In 2009 UBS admitted to facilitating tax evasion by U.S. citizens. In response Congress passed the Foreign Account Tax Compliance Act (“FATCA“) to help the IRS improve collections of foreign income. As the IRS has issued new rules and forms derived from the act, many foreign financial institutions have told U.S. investors that their money is no longer wanted. At the same time record numbers of American citizens have renounced their citizenship. Could it be the U.S. has extended their reach too far?
that’s a complicated way of saying: New rules are being written which will extend the ability of the IRS to track investments made overseas. In anticipation of these rules going into effect foreign banks and hedge funds are divesting themselves of U.S. investors. They complain that these rules are too complex and onerous because they require them to also monitor the companies they do business with. If a business partner is non-compliant with FATCA the foreign financial institution will be required to withhold more profits than usual from their clients and report all income to the IRS. Rather than develop compliance measures these financial institutions have opted to cut ties with Americans. They would rather forego the wealth of the world’s richest country than have to comply with FATCA’s rules. This trend is troubling for American investors because it means they have fewer options and less access to foreign markets.
One response American investors with large holdings have opted for is renunciation of their American citizenship. Most recently, it was revealed that Facebook co-founder, Eduardo Saverin gave up his citizenship in favor of becoming a resident of Singapore. Speculators believe this decision was motivated primarily to avoid taxes on his Facebook stock. But he is also an active investor with holdings in Europe and Asia which would make him, and the firms, subject to the new law. It is not much of a stretch to think this did not factor into his mind. And there are reports (linked above) suggesting that more U.S. citizens are leaving so they can continue to stay invested overseas and avoid any impending tax increases.
Consequences for America: With investment opportunities being closed off to Americans it will be more difficult for them to gain access to global markets and diversify their positions. Over time this may lead to lower returns and, therefore, lower tax revenues. Further, because our dollars are not as able to flow into emerging economies, it will be harder for us to wield influence as they grow larger. If the recent trend of citizen renunciation continues the U.S. will be losing access to many successful, sharp minds and their investment savvy. Not only do they leave, but they generate great animosity and probably feel like they will not be welcomed back.
There is Opportunity: If there are banks out there refusing to service American investors because the compliance costs are too high, perhaps there are also banks who are already compliant and willing to move to Singapore or Hong Kong and fill the void. They may not have the immediate expertise to create financial products that match the quality of local branches, but there is reason to be hopeful that with time they will match our foreign counterparts. Growth opportunities for American banks are not readily apparent these days so this news could be welcomed by them and shareholders. A second offshoot is that U.S. citizen investors may look harder for good investment opportunities within. Perhaps the next facebook is already invented but just needs somebody to provide the funding for them to make the leap to greatness. FATCA creates many headaches and red tape for those investors with assets overseas. But it also encourages them to bring their business home and work on improving America.
It didn’t take long for shareholder derivative suits to be filed against JPMorgan Chase in the wake of the $2 billion dollar trading debacle. Papers submitted in the Southern District of New York by three separate law firms allege JPM mislead investors about the extent of the trading loss prior to the May 10th announcement. While the shareholder frustration over the 12% drop of JPM valuation is valid, filing suits will ultimately do more harm than good for investors and their stock in the company overall.
This is not to excuse JP Morgan’s risk taking and cavalier behavior. The bank is not sufficiently policing itself and this lack of oversight allowed the Chief Investment Office to open positions larger than most senior executives were aware. Many prominent members in congress and aspiring to join Congress have discussed the need for government oversight. If more significant regulation was in place it is possible that positions of this magnitude would not be permitted and the whole ordeal could have been avoided.
There is no doubt that the Chief Investment Office was in the business of operating in risky areas. The CEO, Jamie Dimon, has been an outspoken advocate for freedom for banks to engage exotic and risky markets. Lets be clear, it’s highly unlikely that any position JPM held was illegal. Shareholders are upset that Jamie Dimon dismissed questions about the positions in April by saying there is a “tempest in the teapot.” They could rightfully argue that had they been informed of the type and weight of positions the Investment Office entered into, they would have sold their shares, avoided the risk, and ultimately the decline. But this seems like wishful thinking. Had JPM disclosed their bad positions in mid-April, the stock would have immediately tumbled then. The banking industry is always going to be a risk taking business. Given the size of JPM there will undoubtedly be bad calls that result in significant trading losses. It is a peril of being in the business. For an investor to second guess the company now, when they made a misstep, is cruel. As they say, hindsight is 20/20.
Setting aside the faulty basis for the suit, taking legal action against JPM further contributes to the devaluation of the stock. JPM will need to expend significant resources defending themselves in each case. Lawyers will need to be hired, executives’ will have their days interrupted for depositions and trial preparation, and any judgment or settlement will be paid directly out of JPM’s cash reserve. Each of these factors will be an expense that shrinks the bottom line, hurts profitability, and draws resources away from more efficient uses — all very negative for any shareholder. Second, filing a lawsuit generates plenty of negative publicity. The lawsuit will drag on for months, if not years, and constantly pop back into focus, reminding Congress and the public about JPM’s miscalculation. This period of prolonged, recurring negative press means JPM will be constantly having to defend their brand through increased marketing and public outreach. That is, at the expense of profits for the shareholders.
All this aside, members of the litigation class should not expect to receive compensation equal to their trading loss because the Court and lawyers will need to cover their overhead and fees first. Realistically the only ones benefiting are the lawyers — on both sides. Why would shareholders agree to harm the company they own to line the pockets of others?
Litigation in this case would do nothing to bolster the long term prospects of the company, and instead, only serve to undermine their future growth potential. Shareholders should leave the second guessing to the government instead of piling on to make matters worse.
Delta Airlines agreed to purchase an oil refinery outside Philadelphia from ConocoPhillips for $180 million. The refinery was just one month away from being shut down as it was not producing enough profit for ConocoPhillips to justify keeping it open. Delta estimates that the purchase will save the company as much as $300 million a year because of the economic benefits of “vertical integration.” Critics are skeptical that Delta will have the managerial expertise to operate a refinery better than a bonafide oil company.
that’s a complicated way of saying: Delta Airlines purchased an oil refinery in an attempt to control their fuel costs. Traditionally air carriers purchase jet fuel on the open market and employ “hedges” to limit the cost of jet fuel. In the past few years the price of oil has increased rapidly and undermined the profits of airline companies. Last year fuel purchases accounted for 36 percent of Delta’s operating costs! When you consider the amount of labor it takes to run an airline and the expense of acquiring and maintaining a large fleet of aircraft, 36% is quite a staggering number. Delta’s purchase of the refinery is an attempt to remove jet fuel price volatility and stabilize their profits.
What are the potential benefits of owning a refinery? Delta will be able to easily supply fuel to their hubs in JFK and LaGuardia and throughout the northeast. Eventually the company hopes it will cover approximately 80% of its fuel needs in North America. Receiving fuel from one source will make it easier for Delta to monitor fuel quality. Furthermore, Delta will have effectively cut out one middleman in their supply chain.
This purchase can also be seen as introducing more competition to the refining space. Delta is potentially showing the airline industry an innovative way for them to stabilize costs. Other oil refiners may be forced to lower their prices, improve fuel quality or provide fuel in a more efficient way in order to prevent other airlines from following Delta’s lead.
Removing parts of the supply chain is known as vertical integration. Remember the steel companies and railroad companies of the late 19th century? They started buying up coal and coke mines, successfully driving down the costs of the inputs they needed to produce their primary products. Delta, by refining its own fuel, is expecting to create economic efficiencies to control the cost of their most expensive input and improve their bottom line.
Further, Delta argues that paying $180 million ($30 million of which is funding provided by the State of Pennsylvania) is such a cheap price that even if the venture fails it will not harm their primary business.
What are the potential problems of owning a refinery? Delta Airlines does not have the technological experience or expertise to run an oil refinery. Their skill is in transporting passengers and cargo in airplanes. Why do they think they would be able to do a better job of operating the refinery than ConocoPhillips? Better than a company whose business model is based on producing and distributing fuel from oil? One of the side-effects of an effective, free market, in my opinion, is the specialization of firms. Vertical integration does not lead to higher profits because the savings to the company of lower prices and smoother distribution will be outweighed by the lost production to be expected due to the foreign business. Delta’s purchase looks to prove this tenet wrong.
Second, while Delta has cut out the middleman of the refiner, they will still need to purchase oil, needed to refine into jet fuel, on the open market. The price of oil is the commodity that fluctuates in price. Refined fuel and gas usually follow the same direction as oil. Undoubtedly there is some markup after refining which will be saved. But if the goal is to shield the company from surges in the price of oil, the purchase of the refinery will not achieve that result.
Delta’s rebuttal: Delta will argue that they do not need to refine fuel in a “profitable” manner. Rather, they need to simply refine fuel so it is cheaper than if they had to purchase it on the open market. Any time they can remove a middleman from their supply chain, they are reducing markups and saving money.
Regarding expertise and experience, Delta will say that they are hiring the same people who were operating the refinery before. They will already come with the necessary knowledge to operate the facility in a cost effective way.
My thought: This seems like an unnecessary risk for Delta. Especially since fuel prices appear to be declining a bit. In my opinion they should continue to employ their strategy of hedging fuel costs and buying on the open market from the refining experts. If Delta can operate the plant smoothly and efficiently, it will certainly be a boon for the company. However, I think the chances of Delta making the refinery work better than ConocoPhillips are not good. As a Delta shareholder I am now looking for a good exit point of the stock.
There are plenty of other compelling reasons to own the company, particularly if you agree that fuel costs are going to decline. Time will tell if this was a smart move, but I predict it will end up being a mistake.
If you have been following the debate over the Ryan budget in Washington or keeping tabs on the events in Spain or Greece, you have undoubtedly heard of plans to cure fiscal malady through austerity. Advocates of this approach argue that reducing government expenses and debt will lead to great economic prosperity in the long term. Opponents say taking government funds out of the economy when it is in such a fragile state is the worst thing a policymaker can do.
that’s a complicated way of saying: Many governments spend more money then they take in. This is known as deficit spending. This is not necessarily a bad thing, but it is possible for their debt to get so large that they will no longer be able to operate. At least, the cost of borrowing money will be so greatly increased, that it becomes an obstacle. When this happens, countries must take action to get their balance sheets in order. There are two options: a) raise more revenue and b) reduce spending. In today’s world, most every politician insists that the focus must be on option b. They propose what are known as “austerity measures” which cut government spending. This results in fewer government employees, fewer government benefits and fewer government programs. By reducing the expense of running the government, the government deficit will shrink. At least that is the goal.
Some economists believe that austerity will result in increased economic activity. The “expansionary fiscal contraction” theory argues that a reduction in government spending and taxing will result in increased consumption and long-term growth. The idea being individuals will see the government taking action to reduce their debts and will therefore need less revenue from the citizenry in the future. The citizenry will then feel comfortable spending dollars set aside for future taxes on goods today. The research is split on the issue, as with all things related to economics.
What is the cost of introducing austerity measures? Notwithstanding the expansionary fiscal contraction theory, reductions in government expenditures tend to have immediate, negative consequences for the general economy of a country. This is because it is an integral part of the calculation of gross domestic product, a.k.a. GDP, which is the primary measure of a country’s economic health. The formula is as follows: GDP = Consumption + Investment + Government expenditures + (Exports – Imports). Simply put, if the government spends less money, GDP will go lower. Further, reductions in government welfare programs means fewer individuals will have those funds available to them and therefore will consume less. Further, reductions in government staff means those people will be without jobs/income and will likely consume less. Further, reductions in government subsidy programs mean certain industry, for example alternative energy, will be less economically viable and companies will not invest in developing those technologies as much. Further, reductions in funds for infrastructure projects, for example bridge repair, means fewer jobs available and less consumption by those workers.
It also should be noted that austerity measures tend to have the greatest impact on poorer people. They are the ones who rely on government programs (like welfare) and they are the ones who work jobs that are the first to be eliminated. As evidenced in Spain and Greece, the imposition of austerity measures tends to galvanize the young and workers to express their disdain by protest.
All of that being said, government inaction to cure their budget woes is significantly more problematic. As mentioned before, the cost of borrowing more money to operate will get higher and higher if the markets worry whether a country will be able to pay back their debts. If a country defaults, there is the potential for it to send a ripple throughout the world’s economies. Credit markets would freeze again. Trade and commerce would become incredibly expensive. It is likely the world would slip back into a recession. So governments must take action to cure their budget shortfalls and ensure they have enough to pay off their debtors. Just remember, there is no reason that policymakers should rely exclusively on reductions in government expenditures. They should consider all options, like raising revenue through higher taxes, to get out of the mess they are in.
This is cross-posted at it’s a free country, a WNYC blog. It’s a lot better dressed over there. Check it out by following the aforementioned link or just read it below:
The Supreme Court survived six hours of oral argument spanning four distinct issues related to the landmark Patient Protection and Affordable Care Act. On Friday, the Justices will convene for conference and for the first time reveal to each other which way they are leaning on the issues. By the end of June, all the haggling will be over and the Court will be ready to issue their decision.
I do not think — and the oral argument Monday seems to confirm — that the Justices will throw out the case on justiciability grounds. Everybody appears anxious to have a decision sooner rather than later. Since the Court took the case, they are going to want to rule on the major issues.
There are five votes we can be certain of: Justice Thomas will vote to strike the law. He will not buy the argument that the law is a tax as this would be a way for Congress to forever make an end-run around any limitation on their power. His view of the Commerce Clause is based on an interpretation that pre-dates the New Deal. In most cases that involve the Commerce Clause he goes out of his way to write, in my view, outlandish and extreme opinions (most notably his concurrence in U.S. v. Lopez).
Justices Ginsburg, Breyer, Sotomayor, and Kagan will uphold the law. The “liberal” block of the Court will be applying precedent that has been the rule for the past seventy years and was recently affirmed in a 2005 opinion, Gonzalez v. Raich. They will conclude that Congress acted rationally and reasonably to regulate the health care market which substantially affects interstate commerce.
Given that backdrop, lets start making predictions on the four toss-ups. They are Chief Justice Roberts and Justices Scalia, Kennedy and Alito. Of this group, Justice Kennedy has been the justice most likely to side with the “liberal” block to give them a majority in the past. In Raich he voted with them to uphold the Controlled Substances Act. He has not written many opinions on the issue of the Commerce Clause, so it is difficult to know with certainty what is most important to him. Many of his decisions on major cases appear to be driven by assessing trends in public opinion. But given how divided the country is over the ACA this does not really help us. In several of his decisions he also discusses fundamental rights and liberties which he has a fairly expansive interpretation of. My prediction is that he will vote to uphold the law because the underlying goal, improved access to health care for all, is something that he could construe as a fundamental right.
If Justice Kennedy sides with Justices Ginsburg, Breyer, Sotomayor and Kagan, I see both Chief Justice Roberts and Alito also siding with the majority. During their confirmation hearings they both said they were opposed to any “activist” court decisions. Voting to strike down this law, which exacted a large political price on supporters, would be the embodiment of an activist judge. They would be flouting years of precedent and putting the Court directly into the middle of the controversy. This would also allow the Chief Justice to assign the opinion to himself and construct a ruling narrower in scope.
Then there is the wild card: Justice Scalia. He voted to strike down laws regarding violence against women and guns around schools as being too attenuated from the Commerce Clause. But in 2005 he did not vote to strike down the Controlled Substances Act in Raich. Instead he wrote, “Congress may regulate even noneconomic local activity if that regulation is a necessary part of a more general regulation of interstate commerce.” This would seem to be a statement very favorable to those defending the ACA. Another consideration: In early March I attended a lecture by Justice Scalia at Wesleyan University. He lamented how quickly litigants run to court when Congress or the government does something they disapprove of instead of using the legislative or political process to reverse it themselves.
So add it all up, that is eight votes upholding ACA and only one striking it down.
Osborne Hazel
tacwos 