch extols a moral code based on rational self-interest, individualism, and happiness according to objective values and virtues, its political branch harbors the ideas of collectivism and statism. Thus, we witness attempts by ARI’s fellows and their supporters to justify actions of people in government by appealing to absurd abstractions such as “national self-interest”. Instead of noticing their essential conflict in these matters, they continue to sanction and promote the coercive behavior of those working for the State, and thereby drop the context of self-interest, individualism, and happiness – in addition to reason and objective reality.

Instead of strictly denouncing taxation and the welfare/warfare State, and by extension its ridiculous military structure, based on Objectivism’s principles of reason and individualism – and individualism’s historical and societal roots in America – the fellows at ARI utilize the currently hegemonic, neoconned political climate and the psychological aftermath of 9-11 in a way that rivals the mainstream media. Truthiness has replaced logic to understand war and the elements of statism and collectivism that give rise to it. We are now in mortal danger, they implore, and government’s responsibility is to protect us (regardless of its horrific track record on that account). According to what can be gleaned from ARI fellows’ various assertions and retorts in these matters, anybody who believes otherwise is living in the land of Oz (reflecting a choice debate tactic of Bill O’Reilly).

From their admonitions, similar to politicians who continue to exploit 9-11, you would think that terrorists had been attacking us on a frequent basis here in America. But even if that were the case, it still would not justify the U.S.’s military and all those alphabet soup coercive agencies taking action – for, in the process of making us “safe”, they would assuredly kill and maim many more thousands of innocent people, further damage the American economy, and violate what is left of our liberties. Some good ol’ Randian premise-checking definitely clarifies this issue.

Most people in the Middle East and elsewhere really like America. It is a dynamic and capital-rich marketplace of goods, services, and ideas. It represents, in theory at least, a great land of opportunities for anyone wanting to flourish and willing to be productive – “a shining city on a hill.” They just detest the depraved institution that casts a shadow on our city and the rest of the world. The U.S. government’s empire might be one of the worst kinds, because its citizens tend to view themselves as free and, hence, its coercive actions as benevolent. Of course, the actual individuals who are orchestrating and participating in this madness know full well what they are doing, and how large their bank accounts are getting on account of it. Far from being the selfless do-gooders that ARI folks contend, they are selfish in the most irrational way – sacrificing others’ lives and well-being for their own sakes.

In this age of pervasive authoritarian and collectivistic memes, fears and other strong emotions continue to hinder people’s better judgment. Callous disregard for innocent people in terrible political systems is all too common, as is ignorance of individual rights, self-ownership, and personal sovereignty. Each of us needs to hold strongly to our own liberty, and thus our society, as fear-mongers of all creeds constantly try to take perverse advantage of real or potential acts of terrorism. Beware the intellectual and psychological guises of those who posture as your protectors or philosophical gurus. Pay attention to the way they step.

PAUL-HATERS ON THE RIGHT AND THE LEFT UNITE IN A COMMON CAUSE

You can tell an awful lot about a man by his enemies.

The Ron Paul campaign has generated a lot of excitement, especially among young people. It has made political history by raising more money in a single day than any other presidential campaign, ever. It has inspired thousands and given hope to those who had given up on politics altogether – as well as thrilling longtime libertarians who have been laboring in the vineyards all these years and have not seen anything like this before. On the other hand, it has inspired – if that is the right word – a counter-movement, an anti-Paul coalition that extends from the extreme Left to the neoconish Right, and all points in between. What is interesting is that the lies told by these anti-Paulistas amount to pretty much the same tiresome mantra, no matter what the politics of the perpetrator, and it amounts to this: Paul is a secret neo-Nazi.

I kid you not.

How, you may ask, does someone invert reality to such a degree that the kindly country doctor, whose good name is a byword for integrity and principle, suddenly is turned into a monster with a hidden agenda? Well, it is not easy, and they are having a really hard time of it ...

The anti-Paul Popular Front is wide-ranging, extending from the neocons over at the Weekly Standard and the editorial offices of National Review to the left-wing Web sites priming their readers for Hillary’s candidacy – and leading, finally, to the lair of something called the American National Socialist Workers Party (ANSWP), a neo-Nazi outfit run by a weirdo by the name of Bill White. White’s contribution to the smear campaign is a cock-and-bull story, posted on the Vanguard News Network forum, which claims that Paul and his aides have regularly met with neo-Nazi nut-jobs such as himself, supposedly at a series of dinner meetings organized in Washington, D.C. Says Fuehrer White:

“Comrades:

“I have kept quiet about the Ron Paul campaign for a while, because I didn’t see any need to say anything that would cause any trouble. However, reading the latest release from his campaign spokesman, I am compelled to tell the truth about Ron Paul’s extensive involvement in white nationalism. ...”

There is nothing worse than a sloppy smear, but then again, Paul’s enemies are not too particular about the quality of the slime they sling at him. Charles Johnson, the anti-Arab fanatic who runs the Little Green Footballs website, has absolutely no compunctions about teaming up with a neo-Nazi goofball like White if it serves the purpose of discrediting Paul. Yet by acting as a megaphone for a crazy person, Johnson only winds up discrediting himself.

Oddly, it turns out that Johnson the ardent Zionist and White the goose-steppin’ Nazi have an awful lot in common: hatred of Paul and of libertarianism – and that clearly outweighs the hatred they have for each other.

Yes, it is all about hate, and that is the irony of it. These people accuse Ron of being a hater, but if we investigate the perfervid fever swamps of anti-Paulism, the one emotion that hits us in the face, like a blast of hot, fetid air, is pure, undiluted malevolence. Of course, White deals in hate. His whole identity and crazed persona as the second coming of Adolph Hitler is wrapped up in bile and brazen evil – another “outsider” gone bad. Yet if we go to the other side of the spectrum and meet White’s opposite number, we see the same bile, expressed in the same style. I want you to meet Victor Vancier, AKA Chaim Ben Pesach, head of something called the Jewish Task Force, a splinter group originating in the extremist Jewish Defense League.

Vancier is no ordinary clown. He is a follower of the late Rabbi Meir Kahane, whose Kach movement is an officially designated terrorist organization, and Vancier is a convicted terrorist himself. In 1987, he was arrested and charged with masterminding several bombings. He was convicted, along with his co-conspirators (though one committed suicide), and sentenced to 10 years in prison. In this context, Vancier’s declaration that Ron Paul’s supporters deserve to be killed is ominous in the extreme.

Vancier and Bill White both have a penchant for stormtrooper-semi-military drag, violent hyperbole, and the sort of hectoring, wide-eyed hysteria and outright viciousness that repels any ordinary human being but attracts fellow miscreants and social rejects. In short, they are both crazy, and in practically identical ways. But that is not all they have in common. Both hold ideological grudges against Paul and his fellow libertarians. Vancier hates Paul’s foreign policy views, which he sees as a threat to Israel. White resents Paul’s success because the good Dr. No has a non-racist, nonviolent, anti-collectivist explanation and solution for what White and his fellow Nazi nutsos attribute to a nonexistent “Jewish conspiracy” – the Federal Reserve, bank credit expansion, and subsequent waves of bankruptcies and foreclosures. Paul offers his growing audience of politically and often economically disenfranchised voters a rational explanation in the insight of the Austrian economists and the works of Ludwig von Mises, while White and his tiny cadre of National Socialist Workers look to the discredited pages of the Protocols of the Elders of Zion.

The Don Black donation brouhaha involves $500 from someone who is a top leader of the Stormfront Web site made under extremely suspicious circumstances. Black’s last known political activities were undertaken on behalf of George W. Bush during the Florida recount, when Black and his fellow racist crazies drove Jesse Jackson off the stage during a Democratic Party rally. The Black contribution was soon discovered by the anti-Paulistas, who demanded that Paul return the “tainted” money – and, presumably, undergo sensitivity training under the aegis of the Southern Poverty Law Center.

Paul, however, refuses to return the Black donation, and rightly so. After all, he is not spending the $500 to advance any objectives that could even remotely be connected to neo-Nazism. He is spending it on promoting his own program of economic freedom, individual liberty, and a non-interventionist foreign policy. Anyway, who put the anti-Paulistas in charge of vetting each and every contribution to the Paul campaign – and why should Ron concede that role to them? Over 70,000 people gave this quarter – is the campaign supposed to comb through each and every one of those names and vet them for political correctness? Naturally, the Paul-haters would answer “Yes” – they would love to see the campaign consumed with policing itself according to their strictures.

Surely Black, as the leader of a neo-Nazi group, is very well aware that his “support” is hardly welcome and would actually hurt Paul. Stormfront members discussed this openly when “Commander” White posted his statement. With supporters like that, Ron does not need any enemies. Essentially, Black did exactly what White did and what professional witch-hunters such as David Neiwert and neocon idiot Michael Medved have tried to do, and that is to smear a good man who does not have a racist bone in his body as a “white supremacist”.

What is even more ludicrous is the accusation of “anti-Semitism”. Let us be clear about this: No libertarian, particularly of the Rothbardian variety, of which Paul is one, could possibly entertain the idea of becoming an anti-Semite. In order to do so Paul would have to repudiate his two primary intellectual mentors and guiding lights, Murray Rothbard and Ludwig von Mises, both of whom were Jewish. Indeed, this is what led White to attack Antiwar.com and libertarians in general in a screed that described us as a “Jewish think tank” – because our webmaster and several employees are Jewish.

When the “He is a 9-11 Truther” meme did not take, the smear campaign got really down and dirty with the Paul-is-a-Nazi theme. Given Paul’s most un-Nazi-like ideology and demeanor, however, this one is not going to fly, either.

This has all the marks of a coordinated hit job, and although I would not venture to guess who is doing the coordinating, it seems clear to me that the Republican Establishment is frightened to death of an independent run by Paul in the general election – a possibility Paul has not completely ruled out. By marginalizing him now before he cuts into the GOP base, they can save themselves a lot of trouble – and if they have to get in bed with a lot of truly sleazy types, such as Messrs. White and Black, well, then, that is why they call them “dirty tricks”.

No bag of tricks, no matter how dirty, is going to be enough to stop the Ron Paul Revolution. His appeal is only increasing, along with his visibility, and smear campaigns like the one exposed above are only going to cause thinking people to wonder what the smear-mongers are so afraid of.

What they are afraid of is that the politics of principle represented by Paul and his followers will finally get a hearing, in the debates and on the campaign trail, on account of the millions of dollars contributed by Paul’s supporters nationwide in a spontaneous and truly phenomenal outpouring of donations and independent activism.

The sheer breadth of the anti-Paul Popular Front is an astonishing sight to behold, extending all the way from avowed Nazis to radical Zionists, from Noam Chomsky to Glenn Beck. Both Fox News and the International Socialist Organization are out for Paul’s scalp – and you can tell an awful lot about people by their enemies. What this tells me about Ron Paul is that he is just what many people on both sides of the political spectrum have been waiting and hoping for.

The Ron Paul Problem

There should be no doubt that Ron Paul and his presidential campaign have become a phenomenon, both among Republicans and independents and among libertarians. Also, there is no doubt Ron Paul running for president and bravely and clearly arguing a libertarian case in many issues attracts a lot of people from the “mainstream” to the libertarian movement. The libertarian movement should be growing rapidly thanks to Ron Paul.

I do believe a Ron Paul presidency would be a lot better for me and my personal liberty than any of the other candidates. But that does not mean much considering who the other candidates are and what they are about. With Ron Paul as president, the libertarian movement will, even if it does not endorse Ron Paul’s presidency, become part of the establishment. It will mean the end to radicalism, libertarian values and the call for radical change. As is obvious with the Libertarian Party, it is not only power that corrupts – the aim for power corrupts as much.

The libertarian idea is all about individual freedom and anti-government. A libertarian in the Oval Office is a contradiction so obvious the blind could see it clearly. The only question if this happens is, will it be the end of statism caused by libertarianism – or the end of libertarianism caused by statism? I am afraid it might be the latter.

SLOGANS THAT WORK

Some corporate catchphrases do their job. They inspire the employees and the suppliers to be innovators.

Can you motivate the troops with a mere corporate slogan? Yes, if there is some substance behind it. A few years ago “Blue Ocean” was the rallying cry inside the Kyoto videogame company Nintend. Blue Ocean is the notion of creating a market where there was none before. Instead of joining the videogame arms race of faster processors and more violence, Nintendo aimed to attract people who had not played games before. Its less flashy but addictive games like Nintendogs and Brain Training, coupled with innovative touchscreens, voice activation and motion-sensing technology, made games easy to play. Women and middle-age folks became converts. Nintendo now outsells Microsoft and Sony, and last year its market capitalization surpassed Sony’s.

What makes a corporate slogan effective? A recent issue of the Strategy & Innovation newsletter summed up the matter this way: The most effective corporate catchphrases are sticky. In other words they should be understandable, memorable and effective in changing thought or behavior.

Cranium, a Seattle board game company, uses an in-house jargon word, “chiff” – for “clever, high-quality, innovative, friendly, fun.” With this phrase Cranium’s executives strive to remind themselves – and their suppliers and their 80 employees – that they have to be incessantly innovative, in everything from package design to the choice of questions for their brain-teasers.

According to S&I, their Chinese manufacturing partner called Cranium Chief Executive Whit Alexander to discuss a new plastic game piece. Alexander specified that the piece would be purple and made of multiple parts that would need to be glued together. The Chinese manufacturer balked. “It’s not ‘chiff,’” he said. Alexander was astonished. His supplier, halfway across the globe, had used Cranium’s own pet phrase to critique the lack of innovation. The Chinese manufacturer came back with a novel, smooth design using a single-injection molding. It would be cheaper to make, and it would deliver more fun to the customer.

What kind of slogans fail? Here is one guaranteed to be ineffective: “Our mission is to unlock shareholder value.” What does that tell the customer about how you are going to treat him? What does it communicate to a vendor?

Costco, the retailer that combines high quality with low prices, communicates its philosophy by talking about “salmon stories”. In the mid-1990s Costco was selling skin-on salmon fillets for $5.99 a pound. Good, but not good enough. The fish buyers persuaded the salmon packers to remove fat, back fins and collarbones. Costco cut the price to $5.29. Then buyers asked for skinless, boneless fillets. The boost in quality led to a boost in sales. With volume higher, Costco was able to cut the price to $4.99. Eventually they ordered directly from salmon farms and took the price down to $4.79. Costco could have stood pat at $4.99 but did not because it wanted to reinforce its mission – to drive itself and its suppliers down the cost curve and to do so ahead of when competitive pressures compel it to.

The right philosophy, stated in the right way, makes it easy for the troops to offer feedback. If Cranium’s stated strategy was, “To be the number one provider of tabletop entertainment,” on what ground could a Chinese manufacturer state an objection? Could he say, “Using this glued-together piece will threaten your provider position”? Doubtful.

British Petroleum came up with a catchphrase 17 years ago to state a new philosophy about exploration costs. The oil industry had a tradition of tolerating failure. You poke 10 holes in the ground, and it is okay if the first 9 produce nothing so long as the 10th is a gusher. That might have made sense in the days of Spindletop, but it does not today, when wells have to go much deeper and cost $4 million to $40 million.

The BP slogan: “No dry holes.” Meaning, geologists would have to make a much more compelling case before they ordered up the drilling rig. The idea got across. BP’s hit rate, two in three, is three times the industry average.