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from Alison Frankel:

AIG (mostly) survives Countrywide timeliness defense in MBS case

AIG's $6 billion in mortgage-backed securities claims against Countrywide survived a near-death experience late Wednesday, when U.S. District Judge Mariana Pfaelzer of Los Angeles issued her ruling on Countrywide's statute of limitations defense. In a 25-page opinion, Pfaelzer tossed AIG's federal securities claims, as well as some fraud and negligent misrepresentation claims by AIG subsidiaries. But AIG said in an email statement that the ruling leaves alive "more than 98 percent of the recovery it seeks." For a plaintiff that feared the worst – as AIG most certainly did, thanks to a silver bullet Pfaelzer handed to Countrywide in February – the judge's ruling is a stunning reprieve.

Here's why. Pfaelzer has not been a particularly good friend to investors in Countrywide mortgage-backed securities, particularly when it comes to the statute of limitations on their claims. In a ruling last August, Pfaelzer said that MBS investors were on notice of potential federal securities claims against Countrywide as of Feb. 14, 2008. Given the three-year time limit on those federal claims – and Pfaelzer's role overseeing all Countrywide MBS litigation in federal court – her ruling meant that any Countrywide investor who hadn't filed a complaint by Feb. 14, 2011, or who didn't have a tolling agreement was too late.

Countrywide MBS plaintiffs had an alternative route to recovery, though, through fraud and negligent misrepresentation claims under state laws, some of which have less restrictive time limits. New York, for instance, has particularly generous laws, giving plaintiffs up to six years to file fraud cases. So the New York-based insurer AIG didn't completely despair when its Countrywide MBS claims were severed from its $10 billion suit against Bank of America and transferred to Pfaelzer in Los Angeles. (AIG doesn't think any part of its MBS case belongs in federal court, but that's another story.) The insurer had to expect that in Pfaelzer's court its federal securities case wouldn't survive Countrywide's statute of limitations defense. But it also had reason to be confident that its New York state fraud claims would be fine.

Then Pfaelzer came up with the aforementioned silver bullet for Countrywide. At the end of February, in a different Countrywide MBS case, she dug up an old New York Court of Appeals ruling called Wydallis v. United States Fidelity and Guaranty, which addressed New York's so-called "borrowing statute" to prevent forum shoppers from taking advantage of the state's generous statute of limitations. The state high court had ruled that a corporation is resident in New York if it is incorporated in the state. Pfaelzer invited Countrywide and AIG to brief whether, under Wydallis, AIG is resident in New York – and thus able to benefit from the six-year statute of limitations – or is resident in Delaware, its state of incorporation. Delaware has only a three-year statute.

Countrywide's lawyers at Reed Smith (as you might expect) said that if a corporation is resident when it's incorporated in New York, then it's not resident if it's incorporated elsewhere. But in Wednesday's ruling Pfaelzer instead agreed with AIG's lawyers at Quinn Emanuel Urquhart & Sullivan, holding that AIG is resident in New York, at least for the purposes of the statute of limitations. The judge concluded that there's no case law directly on point, and most of the relevant precedent is either very old or related to individuals, not corporations. Nevertheless, "establishment of a principal place of business in New York is a sufficiently 'significant connection' to New York to qualify as a resident," she wrote. "Accordingly, the court will not apply the borrowing statute if a plaintiff is either incorporated in New York or maintains its principal place of business there."

According to Pfaelzer, the New York statute of limitations does not apply for AIG subsidiaries with headquarters outside of the state, so she dismissed negligent misrepresentation claims for subsidiaries based in Tennessee, California and Arizona, as well as those subsidiaries' fraud claims that weren't covered by a tolling agreement between AIG and BofA. AIG conceded that the negligent misrepresentation claims of its Texas subsidiary weren't within the state's two-year statute but fought hard to keep alive its Texas fraud claims, which have a four-year window. Countrywide asserted that the clock on Texas securities fraud claims begins ticking at the moment of purchase. Pfaelzer found instead that the statute of limitations kicks in only after a plaintiff is on inquiry notice that a fraud may have occurred. Under that standard, she ruled, AIG's Texas claims survive.

AIG's statement on the ruling also noted that its Countrywide federal securities claims may be revived, depending on what the 9th Circuit Court of Appeals has to say about the time limit Pfaelzer set last February. That ruling is on appeal.

from David Rohde:

How Zippos, dredges and vitamins can save the American middle class

Last week, 41 American companies received awards at a little noticed White House ceremony. Despite the recession, the companies – most of them small and medium-size businesses – have experienced rapid growth and handsome profits in recent years. And they’ve beaten Chinese, Indian and European competitors at their own game.

How? By selling to a burgeoning global middle class expected to grow by 1 billion people – primarily in Asia – over the next decade.

Zippo Manufacturing Co, the maker of the iconic American cigarette lighter, has experienced 1,000 percent sales growth in China over the last 20 years and 900 percent growth in India over the last eight years. While other American companies have shed jobs, the 650-employee, Bradford, Pennsylvania-based company has added 150 jobs in the last three years and experienced a 20 percent increase in sales, most of it overseas.

“It's tough to compete, but we're doing it,” said Greg Booth, the company’s president and CEO, referring to cheap lighters manufactured in Asia. “We're competing in a category that is under incredible pressure.”

DSC Dredge, a small, Louisiana-based builder of dredges, has increased its overseas sales by 1,300 percent over the last 10 years and nearly doubled in size from 80 to 140 employees. Their biggest overseas customers? Nigeria and Bangladesh, countries that Americans think of as impoverished but are experiencing significant economic growth. The firm's overseas sales have risen from $1.4 million a year in 2002 to over $20 million last year and make up 65 percent of its business. Charles Sinunu, the director of international sales, said the firm just sold three dredges to Russia and sells to 48 countries worldwide.

“It’s become something where it really wasn’t a big deal 10 years ago, and now it’s a huge deal,” he told me. “Right now, we have a record backlog of business and are actively trying to hire additional people.”

And OSIsoft of San Leandro, California has done the seemingly impossible. While other companies have outsourced programming and technical work to India, the $300 million business software firm has grown from 150 to 750 employees in the last six years. Where are its new customers? In 110 countries around the world. Where are nearly all of its employees? Inside the U.S.

from Tax Break:

Essential reading: Greeks stop paying taxes, Nancy Pelosi’s rich tax, and more

The ancient Acropolis of Athens at sunset. REUTERS/Yannis Behrakis

Welcome to the top tax and accounting headlines from Reuters and other sources.

* Pelosi pushes tax hike for those making $1 million or more. John McKinnon - The Wall Street Journal. Is House Democratic Leader Nancy Pelosi abandoning President Barack Obama in his effort to raise taxes on households making more than $250,000? It sure sounded that way on Wednesday. In a letter to House Speaker John Boehner, Pelosi called on Republicans to pass a permanent extension of Bush-era tax levels for the middle class. The only group Pelosi singled out for a tax increase was people earning $1 million or more. Link

* Nancy Pelosi risky pander on taxes. The Washington Post editorial opinion. House Minority Leader Nancy Pelosi has an interesting definition of what constitutes the middle class. She believes it includes people earning anything less than $1 million a year — at least when it comes to tax cuts. The Democratic leader’s position offers the political benefit of letting Democrats argue that the GOP opposed curtailing tax cuts even for millionaires. The risk of this particular pander, however, is that $1  million becomes the new, high bar; tax cuts below that level remain off-limits. Do Democrats really want their new slogan to be: “Almost as irresponsible as the Republicans?” Link

* UK govt to stop public sector workers avoiding income tax. Ainsley Thomson - The Wall Street Journal. The U.K. government Wednesday vowed to clamp down on public sector workers avoiding paying their fair share of tax after a review found that more than 2,400 highly paid civil servants were paid "off payroll," allowing them to minimize their tax bill. Link

* HMRC job cuts 'undermining' tax crackdown. Hannah Kuckler - The Financial Times. Cutting the number of tax collectors at Revenue & Customs has lost the tax collecting agency 1.1 billion pounds ($1.73 billion) in taxes over five years, Parliament’s public spending watchdog has estimated. Link

from Felix Salmon:

Artnet’s silly indices

A couple of weeks ago, Artnet officially launched Artnet Indices -- what it calls "the world’s first comprehensive set of art indices". According to the press release:

It is now possible to measure price performance and other important market metrics for individual artists and artworks with the same rigorous standards used in financial indices.

Artnet's Thomas Galbraith is quoted in the release as saying that "the artnet Indices provide quantitative market reports on the performance of artists like Andy Warhol or Damien Hirst, just as you might track a Fortune 500 company".

I had a long lunch with Galbraith on the day that the indices were launched, and I've been going back and forth with him since then, trying to get a feel for how they really work. And as you might imagine, I have quite a few problems with these things.

To put this in perspective, here's the chart that Artnet loves to send out to reporters, featuring its first index, the C50 index of contemporary art.

The message of this chart is very clear. Contemporary art is an asset class, it's a strongly performing asset class, and if you go back to 1988, it has significantly outperformed the S&P 500. If you start them both at 100 in 1988, for instance, then by 2009 the S&P would only have reached 354, while the C50 would have reached 578 -- even after a big plunge from almost 1,000 in 2008.

from Felix Salmon:

Counterparties: Private equity’s public relations

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

After Cory Booker's Meet the Press mishap, Noah Smith asks a great question: What does an economy without private equity look like? Smith says we should "sic the pirates on the zombies" of corporate Japan, where there isn't an active PE industry, productivity is low and labor costs are high.

In the US, the private equity industry's advocacy arm continues to focus on PE's role as a job creator, releasing another in a series of videos showcasing job growth after a PE acquisition. But Steven Rattner notes that job creation isn't the industry's primary goal. Private equity, he says, seeks profit first and "any job creation [is] a welcome but secondary byproduct".

The most recent research, Peter Coy writes, indicates that "having your company acquired by a private equity firm is like living through a national recession". Ezra Klein looks at that research and argues that Mitt Romney should have learned from his time at Bain that a strong social safety net is as important as economic growth.

Mike Konczal lays out the the major strains of criticism against private equity and concludes that it "[games] tax law while cashing out short-term value, leaving others in the firm worse off and the firm itself more prone to collapse and less able to produce long-term value". The Epicurean Dealmaker counters, saying that a successful PE deal generally ends with selling to a new buyer, and if the PE firm leaves the company as a shell of its former self, it probably won't have made much money on the deal. – Ben Walsh

On to today's links:

Long Reads The philanthropic complex: Capitalism's risk manager – Jacobin

from Breakingviews:

Goldman renewable energy dash more than greenwash

By Christopher Swann The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Goldman Sachs is making a dash to invest in renewable energy projects. It says it will invest $40 billion of its own and clients’ money over a decade. The Wall Street firm isn’t above self-serving spin, but it’s also never far from the money. With solar and wind power nearing cost levels that are competitive with fossil fuels, clean energy could burnish Goldman’s bottom line as well as its green credentials.

A degree of cynicism over Thursday’s announcement is warranted. The firm helped funnel $4.8 billion to clean energy firms in 2011, so its latest pledge, averaged over 10 years, would actually represent a drop in investment in the sector. But in fact Goldman has a record of being better than its word on environmental investments. A $1 billion commitment in 2005 turned into the deployment of $24 billion of financing by the end of 2011.

And, of course, money talks. Goldman’s timing looks spot on. Solar and wind power seem close to a tipping point in many parts of the world, including the firm’s home market. In sunny U.S. states like California, for instance, the price of solar electricity under long-term contracts has plunged from about 17 cents per kilowatt-hour in 2010 to around 8 cents now, according to Green Tech Media. It would cost a couple of cents more without government incentives, but it’s now within striking distance of electricity generated from natural gas. At today’s low gas prices, that runs around 6 cents per kilowatt-hour.

Technological improvements have also driven the cost of wind generation down by about a fifth over the past decade, again to within easy range of gas-fired generation even in parts of the United States where the winds aren’t especially reliable, according to the Department of Energy.

An added major selling point is that once generation equipment is installed, these prices are locked in for decades since the sun and wind are free. The same cannot be said of America’s gas or even coal, let alone oil. With renewable energy looking like it will soon hold its own competitively, Goldman’s latest $40 billion promise is one it should have little trouble keeping.

from Breakingviews:

Markets vote for the euro

By Edward Hadas The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Companies are broken up when managers think the whole is worth less than the sum of the parts. Smaller enterprises are more flexible, they say, than incompatible organisations artificially joined into a single, excessively bureaucratic entity. Investors often agree and share prices commonly rise on rumours of a split. The euro is clearly different. The fear of a break-up is making the single currency fall.

The market’s vote in favour of the euro is usually portrayed as its equivalent inverse - a vote against the woes which would accompany a retrograde transition to national currencies. Yes, the euro has dropped from $1.32 to $1.25 since the beginning of May because a messy Greek exit would cause all sorts of grief, even for the stronger members. A recession would be unavoidable, just as after the bankruptcy of Lehman Brothers in 2008. Yet while that dire forecast may be justified, it is itself a tribute to the benefits of cross-border integration within the euro zone. The financial ties have are so tight that breaking them would cause a great deal of trouble.

The market’s judgment would probably be the same even if traders believed that a euro split could be managed without much additional financial stress. A currency demerger would reverse significant economies of scale. With floating exchange rates, companies will be more national and less European, cross-border capital flows will become even more capricious and Europe will look pathetic in international negotiations.

National currencies would indeed be more flexible and less bureaucratic than the euro. In practice, that means national governments would be more likely to use inflation and devaluation to avoid tackling structural economic challenges. The loss of a global currency would also be the loss of potential future gains from hosting a global reserve currency. The euro might someday replace the dollar; the deutschmark never will.

It might have been better not to have started with the single currency without more political and financial unity in Europe. But almost 14 years into the experiment, a break-up would be value-destructive. The falling price of the euro shows the market has got this one right.

from Jack Shafer:

The cable news audience has peaked

CNN's rotten ratings have grown only rottener. The Time Warner-owned news network drew fewer prime-time viewers last week than any week since September 1991, the New York Times just reported. But CNN isn't the only network riding the down escalator when it comes to ratings. Over the same week, Fox News Channel attracted its fewest viewers in the important 25-to-54-year-old category since July 2008, the Times added.

Various observers have blamed the viewership downturn on the lull in the 2012 campaign, on viewers defecting to the season finales on the entertainment channels and on the lack of breaking news. But I interpret the falloffs as fresh evidence that the audience for cable news has peaked.

The first sign of a peak in cable news appeared in March 2011, when the Pew Research Center released a study that proclaimed, "Though many will remember 2010 as a hard year for CNN, in reality, most cable news channels suffered audience losses." The able chartists at Pew drew a sad graph of cable news. Combined median viewership for CNN, Fox News and MSNBC during prime time had receded 16 percent, to 3.2 million, that year. Mean viewership had also dropped 13 percent, to 3.3 million, making it the largest year-to-year drop for cable news since Pew started analyzing the numbers in 1997. It also marked the first drop in the median audience since 2006.

The bad news continued through 2011, as cable news viewership remained nearly flat. This was fairly astonishing considering all the breaking news from that year – the Arab Spring, Japan's tsunami, the killing of Osama bin Laden, the Libyan civil war and the European economic crisis – not to mention the bustle of the presidential campaign.

Among those who noticed that cable news was flatlining was the Atlantic Wire's Uri Friedman, who surveyed analysts for the underlying reasons in a March 2011 post. The consensus view put the onus on the Web: Now when big news breaks, the polled pundits agreed, the curious go to the Web (often via their mobile device) instead of cable news. Outside the Beltway's Doug Mataconis speculated that the potential audience for overtly liberal (MSNBC) and overtly conservative (Fox) TV news had maxed out.

Other possible reasons for the cable news slump is that the three channels (plus CNN's subsidiary channel, HLN), approached maximum carriage on large cable systems years ago. Upwards of 90 percent of U.S. households already subscribe to cable or satellite TV, and most carry the news channels, so there are very few eyeballs out there that would like to tune in to CNN, Fox News and MSNBC but can't.

from Tax Break:

Republicans and Democrats diverge on state taxes

Under pressure from Tea Party lawmakers, Kansas Gov. Sam Brownback backed down on sales tax plan.

Kansas lawmakers lowered income taxes earlier this week. The top rate was dropped to 4.9 percent from 6.45 percent. The overall cut to revenue collection went beyond what Republican Gov. Sam Brownback had initially proposed.

Tea Party Republicans in the state legislature successfully  pushed the governor to abandon higher sales taxes that would have offset some of the lost revenue.

Now Kansas stands to lose $800 million in 2014 as a result of the tax cuts.

Lawmakers in the Democrat-controlled state of Maryland went the other way. Earlier this month, Gov. Martin O'Malley signed a tax increase on individuals making more than $100,000 a year.

Maryland's new top income tax rate of 8.95 percent becomes one of the highest in the country. The tax applies retroactively, meaning those effected will see high tax bills for the full 2012 tax year.

from Chrystia Freeland:

Taxes: How low can you go?

Are your taxes too high? When Gallup asked that question in April, tax month in the United States, 46 percent said they were. An additional 47 percent said their taxes were “about right.” Just 3 percent said their taxes were too low.

This campaign season reflects that result. Mitt Romney, the Republican candidate, is offering a 20 percent tax cut for everyone. Given the mood of the conservatives in the United States today, that may not surprise you. But even President Barack Obama, who is routinely described as a socialist by his opponents, is peddling a plan under which 99 percent of Americans would pay less than they did under the last Democrat in the White House, Bill Clinton.

This bipartisan agreement that the overwhelming majority of Americans should pay lower taxes than they did in the 1990s is remarkable for many reasons. For one thing, we are constantly hearing – and it is true – that U.S. politics is more polarized than ever. But unless you are a member of the 1 percent, on this core issue there is a lot more consensus than you might think. Political strategists on both sides, it turns out, know how to read poll data.

But the really surprising thing about the no-more-tax consensus is how much of an outlier it makes the United States compared both with the rest of the world and with itself in recent history. When it comes to foreign policy or to global economic dominance, American exceptionalism may indeed be in jeopardy. But when it comes to taxes, the United States is quite different from most other Western industrialized economies.

According to the International Monetary Fund, in 2011, among the world’s 30 leading Western economies (plus Japan), only in New Zealand and in Japan was government revenue a lower share of gross domestic product than in the United States. Countries like Australia, Estonia, Ireland and Switzerland, which tend to favor low taxes and a small state, have government revenue that accounts for more of GDP than it does in the United States.

The Internal Revenue Service is also relatively restrained compared with recent U.S. history. In 1945, at the close of World War Two, federal tax receipts were 20.4 percent of GDP (expenditures, by the way, were 41.9 percent, putting the federal budget deficit at 21.5 percent, compared with 8.7 percent in 2011). In 1952, the year the Republican Dwight Eisenhower was elected president, federal government revenue was 19 percent of GDP. In 1988, the last year of Ronald Reagan’s transformational conservative presidency, the federal tax take was 18.2 percent of GDP.

Compare those figures with that of today, when a Democrat is in the White House, nearly half of Americans think their taxes are too high, and both parties are promising to keep taxes low for all, or, in the case of the Democrats, 99 percent of Americans. In 2011, government revenue was 15.4 percent of GDP, lower than it was at any time during the Eisenhower or Reagan eras. Like anorexics, who think they are grossly fat when they are very thin, the American body politic is suffering from a national version of body dysmorphia, with nearly half the country believing taxes are high, when they are comparatively and historically low.