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SWISS GOVERNMENT SAYS IT WOULD SEIZE UBS DATA SOUGHT BY U.S.
Will act to prevent Justice Department from seeking the identities of 52,000 American account holders.
Swiss banking giant UBS – giant in size, not corporate intellect ... another story – has turned over to the IRS names and information on over U.S. 250 clients who evaded U.S. taxes using sham reported offshore companies in various tax havens. Using fake companies consituted fraud under Switerland’s own rules so there was no breach of Swiss client privacy laws in the disclosure. But the IRS wants more information on more UBS clients. Much and many more.
The IRS wants the names of 52,000 UBS American clients so that it can engage in a data mining “fishing trip” through the list for possible tax evasion. Without evidence of acts which would be specifically fraudulent under Swiss law, such disclosure would violate Swiss law. If the U.S. demands that UBS cough up all the information or else the bank would be caught between the proverbial rock and a hard place.
Setting up potential showdown at high noon, the Swiss government has said it will seize the UBS client data, in effect making the standoff one between the two governments and removing UBS from its extremely uncomfortable middleman status.
Credit the Swiss for discovering some overdue backbone here. We will see exactly what the U.S. – and its European OECD friends who dislike Switzerland’s residual penchant for defending clients just as much as the U.S. – will do next. One naturally expects yet more blowhard pontificating about the Swiss being tax evasion enablers. But will there be trade and financial sanctions as well?
Switzerland said it would seize UBS AG data to prevent the U.S. Justice Department from pursuing a U.S. court order seeking the identities of 52,000 American account holders in a crackdown on tax evaders.
The assertion came in court papers [July 7] in federal court in Miami, where the Justice Department sued UBS on February 19, a day after the bank avoided U.S. prosecution for helping wealthy Americans evade taxes. The U.S. effort to enforce a summons seeking the names would force UBS to violate Swiss laws barring disclosure of such data, the filing said.
The Swiss government “will use its legal authority to ensure that the bank cannot be pressured to transmit the information illegally, including if necessary by issuing an order taking effective control of the data at UBS that is the subject of the summons,” according to the filing.
UBS agreed February 18 to pay $780 million in penalties, admitted it helped taxpayers hide money in Swiss accounts and gave the Internal Revenue Service more than 250 clients’ names. The bank and Switzerland have since argued that the U.S. lawsuit represents a threat to Swiss sovereignty. U.S. District Judge Alan Gold will hold a July 13 hearing on the case.
“It is hoped that it will be unnecessary for the Government of Switzerland to take the extraordinary action of issuing an order to seize the information at issue, but such an action should be expected if the IRS continues to pressure UBS to violate Swiss law,” according to the filing.
Two UBS clients in the U.S. have pleaded guilty to tax crimes since the bank entered its deferred-prosecution agreement on February 18. Prosecutors have said criminal charges against more UBS clients are likely. The IRS is encouraging others to avoid charges by disclosing UBS accounts voluntarily.
Judge Gold yesterday denied a UBS motion seeking the number of accounts identified to the IRS through voluntary disclosures. UBS had said such data presents an alternative method to gain the information sought in the lawsuit.
In his order, Gold said that such data is not “an adequate alternative” for the U.S. to seek the information it requests in “a timely and comprehensive fashion.”
As part of its deferred-prosecution agreement, UBS admitted February 18 that from 2000 to 2007 its Swiss private bankers helped Americans evade U.S. taxes through sham offshore companies in tax havens including Panama, Hong Kong and the British Virgin Islands. UBS said it created misleading forms saying those companies, not taxpayers, were the beneficial account owners.
UBS also admitted that its private bankers marketed securities and banking services in the U.S., even though it did not have the required license from the Securities and Exchange Commission. Those bankers, UBS admitted, met with clients in the U.S. and communicated with them regularly as they traded securities in their accounts or transferred assets.
The case is U.S. v. UBS AG, 09-cv-20423, U.S. District Court, Southern District of Florida (Miami).
Pity the Poor Rich
Switzerland developed its banking industry to help protect people from their own governments. Thus do people turn to the Swiss once again, as they see their own governments sharpening their knives and tightening their borders.
The inimitable Bill Bonner puts the financial war between Switzerland and the high tax states in proper context: The “rich” have the money the high taxers want. Switzerland helps the “rich” keep it in their own hands. The high taxers do not like this. QED.
Not exactly news to veterans in the offshore world. But worth reading for everyone, especially with the usual Bonner historical tidbits and offhand commentary about how the world works thrown in for good measure.
We begin our week with a quote from our favorite philosopher: Yu Faz.
“The rich man’s heart breaks ... just like the poor man’s. For all his money, he cannot buy another one.”
Yu should know. He was exiled after he had a liaison amoureuse with one of Genghis’s concubines.
Pity poor Yu! Pity the poor rich! As long-term sufferers know, we always take the part of the underdog. We almost never saw a lost cause that we did not want to join. We admire die-hards ... and we like the company of scalawags.
So, today, we take up the banner of one group that is all these things ... a group that is widely despised and routinely persecuted ... the “untouchables” at the top of the economic pyramid: the rich.
“Switzerland at war with the rest of the world,” begins an update from colleague, Cecile Chevre, in Paris.
The Swiss usually manage to stay out of wars. They do it by being heavily armed. Even the yodelers have softened up lately, but until recently every able-bodied man was required to serve in the Swiss Army. He had to keep his rifle at home ... and each year he had to prove that he knew how to use it.
During WWII, the Germans considered invading Switzerland. According to legend, a top German general met with Switzerland’s top military man on the border.
“We have twice as many men on the border as you do,” said the German. “What would you do if we launched an attack?”
“The answer is very obvious,” replied the Swiss general. “I would tell each of my men to shoot twice.”
But now Switzerland is up against even worse odds. Switzerland has long been a haven for people with money. And life is getting tougher for the rich ... as well as for those who defend them.
In the first place, getting rich is not as easy as it used to be. Gone are the days when you could just put your money “in the market” and come back 10 years later with 10 times as much. If you had invested $70,000 in Dow stocks in ‘82 and let it grow, you would have been a millionaire by 2007. Even after inflation, investors came out way ahead.
Gone too are the glory days in real estate, too. How many fortunes in America were built on dirt? Thousands of them ... maybe millions. Especially, in places such as California, Florida and Las Vegas ... a steady immigration over decades produced a bonanza for property owners. A fellow of modest means was able to mortgage his house and buy more properties. He might begin with the house across the street ... and then buy four condo units down the road ... and then move on to major apartment buildings and commercial property too. After a couple of decades, he could easily have parlayed a few thousand of original equity into millions worth of property assets.
But how do you do that when prices are falling? And when lenders no longer want to give you credit? We received a letter recently, from a fellow with a string of properties in Las Vegas. He had bought wisely and now enjoyed positive cash flow – after all costs, including financing. Still, he could not find a lender willing to roll over his debt.
The last couple of years have been a bad time to be rich. The capitalists’ capital is capitulating. It is giving up and dying.
Meanwhile, governments are looking to “the rich” to finance their bailout programs, their wars, their pension programs and giveaways. Where else can they look? They need money. Like Willie Sutton, they know where the money is.
A few years ago too, the rabble-rousers made the news by pointing to the “uneven distribution of wealth” in America. 85% of the wealth in the country was owned by only 20% of the people. What got people chafed was that the rich were getting richer. The percentage of total wealth owned by the rich had gone up from 81% in 1983.
What happened in the years 1983 to 2004 to make the rich so much richer? Financial assets rose in value.
And then what happened? Financial assets fell in value in ‘07‘09. The total amount lost, according to the latest number we saw, is about $13 trillion. Roughly, both houses and stocks are down about a third. Who took those losses? The poor? Ha ha. The nice thing about being poor is that you do not have to worry about losing money in a downturn. No, dear reader, the poor are scarcely poorer because of the slump. They had nothing when it began; they still have nothing. The rich, on the other hand, were big-time losers. They must have borne 85% of the losses – or a total of about $10 trillion. If that is correct, the rich must now own a smaller piece of the pie than any time in the last 25 years.
We feel a tear forming in our right eye. There ... it wells up ... and rolls down over our trembling cheek. The poor rich!
The rich in America may have lost $10 trillion so far ... but their losses are just beginning. Who is going to pay the expenses of bailing out the banks ... the economy ... the states ... Detroit ...?
You do the math yourself. The United States functions as a popular democracy. Politicians get elected by winning votes. The idea is to get as many votes as possible. Do you get the most votes by appealing to the few people with money – the 20% “rich”? Or do you appeal to the masses – the 80% of the population who do not have much wealth?
Well, you can do the math later.
How do you get the masses to vote for you? You offer them something. What? Well ... Medicare ... pensions ... bridges ... tax credits ... wars – whatever they seem to want at the moment. And how do you pay for it?
Okay ... now we are putting 2 and 2 together: You have to take the money from the“rich.”
Of course, it is not that simple. Because you also need money from the rich to “get the word out” about what a great guy you are. And if you lose the race for the House of Representatives, you want to make sure you have a cushy chair somewhere to rest your fat behind. No point in going to the masses for those things. You need friends among the rich.
So, you favor some of the rich – with special subsidies and credits – while making the rest of them pay. And since you are competing with other politicians who have gotten their support from other groups of rich people ... at the end of the day, by the time the votes are counted, it is hard to know exactly who the real winners and losers are. One rich family gets millions in subsidies. Another has his business protected from competition. Another benefits from an obscure amendment to an almost unknown little section of the IRS code. Rivals get wind of these boondoggles and make a stink about it in the press. Pretty soon, the masses think the “rich” are ripping them off ... not realizing that, as a group, the rich pay for 80% of the costs of government.
And now, as the official federal debt goes to $12 trillion, who is really going to pay it? Just apply the 80/20 rule ... the “rich” will have to pay 80% of it – at least. That is $9.6 trillion that will be borne by 60 million citizens. No, wait ... of those 60 million ... you have to take out those who are too young ... or too old. Each household may only have one person earning a living ... say, only about 20 million real taxpayers.
Now, divide $9.6 trillion by 20 million – you get a debt burden of $480,000 for each one.
But that is just the “official” national debt, which is bad enough. But what about Social Security and healthcare obligations ... and obligations to soldiers who have lost their legs in Iraq? Are you going to forget about these people? Who is going to support them?
According to the Petersen Foundation, there is a “financing gap” of about $47 trillion between what the government is obliged to pay out and what it expects to get in tax revenues. Now, let us put that burden too onto the only place it might be shouldered – the same 20% of the population who have the money – the “rich people.” That is another $2.35 million per taxpayer!
And now you see why Switzerland is “at war” with the world. Almost all the world’s governments are running large deficits; all are squeezing the rich. Switzerland is the place “rich” people turn to when they want to protect their money from greedy politicians. It got its start in the 17th century, back when Louis XIV revoked the Edict of Nantes. Suddenly Protestants were not allowed to live in peace in France. Many fled to England, America and the Low Countries. Others sent their money “offshore” to Switzerland, where it would be safe from confiscation. Thus did Switzerland develop its banking industry – to help protect people from their own governments.
And thus do people turn to the Swiss once again, as they see their own governments sharpening their knives and tightening their borders. In order to preserve its role as a protector of foreigners’ money, Switzerland has been forced to resist these measures. Major Swiss banks, for example, announced that they would no longer be available to American clients. Too much paperwork; too much disclosure. And since Swiss law prevents bankers from divulging details of their clients’ accounts, the Swiss are in a jam. If they failed to report to the United States, they would be breaking US law. If they did report to the U.S., they would be breaking Swiss law.
Swiss bankers just sent a letter to their French clients ... asking for permission to pass along information about their accounts to the French government.
“What sort of Frenchman would give his okay?” asks Cecile. “‘Sure, denounce me to the French taxmen ... rat me out, go ahead.’ But the banks were forced to send out the letter in order to comply with French demands.”
Beware William Tell’s Second Arrow
William Tell is a hero not just to Swiss patriots, but to all those in whom the desire for freedom is irrepressible.
Pro Libertante blog editor William Grigg looks at the Switzerland/Washington standoff. His summary is rather blunter than Bonner’s, to say the least, but it amounts to the same: “Washington, the focus of evil in the modern world, is displaying the behavior we would expect terminally corrupt collectivist kleptocracy: It needs revenue to satisfy its retinue of parasitic constituencies, has the power to seize it in defiance of the law, and believes that all people everywhere should genuflect before its demands.”
Hundreds of armed resistant movements the world over pick away at Washington’s obnoxious and evil military overlordship. The Swiss are mounting a major resistance action where it actually hurts most: Against the U.S.’s financial domination. We have seen China and others make noises about getting from under the financial yoke of the U.S. and its dollar, but that will be an evolutionary development when it happens. The Swiss are resisting specific demands made by the U.S. now. The stakes are obviously high, for the U.S. ruling elite and for the people they subjugate, of whom more is always asked no matter how much they fork over in tribute.
“You Swiss are so proud of your 500,000-man citizen militia. ... But what will you do if a 1,000,000-man German Army comes marching across your border?”
“That is easy. Each of us will shoot twice, and go home.”
~~ A reported conversation between a German and a Swiss diplomat, circa 1939.
Seven hundred years ago, when Switzerland was under the domination of the Hapsburgs, a dissolute colonial overlord named Hermann Gessler sought to humiliate the residents of Altdorf, the capital of the central Swiss canton of Uri.
Gessler instructed his minions to erect a tall pole in the town square, at the top of which would be displayed his cap. Every Swiss man who entered the square would be required to pay fealty to Gessler, and the foreign imperial power he represented, by bowing before his cap.
One local resident was a man who distinguished himself by both his virtuosity with a crossbow and his contemptuous hostility toward bullies. Trying to force him to genuflect before another man, let alone his empty cap, would be a bit like trying to relocate the Matterhorn one shovel-full at a time. So while others prostrated themselves before Gessler’s headwear, William Tell stood erect, burly arms folded across his broad chest, slowly shaking his head as his derisive laughter echoed through the town square.
Tell’s defiance became known to Gessler, as did his reputation as a marksman. The Hapsburg stooge was worried about the possibility of Tell’s rebellion becoming contagious. Endowed with the vicious creativity that so often replaces character in creatures of his kind, Gessler abducted Tell’s young son, forcing William to leave his mountain home and stand before him.
Gessler told Tell that his son would be placed in the town square with an apple atop his head. Tell was placed at a considerable distance from his son and told that he was to shoot the apple from his child’s head; failure to do so on his first shot would bring about the death of his son at the hands of Gessler’s soldiers.
According to the legend, Tell hestitated not at all in fitting an arrow to his crossbow and letting fly, cleaving the apple without harming his child.
Tell’s feat, and the composure with which he carried it off, were sufficient to impress even the porcine, self-enraptured Gessler.
As Tell collected his son and turned to leave, a second arrow fell from his coat. Noticing this, a puzzled Gessler asked Tell why he had bothered to grab a second arrow, since the first shot would either have succeeded or brought about the death of his son.
Fixing the despot with an unflinching stare, Tell replied: “That second arrow was for you, if the first had wounded my boy.”
Not long afterward, Tell’s second arrow found its intended destination as Tell and his countrymen rose up against the foreign occupation, leading to the eventual creation of the Swiss Confederacy in the late 13th Century.
Owing to its tradition of resolute individualism, the unexcelled marksmanship of its citizen militia, and its decentralized political system, the Swiss have managed to avoid entanglement in the affairs of other nations and preserve their independence from foreign domination.
Efforts have been made to break Switzerland to the saddle of “internationalism”: In 1798, the French revolutionary army invaded and occupied Switzerland, inflicting on it a centralized “Helvetic Republic” that lasted five years.
In 1939, as recounted in Stephen P. Halbrook’s book Target: Switzerland, the German military drew up plans to invade and occupy Switzerland in the mistaken belief that its citizen militia would be no match for the Wehrmacht.
Under the leadership of Colonel Henri Guisan (at the time, it was the tradition that no officer would be appointed “general” unless the country actually went to war), the militia prepared a strategy called the “national redoubt”: In the event of a German invasion, the militia would retreat into a series of fortified installations in the Alps and wage unremitting guerrilla war for as long as it took to drive the invaders from their land.
Confronting the prospect of fighting an entire country under arms, and horrified by the price that would be paid to pry the Swiss militia from its Alpine redoubts, the German High Command decided to leave Switzerland alone. What this means, of course, is that Switzerland actually won its war without suffering the hideous losses inflicted on any of the combatant nations.
A decade ago, another campaign – this one more subtle than threats of military occupation – was mounted to destroy Swiss independence. Beginning in 1997, Switzerland, which rescued tens of thousands of Jews from the Holocaust, was besieged by spurious claims that its renowned banking system was hoarding gold stolen from victims of the Nazis.
Stories were put into circulation describing the cynical heartlessness of banking officials in turning away aging survivors of Nazi cruelty. Those stories invariably proved to be as substantial as cotton candy and as reliable as Jim Cramer’s investment advice.
Nonetheless, a global campaign of defamation and invective, spearheaded by the coprogenetic [Mr. Grigg has got us on this word! Even the Web is pretty silent on what it means.] Edgar Bronfman Sr. and eagerly abetted by the Clinton administration, indelibly branded the Swiss as Holocaust profiteers, thereby setting the stage for a shake-down that continues to this day.
No matter that on three prior occasions – in 1946, as a result of the post-WWII Washington Accord; in the mid-1950s; and in 1962 – the Swiss banking industry had conducted comprehensive, diligent, and transparent investigations regarding its wartime gold holdings.
Nor did it matter that the Clinton administration’s inquiry actually exonerated the Swiss of claims that they had hoarded “victim gold” stolen from Jews who suffered and perished at the hands of the Nazis. The defamation campaign succeeded in prying some $14 billion worth of gold from the Swiss treasury and – more importantly – inducing the Swiss electorate to enact a new constitution that (among other dreadful features) repudiated the link between the Swiss franc and gold.
The Imperial Regime in Washington apparently believes it has reduced the heroic Swiss to a state of subservience, because its most recent demands savor of the same arrogant, unwarranted self-assurance that led Herr Gessler to place his hat atop the pole in Altdorf’s town square.
Last year, Washington tried to impose a $780 million fine on the Swiss for their refusal to enforce U.S. tax laws within their own country.
Next week, the Regime intends to press its claims in court – that is, in its own courts – in the hope of forcing the Swiss to turn over confidential information on some 52,000 Americans who have private accounts protected by Swiss law.
To their eternal credit, and the benefit of those who cherish freedom everywhere, the Swiss are responding to Washington’s imperial bullying with the equivalent of William Tell’s laughter, augmented by an upraised middle digit.
Earlier this year, the Swiss People’s Party (SVP) began a campaign urging their fellow citizens and elected leaders to resist Washington’s imperial blackmail. After the Swiss government capitulated in late February to Washington’s demand to pay a $780 million fine and disgorge the names of Americans who had opened private banking accounts, the SVP – the nation’s largest political party, which combines tradtionalist populism with enticing hints of libertarianism – angrily demanded the repatriation of Swiss gold stored in the Swiss National Bank in the U.S.
The party also demanded a ban on the sale of U.S. commercial and government bonds in Switzerland (a sound proposal, if only because the sale of fraudulent financial instruments is a crime), an end to the Swiss government’s role as a diplomatic intermediary between Washington and various national governments disinclined to act as U.S. colonies, and a refusal by Geneva to help Washington free itself from the tarbaby it created at Gitmo by taking in detainees freed from the detention facility.
Not everything about the SVP is entirely commendable, but in mounting this pressure campaign it was acting squarely in the noble tradition of William Tell and Henri Guisan. And the party’s efforts may have helped the Swiss political class regain its backbone and virility: The Swiss government has announced that it will forbid UBS AG to comply with any order from the U.S. central government requiring it to surrender confidential banking information – and that Swiss authorities would seize that information, if necessary.
Already, major Swiss banks have announced that, of necessity, they will no longer accept American clients because of disclosure and paperwork requirements being pressed on them by Washington’s commissars for international wealth extraction.
These extraordinary measures, notes Bill Bonner [see above], are being undertaken by Swiss officials in order to preserve their country’s traditional role “as a protector of foreigners’ money.” To that end, as well as the protection of its own citizenry and their economic interests, the Swiss are “sharpening their knives and tightening their borders,” Bonner writes. [This is a misquote or misunderstanding. It is all the other governments which are “sharpening their knives ...”] That is to say, they seem to be recovering a hint of the intransigent patriotism that led them to evict the Hapsburgs, throw of Bonaparte’s yoke, and stare down the Wehrmacht.
Washington, the focus of evil in the modern world, is displaying the behavior we would expect terminally corrupt collectivist kleptocracy: It needs revenue to satisfy its retinue of parasitic constituencies, has the power to seize it in defiance of the law, and believes that all people everywhere should genuflect before its demands. It is behaving pretty much the way Gessler did before he was brought down by Tell’s second arrow.
Wouldn’t it be delicious if Switzerland’s resistance proved to be the precipitating event that brought down Washington’s wretched empire of debt and deceit?
The latest on the UBS affair below, courtesy of the Sovereign Society. It looks like the U.S. is backing off a major diplomatic war with Switzerland, leaving room for a likely settlement with UBS that will involve some big payoff. The key question is how many more names, if any, will UBS divulge.
Monday, July 13, 2009
The international clash between the mighty United States government and those quaint chocolate and cuckoo clock makers over in Switzerland was all set to begin in a Miami federal courtroom today. But as so often happens when lawyers are involved, the dramatic showdown over taxes and banking secrecy was postponed at the last minute.
Federal judge Alan Gold granted the postponement after a joint application by the two parties, the U.S. government and the Swiss banking giant, UBS, leaving them time to negotiate an out-of-court settlement and save face in this confrontation where the positions have become publicly strained in recent days.
This postponement, which was welcomed in Switzerland, allows the Obama administration to avoid a major diplomatic confrontation. Switzerland publicly announced last week that as a sovereign state it would obstruct U.S. demands to obtain the names of the holders of the 52,000 U.S. accounts at the Swiss bank.
Last February, the U.S. Dept. of Justice, representing the U.S. Internal Revenue Service, sued UBS for the names of 52,000 accounts belonging to its U.S. clients, after UBS admitted giving systematic assistance to Americans account holders in evading U.S. taxes from 2001 to 2006.
To avoid prosecution, a day earlier, the IRS had announced a settlement with UBS in which the bank agreed to pay $780 million in fines and give names and account information for a group of 250-300 clients the Swiss judged to have been involved in tax fraud, which is illegal in Switzerland. Tax evasion is not.
While all this makes for great legal and judicial theater, none of it is relevant to Switzerland’s standing as the leading financial center in the offshore world. ...
An interesting quote from the remaining part of the article is from one of Sovereign Society’s Swiss advisors that while UBS had been stupid in allowing U.S. income tax evasion, the bank’s subsequent dumping of its American clients had been “a high-handed violation of trust” and a “crude attempt at their clients’ expense to get rid of a political hot potato. ... [V]ery un-Swiss.”
The article also notes, as covered previously in these pages, that UBS lost a huge bundle ($60 billion and change) from “investing” in credit bubble crap, “the largest loss of any European bank.” These guys are not the sharpest knives in the Swiss financial institution drawer. And with their major U.S. physical and legal presence UBS should never have entered consideration as an “offshore” asset protection provider – to our way of thinking.
PROSPECTIVE RETIREES: PANAMA WANTS YOU
Panama’s quality health care, low costs, and proximity to the states are attracting American professionals as a retirement haven.
These pages have featured many pieces extolling the virtues of Panama as an expat destination. Now Business Week has joined the choir, indicating that such thinking is becoming part of the mainstream. This article was included among their “Retirement: The Big Rethink” cover story pieces.
“We have more time. And apparently we have more money,” says a member of a couple who retired from California to Panama. In comparing the cited prices for housing, healthcare, eating out and household help versus the U.S. equivalents one is left with the overwhelming impression: This gap is not going to last forever. There will always be some differences, but the current magnitude is too large. Effectively there is an arbritrage opportunity for retirees – and that is just with regard to living costs. Those who value economic and personal freedom will be willing to pay a premium for that “service.”
Prospective retirees: Panama wants you. The pitch? A plane ride just 2 1/2 hours from Miami enables the newly poor to swap a wretched retirement in the U.S. for one befitting a royal in the balmy Central American nation. Cash out! Emigrate! Feel rich! Panama – the new Florida.
Spin aside, Panama is increasingly popular among retirement-age types looking to hedge against – or skip out on – the recession. The Migration Policy Institute, a Washington-based think tank that studies the movement of people around the world, says the chief factors prodding professional-class Americans to flock to Panama include its First World health care available at Third World prices and the country’s pensioner program, which offers some of the deepest retiree discounts in Latin America. Seniors get up to half off on nearly everything, including movies, motels, doctors’ visits, plane tickets, professional services, and electric bills. Expats also pay no tax in Panama on foreign income. Nor are they required to pay property tax for the first 20 years.
The fact that a luxe beachfront manse can be had for the same price as a dump in Daytona does not hurt, either. “We would have been looking at $3 million in Miami,” says Jon Nickel of his 3,000-square-foot oceanfront penthouse in Panama City. Nickel and his wife, Gretchen, bought the place in late 2007 for $250,000, right after Nickel retired from his corporate law job in Portland, Oregon, and sold the family’s mortgage-free home for $800,000.
More Bang for the Buck
The skinny isthmus – nearly all coastline, with a mountain range slicing through the middle – boasts some of the best weather and lowest crime rates in Latin America. Other draws include guilt-free conspicuous consumption, with laughably low prices – by gringo standards – on splurges such as a day of beauty ($10) and a maid ($15 a day). A complete blood workup at Panama City’s gleaming new Hospital Punta Pacifica, managed by Johns Hopkins Medicine International, is $36. A checkup with a physician is $50. Boomers who say they would have had to pay roughly $1,200 a month in the U.S. for health care say they are paying roughly $800 a year for coverage in Panama. Barbara Dove, a 66-year-old who suffers from Parkinson’s disease, worried that she would eventually need in-home care if her condition deteriorates. Researching rates in Seattle, she found that nurses run $25 an hour. In Panama City, where she has lived since 2007, they cost $25 a day. Says Dove: “I didn’t want my kids to have to worry about me.”
According to a 2006 report by the Migration Policy Institute, the number of Panama visas issued to U.S. citizens began to rise dramatically after 2003, and an estimated 25,000 U.S. expatriates live there today. “With Americans aging, the economy in shambles, and, possibly, Medicare benefits on the cutting block, it is reasonable to assume that more Americans will retire abroad, particularly to warm, sunny locations such as Panama, where they can get more value for their dollar,” says the Institute’s president, Demetrios Papademetriou.
That is not to say life there suits everyone. Things in Panama movereallyslowly. A repairman who says he will be right over might show up days later. Water and electricity service can be spotty. In Panama City, drivers treat stop signs as a mild suggestion. “It takes a little bit of balls to retire here,” says Matt Landau, a New Jersey native who is the founder of Panama City-based online portal The Panama Report. “This is not for type As. It is not your turnkey Florida retirement.”
Still, boomers who have recently relocated to Panama say they feel as if they have figured out a successful geographic arbitrage. When Stephen Johnson and Linda Murdock were living in Aromas, California, they used to moan half-jokingly about how they would have to retire to Barstow – the armpit of the Mojave Desert, with summers in excess of 100 degrees and winters that can dip below freezing.
Stephen, 63, retired as an executive of the Salinas Valley Solid Waste Authority in June 2008. His wife, Linda, 57, owned a dog-food business.
The pair had watched several friends retire on depleted cash cushions. Many were not fully eligible for Medicare and wound up spending 50% of their income on health care. The couple’s retirement agita was worsened by the fact that they got a late start building equity. “We bought our first house when I was 40 and Steve was 46,” says Linda. “We knew we would never have our house paid for by retirement.”
Over late-night pinot noir on their patio, they started talking about moving to a developing nation to stretch their money further. They had discovered Panama on a trip there in 2004 and saw it as a bargain-basement paradise. The low cost of living appealed to Steve, whose pension amounted to 40% of his pre-retirement income of $150,000. The surf-perfect weather lured Linda, who took up the sport on her 50th birthday.
This is way off point, but does anyone else reading this wonder whether 150k is a lot for an executive position in a government agency? It may not be, i.e., that may be what the private sector would have paid for access to Mr. Johnson’s talents. We just do not know. But with California’s well publicized budget problems, enquiring minds would not mind an answer.
Cracks in Paradise
Johnson and Murdock are now known as the gringos who live in the house with the red door. They bought their newly remodeled 1890 hacienda near the beach in San Carlos for $100,000 cash. They moved in last year and rented out their California ranch house. The rent covers the carrying costs on that house.
But Panama is not only about the beach. The Boquete region in the mountains – Panama’s answer to Boulder, Colorado – boasts loads of U.S.-style gated retirement compounds. The big draws of the area are tennis and golf. For those who are more interested in urban amenities, Panama City, which is by the sea, is sprouting yoga studios, bohemian boutiques, health-food stores, and artsy coffee houses.
Still, there are tradeoffs in this seemingly easy life. “Paradise is just a place you visit,” says Johnson. “If you live here, you begin to see the cracks.” Those include the three months it took them to get their driver’s licenses – a process that involved blood tests, a hearing exam, and lines that make a U.S. Motor Vehicles Department seem like a fast-food joint.
But Johnson and Murdock have no major complaints, and Panama is certainly better than the Mojave. Murdock surfs every single day – and says Johnson looks 20 years younger since retiring. They both love the way their dog can run on the beach without a leash and the fact that their doctors, many of them schooled in the U.S., happily give out their cell-phone numbers and actually answer when called. And their social life is far more active than it was in Aromas. They go out with new friends, a blend of expats and natives, almost daily, often for evenings of fish tacos and endless margaritas – for $20. “We have more time,” says Johnson. “And apparently we have more money.”
CORRUPTION ALLEGATIONS SEE BRITAIN NEAR CONTROL OF TURKS & CAICOS
The British are making known plans to reassert control over the Turks & Caicos, by force if necessary, following reports of extensive corruption in the island nation’s government. While the corruption appears to be very real the Brits do not exactly come to the scene with clean hands. The U.K.’s own corruption is extensive, if less overt, and with its history as colonial overlord its reappearance will naturally meet with suspicion and resistance. Moreover, Britain “plans to suspend partially the islands’ constitution and to end the right of jury trials for those accused of political corruption.”
Nothing like showing those backwards ex-colonies a good lesson in institutionalizing the rule of law.
Britain took the first step towards seizing control of a number of Caribbean islands [on July 2] despite international criticism of a “return to colonialism.”
The Foreign and Commonwealth Office said that the Governor of the Turks & Caicos Islands was appointing a series of experts to help him to run the territory and to prosecute its corrupt politicians.
The Governor Gordon Wetherell was expected to seize control of the islands last month after the planned publication of a final report into allegations of corruption. A navy frigate on patrol in the Caribbean, HMS Iron Duke, would have been on stand-by to offer support as British investigators, lawyers and administrators arrived to replace the elected Parliament.
However, although the takeover plan has been approved formally by the Queen it has now been delayed until at least October because of legal challenges from some of those facing criticism after an investigation into corruption. After weeks of limbo the Government announced yesterday that it was determined to push forward with some of the recommendations in the still unpublished corruption report by Sir Robin Auld, a former Lord Justice of Appeal.
Chris Bryant, a Foreign Office minister, revealed that the report recommends criminal investigations into the islands’ former Premier, Michael Misick, and four former Cabinet members. Mr Bryant said that the Governor has selected a special prosecutor and senior investigating officer to begin the criminal inquiry into the corruption.
He is also appointing advisers to oversee the reform of the islands’ public services, financial management, economy and the management of Crown land at the center of the corruption investigation. In a written statement Mr. Bryant said the British Government “was determined to do everything in our power, as swiftly as possible, to tackle systematic corruption and to restore good governance in the TCI.” In an interim report Sir Robin had said that he had found “clear signs of political amorality and immaturity and of general administrative incompetence”.
Mr. Misick, who is alleged to have built up a multimillion-dollar fortune between his election in 2003 and resignation in March, was at the center of the corruption allegations. The lawyer, who trained in Britain, had overseen the economic transformation of the islands but his ability to fund a celebrity lifestyle with his now estranged wife, LisaRaye McCoy Misick, the American actress, was to become a focus of the investigation.
During a stormy debate in the islands’ Parliament last month Mr. Misick condemned the Governor as a “racist dictator” and called for national unity “to fight the British common enemy.” There has been fierce resistance from leading figures in the Caribbean to Britain’s plans to suspend partially the islands’ constitution and to end the right of jury trials for those accused of political corruption. There are also fears that the controversy will drive away investors in its economically crucial tourism and offshore financial sectors.
Galmo Williams, the current Premier, has described the British proposals as a “return to imperialism.” He has called a general election for October, even though it was not due until 2011, to demonstrate the public opposition to the plans.
The Caribbean Community, an influential regional body, has already criticized the planned takeover and the issue is likely to be raised again at its Heads of Government conference which started in Guyana yesterday.
IRISH REVENUE INQUIRY IDENTIFIES 200 TRUSTS FOR CLOSER INSPECTION
“Linking the trusts and the structures to the beneficial owners is what project investigations is all about.”
Thanks to greater information sharing, the Irish national tax agency is able to take a closer look at certain trusts which may include Irish nationals among the trust parties. And what does Ireland Revenue expect to find?
“Tax planning” of a certain type which “is simply an attempt to conceal the identities of the Irish beneficial owners of the funds and ultimately to evade Irish tax,” said a Revenue update on the subject.
We do not know how closely Irish taxation of offshore trusts corresponds to U.S. taxation, but evidently an actual or de facto beneficial owner does owe taxes on trust income. The solution we would suggest is the same for both U.S. and Irish taxpayors: Go ahead and make good use of an offshore trust. Just do not be a party to the agreement. More information here.
The Revenue Commissioners’ special inquiry into trusts has already identified 200 trusts and offshore structures that it intends to examine closely. The structures were identified through the examination of banking and other financial information relating to clearing accounts held here by foreign banks, and received as a result of High Court orders.
In an update on its inquiry to The Irish Times, the Revenue said the identified structures are located in Guernsey, Jersey, Switzerland, Liechtenstein, Cyprus, the Isle of Man and the Cayman Islands.
Persons with trusts which control undeclared income have until September 1st next to inform the Revenue that they intend to make a disclosure under a scheme which limits penalties, prevents public disclosure and secures immunity from prosecution for those who avail of it. The scheme applies to Irish and offshore trusts.
“These inquiries will cover all historic years for which there are tax issues – not just the last few years,” the Revenue said.
As well as using information obtained from banks, the Revenue is making use of information from third parties on offshore settlements made by Irish settlors in the years since December 24th, 2003.
“Under recent Finance Act legislation, Revenue will be getting third-party returns on transfers and settlements of assets and funds, made by Irish resident and ordinarily resident persons, involving non-resident trustees,” the Revenue said. “The returns will be delivered to Revenue over the coming months by tax, accounting and legal advisers, as well as by the banks and financial institutions.”
These third party returns will give the names and addresses of the Irish settlors and the non-resident trustees.
“Linking the trusts and the structures to the beneficial owners is what project investigations is all about. Revenue will follow the money trails to discover patterns and methodologies used to conceal the beneficial owners.”
As part of its work on the issue, Revenue officials have met with representatives of the accounting, taxation advice, banking and legal professions.
“The scope for escaping detection, and evading tax, through the use of trusts and offshore structures, is diminishing,” the Revenue added.
The decision to have a special scheme for persons with tax issues associated with funds in trusts and offshore structures, follows from special inquiries into other areas where undeclared income was hidden.
Earlier Revenue investigations revealed that the combination of offshore banking and trust services represented a real tax risk. It was clear that trusts and offshore structures were being used to keep funds offshore and out of sight of Revenue and to create the impression that the non-resident entities were the owners of the funds.
“This type of abusive tax planning is simply an attempt to conceal the identities of the Irish beneficial owners of the funds and ultimately to evade Irish tax,” the Revenue said in its update.
BERMUDA INVESTMENT FIRM LOSES ACCOUNTS OVER EMERALD FINANCIAL GROUP CONCERN
A husband and wife have been charged with stealing $300,000 from Emerald Capital International, a Bermuda financial services firm they founded (link). Bermuda’s Fraud Unit has an ongoing investigation into subsidiary Emerald Investment Management Ltd. and liquidation proceedings have commenced. Emerald attracted investors by offering 8%/year “guaranteed” returns.
Administrators responsible for the Emerald liquidation said they are “hopeful” that many investors will get their money back, but some investors decided to take no changes and closed their accounts with another financial company – LOM Asset Managment – which apparently had some investments with Emerald.
An LOM officer claimed that the Emerald goings-on were the “exception, not the rule” and that “the regulatory authorities are doing their job.” However, in the post-bubble environment where the mania-phase fraud’s are being regularly reveal people are not inclined to wait around and assume everything will work out for the best. That was bull market thinking; this is now.
Bermuda’s investment companies have been seeking to reassure their clients and maintain the reputation of the Island’s financial services sector in the wake of an investigation launched into Emerald Financial Group.
LOM Asset Managment Ltd. admitted to having “lost an account or two” after news broke of the entirely unconnected investigation into Emerald.
The Bermuda Police probe was made public last week after a 45-year-old woman was arrested – reportedly the company’s managing director Antoinette Bolden. ... A 46-year-old man was also arrested – reportedly company president David Bolden.
Winding-up proceedings have started against four entities owned by the group – Emerald Capital Investment Ltd., Directrade Ltd., Emerald Financial Ltd. and Emerald Investment Management Ltd.
A year ago, Emerald was advertising its Emerald High Income Fund, which offered a fully guaranteed 8% rate of return on 5-year investments of more than $100,000.
Jon Heckscher, vice-president and general manager at LOM Asset Management Ltd., admitted his company had been cost “one account or two” after the news broke, but added that the events of last week were the “exception, not the rule.”
Bob Richards, managing director of Bermuda Asset Management, said a number of people had expressed concern to him about the situation, however he added that the Island’s regulators seemed to be doing their job.
Mr. Heckscher said it was key to get the message out that there were still a number of bona fide investment firms operating in Bermuda and LOM was being proactive in offering its assistance to the liquidators KPMG after being contacted by concerned clients.
“I think the important thing right now that we need to get out as an industry is the things that happened to Emerald in the last week are the exception and not the rule,” he said.
“I will be honest and say that has cost us an account or two. We had a couple of newer accounts that did not really know us that well and the investors had taken their money out of Morgan Stanley and Goldman Sachs to invest it with us.
“When they heard the news, they contacted us to find out about insurance coverage for their investments and put the money back into the banks.
“When you see that two people get arrested and a company has immediately been put into liquidation by the regulator, it definitely jars some nerves.
“We want to look after the reputation of Bermuda’s financial sector.”
Mr. Richards said that the regulation of the Island’s financial services sector had changed significantly compared to 20 years ago with Bermuda advancing as a global business center.
“It just seems to me that the regulatory authorities are doing their job,” he said. “It just shows that Bermuda has matured as a financial jurisdiction.”
“We do not know the nature of the problem really – people have been arrested, but we do not know what the charges are, if any, and we know that the company has been wound up. But I am somewhat reassured by the orderly fashion in which the regulators seem to have approached the issue.”
SCAM ALERT: HACKERS JOIN FACEBOOK, MYSPACE RUSH
Leading online social networks Facebook and MySpace are becoming favored targets for scammer hackers. The best way to avoid getting hacked are like measures one takes to avoid getting infected via email: Do not click on links provided in messages, even from friends – as it may be an imposter – without checking directly with the contact by means other than the social network. Make your Facebook/MySpace account private. And, of course, be suspicious of anyone, including a “friend”, who asks for money.
The story below gives an example of what can happen should the hackers succeed.
When Bryan Rutberg first appeared on Facebook last December, he joined millions of other boomers, who are the fastest-growing users of social network websites.
A month later, the 47-year-old tech industry executive became a victim of a scam that is increasingly occurring on websites like FaceBook, MySpace and class reunion sites.
On January 21, Rutberg discovered his Facebook page had been hacked with this alarming message: BRYAN IS IN URGENT NEED OF HELP! He tried to access his page to remove the warning, but his password had been changed. When he tried to alert his friends from his wife’s Facebook account that he was OK, he says, the scammer had “defriended” her, blocking any messages he sent. Meanwhile, Rutberg’s Facebook friends who had posted “what’s wrong?” messages were getting replies from the hacker, who posed as Rutberg and claimed that he had been robbed in London and needed money to get home.
Once concerned friend, Beny Rubinstein, wired $1,200 overseas, which the trickster quickly collected. In email exchanges, the hacker had provided enough personal details to convince Rubinstein he was Rutberg. “If you are looking to impersonate someone, Facebook as a good place to start,” Rutberg says. “My page has the names and photographs of my wife, kids, parents, friends, where I went to high school and college – all kinds of personal information.”
With such details readily posted, identity thieves “are clearly investing time and resources on social networks,” says Ryan Naraine of Kaspersky Lab, an online security firm.
A common ruse: tricking users into downloading a program that records their keystrokes. It is likely that Rutberg inadvertently downloaded one such program, providing his Facebook email and password to the identity thief.
One common virus on social networks is called Koobface (from the word “Facebook”) which infects computers when a “video” link is clicked. It can steal personal data and also prompt users to download an updated version of Adobe Flash. “By clicking on that link, it attempts to trick you into buying fake anti-virus software for $30,” Naraine says.
Facebook spokesman Barry Schnitt says that in five years, less than 1% of 200 million users had “security issues.” he says his company has bolstered its efforts to respond quickly to such problems. however, Facebook provides no phone contact number for members, and Rutberg says emails to Facebook reporting his hacking went unanswered for several days.
To avoid problems on social networks – or anywhere else online:
Report suspicious activity on social networks to that website and to the Internet Crime Complaint Center.
- Do not click on links provided in messages – even from friends – unless you check with them with a phone call or off-website email.
- Get program updates by going to the company’s website, not through a provided link.
- Make your Facebook account private so that only your friends can see your details.
- Scan your computer regularly with an updated antivirus program.
- Be suspicious of anyone – even a “friend” – who asks for money over the Internet.
FROM RUSSIA WITH LOVE: AMERICAN CAPITALISM GONE WITH A WHIMPER
The American decent into Marxism is happening with breath taking speed, against the back drop of a passive, hapless sheeple.
Mat Rodina, a Russian, maintains a blog here. He says of his people: “We can well coexist with the West peacefully and profitably. We can even make friends with you, but please do neither lecture us, nor interfere with our affairs. Amen.”
In this April posting Mr. Rodina notes the breathtaking speed under Obama of America’s abandonment of capitalism and the rule of law, and descent into Marxist central planning – as if no one had learned anything from or witnessed the failure of Russia’s 70-year experiment with the idea. And it is happening virtually without a fight from the dumbed down masses. Showing that he has learned from history, Rodina suggests that Russians look at divesting their U.S. investments.
In concluding Rodina recapitulates Goethe”s oft-cited quote that “None are so hopelessly enslaved as those who falsely believe they are free,” with some additional irony for good measure: “The proud American will go down into his slavery with out a fight, beating his chest and proclaiming to the world, how free he really is. The world will only snicker.”
It must be said, that like the breaking of a great dam, the American decent into Marxism is happening with breath taking speed, against the back drop of a passive, hapless sheeple, excuse me dear reader, I meant people.
True, the situation has been well prepared on and off for the past century, especially the past 20 years. The initial testing grounds was conducted upon our Holy Russia and a bloody test it was. But we Russians would not just roll over and give up our freedoms and our souls, no matter how much money Wall Street poured into the fists of the Marxists.
Those lessons were taken and used to properly prepare the American populace for the surrender of their freedoms and souls, to the whims of their elites and betters.
First, the population was dumbed down through a politicized and substandard education system based on pop culture, rather then the classics. Americans know more about their favorite TV dramas then the drama in DC that directly affects their lives. They care more for their “right” to choke down a McDonalds burger or a BurgerKing burger than for their constitutional rights. Then they turn around and lecture us about our rights and about our “democracy.” Pride blind the foolish.
Then their faith in God was destroyed, until their churches, all tens of thousands of different “branches and denominations” were for the most part little more then Sunday circuses and their televangelists and top protestant mega preachers were more then happy to sell out their souls and flocks to be on the “winning” side of one pseudo Marxist politician or another. Their flocks may complain, but when explained that they would be on the “winning” side, their flocks were ever so quick to reject Christ in hopes for earthly power. Even our Holy Orthodox churches are scandalously liberalized in America.
The final collapse has come with the election of Barack Obama. His speed in the past three months has been truly impressive. His spending and money printing has been a record setting, not just in America’s short history but in the world. If this keeps up for more then another year, and there is no sign that it will not, America at best will resemble the Wiemar Republic and at worst Zimbabwe.
These past two weeks have been the most breath taking of all. First came the announcement of a planned redesign of the American Byzantine tax system, by the very thieves who used it to bankroll their thefts, loses and swindles of hundreds of billions of dollars. These make our Russian oligarchs look little more then ordinary street thugs, in comparison. Yes, the Americans have beat our own thieves in the shear volumes. Should we congratulate them?
These men, of course, are not an elected panel but made up of appointees picked from the very financial oligarchs and their henchmen who are now gorging themselves on trillions of American dollars, in one bailout after another. They are also usurping the rights, duties and powers of the American Congress (parliament). Again, Congress has put up little more then a whimper to their masters.
Then came Barack Obama’s command that GM’s (General Motor) president step down from leadership of his company. That is correct, dear reader, in the land of “pure” free markets, the American president now has the power, the self given power, to fire CEOs and we can assume other employees of private companies, at will. Come hither, go dither, the centurion commands his minions.
So it should be no surprise, that the American president has followed this up with a “bold” move of declaring that he and another group of unelected, chosen stooges will now redesign the entire automotive industry and will even be the guarantee of automobile policies. I am sure that if given the chance, they would happily try and redesign it for the whole of the world, too. Prime Minister Putin, less then two months ago, warned Obama and UK’s Blair, not to follow the path to Marxism, it only leads to disaster. Apparently, even though we suffered 70 years of this Western-sponsored horror show, we know nothing, as foolish, drunken Russians, so let our “wise” Anglo-Saxon fools find out the folly of their own pride.
Again, the American public has taken this with barely a whimper ... but a “freeman” whimper.
So, should it be any surprise to discover that the Democratically controlled Congress of America is working on passing a new regulation that would give the American Treasury department the power to set “fair” maximum salaries, evaluate performance and control how private companies give out pay raises and bonuses? Senator Barney Frank ... and his Marxist enlightenment, has led this effort. He stresses that this only affects companies that receive government monies, but it is retroactive and taken to a logical extreme, this would include any company or industry that has ever received a tax break or incentive.
Russian owners of American companies and industries should divest while there is still value left.
The Russian owners of American companies and industries should look thoughtfully at this and the option of closing their facilities down and fleeing the land of the Red as fast as possible. In other words, divest while there is still value left.
The proud American will go down into his slavery with out a fight, beating his chest and proclaiming to the world, how free he really is. The world will only snicker.
RICH HARVARD, POOR HARVARD
Harvard University’s endowment was doing just fine through 2005 – admittedly in a bubble environment. Then your classic “smartest guys in the room” started to tamper with things. Former Clinton Administration Treasury bigwigs Larry Summers – who was president of Harvard at the time – and Robert Rubin – a member of the Harvard Corporation – disapproved of certain aspects of how Harvard Management was run. Summers did not like the hedge-fund competitive salaries pulled down by Harvard Management’s money managers; Rubin disagreed (perhaps correctly?) with Harvard Management head Jack Meyer’s strategies.
Fed up, Meyer left Harvard to start his own hedge fund in 2005 and took 30 portfolio managers and traders, the chief risk officer, chief operating officer, and chief technology officer with him. That was a total gutting of an organization with around $30 billion under management. The prudent thing to do at that point would have been for Harvard to wind down all the investments, or the fancy-dancy ones at least, and put the proceeds in some world financial markets index fund until new management was firmly in place. Instead, the management company was “like a Ferrari without the engine,” according to a portfolio manager who arrived after Meyer left.
This Vanity Fair sysnopsis of an extensive investigation conducted by one of its reporters, Nina Munk, offers more details. The complacency that led to an $8 billion loss by the Harvard endowment is pretty consistent with that demonstrated by countless individual and institutional investors, as well as government people and financial markets pundits, before the bubble popped. As long as everything is going fine, no one asks too many questions. And no one whats to miss out on the next leg up either.
We would add this to Ms. Munk’s observations: Summers and Rubin are back in positions of policy making, in the Obama administration. It was under their watch during Clinton’s reign that the Federal Reserve scheme of growing the money supply faster than nominal GDP was instituted. This is what, in our opinion, led directly to the dot-com and mortgage finance/housing bubbles. There is of course some irony that Harvard got caught in the backwash from these bubbles while Summers and Rubin had direct input into Harvard’s investment policies. More to the point, the narrow academic mindset possessed by those two is totally lacking in big picture, multidisciplinary wisdom. Witness the politics which drove Jack Meyer away from Harvard, which at the very least points to personal priorites not aligned with Harvard’s. Such wisdom is just what the U.S. government is missing now.
For years, administrators at Harvard University could throw money at anything that tickled their fancy. A new medical school building for $260 million? Sure. A massive, Robert A.M. Stern-designed addition to Harvard Law School? No problem. One of the most sweeping financial aid initiatives ever undertaken? Consider it done.
Of course, that was before the money dried up.
Now, Vanity Fair’s Nina Munk finds America’s oldest university suddenly at risk of not being able to keep the lights on. Over the past year, Harvard’s endowment has collapsed (it lost $8 billion between last July and October), its fundraising has declined, and its construction cranes have been idled. Gripped by the worst economic crisis in its history, Harvard is in trouble, and no one can decide who’s to blame.
Munk exposes the behind-the-scenes finger-pointing and uncertainty that has administrators longing for the gilded age of soaring endowments. Highlights from the article, “Rich Harvard Poor Harvard,” include:
A lone bright spot
• Harvard’s year-end numbers will not be as bad as predicted, Munk learned from a source on the board of Harvard Management Company, the firm responsible for managing the university’s endowment. Although the university’s endowment has shrunk precipitously over the past year, the insider says it will be down 23 to 25%, not the 30% predicted elsewhere.
Harvard does not fire people; it “resizes”
• Budget cuts are not in the Harvard vocabulary – or at least they have not been. “I’d rather use the words &l‘uo;reduction,’ ‘shifting things around,’ ‘reorganizing’ – rather than saying something that says ‘cuts,’ which implies you whack the heads off flowers,” Evelynn Hammonds, the dean of Harvard College, said at a town-hall meeting in May. But there is a lot of whacking that will have to be done. “There are going to be a hell of a lot of layoffs. Courses will be cut. Class sizes will get bigger,” conceded a Harvard insider.
In the real world, people get fired for mismanagement like this
• The Harvard endowment soared from $4.8 billion in 1990 to $36.9 billion as of June 30, 2008, and in the last half-decade or so, the men and women who run Harvard seemed to have convinced themselves that the university’s fund would grow at double-digit rates for, well, eternity. “Apparently nobody in our financial office has read the story in Genesis about Joseph interpreting Pharaoh’s dream – you know, during the seven good years you save for the seven lean years,” says Alan Dershowitz, a professor at Harvard Law School since 1967.
Harvard is desperate
• If Harvard were a serious business facing a liquidity crisis, it would have made drastic changes as its endowment tanked: say, axing senior employees, shuttering departments, and selling real estate. But elite universities do not like shaking things up. “None of these schools has the ability to cut expenses fast enough” is how a hedge-fund manager who counts Harvard among his investors describes the situation. Munk asked the hedge fund manager to look at Harvard’s finances and assess the extent to which its endowment will be able to keep pace with its immovable costs. The hedge fund manager’s conclusion: “They are completely f*cked.”
• In the fall of 2008, Harvard tried to sell off a $1.5 billion chunk of its private-equity portfolio – except no one was willing to pay anywhere near the asking price for those assets. One money manager described a conversation late last year with Jane Mendillo (who in July 2008 became president and C.E.O. of Harvard Management Company) in which he offered to buy back Harvard’s sizable stake in his private fund.
“Here, I think it is worth – you know, today the [book] value is a dollar, so I’ll pay you 50 cents,” he said.
“Then why would I sell it?” Mendillo responded.
“Well, why are you?” he said. “I don’t know. You are the one who wants to sell, not me. If you guys want to sell, I am happy to rip your lungs out. ... If you are desperate, I’m a buyer.”
“Well,” Mendillo responded, “we are not desperate.”
Except it is pretty clear Harvard was desperate. In December, the university sold $2.5 billion worth of bonds, increasing its total debt to just over $6 billion. Servicing that debt alone will cost Harvard an average of $517 million a year through 2038, according to Standard & Poor’s.
A $1 billion mistake
• Harvard sold those bonds because it needed cash, fast, to cover what sources say was an almost unthinkable $1 billion unrealized loss from interest-rate swaps. The swaps were put in place under former Harvard president Larry Summers in the early 2000s to protect the university against rising interest rates on all the money it had borrowed. Instead, interest rates plunged. Yet for reasons no one can seem to explain, the university simply forgot to (or chose not to) cancel its swaps. The result was a $1 billion loss.
The fall of Harvard Management Company
• The longtime head of Harvard Management Company, Jack Meyer, quit to start his own hedge fund in 2005 after growing fed up with criticism over the 8-figure salaries some of his managers were pulling down and with persistent meddling from top Harvard officials. Two particular annoyances were Summers, who had been questioning Meyer’s investment strategies, and Robert Rubin, a member of the Harvard Corporation, who frowned on Meyer’s aggressive strategies and wound up on the “warpath” with Meyer, as one person put it.
When Meyer left, he took much of Harvard Management Company with him – including 30 portfolio managers and traders, as well as the chief risk officer, chief operating officer, and chief technology officer. The place became “like a Ferrari without the engine,” according to a portfolio manager who arrived after Meyer left. This angered Rubin, according to someone who knows him well: “In Rubin’s opinion, Meyer crippled the institution.”
Rule one about that “resizing”: Don’t talk about it
• Munk became persona non grata in Cambridge, as Harvard refused to cooperate with her on the story. But speaking on the condition of anonymity, administrators and other officials were happy to snipe back and forth. “Were the judgments we made reasonable ones?” asked a former top Harvard administrator. “At the time, I think they were reasonable judgments. It turns out, with the benefit of hindsight, you might have preferred less ambitious plans.” A member of the board of Harvard Management Company does not buy it. “This story is about leadership. It isn’t about money,” the person said.
BILL MARINA, LIBERTARIAN HISTORIAN, R.I.P.
Gary North laments the passing of libertarian historian and colleague Bill Marina at the comparatively young age of 72. North includes some interesting citations from Mariana’s works, which featured a “hard core” opposition to empire.
Marina wrote a series of articles three decades ago on the militia in the American Revolution. He credits them with the largest role in the British defeat: “The regular American army, as well as segments of a rag-tag militia, accepted the surrender at Yorktown. The existence of that army should never be allowed to obscure the large reason for the British defeat which was that they could never control, let alone win over, a population of armed militia that was the foundation of support for the American government. ... [T]he American guerrilla militia ... made life in the British Army a living hell. Every small detachment was legitimate prey for the Americans. Historians will never know how many of these small skirmishes there were, but only glimpse them all over the landscape, realizing that they form the real reason for the low British morale and eventual defeat.”
Not what you hear from the Washington-worshiping (George and D.C.) statist historians. And it should sound familiar as well to students of the Vietnam and Iraq wars, and of guerilla warfare in general. Those who obscure history, as with those who do not learn from history, are doomed to repeat it.
Bill Marina (19372009) died of a heart attack on the morning of July 7. The libertarian movement has lost one of its most gifted historians. He was retired from teaching, but he was the least retired retired professor I have ever known. He was working on half a dozen major projects when he died.
My main regret is that he did not write more books. But he wrote essays and short items constantly, including one posted a couple of hours before he died: an essay on Israeli “sovereignty” (his quotation marks) and American power.
He was the author of the standard college-level textbook on the history of Florida. That was his only book that ever sold well. He was a non-interventionist in his view of American foreign policy. He began his academic career with a 1968 Ph.D. dissertation: Opponents of Empire: An Interpretation of American Anti-Imperialism, 18981921. Sadly, it was never published. With the Web, I hope the actual dissertation will be. He had recently bought a book-scanning machine that will create PDFs. He wanted to republish classic books and post them on the Web.
Much has been made by some opponents of Interventionism, in suggesting that we go back to Washington’s Farewell Address, of “no entangling alliances,” as a model for the country today. I believe this a misreading of the Washington-Alexander Hamilton view, that this really meant an open door to unilateral intervention.
As exhibit one, I would offer Washington’s aid to the French Creoles in Haiti in 1792, in an effort to thwart the Blacks revolting there. Here was America’s first effort at “foreign aid,” some $726,000 at a time when that was real money! As a southerner and slaveholder, Washington was concerned that Black revolt would carry over into the United States.
Bill Marina was hard-core.
He wrote a series of articles three decades ago on the militia in the American Revolution. The local militias, not Washington’s centralized conventional army, held the British in check inside coastal cities. He wrote this in 1975:
The regular American army, as well as segments of a rag-tag militia, accepted the surrender at Yorktown. The existence of that army should never be allowed to obscure the large reason for the British defeat which was that they could never control, let alone win over, a population of armed militia that was the foundation of support for the American government. The British military historian Eric Robson acknowledged: “Restricted to little more than the ground they stood on, the British increasingly found subsistence a matter of considerable difficulty.” That was not the result of Washington’s valiant little army camped at Valley Forge or for so many years across the Hudson from the British in New York City, but rather the American guerrilla militia that from local homes and farms made life in the British Army a living hell. Every small detachment was legitimate prey for the Americans. Historians will never know how many of these small skirmishes there were, but only glimpse them all over the landscape, realizing that they form the real reason for the low British morale and eventual defeat.
I earned a Ph.D. in American history, with a concentration in colonial America. Before I read Marina, I had never heard this story. It is still ignored in the textbooks. This was the origin of the Second Amendment.
I knew nothing of his heart condition, but I was concerned that he would not finish his great book, a detailed analysis of the Kennedy assassination. He was the only history professor who was in Dealey Plaza at the moment it happened. He was on the faculty of the University of Texas, Arlington, at the time. He spent over 40 years studying the event, and having his students study it. He was convinced that Oswald acted alone.
His death is unnerving for me, because a week ago, I wrote an article about a letter I sent to him on how to market his book, when he finished it.
In late April, I wrote an article just for him, to encourage him to finish. I wrote this:
It is steady as you go. It is line upon line. It is cumulative. If you are working on several projects, be sure that you have a schedule to complete each one in sequence. Stick to your schedule. If you don’t, you will probably die with all of them incomplete and fragmentary.
So, you must prioritize. Be in a position to reschedule your time, so that if you ever find out you are terminal, you can complete the main one. This means that you must steadily complete sections of the main one. Get them finished. Don’t assume that you have 20 years.
My worst fear has been realized.
I will miss him personally. I will miss his intellect. I am happy that just a few days ago, I asked him for recommendations of books on Confucius. He was also an expert in Chinese history. He sent me three suggestions.
I should have asked for a lot more suggestions over the years.
ACTIVISTS ON BOTH THE LEFT AND THE RIGHT SPOTLIGHT A BROKEN FEDERAL GOVERNMENT
The various state successionist movements may be so small government advocate much ghost dancing, or it may lead to some more serious action. But the movements’ characterization of the federal government as broken and beyond reform, as oppressive and expensive yet of no use in a real crisis, will undoubtedly find more ears quite soon.
On October 28, 2005, 400 citizens of Vermont met amid the pomp of their capitol building and voted to secede from the Union. The media, to say the least, was surprised. Those who noticed (which included CBS News and the Christian Science Monitor) treated the story as a novelty, only slightly more serious than the latest sighting of the Virgin Mary’s face in a Texas taco. But the vote was the first rumble of what could become a political and cultural earthquake. And Vermont is not the only state on the fault line. Other secessionist or state sovereignty movements are building from Hawaii to New Hampshire.
Millions of Americans perceive that the federal government is broken and might not be fixable. They view centralized power as heavy-handed, intrusive – and yet useless when it is called upon for help, as in the aftermath of Hurricane Katrina.
Right or wrong, like them or not, state sovereignty activists say, “We have a solution.”
Their solution is radical local activism to restore power to citizens at the state level. They aim to make state laws that counteract federal ones. They hope to preserve local or regional cultures against homogenization. They are all aiming for their idea of freedom – although often their concepts of freedom are diverse, to say the least.
Watch them: They may be the vanguard of a much larger movement of frustrated citizens who feel helpless to achieve their aims at the federal level but who are not willing to accept the status quo.
The Vermont meeting was a gathering of activists, not a session of the state legislature, so the secession vote has no legal force. The members of the Second Vermont Republic (SVR) consider it simply the first of many planned steps.
The SVR is “left-wing.” In addition to opposing big government, it also opposes “big business, big markets, and big agriculture” and what members see as a dreary, institutional sameness being imposed on the entire world.
But secession is not inherently left-wing. Secession is simply the separation of one political entity from another. And it is just one of a number of related ideas now being actively promoted.
Next door to Vermont, for instance, the libertarian Free State Project (FSP) aims to encourage enough activists to move to New Hampshire to permanently alter that state’s politics. They want smaller government, a free-market economy, and the ability to “just say no” to the worst federal laws and bureaucratic policies. The FSP has already signed up 7,000 of a hoped-for 20,000 activists.
The FSP and the SVR arise from opposite ends of the political spectrum. They differ in tactics and goals. The FSP is not secessionist. But both groups share that key central concept: local activism to achieve aims that cannot be achieved at the federal level.
Other sovereignty movements have arisen in Hawaii, Wyoming, Montana, and Alaska, among other places. The group, Christian Exodus, aims to spark an en masse move to South Carolina. There, they hope to gain control of the legislature and run state government on religious principles.
Others would like to unite Canada’s western plains provinces to the USA’s western mountain states, pointing out that they have more in common with each other than with their respective eastern urban centers.
Some groups, like the FSP, are determined to work within the system. Even the most radical secessionist groups hope to “go in peace.” They want no trouble, just to be left alone.
“But isn’t secession illegal?” some object.
Actually, probably not.
The U.S. Constitution is silent on secession. But the 9th and 10th amendments make it clear that states have higher authority than the federal government in all but a few specified areas. Those same amendments proclaim that the people have rights, while the central government has only limited powers delegated to it by the states and the people. In other words, since the Constitution does not say that states cannot secede, then naturally, say the organizers of the SVR and other secessionist groups, they can.
But of course, theory and practice are two different things. The last time American states tried to act on such a claim, the federal government overpowered them, with catastrophic loss of life on both sides.
Will the Second Vermont Republic – or any other regional independence movement – succeed? The example of 1861 sets a disastrous precedent for those who want the most radical solutions. On the other hand, the former Soviet republics more recently separated from Russia without war. And historically the boundaries of countries are ever-shifting.
It is probably a long way to the first true secessionist vote. Possibly no such vote will ever be taken. But even if these projects do not achieve their ultimate aims, they do succeed in bringing activists together. They shine much-needed light on deep national problems. They get people to think “outside the box.” Organizations like the SVR and the FSP could renew the cultural climate of their states and restore an independent spirit to parts of North America. That alone could be a worthy goal.
For more information:
- The Second Vermont Republic, P.O. Box 1093, Montpelier, Vermont 05601, VermontRepublic.org
- The Free State Project, P.O. Box 1684, Keene, New Hampshire 03431, 1-888-532-4604, FreeStateProject.org
- The American Secession Project, Secessionist.us (This is a web-only listing of many secession and free state projects.)
UK Court Ruling Favors Antiguan Receiver in Stanford Case
A firm appointed by Antiguan authorities to liquidate the assets of R. Allen Stanford’s offshore Caribbean bank won control [on July 3] of assets in the United Kingdom worth more than US$100 million, a defeat for a U.S.-appointed receiver in an ongoing fight over jurisdiction in the case.
UK-based Vantis Business Recovery Services said the High Court of Justice ruling allows it to proceed with its effort to collect Stanford assets from around the world and distribute them to thousands of investors who purchased the allegedly fraudulent certificates of deposit issued by Stanford International Bank Limited.
The assets have been frozen by Britain’s Serious Fraud Office.
Ralph Janvey, appointed by U.S. courts to liquidate Stanford assets, said in a statement that the case was “wrongly decided” and he will appeal.
The two receivers are fighting over who has jurisdiction over the Stanford assets, frustrating investors who are eager to recover money they invested in what U.S. authorities have alleged as a US$7-billion Ponzi scheme.
U.S. prosecutors have filed charges that include fraud and money laundering against Stanford, 59, who is in custody in Houston.
Meanwhile, the man appointed to replace Antigua’s disgraced financial regulator is stepping aside to avoid a possible conflict of interest.
Everett Christian was tapped for the job, after officials fired his predecessor Leroy King for alleged ties to Allen’s alleged Ponzi scheme. Christian says his wife works for an offshore bank and the “last thing” the Caribbean nation needs is another financial controversy. Acting Prime Minister Harold Lovell ... said the government would soon name a new chief financial regulator. He said, too, that the oversight commission would hire a public relations firm to repair its image after U.S. allegations that King accepted bribes to ignore Stanford’s fraud.
Amazon Collared for Japanese Back Taxes
Company booked Japanese sales through a U.S.-based affiliate, thus paying only U.S. income taxes.
Amazon has been under pressure of late from U.S. states who want the company to start collecting sales taxes, based on the interpretation that Amazon’s paying commissions to affiliates in a state constitutes an effective legal presence in the state. Now Japan is claiming that Amazon has an effective “permanent establishment” in Japan and thus owes taxes on sales to Japanese customers. The resolution may turn on a technical ruling derived from the exact wording of the double taxation treaty between Japan and the U.S.
Tax authorities in Japan have ordered an affiliate of online retailer Amazon.com to cough up almost $120 million in back taxes for the three year period to the end of 2005.
Although neither the Tokyo Regional Tax Bureau nor Amazon have commented officially on the dispute, reports suggest that the case rests on whether the company has a permanent establishment in Japan, in which case it would be liable for Japanese income taxes.
Amazon is understood to have managed its sales and distribution in Japan through two subsidiaries, Amazon Japan K.K. and Amazon Japan Logistics K.K., but booked Japanese sales through a U.S.-based affiliate, thus paying only U.S. income taxes.
The Tokyo tax office believes that Amazon effectively has a PE in Japan, although the outcome of the dispute may rest upon the interpretation of the relevant clauses of the double taxation treaty between Japan and the U.S. by the tax authorities.
The tax dispute was alluded to in the company’s 2008 annual report, which acknowledged that “significant judgment is required in evaluating our worldwide provision for income taxes.”
Switzerland Forecasts Rising Budget Deficits Until 2013
The highest deficit would still be less then 1% of GDP.
The Swiss Federal Department of Finance (FDF) has published forecasts of growing budget deficits over the next four years. Deficits are forecast to rise from CHF2.4 billion in 2010 to CHF4.2 billion in 2013. This results from a combination of depressed tax revenues arising from the recession and fiscal stimulus measures. There were three economic stimulus packages in the last year totalling some CHF2.5 billion.
The FDF expects revenues to fall by around 3% to CHF58.1 billion in 2010 and expenditures to rise by 2.5% to CHF60.5 billion. A deficit of CHF700 million for 2009 was predicted after the ordinary account for 2008 closed with a surplus of CHF7.3 billion; extraordinary expenditures, especially due to the rescue of troubled bank UBS, brought the overall account into deficit.
The highest deficit in 2013 would still be less then 1% of GDP. Nevertheless in autumn the government intends to develop an action plan to address the budget imbalance in the light of changing economic circumstances, whilst retaining as a first priority the cushioning of the worst effects of the crisis.
European Free Trade Association-Canada Free Trade Agreement Becomes Operational
The Free Trade Agreement between the Member States of the EFTA and Canada entered into force on July 1, 2009. The agreement, which focuses on trade in goods, has the potential to yield significant benefits for exporters in all five participating countries. It provides new links between European and North-American supply and value chains.
Two-way merchandise trade between the EFTA States (Iceland, Liechtenstein, Norway, Switzerland) and Canada amounted to US$9.8 billion in 2008, with EFTA’s exports reaching US$6.1 billion while imports represented US$3.7 billion. This made Canada EFTA’s 5th largest trading partner, while EFTA represented Canada’s 8th largest export destination.
The EFTA States’ main exports to Canada are mineral fuels, pharmaceutical and chemical products, as well as machinery, while Canada primarily exports nickel, aircraft, pharmaceutical products, machinery and mechanical appliances.
Most industrial goods, including fish and other marine products, benefit from duty-free access to the respective markets as of the entry into force of the Agreement. Basic agricultural products – covered by agreements concluded between Canada and the individual EFTA States – form part of the instruments establishing a free trade area between the parties.
Gibraltar signs international agreements at the behest of Britain, says UK/Spain bilateral agreement.
Aim is to make clear that Gibraltar is acting as a colony of Britain and not as an independent territory.
Britain and Spain have reached a bilateral agreement to make clear that when the Government of Gibraltar signs an agreement with an independent state, Gibraltar is doing so at the behest of the British Government. The aim is to make clear that Gibraltar is acting as a colony of Britain and not as an independent territory.
The Spanish foreign ministry was much upset when, in March, the chief minister Peter Caruana and the U.S. Treasury Secretary Tim Geithner signed an agreement for the exchange of tax information amid much fanfare, with the flags of the U.S. and of Gibraltar in the background. The Union Jack was not in the picture.
The agreement with the U.S. was the first by Gibraltar as a prerequisite of the Gibraltar Government to get iself from the grey list of financial centers.
The agreement now reached between Britain and Spain is to make sure that when Gibraltar signs it does so for administrative and not international reasons.
Reports in Madrid say that Gibraltar is also undertaking to sign any such agreements with independent states in a “more discreet manner.” It is being recalled that only last week another tax agreement was signed with Ireland virtually no publicity was given by the Gibraltar Government to the event.
The question arises if in the tripartite talks any agreement is not entered by Gibraltar as such but by Gibraltar at the express behest of the U.K.
Luxembourg says it has removed from tax haven “grey list.”
Luxembourg has been removed from a “grey list” of countries seen by the OECD as lacking financial transparency, Budget Minister Luc Frieden said ... “As of this afternoon Luxembourg will be on the OECD tax haven white list,” Frieden told a news conference.
The Paris-based OECD had placed Luxembourg on the so-called grey list of countries that have agreed to improve transparency standards but have not yet signed the necessary international accords.
Frieden said Luxembourg had signed 12 agreements of exchange of information. By the end of the year, 15 agreements would be signed, with Belgium and Germany to follow in the coming weeks. “We negotiated quickly and with serious countries,” Frieden said. Accords had been signed with the United States, the Netherlands, France, Denmark, Finland, Britain, Austria, Norway, Qatar, Bahrain, India, and Armenia, Frieden said.
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