Tag Archives: Finance

More Capital Controls Hidden In Obama Stimulus Act

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Zerohedge notes the tightening of capital controls in the hiring incentives act (HIRE) passed on March 18 by the Obama administration. A more sober summary of the changes introduced can actually be found at Lexology.  Salient points from Lexology’s summary:

1. Withholding Tax on Payments to Foreign Financial Institutions, Trusts and Corporations. Effective January 1, 2013, the HIRE Act essentially forces foreign financial institutions, trusts, and corporations to choose between either agreeing to provide the IRS with information about their U.S. account holders, grantors and owners, or subjecting themselves to a 30% withholding tax on almost any payment they receive from a U.S. payor. The rules applicable to foreign financial institutions differ from those that apply to foreign trusts and corporations……….

….In general, “withholdable payments” to an FFI are subject to the 30% withholding tax unless the FFI enters into an agreement with the Treasury Secretary requiring the FFI to:

  • Obtain sufficient information from every holder of every account maintained by the FFI to determine whether the account is a United States account.
  • Comply with the verification and due diligence procedures that the IRS and U.S. Treasury may require regarding identification of United States accounts.
  • Provide annual reports on each United States account maintained by the FFI, which must include:
    • The name, address, and TIN of each account holder which is a specified U.S. person and, in the case of any account holder which is a U.S.-owned foreign entity, the name, address, and TIN of each substantial U.S. owner of such entity;
    • The account number;
    • The account balance or value; and
    • Except as provided by the Treasury Secretary, the gross receipts and gross withdrawals or payments from the account.
  • Deduct and withhold a tax equal to 30% of any “passthru” payment by the FFI to either a “recalcitrant account holder,” which is a U.S. account holder who withholds information from the FFI, or another FFI that does not meet the requirements necessary to avoid the 30% withholding tax.
  • Comply with requests by the Treasury Secretary for additional information about any United States account held by the FFI.
  • If foreign law would prevent the required reporting on United States accounts, attempt to get a valid waiver, if one is available under the applicable foreign law, from the account holder, and close the account if a waiver is not obtained within a reasonable period of time…………..

Foreign Entities that are not Foreign Financial Institutions. The new Code Section 1472 also requires 30% withholding on withholdable payments made to nonfinancial foreign entities, unless the withholding agent is provided with certification either (1) that the foreign entity has no substantial U.S. owners or (2) that identifies the name, address, and TIN of each substantial U.S. owner.

Payments to corporations whose stock is regularly traded on an established securities market or of (Lila: correction, “to”) an expanded affiliated group of such corporations, to entities organized under the laws of a U.S. possession and owned entirely by bona fide residents of that U.S. possession, to foreign governments and central banks, and to international organizations are not subject to 30% withholding under Code Section 1472.

[Lila: File under Crikey, What Does This Gobbledygook Mean?]

2. Required Disclosure by Individuals of Foreign Financial Accounts, Increased Penalties, and Extension of Statute of Limitations.The HIRE Act requires individual taxpayers who have an interest in a “specified foreign financial asset” to attach a statement to their income tax return if the aggregate value of all such assets during any year is greater than $50,000………

Required Disclosure. The taxpayer must disclose: In the case of any account, the name and address of the financial institution in which such account is maintained and the number of such account.

  • In the case of any stock or security, the name and address of the issuer and such information as is necessary to identify the class or issue of which such stock or security is a part.
  • In the case of any other instrument, contract, or interest, such information as is necessary to identify such instrument, contract, or interest, and the names and addresses of all issuers and counterparties with respect to such instrument, contract or interest.
  • The maximum value of the asset during the taxable year.

Penalties. There are new penalties for both the failure to disclose a foreign financial account and for understatements of tax attributable to undisclosed foreign financial assets.

The HIRE Act imposes a $10,000 penalty for failure to furnish the required information when due. If the taxpayer fails to correct such failure for more than 90 days after receiving notice of the failure, an additional $10,000 penalty is imposed for each 30-day period (or fraction thereof) during which the failure continues after the expiration of the 90-day period following the notice, up to a maximum penalty of $50,000.

In addition, the HIRE Act increases the penalty on of any portion of an underpayment of tax that is attributable to any undisclosed foreign financial asset understatement from 20% of the understatement to 40% of the understatement.

Extended Statute of Limitations for Undisclosed Foreign Accounts. The HIRE Act extends the statute of limitations for audits of certain unreported income from a foreign financial account from three years to six years.

3. Repeal of Foreign Exceptions to Registered Bond Requirement. The HIRE Act denies an interest deduction for interest on any unregistered bond (typically these will be bearer bonds), effective for bonds issued after second anniversary of the date of enactment.

4. PFIC Reporting. In addition to the reporting already required from shareholders of a passive foreign investment company (PFIC), effective as of March 18, 2010 the HIRE Act requires that each United States person who is a shareholder of a PFIC file an annual report containing such information as the Secretary may require. A foreign corporation that generates passive income (typically interest and/or dividends) is classified as a PFIC if (a) 75% or more of the corporation’s gross income is passive income for purposes of the CFC rules or (b) 50% or more of the average value of the corporation’s assets produce, or are held for the production of, passive income.

5. Electronic Reporting by Financial Institution Withholding Agents. The HIRE Act authorizes the IRS to impose electronic reporting requirements on financial institutions that are withholding agents, even if the institution files less than 250 information returns (the current threshold).

6. Foreign Trust Changes. The HIRE Act makes a number of changes in the rules governing foreign trusts. A transferor to a foreign trust that has a U.S. beneficiary is treated as owner for U.S. tax purposes of the portion of the trust payable to or accumulated for the benefit of a U.S. beneficiary. The HIRE Act provides that an amount is treated as being accumulated for the benefit of a U.S. beneficiary even if the U.S. person is only a contingent beneficiary or if any person has the discretion to distribute from the trust to any person unless the trust specifically identifies the class of permitted beneficiaries and none of the members of the class are U.S. persons.

Loans to a U.S. person or allowing a U.S. person to use trust property are also treated as payments to or accumulations for the benefit of a U.S. person unless the U.S. person repays the loan at a market rate of interest within a reasonable period of time or pays fair market value for the use of the property.

The HIRE Act also requires that any person who is taxable as the owner of a foreign trust must provide such information about the trust as the IRS may require. Penalties for failure to comply with the foreign trust reporting requirements were also increased, effective for returns required to be filed after December 31, 2009.

7. Taxation of Dividend Equivalents. The HIRE Act provides that dividend equivalents used in lieu of dividends to avoid 30% withholding on FDAP income, such as securities lending transactions, sales-repurchase agreements, and notional principal contracts, are treated as U.S.-source dividends for U.S. tax purposes………..”

My Comment:

The Zerohedge headline is rather alarmist, but on closer inspection, despite the dreadful sneakiness of sticking this into some apparently minor stimulus legislation, the controls are only a continuation of a trend already well under way.

The 30% withholding for refusal to disclose US account holder information is pretty high and so are the new penalties, and I’ll post on what I find out about them, but the disclosure rules are already in effect.

Most of this seems to be part of the administration’s attempt to go after off-shore business accounts suspected of money-laundering, tax-evasion, or criminal activity.

The proximate causes of the financial crisis lie in the off-shore and re-insurance racket. And the Obama administration is determined to end banking secrecy in order to end that. I can sympathize, because indeed multinational corporations do siphon off most of their profits through shell accounts in tax-havens, paying little or nothing to the jurisdictions in which they actually work and use public services. Meanwhile, the havens have become festering centers of crime, drugs, and arms sales, and also the home of  penny-stock fraud , as well as of naked short-selling scams.

The European Union Bank, chartered in Antigua in the Caribbean, for example, which boasted of being the first online bank, and which offered secrecy to account holders, was chartered as a subsidiary of Menatep, a large Russian bank, notorious for involvement with organized crime, as this Washington Post piece by Douglas Farah in 1996 noted.

The outfit Tax Justice.net is a global effort to deal with this huge relatively unrecognized problem, initiated by veteran off-shore investigator Lucy Komisar. It seeks banking transparency and an end to the off-shore racket.

This is a laudable goal. And so far as exposure of the crimes and corruptions of these havens help us understand poverty, development, and the impact of globalization, neo-liberalism, and various tax and regulatory regimes, I’m sympathetic.

But, beyond that, I’m wary of the methods and underlying premise. Strengthening the government regulatory and enforcement apparatus has more potential for abuse than use, this late in the crony capitalist game. There’s a much simpler and more libertarian approach to the underlying problems. And that is to reduce income taxes to the lowest level compatible with paying incurred obligations. A simple flat tax should do it.

Abolish pay-roll, personal income, and corporate taxes. Make up the short-fall where it should be made up –  in the kind of user fees and sales taxes described at Fair Tax.org, which are targeted at the biggest users.

Roads, for instance, are largely used..and damaged…by commercial trucks. Yet, these trucks pay far less than they ought, because of the lobbying of their trade associations. Fix these sorts of leakages and then cut income taxes and taxes on investment and job-creating activities, as illustrated in this WSJ piece on people moving to low income tax states. Then go back to sound money and a market interest rate.

You’ll get rid of the incentives for corruption, encourage small businesses to compete more easily, and keep big business onshore. But that’s unlikely to happen any time soon….

Instead, we’re going to have deeper infringements on privacy.

We already knew that private bank accounts were a thing of the past for most ordinary people. Not for the very rich, of course. But we already knew that too..

It remains to be seen whether the new controls will change that.

JP Morgan Gets $3.4 Billion For Buying Wa-Mu; Shareholders Get Zip

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At Seeking Alpha, Troy Racki writes about the second rape of Washington Mutual stock-holders and US tax-payers by JP Morgan:

“In the settlement offer WaMu will relinquish all claims against JP Morgan and the FDIC. In return WaMu will be allowed to keep a $3.9 billion dollar deposit it held in its own bank. Most of the $3.9 billion deposit was generated from the sale of preferred securities in 2006 and 2007. Additionally WaMu will be allowed to keep $1.8 to $2.0 billion of its own tax return created from huge losses in 2008. The rest of the projected $5.6 billion return will be split between the FDIC and JP Morgan.

According to the settlement terms JP Morgan will receive $5 billion in HELOC backed securities valued on the open market at 60% of par, $193 million in Visa class B securities, $2.1 billion in cash, and a $20 million wind farm, all from WaMu. Given the initial purchase price of WaMu for $1.9 billion in 2008, these additional assets received means that JP Morgan will pay a negative $3.4 billion for their purchase of the bank.

The loss of these assets will heavily impact WaMu’s balance sheet which now stands to make only the bondholders whole, according to the settlement’s disclosure statement. Currently senior WaMu holding company debt trades at 106 cents on the dollar.

Under the terms of the settlement WaMu shareholders will receive nothing.

In the disclosure statement WaMu’s attorneys stated that the proposed settlement will net the most for all creditors and that further legal dispute would only financially harm the estate. This comes in stark contrast to prior statements by WaMu’s equity counsel that a protracted legal battle with JP Morgan and the FDIC may have returned up to $20 billion to the estate.

Currently the settlement is awaiting the approval of the FDIC, Washington Mutual bank bondholders, WaMu unsecured creditors, WaMu preferred shareholders, and the bankruptcy judge. An incomplete plan of reorganization was also filed on Friday along with the disclosure statement. The incomplete POR lacks a balance sheet meaning that WaMu’s unsecured creditors are left only to guess at what they may eventually recover, if anything.

Despite the negative purchase price, Jamie Dimon, CEO of JP Morgan has indicated that the purchase of WaMu could have been closed for less, much less. In July 2009 he stated that JP Morgan “could have bought WaMu for a dollar” because of the projected losses that would have been taken on the deal.

The losses never materialized. In May 2009, JP Morgan wrote up its WaMu loan portfolio by $25 billion.

Had the $1 purchase price gone through JP Morgan would have eventually been paid $5.1 billion by WaMu and the FDIC to assume the bank.

While the deal may be good for JP Morgan, former WaMu customers are not so fortunate. Nationally many WaMu Providian credit card customers have since experienced dramatic rate increases. In Oregon, WaMu checking clients report that deposits are being held for fourteen days prior to being accredited to accounts. This abnormally long waiting period means that many checking customers are now being hit by multiple $35-a-peice overdraft charges for having insufficient funds. In northern California, out-the-door waiting lines for teller service at one branch sparked verbal outrage and multiple client threats to move deposits to a community bank branch. The branch responded after twenty minutes by temporarily adding a teller.

Meanwhile FDIC chairwoman Sheila Bair is continuing to push for additional powers that would allow the FDIC to not only shutter banks but their holding companies. This authority would allow for the FDIC to avoid future conflicts when it closes a bank but is unable to force a holding company to capitulate, as is in the case with WaMu. It has come under scrutiny after internal JP Morgan e-mails and PowerPoint presentations revealed that as early as March 2008 regulators were in negotiations with JP Morgan on the closure of Washington Mutual, termed “Project West”, six months prior to the bank’s seizure.”

More later…

Whistleblower Reports Precious Metals Manipulation By JP Morgan

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Bill Murphy, chairman of The Gold Anti-Trust Action Committee (GATA) reports that on March 23,2010, GATA director, Adrian Douglas, was contacted by a London metals trader, Andrew Maguire, who had been told directly by JP Morgan traders how they manipulate the precious metals (PM) markets on non farm payroll data release, COMEX contracts rollover, and similar recurring occasions, to make money.

Maguire had previously contacted the enforcement division of the CFTC (Commodity Futures Trading Commission) to report this. On February 3, 2010, he gave a two-day advance warning of PM manipulation on the release of the non-farm payroll data on February 5 that took place as predicted.

Read more at GATA.

China Bubble: State Firms Bid Up Land Prices To Record Levels

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China Daily:

“In spite of all the government’s tough talk against excessive home price hikes, the record land price for residential housing in Beijing was broken twice on Monday thanks to aggressive bids by State-owned enterprises.

The weeklong postponement of the land auction seemingly served to save policymakers, who were explaining to the National People’s Congress how they would prevent housing bubbles, from trouble.

Yet, the jaw-dropping results only underscored how differently these cash-rich State firms think about housing prices. It seems that all the measures that the government adopted to raise capital requirements and leverage restrictions have so far worked only to discourage private property developers while doing little to restrain the appetite of State firms for a bigger market share.

The record land sales on Monday certainly cast doubts on a previous official claim that not a single cent of the country’s 4-trillion-yuan stimulus package has flowed into the real estate sector. Worse, they fueled expectations of more price hikes to undermine government efforts to prevent housing bubbles.”

Obama Goes After Upper Middle-Class Savers

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Bloomberg reports:

“Congressional leaders are raising to 3.8 percent their proposed new Medicare tax on investment income in the final health-care overhaul plan, a Democratic leadership aide said.

The rate is higher than the 2.9 percent President Barack Obama proposed in February. Under Obama’s proposal, the new tax would apply to income from interest, dividends, annuities, royalties, capital gains, and rents for individuals who earn more than $200,000 and joint filers reporting more than $250,000.

House Speaker Nancy Pelosi, asked today if the tax applied to capital gains, said it would be imposed on unearned income “whatever category it is.”

It would be the first time Medicare taxes would cover investment income. The current 2.9 percent Medicare levy currently applies only to salaries and is split evenly between workers and their employees.”

My Comment:

No redistribution of the ill-gotten loot of the corrupt mega banks and their government and speculator associates …loot that runs to billions. Instead, the administration goes after middle-class investment income. This is a first, and it sets an unholy precedent for the future. Does this government not get that we need to increase capital formation, not slow it down?

During Boom, Regulators Gave Themselves Bonuses For Superior Work

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The Associated Press reports that the banks weren’t the only ones handing out bonuses:

“Banks weren’t the only ones giving big bonuses in the boom years before the worst financial crisis in generations. The government also was handing out millions of dollars to bank regulators, rewarding “superior” work even as an avalanche of risky mortgages helped create the meltdown.

The payments, detailed in payroll data released to The Associated Press under the Freedom of Information Act, are the latest evidence of the government’s false sense of security during the go-go days of the financial boom. Just as bank executives got bonuses despite taking on dangerous amounts of risk, regulators got taxpayer-funded bonuses despite missing or ignoring signs that the system was on the verge of a meltdown.

The bonuses were part of a reward program little known outside the government. Some government regulators got tens of thousands of dollars in perks, boosting their salaries by almost 25 percent. Often, though, rewards amounted to just a few hundred dollars for employees who came up with good ideas.

During the 2003-06 boom, the three agencies that supervise most U.S. banks — the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the Office of the Comptroller of the Currency — gave out at least $19 million in bonuses, records show.

Nearly all that money was spent recognizing “superior” performance. The largest share, more than $8.4 million, went to financial examiners, those employees and managers who scrutinize internal bank documents and sound the first alarms. Analysts, auditors, economists and criminal investigators also got awards.

After the meltdown, the government’s internal investigators surveyed the wreckage of nearly 200 failed banks and repeatedly found that those regulators had not done enough…”

My Comment

How to react to this? Weep….tear your hair out?…..roll on the floor laughing….throw up?

A bit of all.

The salient points:

1. Giving bonuses/incentives for “superior performance” doesn’t work, either in the public or so-called private sector (pseudo-private). The next time anyone makes that argument, rub this article in their nose.

2. Sacking is the key. Every regulator who didn’t sound the alarm over the last decade needs to be demoted and/or sacked. At the very least, the department gets a 25% cut. Or better yet, throw out all the “financial examiners.” Obviously, the job means zip. Hire a team of snake-charmers, dancing bears, or g-stringed pole-dancers……you’d at least get a laugh for your money.

3. The only way to get any real information out of the government is through a Freedom of Information Act request.

4. “Regulatory capture” – the corruption of the government by the people it’s supposed to be regulating – is clearly only one part of the problem. The more intractable problem is bureaucratic empire-building. You don’t need other people to corrupt government officials. They carry the germ themselves, because they aren’t accountable to the market for excesses and mistakes.

5. The underlying problem is the artificial boom. It pushed prices of everything sky high and gave everyone a false sense of prosperity. Naturally, the idiots broke out the champagne and started pinning gold medals for genius on their chests.

6. The mob likes flattery. The boom flattered everyone…

Celente: Report Shows JPMorgan, Citi Helped Push Lehman Under

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Gerald Celente: JP Morgan and Citi acted like mobs bosses in torpedoing Lehman.

Note: the bankruptcy examiner’s report shows Lehman cooking its books to look less levered than it was, but the Federal Reserve Bank of New York (FRBNY) (Mr. Geithner, that would be you) abetted it. So did the SEC, and JP Morgan and Citi acted like cannibals (or street gangs…or mob bosses), as they tried to wipe out their rival.

Well, we said so at the time, in a post called“Statistics Don’t Back Panic Mongers” (October 2008).

And even before that.

Except for the fact that the Wall Street gang uses money, ratings, and other “adult” world paraphernalia, they’re not much more than hooligans who didn’t get toilet-trained right.

Let’s see:

Finger-pointing: He did, teacher, I didn’t (Politicians to voters, voters to politicians)

Avoiding responsibility: But you told us we could (Wall Street to Main Street, home-owners to lenders, managers to accountants, lawyers)

Succumbing to peer pressure: Everyone does it ( Book-cooking managers, lazy reporters, colluding speculators)

Blaming the victim: He deserved it (Corporate raiders, naked short-sellers, media shills)

Soros, Paulson etc. Under DOJ Probe For Destabilizing Euro

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Yes, indeed. One for the good guys!

“The U.S. Justice Department has launched an investigation into whether heavyweight hedge funds including Soros Fund Management, SAC, Greenlight Capital and Paulson & Co.  aggressively shorted the euro in recent weeks to destabilise it, the WSJ reported on Wednesday, citing people familiar with the matter.

According to the paper,  the department has asked hedge funds to retain trading records and electronic communications relating to the EU currency which needless to say has come under strong selling pressure as a result of the Greek debt crisis. The euro has lost more than 10% since November. It currently trades at $1.3609….”

More at the Wall Street Journal.

I blogged a few days ago about David Einhorn’s holdings, noting his anti-Euro trade; I also noted that without the raids against Allied and Lehman and without his late-in-the day piling onto gold, Einhorn’s record really isn’t as impressive as all the hype about his abilities would lead you to believe.

Mexican President Nominated For Citi Director

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Robert Wenzel at Economic Policy Journal:

“Citi’s Board of Directors has nominated Ernesto Zedillo as a new non-management director candidate to stand for election at Citi’s annual shareholder meeting on April 20, 2010. He was the President of Mexico from 1994 to 2000 and is now Director of the Yale Center for the Study of Globalization and Professor in the Field of International Economics and Politics at Yale University.

Zedillo (58) worked at Mexico’s Central Bank (Banco de Mexico), serving in various positions, including those of deputy Head of Economic Research and deputy Director. Zedillo is on the boards of Alcoa Inc. and Procter & Gamble Company.

Obviously, despite the fact that it almost blew itself up because of schemes far from traditional banking, Citi continues to take the New World Order approach to banking.

There is nothing wrong with Citi attempting to penetrate into Latin America for business but, putting a former Mexican president on the board smacks of penetration via back door crony government deals versus attempting to serve the serve the consumer in the Latin American countries.

Sure, you have to deal with the crooked governments in these countries, but that’s what you have connected law firms for. They get things done in a very low key efficient manner. Putting Zedillo on the board sends a different signal, that Citi will not only deal with Latino politicians, but that it is part of the crooked club.”

Financiers Used 9-11 Diversion of FBI to Loot American Middle-Class

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Great interview at Forbes, between Steve Forbes and Senator Ted Kaufman on the capital markets, naked short selling, the uptick rule, sponsored access, HFT (high frequency trading) and digitalization, dark pools, and fraud…

“Forbes: Finally, Fraud Enforcement Recovery Act.
Kaufman: Yeah, yeah.
Forbes: You’re proud of it.

Kaufman: Yeah, I am.

Forbes: What it does, and what will it do?

Kaufman: OK, here’s what it did. After 9/11, we moved a lot of FBI agents over to cover terrorism, which we should have done. But we left only like 250 FBI agents in the country to cover financial fraud. We did more financial fraud cases in 2001 than we did in 2007, can you believe that? So, what we did with this financial and regulatory forum, with Pat Leahy, who is chairman of judiciary committee and Chuck Grassley, an Iowa Republican. It’s a bipartisan bill and we got a bill passed to give us more FBI agents, give us more prosecutors and to go after these folks. And so that’s basic what we passed, and we’re getting organized. Had a really good hearing of the judiciary committee. Rob Khuzami at the Securities Exchange Commission, Lanny Breuer’s head of the criminal division, Kevin [Perkins] from the FBI financial thing.

And we’re really, we’re going after this thing. And I know you agree with me. You know, if you, the folks that committed crimes while this thing was going on, we can all argue about what caused it or not, anybody who took advantage of this situation and lined their own pocket for it should go jail.”