Thursday, May 14, 2009
This is stale news from last week and the week before that - sorry, but I couldn't get to posting this in time... Last week, Stephen Friedman was all over the news - he's an ex-Chairman of the Goldman Sachs Group, who was a Director of the New York Fed and bought Goldman Sachs shares several times after the financial crisis hit, and while he was a director, and last week, he resigned following news coverage of his situation. This was the original WSJ article that broke the story, and this subsequent WSJ article reported his resignation.
Outrageous stuff. Anyway, this post at Muckety has an interactive diagram that shows the links between the various parties and this blog post by Reality Lenses excerpts the thread of logic from the WSJ article to make it more compact.
Sunday, May 10, 2009
Warren Buffett criticized the Obama administration's stress tests on the grounds that of the 19 banks tested, 15 are small enough to be taken into receivership by the FDIC, and so, do not have the same impact as the remaining 4. For the same reason, he concluded that applying a uniform test to all 19 banks (more precisely, bank holding companies) was not a useful exercise - the 4 largest ones are different from the remaining 15 and also from each other. The official test results can be found here. It's not apparent who the 4 Buffett refers to are, since their market capitalizations are now much smaller than they were before the crisis. The FT article explicitly named just Bank of America and Citigroup, but I assume Buffett is referring to Bank of America, Citigroup, Wells Fargo, and JPMorgan Chase.
Basically, the Obama administration is targeting profits of foreign subsidiaries of US corporations in the following 3 principal ways: (i) At present, a US multinational is allowed to deduct expenses incurred by a foreign subsidiary against its US tax liability, while deferring tax payment on that same subsidiary's income until it is repatriated. The new rules will allow deductions to be claimed only in conjunction with the repatriated income, so that both occur in the same period. (ii) The second change is to revise a complex system of foreign tax credits claimed against US tax liabilities. Foreign tax credits make a US corporation appear more profitable by lowering its tax rate, although the same tax is paid by its foreign subsidiary. (iii) The last item is a revision of the rules for reporting of fund transfers between a US corporation and its foreign subsidiaries that will expose more income to taxation. Kudos to the administration on this. It is time to level the playing field so that multinationals do not gain any advantage over mom-and-pop entrepreneurs and smaller companies from engaging in tax arbitrage.
The administration has already heard a predictable chorus of opposition from several fronts: (i) The National Association of Manufacturers called the proposal "disastrous". (ii) John Castellani, Business Roundtable president said, "It is the wrong idea, at the wrong time for the wrong reasons." (iii) Consulting companies, like Ernst & Young, Deloitte & Touche, etc. have entire desks devoted to tax arbitrage. Naturally, Clint Stretch, a tax partner at Deloitte, said the proposal rested on "a continuing belief that there's a substantial pot of money in the international tax rules ... a pretty tired idea". Well, if there wasn't, he wouldn't be a tax partner now, would he? (iv) Silicon Valley also voiced concerns. I think it would be fine for Microsoft to pay the estimated $2.2 billion in taxes resulting from this reform.
In honor of Mothers' Day, I can think of something similar mom might have said: "Eat your broccoli!" If the proposal wouldn't raise taxes, which is its very goal, we would not be hearing any opposition to it. That we are, implies that it has found its mark.
The Center for Public Integrity, a non-profit investigative journalism organization, released a study showing that the top 25 originators of subprime mortgages, most of which are now bankrupt, but were either owned or financed by banks including Citigroup, Goldman Sachs, Wells Fargo, JPMorgan Chase, and Bank of America, spent almost $370 million in Washington over the past 10 years on lobbying and campaign donations to ward off tighter regulation. This essentially is the official finding that confirms what I wrote in my very first post with which I started this blog.
US regulators apparently want to banks to prove that they can issue debt without FDIC insurance. Some banks have been asked to increase their equity, i.e., lower their debt-to-equity ratio. It is a bit hard to understand how they would do both. Increasing equity, whether by new issuance, or conversion of preferred stock or debt to equity, would be dilutive to current shareholders. Issuing new debt would increase the debt servicing load, which I think ought to be reduced.
Getting a bit personal here, I lost money from a "stable value" money market fund breaking the buck. Turns out the fund owned $785 million in Lehman debt which became worthless.
Interesting article, noting that over the past 10 years, European central banks sold 3,800 tonnes of gold, while China's central bank bought 659 tonnes. The European banks sold at the lows, and now gold has appreciated from $287.55 an ounce on January 6, 1999 to $903.50 an ounce on May 6, 2009.
Apparently, this is because equities now offer greater returns thanks to the recent rally. And this is the US Treasury we're talking about. I can't imagine how the TARP-beneficiary banks would do in fulfulling the new requirement (cf., May 6 above) to issue debt without the FDIC guarantee. Yields would have to be higher still, and this would impose a greater debt service load on the banks.
US regulators ordered 10 of the largest US banks to add a total of $74bn in equity following the stress tests.
The government has given US banks assurances that they will not be required to raise the $74bn in equity, if earnings over the next six months exceed regulators' forecasts. This is reminiscent of how Paulson and Bernanke handled Bear, Lehman and AIG: Bail out for Bear Stearns; sorry, Lehman; okay again for AIG. A flip-flop in just a day, based on earnings over a single six-month period. You have to wonder: Do these folks know what they're doing?