"CAN THE ISLAND OF TOBAGO PASS A LAW TO BIND THE ENTIRE WORLD"

That is the question posed in one of the most famous conflict of laws cases the title of which I, of course, cannot remember.  It was back in 1840or there abouts and even I wasn't born yet but the principal is well-asked today as we go fumbling around trying to make believe that if we bark, all others will jump.

Dodd/Frank is once again highlighted as how not to write legislation in what could be an important and dangerous disagreement between the U.S and the Euros concerning swaps and derivatives--you know, those things that no one understands and everyone hates.  Granted, it might not have been a good idea to have these contracts floating about without any real idea of the value of individual positions and the requirement that they now be traded through a clearinghouse might be a good one (more on that later), but when you realize that this business is not solely an American one and therefore if you try to pass legislation that attempts to govern the entire world, somebody might get upset.  The requirement that anybody doing business in the U.S.--not just being physically present mind you, but trading into and out of as well--be bound by the the rules of the U.S. clearing house and thereby subject to all U.S. laws pertaining to the same as Dodd/Frank so states, did in fact get the Euros upset and we are now at a stalemate as to how to proceed.

It is all so silly, really.  Like the Queen of Hearts, Congress has produced a verdict before the trial and run around screaming "off with their heads" in response not to market requirement but, like the rest of that garbage law, to political pandering.  Unfortunately, this is not a simple as throwing a bunch of lawyers together in a room and demanding language on which both sides can agree.  Oh no.  Now we are talking about the right of nations and sovereign egos and that is a very different thing indeed.  And then of course is the substance of the thing which the pols will claim was fully discussed and which I can assure you was never fully understood.  The clearinghouses themselves.

You see, the concern was that in the crisis, no one knew what exposures were where, or to put it another way, who was on the other side with Lehman and for how much.  Now a clearinghouse takes that concern away, or at least it appears to, as the clearinghouse guarantees the fulfillment of obligations traded through it.  There is one small problem, however.  Who spies on the spies or who guarantees the clearinghouse?  No one loses sleep over facing Third-Fifth National, but if it is DeutscheBank?  As the former manager of Man United used to say, "Squeaky bum time, lads."  And so we go into the future with not exactly the lame leading the blind, but certainly with the creation of problems that could have been avoided if some people had paid a bit more of attention to the business in hand rather that to howling of the Crazy Lizzys of the world who now, unfortunately, find themselves with even more power to expand the rubbish heap which they produced.


Eric Holder, the Attorney General of the United States, announced his intention to resign today.  Holder is a race-baiting, lying, malfeasant, extorting thug.  Aside from that, I don't like him very much.

MIXED EMOTIONS

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.