Wow, I never thought this day would come. It has long been an open secret that Goldman Sachs had a role in defrauding subprime mortgage investors, but due to their specific government connections and the general state of the financial sector it was assumed nothing would come of it. However the SEC has filed civil (for now?) charges against Goldman to recoup their ill-begotten gains.
This could have far wider implications: for instance more details are emerging about a hedge fund named Magnetar that helped fuel massive demand for subprime mortgages in order to short them. Yves Smith claims that Magnetar alone accounted for 35-60% of subprime mortgage demand in 2006. She also details their financial contributions to Rahm Emanuel.
Bill Black, the lead regulator in cleaning up the Savings and Loan crisis, has long stated that fraud is endemic in our financial system, particularly in the mortgage arena. In this five part interview he explains how he believes hundreds of billions of dollars of fraud occurs and charges the megabanks with facilitating this at the highest levels. Congressional hearings on Washington Mutual support this view. In his expert opinion, the financial crisis is not as much about misguidance and ignorance as it is about willful criminality.
It is obviously too early to tell where this case will go, let alone whether it is a precursor to more suits, but hopefully it is the beginning of accountability and a necessary step for true economic recovery.
Friday, April 16, 2010
Wednesday, April 14, 2010
Does Multi-National Corporate Success Mean Anything To US?
I don't want to harp on Dorian's post of optimism (OK I do slightly) but I do find it telling that Daniel Gross' breezy article argued for US economic success made up nearly entirely of anecdotes about major multi-national corporations. It is becoming less clear whether success of these corporations really helps the USA in many ways other than the stock market.
Mish has a great post on this (even if you don't agree with his political slant). Much has been made of labor being moved to overseas for wage reasons, but taxes are very important too:
And:
Large corporations never did have much hiring during the last expansion, as they focused primarily on international growth. The majority of jobs and nearly all of the job creation is now at small businesses, which by all accounts are doing terribly. Multi-Nationals may indeed produce new innovation and products as Daniel Gross suggests, but I think he overlooks the reality of the situation: nearly all the materials, manufacturing and increasingly the design will be done overseas. In fact a lot of large companies are "American" as much for political protection and benefits as much as anything else. And for that, we see a pittance in tax collection.
The companies where this is not an accurate characterization (e.g. Google and the like) not only have few employees in the scheme of things, but will increasingly move overseas. As Mish's reader pointed out, good old IBM has reduced American worker headcount by 30% in the last five years and now has 70% of its workers in foreign locales. Low economic growth in the US and increased taxes will exacerbate this trend unless we change other policies.
Mish has a great post on this (even if you don't agree with his political slant). Much has been made of labor being moved to overseas for wage reasons, but taxes are very important too:
In 2004, U.S.-based multinational corporations paid about $16 billion in U.S. taxes while earning about $700 billion offshore, an effective tax rate of about 2.3 percent, according to the administration statement...
Clinton administration officials realized they also had made it easy for multinationals to create entities whose only purpose was to shift profits into low-tax countries and out of reach of the tax authorities, according to a January Government Accountability Office report that found 83 of the 100 biggest companies had subsidiaries in tax havens.
Once the assets were in the haven, the U.S. parent company borrowed from the subsidiary. The interest payments were deductible in the U.S. and tax-free in the haven, the GAO said. The nonpartisan congressional Joint Committee on Taxation recommended in 2005 that the rules be repealed.
And:
As you work on your taxes this month, here's something to raise your hackles: Some of the world's biggest, most profitable corporations enjoy a far lower tax rate than you do--that is, if they pay taxes at all.
The most egregious example is General Electric (GE). Last year the conglomerate generated $10.3 billion in pretax income, but ended up owing nothing to Uncle Sam. In fact, it recorded a tax benefit of $1.1 billion.
How did this happen? It's complicated. GE's tax return is the largest the IRS deals with each year--some 24,000 pages if printed out. Inside you'll find that GE in effect consists of two divisions: General Electric Capital and everything else. The everything else--maker of engines, power plants, TV shows and the like--would have paid a 22% tax rate if it was a standalone company.
It's GE Capital that keeps the overall tax bill so low. Over the last two years, GE Capital has displayed an uncanny ability to lose lots of money in the U.S. ...
It only makes sense that multinationals "put costs in high-tax countries and profits in low-tax countries," says Scott Hodge, president of the Tax Foundation. Those low-tax countries are almost anywhere but the U.S. "When you add in state taxes, the U.S. has the highest tax burden among industrialized countries," says Hodge. In contrast, China's rate is just 25%; Ireland's is 12.5%.
Corporations are getting smarter, not just about doing more business in low-tax countries, but in moving their more valuable assets there as well. That means setting up overseas subsidiaries, then transferring to them ownership of long-lived, often intangible but highly profitable assets, like patents and software.
Large corporations never did have much hiring during the last expansion, as they focused primarily on international growth. The majority of jobs and nearly all of the job creation is now at small businesses, which by all accounts are doing terribly. Multi-Nationals may indeed produce new innovation and products as Daniel Gross suggests, but I think he overlooks the reality of the situation: nearly all the materials, manufacturing and increasingly the design will be done overseas. In fact a lot of large companies are "American" as much for political protection and benefits as much as anything else. And for that, we see a pittance in tax collection.
The companies where this is not an accurate characterization (e.g. Google and the like) not only have few employees in the scheme of things, but will increasingly move overseas. As Mish's reader pointed out, good old IBM has reduced American worker headcount by 30% in the last five years and now has 70% of its workers in foreign locales. Low economic growth in the US and increased taxes will exacerbate this trend unless we change other policies.
Is Our Economy Back? The Record Downturn Makes It Hard To Know
Dorian, the site's (increasingly less lonely) optimist wrote a post earlier linking to Daniel Gross' article in Newsweek.
I have long been skeptical of "green shoots" talk as being bad statistics; for instance the economy grew 5.9% in the fourth quarter, but after inventory adjustment is stripped out the increase was only 2%. There are many measures showing that inventory adjustment is nearly complete and we will lose that contribution starting in Q2 or Q3 at the latest. I argued that GDP is constructed in such a poor way that it is nearly a useless statistic at this point in time, and that instead it was far better to look at the individual components. I still stand by that assessment, but the water is getting very murky on those points too.
Consumer spending increases are a must going forward and there was a great report released for March. In fact overall spending has been very strong in face of all the adversity we are seeing, something that has surprised me.
However, against that backdrop other things don't make sense at all. For instance small businesses are really hurting a ton and are near record lows in their optimism, even tough traditionally they have been the first to benefit from an expansion. Meanwhile, Gallup's self reported discretionary spending poll has been flat since Feb 09, seasonal events excepted. And lastly, state sales tax collections are abysmal, often around the same levels as last year.
How can we reconcile the topline reported increase in sales with all the other data? Well if you look at the methodology of the sales report, you will find that it estimates sales based on same store sales excluding price changes. As Mish points out in the prior link, many chains have gone bankrupt and many existing chains have severely cut back on the number of stores. Thus, if people are spending a similar amount of total money as last year then same store sales will increase and the consumer spending release will rise. Moreover, the small business survey reports very poor pricing power and a lot of price decreases. Again, with minimal total inflation and an increase in buying items on sale or with coupons, the total can not change very much but the official report will show increases.
The board responsible for dating recessions recently said it was too early to call an end to the recession. That doesn't mean much, they often wait for a year and a half after a recession is over to date it. However, it did prompt Calculated Risk to have a great post showing the measures they use. I STRONGLY encourage everyone to check it out.
Not only does the depth of the downturn really shine through, but the dynamics of the recovery do as well. GDP fell a lot, but is now increasing at a historical rate, however income is lagging strongly. Industrial production fell a ton and is making a solid but under performing recovery. Employment is of course a mess, and income less transfer payments has made no recovery at all. It is very clear from the last two metrics that the government is the only thing holding together the economy at present.
I have a one word take away message: confusion. We are in such an ahistorical period that the entire way of looking at the economic world has changed and any argument can be made going forward. This is why banks can make record profits and yet still have trillions of dollars of losses; GDP can increase 6% but see employment losses; income can fall 7% sans transfer payments, but retail sales have been (or maybe haven't been) strong. People can make nearly whatever argument they want as a strong possibility going forward, from complete collapse of the world economy to the strongest recovery in history, and the data will support it. It is no longer just about dollars and cents, but about mindset.
I personally feel that the risks are still very much strongly on the downside and that we will suffer from a surfeit of optimism instead of a deficit. I think that the statistics that show a strong recovery are based on flawed assumptions, and a sense of complacency will harm us going forward. The government is continuing to prop up the economy but it seems like all sense of urgency about making structural reforms as been lost, and that companies are more obsessed than ever at short term gain over long term wisdom. But that's just a feeling, hopefully I'm wrong...But that's just a feeling, hopefully I'm wrong...I've felt this way for quite a while now and it hasn't occurred, so maybe one day I will wake up and decide I was completely led astray.
I have long been skeptical of "green shoots" talk as being bad statistics; for instance the economy grew 5.9% in the fourth quarter, but after inventory adjustment is stripped out the increase was only 2%. There are many measures showing that inventory adjustment is nearly complete and we will lose that contribution starting in Q2 or Q3 at the latest. I argued that GDP is constructed in such a poor way that it is nearly a useless statistic at this point in time, and that instead it was far better to look at the individual components. I still stand by that assessment, but the water is getting very murky on those points too.
Consumer spending increases are a must going forward and there was a great report released for March. In fact overall spending has been very strong in face of all the adversity we are seeing, something that has surprised me.
However, against that backdrop other things don't make sense at all. For instance small businesses are really hurting a ton and are near record lows in their optimism, even tough traditionally they have been the first to benefit from an expansion. Meanwhile, Gallup's self reported discretionary spending poll has been flat since Feb 09, seasonal events excepted. And lastly, state sales tax collections are abysmal, often around the same levels as last year.
How can we reconcile the topline reported increase in sales with all the other data? Well if you look at the methodology of the sales report, you will find that it estimates sales based on same store sales excluding price changes. As Mish points out in the prior link, many chains have gone bankrupt and many existing chains have severely cut back on the number of stores. Thus, if people are spending a similar amount of total money as last year then same store sales will increase and the consumer spending release will rise. Moreover, the small business survey reports very poor pricing power and a lot of price decreases. Again, with minimal total inflation and an increase in buying items on sale or with coupons, the total can not change very much but the official report will show increases.
The board responsible for dating recessions recently said it was too early to call an end to the recession. That doesn't mean much, they often wait for a year and a half after a recession is over to date it. However, it did prompt Calculated Risk to have a great post showing the measures they use. I STRONGLY encourage everyone to check it out.
Not only does the depth of the downturn really shine through, but the dynamics of the recovery do as well. GDP fell a lot, but is now increasing at a historical rate, however income is lagging strongly. Industrial production fell a ton and is making a solid but under performing recovery. Employment is of course a mess, and income less transfer payments has made no recovery at all. It is very clear from the last two metrics that the government is the only thing holding together the economy at present.
I have a one word take away message: confusion. We are in such an ahistorical period that the entire way of looking at the economic world has changed and any argument can be made going forward. This is why banks can make record profits and yet still have trillions of dollars of losses; GDP can increase 6% but see employment losses; income can fall 7% sans transfer payments, but retail sales have been (or maybe haven't been) strong. People can make nearly whatever argument they want as a strong possibility going forward, from complete collapse of the world economy to the strongest recovery in history, and the data will support it. It is no longer just about dollars and cents, but about mindset.
I personally feel that the risks are still very much strongly on the downside and that we will suffer from a surfeit of optimism instead of a deficit. I think that the statistics that show a strong recovery are based on flawed assumptions, and a sense of complacency will harm us going forward. The government is continuing to prop up the economy but it seems like all sense of urgency about making structural reforms as been lost, and that companies are more obsessed than ever at short term gain over long term wisdom. But that's just a feeling, hopefully I'm wrong...But that's just a feeling, hopefully I'm wrong...I've felt this way for quite a while now and it hasn't occurred, so maybe one day I will wake up and decide I was completely led astray.
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