|W.I.L. Home Page||Offshore News Digest Home|
|Sign Up||Finance Digest Home|
THE POLITICAL CLASS CROSSES THE RUBICON
The radical libertarian view of the state as a gang of criminals will no longer be a hard sell.
James Ostrowski avers that with last week's bailout bill passage, "the biggest armed robbery in human history," the political class removed the last remaining shadows of doubt that they are nothing but a criminal gang and shreaded whatever legitimacy they still had. Both parties are useless. Both parties are enemies of the people.
It can no longer be denied that the political class steals from the poor and gives to the rich. Moreover, having bailed out the rich, the door is open for implementing every spending bill helping the less-than-rich as well, which will accelerate the financial collapse. As leaders of the opposition to the bailout, libertarians have in one week erased the lie that they are apologists for the rich.
Ostrowski believes the corporate state regime has now set in motion its own destruction. Congress were besieged by calls, emails, faxes and personal visits against the billionaire banker bailout. The polls said the citizenry were overwealmingly against it. These were ignored. So much for the myth of representative government. "Tempted by a vision of hundreds of millions of sheep on the other side waiting to be sheared and slaughtered," they could not resist and crossed the metaphorical Rubicon.
Many of us are at a loss for words to describe the significance of the billionaire banker bailout. We wish Murray Rothbard was still here to paint a vivid picture for us.
My father would teach us that swearing is what people do when they lack the ability to express themselves clearly. I plead guilty as I have been swearing like a sailor at Congress the last few days.
I cannot help but think back to Caesar and the Rubicon. I think this bailout is the modern Rubicon of the political class. This is the point of no return. As Mises taught us, this massive intervention will accelerate the amazing growth of the power, size and scope of the federal government which will soon lead to escalating and cascading crises that could bring down the regime.
One consequence of the bailout has been overlooked. It will now be impossible to argue against any new spending program that favors non-billionaires and non-millionaires. "If we bailed out Wall Street, why can't we help X." You will hear that line ad nauseum until the kleptocracy collapses under the own weight of its own greed.
So, objectively, the corporate state regime has set in motion its own destruction. The subjective conditions for radical change have also been established. The radical libertarian view of the state as a gang of criminals will no longer be a hard sell. It is now apparent to any honest and thinking person not blinded by being on the dole that the corporate state is a bunch of criminals, degenerates, and hoodlums. They just pulled off the biggest armed robbery in human history right before our eyes. Worse yet, it can no longer be denied that these thugs steal from the poor and give to the rich! Since the libertarians have led the opposition to the bailout, we have in one week erased the lie that we are apologists for the rich.
The corporate state's false god, democracy, has also suffered a mortal wound. We all know that the crooks in Congress were besieged by calls, emails, faxes and personal visits against the billionaire banker bailout. These were ignored.
Let us be clear about what happened here. This was the greatest single outpouring of populist feeling against a bill in living memory and the Congress last week said to the American people: Screw you! The people beseeched Congress not to make this mistake and the Congress responded like Caesar:
“I am constant as the northern star,
Of whose true-fix'd and resting quality
There is no fellow in the firmament.” ~~ Julius Caesar (III, i, 60–62)
The message is clear. If we play by their rules, we will lose. If we "win," they will just replay the game again and again until they win.
We have learned other valuable lessons this week. Both parties are useless. Both parties are enemies of the people. The mainstream media is useless. They were in the tank for the bailout throughout.
This week, the political class, drunk with hubris, crossed their own Rubicon. They had been tempted by a vision of hundreds of millions of sheep on the other side waiting to be sheared and slaughtered.
In this chess game, it is the "sheep's" move. I have played a little chess in my time so I suggest this move: render to Caesar that which is Caesar's. Brutus said:
“There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.” ~~ Julius Caesar Act 4, scene 3, 218–224
Worst Legislation Ever?
Basically an alternative way of expressing the sentiments of the article immediately above. The question is whether the general population will truly "get it" ... that they have been had?
The American people spoke last week, and their rulers ignored them. That is nothing new, I know, but the passage of the bill to rescue Wall Street and other corporate interests from being grievously injured by what they themselves created in a frenzy of runaway greed is the most egregious, morally repugnant piece of legislation to be signed into law since -- well, since when? I cannot think of anything more ghastly in not only what it does but also what it implies about the future of this nation of ours.
It provides welfare for the mega-rich from the ordinary taxpayer. The rulers will ride out falling markets on the backs of the masses, who were told time and again during the drama preceding the enactment of this thing that the reason they did not like it one bit was that they -- the little people -- did not understand it and were too stupid to applaud forking over hundreds of billions of dollars to their betters in just the manner being prescribed. This unprecedented raid on the public till had to be done lickety-split. Authority figures agree, so who are we to argue? Why should there be hearings when the experts were in agreement as to what should be done? Why listen to any of the many dozens of economists who thought the measure to be insane? It has become trite to call this swollen, pork-laden bill "socialism for the rich," but it is precisely that.
And these men we have running for president, where are they on this? Initially, both Sen. John McCain and Sen. Barack Obama expressed their tentative approval of the bailout, oops, I mean rescue bill, and then began backtracking when the extent of voter disapproval made itself known. A few days later, they came to agree on the necessity of it, thereby illustrating beyond any lingering doubt that, as Ron Paul puts it, "our one-party system is complicit in yet another crime against the American people."
People being what they are, many folks of a partisan bent like to blame the other party for the mess we find ourselves assigned, against our will, to clean up. Who dug the hole? Be assured that both Republican and Democratic politicians have been shoveling away at it for many years. Democrats say the GOP is at fault for foisting upon us various deregulations that caused the mortgage mess that triggered the credit implosion. But Tom Donlan says in Barron's that the problem is not that there were not enough regulators or regulations, but that the regulators "were not sane." In an opinion piece, Mr. Donlan says, "Regulation and regulated institutions encouraged the risk-taking, helped to finance it and continue to excuse it."
Republicans accuse the Democrats of pressuring Fannie Mae and Freddie Mac into creating a market for toxic mortgages. Again, Mr. Donlan: "Who did the pressuring? A string of presidents and their appointees at the Department of Housing and Urban Development and a legion of congressmen inspired by housing activists dreaming of home ownership for all." Republicans. Democrats. They are all in it together, an idea those partisans and their media champions find difficult to accept, even though it seems to me undeniable.
I find it strangely satisfying that Congressman Paul, the little Texan who was soundly thrashed in his Quixotic quest for the Republican presidential nomination -- the man who was laughed at and mocked as a kook when he tried to alert us all to the fragile and unsustainable nature of our money system -- is now seen by more and more Americans as the one politician who told us the truth. No wonder the system spit him out.
The plan bulldozed through Congress last week carries with it dire implications about the future of our country. To redistribute income upward as this does means the game is over. We live in an age looking suspiciously like that of other empires in their late periods of decay, and if you do not know what that portends, it is probably just as well.
How many ways can you call an abomination and abomination? In this article from Ireland, written before the $700 billion bailout bill passed, the author dredges up Gore Vidal's contemporary and now particularly apropos observation on Reaganomics: "The U.S. government prefers that public money go not to the people but to big business. The result is a unique society in which we have free enterprise for the poor and socialism for the rich." Robert Reich called the series of bailouts "socialized capitalism." And from economics professor Nouriel Roubini, who vocally and correctly predicted the current mess, unlike most of his state apologist colleagues:
"[C]alling it socialism (even socialism for the rich, the well-connected and Wall Street) is giving a bad name even to a failed experiment like socialism; this is more akin to the creation of a corporatist state (like the Italian fascism or the German Third Reich) where private sector interests are protected (gains privatized and losses socialized), where the government is taken over by corrupt and reckless private interests."
Finally, in Barron's -- not exactly the ultimate source of iconoclastic unconventional viewpoints -- Thomas Donlan editorializes: "The U.S. Senate and House haven't abandoned all their principles by voting for the bailout bill. They have retained some of the principles that had greatly contributed to creating the mortgage mess and the credit crunch. The principles of loose credit, irresponsible subsidy and blind regulation are preserved in the legislation. ... [T]he bill also provided a nearly complete abdication of the principle of congressional responsibility."
NEW ZEALAND TOPS EXPAT QUALITY OF LIFE POLL
Offshore savings bank Alliance and Leicester International conducted a survey of its UK expat customers and found that New Zealand was rated most highly among all expat destinations, due to both its high quality of life and low cost of living. Certainly sounds like a winning combination. The fact that New Zealand is too small to be in the empire building business undoubtedly helps.
New Zealand has topped a poll of the most popular destinations for UK expatriates conducted by Alliance and Leicester International (ALIL), the offshore savings bank. According to the survey, New Zealand was rated highly on two fronts: its favorable cost of living and its high quality of life.
At £105,750 ($185,750), average property prices in New Zealand are relatively low, while food, drink and fuel are also considerably cheaper than in other popular destinations for expats. It also boasts one of the more favorable tax regimes, with the highest band at 39% -- significantly lower than its neighbor Australia (50%) and the ever popular expat destination, France (48%).
In ALIL's Cost of Living Scorecard, New Zealand was followed by South Africa, Florida, Dubai and Canada. The UK rated 8th of the 14 countries. At the other end of the scale, France is the most expensive followed by Hong Kong, Spain, New York and Singapore.
New Zealand -- a country with a population of under 5 million -- also boasts a low crime rate, high internet connectivity and consistently mild weather, favorable working hours and generous annual leave, which puts it at the top for quality of life on the ALIL scorecard.
Australia scored well on the Quality of Life Scorecard coming in at 2nd place -- compared to 9th in the cost of living scale. European destinations -- Italy, Spain, Portugal and France -- also scored more highly on this aspect of the study, as the relaxed Mediterranean attitude to work life balance triumphed. Poor weather dragged the UK down the rankings to 8th, while Canada's freezing winters also affected its position.
While rated the 2nd cheapest country for the cost of living, South Africa fared far worse when it came to the quality of life. This was mainly due to the high crime rate -- South Africa is notorious for high levels of property crime and has the highest rate of murder of any of the countries in the list, with a rate of 0.496 murders per 1,000 people. It also has a very low level of internet connectivity and a long working week (45 hrs).
However, New York with its over 40 hour working week, just 10 days annual leave and relatively high crime rate offered the lowest quality of life. Those devoted to fast city living may dispute this, citing nightlife and high salaries as attracting them, but for many the downsides outweigh the upsides.
Wow. The Big Apple rates lower than South Africa?!
Simon Ripton, Acting Managing Director of Alliance & Leicester International comments: "Costs and quality of life are often not the primary reason that many UK citizens decide to move abroad, particularly if work takes them to another country. However these are certainly important factors once they are in their new home. Most places have their unique attractions, so while one country might be someone's idea of heaven, it might be another's idea of hell."
He adds: "That said, New Zealand does on average appear to offer a high quality of life at a reasonable cost -- attributes that many people value in their country of residence. Its strong cultural links to the UK also make it highly attractive to many UK movers. But wherever expats do decide to settle, they will want to maintain links with the UK and many of the aspects of their home country that they value."
INNOVATION VS. POVERTY
How smart companies create wealth in emerging markets.
Another great article from Forbes on the general subject of generating or doing business in developing countries. With 80% of the world's population and about 40% of the world's GDP, appropriately measured, the business opportunities in the developing world are clearly vast. But the First World mindset is often inappropriate for the levels of development and business cultures of the developing economies.
Harvard Business School professor Clayton M. Christensen and two colleagues supply us with some interesting case studies and insights into what it takes to succeed in economies dramatically different from that of the home base.
The math is clear: more than 80% of the world's population lives in developing countries, and these markets account for 40% of the world economy, adjusting for purchasing-power parity, which takes into account the relative cost of living and inflation rates by country. However, less than 12% of the S&P 500's revenue comes from emerging markets. Even for a global giant like General Electric the figure is a mere 19%.
This imbalance simply cannot hold. The opportunities in the rapidly developing economies of Asia, Africa and Latin America are too big to ignore. They are also very easy to mishandle. A few companies have decided that these markets are too poor to justify investment. Still others have tried to compete by selling the same product they sell in the developed world but for lower prices by shrinking the package size or by stripping out features.
There is another path: designing a profitable business that enables customers in developing economies to be more productive and financially secure. Succeeding with this strategy requires that a company shift its focus away from redesigning its current offerings and toward creating new businesses from a blank slate. Those new businesses will perform jobs that customers in developing countries are struggling to get done. Unless a firm truly comprehends the jobs that developing-country customers want to get done, it risks importing assumptions from abroad that will sink the overseas business.
You can find companies thriving at the bottom of the pyramid in markets as diverse as mobile telephony, chicken farming, banking and brewing. Often the winners are local firms that can see opportunities without the distorting perspective that comes from being headquartered somewhere else. The Tata Group's Ginger discount hotel chain in India is an example of this.
But some multinationals are skilled at finding new markets in poor countries. General Motors, in partnership with the Chinese firm SAIC, has found great success in China with its Wuling Sunshine minivan, a small vehicle with a tiny engine, a top speed of 81 mph and passenger seats that are 1/3 as thick as those found in U.S. models.
For small distributors ferrying goods around China's congested cities, the job is to carry a modest cargo cheaply. The distributors are not much concerned with power, speed, comfort or capacity. They do, however, care about the price, and here GM has it right. The Wuling Sunshine starts at under $5,000, and the vehicle gets 43 mpg. The Wuling has 37% of the small-minivan market.
Entrepreneurship is part of daily life in emerging economies, because often there is no other option. The poor understand that commerce -- selling handmade crafts or running a small shop -- is the way to improve income levels. Some of the most successful firms in emerging markets, such as cellular carriers, have exploited this insight. One African carrier, Celtel, created so much value it was recently sold to Kuwaiti wireless phone company MTC for $3.4 billion. Celtel allowed families and friends in remote countries like Chad to keep in touch, but it also created significant business value. If a repair to a commercial dishwasher is needed, no longer does the restaurant owner have to travel to the township where the repairer lives and hunt for the person. Nor does the owner need to engage middlemen with whom these maintenance laborers contract. Rather, the repairman can be in business himself, responding by mobile as work arises. Partly because of these efficiencies, increasing cell phone penetration by 10% in a country adds half a percentage point of GDP growth, according to a study by McKinsey & Co.
Many firms expanding into emerging markets from developed countries struggle because they are often bound by the business strategy and close operational supervision of their parent companies in the West. As a result, they stand little chance of blazing fundamentally new paths in developing markets.
Citibank has been operating in Zambia since 1979, emphasizing its corporate banking services and opening two branches in Lusaka, the capital, and Ndola, the country's 2nd-largest city. It has reasoned that corporate customers do not need dozens of branches, and therefore it can save on branch operating expenses. The bank also realizes that several multinational customers value one particular job that Citibank helps to get done: simplify financial systems by keeping funds in one global bank, no matter what countries the customer operates in.
Yet there are many functions offered by Citibank, which, while valued by corporate customers elsewhere, have less relevance to Zambians' job requirements. Zambian companies often do not value long-term investment and lending services, and if they do seek loans, they often go abroad to avoid local interest rates that can exceed 20%.
Many Zambian businesses transact in cash, so they benefit little from Citibank's sophisticated reporting systems. Cash transactions could be handled through local Citibank branches, but Citi's emphasis on the corporate market -- and its conclusion from developed countries that branches are of limited value -- severely limits this offering.
In contrast, Zambia's Finance Bank has grown rapidly in recent years with an entirely different business model. The firm has 33 branches in Zambia, drawing long lines of customers depositing or withdrawing as little as $5 at a time. The bank recognizes that its customers often rely on unreliable public transportation and that it can win their business by being close to them. It allows wholesalers of consumer goods such as beer or soda to pay their suppliers through its branches, rather than having to transact large sums in cash with a delivery-truck driver in a busy public market. This service gains the bank a foothold at some of Zambia's largest corporate customers. Finance Bank serves the retail market very profitably, earning $17.3 million last year on $57 million in revenue. Its efficiency ratio, or total operating costs divided by revenue net of interest expense, was an admirable 53% in 2007. Prior to the current banking fiasco, Citibank's ratio was in the mid-50s.
The principle of redesign applies to products as much as to business models. In markets like India where some incomes are rapidly increasing, there is strong demand for products tailored to local market conditions. Air conditioners, for instance, are considered a luxury for most Indian homes, and even those Indians who can afford them rarely turn them on because electricity is costly. LG last year introduced in India an affordable air conditioner with electronic controls that vary the speed of the compressor in accordance with cooling demand. LG claims it can cool or heat a room 50% faster than old models, with 44% less energy usage. Cummins has introduced a low-cost diesel generator with dirt guards to keep the engine running more cleanly in India's dusty towns.
The challenges of distribution in emerging markets can foil even brilliantly conceived ideas. Conversely, effective distribution can give a tremendous leg up to new concepts. Supermarkets are a rare sight in many emerging markets. Small grocers, many operating in the informal economy, serve most of the population. These grocers collect their supplies from entrepreneurs who operate storage trailers in markets spread widely throughout cities, often in the midst of the townships where the poor congregate. Transport being relatively expensive, lengthy and awkward, grocers may simply carry goods by hand from the wholesaler's trailer to their premises, or load them precariously on a bike.
It is not easy to start distributing to these entrepreneurial wholesalers. Existing ones are often locked up by manufacturers in exclusive relationships. Brewer SABMiller ($21 billion in worldwide revenue) has benefited immensely through taking control of distribution systems for beers and soft drinks. SABMiller demands that its distributors work exclusively with its brands or brands SABMiller approves. Any distributor that wants to compete with SABMiller's network has massive obstacles in getting working capital, bank loans and trade credit.
Success at building disruptive growth companies in the poorest countries boils down to four areas on which to focus action. First, gain a deep understanding of the jobs that customers in developing countries need to get done. Twice a year Nokia sends marketing, sales and engineering employees from its entry-level phone group to spend a week in people's homes in rural China, Thailand and Kenya to observe how people use phones. Nokia has the highest market share in phones in India or Africa.
Second, disrupters must develop blank-slate solutions that solve problems better or differently. AllLife is a South African life insurance firm that issues policies to people who are HIV positive, a population of 2 million in South Africa. Competing policies tend to have steep premiums and a $12,000 coverage maximum. AllLife, by monitoring policyholders' health and medicine regimes, is selling cheaper coverage up to $360,000.
Third, subsidiaries must be able to operate freely. Even being dependent on the parent company for IT systems can constrain an in-country manager. In the name of efficiency, banks such as Standard Chartered often centralize emerging market it operations in countries like Malaysia, but when push comes to shove the priorities of relatively large, more developed markets such as the ones in Southeast Asia typically vault ahead of what operations require in some of the smaller, poorest nations such as the countries of Africa.
Fourth, businesses need to be patient for growth, but impatient for profits. The surest sign of a subsidiary's success is whether it makes money, which also signals it is evolving toward a sustainable business model. Managers can adjust their business model many times, but there is a limit to how badly things can go astray if profitability is mandated.
Together these steps can help a company recognize the innumerable inefficiencies and difficulties of developing economies and use those problems to its advantage. Successful firms are those that win the loyalty of frustrated consumers and can turn nonconsumers into new sources of revenue.
Two accompanying sidebar articles are "Cheaper Sleeper: India's ritzy Taj Group has a new hotel chain for the commoners" and "Cleaning Up Cheaply," about a small cleanup operation in Guatemala.
SWISS SAID TO BE SHARING CLIENT DATA IN TAX CASE
The IRS wants Swiss bank UBS to turn over data on certain American clients who the IRS has reasonable suspicion to believe have been evading taxes. This would violate Swiss secrecy laws unless the people under investigation had committed "tax fraud," which is illegal under Swiss law, as opposed to mere tax evasion, which is not. UBS handed the data on the U.S. clients over to the Swiss government, dumping the problem on their laps. Now sources close to the matter have disclosed that the Swiss government will be handing over data on some of the UBS clients to the U.S.
We suspect that with the U.S. holding UBS's U.S. assets hostage, the Swiss government is acceding as gracefully as possible to that which is not in their power to deny: They have looked at the facts of the case presented at length, and like the hidden image popping out of a stereogram when viewed properly, the Swiss suddenly discovered "Tax Fraud" emerging from the background pattern. How convenient.
The New York Times characterizes the data handover as "a significant shift in Switzerland's banking secrecy laws." That is hyperbolic. Our guess is that it is rather a small, if symbolically significant, piece of realpolitik where standing on principle has become too expensive. Remember, the Swiss government may be Swiss, but it is a government.
The veil of Swiss banking secrecy is quietly being lifted -- by Switzerland. Switzerland's tax authorities, under pressure from a growing United States investigation into the Swiss bank giant UBS, are expected to hand over confidential data on wealthy American clients of UBS to the Justice Department, two people briefed on the matter said Tuesday (September 30).
The move would represent a significant shift in Switzerland's banking secrecy laws, whose tradition dates to the Middle Ages.
UBS began handing over data on hundreds of American clients with offshore private banking accounts to the Swiss taxing authority starting in August, these people said. The delivery to the Justice Department, expected to take place within several months, would place American client names in the hands of federal prosecutors seeking to build criminal cases against wealthy Americans they suspect of tax evasion.
UBS, the world's largest private bank, is under a widening federal investigation into whether it helped up to 20,000 wealthy American clients illegally evade taxes by stashing $20 billion in overseas accounts that were not declared to the IRS. UBS declined to comment, saying only that it is cooperating with the investigation.
In July, a federal judge in Miami approved a Justice Department request seeking to force UBS to turn over certain client names. The summons is thought to be the first to a foreign bank.
Swiss law makes disclosure of client data or names a crime unless the Swiss authorities think that the client has committed a serious crime, like money laundering or tax fraud. Unlike in the U.S., Switzerland does not consider tax evasion to be a crime, though both countries have largely similar definitions of tax fraud.
Under pressure in recent months from the Justice Department, Switzerland's justice ministry, taxing authority and banking regulator have adopted the view that some American clients of UBS may have committed tax fraud.
Justice Department officials hope to prove that the American clients committed fraud and engaged in tax evasion by concealing their ownership of offshore assets, in part by creating sham entities and then filing I.R.S. forms that falsely claimed the entities were the owners of the accounts.
United States law requires American taxpayers, including trusts and partnerships, to report all financial accounts held in a foreign country if their total value exceeds $10,000 during the year. Not doing so can result in a penalty of up to 50% of the amount in the account at the time. In a new tactic, the Justice Department is focusing on failure by UBS's American clients to file those reports.
As covered elsewhere on this site (see, e.g., "Offshore Trusts and Taxes" and "To IBC or not to IBC?" reports linked to from this page), which trusts and other entities are "American taxpayers" is a technical matter. The entities under discussion here are alleged to be sham entities. If true, those technicalities are essentially moot.
The entities might be deemed to be shams under a couple of circumstances. It could be because the entities were properly formed, but that functionally they operated as the alter egos of certain parties, and thus the entities and parties would not be regarded as distinct by the IRS for tax purposes. Alternatively, the entities could be shams because the incorporation papers or the like were themselves bogus. If the later holds, and some past news from the UBS matter indicates this may be the case, then the Americans and their UBS handlers gave the Swiss an easy out for concluding that fraud was involved.
The investigation is being aided by a former top UBS private banker, Bradley C. Birkenfeld, who pleaded guilty in June to helping a client, Igor Olenicoff, a property developer, conceal about $200 million in offshore accounts that were undeclared to the I.R.S. Both men, who are U.S. citizens, are cooperating with the investigation.
As part of the inquiry, the I.R.S.'s criminal division is scrutinizing 12 wealthy American clients of UBS and of LGT, a private bank in Liechtenstein, and is likely to send some of those cases to the Justice Department for prosecution, according to two people briefed on the matter.
In addition, about 100 clients of LGT, and of UBS are under active investigation by the I.R.S.'s civil division, but their names have not been referred to the criminal unit for further scrutiny. The I.R.S. and the Justice Department declined to comment on Tuesday.
The 100 client names and data came from a former LGT employee, Heinrich Kieber, who in 2002 stole company data on 1,400 worldwide clients and later turned it over to the I.R.S. and other countries.
UBS gave the client records to the Swiss taxing authority after being urged to do so by the Swiss banking industry regulator known as the EBK. The Swiss "are taking the view that the client, not UBS, is mostly to blame," one of the people briefed on the matter said.
The data includes account names, assets, contact information, records of foreign entities incorporated for the purposes of hiding assets and client authorizations of trades. Under Swiss law, the Swiss taxing authority is required to inform UBS clients of any disclosures. American clients can appeal to the Swiss tax authority not to turn over the data to the Justice Department, a process that can take weeks or even months.
IRS ISSUES REVISED FOREIGN ACCOUNT REPORTING FORM
Many ambiguous issues clarified in new version of form.
The latest revision Treasury Department Form 90-22.1, "Report of Foreign Bank and Financial Accounts" (aka "FBAR"), is sufficiently complicated that one might take pains to avoid triggering the requirements for having to complete it for that reason alone. The form instructions make explicit interpretations of the relevant law where there has previously been ambiguity. Some interpretations are close to what we at W.I.L. have been advocating all along that people effectively adopt for the sake of prudence.
Those required to file TDF 90-22.1 are: "Each United States person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing this report with the Department of the Treasury on or before June 30, of the succeeding year."
Offshore debit cards and pre-paid credit card accounts are now explicitly deemed to be among the financial accounts covered by the law. Also included are equity interests in comingled accounts such as mutual funds.
Most interestingly, the IRS shows it has been paying close attention to how offshore trusts have been structured to try and circumvent offshore financial account and tax reporting requirements. The form defines financial interest in a foreign financial account to include an account for which the owner of record or holder of legal title is "a person acting as an agent, nominee, attorney, or in some other capacity on behalf of the U.S. person," or "is a trust, or a person acting on behalf of a trust, that was established by such United States person and for which a trust protector has been appointed."
The "or in some other capacity" wording in the agent/nominee criterion seems to grant the IRS wide latitude in deciding whether a de facto agent relationship exists. This looks like a nod towards certain "understandings" where the account controller has no visible formal relationship with a given U.S. person -- for example the person supposedly gave away his assets to some trust for nothing whatsoever in return -- yet the account controller mysteriously obeys the person's every wish and command.
The protector criterion is puzzling. All along we have warned that when a trust protector who can replace a trustee is in place, the status of the trust might be crucially dependent on the protector's status. The TDF protector criterion says if a U.S. person establishes an offshore trust and then appoints a protector, the reporting requirement is thereby triggered. The trust may have a foreign trustee and account signatories, but the existence of a protector -- apparently even if he/she is foreign too -- evidently implies, in the IRS's eyes, that the creator has kept some backdoor control.
This article discusses other important changes embodied in the revised form.
In an unanticipated development, the IRS posted on its website on September 30, 2008, a new version of Treasury Department Form 90-22.1, named "Report of Foreign Bank and Financial Accounts," and known as the "FBAR." The FBAR has been the focus of increasing practitioner attention as a result of IRS efforts to publicize its filing requirements and because of ongoing investigations involving Americans who have undeclared foreign accounts at LGT Bank of Liechtenstein, UBS, and other institutions. This recent activity has included the service of a "John Doe" summons on UBS for a list of American account holders, the plea agreement of a Geneva-based UBS private banker, and hearings held by the Senate Permanent Subcommittee on Investigations into the problem of undeclared accounts.
The FBAR is not a tax form. It is a creation of the Bank Secrecy Act, 31 U.S.C. §5314, which, with its associated regulations, requires any U.S. person with signature authority or a financial interest in a foreign bank or financial account to file an information return with the Treasury Department by June 30 of the succeeding calendar year. The filing requirement applies to corporations and individuals, although there are special rules for large corporations that permit abbreviated filings with an explicit commitment to provide more information on request.
There are criminal sanctions and substantial civil penalties for any "willful" failure to file the FBAR, up to as much as 50% of the balance of an undeclared account, per year, for forms due after a legislative change in October 2004. 31 U.S.C. §§5321, 5322. As it has ramped up enforcement activity against Americans with undeclared offshore accounts, the IRS, which is delegated the authority to enforce the FBAR provisions, has made it a point to publicize the filing requirement. On June 17, 2008, two weeks prior to this year's FBAR deadline, the Service issued I.R. 2008-79, reminding taxpayers and practitioners of the obligation to file the FBAR.
This article will identify substantive changes in the FBAR form and instructions that appear in part to be a reaction to recent enforcement activity.
First, the IRS has clarified the definition of a "financial" account to include "debit card and pre-paid credit card accounts." The prior set of instructions did not contain this explicit provision, and some practitioners questioned whether a filing requirement was imposed on a U.S. person with nothing more than a debit or credit card issued by a foreign bank, perhaps guaranteed with deposited funds. The new instructions now make this clear. This clarification is undoubtedly a result of recent IRS enforcement efforts, including reams of data obtained by the Service earlier this decade after serving John Doe summonses on U.S. credit card processors identifying Americans who used credit and debit cards issued on foreign accounts.
Second, the new instructions wade into the problem area of foreign trusts. The instructions provide that a U.S. person has a financial interest in any foreign account "for which the owner of record or holder of legal title is a trust, or a person acting on behalf of such a trust, that was established" by that person "and for which a trust protector has been appointed." Trust protector is defined as "a person who is responsible for monitoring the activities of a trustee, with the authority to influence the decisions of the trustee or to replace, or recommend the replacement of, the trustee."
Many undeclared foreign accounts are associated with trusts, in some places called "Stiftungs," where a trust protector is in place. These instructions now make it clear that the FBAR filing requirement applies to a U.S. person who has established such a foreign trust or Stiftung, bringing a fairly routine form of tax non-compliance involving undeclared accounts explicitly within the ambit of the serious civil and criminal sanctions noted above.
Interestingly, however, the filing requirement applies only to the U.S. person who has established the trust, not that person's heirs. Many situations involving undeclared accounts emerge after the death of the person who created the account, when that person's children have, only immediately before or after their parent's death, learned of the existence of the account. Under the new FBAR instructions, such heirs or beneficiaries do not appear to have an FBAR filing requirement. Having said that, the new instructions include the previous rule whereby any U.S. person who is more than a 50% beneficiary in a foreign trust has an FBAR filing requirement.
Third, the IRS has clarified a provision involving corporate filings. The FBAR requirement applies not just to corporations, but to individual employees who hold signature authority over corporate accounts, even where, as in most cases, those employees have no financial interest in the account. The IRS previously did not require individual employee filings where an account was included on a company's filing if the CFO of the company certified this in writing to the employee. This "CFO certification" exception, however, did not, at least explicitly, apply in the parent/subsidiary context, for example, where the account may have been included in a parent company filing but the CFO did not so certify to the subsidiary company's employees. The new instructions now clarify that the employee of the subsidiary need not file a separate form where the parent's CFO makes the proper certification to the subsidiary's employees and the account has been included in the parent company filing.
Fourth, of great interest to practitioners who counsel U.S. persons on voluntary disclosures involving undeclared accounts, the new form and the instructions provide for a specially designated amended filing, by including a box on the form noting that it is in fact an amendment. The instructions request that the filer "attach a statement explaining the changes." Similarly, the instructions note that for delinquent filings, the filer should "attach a statement explaining the reason for the late filing."
When taxpayers make voluntary disclosures involving undeclared accounts, they generally file delinquent or amended FBARs in addition to amending their tax returns. They will now need to include statements explaining why the FBAR is late or has been amended. Voluntary disclosures offer some general assurance that the IRS will not proceed criminally, but given the size of the potential civil penalties (possibly 50% of the account balance per year), these statements should be drafted with care, as they will undoubtedly be important factors in any IRS decision to seek any such penalties for prior non-compliance.
There are other changes in the form and the instructions:
All in all, the new form makes some significant clarifications, and may impact the advice practitioners give to the growing number of U.S. persons who are seeking to make voluntary disclosures arising from previously undeclared foreign accounts, as well as to clients who annually face this filing requirement. The issuance of the new form and instructions is a significant event, and tax advisors should parse the new rules carefully.
- The instructions make it clear that one has "signature or other authority" if he or she can exercise authority over an account "directly or through an agent, nominee or attorney ... either orally or by some other means."
- In a somewhat surprising addition, the instructions extend the filing requirement to persons "in or doing business in the United States" without regard to citizenship status. This somewhat vague language will surely create issues for foreign persons who have business interests in the U.S.
- They add an explicit five year record retention requirement, which is already in the pertinent regulations.
- The form itself is easier to use and clearer, divided into separate sections for separate filing categories, including allowing for consolidated filings by spouses; previously, each spouse had to file a separate form.
- There are more specific instructions for calculating the account's maximum balance during the year, including directions as to the impact of foreign currency holdings.
- Foreign subsidiaries of U.S. parent companies are explicitly excluded from the filing requirement, but the U.S. parent may have to file, as may an unincorporated branch of a foreign entity doing business in the U.S.
- And the instructions make clear that individual stocks or other instruments, in and of themselves, are not separate "financial accounts," and that an unsecured loan to a foreign business (not a financial institution) does not trigger the filing requirement.
THE MONTH WHEN REALITY INVADED
Gary North posits that the extraordinary financial events of this past month have inculcated the public with an overdue, nascent forboding that, as will their personal financial affairs, government deficits and borrowing cannot continue forever. The public now has an inchoate sense that while the government can delay the inevitable, that is all.
September also finally broke the back of the 1982-2000 bull market. No one is counting on new post-2000 inflation-adjusted highs in stocks any more. At eight years and counting it is about time.
September 2008 will go down in the history books as the month in which the bulls finally looked like losers. It took 8 1/2 years. March 2000 marked the end of the Reagan stock market boom, although the supposed experts did not see this at the time or thereafter. Even after the NASDAQ had declined 80% by 2003, they still told people that the best strategy is to buy stocks and hold them long-term. They still believed that the stock market was going to produce 15% per annum returns for the foreseeable future. September 2008 ended that mantra. On September 3, the Dow Jones Industrial Average was where it had been at its peak in 2000: 11,700. The Standard & Poor's 500 index was lower: 1280 vs. 1529 (close). Subtract from that over 20% price inflation.
The experts on CNBC on September 1 still clung to the illusion that there was no recession, the boom was still in force, and everything would work out just fine. By the end of September, all that lay in ruins. There is no optimism on CNBC today. There is a kind of stiff upper lip determination not to panic.
It should have been obvious in August 2007 that the end of post-2003 stock market recovery was over. Bernanke had tightened money from the day he took over as chairman of the Board of Governors of the Federal Reserve System in February 2006. Real estate was the driving force of the expansion, and real estate was in decline. It was obvious to me in late 2005 that the bull market in real estate was over. I said so at the time. It was surreal estate. A handful of us saw this coming, but it seemed so far-fetched at the time that virtually nobody paid any attention. They now pay attention.
Real estate from 2001 to late 2005 was the largest bubble in American financial history. It dwarfed the bubble of the stock market in the 1920s, because that bubble had involved only a tiny fraction of American investors. The residential real estate bubble involved 2/3 of the population, all of whom owned homes. The other third were affected because of rising rents.
People thought that they were going to get rich with leveraged real estate. Instead, something in the range of 40% of all mortgage debtors in the United States will be under water in their mortgages by the end of 2009. People were told by the experts that "this time it's different." It was not different. It was just more extreme. The consequences will be felt over the next decade.
In September, confidence was at long last shattered. At the beginning of the month, Secretary of the Treasury Henry Paulson was still assuring people that the banking system was perfectly sound. On Sunday, September 7, he unilaterally announced the Federal government was taking over Fannie Mae and Freddie Mac, along with their $5 trillion of mortgage debt. He did not ask Congress. Congress did not complain. That act ended anything resembling a free market in housing.
Falling equity takes away the credit that Americans need to borrow money to live the good life. They will soon feel betrayed. A widespread sense of betrayal is dangerous for politicians.
A LOSS OF FAITH
We are living in a time in which the fundamental religion of our era has been faith in the redemptive power of the State. Whenever there is a crisis, citizens call upon the State to bail them out. They are convinced that the State has a separate existence which enables it to intervene into the affairs of men, thereby improving the life of almost everyone under its jurisdiction.
This religion of State redemption has been fading in recent years. It gained almost universal acceptance during the Great Depression. The fundamental purpose of the State is no longer seen as justice, but rather to serve as the source of guidance for the free market, without which the economy supposedly cannot sustain long-term economic growth. There is enormous faith by the public in the ability of bureaucrats to collect data, interpret data, make accurate predictions, establish incentives that encourage growth, and enforce these incentives without bias. People generally do not believe that God intervenes into the economy with the same frequency and reliability that the State does.
The great redeemer since 1987 has been Alan Greenspan. He had the power of the printing press behind him, and he used it. People concluded that in an economic crisis, under Greenspan's guidance, the Federal Reserve System would be able to overcome all economic setbacks. This faith escalated from 1987 until his retirement in January 2006.
We are now seeing the undermining of this confidence in the ability of the Federal Reserve System to compensate for the downturns in the markets. People are beginning to figure out that Bernanke is in over his head, and the Federal Reserve System seems impotent to overcome the worst economic crisis since the Great Depression.
It is significant that this assessment, namely, that this really is the worst financial crisis since the Great Depression, is now becoming widespread in the media. The assumption that the Federal Reserve, when assisted by the U.S. Treasury, and funded by an extra couple of trillion dollars of Federal debt, will be able to deal with any crisis is now becoming shaky. There are whispers of discontent. Some people are saying that this crisis is more fundamental than what Paulson admitted in the week of September 15.
Paulson would have officially agreed with this optimism prior to September 15. He reiterated again and again that the financial system is fundamentally sound, that there is no threat to the banking system, and that people should not panic.
On September 15, Lehman Brothers Holdings declared bankruptcy. Merrill Lynch had become a subdivision of Bank of America the day before.
On September 16, at 10 in the evening, the Federal Reserve announced an $85 billion bailout of AIG, the nation's largest insurance company. The FED was buying AIG's about-to-be worthless stock. This was the first time the FED had ever publicly bought equity in a company -- a dying company.
On September 18, Paulson clearly panicked. He told Congress that it had to pass a $700 billion bailout of the financial industry. The banks had loaded up on mortgages that are going bad, and this threatens to topple a highly leveraged series of dominoes all over the world. None of this was visible to him the week before. If it really was visible, then he was lying through his teeth, as high government officials are expected to, when he assured the public that there was no fundamental threat to the economic stability of the American economy. So, he was revealed as either a liar or a completely ill-informed high official. He is supposed to be second in knowledge only to Bernanke, but the two of them have imitated a pair of drunks, staggering home in the dark, arms wrapped around each other, each hoping that the other will not fall.
When I see Bernanke on television, he looks like someone who has been hit over the head by a frying pan. He really looks dazed. He does not communicate any sense of optimism. Yet his function, as the senior representative of the fractional reserve banking cartel, is to exude confidence at all times. He no longer does.
As for Bush, he looks washed out. He really is a shell of a man. He can see his legacy going down the tubes. He is now visibly revealed as a man out of touch with reality. He is going through the motions. He is visibly the lamest lame-duck President since Herbert Hoover.
Paulson exudes lots of confidence, but unfortunately that confidence hit a brick wall on September 18. We now face a situation which he did not think we would be facing, or least pretended that we would not be facing, prior to September 15. We are facing a loss of confidence in the Treasury Department and the Federal Reserve.
This loss of confidence now centers in Congress. Congress is hearing from constituents, and most constituents are either opposed to the bailout or else they are not certain that the bailout will work, and offer the pollsters no opinion. The number of people who oppose the bailout is significantly higher than the number people who favor it. The taxpayers are beginning to figure out that they are going to be saddled with an enormous debt, and the main beneficiaries will be bankers. This does not sit well with them.
We are now seeing a significant decrease in confidence regarding the reliability of the government with respect to financial crises. This has not happened in a long time. I do not recall that has ever happened on this scale in my lifetime. It happened from 1929 to 1932, but it has not happened since then.
This new outlook has blindsided the Federal government. All the assurances coming down from the Secretary of the Treasury prior to September 15 are seen in retrospect as blowing smoke. The critics who said that the crisis would get beyond the ability of the government control now appear to have been correct.
Bernanke and Paulson are fighting mightily to persuade Congress to have faith in the proposed bailout. But the resistance of Congress turned out to be greater than either of them thought it would be. The foot-dragging upset their plans. But there was not much they can do about it.
The financial markets are still intact. This indicates that investors are not really convinced that this crisis is so great that they must be saddled with an additional $700 billion of debt in order to bail out bankers.
This has the government in a dilemma. If things get worse, Congress will capitulate to Bernanke and Paulson. It will write a blank check. But if things get worse, the recession will accelerate, Federal tax revenues will decline, and the deficit, even apart from the $700 billion bailout, will call attention to the fact that the American economy is in a crisis.
I think we have moved beyond a tipping point in American economic history. I think the investing public has begun to sense that whatever may be wrong with the financial markets, the Federal Reserve System and the Treasury Department are at wit's end in dealing with the crisis. This sense of uneasiness has not yet reached the general public. Such issues as central banking, the federal funds rate, and derivatives will never penetrate the thinking of the general public. The public simply trusts in the leaders. The public thinks that the leaders know what is going on, and can take active steps to solve any problem when it occurs. This confidence is being tested severely today.
My sense of the matter is the general public is still not anywhere near panic mode. In fact, if I were to assess it one way or the other, I would say that Paulson and Bernanke are closer to panic mode than the general public is. The public is not convinced yet that there has to be this gigantic bailout of the banking system with taxpayers' money. In the past, taxpayers have grumbled when there have been tax increases. They have paid very little attention to the Federal debt. But this bailout is big. Paulson says that it is important that it be executed rapidly. But the public finally has some sense of the magnitude of the crisis that is facing the financial markets, and the magnitude of the debt burden that is going to be placed on their backs. They do not like this message.
I, for one, am all in favor of this message. The message is that the Federal government, even when backed up by the digital printing presses of the Federal Reserve System, is facing a crisis in the financial system that may be more than it can handle. If the public loses confidence in the system, and if people begin to move their assets out of shaky banks into the large ones, the number of bank failures is going to increase. As these bank failures increase, even though these are small banks, a sense of instability will begin to pervade the financial markets. It will have the effect of the series of shoes dropping in a shoe closet larger than those of Imelda Marcos and Tammy Faye Bakker combined.
It is the drip, drip, drip of busted banks that threatens the public's confidence in the ability of the Federal government to deal with the problem. Pain has not yet afflicted most Americans. They have not lost their jobs. They do not have a savings program, so they are not all that worried about a falling stock market. They hear about the falling stock market, and they see the talking heads on television who tell them not to panic, but since most of them are running negative budgets anyway, imitating the Federal government, they do not care. What they care about is whether or not they can meet their payments next month. The Federal government does not worry about this because it can sell debt to foreign central banks, to investors who are moving out of the stock market in fear, and ultimately to the Federal Reserve System. So, the Federal government really does not worry about red ink. Voters do.
DEFICITS DO MATTER
Voters now see that their futures are going to involve a level of debt that they had not planned on. They have heard that deficits do not matter, and so far, deficits have not hurt them personally. But, at some point, either the debt level must cease outrunning economic growth, or else it is going to be funded by fiat money.
Voters do not understand how the Federal Reserve System works, but they do understand that if they continue to roll up debt, month after month, at some point they are going to have to pay the piper. They are going to get calls from the credit collection agencies demanding that they pay what they owe. They defer this day of reckoning, just as the Federal government defers its day of reckoning. The average guy in the street perceives the Federal government as being in the same situation he is, but on a much larger scale. The worse it looks for him personally in terms of his growing debt burden, the more he is going to make the same assumption about the Federal government. This assumption is correct.
The average voter looks at his own budget and concludes that this cannot go on forever. This does not mean that he is going to stop going into debt. Forever is quite some time away. Until then, he will continue to spend more than he earns after taxes. He does not want to go through the pain of balancing his budget. Americans are borrowing against their futures. They no longer save. Yet they do sense that this is going to cost them in the future. They are not going to live in a comfortable retirement. Their children are going to inherit debt from the Federal government, and this will not be compensated by any inheritance left to them by the parents as people grow older. They see that they have fewer reserves, they are supposed to change their behavior. They are supposed to go into panic saving mode. But the people have not done this.
Why not? Because they have been told that deficits do not matter. They have also been reassured, time after time, that the Federal government will intervene and bail them out if they ever get into a major problem. They look to Social Security, Medicare, the FDIC, and all of the other Federal regulatory agencies, and they conclude that they are safe. Yes, they may go through some hard times, and they may miss a few payments, but they will not be reduced to bankruptcy, and even if they are reduced to bankruptcy, someone will still send them a credit card application a month later. So, they really do not worry about the future very much. They have a nagging sense that something is drastically wrong, but they do not try to fix it. They do not want to begin to think about fixing it.
All of this is a threat to the Federal government. It is a threat because people will eventually come to understand fully that the Federal government is not fundamentally different from an individual household. It runs deficits. It can sell Treasury debt to the Federal Reserve System. But, at some point, it either balances its budget or else it goes under. How? By inflating. It ceases to be able to send out checks denominated in money that buys anything. The average guy looks at his own situation, and he concludes that at some point he will run out of maneuvering room. He has some vague awareness that the Federal government is in the same predicament. On the one hand, he is seen that the Federal government always seems to evade a crisis. On the other hand, he knows that he has done the same thing, and time is running out for him. Why should we believe the time is not running out for the Federal government? Time really is running out for the Federal government. The question is: When? It may be 10 years away. It may be 20 years away. Or, if the bailout does not go through, and Paulson was not crying wolf, it may begin in the next six months. The crucial factor is the direction of the trend.
I think the investing public has finally figured out that the stock market is not going to go back up above what it was in March 2000, plus 20% to compensate for higher consumer prices. The number of people on tout TV who talk about a new boom in the stock market being just around the corner, with highs in the range of 20,000 or 30,000 on the Dow, is zero. "Dow 36,000" is a matter of ancient history.
This shift in perspective is going to make it much more difficult for the government to persuade the voters that it has any more rabbits in its hat. Every time it pulls out a rabbit these days, there is a large price tag on it. The rabbit is then handed to the taxpayers. The government has no viable answers. It has only programs to delay the inevitable. As this sense of the inevitable increases, people's willingness to invest in the stock market and the bond market will decline. Capital will become more expensive for private entrepreneurs. I do not think the rate of economic growth will reverse on a permanent basis, or even on a 5-year basis, but it will be reduced. Our lives will be worse off as a result.
GETTYSBURG REDUX: THE WALL STREET ADDRESS
If President Bush could rise the the rhetorical heights of Abraham Lincoln, while simultaneously being overcome by a desire to actually speak the truth, here is what he might say about the current crisis on Wall Street.
Perhaps now, more than at any other time since the War of Secession of the 1860s, is the U.S. immersed in such an existential crisis. During that earlier crisis President Abraham Lincoln delivered the most famous speech in U.S. history, the Gettysburg Address. President Bush should deliver his own address at the site of the current crisis, Wall Street. Here I propose an address with reference to Lincoln's; however, I believe his text concealed and obfuscated while this text states clearly the truth.
Four score and seven years ago our fore fathers brought forth on this continent a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal.
Four score and fifteen years ago our fore fathers, Morgan and Rockefeller, brought forth on this continent a new bank, the Federal Reserve, conceived in secrecy and dedicated to the proposition that all men's wealth is the banks' wealth.
Now we are engaged in a great civil war, testing whether that nation, or any nation, so conceived and so dedicated, can long endure. We are met on a great battle-field of that war. We have come to dedicate a portion of that field, as a final resting place for those who here gave their lives that that nation might live. It is altogether fitting and proper that we should do this.
Now we are engaged in a great financial crisis, testing whether this bank, or any bank, so conceived and so dedicated, can long endure. We are met on a great market in that crisis. We have come to dedicate a portion of that market, as a final resting place for those corporations here that gave their wealth that the bank might live. It is altogether fitting and proper that we should do this.
But, in a larger sense, we cannot dedicate -- we cannot consecrate -- we cannot hallow -- this ground. The brave men, living and dead, who struggled here, have consecrated it, far above our poor power to add or detract. The world will little note, nor long remember what we say here, but it can never forget what they did here. It is for us the living, rather, to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us -- that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion -- that we here highly resolve that these dead shall not have died in vain -- that this nation, under God, shall have a new birth of freedom -- and that government of the people, by the people, for the people, shall not perish from the earth.
But, in a larger sense, we cannot dedicate -- we cannot consecrate -- we can not hallow -- this market. The leveraged corporations, solvent and bankrupt, who struggled here, have consecrated it, far above our poor power to add or detract. The world will little note, nor long remember what we say here, but it can never forget what they did here. It is for us the solvent, rather, to be dedicated here to the unfinished work which they who splurged here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us -- that from these honored bankrupt we take increased devotion to that cause for which they gave the last full measure of money -- that we here highly resolve that these bankrupt shall not have gone bankrupt in vain -- that this bank, under nobody, shall have a new birth of inflation -- and that this Federal Reserve of the banks, by the banks, for the banks, shall not perish from the earth.
ROOT CAUSES BEHIND THE POLITICS
The roots of things are usually quite deep, perhaps apparent only in hindsight.
Byron King notes that many historical figures associated with namesake ism's, e.g., Herbert Hoover, Margaret Thatcher, and Ronald Reagan, achieved their fondly remembered or disdained statuses as much by chance as anything else.
Hoover had to deal with credit excesses of the decade that preceded him and was bound to have a tough time no matter what. A lot of Roosavelt's New Deal implemented projects started under Hoover, but they are remembered as Roosavelt's babies. Paul Volker was appointed by Jimmy Carter and wrung the disease of consumer price inflation out of the system, paving the way for the Reagan-era's borrow and spend binge ... and asset inflation ... which is so fondly remembered today.
Now, whoever is elected U.S. president next month will have his hands tied by the ongoing collapse in credit and confidence. The bailout of banks and other financial companies will be sufficiently far along that it may be irreversible. Certainly the debt incurred will be there to stay. There is simply only so much Obama and McCain will be able to do. Fortunately for either of their reputations, perhaps, the stock market crashed before the election. But that is no consolation for the rest of us.
Some of the greatest economic shifts in history are associated with big political swings, if not with politicians by name. Think of Hooverism, Roosevelt's New Deal, Reaganism or British Thatcherism. But those are just labels. Things are not as simple as they imply.
They are like plate tectonics in the field of geology. An earthquake can often be quite a serious event. But one earthquake is just an indication of the presence of a fault, if not a complex fault system. And that fault system may be part of a vastly larger structural zone at the edge of a shifting continent.
When it comes to major changes, you have to keep something clear. Earthquakes do not move continents. In the big scheme of things, moving continents cause earthquakes. Something similar occurs with economic events.
For example, the Great Depression in the U.S. is associated with the administration of President Herbert Hoover. The term "Hooverism" is commonly used to describe government mismanagement of the economy while things slide from bad to worse.
But the truth is that the market excesses that led to the stock market crash in October 1929 (only seven months after Hoover took office) occurred in the mid- to late 1920s, with Calvin Coolidge in the White House. And many of the monetary excesses of the 1920s had their roots in excess U.S. spending by the Wilson administration during the "Great War," as World War I was called before there was a second.
And looking back at the 1930s, the growth of big government in the U.S. is associated with the presidency of Franklin Roosevelt.
True enough, the New Deal was a Roosevelt campaign slogan. But Roosevelt's plan to close the banks after his inauguration was drawn up during the last six months of the Hoover administration. And many of the great public works projects of Roosevelt, such as the Tennessee Valley Authority or construction of dams on Western rivers like the Colorado or Columbia, were drawn up under the Hoover administration. (Why do you think that they eventually renamed Boulder Dam after Herbert Hoover?)
Much later, the seeds of Reaganism were planted during the preceding administration of President Jimmy Carter, who appointed Paul Volker to run the Federal Reserve. Indeed, it was Volker's sharp increases in interest rates that broke the backs of the Vietnam-era inflation and the stagflation of the 1970s.
Volker's policies allowed the Reagan-era tax cuts and supply-side policies to gain traction. Without Carter's appointment of Volker, we would probably never have heard the term "Reaganism" or "Reaganomics." The economic boom of the 1980s might never have occurred.
And let us take a look at Britain's "Thatcherism." This concept has become almost synonymous with strong growth monetarism in the U.K. Looking back, Margaret Thatcher is often credited with defeating British inflation and ending an era of heavy-handed government spending and control.
Of course, there is no denying the important and bold policies that Margaret Thatcher pursued. Or Thatcher's good fortune to be prime minister during the early and successful exploitation of the oil resources of the North Sea.
But monetarism in the U.K. dates from 1976, three years before Thatcher came into office as prime minister. That was when a Labor government accepted a loan from the International Monetary Fund, paving the way for Britain to prosper under Thatcher.
The point to keep in mind is that major economic trends do not just appear and disappear with the coming and going of politicians in office. (We should be so lucky!) The roots of things are usually quite deep, perhaps apparent only in hindsight.
Thus, you want to be careful of assuming that the upcoming U.S. presidential election will usher in some new era of economic policy. Epic changes in economic trends do not simply appear when voters dismiss one bunch of politicians and ask a new bunch to do things differently. In many respects, the dice are already loaded for whichever of the two candidates prevails on Election Day. Sure they will count the votes on that "first Tuesday," but in many respects the fix is already in.
It is not overstating the case to say that large-scale change tends to happen abruptly -- and not uncommonly -- when the previous policies collapse under their own weight. As history shows, it is often the politicians on their way out (for example, Hoover or Carter -- and G.W. Bush when we eventually look back on these months) are forced to change things once it becomes clear they have failed.
The excess credit creation by the U.S. over the past 10 years has been a policy failure of historic proportions. We witnessed serial bubbles in technology, dot-coms, housing and now energy and commodities. These bubbles were related to horrible distortions within the larger financial system.
Thus, within the past year, the lame-duck Bush administration has presided over a huge expansion of the government's role in finance. The Bear Stearns bailout inaugurated a sea of change in policy. Now investment banks, not just commercial banks, may borrow directly from the Federal Reserve.
More recently, Fannie Mae and Freddie Mac failed. So did Lehman Brothers, winding up in bankruptcy court. Indeed, the entire model of investment banking is history. Now we see the U.S. Treasury attempting to administer a $700 billion bailout of Wall Street banks. What is next?
Perhaps this is not quite the scope of FDR's New Deal. Then again, the New Deal was about building roads, bridges and dams, not bailing out failed banks.
But the new government intervention to bail out large financial players signals a remarkable change in national economic policy. And it has not come about at the behest of the voters. Indeed, when the voters have a say, they reject the bailouts. It is only raw politics that led to the recent bailout bill in Congress.
This new set of government guarantees to investment banks will be difficult -- perhaps impossible -- to reverse. Thus, the new situation will simply be "the way things are" when either President McCain or President Obama takes office.
What will this mean to the future of the U.S. dollar? Among other things, it means that the federal government will be spending tens or hundreds of billions of dollars to bail out bad investments by investment banks and other entities like Fannie and Freddie. And in turn, the government will not be spending dollars to fix national infrastructure like roads, bridges or water or energy systems.
And long term, it is probably bad for the value of the dollar. Which is why you should be sure to preserve some of your savings and purchasing power in precious metals like gold and silver.
U.K. Taxman Plans New Offshore Amnesty
HMRC has more or less confirmed, sort of, a followup amnesty allowing offshore account holders with undeclared income to clean. The first amnesty netted £400 million. Accountants are telling HMRC that when it makes the followup "offer they can't refuse" to publicize it more extensively -- as if the Liechtenstein data theft/tax evasion scandal was not publicity enough.
HM Revenue & Customs is planning to offer British taxpayers a second chance to come clean about their offshore bank accounts as part of its crackdown on tax evasion.
The government department, which is still seeking a first criminal prosecution over offshore tax evasion, told tax experts and accountancy institutes of its plans for a second tax amnesty at a meeting earlier this week.
HMRC had earlier suggested, then appeared to backtrack, on another amnesty, the latest signs suggesting it is indeed planning a new disclosure scheme.
Last year HMRC raised £400 million after British taxpayers with money in offshore accounts run by High Street banks were granted leniency in return for voluntary disclosure. A second offshore tax amnesty could help HMRC clear the backlog of cases in its offshore banking investigation covering tens of thousands of investors with bank accounts in offshore tax centers ranging from Liechtenstein to Bermuda.
Last month HMRC said it had opened enquiries into 12,000 accounts and would proceed with a further 79,000 over the next two years.
One tax partner familiar with the offshore crackdown said the accountancy profession would welcome a second tax amnesty but called for the HMRC to publicize it more heavily than the last one. "You need to do one big amnesty and deal with the issue once and for all," he said.
HMRC is under pressure to show more progress in its offshore tax investigation amid concerns among some accountants that the taxman is struggling with poor quality information and a shortage of experienced investigators. HMRC has said it has enough staff working on the investigation and always knew it was going to be large task.
An HMRC spokeswoman confirmed a second offshore tax amnesty was likely but said it still had to agree the details with accountants and banks.
Four celebrities in U.K. Tax Cheat Probe
Fallout from the theft of Liechtenstein bank client data and its sale this year to various national tax authorities is hitting celebrity circles. No names are given, but four well-known media and sports people are said to among those caught in the backwash from the Liechtenstein affair and other anti-offshore initiatives.
The four, thought to be a male actor, a male TV presenter, a TV actress and a football manager, are among 100,000 tax evaders being investigated in a £1 billion probe. Others are believed to be members of some of Britain's wealthiest families.
The inquiry has centered on secret overseas bank accounts in Bermuda, Panama, Andorra, Hong Kong, Liechtenstein, Singapore and the West Indies.
An HMRC source told The Daily Mirror: "It has recently emerged there are some high-profile figures that are colming under greater scrutiny as part of the wider tax evasion investigation.
"But the Revenue is keen to track down every single tax dodger whether they are entertainers, bankers or lawyers. The important thing is to build enough evidence to bring a successful civil or criminal prosecution."
Operating these hidden accounts has become easier in recent years because of the rise of internet banking.
Offshore accounts are not illegal but money deposited in them must be declared along with any interest earned. Anyone found not to be doing this faces a jail sentence.
The source said that HMRC's investigation had progressed quickly over the last few months. "The number suspected of using offshore accounts to evade paying tax recently topped 100,000. Information has been coming through fast so every single piece has to be assessed and analyzed as quickly as possible."
The current UK investigation comes months after HMRC paid a source £100,000 for details of accounts held by Britons in the tiny central European state of Liechtenstein.
St. Kitts-Nevis Diplomat Charged with Securities Fraud in U.S.
Offshore scam and corruption exposé site Offshore Alert revealed that a St. Kitts & Nevis Honorary Consul, a U.K./U.S. dual citizen, has been arrested and accused of being involved in a Pink Sheets stock manipulation scheme in the U.S. Apparently St. Kitts did not conduct proper due dilligence before making the appointment. More to the point, the manipulation was accomplished by bribing brokers with account trading discretion to buy shares. Lesson: Know your broker before granting such latitude.
An offshore services provider who serves as the Honorary Consul for St. Kitts & Nevis in Costa Rica has been accused of securities fraud in the United States, Miami-based financial newsletter Offshore Alert reports.
Jonathan Randall Curshen, a dual citizen of the U.K. and the U.S., who appears to reside in both Costa Rica and Sarasota, Florida, was arrested in New York after a criminal complaint alleging conspiracy to commit securities fraud was filed against him and a business associate, Bruce Grossman, in Florida on September 4, 2008.
According to Offshore Alert, Curshen and Grossman have been accused of participating in a scheme to manipulate the common stock of Pink Sheets-listed Industrial Biotechnology Corp. by bribing registered representatives to buy IBOT shares in customer accounts over which the registered representatives had trading discretion.
Curshen serves in an unpaid capacity as the Honorary Consul to Costa Rica for the federation of St Kitts and Nevis, an appointment which became effective on July 1, 2004, according to a news service in Costa Rica, Offshore Alert reports.
Jamaica Says It Will Go Ahead with Offshore Center Plans
We have previously reported on announcements and plans by Jamaica to establish an offshore financial center. Their reponse to the current economic turmoil is not exactly "Damn the torpedos, full speed ahead." But they claim that at worst their plans are just delayed.
Faced with a global economic slowdown, Jamaica said this week that it would not [pull] back from plans to implement an offshore center, but acknowledged that the timetable would ride on developments in the market.
"While I recognize that the current crisis in the financial market will have an impact on the international financial corporations all over the world, it is important for Jamaica to ensure that we are ready when the market settles," said Senator Don Wehby, minister without portfolio in the Ministry of Finance and Public Service, in a statement. "There is a slowdown in some of the major economies, but this does not discourage us from putting in place the JIFSC."
Jamaica has been quietly developing its plans for an international financial services center, guided by an advisory committee that was created by Wehby and is led by tax expert Eric Crawford, a partner in PricewaterhouseCoopers. "We are going quietly and we can use the opportunity to do what we need to do so that when the economy recoup we are well placed ahead," said Crawford.
In July, the committee wrapped up its report on the local market and the regulatory framework that is to guide Jamaica's offshore center strategy, with the Finance Ministry now in the process of recruiting a chief implementation officer to lead the process. A shortlist of candidates is to be compiled by the first week of October and a selection made by October 15.
Some of the niche markets identified for the IFSC include sports and entertainment, electronic financial products, stock exchange products and alternative energy. ...
Dr Trevor Thomas, an international tax expert, ... cautioned that the argument that Jamaica may be perfectly placed to attract the international banks just as they are ready to expand again, may be wish-driven, as no one knows how long the cycle will last.
However, the crisis, he said, should not threaten but rather inform the implementation process. "Jamaica, in building its IFSC today, should inevitably be more focused on the importance of banking regulation and the need for the proper supervision of its new financial services sector," said Thomas.
Increasing Concern in Gibraltar about the Financial Crisis
One thing we have seen during the banking crisis is that once a bank's business plan involves anything more complex and risky than taking deposits and investing the proceeds in government bonds, it is vulnerable to a liquidity squeeze from a run on deposits. Also, in an information vacuum people will assume the worst.
In Gibraltar such a dearth of information is leading depositors to draw conclusions based on what they see and hear on the international news channels. So they are withdrawing their deposits from Gibraltar-based banks and depositing it elsewhere. Sounds like it is time for some straight talk from the Gibraltar nabobs.
An increasing number of people in Gibraltar are expressing concern about bank deposits in the wake of the unending world financial crisis.
People are in fact worried about losing their money or having it slashed, and are resorting to withdrawing deposits and opening accounts elsewhere.
This could lead to a financial crisis of Gibraltar's own making, and you cannot blame the public given the lack of information and guidance that reigns supreme. All that people hear is what is being said elsewhere. They watch satellite television channels and hear that the crisis is not going away. They read UK papers and there in front of them are sad stories and how people are being affected.
While elsewhere meetings are taking place and information is forthcoming, in Gibraltar nothing is being said.
The public, understandably, in increasingly more and more concerned -- and prepared to take action on what they hear about in other places. They ask: Why are deposits in Gibraltar guaranteed up to £18,000, when it is €40,000 in the EU, and in the UK they have been increased to £50,000?
There is a case for a major public relations exercise to explain the situation and how Gibraltar is affected. The sooner explanations are given the better for the state of the financial situation in Gibraltar itself.
|Previous||Back to top||Next|