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Unemployment Rate Without Government Cuts: 7.1%



By Justin Lahart
May 8, 2012, 10:15 AM.

One reason the unemployment rate may [(. . .)] have remained persistently high: The sharp cuts in state and local government spending in the wake of the 2008 financial crisis, and the layoffs those cuts wrought.

The Labor Department’s establishment survey of employers — the jobs count that it bases its payroll figures on — shows that the government has been steadily shedding workers since the crisis struck, with 586,000 fewer jobs than in December 2008. Friday’s employment report showed the cuts continued in April, with 15,000 government jobs lost.

But the survey of households that the unemployment rate is based on suggests the government job cuts have been much, much worse.

In April the household survey showed that that there were 442,000 [doubtful, perhaps 42,000; looked and can't verify that number] fewer people working in government than in March. The household survey has a much smaller sample size than the establishment survey, and so is prone to volatility, but the magnitude of the drop is striking: It marks the largest decline on both an absolute and a percentage basis on record going back to 1948. Moreover, the household survey has consistently showed bigger drops in government employment than the establishment survey has.

The unemployment rate would be far lower if it hadn’t been for those cuts: If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%.

Ceteris is rarely paribus, of course: If there were more government jobs now, for example, it’s likely that not as many people would have left the labor force, and so the actual unemployment rate would be north of 7.1% [yah, and of course there'd have been no multiplier effect].

More important, even after making an adjustment for the volatility of the household survey, the starkly different message that it is offering up on the scope of job government losses is curious.

In the three months ended April, it shows that there were an average 20.3 million people engaged in government work, 1.2 million fewer than the average for the three months ended December 2008. That is more than double the job losses registered by the establishment survey.

One explanation is that the household survey is picking up government job losses that the establishment survey hasn’t — it can, generally speaking, be better at picking up shifts in the makeup of the job market.

Another explanation is that the household survey might be picking up jobs lost by people who worked at private companies that were reliant on government spending. A school bus driver, say, who was polled by the Labor Department for the household survey might say that he works for the government when he actually works for a bus company that’s contracted by the local school district. If the school district curtails spending and he loses his job, that would be counted as a government job loss in the household survey, even though it really isn’t.

Though of course it would still be a job lost as a result of government-spending cuts.

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More In Jobs

Depth of Recession Makes Recovery Look Worse
http://blogs.wsj.com/economics/2012/05/04/depth-of-recession-makes-recovery-look-worse/

Private Jobs Turn Positive for Obama Presidency
http://blogs.wsj.com/economics/2012/05/04/private-jobs-turn-positive-for-obama-presidency/

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Copyright ©2012 Dow Jones & Company, Inc.

http://blogs.wsj.com/economics/2012/05/08/unemployment-rate-without-government-cuts-7-1/ [with comments]


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America’s Corporations Made A Record $824 Billion Last Year, As Conservatives Claim Obama Is Anti-Business



By Pat Garofalo on May 7, 2012 at 10:50 am

A favorite conservative attack on President Obama is that his policies [ http://articles.marketwatch.com/2012-04-04/economy/31285731_1_republican-candidate-mitt-romney-obama-election-campaign ] — and even his personality [ http://video.foxnews.com/v/987274388001/home-depot-founder-obama-doesnt-like-business/ ] — amount to an assault on American businesses. “President Obama himself is the most anti-business president [ http://www.foxnews.com/opinion/2012/03/23/obama-is-most-anti-business-president-ive-ever-seen-and-its-killing-us/ ] in my lifetime. With rhetoric not befitting a president he has attacked oil companies, banks, airplane users, Wall Street and anyone who makes money,” wrote Gary Shapiro, president and CEO of the Consumer Electronics Association.

However, according to the latest data, President Obama has been very good for America’s biggest businesses. Last year, in fact, the Fortune 500 made a record $824 billion [ http://www.dailyfinance.com/2012/05/07/the-2011-fortune-500-the-big-boys-rack-up-record-setting-profit/ ], topping the previous record set before the Great Recession:

The Fortune 500 generated a total of $824.5 billion in earnings last year, up 16.4% over 2010. That beats the previous record of $785 billion, set in 2006 during a roaring economy. The 2011 profits are outsized based on two key historical metrics. They represent 7% of total sales, vs. an average of 5.14% over the 58-year history of the Fortune 500. Companies are also garnering exceptional returns on their capital. The 500 achieved a return-on-equity of 14.3%, far above the historical norm of 12%.

Of course, that return to pre-recession level earnings hasn’t translated into job or wage growth for America’s workers. In fact, inflation-adjusted wages fell last year [ http://www.huffingtonpost.com/2012/05/02/ceo-pay-worker-pay_n_1471685.html#s932005&title=Wage_Inequality ]. Big companies are also squeezing more productivity out of their workers, with annual revenue generated per worker increasing by more than $40,000 [ http://online.wsj.com/article/SB10001424052702303815404577331660464739018.html ] over the last five years. CEO pay, meanwhile, increased 15 percent last year [ http://thinkprogress.org/economy/2012/05/03/475952/ceo-pay-faster-worker-pay/ ].

This data also puts the lie [ http://thinkprogress.org/economy/2012/02/27/432749/buffett-corporate-tax-myth/ ] to the Republican claim that corporate tax cuts will spur businesses to hire. If all it took were extra cash, businesses would be hiring like crazy. However, they are clearly not doing so — and the effective corporate tax rate is already at a forty year low [ http://thinkprogress.org/economy/2012/02/03/418171/corporate-taxes-40-year-low/ ].

© 2012 Center for American Progress Action Fund (emphasis in original)

http://thinkprogress.org/economy/2012/05/07/479130/record-corporate-profits/ [with comments]


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Texas-Sized Safety Net Supports County Voting 83% Against Obama


Tractors and farming equipment in West Texas.
Eddie Seal/Bloomberg

Video [embedded]
Texas Farmers on Government Subsidies

Chart: Texas Farmers Embrace Federal Subsidies
http://www.bloomberg.com/chart/iow83GmD9ANA/

By Alan Bjerga - Apr 4, 2012 11:01 PM CT

John Loepky’s story is one of Texan self-reliance. Starting out in the mid-1980s with less than $100 in his pocket, Loepky first found work on farms and by the mid- 1990s owned his own land. Today he coaxes cotton, peanuts and wheat out of 3,300 acres of parched soil in Gaines County [ http://www.co.gaines.tx.us/ips/cms/ ], getting as much as $2.4 million in revenue on a good year.

In bad years -- like 2011 -- he can rely on the government for help. Record-low rainfall triggered record-high crop insurance payouts of $125 million last year to local farmers, with taxpayers subsidizing $30.8 million of the $46.9 million of the premiums paid in the county that year. Loepky received about $1 million, which paid half of his loans for the year.

Landowners such as Loepky who rely on the federal safety net are less fond of the man who heads the government offering it. Gaines voters backed John McCain -- who voted against reauthorizing farm payments in 2008 -- over subsidy-supporting Barack Obama by 83 percent to 16 percent, the most lopsided margin among the top 10 aid-receiving counties in the U.S.

“Republicans understand business better than Democrats,” says Loepky, 47. “We need strong banks, low taxes. We need a safety net for farmers, but we need other things too.”

The landscape in Gaines, a west Texas county on the border with New Mexico, features dry, wind-swept farmland punctuated by oil rigs owned by Exxon Mobil Corp. (XOM) and Hess Corp. (HES) Crude, the area’s biggest industry, is as plentiful as water is scarce. Alcohol, at least officially, isn’t present at all. The county has been legally dry since 1944.

‘Ugly’ for Democrats

These days, Democrats are as hard to find as a drink. Gaines County last voted for a Democratic presidential candidate in 1976, when Jimmy Carter won Texas with 51.1 percent of the vote over President Gerald Ford. Carter won 53 percent [ http://uselectionatlas.org/RESULTS/state.php?year=1976&fips=48&f=0&off=0&elect=0 ] of the Gaines County tally that year.

No Democratic White House nominee has won the state or county in the last eight general elections, and not a single Democrat has filed to run for any county office in next month’s primary. The local congressman, Randy Neugebauer, describes himself on his website as a supporter of “conservative principles” who won a 100 percent rating in 2009 by the American Conservative Union.

“When it came to the filing period I felt like the ugly girl at the dance” trying to recruit Democrats, says Ray Savage, chairman of the Gaines County Democratic Party. “I don’t think this demonstrates an informed electorate.”

Political Shift

The political shift hasn’t stopped the flow of payments to the county’s cotton and peanut growers who have relied on aid dating to the 1930s Dust Bowl [ http://www.weru.ksu.edu/new_weru/multimedia/dustbowl/dustbowlpics.html ] and Great Depression. Gaines County farmers took $797 million [ http://farm.ewg.org/region.php?fips=48165 ] in payments from 1995 to 2010, including price supports, soil-conservation programs and crop- failure compensation, according to a database compiled by Washington-based lobby the Environmental Working Group. That puts it second in the nation behind Fresno County, California, as a recipient of federal funds.

Farmers use the programs mainly to give banks confidence that the loans to finance planned crops will be paid back regardless of weather or commodity prices, says Delmon Ellison, Jr. who farms 4,000 acres of cotton, peanuts and wheat in the area.

By making sure that acreage stays in production and farms don’t fail, “you’re making food affordable in large metropolitan areas,” Ellison says.

Obama ‘Disaster’

Wayne Mixon, the 74-year-old mayor of Seminole [ http://seminoletxchamber.org/ ], the county seat, says he has “nothing good to say” about Obama, who he considers a “disaster” as president. “He is continually throwing money at problems that will probably fix themselves,” he says.

In Gaines County, the mere mention of the president’s name elicits responses from dismissal to disdain. Democrats have almost disappeared, says Jim Hightower, Texas’s agriculture commissioner from 1983 until 1991, when he was unseated by current governor -- and former Democrat -- Rick Perry. The party is seen in west Texas as lacking passion for those who work the land, he says.

“Texans like their politics hotter than high school love,” says Hightower, now a columnist and radio commentator [ http://www.jimhightower.com/ ]. “They really want you to get into it.”

Many farmers today see themselves as small-business owners, says Cindy Rugeley [ http://www.depts.ttu.edu/politicalscience/mpa/Faculty/Rugely.php ], a political science professor at Texas Tech University in Lubbock. Republican identification with low taxes and less regulation appeals to them; meanwhile, government payments that have existed for generations “are institutionalized -- they’re part of business,” she says.

Complex System

Since their establishment under Franklin D. Roosevelt, farm subsidies [ http://www.fsa.usda.gov/FSA/webapp?area=home&subject=landing&topic=landing ] have evolved into a complex system of crop- specific payments, land improvement grants, loan programs and insurance subsidies for companies including Wells Fargo & Co. to protect growers from low prices and weather losses.

Crop output in Gaines County depends on the weather, and in recent years farmers have suffered from extremes. In 2004, 33.18 inches of rain fell on the county, the wettest since 1941. Last year rainfall was 3.51 inches, about half the amount recorded in 1934, the driest since Dust Bowl days.

Freak weather patterns nationwide triggered unprecedented insurance payouts last year. Total U.S. crop insurance payouts topped $10 billion for the first time, Overland Park, Kansas- based National Crop Insurance Services said in February.

In Texas, crop losses totaled $7.62 billion in 2011, including $2.2 billion for cotton growers, Texas A&M University said in March. Texas cotton ginnings fell 55 percent from the previous year to 3.49 million bales.

Farming Revival

Farming in west Texas has survived in the face of such weather woes. Gaines County [ http://www.tshaonline.org/handbook/online/articles/hfs06 ] saw a farming revival beginning in the late 1970s with the arrival of dozens of German-speaking Mennonites from Mexico who bought up fallow land and began lucrative peanut and cotton farms. Their migration contributed the bulk of the county’s 21 percent population jump to 17,526 [ http://quickfacts.census.gov/qfd/states/48/48165.html ] in the past decade, according to Mixon.

Loepky, a Mennonite and the middle one of 13 children, arrived in Texas illegally in 1984 from Chihuahua, Mexico, and became one of almost 3 million people given legal residence through the 1986 amnesty program signed by Ronald Reagan with bipartisan support. He became a citizen in 1997 and says a similar program would help him recruit farm workers.

“I owe Ronald Reagan a big thank you,” Loepky says.

Spanish, German, English

On a blindingly bright March day outside Seminole, Loepky drives through his holdings in a 2004 Chevrolet Silverado pickup that’s seen 166,000 miles. Checking the center-pivot irrigators that dispense the precious water, Loepky speaks Spanish to farm workers, German in a phone call with his wife, and switches back to English to talk to a visitor.

Loepky says subsidies are as important to survival as water, though he accepts that Washington eventually will reduce payments. Congressional agriculture committees have bipartisan support for a $23 billion cut in subsidies over 10 years. House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, last month proposed $30 billion in farm aid cuts over a decade, a plan praised by Republican presidential contender Mitt Romney as a “bold step.” Ryan’s reductions are similar in size to those proposed by Obama in his 2013 budget.

Federal policies have helped guide Loepky’s business decisions. In 2009, he stopped cultivating chili peppers in part because he couldn’t find workers for the labor-intensive plant and federal crop insurance didn’t cover the crop. Wanting to diversify against farm risk, he established JNL Steel Components Inc. [ http://www.jnlsteel.net/ ], a building-materials business near his farm last year that employs his wife, his three children and seven other workers.

“I’ve been able to make this work for the past 20 years, even though I’ve lost some pretty good money some years,” Loepky says. “I will continue to try my best.”

To contact the reporter on this story: Alan Bjerga in Washington at [e-mail]
To contact the editor responsible for this story: Jon Morgan at [e-mail]

©2012 BLOOMBERG L.P.

http://www.bloomberg.com/news/2012-04-05/texas-sized-safety-net-supports-county-voting-83-against-obama.html [with comments]


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Number of the Week: Nice Place to Do Business, but Wouldn’t Want to Live There


Hawaii gets high marks for well being of its people but ranks low as a place to do business.
Bloomberg News

By Phil Izzo
May 5, 2012, 5:00 AM

40: The difference between Hawaii’s state rank as a place to do business (#41) and its rank in well being of resident (#1)

The best states in which to do business aren’t necessarily the best places to live.

The latest issue of Chief Executive magazine [ http://chiefexecutive.net/best-worst-states-for-business-2012 ] ranks the best and worst states to do business based on a survey of 650 CEOs (scroll down for the full list). Respondents were asked to grade states in which they do business in a number of ways, including tax and regulation, quality of work force and living environment. Texas and Florida ranked first and second, respectively.

Texas and Florida also rank highly — third and fourth, respectively — as homes for billionaires, according to Forbes’ list of the 400 richest people [ http://www.forbes.com/forbes-400/ ]. But just because a state is good for business, doesn’t mean business leaders are making their homes there. California and New York — in last and second-to-last place in the rankings for business — are the first and second most popular places for billionaires to live.

Being good for business also doesn’t necessarily mean good for residents. Gallup produces a Well-Being Index [ http://www.well-beingindex.com/ ] for states, which tracks life evaluation, emotional health, physical health, healthy behaviors, work environment and basic access. Among Chief Executive’s top ten states for doing business, just one — Utah — is also in the top 10 for well being. Texas ranks 27th and Florida is 41st. Meanwhile, the top ranked state for well being — Hawaii — is in the bottom 10 for states to do business.

CEO sentiment can’t be ignored, but perhaps the most important metric for business is how the states rank in economic growth. By that measurement, some of the states popular with chief executives managed to post strong expansions in 2010 [ http://www.bea.gov/newsreleases/regional/gdp_state/gsp_newsrelease.htm ]. Indiana, Tennessee and North Carolina were in both top 10s. But some of the unpopular states posted among the strongest growth. New York, Massachusetts and Oregon were in the bottom 10 places to do business, but the top 10 states for growth.

Attracting business is an important goal for states looking to create opportunities and jobs for their people. They just need to be sure they aren’t sacrificing citizens’ quality of life to improve the quality of business.

[complete 50-state table included]

Copyright ©2012 Dow Jones & Company, Inc.

http://blogs.wsj.com/economics/2012/05/05/number-of-the-week-nice-place-to-do-business-but-wouldnt-want-to-live-there/ [with comments]


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Memo to Would-Be Members of the 1%: Move to the Northeast or Mid-Atlantic

By CATHERINE RAMPELL
Published: May 9, 2012

Reaching for the American dream? Your best chances are probably in New York, New Jersey or Maryland.

Those states are best at helping Americans move up the income ladder, both in absolute terms and relative to their peers, according to a groundbreaking new study [ http://www.pewstates.org/research/data-visualizations/economic-mobility-of-the-states-interactive-85899381539 ] from the Economic Mobility Project [ http://www.pewstates.org/projects/economic-mobility-project-328061 ] at the Pew Center on the States.

Generally speaking, states in New England and the mid-Atlantic had the most upwardly mobile residents, whereas states in the South had the least mobile populations.

The study, which appears to be the first to try to measure economic mobility at the state level, looked at the incomes of Americans in each state over a 10-year period using data from the Census Bureau and the Social Security Administration. Researchers tracked a group of nationally representative Americans who were age 35 to 39 at any point from 1978 to 1997.

They then examined how each individual’s earnings had changed exactly one decade after the initial income number was collected.

Across the country, the income of the typical American rose by about 17 percent in inflation-adjusted terms during that time. There was great variation among the states, though.

In a handful of states, including New York, Utah and Massachusetts, residents’ incomes rose at least 20 percent over the course of a decade. On the other hand, in Alabama and South Carolina, average incomes rose only 12 percent after adjusting for inflation.

The study, by Erin Currier and Diana Elliott, also considered whether people were able to move up the income ladder relative to their peers — that is, how common is the modern-day Horatio Alger hero, the upstart who displaces people who are more privileged?

To measure this “relative upward mobility,” the authors focused on people in the bottom half of the income distribution and tracked whether those individuals were able to move up at least 10 percentiles.

For example, a person who started out in the 20th percentile would have to climb to at least the 30th percentile after a decade in order to be considered “upwardly mobile” in this study.

Across the country, about a third of Americans who started in the bottom half in income were able to move up that much.

At the more upwardly mobile end, in Connecticut, 40 percent of the state’s residents who started in the bottom half moved up at least 10 percentiles over the course of a decade.

At the other extreme, in North and South Carolina only about a quarter — 26 percent — of people who started at the bottom were able to lift themselves up that much.

The report had similar measures looking at downward mobility — that is, whether people in the top half of the income distribution dropped by at least 10 percentiles over the course of a decade.

Using all three metrics together — absolute income gains, relative upward mobility and relative downward mobility — the researchers determined that New York, New Jersey and Maryland performed best in the country. They were, in fact, the only three states that outperformed the country as a whole on all three measures.

Louisiana, Oklahoma and South Carolina were the only states that performed worse than the rest of the country on all three measures.

The states with more upwardly mobile populations were more likely to be liberal-leaning states, and those with more stagnant populations were more likely to be conservative-leaning states. But it is not clear if that correlation is causal; the report does not explain how public policy or other factors may have affected people’s chances of evolving from rags to riches.

“It was beyond the scope of the study to look at why states performed the way they did,” Ms. Currier said. “What I can say is that our previous research has found some particular drivers of economic mobility at the individual level, including education, savings and assets, and neighborhood poverty during childhood.”

The researchers found at least one other factor that correlated with higher income mobility: the willingness to move to another state. People who moved to another state were more likely to get a big income increase, presumably because higher-income opportunities were part of the reason for migrating in the first place.

The report did not find that high turnover — having a lot of people move in, or a lot of people move out — affected how states performed.

“We thought there might be some sort of a brain drain effect, that maybe the best and the brightest move out,” Ms. Currier said. “Our sample — and other data — showed that in general people are unlikely to move out of birth state. As a result, the aggregate level of moving out or moving in or staying put didn’t actually affect any state as whole.”

© 2012 The New York Times Company

http://www.nytimes.com/2012/05/10/business/northeast-and-mid-atlantic-states-most-upwardly-mobile.html


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U.S. Millionaires Told Go Away as Tax Evasion Rule Looms


A view from SkyPark atop Marina Bay Sands in Singapore.
Sam Kang Li/Bloomberg

By Sanat Vallikappen - May 8, 2012 10:46 PM CT

Go away, American millionaires.

That’s what some of the world’s largest wealth-management firms are saying ahead of Washington’s implementation of the Foreign Account Tax Compliance Act, known as Fatca, which seeks to prevent tax evasion by Americans with offshore accounts. HSBC Holdings Plc (HSBA), Deutsche Bank AG, Bank of Singapore Ltd. and DBS Group Holdings Ltd. (DBS) all say they have turned away business.

“I don’t open U.S. accounts, period,” said Su Shan Tan, head of private banking at Singapore-based DBS, Southeast Asia’s largest lender, who described regulatory attitudes toward U.S. clients as “Draconian.”

The 2010 law, to be phased in starting Jan. 1, 2013, requires financial institutions based outside the U.S. to obtain and report information about income and interest payments accrued to the accounts of American clients. It means additional compliance costs for banks and fewer investment options and advisers for all U.S. citizens living abroad, which could affect their ability to generate returns.

“In the long run, if Americans have less and less opportunities to invest overseas, it would be a disadvantage,” Marc Faber, the fund manager and publisher of the Gloom, Boom and Doom report, said last month in Singapore.

The almost 400 pages of proposed rules issued by the U.S. Internal Revenue Service in February create “unnecessary burdens and costs,” the Institute of International Bankers and the European Banking Federation said in an April 30 letter to the IRS, one of more than 200 submitted to the agency. The IRS plans to hold a hearing May 15 and could amend how and when some aspects of the rules are implemented. It can’t rescind the law.

Bank Transparency

The government needs to be tougher on offshore tax crimes than it has been, said U.S. Representative Richard Neal, a Massachusetts Democrat and one of the original sponsors of the legislation. Fatca, introduced after Zurich-based UBS AG (UBSN) said in 2009 that it aided tax evasion by Americans and agreed to pay $780 million to avoid prosecution, is already helping to improve banking transparency, he said.

“People should know, and the IRS should know, what money is being held offshore and for what purpose,” Neal said. “I don’t think there’s anything unreasonable about that.”

UBS, the world’s biggest non-U.S. private bank according to London-based industry tracker Scorpio Partnership Ltd., said in 2008 it would discontinue offshore accounts for U.S. citizens. The firm now refers them to its wealth-management offices in the U.S., or to its Swiss Financial Advisers unit, which complies with U.S. and Swiss regulations, said Serge Steiner, a spokesman for UBS. The company continues to provide Americans outside the U.S. with services other than securities investments, including consumer and commercial loans, foreign-currency spot trading and precious-metals transactions, he said.

‘Too Complex’

Investments in products offered by third parties that non- U.S. citizens can purchase through UBS or other banks also may be restricted.

“Most of the hedge funds I know in Asia won’t take American clients,” said Faber.

Bank of Singapore, the private-banking arm of Oversea- Chinese Banking Corp. (OCBC), ranked strongest in the world for the last two years by Bloomberg Markets magazine, has turned away millions of dollars from Americans because it doesn’t want to deal with the regulatory hassle, according to Chief Executive Officer Renato de Guzman. The bank had $32 billion under management as of the beginning of the year.

“It’s too complex, too challenging,” de Guzman, who at 61 has more than 35 years of banking experience, said in an interview in Singapore in March. “You probably should have a dedicated team to handle them or to understand what can be done or what cannot be done.”

Rejecting Americans

At industry meetings he attends in Singapore, not accepting U.S. clients is “quite a prevailing sentiment,” de Guzman said. There are 18 private banks operating in Singapore, including units run by UBS, Credit Suisse Group AG, Deutsche Bank (DBK) and HSBC, he said.

“We have enough business in Asia, so we don’t want to make our lives too difficult,” de Guzman said.

Asia has the world’s fastest-growing number of people with more than $1 million in investable assets, according to a report last year by Bank of America Corp. (BAC) and Capgemini SA. Its number of millionaires climbed 9.7 percent in 2010 to 3.3 million people, higher than the 8.6 percent growth in North America. The combined wealth of Asian millionaires increased to $10.8 trillion, topping Europe for the first time, the report said.

Singapore is Asia’s largest wealth-management center, with $512 billion in offshore assets in 2010, data compiled by the Boston Consulting Group show. Bank of America is the world’s No. 1 wealth manager, with $1.9 trillion under management, followed by Morgan Stanley and UBS, with $1.6 trillion, according to Scorpio.

HSBC, Deutsche Bank

HSBC decided last July that it would no longer offer wealth-management services to Americans from locations outside their home country after tax authorities stepped up a probe of the London-based bank’s U.S. clients.

Americans would be “better served” by private bankers in the U.S., Goh Kong Aik, a spokesman for the firm in Singapore, said in an e-mail. He declined to say whether those who already have private-banking accounts abroad will be allowed to remain customers, except that they would be helped through an undefined “transition process.”

Deutsche Bank said it terminated securities accounts held abroad by people with U.S. residency as of mid-2011. The action didn’t include checking or savings accounts and didn’t affect citizens living outside the U.S. The Frankfurt-based bank said “only a small number of customers” were affected.

Spokesmen for Credit Suisse, France’s BNP Paribas SA (BNP) and Amsterdam-based ABN Amro Bank NV, also among the top 10 non-U.S. global wealth managers, said their banks are studying the issue and haven’t decided what to do with American account holders.

Collateral Damage

“Bank accounts, investment accounts, mortgages and insurance policies are being refused to American clients, and those with accounts are seeing them closed or have been threatened with closure,” Marylouise Serrato, executive director of American Citizens Abroad, a Geneva-based organization, wrote in an e-mail.

U.S. citizens who live in countries that aren’t served by U.S. banks may find themselves unable to bank at all, and implementation of the law in its current form could cause collateral damage to American businesses abroad, she said.

“Americans either will not be allowed to enter into international partnerships or live and work overseas, and will be replaced by foreign nationals who do not have these limitations,” Serrato wrote. “The extensive reporting requirements of Fatca will be destructive to those who wish to do business internationally as well as to those Americans who are legitimately living and working overseas.”

‘Turned Away’

That view is shared by Richard L. Weisman, Hong Kong-based head of law firm Baker & McKenzie LLP’s global tax practice.

“U.S. expatriates already face severe U.S. tax rules related to their non-U.S. income and investments,” Weisman said. “Fatca will increase the extent to which they are turned away by non-U.S. financial institutions.”

Tan of DBS said she refers Americans seeking private- banking services to U.S. institutions with operations in Singapore such as Citigroup Inc. (C), Bank of America, Morgan Stanley, Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co., which are able to open securities accounts for Americans because they’re regulated by U.S. authorities. Such accounts allow purchases of investment products without restricting Americans to cash and time-deposit accounts.

While that may be easy for Americans in Singapore, those who live elsewhere face obstacles. Before Fatca, U.S. citizens in Bangkok or Manila could find investment opportunities through non-U.S. banks such as HSBC. Now their only option is to fly to cities where U.S. firms operate.

Limited Choices

If Americans choose to bank with a non-U.S. firm such as HSBC, their investment choices are limited. At the HSBC branch in the bank’s Asia regional headquarters in Hong Kong, Americans can hold only savings deposits. They’re prohibited from opening accounts to trade local stocks or buy products available to non- U.S. customers, including 45 equity funds investing in China or other geographies and industries. There’s only one comparable emerging-markets equity option available on HSBC’s U.S.-based investors’ website.

Financial institutions that choose not to accept American customers still must determine whether new or existing clients are so-called U.S. persons in order to comply with Fatca, according to Michael Brevetta, director of U.S. tax consulting at PricewaterhouseCoopers LLP in Singapore.

The definition includes citizens, green-card holders and non-Americans deemed U.S. residents by being present in the country for at least 183 days over a three-year period, which makes them subject to U.S. tax on their worldwide income, according to the IRS.

Compliance Costs

The compliance costs for banks, asset managers and insurance companies “could stretch into the billions of dollars,” Brevetta said. Private-banking firms in Hong Kong and Singapore already have operating costs between 88 percent and 90 percent of their revenue, compared with 70 percent at Swiss banks, PricewaterhouseCoopers estimated in a September report.

Penalties for not complying will be stiff. Non-U.S. firms that don’t make required disclosures will be subject to 30 percent withholding of certain dividends, interest or proceeds from the sale of assets they or their customers receive from U.S. sources, according to Baker & McKenzie’s Weisman, who has conducted workshops and seminars on the proposed rules for current and potential clients in Hong Kong and Singapore.

“Overwhelmingly, financial institutions outside the U.S. don’t like it, for obvious reasons,” Weisman said, calling the withholding tax a “stick” the U.S. is wielding. “The U.S. is outsourcing a tax-compliance function, which is enormously expensive.”

Renouncing Citizenship

Americans who don’t comply with Fatca are deemed “recalcitrant,” and income they receive from U.S. sources also is subject to a 30 percent withholding tax, said Jason Choi, a Singapore-based tax lawyer with Latham & Watkins LLP.

Renouncing citizenship is an option chosen by increasing numbers of Americans. A record 1,780 gave up their U.S. passports last year compared with 235 in 2008, the IRS reported.

Royal Bank of Canada (RY), the sixth-biggest wealth manager with $435 billion under management as of the beginning of 2011, said it sees an opportunity as competition is exiting, including in emerging markets, where it manages $60 billion.

“We are one of the few wealth managers to hold a Securities and Exchange Commission license offering U.S.- compliant investment advice in Switzerland and London and see an opportunity in accepting tax-compliant U.S. persons as clients outside of the U.S.,” said Barend Janssens, the Singapore-based head of the bank’s wealth-management unit for emerging markets.

Tax Evasion

Coutts, the wealth division of U.K. government-owned Royal Bank of Scotland Group Plc, plans to comply with Fatca and to continue accepting tax-compliant U.S. persons, according to Tim Winter, associate director of the U.S. Competence Centre at Coutts. The London-based bank has invested since July 2010 in a “global program of work established to support the implementation of Fatca,” he said in an e-mail.

The Swiss government has been in talks for more than a year with U.S. authorities, who, after obtaining data on about 4,700 UBS clients, are now investigating 11 other firms, including Zurich-based Credit Suisse (CSGN) and Julius Baer Group Ltd., for alleged assistance in U.S. tax evasion.

Credit Suisse continues to “work hard” to resolve the probe, CEO Brady Dougan said in an interview April 25. Julius Baer exited its U.S. private-client business between 2009 and 2011, said Jan Vonder Muehll, a bank spokesman in Zurich.

Wegelin Forfeiture

Wegelin & Co., a Swiss private bank established in 1741, became the first Swiss lender to face criminal charges in the U.S. crackdown on offshore firms suspected of abetting tax evasion. It had to sell its assets in January to Switzerland’s Raiffeisen Group to save its non-U.S. business before the U.S. indicted the firm in February. The St. Gallen-based private bank helped Americans hide more than $1.2 billion in assets and evade taxes, wooing clients spurned by UBS, according to an indictment filed in federal court in New York.

U.S. District Judge Laura Taylor Swain ordered Wegelin to forfeit $16 million on April 24, allowing the U.S. government to take the amount from Wegelin’s U.S. account, held at UBS in Stamford, Connecticut. Albena Bjoerck, a spokeswoman for Wegelin, declined to comment.

Spokesmen for Citigroup, Bank of America, Morgan Stanley, Goldman Sachs and JPMorgan all declined to comment on how Fatca is affecting their business, with some citing company policies not to discuss government regulation. Standard Chartered Plc (STAN), France’s Societe Generale SA, Barclays Plc (BARC) and Hong Kong-based Hang Seng Bank Ltd., which all have wealth-management businesses, also declined to comment.

‘Pain for Americans’

The restrictions on products available to Americans may not matter to a savvy investor, according to Hugh Young, who helps manage $70 billion in Asian equities in Singapore for Aberdeen Asset Management Plc.

“The financial institutions can restrict you from some of the best products, but you have others of the best,” he said.

Still, the limitations create complications that act as an investment deterrent, said Philip Marcovici, a retired U.S. tax lawyer who advises wealthy families and governments.

“It’s a pain for Americans to invest in markets outside of the U.S.,” he said.

To contact the reporter on this story: Sanat Vallikappen in Singapore at [e-mail]
To contact the editor responsible for this story: Chitra Somayaji at [e-mail]

©2012 BLOOMBERG L.P.

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Occupy London Tour Shows Bankers Profiting Amid Poverty

By Simon Clark - May 8, 2012 6:02 PM CT

Bank security guards in London lock the doors when they see Liam Taylor coming.

At a time of protests in March 2011, the secondary school teacher and a dozen others pushed through the revolving doors of Barclays Plc (BARC)’s headquarters in the Canary Wharf financial district of London. He led placard-waving chants to protest bonuses and tax avoidance.

The British bank was handing out 65.5 million pounds ($106 million) to eight executives, including Chief Executive Officer Robert Diamond, whom Taylor has never met. Meanwhile, the council of the poverty-mired surrounding London neighborhood of Tower Hamlets was slashing 72 million pounds from its taxpayer- funded budget.

Here, where two worlds collide, the 26-year-old umbrella- toting teacher plays an active role in the Occupy London protest movement. Tower Hamlets has one of the highest rates of young people receiving jobless benefits in London, the highest proportion of poor children and older people in England and the worst child poverty in the U.K.

In its midst is Canary Wharf, a privately owned, guarded riverside oasis of wealth where Taylor leads Occupy tours every couple of weeks. Nine of the world’s biggest banks trade, lend and advise clients here. His message: This is where the wealthy 1 percent enrich themselves by avoiding tax, racking up debt, selling risky investments and using public funds for bailouts. They do so at the expense of the remaining 99 percent, who bear the burden of higher taxes and fewer public services, he says.

World’s Highest Salaries

“These huge glass towers you can see around us are all in Tower Hamlets, and yet Tower Hamlets remains the borough with the highest rate of child poverty,” says the soft-spoken Taylor, who has blue eyes and cropped red hair. “The bonuses are being paid out of money which should have been paid in tax to provide public services.”

(To see data, photos and video of Tower Hamlets and Canary Wharf, click here.)

Canary Wharf is the base for companies that pay some of the highest salaries in the world. They include Barclays and HSBC Holdings Plc (HSBA) of the U.K., Switzerland’s Credit Suisse Group AG (CSGN) and the European operations of U.S.-based Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley (MS) and Bank of America Corp. (BAC)

Protests over economic inequality erupted around the world again last week. After a year of Occupy and trade union demonstrations in London, the sense of unfairness is growing as support for the U.K. government erodes. The ruling coalition of Conservative and Liberal Democrat parties lost hundreds of seats in last week’s local-council elections, although London’s Conservative Mayor Boris Johnson retained office.

Scale of Inequality

British austerity measures are taking effect just as the U.K. enters its first double-dip recession since the 1970s. The budgets of Tower Hamlets and the deprived boroughs of Hackney and Newham were cut the most among London neighborhoods last year while wealthy Richmond-upon-Thames’s was reduced the least.

Income inequality among working-age people has risen faster in the U.K. than in any other wealthy Western country since 1975, according to the Paris-based Organization for Economic Cooperation & Development. London and the finance industry are the driving forces behind the rise, according to Mark Stewart, an economics professor at the University of Warwick.

“There is a groundswell of increasing concern with the scale of inequality,” says Richard Wilkinson, coauthor with Kate Pickett of the book, “The Spirit Level.” They make the case that more-unequal societies have lower life expectancies and more mental illness, violence, teenage pregnancies and incarceration, resulting in less trust.

‘Out of Stock’

Nowhere is the divide between rich and poor more evident than in Tower Hamlets and Canary Wharf. Many of Canary Wharf’s 95,000 workers travel to and from the skyscrapers on trains that pass under or over the 240,000 residents of Tower Hamlets. Taylor’s students say commuters on trains look right through them. A four-lane highway and railway separate Canary Wharf from the rest of the borough. There are guarded checkpoints for cars.

Canary Wharf’s shiny underground malls are decked with advertisements for products including a Citigroup (C) account for those with an “international lifestyle.” The grubby streets of Tower Hamlets feature empty spaces covered with graffiti: “Sorry! The lifestyle you ordered is currently out of stock.”

Taylor moved to Tower Hamlets in 2008 and soon began teaching history and citizenship as the financial crisis unfolded. He had just graduated from one of the oldest colleges in one of the most elite universities in the world -- Balliol College of Oxford University -- where “The Wealth of Nations” author Adam Smith and the welfare-state pioneer William Beveridge studied.

U.K. Bank Rescue

The son of government-employed social workers, Taylor was born the same year that former Prime Minister Margaret Thatcher’s Big Bang financial deregulation triggered a massive expansion of the U.K. banking industry. That spurred demand for the giant trading-floor spaces of Canary Wharf.

Taylor watched as lenders took multibillion-pound government rescues. Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc (LLOY) got bailouts in October 2008. The British government propped up banks with 1 trillion pounds in capital and guarantees. While Barclays didn’t cede an equity stake to the U.K., the bank did benefit from government liquidity support along with all lenders, former CEO John Varley said in 2010.

The gross domestic product of the U.K. is still more than 4 percent below its peak in early 2008, while net debt has almost doubled to 1.02 trillion pounds since then. In May 2010, the Conservative Prime Minister David Cameron took office with a mandate to halt the government’s debt spiral.

Sense of Injustice

Cameron pushed through cuts to spending on public services including hospitals and schools such as Taylor’s, where about 60 percent of students are poor enough to get free meals. Taylor’s sense of injustice boiled into anger, and he evolved into a political campaigner convinced that the finance industry creates inequality rather than wealth.

“My entire life I’ve been told that banks are a good thing, that they bring lots of money into the economy and that we shouldn’t do anything about them,” Taylor says. “It’s time for a bit of hearing the other side of the argument.”

Tower Hamlets takes its name from the villages that surrounded the Tower of London, the famous 946-year-old fortress. It was the site of gatherings during the Peasant’s Revolt of 1381. The modern borough is crammed with shops, cafes and street markets selling vegetables and garments such as brightly-patterned kaftans. More than 20 percent of the population is of Bangladeshi origin.

Canary Wharf bankers looking northeast can see the concrete blocks of the Robin Hood Gardens estate, where Bangladeshi women grow spinach in flowerbeds and where laundry dries on balconies. Terraced houses and government-owned flats are packed in among historic buildings that survived bombs in the Battle of Britain.

Canary Wharf Jobs

The borough stretches north to the stadium built for this summer’s Olympic Games and west to the City of London, the ancient financial district built around St. Paul’s Cathedral and the Bank of England. While the Olympics are managed from Canary Wharf by former Goldman Sachs Group Inc. (GS) executive Paul Deighton, none of the events will take place in Tower Hamlets.

Until the 1980s, Canary Wharf was the largely derelict site of disused River Thames dockyards. Construction of one of the world’s biggest financial centers was a pioneering “regeneration project,” according to Howard Dawber, strategic adviser to Canary Wharf Group Plc, the company that manages and develops the district. Companies there employ about 9,000 people from Tower Hamlets, and Canary Wharf has generated 720 million pounds of contracts for local businesses, he says.

People from the two worlds don’t know much about each other. When a reporter asked 50 people in Canary Wharf on Feb. 20 which borough they were in, 37 said they didn’t know.

Welfare Overhaul

“It’s a bit strange that this is all part of Tower Hamlets, because it’s not poor,” said Eloise Hillman, an information technology consultant, as she walked among the skyscrapers of Canary Wharf, where she works. “It’s not run- down, and it’s banking and financial and rich.”

From the other side of the tracks in Tower Hamlets, Barbara Williams can see the tower-top signs of capitalist icons such as Citigroup from her balcony. Walking through the streams of suited workers makes her feel “worthless,” she says.

“They think they’re above me, that I’m not worthy to share the same air as them,” says Williams, 33, an unmarried mother of two. She has lived on government welfare since bearing her first child at the age of 17.

With no savings and 13,000 pounds of debt, Williams estimates she will have to earn 24,000 pounds a year to maintain her standard of living without government benefits. In April, she found a job at a company that provides holidays for the disabled. It pays 16,000 pounds a year.

“We didn’t cause the crisis,” Williams says. “The government and the people with the high-paid jobs caused it.”

Royal Navy Veteran

The aim of the welfare overhaul is to “recreate a culture of independence and self-reliance,” said David Freud, the government minister for welfare reform who is a great-grandson of Sigmund Freud and a former UBS AG (UBSN) investment banker, in a speech in April. The system has trapped people in joblessness and benefit dependency, he said.

That isn’t the way John Jones sees the benefit changes. Wounded twice serving in the Royal Navy during World War II, he worked 50 years as a plumber and paid taxes to fund the British welfare state. Now blind, with prostate cancer and arthritis of the hands, the 91-year-old says he feels let down.

A representative of Tower Hamlets visited to tell him the borough council would discontinue his midday caregiver’s visit, Jones says. That means no warm food or drink until evening.

“She said it’s all to do with the money,” says Jones, who keeps the ashes of his wife in an urn by a sofa. “I was very upset about it.”

Taylor’s School

The cutbacks may bring wrenching change to the borough, says Tower Hamlets Mayor Lutfur Rahman. A new cap on housing benefits may force 6,000 people to move, he estimates. While the mayor declines to discuss Jones’s case, he says he wants to protect the most vulnerable.

At Langdon Park School where Taylor teaches, the spending cuts became evident soon after Cameron gained power in May 2010. Teacher pay was frozen. A multischool program to increase participation in sports -- dubbed by politicians as part of the Olympic Games legacy -- was cut in 2010. Headmaster Chris Dunne, who coordinates the project for a group of schools, mobilized students to join in a protest at Parliament.

“With the end of this program, there will be no Olympic legacy,” Dunne says. While he is negotiating to share the cost of continuing it with other schools, his own school’s budget faces a 330,406-pound deficit because it is currently carrying the expense of the program. The 62-year-old educator has led the institution for 20 years.

Public Speaking Champion

Taylor’s classroom is in a temporary block looking south across a running track toward Canary Wharf. The sun glints off the square glass towers, which peek over concrete housing units. The classroom walls are decorated with displays on the industrial revolution and world religions. The school has about 890 students ages 11 to 16 and specializes in sports such as soccer, cricket, tennis, basketball and volleyball.

Headmaster Dunne says he can’t recall a student ever getting work experience in Canary Wharf.

John Parry, a fair-haired 15-year-old student at Langdon Park, won the Tower Hamlets public speaking competition this year, sponsored by Lloyd’s of London, the world’s oldest insurance market. He says he would be glad for an opportunity to work at Canary Wharf, and yet he sees his prospects for going to university dimming since the government almost tripled fees to as much as 9,000 pounds a year. Parry sees Canary Wharf as a place for people from another class.

Bonuses Versus Benefits

“You can do anything if you want to do it, but I think it would be harder for someone like me to get there,” says Parry, who wears a black sweater and the school’s black-and-yellow tie. He can see Canary Wharf from his bedroom window. The son of a scaffolding builder who worked on the Olympics site, he says he is thinking of becoming a plumber and a property developer.

The drumbeat of service cutbacks amid bank bonus payouts helped make 2011 a year of protest rolling across the U.K. Days after Taylor led his band into Barclays that March, 250,000 public-sector workers marched through London objecting to cuts to education and health care. The government was carrying out the biggest fiscal consolidation since the Second World War. Banners said: “Cut bonuses, not benefits.”

Last August, social tension across London flared up in the worst riots since the 1980s. Thousands of young people looted shops after a peaceful protest over a police shooting in the north of the city turned violent. Police arrested thousands after shops, buses and cars were burned.

Occupy London Encampment

In October, Taylor joined Occupy London in pitching tents outside St. Paul’s Cathedral. During the four-month encampment, participants created a university in a tent and held twice-daily discussions on the cathedral steps about war, corporate corruption, poverty and pollution. They fed homeless people, attracted support from artists and politicians including the American civil rights figure Jesse Jackson, and criticism from some bankers who told them to get jobs. Taylor showered at home on the way to work at the school.

One Sunday evening in November, protesters were preparing to debate the role of the City of London Corporation, which manages the old financial district around the cathedral. The corporation traces its roots back more than 1,000 years, and officials have long defended and promoted the finance industry.

City of London Debate

Stuart Fraser, as the corporation’s policy chairman, personifies the industry that Occupy participants criticize. He has worked in the City for a half-century after starting as a stockbrokers’ messenger. The 66-year-old learned of the planned debate from Twitter, he says, and walked over to participate.

“I just went along and said if you are going to talk about it, you might as well have the arch-evil person here,” Fraser says. He found three speakers discussing whether the corporation should be dissolved, with no one to challenge them, he says.

Over succeeding months, Fraser continued to defend the industry against complaints it didn’t pay enough tax while adding to economic inequality. One sunny day in March, Fraser strode into an interview in the 600-year-old Guildhall in the City and extolled the benefits of the finance industry, including 63 billion pounds of taxes paid in 2011.

At the same time, protesters are having an impact, Fraser says. He credits the movement with elevating inequality on the national agenda. On March 8, the City agreed to join Occupy protestors in backing a campaign by the Tower Hamlets-based organization Citizens U.K. to pay higher wages to cleaners and other workers.

‘Failure of Ambition’

Some people on both sides of the railway tracks are trying to break down the barriers that contribute to inequality. Rushanara Ali, a Labour member of Parliament from Tower Hamlets, helped start Fastlaners, a two-week finishing school to prepare university graduates for jobs in Canary Wharf and elsewhere. It provided training in teamwork, office etiquette, posture, voice and dress. She and a Tower Hamlets nonprofit, the Young Foundation, got government funding and office space from Canary Wharf Group.

Local people need that kind of help to overcome the psychological obstacles to economic opportunities, says Ali, 37. Born in Bangladesh and raised in Tower Hamlets, she was educated at Oxford University’s St. John’s College.

“There has been an absolute failure of ambition in terms of getting the business community to work closely with the local community,” says Ali, who wears her dark hair long and favors trouser suits.

Barclays Mentor

Fastlaners’ funding ran out in 2011 and wasn’t renewed by the new government. Though an opposition MP, Ali is still working to close the opportunity gap. She and the Young Foundation are promoting another program called UpRising, designed to pair up young people with mentors from companies in Canary Wharf and elsewhere.

Vikash Gupta was one of the mentors at a twilight reception Ali attended one evening in February. He is a Barclays banker for clients with more than 10 million pounds to invest. Gupta, 35 and born in India, works above the foyer that the teacher Taylor invaded a year ago.

“The biggest inequality we can address is the level of confidence and ambition and accessibility,” says Gupta. The son of a soap maker from Jharkhand and a mother who was married at the age of 13, Gupta was the first in his family to go to university, studying mechanical engineering at Bangalore University.

59 Pound Haircut

He is mentor to Andrew Jude Rajanathan, a 24-year-old graduate of Queen Mary, University of London in Tower Hamlets and of the London School of Economics. Rajanathan inherited his family house at the age of 20 when his Sri Lanka-born father died. While at university, he worked to pay the mortgage and support his mother.

Rajanathan works at Liv-ex, an online market for fine wine, and says equality campaigners have “very valid” concerns, which the government can address with more support for entrepreneurs and work for those leaving school.

Gupta himself sees the divide between Tower Hamlets and Canary Wharf as he walks from his riverside apartment with manicured lawns. He crosses under the railway to reach the New Look barbershop in Tower Hamlets not far from Taylor’s school. A good haircut there costs 7 pounds, compared with 59 pounds for the cheapest cut at the Toni & Guy salon in Canary Wharf.

When Gupta suggested distributing leaflets in Canary Wharf, barber Ali Hussain’s response surprised him, Gupta says. Hussain said he had never been to the business district, where he thought entry required a security pass, Gupta says.

Taylor’s Occupy Tour

Taylor, who makes 29,000 pounds a year, started his free Occupy tours of Canary Wharf last November. The visits began as a way of educating the public after Canary Wharf Group obtained an injunction against protestors, Taylor says.

On a chilly January evening, Taylor waits at the top of the shiny metallic escalator leading from the Canary Wharf subway station. A guard jokes that Taylor should demand higher pay for security people. The tour lasts a little more than an hour and draws between four and 25 people each time, plus trailing guards. The teacher insists he is motivated by justice and not by the politics of envy. Taylor begins by quoting C.S. Lewis.

“The greatest evil is not now done in those sordid dens of crime that Dickens loved to paint,” he says, reading from notes. “It is conceived and ordered in clean, carpeted, warmed and well-lighted offices by quiet men with white collars and cut fingernails and smooth-shaven cheeks who do not need to raise their voices.”

“Arguably, the kind of offices that we see around us here right now,” Taylor says.

‘Doomed, Cursed Building’

A century ago, the area was full of ships delivering goods from all over the world, Taylor says. The American author Jack London called it “one unending slum.” Today, “the only things traded are the figments of bankers’ imaginations,” Taylor tells the tour group.

The first stop is a tower occupied by JPMorgan. (JPM)

“This is the most doomed, cursed building in financial history,” Taylor says. It was originally intended for Enron Corp., the world’s largest energy trading company before its 2001 bankruptcy filing because of accounting fraud, he says. Then Lehman Brothers moved in. The securities firm filed the biggest bankruptcy in U.S. history in September 2008 because of too much debt and risky real estate investments.

Taylor shepherds his group on to Barclays, taking questions from university students.

“Barclays bank is systematically avoiding tax,” the teacher tells his tour.

Barclays Tax Payments

While bankers were grilled on the matter last year in Parliament, Barclays maintains it obeys tax law. In response to questions last year from lawmakers, the bank disclosed that in 2009 it paid 113 million pounds of U.K. corporation tax. That worked out to 4.5 percent of the bank’s U.K. pretax profit of 2.5 billion pounds. The statutory rate then was 28 percent. Barclays said losses on writedowns reduced the amount owed.

“Barclays is not evading taxes,”Diamond, the Barclays CEO, told a Treasury Committee hearing at the House of Commons. “We are complying with both the spirit and the letter of the law.” Last year, the 60-year-old American executive called for bankers to be better citizens.

The company’s 2011 citizenship report shows that almost 46,000 employees did 418,000 hours of volunteer work. The bank reported paying 1.7 billion pounds of corporate tax globally last year, and 300 million pounds in the U.K.

Teachers’ Pension Protest

On a warm March day, Taylor joins thousands of fellow London teachers in a march on Parliament. The government is raising teachers’ retirement age to 68 from 65 and requiring higher contributions without increases to salaries. As they pass through Trafalgar Square, the teachers chant, whistle and wave colorful banners and placards.

“What do we want? Fair Pensions!” the teachers shout. “When do we want them? Before we die!”

Taylor carries a black backpack with a water bottle and a Mars bar in the side pocket. He holds up a banner bearing the name of his school. Marching, protesting, occupying and guiding tours are the tools Taylor says he has to help rebalance the world.

“If you’ve got money and you’ve got connections, you’re heard,” Taylor says. “And if you don’t have money and don’t have connections, you’re invisible.”

To contact the reporter on this story: Simon Clark in London at [e-mail]
To contact the editor responsible for this story: Melissa Pozsgay at [e-mail]

©2012 BLOOMBERG L.P.

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JPMorgan’s Drew Embraced Risk Before ‘Egregious’ Loss


JPMorgan Chase & Co. signage is displayed in front of the headquarters building in New York, U.S.
Jin Lee/Bloomberg

By Max Abelson - May 10, 2012 10:12 PM CT

JPMorgan Chase & Co. (JPM)’s Chief Investment Officer Ina R. Drew, head of the unit responsible for a $2 billion trading loss, built a 30-year career at the largest U.S. bank by embracing risk and avoiding the spotlight.

“With everything she does, she thinks in terms of trading,” said Stephen Murray, head of CCMP Capital Advisors LLC, created from a JPMorgan private-equity unit in 2006. “There are risk-lovers, there are risk-haters, and the best traders will take the risk as long as they get paid for it.”

Drew’s operation, which helps manage the bank’s risk, has been transformed under Chief Executive Officer Jamie Dimon to make bigger speculative bets with the firm’s own money, according to five former employees, Bloomberg News reported [ http://www.bloomberg.com/news/2012-04-13/jpmorgan-said-to-transform-treasury-to-prop-trading.html ] last month. Some bets were so big JPMorgan probably couldn’t unwind them without roiling markets, the former executives said.

The loss disclosed yesterday came after an “egregious” investment-office failure tied to credit derivatives, Dimon said in a conference call. “In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored.”

Drew, 55, is one of two women who sit on the New York-based firm’s operating committee. Her office oversees about $360 billion, the difference between money from deposits and what the bank extends in loans. Dimon, 56, had pushed the unit to boost profit by buying higher-yielding assets, including structured credit, equities and derivatives, two former employees have said. The shift to riskier bets underscores how blurry the line can be between so-called proprietary trading and what banks say is hedging.

Chemical Bank

Drew has overseen both kinds at the firm for decades. She joined Chemical Banking Corp. in 1982 after graduating from Johns Hopkins University in Baltimore and receiving a master’s degree from Columbia University’s School of International Affairs, according to the bank.

When Chemical merged with Manufacturers Hanover Corp. in 1991, Drew was put in charge of managing U.S. interest-rate risks and given oversight of discretionary trading positions, according to a news release that year.

“Ina was all about risk-taking,” said Mark Schneiderman, a former human resources manager at Chemical. “She was scary- smart, she was very determined, she was very low-key compared to the crazies that you find on a trading floor -- but very, very determined.”

Petros Sabatacakis, a former chief risk officer for Citigroup Inc. and now a director of the National Bank of Greece SA, said he promoted her at Chemical.

“I don’t know what makes a good trader, but I could see the results,” he said in an interview.

Long-Term Capital

Chemical merged with Chase Manhattan Corp. in 1996. Drew’s work as head of Chase’s domestic treasury helped position the firm for the collapse of hedge fund Long-Term Capital Management LP two years later, according to an executive who worked with her on risk management and stress tests. The person asked for anonymity because he wasn’t authorized to speak. While Chase reported record earnings for the fourth quarter of 1998, Drew never sought publicity, the colleague said.

Drew, who was put in charge of JPMorgan’s chief investment office in February 2005, received $14 million from the bank last year, according to company filings. Dimon said yesterday that the portfolio she managed almost doubled in recent years.

“I read somewhere that we made it more aggressive,” he said yesterday. “I wouldn’t it call more aggressive, I would call it better.” Joseph Evangelisti, a spokesman for JPMorgan in New York, said Drew wouldn’t comment.

Corrective Action

John Farrell, a former human resources chief at JPMorgan, said Drew would tell heads of the firm’s investment-banking and trading businesses, “I don’t agree with that, and here’s what we should be doing,” Farrell recalled. “And what we end up doing was what Ina said.”

While the losses originated from the unit’s London team that reports to Drew in New York, more than one trader was responsible, according to an executive at the bank. The company is reevaluating the risk-monitoring team within Drew’s unit, according to the executive. Dimon said yesterday that “all appropriate corrective actions will be taken, as necessary.”

To contact the reporter on this story: Max Abelson in New York at [e-mail]
To contact the editor responsible for this story: David Scheer at [e-mail]

©2012 BLOOMBERG L.P.

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JPMorgan Chase acknowledges $2 billion trading loss

May 10, 2012 6:05 PM
Updated 8:34 PM ET

(AP) JPMorgan Chase (JPM), the largest bank in the United States, said Thursday that it lost $2 billion in the past six weeks in a trading portfolio designed to hedge against risks the company takes with its own money.

The company's stock plunged almost 7 percent in after-hours trading after the loss was announced. Other bank stocks, including Citigroup and Bank of America, suffered heavy losses as well.

The trading loss is an embarrassment for a bank that came through the 2008 financial crisis in much better health than its peers. It kept clear of risky investments that hurt many other banks.

"The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought," CEO Jamie Dimon told reporters. "There were many errors, sloppiness and bad judgment."

Dimon was asked whether other banks could be in trouble.

"On that conference call Dimon was asked that very question point blank. He said not that he's aware of. In his words, just because we were stupid doesn't mean anyone else was," said CBS News correspondent Anthony Mason.

The exotic financial investments got the world in trouble in 2008. Mason notes that's the question a lot of people are asking now, did JPMorgan Chase learn nothing?

"The scary part of this is people thought that Chase was the best-run bank, maybe, on Wall Street," said Mason.

The loss came in a portfolio of the complex financial instruments known as derivatives, and in a division of JPMorgan designed to help control its exposure to risk in the financial markets and invest excess money in its corporate treasury.

Bloomberg News reported in April that a single JPMorgan trader in London, known in the bond market as "the London whale," was making such large trades that he was moving prices in the $10 trillion market.

Dimon said the losses were "somewhat related" to that story, but seemed to suggest that the problem was broader. Dimon also said the company had "acted too defensively," and should have looked into the division more closely.

The Wall Street Journal reported last month that JPMorgan had invested heavily in an index of credit-default swaps, insurance-like products that protect against default by bond issuers.

Hedge funds were betting that the index would lose value, forcing JPMorgan to sell investments at a loss. The losses came in part because financial markets have been far more volatile since the end of March.

Partly because of the $2 billion trading loss, JPMorgan said it expects a loss of $800 million this quarter for a segment of its business known as corporate and private equity. It had planned on a profit for the segment of $200 million.

The loss is expected to hurt JPMorgan's overall earnings for the second quarter, which ends June 30. Dimon apologized for the losses, which he said occurred since the first quarter, which ended March 31.

"We will admit it, we will learn from it, we will fix it, and we will move on," he said. Dimon spoke in a hastily scheduled conference call with stock analysts. Reporters were allowed to listen.

Independent banking consultant Bert Ely said $2 billion is a big loss, but it won't bring down the bank.

"JPMorgan Chase is big enough, it has enough capital and earning power that it will be able to absorb this loss," he said.

Ely said this loss undercuts the industry's complaints about too much regulation.

"From time to time there are going to be blunders like this," he said. "The objective of public policy is to make sure those losses stay in the private sector and don't destabilize the financial system."

Among other bank stocks, Citigroup was down 3.3 percent in after-hours trading, Bank of America was down 2.9 percent, Morgan Stanley was down 2.4 percent, and Goldman Sachs was down 2.2 percent.

JPMorgan is trying to unload the portfolio in question in a "responsible" manner, Dimon said, to minimize the cost to its shareholders. Analysts said more losses were possible depending on market conditions.

Dimon said the type of trading that led to the $2 billion loss would not be banned by the so-called Volcker rule, which takes effect this summer and will ban certain types of trading by banks with their own money.

The Federal Reserve said last month that it would begin enforcing that rule in July 2014.

Some analysts were skeptical that the investments were designed to protect against JPMorgan's own losses. They said the bank appeared to have been betting for its own benefit, a practice known as "proprietary trading."

Bank executives, including Dimon, have argued for weaker rules and broader exemptions.

JPMorgan has been a strong critic of several provisions that would have made this loss less likely, said Michael Greenberger, former enforcement director of the Commodity Futures Trading Commission, which regulates many types of derivatives.

"These instruments are not regularly and efficiently priced, and a company can wake up one day, as AIG did in 2008, and find out they're in a terrific hole. It can just blow up overnight," said Greenberger, a professor at the University of Maryland.

The disclosure quickly led to intensified calls for a heavier-handed approach by regulators to monitoring banks' trading activity.

"The enormous loss JP Morgan announced today is just the latest evidence that what banks call `hedges' are often risky bets that so-called `too big to fail' banks have no business making," said Sen. Carl Levin, D-Mich.

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Related

JPMorgan Chase: London whale swallows $2B
http://www.cbsnews.com/8301-505123_162-57432269/jpmorgan-chase-london-whale-swallows-$2b/

*

© 2012 The Associated Press

http://www.cbsnews.com/8301-505125_162-57432174/report-jpmorgan-ceo-acknowledges-$800-million-loss/ [with comments]


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Seized Financial Firms May Keep Doing Business in FDIC Plan


Martin Gruenberg, acting chairman of the Federal Deposit Insurance Corp.
Andrew Harrer/Bloomberg

By Jesse Hamilton - May 10, 2012 2:27 PM CT

The U.S. Federal Deposit Insurance Corp. will let foreign and domestic subsidiaries keep working when the agency uses its power under the Dodd-Frank Act to rebuild failing financial firms, acting chairman Martin Gruenberg said.

When systemically important firms collapse, the FDIC will step in and transfer assets and some liabilities to a temporary bridge holding company, leaving the pre-existing subsidiaries conducting business, Gruenberg said today at a Federal Reserve Bank of Chicago conference.

“We believe this strategy holds the best possibility of achieving our key goals of maintaining financial stability, holding investors in the failed firm accountable for the losses of the company, and producing a new, viable private-sector company out of the process,” Gruenberg said.

Dodd-Frank gave the FDIC authority to seize and unwind systemically important firms, similar to its power to take over failing banks whose deposits are insured by the agency. Being able to credibly close down the largest financial companies -- often called too big to fail -- “is essential to subjecting these companies to meaningful market discipline,” Gruenberg said.

In the FDIC’s plan, original shareholders would be wiped out and debt holders would be given equity in the emerging entity, Gruenberg said. The FDIC would appoint a temporary new board of directors and chief executive “from the private sector” for the bridge company, he said. The new equity holders would then elect a permanent board for the reconstituted company.

Cross-Border Issues

The bank regulator is negotiating terms with other countries for the resolution of the big firms, Gruenberg said. The systemically important firms primarily operate in a “relatively small number of jurisdictions,” with much of their non-U.S. business focused in the U.K. In an April 12 speech, he said that dealing with cross-border resolution issues may be easier “than is commonly thought.”

The regulator’s plan was outlined at a Jan. 25 meeting of the FDIC’s Systemic Resolution Advisory Committee. Agency officials, including Gruenberg, mentioned Lehman Brothers Holdings Inc.’s collapse, when its subsidiaries were cut off from liquidity, as an example of the need to support the units.

At the January meeting, James Wigand, who leads the agency’s Office of Complex Financial Institutions, said the structure of major financial institutions makes them unresolvable in a bankruptcy process.

To contact the reporter on this story: Jesse Hamilton in Washington at [e-mail]
To contact the editor responsible for this story: Maura Reynolds at [e-mail]

©2012 BLOOMBERG L.P.

http://www.bloomberg.com/news/2012-05-10/fdic-to-let-foreign-affiliates-operate-during-u-s-resolutions.html [no comments yet]


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FDIC says capable to take down US financial giant

* FDIC lays out strategy for liquidation

* Republicans want to repeal liquidation powers

* Markets skeptical government bailouts would not occur

By Dave Clarke
Thu May 10, 2012 5:09pm EDT

WASHINGTON, May 10 (Reuters) - The head of the Federal Deposit Insurance Corp on Thursday sought to convince skeptical financial markets and politicians that U.S. regulators can effectively liquidate a large financial institution without resorting to taxpayer bailouts.

In recent months the agency has been trying to highlight the efforts it has made to turn the concept of a government-run liquidation into a working, d e tailed plan.

The concept -- laid out in the 2010 Dodd-Frank financial oversight law -- is to avoid the market chaos that followed the bankruptcy of Lehman Brothers in September 2008 and end the need for taxpayer bailouts.

On Thursday Acting FDIC Chairman Martin Gruenberg laid out the mechanics of how such a liquidation would work in an attempt to show skeptics his agency is ready to act if U.S. regulators decide to seize a failing financial giant and have the FDIC preside over its funeral.

"There is a very strong public interest in the FDIC developing the capability to carry out its new systemic resolution responsibilities in a credible and effective way," he said in a speech to a Federal Reserve conference in Chicago.

Supporters of the law view widespread faith in the liquidation powers as key to ending the idea that some banks are "too big to fail" and that if they are at risk of failing the government will flinch and rescue a failing giant.

Large banks are still able to fund themselves at better rates than their smaller competitors partially because of the belief that the government will make investors whole if the bank runs into trouble.

"There is a lot of skepticism in the market," former Federal Reserve Chairman Paul Volcker told a Senate Banking subcommittee on Wednesday. "I think that skepticism is overdone, but it's got to be dealt with."

The challenge of winning over skeptics was on stark display on Thursday.

While Gruenberg was delivering his speech in Chicago the U.S. House of Representatives was busy in Washington passing a bill that would strip the FDIC of its new liquidation, or resolution, powers as part of a larger budget savings package. [ID: nL1E8GAE42]

Republicans contend a liquidation cannot be done without risking taxpayers dollars and instead want changes made to the bankruptcy process to better accommodate large banks and other financial firms.

The bill is not likely to be enacted this year due to opposition from Democrats in the Senate.

Supporters of the Dodd-Frank law have been at pains to dispel the notion that taxpayer money could be jeopardized, pointing out the law specifically prohibits bailouts.

Under the law the FDIC can borrow from the Treasury to keep important functions of a bank or financial firm running during the liquidation so that its failure does not cause major ripples in financial markets and the economy.

Whatever money is borrowed, however, has to be recouped either through the assets of the failed firm or through an assessment on large financial firms.

"Taxpayers cannot bear any loss from the resolution of a financial company under the Dodd-Frank Act," Gruenberg said.

The FDIC first laid out its specific strategy for liquidating a failing firm in January at a meeting of an advisory panel it created.

In an interview earlier this year Gruenberg said the FDIC will meet with financial institutions, investor groups, public interest groups and academics to sell them on the FDIC's plan. [ID: nL2E8EDIRB]

"I don't know that we're going to persuade everybody, but if we can even move the center of gravity a little bit in terms of persuading people that we are really quite serious about this ... we really will have accomplished a lot," Gruenberg said.

Copyright 2012 Reuters (emphasis added)

http://www.reuters.com/article/2012/05/10/financial-regulation-fdic-idUSL1E8GAHDI20120510 [with comments]


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Banks 'Too Big to Fail,' Bank Shareholders Not

By Philip van Doorn
05/10/12 - 03:19 PM EDT

NEW YORK (TheStreet) -- Shareholders of failing financial holding companies will take it on the chin -- but healthy subsidiary businesses will have a better chance of surviving -- under the Federal Deposit Insurance Corp.'s new resolution authority.

Acting FDIC Chairman Martin Gruenberg says the agency is ready to move beyond its traditional role of resolving failing federally insured banks and thrifts, with staff and processes in place to resolve large failing financial holding companies.

The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 expanded the FDIC's traditional role, to allow the resolution of entire financial holding companies, rather than just subsidiary banks and thrifts, and Gruenberg said at the Federal Reserve Bank of Chicago Bank Structure Conference on Thursday that the agency's new Office of Complex Financial institutions was ready to "monitor risk within and across these large, complex financial firms from the standpoint of resolution," conduct resolution planning for "potential crisis situations," and "coordinate with regulators overseas regarding the significant challenges associated with cross-border resolution."

The largest failed U.S. bank or thrift was Washington Mutual FA, which was shuttered by the Office of Thrift Supervision in September 2008. The failed thrift was the main subsidiary of Washington Mutual, Inc., which continued to exist after the FDIC was appointed receiver and sold Washington Mutual FA to JPMorgan Chase (JPM_) for $1.9 billion, at no cost the deposit insurance fund.

In the long aftermath of Washington Mutual FA's failure, the surviving Washington Mutual, Inc., and its shareholders have fought several court battles, to prevent the approval of the holding company's bankruptcy plan, arguing that the thrift subsidiary should never have been shut down.

The FDIC's new authority to revolve entire holding companies aims to prevent that sort of messy aftermath.

Under its new authority, the FDIC will require much-maligned "living wills" for bank holding companies with total assets of over $50 billion, along with "certain nonbank financial companies," to help the agency manage orderly liquidations in the event of failure.

Subsidiary banks and thrifts with total assets of more than $50 billion will also be required to submit "living wills," and Gruenberg said "these two resolution plan rulemakings are designed to work in tandem and complement each other by covering the full range of business lines, legal entities and capital-structure combinations within a large financial firm." The FDIC acting chairman added that his agency and "the Federal Reserve have started the process of engaging with individual companies on the preparation of their resolution plans. The first plans, for companies with assets over $250 billion, are due in July."

Of course, with holding companies relying on overnight lending for so much of their funding, the FDIC would not have time to plan an orderly resolution and find a buyer like it does for an insured bank and thrift funded mainly with deposits, which further justifying the usefulness of the "living wills."

One of the FDIC's goals in establishing the new resolution rules for holding companies is "accountability, ensuring that the investors in the failed firm bear the firm's losses," and Gruenberg said that a "promising approach" to resolving a large, complex, publicly traded holding company would be to immediately place the holding company into receivership -- wiping out shareholders -- while "maintaining the subsidiary interconnections."

Another goal of the new resolution authority is financial stability, which Gruenberg said would be enhanced, because a failing large financial holding company's "subsidiaries will remain open and operating as going-concern counterparties, [and] we expect that qualified financial contracts will continue to function normally as the termination, netting and liquidation will be minimal," which will "preserve the franchise value of the firm and mitigate systemic consequences."

Gruenberg also said the FDIC's resolution authority would "ensure that there is market accountability," because its resolution authority for a nonbank entity "does not provide insurance or credit protection for creditors and counterparties, and creditors will always be subject to potential losses."

After a large failing financial holding company is closed, the FDIC under its new authority will set up a bridge holding company, with "some of the debt of the former parent company, which has been left in the receivership, [being] converted to equity in the new bridge holding company," with the former debt holders -- now the bridge holding company's shareholders -- having "their claims will be written down to reflect any losses in the receivership that the shareholders cannot cover and that, like the shareholders, these claims will be left in the receivership."

To shore up liquidity for a bridge holding company, the FDIC will have access to the Treasury Department's Orderly Liquidity Fund, created under Dodd-Frank. The bridge holding company will be required to pay back the Orderly Liquidity Fund "from recoveries on the assets of the failed firm or from assessments against the largest, most complex financial companies," so that taxpayers won't be left holding the bag.

Following a transition period with a board of directors and senior management for the bridge holding company appointed by the FDIC, the bridge holding company's new shareholders -- the former debt holders -- will be "responsible for electing a new board of directors," which will in turn "appoint a CEO of the fully privatized new company."

"For a variety of reasons, Gruenberg said, "we would like this to be a rapid transition."

© 2012 TheStreet, Inc.

http://www.thestreet.com/story/11530486/1/banks-too-big-to-fail-bank-shareholders-not.html [with comments]


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