Five welcome headlines for the coming year

December 24, 2010

By  Richard Beales and Rob Cox

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

The financial crises of the past couple years spawned myriad reforms of their own. But there are other undesirable situations around the globe that still need changing.

Reuters Breakingviews highlights five financial headlines that investors should wish for — but are highly unlikely to appear.

(1) “G20 agrees to scrap interest deduction.” Corporate finance everywhere is skewed by the tax deductibility of interest, which encourages excessive leverage — one underlying cause of the recent financial crisis. And housing markets where borrowers can deduct large amounts of mortgage interest, notably the United States, suffer similar distortions, with predictably troublesome results. The UK phased out the mortgage deduction it used to have. But these are tricky political waters, and even isolated moves are unlikely, never mind a concerted global effort.

(2) “Apple, Google, other global tech firms to pay huge special dividends.” Sure, some, like Cisco, have talked about starting a payout of a modest size. But their stashes of cash are out of all proportion to the universe of sensible ways they could spend it. Most of the pile should go to shareholders. But that requires bosses to concede their growth prospects are finite and effectively shrinking the companies they run.

(3) “China floats the yuan.” Perhaps not completely freely — that could be asking too much, even for a rust-belt Congressman. But it’s a needed move to ease global economic imbalances. Unfortunately stability and employment are over-riding objectives of the regime in Beijing, and any big step that threatens either won’t be taken.

(4) “Bipartisan energy bill passes Congress with overwhelming support.” A sweeping effort by the world’s top consumer of hydrocarbons could include eliminating inefficient subsidies for U.S. ethanol production, the removal of import tariffs on Caribbean and Brazilian cane ethanol, a $1 per gallon (or higher) gas tax, a mandate for all federal agencies to convert their vehicles to run on compressed natural gas and a carbon tax encouraging energy conservation and cleaner-burning fuels. Pigs might fly, too.

(5) “General Electric follows Citigroup and Bank of America with break-up plan.” Carving up GE into separate businesses and winding down GE Capital would create value for shareholders and show that Jeff Immelt, the chief executive, recognizes that the company’s conglomerate structure doesn’t create sufficient synergies to warrant keeping the undervalued assets together. The company may slowly be heading in that direction — but swallowing his pride and doing it quickly looks a step too far for Immelt.

(Editing by Rob Cox and Martin Langfield)

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