January 25, 2016
What we’re reading this week
The Bank of Japan
The Bank of Japan recently dropped its interest rates below zero after previously keeping them very low. When the BOJ was asked “how low can you go” they dodged the question and referenced Switzerland, Sweden and Denmark, Nations with negative rates of minus 0.75 percent, minus 1.1 percent and minus 0.65 percent, respectively. While these measures primarily encourage monetary easing by applying downward pressure on financial institutions I still love the idea of a bond that pays negative interest. It’s absurd and doesn’t really pan out in this strategy but whenever I hear a story like this I imagine a representative from the municipality going-to-door to bondholders and demanding they pay their dividends back every quarter. You probably have to work in finance to find that funny. At any rate, ignoring the economic objectives, the practical implication of this is that investors holding the bonds until maturity actually get less than their original investment back. There is not really enough data to support this theory of monetary easing and many nations have been reluctant to adopt this strategy, opting instead to do what the US did: buy back its bonds.
As of Wednesday, the six brokers charged with rigging Libor were acquitted. The accusation was that they conspired with Tom Hayes, formerly of UBS and Citigroup, to manipulate Libor. Hayes was the first to stand trial, was convicted, then sub sequentially sentenced to 14 (later reduced to 11) years in prison. According to the Wall Street Journal, “A statement released on Mr. Hayes’s behalf said he was “thrilled that the brokers can tonight return to their families and their lives” while also “bewildered that he is now in a situation where he has been convicted of conspiring with nobody.” The brokers were acquitted because although Hayes did ask them to manipulate Libor, they did not do as he asked, they just told him they did. This proves once and for all: two wrongs do make a right! While I don’t feel great about brokers lying to a customer, it’s a slightly better offense to con a con man right? Equally murky is the ruling against Hayes. 11 years in prison seems right for a Libor-manipulating mastermind conspiring to move global interest rates, however this penalty seems heavy for simply asking someone to move global interest rates and having them say “sure” but never following through.
Hot New Tax Haven: The US!
Bloomberg wrote a story about how the US is shunning new global disclosure standards and becoming a new market for wealthy foreigners to move their money to. Peter A. Cotorceanu, a lawyer at Anaford AG, a Zurich law firm, had this to say “How ironic—no, how perverse—that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour.” Foreign banks and financial institutions feel better about it. Rothschild, for instance, opened a trust company in Reno, NV and is moving clients’ money from exotic locales to avoid the international disclosure requirements. And while the firm is quoted as saying the US “is effectively the biggest tax haven in the world” their spokeswoman also says ” We do not offer legal structures to clients unless we are absolutely certain that their tax affairs are in order; both clients themselves and independent tax lawyers must actively confirm to us that this is the case.” I guess that puts my mind at ease: before moving massive fortunes to secretive US-based trusts the company is at least asking the clients if their taxes are in order. I also have to wonder how independent said lawyer are…I mean someone has to pay them right? I assume that either the institution or the client is fronting money for this service and while I hope for the best that’s not really how conflicts of interest work.
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