Finance

Last week, the Hurun Report released the top two on its 2009 China rich list, a ranking of the wealthiest people on the mainland: Wang Chuanfu at $5.1 billion, whose company makes electric cars and batteries, and Zhang Yin at $4.9 billion, whose company produces recycled paper products. The rest of the list comes out this month.

A few things about these two titans and the rich list and its older versions interested me. First, as the United States' billionaires are getting fewer and poorer, China's are getting more plentiful and richer. There are now 131 dollar billionaires in China -- compared with around 350 in the United States.

Second, an exceedingly obvious point but one to marvel at: Rich people in China own companies which make things. The country remains the organ that produces the world's stuff -- batteries, cars, paper, widgets, tires, you name it. And these companies remain relatively undiversified, vertically, not horizontally. One member of the rich list, for instance, owns a company that produces pig feed. 20 years from now, he might own a conglomerate that makes pig feed, feeds it to pigs, slaughters them, and sells the meat. Then, 20 years from then, he might own a holding company which subcontracts out all of those functions to workers and producers in cheaper markets.

In contrast, the 10 richest people in the United States (in descending order: Bill Gates, Warren Buffet, Larry Ellison, assorted Waltons, Michael Bloomberg, and Charles and David Koch) run diversified companies which trade in finance, technology, information, and real estate.

I also took a bit of interest in the producer of the Hurun Report -- one Rupert Hoogewerf. He's a Luxembourgian alumnus of the accounting firm Arthur Andersen who produced Forbes' China rich list between 1999 and 2003. At that point, it seems that Forbes fired him, possibly due to "public doubts and questions of the accuracy and authority of the wealth ranking year after year," according to state paper China Daily. It added: "It is understood that he received no compensation settlement from Forbes."

The official line is that Forbes simply decided to have a Shanghai editor manage the production of the list. But I like the idea of list-maker Hoogewerf going rogue. Does make you wonder about the accuracy of those lists, though...

European leaders are starting to follow suit; Britain's five largest banks have agreed to publish the pay of their key staff members, and will spread bonus payments over three years. French president Sarkozy has announced a set of even tougher and more broadly applied regulations.

Of course, not everyone thinks that bonus reforms are the way to go. Nobel prize-winning conomist Robert F. Engle III says

We shouldn't ban bonuses, but restructure the way they're paid so they're more commensurate with the risk the company is taking....What's important is we give the banking system the right incentives to figure this out. When companies get too big and too complex to fail, they would face a higher tax rate, which would go into a rescue fund. The banks are not excited about it, they would rather go back to business as usual."

The increasingly friendly relationship between Iran and Venezuela is hardly a secret. Just yesterday, Venezuela announced that it will begin exporting 20,000 barrels of gasoline per day to the Islamic Republic. This followed a meeting on Saturday between Presidents Ahmadinejad and Chavez during which the two leaders promised to stand together to defeat imperialist foes.

Legendary New York District Attorney Robert Morganthau explained his concerns about the link in a talk at the Brookings Institution today, sponsored by the the American Interest magazine and Global Financial Integrity. According to Morganthau, some of the most dangerous aspects of the relationship take place far from the cameras, in the shadowy world of illicit finance:

The ostensible reason the the Iranian owned Banco International de Desarrollo (BID) was opened in Caracas was to expand economic ties with Venezuela. Our sources and experiences lead me to suspet an ulterior motive. A foothold into the Venezuelan banking system is a perfect "sanctions-busting" method -- the main motivator for Iran in its banking relationship with Venezuela. Despite being designated by OFAC we believe that BID has several correspondent banking relationships with both Venezuelan banks and banks in Panama, anation with a long-standing reputation as a money laundering safe-haven.

This scheme is known as "nesting." Nested accounts occur when a foreign financial institution gains access to the U.S.  financial system by operating through a U.S. correspondent account belonging to another foreign financial institution. For example, BID who is prohibited from establishing a relationship with a U.S. bank could instead establish a relationship with a Venezuelan or Panamanian bank that has a relationship with a U.S. bank.  If the U.S. bank is unaware that its foreign correspondent financial institution customer is providing such access to a sanctioned third-party foreign financial institution, this third-party financial institution can effectively gain anonymous access to the U.S. financial system. [...]

There is little reason to doubt Venezuela's support for Ahmadinejad's most important agenda, the development of a nuclear program and long-range missiles, and the destabilization of the region. For Iran, the lifeblood of their nuclear and weapons programs is the ability to use the international banking system and to make payments for banned missile and nuclear materials. The opening of Venezuela's banks to the Iranians guarantees the continued development of nuclear technology and long-range missiles. 

Morganthau's office recently prosecuted British bank Lloyds for helping Iran move money through the U.S. financial system by stripping identifying information from wire transfers. He believes the cozy Chavez-Ahmadinejad relationship will only make such operations easier for the Iranians. 

Morganthau stopped short of announcing specific prosecutions, but from the sound of it, some new revelations may be forthcoming. 

Photo by David Shankbone. Used under Creative Commons license.  

Chancellor Angela Merkel and her Finance Minister Peer Steinbrück have been at the forefront of the international campaign to crack down on tax havens like Luxembourg and Switzerland. But they may be overlooking a problem much closer to home, according to Beat Balzli and Michaela Schiessl:

[T]he minister's rage against tax havens risks obscuring a much bigger problem: A completely legal tax avoidance industry is flourishing right at home in Germany. It is an industry that thrives on the mistakes made by ministries and the parliament in drawing up tax legislation. And hardly any other industry is as successful, irrespective of the current economic situation, or operates as efficiently.

While ordinary German workers are at the mercy of the tax authorities, millionaires and corporations use aggressive tax models to make themselves appear to be artificially poor -- and it's completely legal. In fact, seminars on "International Tax Structuring" are even tax-deductible in Germany as professional training.

What the national treasury loses in the process is far from insignificant. The German Institute for Economic Research (DIW) has calculated that there is a gap of €100 billion between the demonstrated profits of corporations and partnerships and the profits they have reported for purposes of taxation. "This points to tax breaks and structuring options with which companies can lower their taxable profits or shift them abroad," writes the DIW.

In fact, German corporations structure their international subsidiaries in such a way that the most profitable ones are located in the countries with the lowest tax rates. Corporate tax paid by corporations makes up only 2.8 percent of the government's total tax revenues of €561 billion. Germany's army of wage-earners contributes the largest share.

"Germany is a tax haven for large companies," says Wiesbaden-based economist Lorenz Jarass. "People with normal incomes are being robbed."

The world's largest accountancy firm has been appointed to allocate international aid in Somalia in an effort to demonstrate to donors that contributions will be spent on national development. PwC will set up money tracking systems to ensure that relief assistance, including $67 million pledged by international donors in April, will be spent on security, health and education instead of being siphoned into officials' pockets. The firm has undertaken similar work in Afghanistan and Sudan, and will receive a commission of between two and four percent on all funds that reach their intended destinations.

Embroiled in an 18-year civil war, efforts to combat Islamic insurgents and recent piracy attacks are compromised by the slow delivery of funds from donors who are hesitant to invest in a country without a formal banking system. Somalia's first Deputy Prime Minister Abdulrahman Adan Ibrahim said:

We want to be different from other African countries. We want to show the world that the money given to us will be going to where they want it, to be used in a transparent way.

Clearly, outsourcing is the answer.

Swiatoslaw Wojtkowiak/Flickr

Remember U.S. Treasury Secretary Timothy Geithner's plan to ease the credit crunch, the byzantine "Legacy Loans" program released to much hand-wringing this winter? It was, perhaps, the most ambitious, most confusing, most surprising governmental response to the Great Recession.

The idea was to help price and start a market for mortgage-backed assets on the banks' books. The government would assess and tranch the assets to sell at auctions to public-private investment partnerships; the government would eat the losses if the assets went sour.

Remember hearing about it recently? No?

That's because it's dead in the water, the New York Times reports.

The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets.

In a move that confirmed the suspicions of many analysts, the agency called off plans to start a $1 billion pilot program this month that was intended to help banks clean up their balance sheets and eventually sell off hundreds of billions of dollars worth of troubled mortgages and other loans.

Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay. 

The blogosphere's been all over sorting out what this means -- see Yves Smith and Ezra Klein, for examples.

Part of me thinks: goodness, isn't this the best of all worlds for everyone? The banks will be forced to mop up their own mess, and mark down the proper (low but existant) value of these assets at some point. (The i-banks' counterproductive and unethical desire to mismark and misprice concerns me a lot on this point, to be fair.) But if they want to wait for the assets to mature rather than moving them now, spreading their losses out over several years -- that's fine with me.

The government won't have to cajole hedge funds into participating, promising them some oversight concessions in return. That means hedge funds and the like can use their free capital, hopefully, on more productive investments. The government also won't have to subsidize the banks' losses on these assets, leaving those precious funds for other better purposes.

Plus, if the Geithner plan was always in part a confidence thing -- born of the perceived need to reassure banks that the government would not let them fail and would help ease the credit crunch -- this part of the plan seems to have worked. And without costing anything.

Here's looking forward to the other pieces, though.

Writing in The Nation, David Cay Johnston takes liberal interventionism to a new level with this modest proposal:

President Obama proposed on May 4 to crack down on offshore tax cheating; that proposal does not go nearly far enough. Instead of settling for a dime on the dollar, as Obama's plan would do, let's get serious about offshore tax cheating, both legalized and criminal. Let's do what we did to halt the imagined threats of communists in Grenada, depose a drug-dealing president in Panama and find those imaginary weapons of mass destruction in Iraq. Let's invade the Caymans!

The islands, which belong to Britain, have no military and just 300 or so police. An invasion force composed of tax lawyers, forensic auditors and a handful of computer technicians could execute a hostile takeover without firing a shot.

The Caymans are not really a country; they are a law firm posing as one. More than 12,000 "companies" operate out of a single building known as Ugland House, home to the law firm Maples & Calder.... There is $1.9 trillion in bank deposits in the Caymans--money actually invested in the United States and other countries but invisible to the IRS. 

I could certainly think of less pleasant places to invade. Though if we head down this path, the U.S. should probably start preparing for EU forces to make an amphibious assault on Delaware.

David Rogers/Getty Images

This is one weird commercial:

Yes, that's noted humanitarian and alleged former rock star Bob Geldof (along with physicist Stephen Hawking, feminist scholar Germaine Greer, and businessman Alan Sugar) trying to sell Britons on National Savings & Investments.  NS&I is a state-owned savings bank serves as a lender to the British government. It describes itself as a way to "raise cost effective financing for the government and to reduce the cost of government borrowing to the tax payer."

So after more than two decades of raising money for famine relief and pushing for debt cancellation in Africa, Geldof is now raising money for the exchequer to cover its debts. Not sure if that says more about Geldof or about the current state of the British economy, but either way, like I said, weird commercial.