Author Archive for Douglas French

Jerry Davis R.I.P.

Sadly, one of the most enthusiastic and generous supporters to the Mises Institute, Jerry Davis, has passed away.  Before health issues slowed him, Jerry was a frequent caller to the Institute, providing inspiration, to talk about Austrian economics and liberty, or to order books to be sent to friends or just people he came in contact with.  Jerry purchased  thousands of books  to spread the word of liberty.

His generosity made the Mises Circle in Houston a tradition and set the standard for Mises Circle attendance.   Mr. Davis’s sponsorship extended above and beyond, as he worked tirelessly to fill tables.  He paid the admission for dozens of attendees in addition to the Institute’s event costs.

Jerry was also an enthusiastic supporter of Mises High School events, sponsoring these programs in Auburn, Houston, and other cities.  What he cared about most was for young people to learn about freedom and sound economics.

Jerry was truly one of a kind.  Thousands of students have benefited from his kindness, generosity and passion for liberty.

Today, the cause of freedom lost a real warrior.  But his legacy will live on through the many he has inspired.

Jerry, R.I.P.

Can You Yell “Run” in a Crowded Bank?

Many states have laws on the books prohibiting anyone from making disparaging comments about a particular bank’s financial condition.  This sort of talk is thought to be outside free speech because just the slightest rumor can trigger a bank run.  Of course, not much of a line needs to develop at the teller window for bankers to get nervous, because they don’t keep much cash around to satisfy withdrawals.  Depositor money is lent out or invested, or in the case of J.P. Morgan, used for speculating in London.

In California, there’s been an anti-bank run law on the books since 1917 prohibiting a person from spreading false information about a bank’s condition.  In this age of deposit insurance and the FDIC, the law hasn’t been tested much.  But along comes Robert Rogers, who as an ex-employee of Summit Bank posted a rant and rave on Craigslist, saying, “I would suggest that anyone that banks at Summit Bank leave before they close.”

Rogers, who served as the bank’s chief credit administrator and vice president, also took the opportunity to post what American Banker describes as “vulgar comments about the bank’s chief executive officer and her son.”

The bank sued Mr. Rogers for libel, to which the ex credit administrator countered that his speech was protected by the First Amendment.  So, the lawyers for Summit pulled out a copy of the 1917 law and claimed his statements should not be considered free speech.

But the appeals court in a 30-page opinion said, “We find section 1327 cannot be reconciled with modern constitutional requirements.”   The court went on to say,  “When analyzed under modern constitutional jurisprudence, the broad provisions of Financial Code section 1327, on their face, impermissibly sweep within their proscriptions speech that cannot be criminally punished.”

The justices said the law is too vague and has too broad a reach, “and said the law lacks a requirement — included in other statutory restrictions on speech — that a speaker’s statement be proven to be malicious,” reports AB.

“It is a criminal libel statute without a malice requirement, which is designed to prohibit speech based on its content,” the court said. “It fails to give persons of ordinary intelligence fair notice of what is forbidden. It sets no discernible limits on what types of speech can be criminalized, and, allowing such free range, it lends itself to arbitrary enforcement.”

Of course bankers and their attorneys are troubled by the decision.

“While the First Amendment certainly provides broad protection to analyze and comment on banking matters, and even provide sharp and critical commentary, the U.S. Supreme Court has consistently held that the First Amendment does not give a person a constitutionally protected right to falsely cry ‘fire’ in a crowded movie theatre,” V. Gerard Comizio, a partner at Paul Hastings said. “The real question here is whether attempting to trigger a bank run arguably has a similar impact.”

“This case has profound implications about the scope of the First Amendment and the use of social media to provide critical commentary on the safety and soundness of particular banks,” said Comizio.

Murray Rothbard explained that there is no such thing as freedom of speech, but instead property rights.  Even in the case of falsely yelling “fire” in a crowded theater, Rothbard explains,

For, logically, the shouter is either a patron or the theater owner. If he is the theater owner, he is violating the property rights of the patrons in quiet enjoyment of the performance, for which he took their money in the first place. If he is another patron, then he is violating both the property right of the patrons to watching the performance and the property right of the owner, for he is violating the terms of his being there. For those terms surely include not violating the owner’s property by disrupting the performance he is putting on. In either case, he may be prosecuted as a violator of property rights; therefore, when we concentrate on the property rights involved, we see that the Holmes case implies no need for the law to weaken the absolute nature of rights.

In this case Mr. Rogers doesn’t have “freedom of the press” to post on Craigslist, but instead, as Rothbard writes,

what he does have is the right to write or publish a pamphlet, and to sell that pamphlet to those who are willing to buy it (or to give it away to those who are willing to accept it). Thus, what he has in each of these cases is property rights, including the right of free contract and transfer which form a part of such rights of ownership. There is no extra “right of free speech” or free press beyond the property rights that a person may have in any given case.

Bankers are sensitive, and for good reason as Rothbard makes clear,

But in what sense is a bank “sound” when one whisper of doom, one faltering of public confidence, should quickly bring the bank down? In what other industry does a mere rumor or hint of doubt swiftly bring down a mighty and seemingly solid firm? What is there about banking that public confidence should play such a decisive and overwhelmingly important role?


Running on the Euro

Wary depositors have been hauling billions of Euros out of Greek and Spanish banks over the past few weeks.  Since 2009, Greek depositors have withdrawn $4 million a month from that nation’s banks, while Spanish bank customers pulled 31 billion euros from Spanish banks in April alone.

More than any election result, bank runs reflect the mood of the people.  After all, depositors consider bank deposits their property.  The bank is just holding the money for them.  Any bit of nervousness, and it’s run first and ask questions later.  There is no upside to trusting the bank.  If it goes broke, the depositor’s property is gone.  At best, the bank doesn’t fail and the property remains.  There is no compensation for the sleepless nights.

Murray Rothbard explained in Making Economic Sense,

But in what sense is a bank “sound” when one whisper of doom, one faltering of public confidence, should quickly bring the bank down? In what other industry does a mere rumor or hint of doubt swiftly bring down a mighty and seemingly solid firm? What is there about banking that public confidence should play such a decisive and overwhelmingly important role?

Deposit insurance and the Federal Reserve have made banks runs in America a historical relic of the Great Depression.  The result is that bankers can lend increasingly high percentages of deposits with little fear that lines of anxious depositors form at the front door, not matter what the economic environment.   There’s no competitive advantage for a bank to maintain high reserves in the era of deposit insurance.

Systemically important banks are bailed out if their loans don’t work out, while small banks that topple over are seized on Friday evenings, with the deposit liabilities most likely assumed by another bank.  A new sign is put on bank over the weekend and many deposits don’t notice the difference.

Deposit insurance is only as good as the private entity or government that stands behind it.  As Rothbard points out, private and state deposit insurance schemes have not worked because all banks with fractionalized reserves are unsound and susceptible to bank runs, no matter how profitable they may be.  No private system has the monopoly of force required to cover all deposits.

If Greece announced a return to a drachma backed by gold or silver and 100% reserve banking, deposits would come flooding into Greek banks.

Instead, what the bank runs in Europe expose are the unsound nature of those banking systems, the fragility of the euro, and the uncertain viability of the individual fiat currencies that may be forced upon the public.  All of which is a good thing.  These runs provide a natural check on the banks’ ability to inflate.

On the bank run, Rothbard writes,

It is a marvelously effective weapon because (a) it is irresistible, since once it gets going it cannot be stopped, and (b) it serves as a dramatic device for calling everyone’s attention to the inherent unsoundness and insolvency of fractional reserve banking.

According to Wikipedia, deposits are insured in Greece and Spain, but there must be some doubt about the viability of those deposits, the currency, the deposit insurer, and the government itself.

Not wanting to let a good crisis go to waste, European Central Bank President Mario Draghi is urging European leaders to form a “banking union” that would include deposit insurance for depositors and “prevent failed banks from threatening the financial system,” the WSJ reports.  This is code for having the EU bail out systemically important banks,  because individual country finances are not capable of funding these bailouts.

Olli Rehn, the economics head of the European Commission, claims,

We need both a genuine stability culture in the euro zone and its member states, and a much upgraded capacity to contain contagion and reduce borrowing costs for its members. This is the case if we want to avoid a disintegration of the euro zone and instead make the euro survive and succeed.

The money Draghi would like to get his hands on is the European Stability Mechanism, the euro-zone’s permanent rescue funds. Right now these funds can only be used to lend to government, the ECB President would like to use the funds to re-capitalize banks.   In addition to providing euro zone-level deposit insurance, Draghi would also like to centralize banking supervision and regulation.

“The latest EU funding program does not solve the longer term problems of the solvency or funding of the banks, which now remain heavily dependent on the largesse of the central banks. One European economist calls  “a government-sponsored Ponzi scheme where weak banks are supporting weak sovereigns, who in turn are standing behind the banks — a process which can be described as two drowning people clinging to each other for mutual support.”

Bank customers who have decided to take their money and run, are looking out for themselves while leaving the bankers and the bureaucrats to drown.

The euro is a political construct that has the full backing of Europe’s political elite.  If the market was allowed to prevail, the euro and all of Europe’s banks would be history.  Even London bookmaker Ladbrokes has the odds at less than even-money the euro will be gone by the end of 2015.

Allowing the bank runs to continue would bring about a collapse of the banking system throughout Europe, paving the way for sound money. But don’t underestimate government force.  Draghi’s bank union plan can take the fate of euro, temporarily, out of the public’s hands, allowing the inflating to resume and the charade of a united Europe to continue.

Lawyers Cash in at the ADA ATM

Banks have been scrambling to upgrade their ATM machines to comply with titles II and III of the Americans with Disabilities Act (ADA), requiring them to make all of their ATMs fully accessible to the visually impaired.  But many of the nation’s 405,000 ATMs are not in compliance and lawyers are gearing up the class action lawsuits.  American Banker reports that 17 banks in the Ohio, Western Pennsylvania area are snagged in such a suit,

leaving them open to potentially millions more in litigation costs. Bank defense attorneys say the Pennsylvania-Ohio legal cluster could replicate itself across the country, particularly as the ADA suits fall within the framework of successful class actions filed over wheelchair ramps and other physical design issues.

“When you take a look at the motivation for class actions, [class action shops] get attorney fees and settlement fees, and the banks pay for this,” says Mercedes Kelley Tunstall, of counsel, at Ballard Spahr.

The law firm of Carlson Lynch is representing Robert Jahoda who is the sole plaintiff in all of the suits, representing similarly “situated” people.

“I and my law firm have filed a number of lawsuits calculated to cause compliance with the requirements of this law,” Bruce Carlson, the lead attorney in the case, wrote in an email to American Banker.  “We expect that the lawsuits that we filed will achieve the objective of Congress in that they will cause compliance with a law that the industry has known about for an extended period of time.”

Yes of course, it’s all about compliance and making sure a visually impaired person can operate each and every ATM in the United States.  But compliance doesn’t come cheap.

After banks pay thousands to upgrade their machines or buy new ones for upwards of $50,000, it turns out they are not done complying with a judge’s order.  According to the American Banker,

The real consequence can be years of oversight meted out through consent decrees where the plaintiff’s law firm gets thousands of dollars in fees, including from third parties monitoring compliance, experts say.

“With ADA class actions, you will often see the settlement has ongoing compliance requirements with a third party coming in and checking that the bank remains remediated, and the plaintiff’s lawyer gets between $5,000 and $25,000 in annual fees for reviewing the results,” Tunstall says.

Trust but verify.

Las Vegas: From Good Gamble to Expensive Drunk

The plane ride to Las Vegas for the Memorial Day weekend was like many I’ve been on.  There’s a certain energy to a Vegas flight unlike a flight to, say, Phoenix.  Passengers flying into Phoenix don’t feel the need to get blasted en route with Delta Airlines alcohol, timing their collective buzz just right so as to hit the ground partying once the plane has touched down.   The six girls occupying the row behind me just couldn’t imagine facing Vegas sober.

I did notice a game of blackjack being played a couple rows away, bringing back memories of flights to Vegas when the primary sin that Sin City offered was–gambling.  A decade ago, airline personnel would wish deplaning passengers “good luck.”  Now, the farewell wish is a generic “have a good time.”   The excited cabin chatter is not about sure-fire gambling systems anymore, but what nightclub is the hippest.

The business of post-meltdown Vegas is not offering a good gamble, as Benny Binion used to say, but providing the opportunity for an expensive drunk.  Back in the day, the Vegas business model called for giving most everything away, either for free or for cheap, because there is “a paddle for every butt.”  In other words, gaming revenue would take care of everything.

Not anymore, even the hotel pool is now a profit center.  While frugal depression babies who built Vegas by gambling away a bit of their precious savings thought the pool and the golf course were places to relax and wile away a few hours before hitting the tables or machines again,  the twenty-somethings that now storm Vegas are there for the party and the party starts in the afternoon by the pool, with a $20 or $30 cover charge to hear the DJ, see the sights, and get a little wet.  Don’t plan on swimming laps.  This is a live reality show.

David G. Schwartz, director of the Center for Gaming Research at the University of Nevada, Las Vegas, writes, “Pool season reflects LV’s ability to evolve.”  Some might see it as just the opposite.  Rather than playing $20 blackjack (or ‘21’ as it’s known in Las Vegas), the young Sin City visitor is shelling out hundreds for bottles of Grey Goose, buckets of ice, and some glasses.  For real mogul wannabes, a cabana can be rented for upwards of $10,000 a day, complete with a flat-screen TV and private wet bar.  Who knows what kind of afternoon hijinx can take place in such semi-privacy.

The new Vegas allows a person to blow lots of money before sundown and still get some fresh air.   The pool party craze is just a continuation of the expensive Las Vegas hotel nightclub business.  A couple members of our dinner party at Aria’s Julian Serrano  on Saturday night said they had tickets to get into Haze, a nightclub in the hotel.  They had paid $70 each for tickets that would only get them in the door.  The night before they had waited in line for two hours to get in, finally getting inside at two a.m. They were out until four but were ready to do it again.  They’d sleep when they returned to Orange County.

Another couple in our party was headed down the street to Surrender, located inside the Encore.  It was midnight and they were worried they’d be standing in line for an hour and a half to get in.
On the rare occasion I see midnight, standing in line is not something I have an interest in.  However, I should note that I’m on AARP’s mailing list.

Professor Schwartz points out that 23 percent of Vegas visitors claim not to gamble at all.  This might be right.  As Schwartz explains,

Once, the casino floor was the primary revenue center in the average casino resort. In 1984, gambling generated about 62 percent of all revenues for Nevada casinos. Today, that figure is 46 percent — and it’s less than 38 percent on the Strip.

So while Asian gamblers pack Macau and Singapore to–gamble–Las Vegas has morphed into a high-end spring break party. Six years of college isn’t enough.  Gamblers in Macau don’t drink alcohol while playing, while Vegas visitors can barely stop drinking long enough to read the cards and dots on the dice.

Instead of offering the opportunity to defy the overwhelming mathematical odds that games of chance present, Vegas is now a place to allow excess alcohol consumption provide the chance for life-changing mistakes to be made.  It’s the place to first hold a bachelor or bachelorette party, then a wedding, and eventually then cheat on a spouse.  After all, the Las Vegas Convention and Visitors Authority claims,  “what happens in Vegas, stays in Vegas.”

If it’s food that turns your crank, and you just can’t get enough to eat in Peoria, come to Vegas and eat to your heart’s content.  The “Buffett of Buffetts” allows you to belly up at seven different buffetts around town for less than $50 a day.

The visitor count to Vegas has returned to near all-time highs, but gaming revenue is not close to the boom years.  The average gambling spend in Clark County per visitor has fallen from a high of $277.27 in 2007 to $236.71 in 2010.  That’s a large percentage drop in a town that added thousands of hotel rooms–Palazzo, Encore, Cosmopolitan, CityCenter– during that same time period.

My Memorial Day weekend visit included an afternoon at the Palms Hotel attempting to predict the futures of certain thoroughbreds competing at Golden Gate and Hollywood Park. The Palms was once the hottest hotel in Las Vegas, popular with hip young visitors and value-seeking locals alike.  The Maloof family was thought rich beyond comprehension and George Maloof, particularly, was thought to have the golden touch.        .

Post crash, the family’s ownership in the hotel is down to two percent, after the Maloofs  restructured $400 million in debt giving ownership to investment firms TPG Capital and Leonard Green and Partners.  Those firms own 49 percent of the Palms, each, in exchange for assuming that $400 million debt (the family is still responsible for the reported $20 million debt at Palms Place condo towers).

TPG Partners owns a bit of the Boston Celtics, so the sports book cannot accept action on Celtics games.  However, while I was there, the race and sports book was not taking much action on anything despite it being a holiday weekend.  And while the Palms pool looked to be busy, there was no line to get in, and the casino was close to deserted.  Sadly, the Playboy Club is due to close in a few weeks, ending the partnership that produced so many photo-ops for Hugh Hefner and the Girls Next Door.

Ironically what’s kept Las Vegas afloat has been baccarat play.  Baccarat is favored by high-end gamblers–especially from Asia.   According to Professor Schwartz,  in 2003, as Las Vegas was emerging from the post 9/11 slowdown, baccarat revenue provided less than 4 percent of Nevada gaming win.  At the time, homeowners were drawing on their home equity lines to finance trips to Vegas.  However, last year, the baccarat percentage rose to its highest point ever, nearly 12 percent.

Schwartz writes,

In other words, more than $1 out of every $10 won by Nevada casinos was won at the baccarat tables in a handful of Strip casinos. With the thinning of the mass market (the state’s slot win crept up by only 1.48 percent in 2011), high-end play has become more important to the entire state, not just the few casinos that court it.

The mass market that used to feed Nevada’s gaming table and machines is still licking its economic wounds, while the slack has been picked up by baccarat players.  However, this can’t go on forever. The annual percentage gain in baccarat win has fallen from 27 percent in 2009, to 21 percent in 2010 and to 6 percent last year. “Baccarat has gotten Nevada through a rough patch, but it won’t keep growing at Macau rates,” writes Schwartz.

Wall Street keeps hoping for a Las Vegas rally, but the numbers are not promising.   UNLV’s Center for Gaming Research reports that for the Las Vegas Strip,

despite a strong fourth quarter 2011, [the LV Strip] has seen its growth decelerate since January. March’s 15% decline in gaming revenues didn’t entirely erase earlier gains—for the first quarter of 2012, the Strip is still well ahead of 1Q 2011—but it does raise the possibility that the recovery is not right around the corner.

Las Vegas is now a distant third behind Macau and Singapore in gaming revenue.  And while Singapore has only two casinos and is a fresh new market, Macau has a billion people that love to gamble living close by, Las Vegas is a like an aging cocktail waitress, protected by her union membership, but relegated to serving unruly drunks in her golden years for meager tips.  The present isn’t so great, and the future ain’t pretty.


The Demand for Money

U.S. banks are awash in deposits as the industry continues to lick its wounds from the 2008 crisis.  The net loan to deposit ratio for all banks is just 70%, the lowest level since 1984, reports David Reilly for the WSJ.

Meanwhile, in Europe, where Greeks have been pulling money out of banks steadily since the first of the year, loan to deposit ratios are much higher, as this chart reflects.

From Zero Hedge’s vantage point,

With banks such as Danske, SHB, Swebank, DnB, and Nordea literally at 200% Loan-to-Deposits, but most other European banks too, even the tiniest outflow in deposit cash (ala what is happening in the PIIGS) will send the system into yet another liquidity spasm. Only this time, since what little unencumbered assets remaining have already been pledged to the ECB, there will be no quick LTRO collateral-type fix this time.


According to real estate site Zillow, almost 16 million homeowners owe more on their mortgage than the underlying collateral is worth.  At the same time, the LA Times reports that 90% of these underwater homeowners are current on their mortgage payments.

Nevada has the highest percentage of upside down homeowners at 67%.  And while I don’t know for sure, based on stories from people in the real estate business in Las Vegas, there are likely thousands of homeowners in that city who not only are not current on their mortgage payments, but haven’t made a payment in many months.

Zillow has this very cool interactive negative equity map showing a large percentage of homes in Clark County Nevada are underwater more than double the value of the home..  Arizona’s Maricopa Country and Ventura County in California also have sizable populations of homeowners in the same predicament.

Alejandro Lazo writes for the LA Times,

In roughly 10% of Southern California cities, 1 of every 5 homeowners with a mortgage owes double the value of the house, according to the data, released Wednesday. As sales and prices improve, some economists expect homeowners who have been stuck in underwater properties to try to sell their homes, muting any significant price appreciation.

While people aren’t walking away in droves, people are stuck where they are and not able to take advantage of job opportunities.

“People don’t like to walk away from something they have put money into,”Richard Green, director of the USC Lusk Center for Real Estate, told the Times. “People seem to hate realizing losses.”  Yes, indeed.  In Chapter 9 of Walk Away I point out,

Underwater homeowners aren’t walking away because they feel a duty to satisfy their lenders. It’s because they don’t wish to feel the regret of buying at the top of the housing market using too much debt.  And instead of doing the financially rational thing and walking away,  some keep paying, rationalizing that they are duty-bound to pay the note until the bitter end, but secretly hoping their financial acumen will be resurrected by a rally in home prices. A prospect that in many
cities is hopeless.

Experts have been calling for the bottom of the housing market each year since the crash, and prices continue to tumble because of this overhang in negative equity.   This year is no different.  Even investor savant Warren Buffett told CNBC he’d buy a couple hundred thousand houses if he could.

If Mr. Buffett comes calling, and the bank will approve the short-sale, take him up on it.

The Problem with the Sun

In 1845,  Frédéric Bastiat   penned a satirical masterpiece with the long lumbering title of “A PETITION From the Manufacturers of Candles, Tapers, Lanterns, sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.”

This faux open letter to the French Parliament told its members that they were on the right track in not worrying about low prices and abundance for customers, but in their concern and protection of the nation’s producers.

Forget theory and principle, and the common man’s well-being, what’s best for the producer must be the parliament’s primary concern.  And of course, from the title, one can figure out that the petition addresses the wholly uncompetitive way the sun provides lighting.

Bastiat is brought to mind by the case of tanning customer Patricia Krentcil of Nutley, New Jersey, who is charged with taking her 5-year-old daughter inside a tanning bed.   Ms. Krentcil is now dubbed the “Tanning Mom,” is the brunt of late night comedy sketches, the subject of a parody action figure and has reportedly been banned from local tanning salons.

New Jersey law prohibits children under the age of 14 to tan in a tanning booth.  Teenagers between 14 and 17 in that state can tan in a booth, but must be accompanied by an adult, which seems like it would be a little crowded.

Of course this whole  brownhaha started when a teacher at the 5-year old’s school was concerned when the child came to school with a sunburn.  The little girl was telling her classmates that she “went tanning with Mommy.”

Upon hearing this, the conscientious teacher swung into action, not by grabbing some Aloe Vera, but by calling the cops to report child endangerment.

“This whole big thing happened, and everyone got involved,” Rick “Tanning husband” Krenteil  said. “It was 85 degrees outside, she got sunburned. That’s it. That’s all that happened.”

Tell that to politicians who have already slapped a 10% tan tax on the industry. reports,

But at the Statehouse today, lawmakers and health experts said they’re now trying to channel Patricia Krentcil’s notoriety into another cause: jump-starting a stalled bill that would ban anyone under 18 from using a tanning salon.

With prom season approaching, [Blair] Horner said he hopes lawmakers will act. “Parents will feel more comfortable saying no if there is a law against it,” he said.

Assemblyman Herb Conaway (D-Burlington), sponsor of bill (A21422) said the episode in Nutley “will raise attention among my colleagues … Unfortunately, this is how change comes.”

Chicago pols also want to ban teen tanning.   ”We regulate cigarettes being sold to minors under the age of 18 mainly because they are harmful to our youth. I do not see why this should not be extended to barring minors under the age of 18 from tanning facilities,” 50th Ward Alderman Debra Silverstein said in a news release.

North of the border, Conservative MP James Bezan wants to stop Canadians under the age of 18 from tanning indoors.  Bezan and his wife admit to tanning via a tanning bed in their younger years, but with more and more young Canadians browning up for prom season,  Bezan says, “That is a disturbing fact, and also that melanoma is the number three cancer among women under the age of 30.”

But one wonders if these assorted local politicians are not setting their sights high enough.  Are tanning beds really the biggest bogeyman to eradicate in the concern for melanoma?  Isn’t there a big red ball in the sky throwing off lots of heat and light that damages people’s skin, and not to mention, makes everyone sweat.  That thing that rises in the east and sets in the west.

Assemblyman Conaway, Alderman Silverstein, and MP Bezan, it is the sun that is the real problem.  And short of shutting off the sun’s harmful rays,  the only way to protect our kids is to make it unlawful for any and all children under the age of 18 to be outside exposed to the sun’s rays at any time.   Young people’s delicate skin must be protected and laws must be passed requiring children to stay indoors.

All Aboard For Singapore

In a piece for Bloomberg, reporter Sanat Vallikappen begins, “Go away, American millionaires.”   Valliikappen then goes on to explain that wealth management firms the world over are declining to open offshore accounts for Americans.

“I don’t open U.S. accounts, period,” said Su Shan Tan, head of private banking at Singapore-based DBS, Southeast Asia’s largest lender, who described regulatory attitudes toward U.S. clients as “Draconian.”

It hadn’t been easy for Americans doing financial business overseas, but since the 2010 passage of the Foreign Account Tax Compliance Act, known as Fatca, which seeks to prevent tax evasion by Americans with offshore accounts, opening a foreign bank account has become mission impossible.

Valliikappen writes,

The 2010 law, to be phased in starting Jan. 1, 2013, requires financial institutions based outside the U.S. to obtain and report information about income and interest payments accrued to the accounts of American clients. It means additional compliance costs for banks and fewer investment options and advisers for all U.S. citizens living abroad, which could affect their ability to generate returns.

The Institute of International Bankers and the European Banking Federation said in an April 30 letter to the IRS, that the 400 pages of rules and regulations issued by the American tax authority create Unnecessary burdens and costs.”

Massachusetts Democrat Richard Neal says the government needs to crack down on offshore tax dodgers.  Mr. Neal wants tax money and doesn’t care much about privacy and all that.

“People should know, and the IRS should know, what money is being held offshore and for what purpose,” Neal said. “I don’t think there’s anything unreasonable about that.”

One young gentleman that believed Rep. Neal and the other thieves on Capitol Hill to be a bit too greedy and unreasonable is Eduardo Saverin, the billionaire co- founder of Facebook Inc.  Before Facebook does its public offering, and the price of Facebook stock is quoted daily, making Saverin’s wealth undistributable, he decided to renounce his American citizenship and head for Singapore.

Bloomberg reports,

Saverin, 30, joins a growing number of people giving up U.S. citizenship, a move that can trim their tax liabilities in that country. The Brazilian-born resident of Singapore is one of several people who helped Mark Zuckerberg start Facebook in a Harvard University dorm and stand to reap billions of dollars after the world’s largest social network holds its IPO.

Singapore doesn’t have a capital gains tax. It does tax income earned in that nation, as well as “certain foreign- sourced income,” according to a government website on tax policies there.

Saverin has to pay the U.S. government an exit tax but doing it before the IPO was wise.  Renouncing your citizenship well in advance of an IPO is “a very smart idea,” from a tax standpoint, said Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan’s law school. “Once it’s public you can’t fool around with the value.”

There are a few Mises Institute supporters who have paid the American exit tax and now live in Singapore.  None I’ve spoken with regret it.

“It’s a loss for the U.S. to have many well-educated people who actually have a great deal of affection for America make that choice,” said Richard Weisman, an attorney at Baker & McKenzie in Hong Kong. “The tax cost, complexity and the traps for the unwary are among the considerations.”

While Mr. Neal chases away taxpayers, the only ones left will be tax eaters.

JP Morgan Loses $2 Billion trading, FDIC says no more TBTF

Victoria McGrane reports for the Wall Street Journal that the FDIC says it has it all figured out as to how it will unwind those huge, complicated, multinational financial institutions should the need arise.  McGrane writes,

The FDIC, known more for its bank deposit insurance, is working to persuade major investors, analysts, economists and bankers that it is building an apparatus that could cleanly guide a massive financial firm to failure without a taxpayer bailout.

Regulators at the Fed generally look down their noses at their FDIC peers, who primary regulate small banks.  Last month, Former Federal Reserve governor Kevin Warsh said that the new FDIC authority “is unlikely … to be up to the task” of mitigating harm in the next financial crisis.

“Critics argue that the FDIC doesn’t have the expertise to wind down a Lehman-like financial firm,” McGrane writes, “or they say that the international complexities would render the agency’s powers meaningless.”

Later in the day, after FDIC Chairman Martin Gruenberg gave a speech about all of this, J.P. Morgan’s wunderkind banker Jaime Dimon called an emergency press conference to announce that his bank’s CIO department booted $2 billion.  These weren’t a bunch of credit card loans gone bad.  The WSJ explains,

A massive trading bet boomeranged on J.P. Morgan Chase & Co., leaving the bank with at least $2 billion in trading losses and its chief executive, James Dimon, with a rare black eye following a long run as what some called the “King of Wall Street.”

The losses stemmed from wagers gone wrong in the bank’s Chief Investment Office, which manages risk for the New York company. The Wall Street Journal reported early last month that large positions taken in that office by a trader nicknamed “the London whale” had roiled a sector of the debt markets.

As the gang at Zero Hedge says, JPM’s CIO department is the world’s largest prop trading desk.   JPM wasn’t hedging but speculating,

because it knew with 100% certainty that if things turn out very, very badly, that the taxpayer, via the Fed, would come to its rescue. Luckily, things turned out only 80% bad. Although it is not over yet: if credit spreads soar, assuming at $200 million DV01, and a 100 bps move, JPM could suffer a $20 billion loss when all is said and done. But hey: at least “net” is not “gross” and we know, just know, that the SEC will get involved and make sure something like this never happens again.

Mr. Gruenberg, are you sure your troops are up to this?