10 March 2009

Perspective on Banking Secrecy

During the recent past politicians and lobbies of all persuasions seen to have found a new 'Enemy Number One' - Banking Secrecy and linked to this Tax Havens large and small.
Politicians and their paid servants the regulators have failed miserably to prepare for the current global financial crisis. Despite the fact that institutions like the Bank of International Settlements has spent roughly 10 years and produced a report of 1000 pages the Bale 2 rules did nothing to prevent the debacle that has afflicted major banks around the world.
So it appears to be nothing more than a desperate search for scapegoats when politicians attack banking secrecy and tax havens. They are not the cause of the current crisis!
Not so long ago there was a time when anyone could walk into a Bank in Austria and open a bank account without presenting any form of documentation. No one asked what their name or address was. You paid in your money and you received a bearer passbook that was the only document you needed to claim back your money. In his teenage years the author even opened a number of passbooks on the same day. That way he pocketed a small amount of money that the banks put into new passbooks as a reward for opening the account.
Was crime any higher as a consequence of lax banking regulation? Was corruption rampant? Not at all. Since the (US inspired) crusade against banking secrecy gathered speed both crime and corruption have - if anything - increased. The world certainly does not seem to be a safer place.
Ironically, much crime and corruption can be traced back to ill-conceived legislation: the war on drugs, arbitrary taxes (tobacco, alcohol), questionable regulations and subsidies (agriculture, trade tariffs), limits on prostitution. All these laws and regulations may be well-intentioned but they provide a fertile field for criminal activity and usually are counterproductive as well as costly to the taxpayer and citizen (who most of the time get no say on respective laws.
If countries want to close down tax loopholes they can avail themselves of a solution that is easy to administer and leaves the precious privacy of all citizens untouched: Legislators can decide to impose taxes at source. If politicians are really only interested in reducing the amount of tax that in unpaid this solution should be suffice. Anything more intrusive indicates that the authorities are really interested in invading the private sphere of the individual and increase the control that the state already has over the citizen's lives.

9 March 2009

Euroland a Zone of Instability?

In July 2005 we penned a warning about the Euro. The past few months have demonstrated that the new currency is not the solution to the Old Continent's economic problems. In fact, it is a potential risk to the stability of the Eurozone. While the risk of sudden shifts in currency values is (for the moment) off the table the economic imbalances express themselves in the credit markets as the markets try to evaluate which country may eventually have to default on its debt.

7 March 2009

Guaranteed Products - but by whom and under what conditions?

Investment Solutions that offer the Investor a guarantee for the return of part or all of its investment appear to many Investors to be the Holy Grail of Investing.
One of the fundamental tenets of Portfolio Theory is the relationship between risk and return. The higher the expected return the more risk has to be assumed by the Investor.
As we all would like to have something for nothing - or at least as little as possible - the vendors of Guaranteed Investment Products dangle a very tempting solution to this investment conundrum.
These investments are also promoted under the name of 'Structured Investments' and usually contain an array of derivatives - options in particular - that even investment professionals may find difficult to understand.
In addition, there is also substantial counterparty risk associated with the investment package and as the Credit Crunch has demonstrated the investment and banking professionals were found to be less than capable of correctly assessing the credit worthiness of even the most prominent financial service providers.