Monday, April 28, 2014


No, not the watch-a-busload-of-economists-go-over-a-cliff-and-realize-that-two-seats-are-empty kind.  It's the wake up in the morning and tell the world, "I told you so" kind.  You love to be right but in so being, bad things are going to happen

Today was a two-fer.  Pfizer announced that it was prepared to make a bid for Sandoz of $100 billion.  Yeah, $100 Billion.  Whether the proposed merger made any sense from a business standpoint I haven't the slightest idea, although one can assume that deals such as this are not announced on a whim, what will catch the headlines is that if the transaction is concluded Pfizer will switch from being an American company to one whose corporate domicile is in the United Kingdom.  Why?  Taxes.

Pfizer has beaucoup dollars stashed away offshore which, if repatriated, would be subject to the U.S. rate of 35%.  BUT, if Pfizer completes the transaction and shifts its corporate nationality, the funds can be used to fund its operations in the U.S. with zero tax liability.  In addition, the U.K. has a corporate rate of 21% as opposed to the afor-mentioned 35%.  They also speak English Over There.

You might remember that in 2009, I wrote extensively of The Leader's appointment of a blue ribbon panel to explore the overhaul of the tax code.  The result was actually a thoughtful, intelligent and accurate review of where we stood and where we could go and the benefits that could be attained if the outlined path was followed.  Oh no one expected it to be adopted immediately, but it presented more than simple discussion points: it was a road map.  It was at the time and up to today completely ignored by The Leader and at the time I said that unless we got our code in order and recognized that there was competition out there we could well see the shift in the domicile of our corporations, it already having occurred with Transocean.

The trickle is about to become a full-running stream and the reaction will of course be outrage at the level of The Leader and Congress with calls for legislation to stop this "stealing from the taxpayer." Under what chapter of the law this can be accomplished is something I haven't quite figured out as of yet but it will be proposed.  What will not be proposed is the reform of our tax code which will of course require bi-partisan agreement.  Can't have that when the mantra for years has been inequality among the haves and the have-nots.   Whose next, Exxon?

The other I-told-you-so event was a squib in the WSJ speculating that the major financial institutions who are leaders in the SWAPS business are not-so-quietly education their client that this business will soon be shifted to locations outside of the U.S.--probably London--where the implementation of new rules and regs governing the business will not be in place before 2016 and even then will probably be considerably less onerous and simpler with which to comply than those Over Here.  Gee did I predict that too?  If this is the case, that wipes out 250 pages of Dodd/Frank to which the reaction will be "good riddens."  Mind you, such an act would come with the understanding that any overseas affiliate engaged in this business would not enjoy the explicit guarantee of the parent company.  "How about implicit" you may ask?  To be fair, for many years financial subsidiaries were deemed to be implicitly guaranteed by their parent in many situations and markets operated under these assumptions.   But today, the numbers are far bigger and given the added risk, the business may shrink to hedging operations for which the products were originally designed and much of the trading for fun and profit may be greatly reduced.  That may not be such a bad thing if you think about it.  But what is a bad thing is what is, and will become a greater effort to avoid the crushing regulatory oversight by switching other product lines to regulatory safe-havens.  London is one thing: the off-shore banking center of the Island of Peilu is quite another.  I'll let you know when that happens.

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