“The trouble with Wall Street isn’t that too many bankers get rich in the booms. The trouble, rather, is that too few get poor — really, suitably poor — in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside. How much better it would be if the bankers took the losses just as they do the profits”

In an editorial for the Washington Post James Grant captures the essence of what financial reform should be all about. I think the same principle should apply to private wealth managers. Why not have fee arrangements that reward an adviser for profitable strategies and make him pay for bad advice?

“The job before Congress is to bring the fear of God back to Wall Street. Not to stifle enterprise but quite the opposite: to restore real capitalism. By all means, let the bankers savor the sweets of their success. But let them, and their stockholders, pay dearly for their failures. Fair’s fair.”

Bloomberg reports that it is safer to lend to Warren Buffett than to Barack Obama aka the US government:

“Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg.(…) Berkshire Hathaway’s 1.4 percent notes due February 2012 yielded 0.89 percent on March 18, 3.5 basis points, or 0.035 percentage point, less than Treasuries, composite prices compiled by Bloomberg show.”

When will Mr. Buffett announce his candidacy for president of the United States?

The New York Times Magazine has interviewed Harry Markopolos, an investment manager and math whizz who spent nine years to track the machinations of Bernie Maddoff’s hedge fund.  He concluded  early on that Madoff must be a fraud.  In November 2005 he sent a memo to SEC regulators titled  “The World’s Largest Hedge Fund  is a Fraud.” It described his suspicions about Madoff in more detail and asked the SEC to check his fraud theory.

In the NYT interview, Markopolos judgement of the SEC is a harsh one:

Q: “Why do you think the S.E.C. failed to wake up to Madoff’s $65 billion Ponzi scheme until he turned himself in?”
A: “They weren’t even asleep at the switch; they were comatose. They didn’t respond to heat and light, much less evidence of wrongdoing. They were not engaged in the fight.”

The whole story is a great example how dysfunctional huge regulatory administrations have become in the financial industry. They are not even able to uncover a fraud scheme when someone else does the analysis for them.

Governments around the world are busy these days to develop grand schemes for new regulatory bodies and laws. No doubt, they will be even less functional. The dysfunctionality will most likely be proportional to the complexity of the law and the number of new bureaucrats hired.

Yet, ordinary investors should really take one learning from the Madoff story: Don’t trust the government to see the red flags and protect investors. It won’t happen. Or more precisely, it will happen but far too late. There is only one way for investors to protect themselves from fraudsters - do the critical analysis yourself,  and keep a very skeptical eye on the ocassional fund management Wunderkind.

A recent study ranks the U.S. state Delaware as the place with the most secretive jurisdiction worldwide. Or how the Guardian puts it in more practical terms: “(…) Top of the pile, beating the British Virgin Islands, Belize or Liechtenstein as the best place to hide wealth, is Delaware”.

Already last June we have pointed on this mostly overlooked fact in the ongoing hypocritical discussion on offshore banking and the witch hunt on countries like Switzerland or Liechtenstein. Learning: If you start an offshore centre and do not want to be punished you better be a superpower or at least a G-7 member.

BTW: London (yes, the capital of the other main country going after offshore centres) is ranked as 5th most secretive jurisdiction worldwide.

The Wall Street Journal reports:

“The U.K.’s myriad overseas territories and crown dependencies must improve standards on financial regulation and tax information-sharing and should broaden their tax base or face possible consequences, a U.K. treasury commissioned report said Thursday.”

This is just another indicator of how rapidly offhsore banking is losing ground on a global scale. The UK responds to complaints by Austria, Luxembourg, Switzerland and other offshore centers that the UK government is attacking foreign financial centers while protecting its own financial offshore centres overseas. This move will increase the pressure especially on Austria and Luxembourg to move towards automatic data exchange on bank clients who hide assets under the protection of the banking secret in Austria or Luxembourg.

That is the amount a 22 year old college graduate in the US will have to pay over his lifespan for the 2008/09 government bank bailout. The calculation seems quite reasonable, the results are very unpleasant. From an economic point of view it’s much better to be old these days…

Read our comment on the disclosure of  details of the UBS settlement here.

Today the Liechtenstein government announced that it has agreed with the UK government on a new tax treaty. Part of this new treaty is the rule that Liechtenstein banks will have to check on any UK-clients whether their assets have been declared to the UK tax authority. Clients with undeclared assets will not been accepted as clients or, if they are clients already, will be forced to close down their accounts in Liechtenstein.

UK clients with undeclared assets in Liechtenstein will have the opportunity to disclose their assets to the UK tax authority and receive a somewhat lenient treatment. Disclosure has to be made up to 10 years back. The tax rate will be at a maximum of 40% and the penalty at 10% of the payable taxes. These rules will apply in a limited period between 2010 and 2015.

These new regulations are only a small step away from an automatic exchange of client information between governments. In fact, this means that any Liechtenstein wealth manager is now an unpaid helper of the UK tax authority. UK citizens lose their financial privacy completely. This confirms strongly our view that the end of offshore banking is near. Liechtenstein, and Switzerland as well, will face dramatic changes in their respective banking industries. Many Swiss and Liechtenstein banks believe that they can differentiate themselves for many other reasons besides the banking secret. We doubt this (if you don’t count the extraordinary high fees as a differentiator). It is a matter of survival for the Swiss and Liechtenstein banking industry to radically re-think their strategies and re-invent their business model. If they have not done this yet it will be too late soon.

Interesting piece on the health care debate in the US, and why Obama thinks that the rich should pay for it. I doubt if this additional tax on the top 0.5% earners can pony up enough for the gigantic plans the Democrats have for government health care.

And there is also the point of fairness: IRS data shows that in 2004, the wealthiest 50% of the taxpayers paid 96.7% of total income taxes. From 1986 to 2004, the share paid by the wealthies half grew from 93.5% to 96.7%, and the share paid by the richest 1% surged from 25.75% to 36.89%. Pretty impressive numbers…

I just saw an article on the WSJ website which indicates that the Swiss government is prepared to stay firm in the UBS case. The US Internal Revenue Service (IRS) is trying to force the Swiss bank UBS to hand over data from more than 52,000 US customers. But the Swiss banking secrecy law prevents the bank to hand over such data except for cases where a foreign government can make a clear case of tax fraud or tax evasion. The IRS however is trying to win a Joe Doe summons from a court in Florida which is intended to force the bank to disclose customer data without providing sufficient evidence that taxes have actually been evaded. The Swiss government stated today  that it is not prepared to bend Swiss law and give permission to the UBS to disclose the client data.

These court proceedings and the statements of the involved governments are of course part of an elaborate and byzantine power game which most likely will result in a settlement. As part of this settlement the UBS will probably pay a substantial fine to the US tax authorities compensating for the alleged tax losses.

But whatever the outcome: For Switzerland, but also all other countries who value the privacy of their citizens and the clients of their banks, it is now the time to stand firm. They have to draw a line which must not be crossed by the tax-hungry bullies of hopelessly indebted governments. And I sincerely hope that when the going gets tough, Switzerland and its allies will be tough enough defend this line.

Check also this article which explainis why the US has its own tax haven problem.