Bearish News

Goldman Sachs’ tax rate dropped to 1% in 2008. That’s down from 34% in 2007, according to Bloomberg News. Goldman attributed this drop to “geographical changes” and tax credits. I’m not a CPA, but that screams “tax haven!” to me.

If they are using offshore corporations to dodge taxes, the testicular fortitude on these guys is impressive. They’re taking taxpayer dollars via the bailouts, shifting profits overseas to avoid paying any taxes, then awarding themselves generous bonuses. This type of creative tax-accounting is common among big banks. See the CBS story which I link to below for more. Just to be clear, I do not have any evidence or proof of legal wrongdoing by Goldman Sachs, or any other investment bank traditional bank. But it just doesn’t smell right.

There is some hope. Today Timothy Geithner announced the Obama administration’s support for legislation which aims to eliminate offshore tax havens:

Let me just start by saying that we fully support the legislation you referred to championed by your colleagues on offshore tax centers, and we look forward to working with you as part of the broader effort to address international tax evasion and close the tax gap. source

Most large banks who received taxpayer-bailouts have significant oversea tax havens. But the sheer number of tax-haven subsidiaries owned by the banks in the Cayman Islands alone is staggering:

Goldman Sachs has 15 subsidiaries there. Bank of America: 59. Citigroup: 90. But Morgan Stanley beats them all with at least 158 subsidiaries in the Cayman Islands – seven times the number of hotels. source

Goldman Sachs stock was down 4.5% today. Given their miraculous 4q tax-rate, I’d say there’s a good chance that these events are related.

Post was updated for clarity and legal-compliance 5/24/09.

Minor edits made again 8/11/09 (sloppy writing, slowly getting better I hope). It is interesting to note that absolutely nothing has been done to shut down these tax-havens, despite Geithner and Obama’s promises. Working on an update piece on this now.

Disclosure: short JPM, long GS puts. Disclaimer: None of the information here should be considered investment advice. Always consult a professional before making investment decisions.

If any information here is not correct, please contact me through the form at the top of the page and I will remove/fix it ASAP.

The U.S. and AIG nears agreement on new bailout package. The BOD of AIG will vote on Sunday. The revised agreement will include an additional 30B equity commitment from the government, more lenient terms on its existing preferred investment, and a lower iinterest rate on its current 60B line of credit. It will also give the FED ownership interest in two of AIG’s foreign units. Source: www.cnbc.com/id/29442377.

Two more banks failed this weekend. One in Nevada and one in Illinois. The failure in Nevada will cost the FDIC 59.1 Million dollars. No estimate on the Illinois bank. 17 banks have failed thus far in 2009. Source: Marketwatch

The FDIC will charge a one-time emergency insurance fee to replenish the agency’s insurance fund. The fee will amount to 12 Billion dollars. Source: www.marketwatch.com/news/story/FDIC-char…

Markets:

We can close the books on February. The S&P 500 index closed Friday at a 12 year low. The DOW has fallen for 6 straight months, shedding 39% of its value. The DOW has not lost this much of its value, in a 6 month period, since 1932. In February, the DOW and S&P lost 12% and 11% respectively. We are very close to a 6 handle on both indexes. Source: www.cnbc.com/id/29428052

Financial companies in the S&P 500 slipped 57% in 2008, its largest drop on record. This industry had been increasing its share of this index from 2002 through 2007, peaking at 22% in 2006. The percentage now stands at 10% and is expected to drop to 7%. Source: Bloomberg

The lowering of interest rates have not spurred home buying as fees have increased and eligibility requirements have tightened. Appraisers are finding it difficult to assign a market value to homes as they are unable to find the required 3 comparable sales over a 6 month period within a 1 mile radius of the home in question. Also, other underwriting standards have shifted from overly lax to too tight. Source: Bloomberg

U.S. demand for oil in 2008 hits a 10 year low. Source: www.cnbc.com/id/29429395

From MrKenduffy on the Yahoo message boards.

The headline on Yahoo’s front page read, “Gov’t reportedly mulls taking larger stake in Citi”. Hmm, I wonder why the government wants to invest in CitiGroup? Maybe I should buy some too! Geithner’s a real value-investor, looking at these beat-down dogs of the dow.

Maybe the headline should have read, “Citigroup insolvent, begs Fed for cash”. It’s a pretty sad attempt at spin. The market isn’t going to be fooled into thinking that the government is “mulling a larger investment” in Citi. They’re on life support and need cash to surive. C’mon Obama, follow through with that transparency stuff you talked about.

How much will the taxpayer get for our stake this time? Last time I believe we scored a 3.5% ownership stake in a $35 billion company for $25 billion plus $100b+ in loan guarantees. Now THAT is a deal.

Dennis Kucinich is alleging that an unnamed entitity ordered the SEC to stand down when they were investigating the Stanford Group (aka mini-Madoff). Intersting stuff, could get ugly:

The Royal Bank of Canada just released a report, and they say most of the upcoming failures will be caused by commercial real estate (CRE) loans. Excerpt:

The Federal Deposit Insurance Corp. closed nine banks so far this year after shutting 25 in 2008 and has 171 institutions on its “problem list.”

To summarize: since 2008 we’ve only closed 34 banks. And RBC says 1,000 may close over the next 3 years. It’s highly unlikely that the FDIC will have enough to cover all those failures. We might need to toss them a trillion too.

The comparison between our bubble and Japan’s seems almost flattering these days. Let’s take a look at how our economies looked going into our crisises:

• Japan: Creditor nation, loans others money. High personal savings rate. Large manufacturing base
• US: Debtor nation, borrows loads of money. Extremely high debt in all areas: personal, corporate, and public. Shipped most of our manufacturing capacity overseas because the dollar was strong

Add to that our unfunded medicare and social-security liabilities of $45-$99 trillion (depends on time horizon and who you listen to). Either way, it’s an inconceivable amount of money. A USA Today article from 2004 put the number at $53 trillion, which would equal $513,000 per household. That was 2004, hmmm….

Japan’s main stock market index (Nikkei 225) has plummeted from 38k in 1989, to around 8k today. But they maintained a decent standard of living. Health care wasn’t a total disaster. No major civil unrest or riots. I would almost be OK with that. But I still want our government to do better, and restore market efficiency, transparency, and honesty. Ugh.