naked capitalism

ndk says:

Can unilateral action by any single country to limit tax havens and regulatory arbitrage really have much impact? I’m sure tempted to suggest that it could, after seeing some of the provisions in the Stop Tax Haven Abuse Act. It certainly isn’t toothless; I’m particularly impressed by Section 102.

Capital moves fast, though, and money laundering is a time-honored activity that people have gotten very good at. I worry that anything enacted by a single country will be ineffective, particularly without diligent enforcement.

River says:

Re: Obama Crackdown On Tax Havens…

Tax havens and smuggling have a lot in common. We all know how government operations aimed at shutting down smuggling have faired. In many cases the profits are so large that the enforcers are corrupted.

Smugglers take advantage of variations in laws between countries. Nothing short of one world government and a single code of laws would be effective against smuggling. I submit that the same is true of tax havens.

mft says:

Concerning the Guardian article on Obama’s tax haven offensive: this is poor reporting by the Guardian, not even mentioning the British overseas dependency of the Cayman Islands, the principal target of the legislation proposed in Feb. 2007 by Obama, Coleman and Levin. And so far as I know (please correct me someone if this is wrong) the Isle of Man, Jersey and Guernsey are of little importance for US offshore tax haven hanky-panky. These islands are mainly used by expatriate Britishers to deposit their earnings in offshore accounts at British banks which are nevertheless able to make payments in the UK. Expatriate Britishers cannot operate normal, onshore UK accounts because of anti-terrorism/moneyaudering legislation since 9/11. I think most of them are not liable for tax in the UK.

sound money says:

The article about Keynes is garbage.

russell1200 says:

re: Merrill

I don’t think they really wanted the senior tranches. I think they were stuck with them.

They were booking record profits in 2007. Who was buying record amounts of CDOs in 2007?

You are selling ‘insurance” on iffy mortgage bonds in 2007 (the default swaps) and no longer paying AIG to cover it. You also have a certain amount of cash flow coming in from the underlying mortgages.

If the housing market bottomed out (and their have always been some thinking it would) they would have a great 2007 and never look back.

Obviously that is not what happened.

My only question is: who bought the junk tranches then? Since CDOs where often made up of some pretty junky pieces to begin with, I am curious who would be buying the junk of the junk.

I suspect that they gave it away, and just made assumptions that made the accounting look good. But that would be a diff ult trick to pull off.

Anonymous says:

Yay! Pandas!!!

Anonymous says:

ML was in the business of placing the various tranches of CDOs, synthetic and cashflow, with its institutional clients. Most notably in this regard, if it sold a significant proportion of the lowest-rated tranches (equity, BB, BBB and single A) it would “print” the deal. So, even if the deal had a total notional size of $1 billion, if it had placed, say $150 million of it, as long as the $150m was comprised of high risk parts of the capitalisation structure, it considered the deal done. It then “warehoused” the senior portions of those deals. An internal fight did occur as to how much “super senior” risk could/should be retained but the revenue producers won the day.

In the case of the synthetics, the risk of the entire portfolio is tranched into several different derivative swaps which assume the losses from the underlying portfolio according to a set of priorities. The middle tranches were credit enhanced by the most junior tranches and the senior most tranches were credit enhanced by the middle and junior tranches. The risk of the underlying portfolio, that was to be transferred through the tranches of risk in the synthetic (Merrilly BUYING PROTECTION in the form of SCDO tranches), could be assumed by Merrill (the assumption of risk here is actually a hedge for the risk already sold through the SCDO protecton) in either cash or derivative form. In the case of cash form, the underlying bond is bought and financed with repo and any interest rate risk is delta hedged with swaps. The result is a replicated strategy for a default swap. IN the case of derivative form, Merrill simply sold protection on the reference portfolio on which it (partly) bought protection in tranched form.

Now, in Merrill’s case, they fell in love with the “fees” and league table status of the deals they were printing even though they retained lots of “tail risk” in the form of super senior tranches. Risk models assigned a very low probability of loss and also a very low VAR to these tranches and hence the notional amount that could be retained against a modest amount of risk capital was quite large. It is only once the underlying assumptions deviate substantially from the initial assumptions (in the adverse direction, ie market implied default rates increase) do they begin to require substantial amounts of risk capital. At that point, they would have realised that they had a problem but they would also have realised that their positions were to big to place – the act of placing that much risk would drive the losses on the retained risk to unacceptable levels.

In Merrill’s case, they did this with CDO-squareds in which the underlying were (already leveraged) mezzanine (or middle) tranches of CDOs backed by home equity or subprime mortgages. The models underestimated the volatility of the underlying and hence the loss distributions assumed to “haircut” or determine the amoutn of required risk capital for the super senior tranches greatly underestimated the risk of loss on these tranches and certainly underestimated the mark to market volatility of these tranches.

Risk management was clearly lacking. The notional sizes involved in the retained super senior tranches was in the tens of billions. Even if one believed the risk was minimal, the nominals should be limited by the prospect of that assessment being wrong since these tranches by their very nature provide a small income compensation for low-probability but HIGH SEVERITY potential events.

I have written too much.

Hayek