Wealth International, Limited (trustprofessionals.com) : Where There's W.I.L., There's A Way

W.I.L. Offshore News Digest for Week of December 8, 2008

This Week’s Entries : This week’s W.I.L. Finance Digest is here.


Narco violence is exploding – just as oil prices are plunging and Mexico is bracing for a deep U.S. recession.

While the U.S. federal government is busy minding everyone else's business halfway around the world, the situation on its southern border is starting to look threatening to the homeland itself. The drug warlords have become the de facto government in much of northern Mexico. Of course once a criminal gang has become established it will not confine its chosen domain to its original market, so kidnapping and extortion have become big businesses -- just as with a regular government, but without the pretentions.

This Forbes article provides an in-depth background treatment of the subject along with an overview of the overall situation in Mexico. Potential Mexican expats beware, we would say.

The one conceivable solution to even begin to deal with the issue would be for the U.S. to stop its fruitless, expensive, and destructive "War on Drugs." If drug use were to be decriminalized and its sale distribution channels regulated a la the alcholic beverage industry, then "real" governments would have the opportunity to retake terroritory and profits from their contenders. We are not holding our breath.

The "War on Drugs" is approaching the logical denouement consistent with the metaphor: Real battles between real armies. This year to date there have been 4,300 drug-related deaths in Mexico. No doubt some current-day Madeleine Albright equivalent will reassure us that it is "worth it."

The November 4 crash of a Learjet in an upper-class Mexico City neighborhood caused a disproportionate amount of destruction. All eight passengers were killed -- including Interior Minister Juan Camilo Mouriño, President Felipe Calderón's right-hand man, and José Luis Santiago Vasconcelos, a leading prosecutor against the powerful drug cartels. Seven people on the ground died, too.

Hours after the disaster, rumors shot across the capital city like the discharge of automatic weapons: The crash was the work of drug traffickers showing who was boss in this nation of 110 million souls. A preliminary report found no evidence of explosives and strongly suggested pilot error in turbulent conditions. Still, says Larry N. Holifield, former head of the Mexico City office of the U.S. Drug Enforcement Administration, "people will not believe it was an accident. They think everything down there is a conspiracy because half the time it really is." One witness to the crash believes the worst. "A plane just does not fall out of the sky," says Guadalupe Rodríguez, 42, a law firm assistant. "The narcos are saying, 'Here we are -- and nobody is going to get rid of us.'"

You can forgive Rodríguez for thinking so. This year, through mid-November, there have been 4,300-plus drug-related deaths in Mexico, compared with 2,500 in 2007. Edgar Millán Gómez, who oversaw the joint efforts of the army and federal police, was assassinated in May in his home in Mexico City. Roberto Velasco Bravo, a federal chief of criminal investigations, was shot in the head a week earlier. The narcotraficantes have infiltrated the highest levels of law enforcement, including, allegedly, Mexico's principal link to Interpol and its former senior drug czar. Mexico, once again, is battling the ever powerful gangs. "It has been a fierce bloodbath," says Felipe González González, president of the Senate public security commission and former governor of the central state of Aguascalientes. "We have more dead than you have in Iraq."

Is Mexico descending into criminal and economic chaos? "Failed state? That is a very irresponsible remark," bristles Arturo Sarukhan, Mexico's ambassador to the U.S. "The challenge of corruption is being taken on. We are rooting out people who have been infiltrated. Look at the role of the Mexican private sector and civil society. Nowhere can you see signs of anything akin to a failed state."

But there is urgent concern north of the border about a potential strategic threat. "We are fixated on Iraq and Afghanistan, but from a homeland security perspective, right here on our border, isn't this more important?" asks Fred Burton, a former State Department counterterrorism official, now a vice president at Stratfor in Austin, Texas.

Washington, D.C. is fretting, too. "The consequences for both our countries in the near future and the not-so-near future could not be greater," says John Walters, director of the White House Office of National Drug Control Policy, a.k.a. the drug czar. "The consequences if President Calderón fails and the institutions of government, at least in the northern part of his country, become controlled by terrorist mafias -- well, we worry about ungoverned spaces far away from the U.S., and this is right next door."

No disagreement from Antonio Oscar (Tony) Garza, U.S. ambassador to Mexico. "The focus of the last couple years has clearly been security," he says. In the so-called Mérida initiative, Uncle Sam has committed $1.4 billion in military hardware to help Mexico battle the cartels. But as of late November no significant transfers had yet occurred.

The explosion of narco terror comes alongside a precipitous drop in oil prices and the crushing effects of a deep U.S. recession. The climate of fear is kicking the life out of the economy. The second wave of the global financial crisis is playing out in the developing world -- and right on our doorstep. After expanding by 3.2% in 2007 to $900 billion, Mexico's GDP growth will slow to 1.5% this year and tumble to somewhere between zero and 0.7% in 2009, predicts Raúl Feliz, an economist at CIDE, a Mexico City think tank that specializes in economics and politics. While some of that meager expansion will come from government stimulus spending, its hands are tightly tied because state-owned oil monopoly Pemex (Petróleos Mexicanos) contributes 37% -- $80 billion in 2008 -- of federal revenue. Next year analysts expect a plunge in petrodollars. Unemployment will jump from its current 4.1%. Throw in part-time workers, who account for roughly 1/3 of GDP, and the jobless figure soars to 10%. Feliz expects that number to reach 12% next year.

Credit-rating agencies are taking notice. In November Fitch put Mexican government foreign and local currency debt on "negative outlook" (though the ratings are still investment grade). It said that Mexico's ability to absorb global shocks was limited.

To say nothing of internal shocks. 80% of Mexican exports -- $240 billion this year, up 10% from 2007 -- go to the U.S., where shoppers are not spending. You can see the effects in Ciudad Juárez, just across the border from El Paso, Texas. Roughly 223,000 people work at 330 companies in the maquiladora sector, assembling auto parts for the likes of Lear and Delphi, set-top boxes for Cisco's Scientific Atlanta unit and medical devices for Johnson & Johnson, among others. But 22,000 people have lost maquiladora jobs this year, most of them since August, says Sandra Luz Montijo-Dubrule, president of the Maquiladora Association of Ciudad Juárez. "Seventy percent of our industry here is U.S.-owned factories. Now that the recession has hit, we do not have the consumers in the U.S.," she laments. Worse: Every maquiladora job supports four other jobs in the city.

Drug-related violence pervades all segments of life in Mexico. "The cartels have an extraordinary capacity for corrupting and intimidating," says U.S. Ambassador Garza. The drug lords operate through most of the country (see map). In Ciudad Juárez the body count is 1,100 this year -- 200 or more of those deaths in August.

The cartels are also taking a big toll on business. "U.S. companies are worried about the safety of their workers," says Maria Luisa O'Connell, president of the Border Trade Alliance in Phoenix, Arizona. "Drugs have become such a big problem." As they have for the business community throughout Mexico. As a result of many high-profile kidnappings and murders, one of the most vibrant businesses in the nation is security -- bodyguards and armored vehicles. An executive can shell out as much as $500,000 a year to protect himself and his family, reports Stratfor.

Many Mexicans believe the problem originates in the U.S., and that the cartels could be wiped out tomorrow if gringos wrestled seriously with the demand side of drugs. But the Mexican government realizes what it is up against at home. "The state is fighting against an opponent with no limits on arms or financial resources," says Jorge Gonzalez, a professor of international economics at Trinity University in San Antonio, Texas. and a native of Monterrey, Mexico. Throwing 25,000-plus troops at the U.S. border and other hot spots like the northwestern state of Sinaloa, President Calderón has scored a few headline-grabbing wins. He first targeted the powerful Gulf cartel and its infamous enforcement arm, a group of army deserters known as Los Zetas. In late January special forces arrested Alfredo Beltrán Leyva (El Mochomo, or "Red Ant"), a reputed deputy of Joaquín (El Chapo, "Shorty") Guzmán Loera, Mexico's most wanted man. The last of the five brothers who allegedly ran the Tijuana cartel, Eduardo Arellano Félix, was arrested in October. Most Mexicans, however, believe the cartels are winning the war.

Still, Calderón's assault has disrupted the cartels' business in the U.S. It is reflected in the rising price of cocaine, recently $123 a gram on America's streets, up 27% since early 2007, notes Michael Braun, managing director at Spectre Group International in Alexandria, Virginia and recently retired chief of operations at the DEA. Cocaine purity is down 16%.

On the economic front Mexicans like to point out how they are in better shape to weather tough times than they were 14 years ago, when the U.S. and others had to intervene to save the peso. Some of that is true. The federal deficit is down to 0.2% of GDP. Short-term interest rates on government debt, while still high, are 8.3%; inflation is at a manageable 5.8%. Solid companies like Wal-Mart de México (68% owned by the Bentonville, Arkansas giant) and América Móvil, the wireless services provider, are still forging ahead with precrisis capital expenditures. There is still hiring going on at the factories in Guadalajara, Chihuahua and Reynosa operated by contract manufacturer Jabil Circuit. PepsiCo recently decided to spend up to $3 billion to expand its snack and drink business.

Mexico's other Nafta partner, Canada, has been investing. Two years ago Bombardier Aerospace, lured by tax breaks and a new university to train people in the industry, opened a wire harness factory in the state of Querétaro. Recently it unveiled a $250 million plan for another factory to make wings and fuselages. Canada's Goldcorp is spending $1.5 billion for a gold, silver, lead and zinc mine in Zacatecas State that will employ 1,000 people. That is on top of the three mines it already operates and the $80 million it is spending to drill for gold

But these investments hardly make a dent in Mexico's economy. There is plenty of grim news to darken the bright spots. The three leading sectors of the economy -- services, industrial and agriculture -- are slowing; manufacturing is expected to contract next year (see charts).

One silver lining is that the banking system is well capitalized, at least for now, says Deborah Riner, chief economist for the U.S. Chamber of Commerce in Mexico. As a recent IMF report points out, there is little exposure to U.S. subprime assets and no hint yet of a credit crunch. That is because the nation has not yet developed an addiction to debt. "In times of crisis, cash is king," says Ricardo Salinas Pliego (net worth: $6.3 billion), who controls TV Azteca, mobile phone provider Iusacell and home electronics retailer Grupo Elektra. Salinas recently spent $41 million buying a 28% stake in the bankrupted chain Circuit City.

Salinas's Banco Azteca makes loans to street vendors, cabdrivers, bricklayers and plumbers -- at average annual interest rates of 50%. Vice-Chairman Luis Niño de Rivera indignantly defends the usurious rates, which he claims are the market rates. "There used to be no hope for low-income people who barely had access to credit," he says. "We have changed the history of all these people," as well as allowed them to buy goods and services from Salinas enterprises. With 1,530 branches, Banco Azteca has $4 billion in deposits and $2 billion in loans on its books. Borrowers pay weekly -- often handing over small sums to one of Azteca's 5,500 collections officers, who show up on motorcycle. That keeps loan losses down to 5.5%.

Default rates will rise in a degrading economy. Already there are bleak signs in the $85-billion-a-year auto industry. While Toyota North America insists it is sticking to its schedule next year, Ford of Mexico says it will "adjust our plans accordingly." Nissan Mexicana recently halted production for six days at its Aguascalientes plant and canceled a planned third shift in Civac. General Motors has cut 660 of its 13,000 workers, discontinued its line of GMC Kodiak medium-duty trucks in Toluca and slowed production of SUVs and pickups in Guanajuato. "Everyone is worried about the future," says a spokesman. Chrysler Mexico laid off 400 of 6,000 people in October and is culling 20% of its 1,200 white-collar employees. Delphi has 55,000 workers at 48 Mexican plants, down from 65,000 at 54 factories two years ago. The auto parts maker is asking some employees to take a voluntary reduced workweek at 50% pay.

On the other side of the border look for a large drop in remittances from Mexicans living in the U.S. For 2008 they will be down roughly 10% to $21.6 billion. In 2009, predicts Roberto Newell, chief executive of the Mexican Institute of Competitiveness, total remittances may be off by as much as 25% from last year. Of the 11 million Mexicans in the U.S., 60% of them send money home. Perhaps as many as 150,000 will be unemployed by June, says Manuel Orozco, an analyst at the Inter-American Dialogue in Washington. Many more have already been forced out of high-paying construction jobs into jobs paying a lot less. After interviewing migrants, Orozco concludes that 3% to 7% of them will go home next year.

All this pinches the lives of people like Sandra Ruiz Martínez, 36. She lives in a two-room cinder block home that somehow stays pegged to the hillside of Ecatepec, Mexico City's largest suburb, with her seven children and her sister and her sister's two babies. Six years ago Ruiz's husband, an undocumented immigrant, went to San Juan Capistrano, California to find work (and ended up starting a second family). As a cook, he used to send $135 every eight days. Since his hours were cut in August, he has been remitting the same amount every three weeks. Ruiz says she needs $8 a day to run her household. While the government helps pay for high school, she cannot juggle finances until the money arrives, and none of her kids has gone past the equivalent of 8th grade. The latest squeeze means no new shoes or clothes for anyone. Still, the tiny house is full of laughter. "Why be broke and sad?" she shrugs. "We try to forget."

It may be a lot harder to forget next year, when some government subsidies disappear. Hit by the double whammy of sinking oil prices and lower production, Pemex's contribution to state coffers could drop 20% or more to $65 billion in 2009. This despite only $18-per-barrel production costs, a $22 discount on today's spot price in Mexico.

Pemex is in sorry shape. From a peak of 3.3 million barrels a day in 2004, output is down to 2.8 million barrels. Unless someone figures out how to halt the decline, Mexico may become a net oil importer by 2015, says Allyson Benton, analyst at Eurasia Group, a political-risk consultancy in Manhattan. Pemex vigorously contests the prediction.

The problem is not a lack of resources. Exploration and production chief Carlos Morales Gil says Pemex has 14 billion barrels of proved reserves, 30 billion barrels of probable and possible oil and another 54 billion barrels yet to be found. The culprit is Mexico's constitution, which stipulates that all oil and gas reserves are the sole property of the people of Mexico. That bars Pemex from selling stakes in oilfields to foreign companies -- depriving Mexico of the risk capital and the talent that Western oil companies are instead sending to colder climates and deeper waters.

The Cantarell field was so big that Mexico could afford to be xenophobic about oil production. It is no longer the gusher it was: Production is down from 2 million barrels a day in 2004 to 1 million today. "It made us think we inherited a guaranteed flow of dollars for the rest of our lives," sighs Morales Gil.

A new law passed by the legislature will help to a degree. While the wording of new contracts must still be painstakingly matched to the constitution, the reforms permit Pemex to develop the technology of foreign oil services companies -- finally opening Mexico to deepwater exploration of the Gulf -- and to pay them incentives based on Pemex's success. Morales Gil can envision a nonequity partnership to produce Mexico's oil via platforms on the U.S. side of the maritime border, where Royal Dutch Shell, bp and Chevron are installing an estimated $6.7 billion spar platform that will be linked to fields as far as 10,000 feet below sea level. "Perhaps in these reservoirs it makes sense to get together with the other guys and plan a joint investment," he muses, but "keep the reserves separate."

Pemex says it must spend $20 billion a year for two decades just to keep output stable. That will be very tough to pull off without outside investment -- especially for a company sagging under $100 billion in debt. David Shields, an analyst who has long studied Mexican oil, suggests the government take the liability off Pemex's books by converting it to sovereign debt.

But what foreign investor would be eager to buy that debt when the Mexican public markets themselves are pretty spooked these days? "People do not want to put their surnames on a share listing," Mexican stock exchange president, Guillermo Prieto, recently said. "At least six or seven companies have said crime is a reason [for not floating an issue]." The cartels have left particularly grisly marks, including at least 40 decapitations this year. "You have gangs publicizing that they have killed innocent people to enhance their reputation," says Peter Reuter, professor of public policy at the University of Maryland and a Rand Corp. scholar. On November 3 there were 58 drug-related deaths, including four men burned to death in the beach town of Sinaloa de Leyva. On that same day surgeons in a Ciudad Juárez hospital were ordered out of an operating room as hooded men executed a patient who had shown up with a gunshot wound. With so little faith in his own men, Juárez's mayor fired 400 police officers for failing lie detectors and other tests to root out corruption and started to recruit federal troops to the force.

Chronic fear of kidnapping, or worse, is driving more and more Mexicans north to the U.S. Alejandro Junco, proprietor of one of Mexico's largest dailies, El Norte, recently moved his entire family to live in Texas. Pablo Jacobo (Jack) Suneson Bautista, owner of Marti's, a high-end arts and crafts gallery on Guerrero Avenue in Nuevo Laredo, refuses to let his kids come home to work in the business. "No way," he says. "I am just afraid they might be singled out or there might be some kind of kidnapping attempt." No one knows how many Mexicans are fleeing. But Arturo Rolland, a broker at Latin Credit Mortgage & Realty in San Diego, guesses that maybe 100 families a month are moving from Tijuana to the Chula Vista/San Diego area to seek safety. Some because gangsters "are using Facebook and MySpace to track people and their relatives," says a source at the Asociación de Empresarios Mexicanos, an entrepreneurs group in San Antonio.

The narcotraficantes have found opportunity in the U.S., too. If the late Colombian drug lord Pablo Escobar had Miami, then Joaquín Guzmán has Atlanta, which has become the East Coast distribution center of cocaine and other drugs for the Mexican cartels. Atlanta's accessibility to key interstates like I-95 and I-85 make it a perfect hub for moving cocaine and marijuana and taking bulk cash back to Mexico. Atlanta's fast-growing Mexican population, lured largely by the region's building boom, has provided excellent cover and resources for the cartel's U.S. emissaries.

Northwestern Georgia is dotted with drug warehouses and money-counting houses, often set up in empty suburban homes furnished with a few tables and laptops. From there cocaine is moved to New York, Pittsburgh, Washington, D.C., Miami and Chicago. The cash can be counted and inserted within 24 hours in sophisticated hydraulic traps built into tractor trailers for the trip to Texas and the southwestern border. No need for cages or safes -- the cash at the money-counting houses is kept in closets, and one Gulf cartel moneyman made it clear that the lives of families in Mexico of anyone messing with the efficiency of his money-moving operation were at stake. "I don't know how much more worried I would have to be," says John C. Killorin, director of the Atlanta High Intensity Drug Trafficking Area.

The Gulf cartel has dug its claws into the Atlanta area, as shown by a federal indictment in September of 34 of its members who authorities say were organized into distribution and transportation cells. The feds say the leader, 20-year-old Edgar Rodríguez-Alejandro, was taking orders from the highest levels of the Gulf cartel in Mexico until he was arrested in May with 12 kilos of cocaine and $7.7 million, a slim fraction of the 16,000 kilos of cocaine and 116 weapons recently seized in the U.S. Two cells of Shorty Guzmán's cartel in Atlanta were tracked and 20 indicted in December 2007.

The cartels are getting hard for Americans to ignore. In July a Rhode Island distributor who owed the Gulf cartel $300,000 was lured to an Atlanta suburb and then jumped by three members of the gang, who held and tortured him. He was rescued by the feds. Says Rodney Benson, the DEA's special agent in charge in Atlanta: "My number one concern is that if we don't impact these organizations there may be increased violence down the road."

What about help from the Mérida plan? "The money is going to the wrong side of the border," contends Congressman Ted Poe (R-Texas). "With the infiltration of law enforcement and so many corrupt officials in Mexico, we don't want that equipment used against us."


Fourth generation warfare (4GW) is a military system theory which posits a blurring of sharp lines between war and politics, soldier and civilian, peace and conflict, battlefield and "behind the lines." For starters, we think of it as classic insurgency or guerilla warfare taken to a more systematic and higher level. It can be expected to arise when direct confrontation with conventional military forces would be suicidal to a contender for power.

One of the most important characteristics of a 4GW campaign is the objective of draining away the regular de jure government's legitimacy, however long that takes. It is a basic conceptual challenge to the whole idea of having a monopoly on force over a defined territory. Current examples of 4GW practitioners include al Qaeda in Iraq, the Talliban, Hezbollah ... and the Latin American drug syndicates.

William S. Lind is one of the originators of 4GW theory and continues to write on his developments of the theory often. He is a semi-regular columnist on LewRockwell.com, writing on general cultural matters as well as 4GW. An interesting thinker, we find.

The situation in Mexico where narco gangs have taken over the effective government of wide swaths of territory is frequently cited by Lind as an example of 4GW manifested. Below is part of an article from last July. His synopsis of the standoff between the Mexican state and the drug gangs: "[All] the Mexican drug gangs demand is a deal with the state: We will leave you alone if you leave us alone. The state's real sovereignty bleeds away, but the structures remain, allowing the politicians to do what they want, i.e., continue to line their own pockets."

Two recent news stories added important evidence to issues raised in my columns. The first concerns a Fourth Generation war taking place on America's doorstep, that between the Mexican state and drug gangs. The July 14 Financial Times, one of the world's best newspapers, reported that the head of Mexico's intelligence agency ...
Told a small group of foreign media recently: "Drug traffickers have become the principal threat because they are trying to take over the power of the state."

Mr. Valdes said the gangs ... had co-opted many members of local police forces, the judiciary, and government entities ...

Those efforts, he said, could now also be targeting federal institutions such as Congress itself. "Congress is not exempt ... we do not rule out the possibility that drug money is involved in the campaigns of some legislators," Mr. Valdes said.
The news here is not the "possibility" that some Mexican legislators are on drug traffickers' payrolls. The news is that a prominent Mexican official, one whose position gives him a good look at what is going on, was willing to go public about the threat to the state itself. The fact that he took that risk suggests the cancer is far advanced. For intelligence officers, going public is usually an act of desperation.

From the perspective of 4GW [Fourth Generation War] theory, it is beginning to look as if the drug traffickers/Hezbollah model may be more sophisticated and more successful than the al Qaeda model. Al Qaeda seemingly is on the ropes in Iraq, not because of the "surge" but because of its own blunders. To at least some extent those blunders proceed from its strategy, which faces the state with a life-or-death struggle. In contrast, all Hezbollah and the Mexican drug gangs demand is a deal with the state: We will leave you alone if you leave us alone. The state's real sovereignty bleeds away, but the structures remain, allowing the politicians to do what they want, i.e., continue to line their own pockets.

The Lebanese state recently cut a deal with Hamas along exactly these lines, and the Mexican state will have to do the same at some point. The Financial Times reports that under the Merida Initiative, the U.S. will give Mexico $400 million this year for counter-narcotics operations, but the Mexican state is already too deeply suborned to use such aid effectively. Mexican politicians, cops, and military officers will happily accept the U.S. money with their right hands while their left hands take the drug gangs' payoffs. If the Mexican state wants to restore order, it will have to offer the gangs a "live and let live" deal.

The rest of the article concerns the then situation in Iraq and the American withdrawl timeable -- it is practically a whole separate article. In a more recent piece Lind offers this on the Talliban and other 4GW conflicts:

When they were in power in Afghanistan, the Taliban also imposed a Puritanism that overrode local cultural norms and thereby alienated much of the population. However, the Taliban also left power with several assets on its balance sheet, assets it continues to draw on. It represented Pashtun dominance of Afghanistan, something all Pashtun regard as natural and necessary (the Karzai regime's origins are Uzbek and Tajik). Like a state, it brought order. It reduced corruption, now out of control, to locally acceptable levels. And while actually a creation of Pakistan's ISI, the Taliban successfully presented themselves as something home-grown, which the Karzai government will never be able to do. In terms of the all-important quality of legitimacy, Robespierre always trumps Vichy.

Beyond Afghanistan, the Fourth Generation future belongs neither to al Qaeda nor to the Taliban but to two more sophisticated models, Hezbollah and the Latin American drug gangs. Both can fight, but fighting is not primarily what they are about. Rather, both are about benefiting their members with money, services, community, identity, and, strange as it may sound, what passes locally for good government. Even the drug gangs' governance is often less corrupt than that of the local state.

Both of these 4GW models can fall into the fatal error of alienating the local population, but the tendency is not inherent. While Hezbollah is religiously defined, it seems to appeal well beyond the Puritans, which means it can give orders Puritans will not obey. The drug gangs' principal faith is in making money, and few faiths are more broadly [undogmatic]. ...

In Iraq as elsewhere, the fading of the al Qaeda model is being balanced not by the rise of a new state but by the adoption of other models of 4GW. So far, as best I can determine, no foreign intervention in a Fourth Generation conflict has succeeded in re-creating a real state (you can add Ethiopia in Somalia to the long list of failures).

As one can see, Lind believes the al Qaeda insurgency in Iraq is failing while the drug gangs usurpations are so far not. Interesting is his comment that the drug gangs' governance "is often less corrupt than that of the local state." Obviously one could pick up that thread and go on forever. We will just ask this: In instances where what Lind says applies, just why should the populace prefer a "legitimate" (in whose eyes?) government?


The currency’s decline could dampen foreign speculators’ enthusiasm.

Most people have assumed -- and the U.S. government has consistently asserted -- that the Chinese renminbi was artificially low versus the U.S. dollar. Going against this consensus, others speculated/warned that if the renminbi were ever allowed to float it could conceivably go down.

Now this has happened, minus the float. Last week, the renminbi did decline ignificantly against the dollar, while still within the managed float that has been in place for years. Among other things, this is another example of where if something is possible it will happen if given enough time. It is not as though one of Newton's laws was violated by the renminbi falling.

The world's last surefire one-way bet is falling apart. Last week, China's currency, the renminbi, juddered to its biggest one-day decline against the greenback since Beijing began a managed float in 2005.

Says Win Thin, a currency economist at Brown Brothers Harriman: "The prospect of appreciation is off the table for now." Morgan Stanley now expects China to depreciate its currency by 5% to 10% in the coming year. The current rate is 6.88 to the dollar.

The renminbi can float in a trading band of 0.5% on either side of the U.S. dollar and has gone up 20% against the buck in the past three years. To trim China's fat trade surplus with the U.S., Treasury Secretary Henry Paulson is pushing for further appreciation, and the Obama administration will probably hew to the script.

The dollar's recent jump has pulled the renminbi up sharply against the euro and the currencies of Korea, Taiwan and Indonesia. That is bad news for China. Its exports account for just 8.8% of GDP, but nearly 20% of growth. Now, China is slashing rates and spending $586 billion to stimulate its economy. Last month, Brown Brothers notes, People's Bank of China Gov. Zhou Xiaochuan said he could not rule out weakening the renminbi to boost the economy.

Long-term, the renminbi may revive, especially if Beijing ever lets it float freely. Right now, at the very least, it is no longer a one-way trade. That is likely to dampen foreigners' interest in Chinese real estate and equities -- both formerly beloved by speculators.

Among those pulling back are "foreign property investors who previously managed to structure deals with non-renminbi debt," says Shu Yin Lee, director of Grand River Investments in Shanghai. Some foreigners who bought property in the past two to three years recently cut their asking prices to levels near their original purchase price (they have still made money because of the renminbi's rise). Lee says some Korean investors, "are now willing to accept a loss in renminbi terms because the won has deteriorated so much. At the margin, I think this might push some foreigners to lower prices further, to get out quickly without taking a loss."

While currency speculators may suffer, China's stock market may not take much of a hit, because only a small percentage of its listed companies are exporters. Indeed, the biggest Chinese-linked American depositary receipts listed in New York -- China Unicom (ticker: CHU), China Mobile (CHL), PetroChina (PTR), China Telecom (CHA), Huaneng Power International (HNP), and China Life Insurance (LFC) -- are domestic plays.

Such domestic plays are looking cheap. Edward Mullen, CEO of Shanghai-based Emperor Investment management, thinks stock prices are so bombed out that a currency decline will not matter.

He sees earnings growing 6.3% for China H shares (mainland shares traded in Hong Kong), versus declines for Taiwan, Korea, and Singapore and Hong Kong. H shares are nearly 60% below their high, and their trailing 12-month P/E ratio has collapsed to near 8 from 14. They now yield 4.2% -- the highest level since the 1997 Asian currency crisis.

Mullen is a fan of Internet companies like Tencent (0700.Hong Kong), which provides games, instant messaging and blogging services and has China's largest online community, and Want Want China Holdings (0151.Hong Kong), a food and beverage outfit whose revenue and earnings are growing at a 30% clip.

What would restore the renminbi bet? A healing world. But signs of global economic stability, most economists agree, will not emerge until late next year.


Another informative interview from the Expat Women website. Rebecca Kousky founded a microfinance loan making nonprofit institution, Nest, which targets a clientel of women artists in developing countries. The basic idea of microfinance is that small investments, too tiny for conventional financial institutions to bother with, can result in outsized payoffs in capital deprived economies. In standard neoclassical economic theory: The marginal return on capital is large when capital is short and labor is in surplus.

The whole idea of microfinance predates the invention of money but has really only recently been codified into a widely recognized concept. It has had naysayers, some who perhaps objected in principle to the notion that such a profit-making opportunity could have gone overlooked and unserved for so long. The article below from Forbes (typically) cautioned that the business was hardly a one-way success ticket, and to be careful where you place your bets. Fair enough. In fact, they further warn, there are some fraudsters using microfinance as a front. What a surprise (not). (Forbes has a multitude of articles on microfinance. See search results.) We also recall one article from an unremembered source which said that loans designed to empower women can end up upgrading their husbands' lifestyles instead. Probably true in some cases.

No doubt as with any industry the experience across participating businesses (and customers) is not uniform. However, Ms. Kousky is happily and successfully running Nest within the nonprofit arena she has chosen. The procedures implemented in Nest's business and oversight practices appear to offer safeguards to make sure the loans' intended beneficiaries actually benefit.

Rebecca Kousky is the founder of Nest, a nonprofit with a mission of giving microfinance loans to female artists in developing countries and an online artistic community.

Nest's microfinance loans allow women to create and/or maintain small arts and crafts-based businesses. Nest raises funds for loans via its online store. Nest sells clothing, accessories and home merchandise created by successful international artists and designers to discerning customers who want their purchases to make a difference.

ExpatWomen: Rebecca, tell us about your experience living overseas and where you live today? How did this experience influence you to start Nest?

Rebecca: I have had extensive experience working with women both internationally and in the U.S., but two experiences in particular shaped my vision for Nest. In 2002, I worked with Mayan Indian women in Chiapas, Mexico, on agricultural techniques to help them increase yields from small farms, thereby becoming more financially independent. In 2004, I traveled to Delhi, India, to volunteer at an NGO which provided education and training to children and adults afflicted with polio. Through these experiences and others, I was able to see firsthand the plight of women in developing countries who face hardships complicated by lower levels of education, lower social status and talents and abilities that do not always translate into productive employment. I observed that when women are given the opportunity to create their own businesses and earn a steady income, families are strengthened and communities are stabilized. Returning from my travels, I made my entrée into social enterprise in my hometown of St. Louis, Missouri.

Why this name?

I chose the name Nest for several reasons. I love the idea of the "nesting instinct" -- that, universally, women have a compelling desire to create a sanctuary for themselves and their families, filled with objects of comfort and joy. Our eclectic line of merchandise reflects this: beautiful, affordable, one-of-a-kind specialty items for women and their homes. But more importantly, our loan program brings this promise to women worldwide.

But Nest is more than the objects each artist has created. It is also a place where women artisans across the globe come together to bring about lasting social change. From the designers, who create special objects, as well as donate their time and share their expertise, to loan recipients, who are now able to provide for their families, to facilitators, who arrange our microfinance loans in countries all over the world, to volunteers, who assist Nest in all its endeavors and to customers, who want their purchases to make a difference in the lives of women, Nest is virtual gathering place and an online artistic community.

How do you choose the women who will receive the loans? And when do they need to pay the money back?

We work with facilitators who live in the countries and communities where we operate. They help us locate and process each loan recipient. We provide loans that are used directly for the purchase of a specific item or to implement an idea that will allow our loan recipients to start or expand art- or craft- based businesses. For example, they can use the money for sewing machines, pottery kilns, rent for studio space, etc. Recipients may pay back the loan either by wiring money or in-kind, by providing merchandise they have created which we then sell on our website. This latter option allows women to access the western market and gives them flexibility in how the loans are repaid. Additionally, when we purchase an order, only a percentage of the order is used as repayment, so they have continual orders coming in.

Once loan recipients have been approved, we wire the money, but ask for accountability of its use. We want to make sure the funds are being used appropriately, but we also want to keep track of how the money has changed the lives of women and their families. Through their facilitators, we do follow-up for five years post-loan.

Most of the decisions about the loan, including how and when the money should be returned, is decided by the woman herself. I think this is what Nest is all about -- helping women jumpstart their dreams by giving them the capital they need to become self-sufficient business owners. The choice of loans, as opposed to other forms of charitable giving, was intentional. By requiring that each woman be intimately involved in the process -- from deciding how much to ask for (creating a business plan), what to use it for, the method and time frame for repayment, and actually being responsible for the repayment -- Nest's microcredit loans encourage active participation in each step of the process and encourage self-sustainability.

Rebecca, how do you get successful artists and designers to sell their merchandise on your site? (Proceeds from these sales are used to fund the loans.)

We are lucky and have had wonderful press, so artists and designers now find us! It is also a wonderful win-win, because we allow our designers to donate to a cause that supports women like them -- who just happen to be slightly less fortunate. Further, Nest designers not only offer exclusive merchandise for sale, with the proceeds used to fund loans, many have also agreed to advise loan recipients on building their businesses. In this way, Nest is a worldwide network of artists helping artists (and largely women helping women).

What are some of the challenges you have faced running Nest?

There honestly have not been too many! I am surrounded by a great support network of friends and family and the Nest team is amazing. We face small challenges each day, but we try to get through them one at a time. Maybe one of the biggest challenges has been being too strict with myself. As any entrepreneur can attest, starting a business is an emotional roller coaster. I try to learn from my mistakes, but I also try to keep things in perspective, and above all, to see and appreciate each new learning experience. I am dedicated to my work to the point of obsession, but I also try to enjoy the journey.

Please share with us some of your success stories.

Our first loan recipient was a woman named Meral Tuncer, who lives in Izmit, Turkey. She received a Nest microfinance loan to grow her jewelry business by being able to purchase higher quality stones and beads that will allow her to reach new clientele at the bazaar.

Our facilitator in Turkey is Nest designer, Rose Deniz. Rose once told me, and it made me cry, "when we told Meral how much she was going to make from the earring order, she was so happy. [C]ombine that with the loan, in one week she is making more than she might make in a month. You can imagine her excitement! Thanks does not express it enough."

But I think Meral's own testimonial speaks most clearly. She wrote: "At the bazaar, I have my own table where I display my goods. I want to stop selling at the bazaars because people do not appreciate quality things. I spend a lot of time setting up my table and am there all day. It is my dream to open my own store where I sell beads and my own jewelry. The Nest loan will help me to create more variety of jewelry with more materials, better sales because I won't only be displaying my jewelry at bazaars, and create a start towards achieving my dreams."

Rebecca, any big plans in the future for Nest?

Yes, within the next year we would like to launch a wholesale interior design line created by our loan recipients. This line would be marketed in the U.S. and would allow our women to have stable income. It would be in addition to the microlending services we already provide. We also hope to expand the services we offer each woman to include more intensive training on personal finances, business assistance and product development.

What are your Top 3 Tips for women who want to help women in their local communities.
  1. Consider using it as a way to learn the language. By getting involved locally, you can have those you are helping teach you!
  2. Include your family. Volunteering as a family allows you to spend more time together and teach your children the importance of giving back.
  3. Do not wait to get started. Your "to do" list will never be shorter, your days will never be less full, so just start!

Microfinance Fever

A lot of people are chasing returns in barefoot banking. Here is what you should know before you follow.

This very useful background piece on microfinance from Forbes suggests you enter the industry on the financier side carefully -- as is Forbes’s wont. You should know which of the 11,900 microfinance lenders "are not worth investing a dime in," cautions a quoted Harvard Business School professor. Forbes did some filtering for us in their typical rigorous style, screening on low costs and high returns on assets.

Note that some of the interest rates cited make the local loan shark look like a charity. Presumably the high returns earned by the borrower make it worth their while. Also, the average default rate for the quality institutions at hand is low. Both the market and the borrower can evidently bear the burden.

Maria Guadalupe Licona, of Tulancingo, Mexico needed to expand her herd. So she borrowed $100 for six months from a microlender that charges on average 40% interest and purchased additional sheep and pigs.

The money came from somebody like J. Alex Hartzler. He and his partners sold their Web Clients ad business to online marketing firm ValueClick [ticker: VCLK] for $141 million in July 2005. A Fulbright scholar who volunteered in Bolivia with the Mennonite Church before entering law school, he wanted to put some of his gains into doing good.

So Hartzler, now 39, invested first in an equity fund and later in a debt fund managed by MicroVest of Bethesda, Maryland and backed by a portfolio of notes taken out by mostly small Latin American borrowers. The debt fund's target 10-year return of 6%, net of fees, is only two percentage points better than the yield on default-proof 10-year Treasury notes. Without the do-good feel, it probably would not attract much capital. Hartzler sticks 1/5 of his international holdings in microfinance and the rest in mainstream exchange-traded funds.

He should probably point out here that this article was written about a year ago, when the current financial turmoil was no more than a blip on the horizon for most people.

There are, of course, less adventurous ways to be a socially conscious investor. You could join the crowd selecting mutual funds that exclude naughty companies, such as those (depending on your taste) that make weapons, sell tobacco or run nuclear plants. The Social Investment Forum claims that socially conscious funds account for 10% of managed money, or $2.2 trillion.

Microfinance investing can be a little less passive than the average open-end fund. The idea gained attention when Muhammad Yunus won the 2006 Nobel Peace Prize. His Grameen Bank, founded three decades ago in Bangladesh, has $521 million outstanding on loans to small businesses in poor countries. High-profile microfinance investors include Ebay founder Pierre Omidyar and Sequoia Capital, the venture capital backer of Google and YouTube. An estimated 40 funds focused on microfinance have been created since 2005.

As many as half of the world's 3 billion poor may be eligible for microloans. Average loan sizes vary from $100 in India to $1,530 in Bolivia. The current $17 billion in loans outstanding represents 10% of the potential microfinance market, notes a 2006 McKinsey & Co. report.

Fixed-income microfinance funds return an average 5.8% in U.S. dollars, according to the Consultative Group to Assist the Poor, a group of 33 public and private development agencies. ProFund, the first private equity fund in microfinance, yielded an annualized 6.6% over 10 years through 2005. Making loans directly to established microfinance institutions usually requires a minimum investment of $250,000 to $500,000. Depending on the fund, you can invest much less.

Not all these lenders are good ideas, though. "You need to discriminate between the 11,900 that are not worth investing a dime in," cautions Michael Chu, a Harvard Business School professor and early investor in ProFund. Four Kampala microfinance firms are under Ugandan police investigation for cheating poor borrowers and refusing to fulfill withdrawal requests.

Many microfinance lenders function like banks. They pull in deposits from people in their communities. They rely on foreign investors for their risk capital, a mix of equity and subordinated debt.

The table lists the top 10 of the better microfinance institutions. To assemble the list, we asked the Microfinance Information Exchange for financial results for 641 microfinance providers, and our list includes only those that reported audited financial statements. Also helpful were credit ratings from Sanjay Sinha, managing director of Micro-Credit Ratings International Ltd. in India, and Damian von Stauffenberg of MicroRate ... Table standings reflect a consolidated score for four criteria (scale, efficiency, portfolio risk and profitability). For the full list, visit this page.

Top-ranked Asa (Bengali for hope) was founded as a civil rights organization in 1978 by a group of young people fighting a liberation struggle against Pakistan, but it did not start issuing credit until 1991. A staff of 23,000 working at 3,300 branches across Bangladesh services loans, which average $110, to 5.5 million borrowers.

Crediamigo is the microfinance arm of Banco do Nordeste, a combination development, investment and commercial bank with 174 branches covering 1,955 cities in Brazil. It finances 77% of all the rural and industrial loans in the country's Northeast region. The Brazilian federal government controls 90% of Crediamigo shares with the remainder in private hands. Crediamigo caps loans at $1,400 and mostly pushes small loans lasting 3 to 18 months. These average $375 and come with a steep 35% interest rate.

With 537,000 borrowers and another 225,000 savers (as of December 2006), Amhara Credit & Savings Institution in Ethiopia is one of Africa's largest microfinanciers. On overhead it consumes only 5 cents of every net dollar lent (that's after interest costs are subtracted).

It keeps staff costs low and is frugal on such expenses as electricity. These microlending organizations have low default rates. The share of Amhara's loans in default or more than 30 days late on interest and principal payments, as of year-end 2006, was 1.5%.

Our top ten's overhead costs are low, ranging from 0.7% to 3.65% of gross national income per capita. They spend next to nothing on marketing and not much on paperwork. Our microfinance lenders show returns on assets that would be eye-popping for a commercial bank. Mexico's Banco Compartamos has a 23.2% ROA. How does it do that? Its loans cost on average a usurious-sounding 80% in interest. Also, its equity comes to 42.3% of assets, a much higher ratio than you'd see at any ordinary bank.

Here are ways do-gooders can join in:

MicroPlace.com, launched by Ebay this past October [2007], is a regulated broker-dealer that sells microfinance loans online as securities through the Calvert Social Investment Foundation and Oikocredit USA. Most such securities mature in three years and yield 3%. You need as little as $100 to get in. The Web site has attracted $500,000 so far. The prospectus can be found on the site.

So-called microfinance investment vehicles typically either resell a basket of debts held by microfinance institutions or make equity investments in lenders directly. Minimum investments range from $100,000 to $500,000. One of the largest, MicroVest ($39 million in loans outstanding), is typical in that it raises money via private placements and is therefore not registered with securities regulators in states where it is offered. To gauge a fund manager, you should request a prospectus; they're usually not available on Web sites.

Downside: Expenses can be high, up to 2.5% of assets annually. Liquidity is as low as in a limited partnership or hedge fund: You have no right to withdraw before the announced close-down date (typically, in 7 to 10 years) and so would have to take your chances selling on the secondary market.

One other potential catch: If you invest in a microfinance fund incorporated offshore, you could get hit with a nasty "penalty tax" on "excess distributions" if the fund is liquidated and the right paperwork is not done. (That is in addition to the normal tax on earnings from the investment, which might also drive up your tax accountant's bill.)

Indeed, there is no point in trying to do good and end up doing poorly. Owning an offshore legal entity in your own name invokes a host of reporting requirements and tax accounting -- not to mention paying -- that are best avoided. Using the services of Wealth International is one option. We would be suspicious of any opportunity that exposed one to such requirements that failed to warn you of such early and often.

One way around this is practiced by Philip Smith of Tulsa, Oklahoma, the former chief executive of Prize Energy, an oil and gas firm. He is investing in microfinance with dollars he has earmarked for charity anyway, using a donor-advised fund. Here, you donate cash, or better yet highly appreciated stock, to a fund and claim an income tax deduction now. Then you and your heirs dribble out contributions to favorite charities over the years.

Meanwhile, your charitable kitty is invested and (it is hoped) earning more for charity. Most community foundations, including ones in New York, Tulsa and Oakland, California, as well as religiously affiliated entities, allow donor-advised dollars to be invested in microfinance. So your dollars do good overseas, even as they earn a (modest) return for charity. And you avoid tax hassles. (Warning: Donor-advised funds affiliated with virtually all mutual fund companies, such as Vanguard and Fidelity, do not offer this option.)

Or you could buy shares in one of the handful of microlenders that are traded publicly. Alas, all but one are listed in such places as Indonesia and Kenya, where it's hard for foreigners to buy shares.


The U.S. and Liechtenstein have signed a tax information exchange agreement (TIEA). A small and limited-life loophole is that it covers information for 2009 and later only. Reading this article from Bloomberg one might conclude this is the end of the line for true privacy courtesy of Liechtenstein.

Not so fast, writes the Sovereign Society's Bob Bauman in a note to those on their email distribution list: “[T]here is one major catch: the agreement covers only clients who are already being investigated or prosecuted for tax evasion in the United States. In other words, no IRS ‘fishing expeditions’ allowed.” A careful reading of the U.S.-Liechtenstein TIEA annoucement does not contradict Bauman's conclusion.

Bauman further quotes one Jack Blum, “a self-appointed authority on offshore fraud to whom the leftist news media habitually turn for quotes”: “It does not do anything. They are offering to give up what we already know.” No better anti-endorsement needed. Odd how Bloomberg fails to mention the little fillip. Hmmmm. Actually, no.

Note well, however: This does not mean failing to report offshore financial accounts or taxable earnings is in any way intelligent or safe. Far from it. For one, who knows what the future will bring vis a vis the U.S. and Liechtenstein. Today's agreement is today's. For two, there are too many other weak links in the chain required to preserve absolute privacy to think that they will all hold forever. But for today, Liechtenstein has upheld and indeed enhanced its reputation as a defender of the basic human right of privacy.

The United States and Liechtenstein plan to sign an agreement to share information on banking clients that will erode the principality's allure to rich Americans trying to hide assets behind impenetrable bank-secrecy laws.

The accord culminates two years of negotiations, and follows a U.S. Senate committee probe this year of tax avoidance by clients of Swiss and Liechtenstein banks, including LGT Group, which is controlled by the principality's ruling family.

The agreement will be signed December 8 in Liechtenstein's capital of Vaduz, Matthew Keller, an official at the principality's Washington embassy, said in an interview. That will leave only Monaco and Andorra as havens without formal procedures for exchanging information with the U.S. Internal Revenue Service, according to the Paris-based OECD.

"People who would hide assets or income from the IRS are running out of places to move it to," said Pamela Olson, a former Treasury Department tax official who is now a lawyer at Skadden, Arps, Slate, Meagher & Flom in Washington.

The Liechtenstein accord takes effect in 2010, according to a statement from the principality's embassy in Washington. It covers financial information for 2009 and later tax years. Americans are required to disclose most offshore assets to the IRS, although some take advantage of bank-secrecy standards in places such as Liechtenstein and Switzerland to hide money from tax collectors.

The U.S. Justice Department is investigating possible tax evasion by as many as 17,000 American clients of UBS AG in neighboring Switzerland. A Switzerland-based UBS executive was indicted last month in Florida on a charge that he helped rich Americans evade taxes, and a former UBS banker pleaded guilty in a related case earlier this year.

In July, Zurich-based UBS said it would stop providing cross-border banking services to American clients through units that are not licensed in the U.S.

Because the Liechtenstein agreement does not apply to information from 2008 and previous years, American clients of UBS's Swiss banking operations may have a brief window to move assets to Liechtenstein before January 1 without exposing earlier transactions to U.S. authorities, said Asher Rubinstein, a lawyer in New York with nearly 100 clients who have accounts in the principality.

"Clients with non-compliant accounts with UBS and elsewhere have a month to set up a tax-compliant strategy in Liechtenstein," Rubinstein said. "Anything before 2009 will not be revealed to the IRS."

The delayed implementation of the U.S.-Liechtenstein agreement may undermine the accord's immediate deterrent effect on tax evasion, said John Christensen, director of the London-based Tax Justice Network, an advocacy group that tracks tax havens and supports global cooperation to combat them. "It creates a situation where people might be able to get in before the deadline," he said. ...

Even with its 2010 effective date, the Liechtenstein agreement will not protect taxpayers from penalties for earlier misdeeds, said Bryan Skarlatos, a lawyer with New York-based Kostelanetz & Fink. "It is not as if this is going to be a magic bullet and everything will be OK," Skarlatos said. "The IRS is simply going to go to the person and say 'Did you have any foreign financial arrangements before 2009?' A truthful answer would implicate the taxpayer if they did not file the necessary returns and report the income."

Skarlatos said he will not help clients move accounts to Liechtenstein unless they voluntarily disclose assets that have not been properly reported to the IRS.

Cono Namorato, a lawyer at Caplin & Drysdale in Washington, said Americans facing tax liability for offshore accounts should take advantage of an IRS leniency policy, which typically lets taxpayers avoid criminal prosecution if they voluntarily report assets. "Given the new agreement, it would be very short-sighted to move into Liechtenstein if the objective is to keep it in a secret jurisdiction," Namorato said.

Under the accord, Liechtenstein in some cases will provide information about how corporations use the principality's banks to reduce their tax bills. The embassy said the accord will be delayed until 2010 to give the principality time to enact enabling legislation.

"With this negotiation result, we are expanding our good relations with the United States, creating stability for the financial center and legal certainty for bank clients," Liechtenstein Prime Minister Otmar Hasler said in the statement.

Liechtenstein, a 62-square mile principality bordered by Switzerland and Austria, found itself at the center of an international scandal in February when a former LGT employee sold data on customer accounts to German authorities. Germany raided hundreds of businesses and the homes of wealthy citizens to collect back taxes and shared the data worldwide.

UBS spokesman Mark Arena said the bank continues to work "on an orderly wind-down" of Swiss banking services for U.S. clients. Arena said he does not know whether any clients are moving to Liechtenstein banks.

U.S. and Liechtenstein Sign Tax Information Exchange Agreement

The U.S. Treasury announced on Monday that the United States and Liechtenstein have signed an agreement to allow for the exchange of information on tax matters between the two countries. ... According to the Treasury, the Tax Information Exchange Agreement (TIEA) with Liechtenstein will provide the United States with access to information it needs to enforce U.S. tax laws, including information related to bank accounts in Liechtenstein.

It explained that:

"The TIEA will permit the United States to seek information from Liechtenstein on all types of federal taxes, and in both civil and criminal matters. Under the TIEA, the requested information must be obtained and exchanged without regard to whether the country receiving the request needs the information for its own tax purposes or whether the conduct being investigated would constitute a crime under its law.

"If the country receiving the request for information does not have the requested information in its possession, it must take relevant information gathering measures to provide the requested information. Moreover, requests from one country to the other must be honored, even if the information relates to, or is held by, nonresidents.

"As with all agreements to exchange information, only specific tax authorities are allowed to receive and send information. Information exchanged pursuant to the TIEA may be used only for tax purposes, and the competent authorities must safeguard the confidentiality of information exchanged pursuant to the TIEA."

The TIEA will allow for the exchange of information relating to 2009 and the years following. Documents or other information created before 2009 can be obtained, provided that the request relates to an investigation of a post-2008 year. In the case of pre-2009 years, information can be exchanged regarding criminal tax matters under the U.S.-Liechtenstein Mutual Legal Assistance Treaty.

It further emerged that as part of the signing of the TIEA, the United States is extending Liechtenstein's treatment as an eligible Qualified Intermediary (QI) jurisdiction until December 31, 2009.

The Treasury stated that:

"This one-year extension is intended to provide Liechtenstein with time to enact the legislation necessary for full implementation of the TIEA. If Liechtenstein fully implements the TIEA by the end of 2009, Liechtenstein's QI status will be renewed for the standard six-year term.

"The QI program generally allows financial institutions that are located in an eligible QI jurisdiction to enter into an agreement with the IRS in which the foreign financial institution assumes certain documentation and withholding responsibilities in exchange for simplified information reporting for its non-U.S. account holders."


A new report by the House of Commons urges HM Revenue and Customs to start doing unto the U.K. underground economy what it has starting do to offshore account holders. The chairman of the committee which issued the report claims the level of tax revenue losses from unreported underground economy transactions "might" be as much as £2 billion. This does not seem like a lot to get worked up over, even factoring in the usual bureaucratic recoil against anything that escapes their control, but we suspect the amount is much greater. Some interesting details about the anti-underground efforts are in the report summary.

HM Revenue and Customs is making little ground in its efforts to diminish the "cash-in-hand culture" operating in the United Kingdom, according to a new report by the House of Commons Public Accounts Committee.

"HMRC has no solid estimate of the level of losses but it might be over £2 billion ($2.96 billion) a year," commented Edward Leigh, committee Chairman ... "With a detection rate of only 1.5%, the chances of being caught are very slight. For those who are caught, the penalties imposed are usually relatively trifling: On average only 3% of the tax detected. And in very few cases, just two out of a thousand, is a prosecution launched."

"The Department has had some success at motivating people with offshore accounts to come clean and voluntarily to pay the tax they owe. It should devise similar schemes to persuade those in other risk areas -- such as self-employed builders and buy-to-let landlords -- to put their tax affairs in order.

"HMRC must also do much more to publicize both the benefits of joining the formal economy and the potentially serious consequences of not doing so. And if such publicity is to have any effect, then it must be backed up by resolute action by the Department to complete more investigations, apply the full range of new penalties available and ramp up the number of prosecutions."

Leigh was speaking as the committee published its report on the scale and nature of the hidden economy, encouraging people into the formal economy, detecting people in the hidden economy, and the use of penalties and criminal investigations.

It is thought that around 2 million people operate in the informal economy, although there are no reliable estimates of the tax lost as a result. HMRC spent £41 million in 2006-07 on encouraging people and businesses into the formal economy, and detecting and imposing sanctions on those operating in the hidden economy. The department achieved a return/cost ratio of 4.5:1 which is expected to increase as recent initiatives achieve their full effect.

Areas of risk identified in the report include: self-employed people, such as builders and decorators, who often receive cash payments; individuals who trade on the internet; and buy-to-let landlords.

Since 2003-04 HMRC has detected some 30,000 hidden economy cases a year, a detection rate of only around 1.5%. The amount of tax from cases detected in the hidden economy has, however, increased by 13% in real terms since 2003-04. The return on the Department's investigations in 2006-07 was 5:1.

To increase detections, the department has been making more use of data matching techniques. It also set up the Tax Evasion hotline in 2005 for members of the public to report suspicions of tax evasion. The hotline received over 120,000 calls in 2006-07 but progress in investigating cases has been slower than the department expected.

HMRC completed 2,000 investigations compared with 5,500 planned, yielding additional tax assessments of £2.6 million compared with £32.5 million planned. Investigations of small businesses, businesses which should be registered for VAT but are not, and employers' compliance yield higher returns.

When the HMRC detects people in the hidden economy, it can impose a penalty of up to 100% of the tax owed. In most cases it either imposes a much lower penalty or waives the penalty. In 2006-07 the department imposed penalties of £5 million, amounting to around 3% of the tax identified. Prosecutions rose to 69 cases in 2006-07.

To encourage people to declare tax owed, the department has run advertising campaigns, which have led to a further 8,300 registrations and should result in additional tax of £38 million over three years. In 2007, HMRC introduced the Offshore Disclosure arrangements to encourage people holding overseas bank accounts to voluntarily disclose and pay any tax owed. This followed landmark rulings against several major financial institutions which required them to disclose details of around 400,000 bank accounts. Some 45,000 people came forward bringing in around £400 million at a cost of £6 million, a return of £67 for every £1 spent.


Some point to Alan Greenspan, but his hands-off approach to the economy allegedly originated with Ayn Rand. A Rand supporter begs to differ.

Several weeks ago we posted a piece by a pair of Ayn Rand supporters titled "Stop Blaming Capitalism for Government Failures." Now one of the authors, Yaron Brook, is back arguing his point in a more extented format, in an active give-and-go with a Newsweek interviewer.

Going beyond defending Rand's and Objectivism's reputation from their association with Greenspan, Brook notes: "Atlas Shrugged is coming true. ... Businessmen are panicking, and I think they should be panicking. Many of them understand that this was not a crisis of free markets. There was no free market to fail. What we have is a regulated market, and the regulated market has failed."

We, naturally, would suggest people panic now -- beat the crowd! -- and move some of their mobile wealth beyond the reach of the "looters" while the moving is still good.

It is not easy being Alan Greenspan these days. As the former Federal Reserve chairman, he urged government regulators to take a light touch while banks like Bear Stearns and Lehman Brothers buried themselves -- and the economy more generally -- under a mountain of debt. Now that his reputation is plummeting faster than the stock market, he has been forced to admit a "flaw" in his hands-off ideology.

Of course, things look entirely different to members of "free-market advocacy groups," as they like to be called. One such group is the Ayn Rand Institute, named after the matriarch of the movement, whose antigovernment and anti-regulation views are embodied in her best-selling novels Atlas Shrugged and The Fountainhead. Indeed, Greenspan himself was a friend of Rand's, and a devotee of her extreme free-market philosophy, known as Objectivism. Newsweek's Barrett Sheridan spoke with the head of the Ayn Rand Institute, Dr. Yaron Brook, about why he defends free markets while much of the rest of the world has turned away from them, and what he thinks of Greenspan today. Excerpts:

Newsweek: Lack of regulation is being blamed for our current crisis, and free markets are in disrepute. Has Objectivism been dealt a deathblow?

Yaron Brook: No, not at all. From a public-relations perspective, it has been hurt. But in the long term there will be a backlash against what is going on in the markets today -- the heavy government involvement, the nationalizations and the move toward socialism. If the free-market advocacy groups position themselves correctly, they can benefit from it.

How can they do that?

What we need to do is really make the case to the American people -- and I think it is an easy case to make -- that this is not a failure of free markets, this is not a failure of capitalism, but this is a failure of the exact opposite. It is a failure of the regulatory state. It is a failure of all the government policies of the last eight years. Actually, the last 95 years.

Why do you say the last 95 years?

I believe that the #1 cause of the current crisis is Federal Reserve policy. [The Federal Reserve was created in 1913.] The Federal Reserve, by necessity, creates economic problems; no matter how good a Federal Reserve chairman is, he is going to create cycles of booms and busts.

How did the Federal Reserve create today's mess?

The current crisis was caused by the housing bubble, and the primary cause of the housing bubble was the Federal Reserve keeping interest rates at 1 percent in 2003. They were asking people to borrow money, basically begging them. The financial problem we face today was a problem of overleverage, of too much debt -- but that's exactly what Federal Reserve policy encouraged.

But during that time, the head of the Federal Reserve was Alan Greenspan, a close friend of Ayn Rand and the world's most famous Objectivist.

Alan Greenspan was close to Rand, but he sold his soul to the devil for power.

Yes. Alan Greenspan was quite close to Ayn Rand in the 1960s and 1970s. But from pretty early on, Greenspan was a part of economic policies that I do not think Ayn Rand would have approved of. Yes, he wanted less regulation, but he never talked about rolling back regulation. He never talked about significantly meaningful ways to cut spending, cut taxes. I believe he sold his soul to the devil. Power corrupts, and absolute power -- which I think is what you have at the Federal Reserve -- corrupts absolutely.

So it sounds like you are not bothered by his admission that he found a "flaw" in his "free-market ideology."

No, the only thing that bothers me is that the press took it to mean, "See, capitalism has failed, even according to this guru of capitalism." He was never a guru of capitalism! At least he has not been a guru of capitalism since the 1980s.

Do you have any contact with Greenspan?

No, I don't.

Have Objectivists largely disavowed him?

I think so, but I think he has disavowed us, as well, so it is mutual. I do not think he would have dinner with me if I asked.

What do you think of the various and numerous bailouts?

They are horrible. I think that the biggest mistake that was made was probably the bailout of Bear Stearns. I think they should have let Bear Stearns fail. The fact that everybody else now wants a bailout makes complete sense. Why bailout AIG and not General Motors? General Motors employs more people.

But scholars like Ben Bernanke, current head of the Federal Reserve, says one reason the Great Depression was so severe was that government waited three years before intervening, and let scores of banks fail before then.

Unfortunately, just because economists understand what caused the Great Depression does not mean they understand what needs to be done to prevent one. People today mistakenly think that FDR saved us from the Great Depression. But from 1932 until at least 1940, the U.S. was still in a depression. Government grew during the 1930s more than in any decade in history, and yet at the end of the 1930s, we still had more than 15% unemployment. So government growth and regulation is not a solution to a depression. I would argue it is the exact opposite.

What does that mean for the current situation?

Everything that [Treasury Secretary Henry] Paulson and Bernanke have done since day one of this crisis has made things worse, not better, if only because they have been so panicky and hysterical, and changed their minds so many times and offered so many different plans. The market has come to the conclusion that they have no idea what they are doing.

You want to do away with the Federal Reserve, but something that radical is not going to happen, at least not anytime soon. In the meantime, would more regulation of the financial sector not make sense?

No, I think quite the opposite -- more financial regulation would be a disaster. Financial regulations created this mess. The Community Reinvestment Act, Freddie Mac and Fannie Mae -- they are the institutions and proposals that got us into this. Regulators are not good at managing financial institutions. Think about the [savings and loan] crisis: the S&L industry was the most regulated industry in the United States. Did that stop the crisis from happening? No. Regulations do not prevent crises; they cause them.

But AIG's downfall was due largely to credit-default swaps.

There is nothing wrong with credit-default swaps. If they had let AIG fold, we would have discovered that. There has been no problem with the credit-default swap-market to date. It is actually working better than the securitized mortgage market, which is a government creation through Fannie and Freddie.

But AIG had too many credit-default swaps on its books, and almost collapsed as a result. Shouldn't we prevent that level of risk-taking?

Yes, AIG made mistakes. And the company should suffer for those mistakes. But do you think that if federal regulators were regulating the credit-default-swap market, things would be better or worse? I suggest that things would probably be worse.

Atlas Shrugged is coming true.

With free markets now in disrepute, what is going to happen to the popularity of Ayn Rand's most famous book, Atlas Shrugged?

I think it is going to go up dramatically. I think it already has. [People] are saying, "We are heading toward socialism, we are heading toward more regulation." Atlas Shrugged is coming true. How do we get out? How do we escape? Unfortunately, there is no escape. Businessmen are panicking, and I think they should be panicking. Many of them understand that this was not a crisis of free markets. There was no free market to fail. What we have is a regulated market, and the regulated market has failed.


We have previously posted pieces on claims that there is a back door into Skype's propriety closed source encryption protocol. Skype has also confessed to privacy breaches for its China-based users which further that suspicion. These reservations, however, apply to the use of Skype as an secure communications mode, and do not impinge upon its virtues as a substitute for your regular phone service.

On this later use there is no doubt that Skype is cheap and convenient, sufficiently so as to be revolutionary. And it is easy to set up as well. Here are some convenient instructions for getting started.

One caution not referenced below: Last week's Digest has a post on the insecurities of Wi-Fi networks. If you are going to use Skype over Wi-Fi networks from home or when you travel, be aware of that. Roving wireless network hackers are probably looking for more useful information than the content of your voice conversations, but that is not reason for dropping all guards.

Earlier this year, I called my phone company to talk about my bill. For years, I had been paying about $25 a month for a land line arrayed with a panoply of services that I rarely used -- unlimited local calls, cheap long distance, call-waiting, and several other fancy options. I wanted to cancel all of it. I have long used my mobile phone as my primary line. I had only kept the land line because I get poor cellular reception in my house. A year ago, though, I switched over to Skype. It beats cell phones and land lines in both price and quality. Best of all, it is portable: I can use the same phone plan to make calls from home, from the office, and even from hotels around the world -- again, for very little money.

Skype is not new -- it launched in 2003*, and millions of people around the world use it. But because Skype is so unbelievably cheap, I have run across lots of people who still consider it some kind of Internet dark art -- a service with mysterious inner workings, one that requires some kind of special equipment or technical know-how to get it up and running.

This is not so. Skype, which routes your calls through the Internet, is easy to set up and pretty hassle-free to use. Unlike Vonage or other Internet phone services, it requires no contract or installation. You can set it up yourself and use it as often as you like, and you can use it to supplement (rather than replace) your normal phone if you prefer. It is also completely legal and here to stay -- eBay bought the company in 2005, and you do not have to worry about the Feds shutting it down. You do need to buy some equipment to use Skype, but none of it is exotic or expensive. And once you are using it, it feels no different from an ordinary phone. (Do note, though, that Skype does not do emergency calls; if you need 911, use a real phone.)

I have put together a primer (below) on how to get started with Skype. Follow these simple steps, and soon you, too, will be calling your phone company to cancel everything.

What you need: There are two ways to run Skype -- from your computer or from a phone equipped with Skype's software. Starting with your computer is easier. For this you need a machine capable of running Skype's software (something made within the last five or so years), a broadband Internet connection, and a USB headset and microphone, which should set you back about $25 to $30. (Your laptop's built-in mike will work, but a headset sounds sound better. If your computer has a Bluetooth chip, you may be able to use the Bluetooth headset you use for your cell phone.)

After you connect your headset, download and install Skype and create a free user account. That is it -- now you can make Skype calls from your computer. To test out your setup, type echo123 into Skype's address bar and press Call. This will give you a prompt asking you to say something. Skype will then play back what you said -- if you can hear yourself, your setup is working.

I make most of my Skype calls through a headset attached to my computer. But if you would prefer to use your home phone to make calls, you can buy an adapter that turns any ordinary phone into Skype's mike and speaker. Plug the adapter into your computer, then plug your phone into the adapter -- now all your Skype calls will be routed through your home phone. I have found this works pretty well; you can even use a cordless phone to roam around the house.

Both those options require that your computer be turned on when you are using Skype. If that is too much of a burden, you can buy a special Skype phone with a built-in Wi-Fi radio. These phones connect directly to your wireless network, bypassing your computer altogether. They are slightly expensive, running between $120 and $200. On the other hand, they are very portable, allowing you to use Skype wherever you have got Wi-Fi -- very handy if you are traveling internationally and want to call home for cheap. A word of caution, though: Despite telecom company objections, more and more new cell phones are capable of running Skype. If you wait a while, your iPhone or Google phone may get Skype capabilities, and then you will not need a dedicated Skype phone.

Calling other Skype users: How cheap is Skype? If you want to talk to other Skype users, it is free. If you are in a long-distance relationship or have grandkids on the other side of the country, you should get your chatting partner on Skype immediately. (The software also does video -- buy two webcams, and you are up and running.)

Calling people who do not use Skype: Skype is an Internet application -- it works by streaming your calls over the network on a peer-to-peer protocol. (The software's inventors are peer-to-peer devotees, having developed the file-sharing program Kazaa and the TV-streaming app Joost using the same principles.) But Skype's magic is that it connects to the phone system, too, letting you talk to people who have no interest in any of this computer mumbo jumbo.

Calling people's phones is not free: To get started, you have got to give Skype your credit card number (or your PayPal account). Then type in the phone number and press Call.

You can pay for your Skype calls on a per-call basis or through a subscription. Skype's pay-as-you-go rates are very good. You can talk to most people in Asia, Europe, and North and South America for about 2 cents a minute. (Calling mobile phones in some countries costs a bit more; every time you make a Skype call, you will see your current rate on the screen.) If you install Skype on your laptop, you have now got an international roaming phone -- go to a hotel in London, and you can call New York for a few cents a minute.

Skype's subscriptions are an even better deal: You can get unlimited calling in the United States and Canada for $3 a month and unlimited calls to 36 counties around the world for $10 a month. If you subscribe, you also get a free online voice mailbox.

Receiving calls: If you want to switch over to Skype completely, you need to pay for a service called SkypeIn -- a dedicated Skype phone number that allows people to call you from their phones. When someone dials your SkypeIn number, your Skype device -- your computer or your Wi-Fi phone -- will ring.

Skype numbers are available in area codes across the United States and 21 other countries. You can even buy multiple numbers in different countries. This way, your friends in London can call your U.K. Skype number while your friends in New York call your Manhattan number. Each of them will pay only the cost of a local call.

SkypeIn numbers cost $60 a year or $18 for three months. (You get a discount if you subscribe to one of Skype's calling plans.)

Other stuff you can do with Skype: Making calls through the Internet rather than the phone network brings all kinds of advantages. Because your phone is a piece of software, you can tweak it in many ways -- for instance, use Skype recording software to save all your calls or use a digital voice modulator to make prank calls. One add-on claims to analyze the other person's voice to detect whether she really loves you. You can also run a baby monitor (or a nanny cam) through Skype: Attach a webcam to one computer, then Skype in to it from another machine -- you will see everything come in live.

Even with all these bells and whistles, the best thing about Skype is still the price. If you are already paying for Internet service, there really is no need to pay for phone service, too. The Internet is already your phone. Use it.


Julius Baer’s Widmer is dead of possible of suicide at 52.

Alex W. Widmer, a prominent Swiss private banker, died Wednesday (Dec. 3) of what police are treating as a possible suicide, according to people familiar with the situation.

Overseeing the private bank at Julius Baer Holding AG, Mr. Widmer turned the Zurich firm into a leading bank for wealthy clients by poaching bankers from larger Swiss rivals UBS AG and Credit Suisse Group. He also expanded in Europe and the Middle East. The 52-year-old Mr. Widmer was a widowed father of three. ...

Mr. Widmer's death comes at a volatile time in Swiss banking. UBS is under investigation in the U.S. for allegedly helping clients evade taxes and has booked about $46 billion in write-downs. Julius Baer's private bank, though, has been doing well in recent months, with net gains in money flowing in, in part picking up funds leaving UBS. But its asset-management arm has suffered due to its exposure to hedge funds. ...

Bank Julius Baer, which includes the private-banking business, is one of two main units at the company, which also runs an asset-management arm.

Jon Peace, a banking analyst at Nomura International PLC in London, said he expects Julius Baer "to try and poach a big name from outside the bank" to replace Mr. Widmer.

Bermuda-Based Insurer Relocates to U.S.

File this in the "hmmmm" drawer. Hiscox Insurance Co., Ltd. relocated from London to Bermuda in 2006. Now it has annouced that it is shuttering operations in Bermuda and relocating to the U.S. To what degree this is related to recent U.S. tax law changes, recently characterized as an "extremely real" threat to Bermuda by a major Bermuda insurance company CEO, we are not sure. It could be that Hiscox figures that with the U.S. a major target of opportunity, it may as well not sail against the political winds.

Hiscox has announced that it will be relocating its Bermuda-based specialist reinsurance and insurance team to "take full advantage of market opportunities" in the United States.

The international specialist insurer announced on December 3 that it would shut down the reinsurance and insurance arms of its operation which is currently run from Bermuda and expand its presence in the U.S. market in five states. In addition to Hiscox's existing offices in Armonk, Manhattan, Chicago, Geneva (Illinois), and San Francisco, the group plans to establish offices in Lexington, Boston, Kansas City (Missouri), Miami and Los Angeles by the end of 2009.

"The tide is continuing to turn in our favor. In the last few weeks we have been presented with a number of excellent opportunities to enhance our local expertise and we are taking full advantage of them," said Bronek Masojada, Hiscox Chief Executive.

Hiscox has underlined that the move will not have a material impact on Hiscox International’s 2009 business plan. The firm's treaty reinsurance business in Bermuda will continue under the leadership of Rob Childs.

The insurer moved to Bermuda in December 2006 to take advantage of the more favorable tax regime in the jurisdiction compared with the United Kingdom, and it subsequently delisted from the London Stock Exchange. The move was also aimed at targeting the prominent U.S. market.

Hiscox currently operates from 12 offices in Amsterdam, Bermuda, Brussels, Cologne, Dublin, Guernsey, London, Madrid, Munich, New York, Paris, Lyon, Stockholm and Lisbon.