Commentaries

“Tobin tax” gaining ground in Europe

No longer just a hopeless cause for anti-capitalist activists, the idea of a global tax on financial transactions is gaining ground in Europe.

European Union leaders could not agree to put it on the agenda of this week’s G20 summit on reforming the financial system in Pittsburgh, but the leaders of France, Germany and the European Commission endorsed the concept. (more…)

A dark hour for CMBS

The last week has been a bit of a shocker for Europe’s already crumbling commercial mortgage-backed securities market (CMBS). Investors have had to cope with steep declines in the value of their bonds and a wave of downgrades by rating agencies.

Now, to add insult to injury, there has been a jump in legal and structural issues. Bondholders are having their rights diluted over or taking on fresh liabilities they didn’t even realise they had.

In France a judge this week sided against bondholders who wanted to take control of a Paris-office skyscraper formerly owned by a Lehman Brothers unit. The loan defaulted earlier this year, but a Paris judge approved a safeguard plan proposed by its owners, which include Lehman’s receivers Pricewaterhouse Coopers. Creditors argue that the ruling risks damaging property investment in France.

And in the UK there is the never-ending saga of White Tower 2006-3. This portfolio of elegant city offices was once the property empire of billionaire Simon Halabi, who refinanced them with a CMBS arranged by Soc Gen.

Now the loan has defaulted and the properties are the playthings of a handful of frustrated bondholders and, all of a sudden, the UK tax authorities, which have slapped the companies that own the properties with a withholding tax charge. FT’s Alphaville tells the story here. 

This is all bad, but the worst is probably still to come for bondholders. The highly levered nature of many property loans refinanced during the boom years will likely lead to a truly ghastly default rate as loans mature and can’t be refinanced. The only thing that could save the market is a speedy recovery in commercial real estate and revival in bank lending, hardly a likely prospect.  The return of any kind of CMBS market in Europe looks further away than ever.

Why the U.S. needs a Value Added Tax

Swelling deficits and an aging population leave few palatable options when it comes to taxes.

The best choice by far would be the creation of a new value added tax — a “money machine” that can bring in huge sums with relatively little effort. America is alone among rich nations in not charging a VAT, and its continued unwillingness to do so will make it harder to cope with the fiscal challenges ahead.

Giving birth to a new tax will certainly not be an easy sell. The stunning 1980 reelection defeat of Al Ullman, the powerful chairman of the House Ways and Means Committee who had advocated a VAT, is still a warning to American politicians.

The timing of a new tax on consumption may also seem suspect. Aren’t we supposed to be getting Americans back into the malls?

VAT, however, is worth the risk. It could yield enough money to pay for healthcare reform, as well as a meaty cut in income tax and a reduction in the deficit. It could also be done without destroying Obama or the Democrats.

Unlike taxing the rich — which has emerged as a favorite strategy of many Democrats — a VAT is extremely easy to collect. This is partly because it is gathered from each producer in a chain.

Take bread. The farmer, miller, baker and grocer all pay their share of the tax. If the grocer cheats, the government loses only a quarter of its tax. Furthermore, each producer has incentive to make sure its suppliers have paid VAT. The miller becomes liable for the farmer’s share of VAT unless he can prove the tax has already been paid. VAT collection polices itself to a large extent. The sums of money that could be raised are immense, making it easier to strike a political compromise. Exactly how lucrative VAT would be depends largely on which goods are exempt.

The rich are not easy quarry

Cash-strapped politicians are more willing to play Robin Hood than at any time in a generation. Tax rates on the rich may soon hit levels not seen since the 1980s.

The wealthy, alas, are not easy prey. Backed by highly paid lawyers and accountants, no other group is better able to run circles around the taxman. As a result, America’s politicians may get less cash than they bargained for and more economic distortions.

There are many easier and less disruptive ways to get the cash.

Of course, the temptation to launch a direct strike on the rich is understandable. The past three decades have been very good to the affluent. The top 1 percent of earners now account for 19 percent of America’s income, up from 9 percent in 1980. This elite group has also been quiescent, dutifully paying 40 percent of all income tax, according to the non-partisan Congressional Budget Office.

It has been many years since the rich had a powerful incentive to test the limits of the tax code. The top rate of income tax has fallen with only minor interruptions since its vertiginous peak of 92 percent in 1953. But a foretaste of what might be expected was offered by Maryland’s ill-fated creation of a millionaires-tax bracket in 2008.

A year later 1,000 millionaires had disappeared — a third of the total — and revenues from this group had fallen by $100 million. Some may have left the state while others may have found ingenious ways to reduce their reported income.

The U.S. tax code is replete with legal dodges for the wealthy, whether you are a top executive, independent business owner or the lucky recipient of inherited wealth.

Tax Goldman debate heats up

The idea of taxing Goldman Sachs and other banks that engage in prop trading is heating up.

I fully endorsed the idea in a column on Thursday. (i amended my thoughts a bit from earlier in the week). FDIC Chairman Sheila Bair seems to be talking about a similar bailout tax concept. And we may hear more from Bair on the subject next Thursday when she is set to testify before the Senate Banking Committee.

The Wall Street Journal editorial page earlier this week also lobbied for some form of bailout tax–one related to firms that rely on high-levels of leverage. John Carney at Clusterstock is on board.

And now it appears the folks at Baseline and Abnormal Returns like the idea of some sort of tax on financial firms that make big profits from trading with the implicit backing of the US government.

Anyone else want to jump on board the tax Goldman train?

Tax Wall Street trades

Reports of the death of the investment bank have been greatly exaggerated, as Mark Twain might have put it.

Now all the chatter is about how little things have changed on Wall Street, with trading revenues and fees from underwriting stock deals padding the bottom lines of both banks. Back in September, The New York Times ran a lengthy article headlined “Wall Street, R.I.P.: The End of an Era.”

But this week the paper of record is writing about the return of the gilded pay package at Goldman.

Of course, things are different on Wall Street. Two big investment banking competitors are gone, leaving more opportunities for the remaining players. Banks like Goldman and Morgan Stanley owe a large debt of gratitude — and maybe their very existence — to the federal government.

In particular, Goldman, Morgan Stanley and JPMorgan collectively sold more than $80 billion in government-guaranteed debt. The government-backed bond sales enabled the banks to raise desperately needed capital at a time when investor confidence was at an all-time low.

It’s amazing what a big bank can do when it’s all but got the full faith and credit of the U.S. government behind it.

The big trading gains at Goldman and JPMorgan also should put to rest the notion that banks can’t generate hefty trading revenues, if forced to operate with lower levels of leverage. The gross leverage ratio — a measure of a bank’s debt to assets — dropped to 14.2 at Goldman, nearly half of what it was at the start of the financial crisis.

Tax Goldman

Goldman Sachs is entitled to make as much money as it wants from proprietary trading–that is trading stocks, bonds, currencies and bonds for its own account. But as long as Goldman benefits from bonds it sold with a government guarantee, it should pay an extra tax on those prop trading gains.

The Wall Street Journal editorial today proposed a tax along this lines and I think it’s a good idea. It’s not often I find myself in agreement with the WSJ editorial page, but the paper’s edit writers are right in calling for an “FDIC bailout tax.”

The Journal suggests tying this tax to the leverage ratio of any financial institution, like Goldman, that is deemed too big to fail. But I’m not sure how that would work.

An easier way to institute such a tax would be to simply impose it on the profits a firm like Goldman made from prop trading. Such a tax also would have the added benefit of forcing Goldman and other firms to break out revenues and profits for prop trading and trading for customers.

Goldman and other banks currently lump all trading revenue together–making it impossible for investors to understand how these giant financial institutions tick.

Goldman and other too big to fail banks could get out from under this tax by retiring the billions in bonds they sold during the winter with the backing of the Federal Deposit Insurance Corp.

As long as taxpayers are implicitly on the hook for saving these too big to fail institutions, big banks like Goldman should be paying more in tax dollars for the priviledge of their elite status.