Sunday, May 03, 2009

Don't You Want Somebody to Shove?

Blame Game Update

I think those greedy bank executives who are putting us through this torture deserve prosecution for violating the Geneva Conventions and taking their bonuses. Or is it the Basel II Framework? Perhaps I am confusing two different issues, and I did promise to try to avoid sarcasm.

I see nothing wrong with most of them getting bonuses if their divisions are doing well. The heads of the companies, of course, can easily pass on one year's extra compensation, and that is to be expected when simultaneously taking massive bailout money and producing enormous losses. A second disastrous year, though, should mean firing. That would mean the huge write-offs they took the first year--when they really had the chance to name their size--were insufficient, and would mean that they did a terrible job of risk management indeed.

Otherwise, it's a shame the non-bank manipulators are coming back so energetically, this time promoting "Obama-driven" mortgage reform scams. At least there's no Countrywide ads. So far.

Please see my two previous postings ("Bailout FAQ" and "Bailout FAQ Revisited") for blame assignments. Some of the assignments are being completed, though none have been turned in, more have not even begun hearings. I'm waiting to see how the new Federal super-regulatory agency will handle the credit rating agencies. In the popular view, AIG is the arch-villain that constructed the financial meteor that hit us.

Taxing Offshore Profits

President Obama announced this week he will push for revisions in the US tax code which will take away flexibility from corporations with regard to reporting profits overseas. This is the method he has chosen to fulfill one of his campaign promises, namely to take away the right of corporations ("Benedict Arnold corporations", John Kerry called them in 2004) to deduct expenses related to outsourcing jobs overseas.

The gnashing of teeth of the US Chamber of Commerce about this suggests that august organization is much more concerned for their multinational clients than they are about the US or about domestic commerce. Or about the US government budget deficits projected for the future. There was also supposed to be some tightening with regard to foreign companies operating in the US, which would make sense if only to prevent those on the fence from switching their incorporation out of the country.

I think that the discussions I heard totally missed a key point: what the US government is trying to do to Corporate entities is no less or no more than they already do with "US individuals". As most any expat could tell you, the US is alone in taxing the worldwide income of US citizens and "US persons"--namely anybody who wants to return to these spacious skies, etc. Other countries go through elaborate means to allow their taxpayers to identify the portion of their income which is home income as opposed to foreign income, which is not taxed. We, instead, have this notion that all income of Americans is US-taxable (though we do credit for taxes paid overseas).

In other words, the Obama proposal is an overreach, just as it is for individuals. It will encourage "legal cheating" and a lot of feigned ignorance. Still, a willingness to tackle the tax code will be a critical aspect of successful policy to end Bushite economics.

Banks Pass Smell Test

It will surprise no one that the Treasury's stress tests on the 19 largest TARP banks will result in zero Federal takeovers of those banks; if AIG wasn't insolvent enough, how could any of these banks--all of whom have been more-or-less officially designated "too big to fail"?

I was watching the news and the movements on some of these bank stocks closely this week. I see a pretty clear pattern that banks had been notified of the contents of today's announcements (who needed more capital, and how much). Then, possibly as a signal of Geithner/Obama's benign intentions toward the banks, or possibly just as a pragmatic move, they seemed to have told the banks they could go ahead and try to make the best use of the information in the public arena. Bank of America, which needs a lot more capital, leaked that news out on a good market day and having thus broken wind in advance, didn't suffer as the stink was broadly received today.

Similarly, American Express, having been told they wouldn't need to reinforce their capital, pushed out a different piece of news (on another good day; there have been quite a few recently)--that their credit was being downgraded by rating agencies due to "liquidity concerns". Amex's problem doesn't appear to be the toxic assets they acquired, as much as worries about weak consumption spending combined with increased credit losses from their cardholders. The rating downgrade should have pushed the stock down, as it will certainly reduce their margins, but the stock rallied as investors concluded--correctly, I believe--that the bad news was then fully out.

These were successful stock boosterism moves; those who waited and now need to face bad news in the face of the overall pleasing aroma coming off the stress tests (Citicorp?) will be punished.

The title of this update on financial news (actually posted on 5/6/09) comes, modified, from Soul Asylum via the Jefferson Airplane.

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