CDZ RCC: Discovering the Obvious in Panama

[Andylusion]

Discovering the Obvious in Panama

One thing that constantly fascinates me about the general public, is how something can be known by everyone, and then magically become a media frenzy with the revelation that what everyone knew was true.... was in fact.... true.

It's an odd fact of human nature that unless someone makes a big deal out of what everyone knows, no one cares, even though they all know it.  It's kind of like tipping a garbage can over along the street. For weeks, people will walk back and forth past the garbage can, and everyone will think someone should do something about it, and yet no one will do anything.

However, if you paint that same garbage can red, put a flag on top, and flash some lights on it, suddenly everyone will be shocked and surprised... oh there's a tipped over garbage can! And suddenly something will happen.

Panama, Fertile Soil for Offshore Business

Everyone has known, since the 1970s, that Panama was a tax haven. In fact, in some circles, they claim Panama has been a tax haven since 1919.

Yet one guy working at a law firm in Panama, leaks some documents to Süddeutsche Zeitung (which means simply South German Newspaper), and suddenly everyone is shocked by the Panama Papers. Oh wow, you mean they really are using tax havens, that we all knew everyone was using for going on a century?! Why yes... yes they are.  Just like we all knew they were.

Panama Papers - All articles by Süddeutsche Zeitung

Possibly the best single dedicated site for Panama Papers information.

Now with that as the setup, I going to take some time to explain what exactly the Panama Papers are, what off shore corporations and accounts are, why and how tax havens function, and then I'll get into a short commentary on what I got out of the whole deal.

What exactly are the Panama Papers?

At the most fundamental level, the Panama Papers are legal documents. The firm from which the leaked documents came from, was a law firm named Mossack Fonseca. The leak contains over 11.5 Million documents, nearly all of which are multiple pages. They contain identification documents, legal documents, data base information, and a massive amount of Emails.

One question that came up rather quickly was, we can't trust the media, why don't they just release these documents publicly? There's a number of reasons.

For one, many of these documents are written in clear concise legalize. In other words, gibberish. If you have ever read a deep legal document, sometimes you can't figure out what it says without a Star Trek translator.

Another problem is that these are in fact legal documents, and if you release the information of innocent and private citizens, you'll end up being in a lawsuit.

Lastly, there is a problem of security. The documents contain addresses, account numbers, and other things that if released would end up being used by criminals to defraud banks... and if it's your bank that's hit, and your money wiped out, you'd be ticked. This is why the data isn't just dumped on the internet somewhere.

But more than this, relatively speaking, very little in the Panama Papers is even close to being illegal. While some try and dispute that, you have to consider that out of a dozen published stories on the Panama Papers, this a small amount compared to 11.5 Million documents leaked.

However most of the Panama Papers is made up of off shore accounts, and off shore corporations, and most are for the purpose of being a tax haven. That doesn't mean that it is illegal, or even immoral.

So how do Tax Havens work?

This is going to be the most basic explanation possible. You want to get into details, and technicalities, you'll have to find another source. However, I think it is important because I ran into some people who think you can just cash your paycheck on an Island, and pay zero tax. Not true. Not at all.

Say I open a retail widget selling company, and I make $1 Million profit. I'm taxed at 35%. I lose $350,000 in taxes.

I don't really like that. So I open a company in the Cayman Islands. I give that Intellectual Property, namely the patents for the widgets. Now my company pays the Island company a royalty fee, of say $750,000.
My company makes a $250,000 profit, taxed at 35% paying $87,000 in taxes. My Island company makes a $750,000 profit, and pays 0% in taxes, because the Cayman Islands has no corporate tax rate.

Now this isn't the common way to avoid high taxes. And this causes another problem. The money located at Cayman Island Corp, can't be used in the US. If they bring the money form the Island Corp, to the US, the US government charges the full tax rate, minus taxes paid elsewhere. In this case, a full 35%. If say they locate Island Corp somewhere the Corp Tax is 10%, then they would charge 25% taxes when they bring the money into the US.

However the most common tax haven system, is by moving profits around. So my Retail Corp sells widgets. Let's say that my company buys widgets from Ecuador. EcuCorp makes the widgets for $10, and sells them for $20. My company buys the widgets for $20, and sells them in the US for $30. Both companies are making a $1 Million profit. Both companies are paying corporate taxes. EcuCorp at 22%, and my company at 35%.

But my company decides to purchase EcuCorp. So now we own both companies. Right now combined, we're paying $570,000 in taxes. However, since I now own both companies, I can decide where that profit is. So here is what I do.... I have EcuCorp make the widgets for $10, and sell them for $30, making $2 Million in profit. Meanwhile Retail Corp will buy the widgets at $30, and sell them for $30, earning a profit of zero.

I still make $2 Million in profit, but now I pay the lower Corporate tax in Ecuador of only 22%, for a tax of $440,000 in taxes, instead of $570,000.

Now that saves a little bit of money, but it's an awful lot of fooling around to save so little. That's when something occurs to me. What if I brought back that Island Corp, and moved the profits there?

So EcuCorp makes the widgets for $10, sells them for $10 to Island Corp. Zero profit. Zero Taxes.
Island Corp, buys the widgets for $10, sells them for $30 to Retail Corp. $2 Million Profit. 0% Corp Tax, zero taxes.
Retail Corp buys the widgets for $30, and sells them to the public for $30. Zero Profit. Zero Taxes.

This is how Tax Havens work, and there is nothing illegal about them. Now it doesn't happen exactly like this, because each company would need some profits, to maintain themselves. Also, opening up a tax haven corporation has expenses itself, which would drain some profits away. But like the example, you can pay an awful lot of people with the $570,000 a year saved. And that's just a company with only $2 Million in profits. When companies start earning billions, the savings are obviously much larger.

One of the reasons this problem even exists, is due to our American culture.

Now a lot of people get ticked off about this, but the problem doesn't exist all over the world. There are some countries that have this issue, but it really is a largely an American problem, with only a few others.

See fundamentally, America as a whole, see corporations as a parasite. We see them as blood sucking ticks, that ruin the country, and keep people in poverty. But that isn't the way the rest of the world sees them. In many places, especially Asia, they see companies provide jobs, create wealth, create investment, and build the economy. Because that is in fact, what they do.

And especially when it relates to foriegn income, America is one of the few countries that taxes global income. When a US company, makes a billion dollars over in Brazil, that money is tax at 35%, the US corporate tax rate, if they bring that money home to the US.

What many people don't know, is that the US is one of only a handful of countries around the world that does this. Again, we see corporations as evil and destructive. Most countries see corporations as beneficial and good.

For example, if a Chinese company operates in Brazil and makes a billion dollars, they can bring that money home to China, and pay zero tax.

A Global Perspective on Territorial Taxation

In fact, out of 34 countries currently in the OECD, only 6 other countries, have a global tax system. Mexico, Chile, Greece, Korea, Israel, and Ireland, which is a bit of a joke with a 12.5% Corporate tax rate. Ireland may have a global tax, but it is so low, they are still a tax haven.

The point again is, in most of the world, when a corporation makes profits abroad, the home country sees that as a benefit to the nation, and allows those profits to come home tax free. Japan was famous for this in the 1980s.

We're one of the few which has companies like Apple and Microsoft, which both have $100 Billion in offshore corporations, and wondering why they don't bring those profits home to invest and grow the business.... Well duh... it's because they would lose 1/3 of that money in taxes.

This is why Republicans have been pushing to end global tax policy, in favor of tax free foreign profits. To bring those billions home, to grow our country, instead of other countries.

But now that I have covered how tax havens work, it should be noted that there are perfectly legitimate uses of off shore corporations and offshore accounts. This idea that "well no one should ever have an offshore anything... is crazy.

In brief, let me cover that. If you have family outside the US, and you wish to have inheritance held, you will need an off shore corporation. I have read and been told, that if you wish to own property in Mexico, that they require a local owner. This would require you to open and offshore corporation to own your Mexican property. If you have a complicated estate situation, and wish to simplify it with your heirs, you can have it held by an offshore corporations, which disperses property on death, and you don't have to go to probate court at all. If you have multiple business in different countries, you generally need to create an offshore corporation to centrally manage your multiple businesses. If you are in entertainment, and do traveling gigs around the world, you will likely need an offshore corporation to handle your business in differing countries.

Emma Watson of Harry Potter fame, was found to have an offshore corporation in the Panama Papers. That doesn't mean she was trying to dodge taxes. In fact, tax havens for corporations that work as shown above, do not work for personal income. In nearly all countries, private citizens have to pay full tax, on full wages, no matter where they are earned. So it is unlikely that Emma Watson was avoiding taxes. Possible, but not likely.

Now lastly, my direct take away, from the Panama Papers.

What I didn't find surprising at all, was the shock and outrage that sprung up across the media over the Panama Papers, that what was common knowledge, was true.

What DID surprise me, was how quickly the Panama Papers vanished from the media. I had expect to hear about the evil rich, and evil 1%, hiding their evil wealth, in the evil tax havens for the next two years. I expected to hear about it in the political campaigns.

But almost as abruptly as the fury started, is vanished without a trace. That got me curious.

What you are looking at, is a graphical representation of the occupation of people who were found in the Panama Papers.

Are you seeing why the fury over the Panama Papers died?

Who is the usual guilty party with the left wing? Who do they scream about? The wealthy? The 1%ers? The super CEOs, with corporate jets and multinational corporations?

But look at the major players here. Who are the tax havens for? Actors, Singers, Politicians, Diplomats, Football Stars, Film produces, Economists (ironic isn't it), Models, Golf Stars, Journalists, Screenwriters, Tennis stars, Universities even.

Think about it..... all the people who are the biggest screamers about the wealthy 1%ers, they are the ones who are in the Panama Papers.

http://www.usatoday.com/story/news/world/2016/04/04/panama-papers-list/82607516/

From sports stars, actors, and the left wing of mass entertainment.... all in the Panama Papers. From economists, to politicians, diplomats, a regular list of the worlds most powerful government leaders of the world.

But equally as surprising, where are the 1%ers? Where are the Waltons, and Gates? Where's Buffet's hidden off shore billions? Even I bought the left-wing lies, and expected to find at least some of the super wealthy in the Panama Papers. But instead, few if any were found.

This is why the screams died out as quickly as they started. This is why the headline splashes vanished in a week. This is why the politicians around the world, didn't start investigations across the globe, because they themselves, the very people demanding ever greater taxes from the people.... were the very ones hiding their wealth from the taxes they demanded.

We have got to stop being duped by the left-wing on this. They always talk about "paying your fair share", but that's you paying your fair share. Not them. Never them.

 

[320 Years of History]

Way back when I sat in my corporate tax class, something I did after having taken intermediate and advanced accounting, I thought to myself, why do we have a tax system that classifies as income anything other than what a corporation would publish in it's financial statements? Of course, I understand the difference between accrued income and cash income, and that difference has a good deal to do with it. Even so, what our system of taxation does is create conflicting objectives.

• In consolidated financial statements made available to potential investors, corporations and other businesses aim to show, among other things, as much income and net profit as possible. The very point of the entity's existence is to make as much profit as possible.
• In their tax return, which is essentially a specific purpose, the purpose being to report cash/income collected and pay taxes on it, statement of cash flow, itself merely accrual basis income converted to cash basis, companies aim to show as little income as possible.

To this day, I cannot think of one good reason why we don't simply require all businesses to annually produce audited financial statements and use the sums noted in their statement of cash flows as the basis for determining how much tax to pay. The process would be quite simple:

1. Prepare financial statements in accordance with GAAP.
2. Sum the cash provided from operating, investing, and financing activities.
   
   (In the image below, the cash "provided" by investing and financing activities is negative, so the labels for those lines should say "cash used by" not "provided by." For tax purposes, if the cash provided is negative, the entity should not get a deduction, that is use it to offset cash earned from other activities; it should merely not pay tax on that portion of cash received.)
3. Multiply it by a tax rate.
4. Send to the IRS the sum corresponding to the product obtained in step three.
5. Apportion the cash basis income shown in the statement of cash flows to the various states in which one does business.
6. Apply the respective states' tax rates to those amounts.
7. Send in the payment.
8. Tax calculation time: a few minutes.
   Tax code knowledge/tax experts needed: none...what's needed is the ability to add, multiply and divide.

Our current model encourages liberality in reporting income for one audience, investors and business managers, and conservatism in reporting income to another audience, federal, state and local jurisdictions. That's just nuts if you ask me.

The approach, call it a tax reform if you want, noted above gets rid of all the complexity in preparing income taxes. It also aligns businesses' objective of showing maximum performance results with government's need to collect revenue. Lastly, it increases the audit industry's need to apply even more rigorous degrees of integrity in performing audits, or at least it would if their livelihood were at risk if they fail to do so.

 

[oldsoul]

View attachment 76581
Discovering the Obvious in Panama

One thing that constantly fascinates me about the general public, is how something can be known by everyone, and then magically become a media frenzy with the revelation that what everyone knew was true.... was in fact.... true.

It's an odd fact of human nature that unless someone makes a big deal out of what everyone knows, no one cares, even though they all know it.  It's kind of like tipping a garbage can over along the street. For weeks, people will walk back and forth past the garbage can, and everyone will think someone should do something about it, and yet no one will do anything.

However, if you paint that same garbage can red, put a flag on top, and flash some lights on it, suddenly everyone will be shocked and surprised... oh there's a tipped over garbage can! And suddenly something will happen.

Panama, Fertile Soil for Offshore Business

Everyone has known, since the 1970s, that Panama was a tax haven. In fact, in some circles, they claim Panama has been a tax haven since 1919.

Yet one guy working at a law firm in Panama, leaks some documents to Süddeutsche Zeitung (which means simply South German Newspaper), and suddenly everyone is shocked by the Panama Papers. Oh wow, you mean they really are using tax havens, that we all knew everyone was using for going on a century?! Why yes... yes they are.  Just like we all knew they were.

Panama Papers - All articles by Süddeutsche Zeitung

Possibly the best single dedicated site for Panama Papers information.

Now with that as the setup, I going to take some time to explain what exactly the Panama Papers are, what off shore corporations and accounts are, why and how tax havens function, and then I'll get into a short commentary on what I got out of the whole deal.

What exactly are the Panama Papers?

At the most fundamental level, the Panama Papers are legal documents. The firm from which the leaked documents came from, was a law firm named Mossack Fonseca. The leak contains over 11.5 Million documents, nearly all of which are multiple pages. They contain identification documents, legal documents, data base information, and a massive amount of Emails.

One question that came up rather quickly was, we can't trust the media, why don't they just release these documents publicly? There's a number of reasons.

For one, many of these documents are written in clear concise legalize. In other words, gibberish. If you have ever read a deep legal document, sometimes you can't figure out what it says without a Star Trek translator.

Another problem is that these are in fact legal documents, and if you release the information of innocent and private citizens, you'll end up being in a lawsuit.

Lastly, there is a problem of security. The documents contain addresses, account numbers, and other things that if released would end up being used by criminals to defraud banks... and if it's your bank that's hit, and your money wiped out, you'd be ticked. This is why the data isn't just dumped on the internet somewhere.

But more than this, relatively speaking, very little in the Panama Papers is even close to being illegal. While some try and dispute that, you have to consider that out of a dozen published stories on the Panama Papers, this a small amount compared to 11.5 Million documents leaked.

However most of the Panama Papers is made up of off shore accounts, and off shore corporations, and most are for the purpose of being a tax haven. That doesn't mean that it is illegal, or even immoral.

So how do Tax Havens work?

This is going to be the most basic explanation possible. You want to get into details, and technicalities, you'll have to find another source. However, I think it is important because I ran into some people who think you can just cash your paycheck on an Island, and pay zero tax. Not true. Not at all.

Say I open a retail widget selling company, and I make $1 Million profit. I'm taxed at 35%. I lose $350,000 in taxes.

View attachment 76582

I don't really like that. So I open a company in the Cayman Islands. I give that Intellectual Property, namely the patents for the widgets. Now my company pays the Island company a royalty fee, of say $750,000.
My company makes a $250,000 profit, taxed at 35% paying $87,000 in taxes. My Island company makes a $750,000 profit, and pays 0% in taxes, because the Cayman Islands has no corporate tax rate.

View attachment 76583
View attachment 76584

Now this isn't the common way to avoid high taxes. And this causes another problem. The money located at Cayman Island Corp, can't be used in the US. If they bring the money form the Island Corp, to the US, the US government charges the full tax rate, minus taxes paid elsewhere. In this case, a full 35%. If say they locate Island Corp somewhere the Corp Tax is 10%, then they would charge 25% taxes when they bring the money into the US.

However the most common tax haven system, is by moving profits around. So my Retail Corp sells widgets. Let's say that my company buys widgets from Ecuador. EcuCorp makes the widgets for $10, and sells them for $20. My company buys the widgets for $20, and sells them in the US for $30. Both companies are making a $1 Million profit. Both companies are paying corporate taxes. EcuCorp at 22%, and my company at 35%.

View attachment 76585
View attachment 76586

But my company decides to purchase EcuCorp. So now we own both companies. Right now combined, we're paying $570,000 in taxes. However, since I now own both companies, I can decide where that profit is. So here is what I do.... I have EcuCorp make the widgets for $10, and sell them for $30, making $2 Million in profit. Meanwhile Retail Corp will buy the widgets at $30, and sell them for $30, earning a profit of zero.

View attachment 76587
View attachment 76589

I still make $2 Million in profit, but now I pay the lower Corporate tax in Ecuador of only 22%, for a tax of $440,000 in taxes, instead of $570,000.

Now that saves a little bit of money, but it's an awful lot of fooling around to save so little. That's when something occurs to me. What if I brought back that Island Corp, and moved the profits there?

So EcuCorp makes the widgets for $10, sells them for $10 to Island Corp. Zero profit. Zero Taxes.
Island Corp, buys the widgets for $10, sells them for $30 to Retail Corp. $2 Million Profit. 0% Corp Tax, zero taxes.
Retail Corp buys the widgets for $30, and sells them to the public for $30. Zero Profit. Zero Taxes.

View attachment 76590
View attachment 76591
View attachment 76589

This is how Tax Havens work, and there is nothing illegal about them. Now it doesn't happen exactly like this, because each company would need some profits, to maintain themselves. Also, opening up a tax haven corporation has expenses itself, which would drain some profits away. But like the example, you can pay an awful lot of people with the $570,000 a year saved. And that's just a company with only $2 Million in profits. When companies start earning billions, the savings are obviously much larger.

One of the reasons this problem even exists, is due to our American culture.

Now a lot of people get ticked off about this, but the problem doesn't exist all over the world. There are some countries that have this issue, but it really is a largely an American problem, with only a few others.

See fundamentally, America as a whole, see corporations as a parasite. We see them as blood sucking ticks, that ruin the country, and keep people in poverty. But that isn't the way the rest of the world sees them. In many places, especially Asia, they see companies provide jobs, create wealth, create investment, and build the economy. Because that is in fact, what they do.

And especially when it relates to foriegn income, America is one of the few countries that taxes global income. When a US company, makes a billion dollars over in Brazil, that money is tax at 35%, the US corporate tax rate, if they bring that money home to the US.

What many people don't know, is that the US is one of only a handful of countries around the world that does this. Again, we see corporations as evil and destructive. Most countries see corporations as beneficial and good.

For example, if a Chinese company operates in Brazil and makes a billion dollars, they can bring that money home to China, and pay zero tax.

A Global Perspective on Territorial Taxation

In fact, out of 34 countries currently in the OECD, only 6 other countries, have a global tax system. Mexico, Chile, Greece, Korea, Israel, and Ireland, which is a bit of a joke with a 12.5% Corporate tax rate. Ireland may have a global tax, but it is so low, they are still a tax haven.

The point again is, in most of the world, when a corporation makes profits abroad, the home country sees that as a benefit to the nation, and allows those profits to come home tax free. Japan was famous for this in the 1980s.

We're one of the few which has companies like Apple and Microsoft, which both have $100 Billion in offshore corporations, and wondering why they don't bring those profits home to invest and grow the business.... Well duh... it's because they would lose 1/3 of that money in taxes.

This is why Republicans have been pushing to end global tax policy, in favor of tax free foreign profits. To bring those billions home, to grow our country, instead of other countries.

But now that I have covered how tax havens work, it should be noted that there are perfectly legitimate uses of off shore corporations and offshore accounts. This idea that "well no one should ever have an offshore anything... is crazy.

In brief, let me cover that. If you have family outside the US, and you wish to have inheritance held, you will need an off shore corporation. I have read and been told, that if you wish to own property in Mexico, that they require a local owner. This would require you to open and offshore corporation to own your Mexican property. If you have a complicated estate situation, and wish to simplify it with your heirs, you can have it held by an offshore corporations, which disperses property on death, and you don't have to go to probate court at all. If you have multiple business in different countries, you generally need to create an offshore corporation to centrally manage your multiple businesses. If you are in entertainment, and do traveling gigs around the world, you will likely need an offshore corporation to handle your business in differing countries.

Emma Watson of Harry Potter fame, was found to have an offshore corporation in the Panama Papers. That doesn't mean she was trying to dodge taxes. In fact, tax havens for corporations that work as shown above, do not work for personal income. In nearly all countries, private citizens have to pay full tax, on full wages, no matter where they are earned. So it is unlikely that Emma Watson was avoiding taxes. Possible, but not likely.

Now lastly, my direct take away, from the Panama Papers.

What I didn't find surprising at all, was the shock and outrage that sprung up across the media over the Panama Papers, that what was common knowledge, was true.

What DID surprise me, was how quickly the Panama Papers vanished from the media. I had expect to hear about the evil rich, and evil 1%, hiding their evil wealth, in the evil tax havens for the next two years. I expected to hear about it in the political campaigns.

But almost as abruptly as the fury started, is vanished without a trace. That got me curious.

View attachment 76593
What you are looking at, is a graphical representation of the occupation of people who were found in the Panama Papers.

Are you seeing why the fury over the Panama Papers died?

Who is the usual guilty party with the left wing? Who do they scream about? The wealthy? The 1%ers? The super CEOs, with corporate jets and multinational corporations?

But look at the major players here. Who are the tax havens for? Actors, Singers, Politicians, Diplomats, Football Stars, Film produces, Economists (ironic isn't it), Models, Golf Stars, Journalists, Screenwriters, Tennis stars, Universities even.

Think about it..... all the people who are the biggest screamers about the wealthy 1%ers, they are the ones who are in the Panama Papers.

http://www.usatoday.com/story/news/world/2016/04/04/panama-papers-list/82607516/

From sports stars, actors, and the left wing of mass entertainment.... all in the Panama Papers. From economists, to politicians, diplomats, a regular list of the worlds most powerful government leaders of the world.

But equally as surprising, where are the 1%ers? Where are the Waltons, and Gates? Where's Buffet's hidden off shore billions? Even I bought the left-wing lies, and expected to find at least some of the super wealthy in the Panama Papers. But instead, few if any were found.

This is why the screams died out as quickly as they started. This is why the headline splashes vanished in a week. This is why the politicians around the world, didn't start investigations across the globe, because they themselves, the very people demanding ever greater taxes from the people.... were the very ones hiding their wealth from the taxes they demanded.

We have got to stop being duped by the left-wing on this. They always talk about "paying your fair share", but that's you paying your fair share. Not them. Never them.

As someone who is about as far from a finacial whiz as one can get, I found this to be highly informative, easy to follow and understand, and not the least bit suprising. In fact, if one where to ask me, before reading this, why the media "screams" died out so quickly, I would have hypothisized that there was politicing at work here. It is no suprise to me, nor should it be to anyone paying fairly close attention to politics, that the largest share, reportedly, belongs to politicians, with lawyers not that far behind. I did find it faily interesting that football was such a large share. I wonder if that is mostly players, or if it is more owners and coaching staff.

 

[Andylusion]

View attachment 76581
Discovering the Obvious in Panama

One thing that constantly fascinates me about the general public, is how something can be known by everyone, and then magically become a media frenzy with the revelation that what everyone knew was true.... was in fact.... true.

It's an odd fact of human nature that unless someone makes a big deal out of what everyone knows, no one cares, even though they all know it.  It's kind of like tipping a garbage can over along the street. For weeks, people will walk back and forth past the garbage can, and everyone will think someone should do something about it, and yet no one will do anything.

However, if you paint that same garbage can red, put a flag on top, and flash some lights on it, suddenly everyone will be shocked and surprised... oh there's a tipped over garbage can! And suddenly something will happen.

Panama, Fertile Soil for Offshore Business

Everyone has known, since the 1970s, that Panama was a tax haven. In fact, in some circles, they claim Panama has been a tax haven since 1919.

Yet one guy working at a law firm in Panama, leaks some documents to Süddeutsche Zeitung (which means simply South German Newspaper), and suddenly everyone is shocked by the Panama Papers. Oh wow, you mean they really are using tax havens, that we all knew everyone was using for going on a century?! Why yes... yes they are.  Just like we all knew they were.

Panama Papers - All articles by Süddeutsche Zeitung

Possibly the best single dedicated site for Panama Papers information.

Now with that as the setup, I going to take some time to explain what exactly the Panama Papers are, what off shore corporations and accounts are, why and how tax havens function, and then I'll get into a short commentary on what I got out of the whole deal.

What exactly are the Panama Papers?

At the most fundamental level, the Panama Papers are legal documents. The firm from which the leaked documents came from, was a law firm named Mossack Fonseca. The leak contains over 11.5 Million documents, nearly all of which are multiple pages. They contain identification documents, legal documents, data base information, and a massive amount of Emails.

One question that came up rather quickly was, we can't trust the media, why don't they just release these documents publicly? There's a number of reasons.

For one, many of these documents are written in clear concise legalize. In other words, gibberish. If you have ever read a deep legal document, sometimes you can't figure out what it says without a Star Trek translator.

Another problem is that these are in fact legal documents, and if you release the information of innocent and private citizens, you'll end up being in a lawsuit.

Lastly, there is a problem of security. The documents contain addresses, account numbers, and other things that if released would end up being used by criminals to defraud banks... and if it's your bank that's hit, and your money wiped out, you'd be ticked. This is why the data isn't just dumped on the internet somewhere.

But more than this, relatively speaking, very little in the Panama Papers is even close to being illegal. While some try and dispute that, you have to consider that out of a dozen published stories on the Panama Papers, this a small amount compared to 11.5 Million documents leaked.

However most of the Panama Papers is made up of off shore accounts, and off shore corporations, and most are for the purpose of being a tax haven. That doesn't mean that it is illegal, or even immoral.

So how do Tax Havens work?

This is going to be the most basic explanation possible. You want to get into details, and technicalities, you'll have to find another source. However, I think it is important because I ran into some people who think you can just cash your paycheck on an Island, and pay zero tax. Not true. Not at all.

Say I open a retail widget selling company, and I make $1 Million profit. I'm taxed at 35%. I lose $350,000 in taxes.

View attachment 76582

I don't really like that. So I open a company in the Cayman Islands. I give that Intellectual Property, namely the patents for the widgets. Now my company pays the Island company a royalty fee, of say $750,000.
My company makes a $250,000 profit, taxed at 35% paying $87,000 in taxes. My Island company makes a $750,000 profit, and pays 0% in taxes, because the Cayman Islands has no corporate tax rate.

View attachment 76583
View attachment 76584

Now this isn't the common way to avoid high taxes. And this causes another problem. The money located at Cayman Island Corp, can't be used in the US. If they bring the money form the Island Corp, to the US, the US government charges the full tax rate, minus taxes paid elsewhere. In this case, a full 35%. If say they locate Island Corp somewhere the Corp Tax is 10%, then they would charge 25% taxes when they bring the money into the US.

However the most common tax haven system, is by moving profits around. So my Retail Corp sells widgets. Let's say that my company buys widgets from Ecuador. EcuCorp makes the widgets for $10, and sells them for $20. My company buys the widgets for $20, and sells them in the US for $30. Both companies are making a $1 Million profit. Both companies are paying corporate taxes. EcuCorp at 22%, and my company at 35%.

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But my company decides to purchase EcuCorp. So now we own both companies. Right now combined, we're paying $570,000 in taxes. However, since I now own both companies, I can decide where that profit is. So here is what I do.... I have EcuCorp make the widgets for $10, and sell them for $30, making $2 Million in profit. Meanwhile Retail Corp will buy the widgets at $30, and sell them for $30, earning a profit of zero.

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I still make $2 Million in profit, but now I pay the lower Corporate tax in Ecuador of only 22%, for a tax of $440,000 in taxes, instead of $570,000.

Now that saves a little bit of money, but it's an awful lot of fooling around to save so little. That's when something occurs to me. What if I brought back that Island Corp, and moved the profits there?

So EcuCorp makes the widgets for $10, sells them for $10 to Island Corp. Zero profit. Zero Taxes.
Island Corp, buys the widgets for $10, sells them for $30 to Retail Corp. $2 Million Profit. 0% Corp Tax, zero taxes.
Retail Corp buys the widgets for $30, and sells them to the public for $30. Zero Profit. Zero Taxes.

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This is how Tax Havens work, and there is nothing illegal about them. Now it doesn't happen exactly like this, because each company would need some profits, to maintain themselves. Also, opening up a tax haven corporation has expenses itself, which would drain some profits away. But like the example, you can pay an awful lot of people with the $570,000 a year saved. And that's just a company with only $2 Million in profits. When companies start earning billions, the savings are obviously much larger.

One of the reasons this problem even exists, is due to our American culture.

Now a lot of people get ticked off about this, but the problem doesn't exist all over the world. There are some countries that have this issue, but it really is a largely an American problem, with only a few others.

See fundamentally, America as a whole, see corporations as a parasite. We see them as blood sucking ticks, that ruin the country, and keep people in poverty. But that isn't the way the rest of the world sees them. In many places, especially Asia, they see companies provide jobs, create wealth, create investment, and build the economy. Because that is in fact, what they do.

And especially when it relates to foriegn income, America is one of the few countries that taxes global income. When a US company, makes a billion dollars over in Brazil, that money is tax at 35%, the US corporate tax rate, if they bring that money home to the US.

What many people don't know, is that the US is one of only a handful of countries around the world that does this. Again, we see corporations as evil and destructive. Most countries see corporations as beneficial and good.

For example, if a Chinese company operates in Brazil and makes a billion dollars, they can bring that money home to China, and pay zero tax.

A Global Perspective on Territorial Taxation

In fact, out of 34 countries currently in the OECD, only 6 other countries, have a global tax system. Mexico, Chile, Greece, Korea, Israel, and Ireland, which is a bit of a joke with a 12.5% Corporate tax rate. Ireland may have a global tax, but it is so low, they are still a tax haven.

The point again is, in most of the world, when a corporation makes profits abroad, the home country sees that as a benefit to the nation, and allows those profits to come home tax free. Japan was famous for this in the 1980s.

We're one of the few which has companies like Apple and Microsoft, which both have $100 Billion in offshore corporations, and wondering why they don't bring those profits home to invest and grow the business.... Well duh... it's because they would lose 1/3 of that money in taxes.

This is why Republicans have been pushing to end global tax policy, in favor of tax free foreign profits. To bring those billions home, to grow our country, instead of other countries.

But now that I have covered how tax havens work, it should be noted that there are perfectly legitimate uses of off shore corporations and offshore accounts. This idea that "well no one should ever have an offshore anything... is crazy.

In brief, let me cover that. If you have family outside the US, and you wish to have inheritance held, you will need an off shore corporation. I have read and been told, that if you wish to own property in Mexico, that they require a local owner. This would require you to open and offshore corporation to own your Mexican property. If you have a complicated estate situation, and wish to simplify it with your heirs, you can have it held by an offshore corporations, which disperses property on death, and you don't have to go to probate court at all. If you have multiple business in different countries, you generally need to create an offshore corporation to centrally manage your multiple businesses. If you are in entertainment, and do traveling gigs around the world, you will likely need an offshore corporation to handle your business in differing countries.

Emma Watson of Harry Potter fame, was found to have an offshore corporation in the Panama Papers. That doesn't mean she was trying to dodge taxes. In fact, tax havens for corporations that work as shown above, do not work for personal income. In nearly all countries, private citizens have to pay full tax, on full wages, no matter where they are earned. So it is unlikely that Emma Watson was avoiding taxes. Possible, but not likely.

Now lastly, my direct take away, from the Panama Papers.

What I didn't find surprising at all, was the shock and outrage that sprung up across the media over the Panama Papers, that what was common knowledge, was true.

What DID surprise me, was how quickly the Panama Papers vanished from the media. I had expect to hear about the evil rich, and evil 1%, hiding their evil wealth, in the evil tax havens for the next two years. I expected to hear about it in the political campaigns.

But almost as abruptly as the fury started, is vanished without a trace. That got me curious.

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What you are looking at, is a graphical representation of the occupation of people who were found in the Panama Papers.

Are you seeing why the fury over the Panama Papers died?

Who is the usual guilty party with the left wing? Who do they scream about? The wealthy? The 1%ers? The super CEOs, with corporate jets and multinational corporations?

But look at the major players here. Who are the tax havens for? Actors, Singers, Politicians, Diplomats, Football Stars, Film produces, Economists (ironic isn't it), Models, Golf Stars, Journalists, Screenwriters, Tennis stars, Universities even.

Think about it..... all the people who are the biggest screamers about the wealthy 1%ers, they are the ones who are in the Panama Papers.

Panama Papers read like Who's Who of world power

From sports stars, actors, and the left wing of mass entertainment.... all in the Panama Papers. From economists, to politicians, diplomats, a regular list of the worlds most powerful government leaders of the world.

But equally as surprising, where are the 1%ers? Where are the Waltons, and Gates? Where's Buffet's hidden off shore billions? Even I bought the left-wing lies, and expected to find at least some of the super wealthy in the Panama Papers. But instead, few if any were found.

This is why the screams died out as quickly as they started. This is why the headline splashes vanished in a week. This is why the politicians around the world, didn't start investigations across the globe, because they themselves, the very people demanding ever greater taxes from the people.... were the very ones hiding their wealth from the taxes they demanded.

We have got to stop being duped by the left-wing on this. They always talk about "paying your fair share", but that's you paying your fair share. Not them. Never them.

As someone who is about as far from a finacial whiz as one can get, I found this to be highly informative, easy to follow and understand, and not the least bit suprising. In fact, if one where to ask me, before reading this, why the media "screams" died out so quickly, I would have hypothisized that there was politicing at work here. It is no suprise to me, nor should it be to anyone paying fairly close attention to politics, that the largest share, reportedly, belongs to politicians, with lawyers not that far behind. I did find it faily interesting that football was such a large share. I wonder if that is mostly players, or if it is more owners and coaching staff.

Thank you very much. My goal has always been to make what is otherwise difficult to understand, in to something easy to follow.

The answer to your question is all of the above.

Any person who plays in other countries routinely, is likely to avoid taxation.

Say you are in the UK, and you want to play a game in Europe or Africa. You go there, play the game, get a large pay off, and then head back to the UK.

Do you bring all the money back? If you do, you will be hit with exchange rates of Euros to Pounds, and at the same time, taxed on it immediately.

However, you know for a fact that you'll be back there in.... 3 months, 6 months, next year. Whatever. Right? You'll end up playing in that country again. So why not setup an offshore corporation, to hold your assets in that country. Then when you come back you don't have to exchange money, and your money could be invested and grow in that country.

This would be true of coaches, staff, and the players.

Owners are a little different. Now it depends on the country, and the structure of the leagues, but in most cases their income is usually in shares of ownership of the football club. As a result, they don't need tax shelters, because their raw cash income, isn't all that high. (relatively speaking).

This is why the top 1%, are usually not the users of tax havens. Take Warren Buffet. Warren Buffet is a billionaire. But he doesn't have a billion dollars. He has a billion in assets, namely in shares of his company Berkshire Hathaway. Buffets real raw cash income, is only $100,000 a year.

But football stars, Pop stars, movie stars... they all get paid in raw cash income. Wayne Rooney, Manchester United football star, makes £250,000 per week. Raw cash. (that's $360K a week).

So you can see why it's not the wealthy 1% that use tax havens. It's all a myth. It's the people shown above that use tax havens the most.

 

[Andylusion]

Way back when I sat in my corporate tax class, something I did after having taken intermediate and advanced accounting, I thought to myself, why do we have a tax system that classifies as income anything other than what a corporation would publish in it's financial statements? Of course, I understand the difference between accrued income and cash income, and that difference has a good deal to do with it. Even so, what our system of taxation does is create conflicting objectives.

• In consolidated financial statements made available to potential investors, corporations and other businesses aim to show, among other things, as much income and net profit as possible. The very point of the entity's existence is to make as much profit as possible.
• In their tax return, which is essentially a specific purpose, the purpose being to report cash/income collected and pay taxes on it, statement of cash flow, itself merely accrual basis income converted to cash basis, companies aim to show as little income as possible.

To this day, I cannot think of one good reason why we don't simply require all businesses to annually produce audited financial statements and use the sums noted in their statement of cash flows as the basis for determining how much tax to pay. The process would be quite simple:

1. Prepare financial statements in accordance with GAAP.
2. Sum the cash provided from operating, investing, and financing activities.
   
   (In the image below, the cash "provided" by investing and financing activities is negative, so the labels for those lines should say "cash used by" not "provided by." For tax purposes, if the cash provided is negative, the entity should not get a deduction, that is use it to offset cash earned from other activities; it should merely not pay tax on that portion of cash received.)
3. Multiply it by a tax rate.
4. Send to the IRS the sum corresponding to the product obtained in step three.
5. Apportion the cash basis income shown in the statement of cash flows to the various states in which one does business.
6. Apply the respective states' tax rates to those amounts.
7. Send in the payment.
8. Tax calculation time: a few minutes.
   Tax code knowledge/tax experts needed: none...what's needed is the ability to add, multiply and divide.

Our current model encourages liberality in reporting income for one audience, investors and business managers, and conservatism in reporting income to another audience, federal, state and local jurisdictions. That's just nuts if you ask me.

The approach, call it a tax reform if you want, noted above gets rid of all the complexity in preparing income taxes. It also aligns businesses' objective of showing maximum performance results with government's need to collect revenue. Lastly, it increases the audit industry's need to apply even more rigorous degrees of integrity in performing audits, or at least it would if their livelihood were at risk if they fail to do so.

I would generally agree with everything you said. One of the most fascinating things I learned, was that absolutely no, as in not one single company anywhere, uses their SEC filings for anything informative.

Think about it..... Companies hire scores of accountants, who are paid good money, to spend MONTHS compiling and writing up, a hundred page document, to file with the SEC....... and then never use it for anything else.

Just think about that. IF you spent $100,000 writing a fiscal statement, why would you not use that statement for everything, not just the SEC?

And of course the answer is that, the SEC reports are absolute trash that no one uses. Ever. For anything, other than of course to give to the government and forget about.

Now wager the reason for this, is something most will disagree with. The IRS is the most sadistic, cruel group of blood suckers on the planet.

The reason the fiscal filings are so complicated and ridiculous, is a combination of government trying to suck out of companies every penny they can, and the IRS trying to make as many rules as possible, specifically so that they can hire on a million more tax agents to enforce those rules. At the same time, the more dumb rules, the more accidental mistakes can be made, which results in fines, fees, interest penalties and so on.

Quite frankly, I'm all for your system of simplification. I would like income tax filing to be the size of a post card. Income _____ times 10% tax rate.... equals tax bill ______ Send payment. Shouldn't take 20 minutes for anyone to do their taxes.

Good luck convincing the blood sucking ticks in government to do it though.

 

[320 Years of History]

It's great that you agree with my proposed idea, and TY for saying you do. Your reasons for doing so, at least to the extent you've described them in your remarks, are way off base. I think you are "barking up the right tree" for the wrong reason(s).

Companies hire scores of accountants, who are paid good money, to spend MONTHS compiling and writing up, a hundred page document, to file with the SEC....... and then never use it for anything else.

I've began my professional career as an auditor for a then Big Eight firm and participated on audits of huge multinational organizations, corporate, privately held for profit, non-profit and governmental entities. "Hiring scores of accountants" is not at all what happens.

The typical audit team consists of two or three staff accountants, a manager, senior manager and a partner. The data they audit is held in digital databases (or in the "old days" digitized sequential flat files). The audit teams generally use statistically valid sampling methods having confidence levels of 95% (or higher in some instances) to identify and select specific transactions to review in detail.

Independent auditors do not produce the financial statements; their client, the entity being audited, does. The auditors produce an audit report that contains their opinion on whether the financial statements and related notes that the client produced "financial statements present fairly, in all material respects, the financial position of [XYZ Organization] as of [a point/period in time], and its change in net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America." That one statement is the auditor's opinion and it, and the auditor's documentation of the audit activities performed, are all the auditor creates in connection with a client's financial statements audit.

The preceding illustrates what is called an unqualified auditor's opinion. It's called an opinion because auditors do not review in detail every transaction a company performs. Were independent auditors to examine

If the auditors feel the financial statements do not "fairly present in all material respects," they instead issue a qualified opinion. There are many things that can lead to a qualified opinion. What they all have in common is that they identify that the auditor does not feel the information in the financial statements "fairly present" something or other. For example, a set of financial statements can "to the T" reflect the state of the company, yet the auditor may issue a qualified opinion because the statements show there is "substantial doubt concerning the entity's ability to exist as a going concern."

IF you spent $100,000 writing a fiscal statement, why would you not use that statement for everything, not just the SEC?

If you truly think companies don't use their financial statements for anything other than complying with SEC and/or investor/lender requirements, someone has grossly misinformed you or you failed to confirm the veracity of your self-conceived supposition in that regard. Moreover, the company that produces the financial statements is not the sole user of them.

• Purpose of Financial Statements and Users of Financial Statements

Quite frankly, I'm all for your system of simplification. I would like income tax filing to be the size of a post card. Income _____ times 10% tax rate.... equals tax bill ______ Send payment. Shouldn't take 20 minutes for anyone to do their taxes.

Good luck convincing the ... government to do it though.

The government, namely the IRS, is the least of the parties who need to be convinced. Indeed, the IRS would be thrilled to implement such a simplification. The people who need to be convinced are the partners of public accounting firms (this is probably the easiest group to convince as they'd just shift folks from the tax unit to the audit unit), tax accountants, the AICPA, NABA, Intuit and their competitors, and tax attorneys. Such an approach would essentially put thousands of them, but not all, out of work and in one fell swoop eliminate the need for most tax preparers, nearly all business tax preparation software products/system, and so on.

 

[Andylusion]

It's great that you agree with my proposed idea, and TY for saying you do. Your reasons for doing so, at least to the extent you've described them in your remarks, are way off base. I think you are "barking up the right tree" for the wrong reason(s).

Companies hire scores of accountants, who are paid good money, to spend MONTHS compiling and writing up, a hundred page document, to file with the SEC....... and then never use it for anything else.

I've began my professional career as an auditor for a then Big Eight firm and participated on audits of huge multinational organizations, corporate, privately held for profit, non-profit and governmental entities. "Hiring scores of accountants" is not at all what happens.

The typical audit team consists of two or three staff accountants, a manager, senior manager and a partner. The data they audit is held in digital databases (or in the "old days" digitized sequential flat files). The audit teams generally use statistically valid sampling methods having confidence levels of 95% (or higher in some instances) to identify and select specific transactions to review in detail.

Independent auditors do not produce the financial statements; their client, the entity being audited, does. The auditors produce an audit report that contains their opinion on whether the financial statements and related notes that the client produced "financial statements present fairly, in all material respects, the financial position of [XYZ Organization] as of [a point/period in time], and its change in net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America." That one statement is the auditor's opinion and it, and the auditor's documentation of the audit activities performed, are all the auditor creates in connection with a client's financial statements audit.

The preceding illustrates what is called an unqualified auditor's opinion. It's called an opinion because auditors do not review in detail every transaction a company performs. Were independent auditors to examine

If the auditors feel the financial statements do not "fairly present in all material respects," they instead issue a qualified opinion. There are many things that can lead to a qualified opinion. What they all have in common is that they identify that the auditor does not feel the information in the financial statements "fairly present" something or other. For example, a set of financial statements can "to the T" reflect the state of the company, yet the auditor may issue a qualified opinion because the statements show there is "substantial doubt concerning the entity's ability to exist as a going concern."

IF you spent $100,000 writing a fiscal statement, why would you not use that statement for everything, not just the SEC?

If you truly think companies don't use their financial statements for anything other than complying with SEC and/or investor/lender requirements, someone has grossly misinformed you or you failed to confirm the veracity of your self-conceived supposition in that regard. Moreover, the company that produces the financial statements is not the sole user of them.

• Purpose of Financial Statements and Users of Financial Statements

Quite frankly, I'm all for your system of simplification. I would like income tax filing to be the size of a post card. Income _____ times 10% tax rate.... equals tax bill ______ Send payment. Shouldn't take 20 minutes for anyone to do their taxes.

Good luck convincing the ... government to do it though.

The government, namely the IRS, is the least of the parties who need to be convinced. Indeed, the IRS would be thrilled to implement such a simplification. The people who need to be convinced are the partners of public accounting firms (this is probably the easiest group to convince as they'd just shift folks from the tax unit to the audit unit), tax accountants, the AICPA, NABA, Intuit and their competitors, and tax attorneys. Such an approach would essentially put thousands of them, but not all, out of work and in one fell swoop eliminate the need for most tax preparers, nearly all business tax preparation software products/system, and so on.

Well, obviously I'm not going to argue with you on this, because everything I have learned is second hand. And I can assure you it is not my self-conceived supposition.

The reason I said that, is because it is what I have read, and heard. One was from a book on Exxon, where the CEO of Exxon said openly they never used the SEC filings for anything other than to file with the SEC, and say to the shareholders that they had filed with the SEC and it was reported.

Additionally, I heard exactly the same on an addition of EconTalk, with Economist Russ Roberts, and I believe (not sure), William K. Black who is a lawyer, former bank regulator, and now academic and author of "The Best Way to Rob a Bank Is to Own One", where he talks about Financial Fraud.

In the episode I listened to, he said that almost no corporations use their SEC filings for anything. Without exception, the SEC filings are used as nothing more than cover.

Which ironically, when Enron was in trouble, and shareholders expressed concern over shady reporting, Enron's executives pointed to the fact the SEC accepted their filings as proof they were not hiding anything. Which again, was convenient, since no one ever reads the official SEC filings (again, according to what I've read and heard).

Now I did NOT say they don't use financial statements for anything. Corporations obviously put out many financial statements, and they are used for all sorts of things, including getting loans, talking to creditors, takeovers and mergers, and so on. I was specifically talking about their SEC filings.

Again, I'm not going to argue with an accountant about what he sees at his job. You would know more about your work, than I know about your work.

I'm just reporting to you what I have read and heard. When the CEO of Exxon says they don't use their SEC filings for anything other than the SEC, that carries weight with me. And when former government regulators say SEC filings are useless, that carries weight with me.

By the way, I actually went to several companies, and downloaded their SEC filings to see for myself what they say. And assuming the two I looked at were somewhat representative of what most companies file.... yeah... it's trash. Tons of irrelevant data, not helpful to anyone, except perhaps a massive government bureaucracy which needs excuses to hire more people.

Regardless I still agree with your plan. Again, if I could vote you in to replace our tax code, I'd do it.

 

[320 Years of History]

the CEO of Exxon said openly they never used the SEC filings for anything other than to file with the SEC

Yes, okay. So it's true that the actual document filed with the SEC has no real use beyond filing it with the SEC. The financial information in the document is what is important, and that is what companies and their managers use daily. So, yes, CEOs, CFOs, and other company managers do not look at their 10-K, annual report, etc. on anything like a routine basis. But they don't have to, they know their company and they have the very same information in their financial systems. I imagine all of them all on their decision information system dashboards, precisely the same financial information that's in the firm's 10-K. Moreover, they can look at a given line item and "drill down" on the details that support it if they feel the need to do so. Thus they have no reason to look at the 10-K or their glossy annual report (largely the "fancy" version of the 10-K) itself. Additionally, for example, as they (their staff) wrote the MD&A that accompanies the 10-K, they have no need re-read it either.

Hopefully the discussion above gives you enough context to accurately understand what the CEOs meant when they said they don't use or read their 10-K document.

Enron's executives pointed to the fact the SEC accepted their filings as proof they were not hiding anything.

So long as the document is accompanied by an independent auditor's report, they'll accept any correctly submitted 10-K or quarterly report a company provides. It's worth noting that the Enron matter is the reason Arthur Andersen went belly up. That series of events is what led to a piece of legislation called Sarbanes-Oxley.

 

[Andylusion]

the CEO of Exxon said openly they never used the SEC filings for anything other than to file with the SEC

Yes, okay. So it's true that the actual document filed with the SEC has no real use beyond filing it with the SEC. The financial information in the document is what is important, and that is what companies and their managers use daily. So, yes, CEOs, CFOs, and other company managers do not look at their 10-K, annual report, etc. on anything like a routine basis. But they don't have to, they know their company and they have the very same information in their financial systems. I imagine all of them all on their decision information system dashboards, precisely the same financial information that's in the firm's 10-K. Moreover, they can look at a given line item and "drill down" on the details that support it if they feel the need to do so. Thus they have no reason to look at the 10-K or their glossy annual report (largely the "fancy" version of the 10-K) itself. Additionally, for example, as they (their staff) wrote the MD&A that accompanies the 10-K, they have no need re-read it either.

Hopefully the discussion above gives you enough context to accurately understand what the CEOs meant when they said they don't use or read their 10-K document.

Enron's executives pointed to the fact the SEC accepted their filings as proof they were not hiding anything.

So long as the document is accompanied by an independent auditor's report, they'll accept any correctly submitted 10-K or quarterly report a company provides. It's worth noting that the Enron matter is the reason Arthur Andersen went belly up. That series of events is what led to a piece of legislation called Sarbanes-Oxley.

Yes. I was under the impression that the information in the SEC report, was itself, largely worthless. That the documents used at Shareholder meetings was completely different, and largely more like the example you posted. Simple, easy to follow, detailed enough to be useful, but simplified enough to be understandable. But was otherwise completely unlike the SEC report.

Well Arthur Andersen was an accomplice. They knew they were massaging the numbers to some degree. It would be impossible to not know.

Sarbanes Oxley is another one of these dumb regulations in my opinion.

It's kind of like my sister and her children. (she has 6). She could just talk at them and tell them not to get into the cookies... or she could smack them when they do. Oddly, just barking at people doesn't seem to work. But getting smacked hard every time you do, that seems to work.

Enron was a success, only because people went to prison. 2008 was a failure because we basically said, we're going to bail you out when you mess up, and oh, here's some new rules.

People who are willing to violate the rules.... does it matter how many rules you make? It's like making illegal for murderers to own guns. As if a person willing to murder, is going to be super worried about having a gun violation on their record.

We don't need new rules. In fact, the more complicated the regulations are, the easier it is to hide the fraud. At least that's what I believe. Do you think differently?

 

[320 Years of History]

It's kind of like my sister and her children. (she has 6). She could just talk at them and tell them not to get into the cookies... or she could smack them when they do. Oddly, just barking at people doesn't seem to work. But getting smacked hard every time you do, that seems to work.

I'm not a fan of corporal punishment, but did use it about two to five times with each of my three children. My parents too are not fans of it. On the other hand, my father was quite the disciplinarian. I shared one of my childhood discipline experiences here. Another member thought that amounted to "easy street." Lest you arrive at the same misguided conclusion, I point you here.

I was under the impression that the information in the SEC report, was itself, largely worthless.

Well, I'm glad you now see that it's far from worthless.

That the documents used at Shareholder meetings was completely different, and largely more like the example you posted. Simple, easy to follow, detailed enough to be useful, but simplified enough to be understandable. But was otherwise completely unlike the SEC report.

??? The SEC filed documents aren't at all worthless.

• 10-K -- The substantive and factual information about a publicly traded/held company is all it contains. It dispenses with the "fluff" -- the rosy narrative and spin the corporation's directors put on the nature of the prior year's results and where they are taking the company in the years to come, and how whatever direction that is will be good for the shareholders -- that's in a firm's annual report.
• 10-Q -- Basically the same thing as the 10-K, but filed quarterly rather than annually. It's a primary source of financial information for analysts and interested parties.

Pick any corporation that suits you and compare and contrast the content in the10-K with its annual report and you'll see what I mean. The 10-K has some info that's not in the annual report, but not much. A firm's 10-K neer has all the pretty pictures and graphical summarizations that are often in an annual report.

Sarbanes Oxley is another one of these dumb regulations in my opinion.

I do not share you opinion. I believe SarbOx was overdue upon arrival. The very fact that "Enron" occurred is testament to its having been so.

2008 was a failure because we basically said, we're going to bail you out when you mess up, and oh, here's some new rules.

The events of 2008 inform me that SarbOx didn't go far enough. It's not that the auditors missed something or colluded with their clients to ignore material weaknesses or failings. It's that the scope of an independent auditor's work does not include opining on the quality of the choices, risk position, and other qualitative and/or subjective dimensions of a company's business operations.

People who are willing to violate the rules.... does it matter how many rules you make?

Well, no, of course no law is worth the paper it's printed on to folks who are committed to breaking it or doing whatever they want to in spite of its enactment. The thing is that nobody in business actively want to get caught breaking a law, but more importantly, the owners of huge multibillion dollar entities have zero desire to lose their business for doing something they could have instead just not done and made billions even though they didn't undertake that action.

The whole premise behind violating any law is that the lawbreaker is willing to take the risk that they won't get caught doing so. That's so for all proscriptions, from speed limits to "thou shalt not kill." That's not the law's problem, that's the lawbreaker's lapse in or lacking of integrity. Let's face facts. There's no need for laws that make people do what they are going to do anyway. You don't need laws to prevent lawbreakers from doing whatever they are of a mind to do regardless. We need laws only to form a basis for (1) drawing the line that demarks what our society deems acceptable and what it does not, (2) providing a framework for punishing folks who cross that line.

Prohibition in the 1920s and '30s informs us that when making laws, there's absolutely no point in passing and enforcing a law that most (enough) of the citizenry is unwilling to follow, even if that law rises to the level of being literally Constitutional.

We don't need new rules. In fact, the more complicated the regulations are, the easier it is to hide the fraud. At least that's what I believe. Do you think differently?

I do not think the complexity of laws and regulations increases the ease of committing fraud. I think the complexity of laws makes it harder for unsophisticated (untrained) readers and interpreters of the laws and regulations to discern whether an act they commit will or will not be adjudged fraudulent if that act comes under close scrutiny.

 

[Andylusion]

It's kind of like my sister and her children. (she has 6). She could just talk at them and tell them not to get into the cookies... or she could smack them when they do. Oddly, just barking at people doesn't seem to work. But getting smacked hard every time you do, that seems to work.

I'm not a fan of corporal punishment, but did use it about two to five times with each of my three children. My parents too are not fans of it. On the other hand, my father was quite the disciplinarian. I shared one of my childhood discipline experiences here. Another member thought that amounted to "easy street." Lest you arrive at the same misguided conclusion, I point you here.

I was under the impression that the information in the SEC report, was itself, largely worthless.

Well, I'm glad you now see that it's far from worthless.

That the documents used at Shareholder meetings was completely different, and largely more like the example you posted. Simple, easy to follow, detailed enough to be useful, but simplified enough to be understandable. But was otherwise completely unlike the SEC report.

??? The SEC filed documents aren't at all worthless.

• 10-K -- The substantive and factual information about a publicly traded/held company is all it contains. It dispenses with the "fluff" -- the rosy narrative and spin the corporation's directors put on the nature of the prior year's results and where they are taking the company in the years to come, and how whatever direction that is will be good for the shareholders -- that's in a firm's annual report.
• 10-Q -- Basically the same thing as the 10-K, but filed quarterly rather than annually. It's a primary source of financial information for analysts and interested parties.

Pick any corporation that suits you and compare and contrast the content in the10-K with its annual report and you'll see what I mean. The 10-K has some info that's not in the annual report, but not much. A firm's 10-K neer has all the pretty pictures and graphical summarizations that are often in an annual report.

Sarbanes Oxley is another one of these dumb regulations in my opinion.

I do not share you opinion. I believe SarbOx was overdue upon arrival. The very fact that "Enron" occurred is testament to its having been so.

2008 was a failure because we basically said, we're going to bail you out when you mess up, and oh, here's some new rules.

The events of 2008 inform me that SarbOx didn't go far enough. It's not that the auditors missed something or colluded with their clients to ignore material weaknesses or failings. It's that the scope of an independent auditor's work does not include opining on the quality of the choices, risk position, and other qualitative and/or subjective dimensions of a company's business operations.

People who are willing to violate the rules.... does it matter how many rules you make?

Well, no, of course no law is worth the paper it's printed on to folks who are committed to breaking it or doing whatever they want to in spite of its enactment. The thing is that nobody in business actively want to get caught breaking a law, but more importantly, the owners of huge multibillion dollar entities have zero desire to lose their business for doing something they could have instead just not done and made billions even though they didn't undertake that action.

The whole premise behind violating any law is that the lawbreaker is willing to take the risk that they won't get caught doing so. That's so for all proscriptions, from speed limits to "thou shalt not kill." That's not the law's problem, that's the lawbreaker's lapse in or lacking of integrity. Let's face facts. There's no need for laws that make people do what they are going to do anyway. You don't need laws to prevent lawbreakers from doing whatever they are of a mind to do regardless. We need laws only to form a basis for (1) drawing the line that demarks what our society deems acceptable and what it does not, (2) providing a framework for punishing folks who cross that line.

Prohibition in the 1920s and '30s informs us that when making laws, there's absolutely no point in passing and enforcing a law that most (enough) of the citizenry is unwilling to follow, even if that law rises to the level of being literally Constitutional.

We don't need new rules. In fact, the more complicated the regulations are, the easier it is to hide the fraud. At least that's what I believe. Do you think differently?

I do not think the complexity of laws and regulations increases the ease of committing fraud. I think the complexity of laws makes it harder for unsophisticated (untrained) readers and interpreters of the laws and regulations to discern whether an act they commit will or will not be adjudged fraudulent if that act comes under close scrutiny.

Ok, you are going to need to explain that last statement a bit more.... because from my perspective, you just contradicted yourself.

"I do not think complexity of the laws and regulations increases the easy of committing fraud"

Followed by....

"I think the complexity of laws makes it harder for unsophisticated (untrained) readers and interpreters of the laws and regulations to discern whether an act they commit will or will not be adjudged fraudulent if that act comes under close scrutiny"

If the complexity of the laws and regulations makes it harder for anyone.... trained or untrained, to determine if a given action could be fraudulent... wouldn't that in and of itself, make committing fraud easier?

I keep going back to Enron executives meeting with creditors who said openly it appears as though you are hiding something from your public financials, and having Enron respond saying "well the SEC accepted our report"

Now at face value, my first thought would be to look at the SEC report. If the report was easy enough to follow, I would assume Enron creditors would have looked at it.... don't you?

So how come the red flags they found in Enron official financial documents raised red flags, while the complex and information packed SEC filing, did not?

To me... the answer is clearly such a complex set of regulations and laws, made the information difficult for Enron's creditors to discern.

Would you disagree with that conclusion?

 

[Andylusion]

2008 and SarbOx, had nothing to do with each other, and there is nothing in SarbOx that could have prevented anything in 2008. I don't care what law you passed, there would have been a crash, and it would have been massive. The government itself was pushing sub-prime loans. No amount of regulations would stop the crushing wave of sub-prime loans, when the government itself was pushing for, and rewarding, sub-prime loans. Even if.... and it's a massive if.... they did pass a law to stop sub-prime loans, it would have simply moved the crash up. The sub-prime bubble, and housing price bubble was already in full swing by 2002. You can't retroactively prevent a bubble that already exists. You can only pop the bubble, which would have wrecked the economy, then, rather than 2008.

 

[320 Years of History]

We don't need new rules. In fact, the more complicated the regulations are, the easier it is to hide the fraud. At least that's what I believe. Do you think differently?

I do not think the complexity of laws and regulations increases the ease of committing fraud. I think the complexity of laws makes it harder for unsophisticated (untrained) readers and interpreters of the laws and regulations to discern whether an act they commit will or will not be adjudged fraudulent if that act comes under close scrutiny.

Ok, you are going to need to explain that last statement a bit more.... because from my perspective, you just contradicted yourself.

Perhaps if I rewrote the first sentence (red) it'd help:

I do not think the complexity of laws and regulations facilitates or abets cozeners in planning, performing, or successfully achieving their fraudulent objectives.​

 

[320 Years of History]

there is nothing in SarbOx that could have prevented anything in 2008.

Correct. That's why I said I think SarbOx didn't go far enough.

 

[Wilbur Right]

And finally why would the USA have need for more

The approach, call it a tax reform if you want, noted above gets rid of all the complexity in preparing income taxes. It also aligns businesses' objective of showing maximum performance results with government's need to collect revenue. Lastly, it increases the audit industry's need to apply even more rigorous degrees of integrity in performing audits, or at least it would if their livelihood were at risk if they fail to do so.

Why would major corporations be interested in a revamped tax system that you propose.

The system we currently have in place has taken years for corporations to put in place. Even though our stated corporate tax rate is high, who pays the full amount?

And if your system, while simplifying the filing, result in greater taxes being paid by corporations, who would support that?

And if the revenue to the treasury stays the same, why bother?

Finally, can you think of any very expensive activity that ONLY the USA engages in that benefits major international corporations?
Sure I can. A world wide military presence. A very expensive world wide military presence. And that's why our corporations pay more tax than other countries. Because they get to benefit from this worldwide military presence.

You think corporations should have a lower tax burden and I understand that. So who do you want to pay for all this military around the world? The citizens who aren't benefiting? Or the corporations who are?

 

[Wilbur Right]

When I wrote mortgage loans for a living, I used to wonder why we made the process so complicated. It was because only the people who worked in the business understood the entire process. Which made it much easier to do some of the shady activities that ended up permeating the industry.

But to think top level corporate executives didn't know they were making shit loans, when us on the street originators knew, is ludicrous. What the top level people figured out was how to profit from bad loans and not have any risk should the loan default.

Good work while it lasted. Morals be damned. Greed was king.

 

[320 Years of History]

And finally why would the USA have need for more

The approach, call it a tax reform if you want, noted above gets rid of all the complexity in preparing income taxes. It also aligns businesses' objective of showing maximum performance results with government's need to collect revenue. Lastly, it increases the audit industry's need to apply even more rigorous degrees of integrity in performing audits, or at least it would if their livelihood were at risk if they fail to do so.

Why would major corporations be interested in a revamped tax system that you propose.

The system we currently have in place has taken years for corporations to put in place. Even though our stated corporate tax rate is high, who pays the full amount?

And if your system, while simplifying the filing, result in greater taxes being paid by corporations, who would support that?

And if the revenue to the treasury stays the same, why bother?

Finally, can you think of any very expensive activity that ONLY the USA engages in that benefits major international corporations?
Sure I can. A world wide military presence. A very expensive world wide military presence. And that's why our corporations pay more tax than other countries. Because they get to benefit from this worldwide military presence.

You think corporations should have a lower tax burden and I understand that. So who do you want to pay for all this military around the world? The citizens who aren't benefiting? Or the corporations who are?

??? Whatever be the tax rate is irrelevant to my proposal. I proposed a change in the process of determining what a corporation's tax bill is, not how much they pay. If you want to raise, lower or keep the corporate tax rate same, fine...all that does is alter the multiplier, which is given by the IRS. My proposal simplifies determining the multiplicand, which is determined by the taxpayer/corporation.

 

[Andylusion]

We don't need new rules. In fact, the more complicated the regulations are, the easier it is to hide the fraud. At least that's what I believe. Do you think differently?

I do not think the complexity of laws and regulations increases the ease of committing fraud. I think the complexity of laws makes it harder for unsophisticated (untrained) readers and interpreters of the laws and regulations to discern whether an act they commit will or will not be adjudged fraudulent if that act comes under close scrutiny.

Ok, you are going to need to explain that last statement a bit more.... because from my perspective, you just contradicted yourself.

Perhaps if I rewrote the first sentence (red) it'd help:

I do not think the complexity of laws and regulations facilitates or abets cozeners in planning, performing, or successfully achieving their fraudulent objectives.​

LOL... thanks.. No no, the problem is with the following line after the red.

"I think the complexity of laws makes it harder for unsophisticated (untrained) readers and interpreters of the laws and regulations to discern whether an act they commit will or will not be adjudged fraudulent if that act comes under close scrutiny."​

Now the way I read that is, to other investors.... the people who are trying to determine whether or not to invest in any particular investment.... "the complexity of laws makes it harder for unsophisticated (untrained) readers and interpreters of the laws and regulations to discern".

Do you see where my question comes in?

You openly admit that the complexity of the regulations make it more difficult for those who are not trained to determine whether or not any actions, are fraudulent.

I agree.

Now out of the vast majority of the 8 billion people on the planet, are they trained? Of course not. So the complexity of the law, would make it more difficult for them to determine if what so-and-so is doing is fraudulent. Which means, in my view, that they would be more likely to be duped into investing into a fraudulent scheme. Do you see?

That is my point. We have the most regulated financial sector in the world today. There isn't anywhere else, any other country, that is more regulated than the US is. The rest of the world, never had a Glass-Steagal regulation. Their capital reserve requires are much lower than ours. Their lending standards far less complex than ours. There never was a separation of commercial and retail and investment banking in the rest of the world.

Yet the last several banking problems, have started here... not in Europe.

Why?

Who finds the fraud and problems in the system? Is it the government? Or the people? Who caught Enron? Do you know? It wasn't the government. It wasn't the SEC, or FBI, or some other agency.

It was the investors. It was the market analysts. They were the ones that started questioning Enron's claims, and sounding the alarms about their mythical profits.

The SEC didn't show up on Enron, until the Enron stocks had crashed. Why did the stocks crash? Because investors figured out Enron was a joke, and started pulling their money.

Who caught Bernie Madoff? Government? Nope. It was the investors that caught Madoff. Market analysts reported that Madoff was a fraud in 1999.

Now he reported to the SEC, and yet from 1999 to 2009, he continued and grew his business.

So how was Enron able to keep running for a decade, and Madoff able to keep operating for a decade, and able to scam people out of billions?

My answer.... would be the answer you gave.
"I think the complexity of laws makes it harder for unsophisticated (untrained) readers and interpreters of the laws and regulations to discern whether an act they commit will or will not be adjudged fraudulent if that act comes under close scrutiny."

Which contrary to your prior claim, makes it easier for people to scam the system. Regulations and complexity make it more difficult for the average person, to determine if someone is engaged in fraud. Thus they are more likely to engage in fraud without being caught.

Again, I keep going back to that story about Enron, where investors questioned the executives about their earnings, and Enron Execs said "the SEC report was accepted, so we're clean!". The regulations were directly used by Enron to hide their fraud.

I assume you still disagree?

 

[Picaro]

2008 and SarbOx, had nothing to do with each other, and there is nothing in SarbOx that could have prevented anything in 2008. I don't care what law you passed, there would have been a crash, and it would have been massive. The government itself was pushing sub-prime loans. No amount of regulations would stop the crushing wave of sub-prime loans, when the government itself was pushing for, and rewarding, sub-prime loans. Even if.... and it's a massive if.... they did pass a law to stop sub-prime loans, it would have simply moved the crash up. The sub-prime bubble, and housing price bubble was already in full swing by 2002. You can't retroactively prevent a bubble that already exists. You can only pop the bubble, which would have wrecked the economy, then, rather than 2008.

Thanks for making posts that actually inform somebody, a rarity on most forums. A few small points:

10K filings are only required for publicly traded corporations, if that wasn't already included in a post after the OP. They are indeed pretty useless; try examining General Electric's or any other multi-national's 10K's if there is somebody who doesn't believe me. Why they and most prospectuses have become useless as information for investors are the numerous GAAP changes since the late 1970's to the present, which alters how assets and liabilities are valued, something else you probably already know; the accounting standards are so loose now it's inevitable criminal activity has made a lot of the financial system unstable, and worsens the effects of both bubbles and their inevitable collapses.

I will also point out it wasn't the sub-prime mortgages that caused the collapse of the housing bubble; the first companies to crash didn't have any of those in their portfolios. USB in Europe kicked off the panic within the big players' operations by their write down of their mortgage portfolios, setting off a wave of write-downs required by the mark-to-market regulations, don't recall the year that law was implemented, but it was fairly late, 2006 maybe. This in turn dried up the overnight lending market for firms like Thornburg here in the U.S., the first domino to fall here. Thornburg only held the top-rated mortgages, AAA+, and had a default rate of less than 1%. What they did have was a massive over-leverage of their assets, a ratio of some 50 to 1, and this over-leveraging was rife over the entire industry; the mark to market rule almost instantly dried up their collateral, as it did most of those who failed, and made the monthly bridge loans necessary to maintain the ridiculous leverage ratios impossible to obtain or at interest rates that would have ruined them anyway. Thornburg had some $2.7 billion in equity, and had bought some $28 billion in ARMs and other mortgages through borrowing and CDO's; not a single sub-prime in their portfolio.

The simple fact is it was insane over-leveraging of assets by bankers and traders who supposedly knew what they were doing, common in all bubbles, that caused the crisis, not sub-primes; they did contribute to the domino effect via later fallouts, exposing the criminal frauds at outfits like Countrywide, AIG, and the like.

 

[Andylusion]

2008 and SarbOx, had nothing to do with each other, and there is nothing in SarbOx that could have prevented anything in 2008. I don't care what law you passed, there would have been a crash, and it would have been massive. The government itself was pushing sub-prime loans. No amount of regulations would stop the crushing wave of sub-prime loans, when the government itself was pushing for, and rewarding, sub-prime loans. Even if.... and it's a massive if.... they did pass a law to stop sub-prime loans, it would have simply moved the crash up. The sub-prime bubble, and housing price bubble was already in full swing by 2002. You can't retroactively prevent a bubble that already exists. You can only pop the bubble, which would have wrecked the economy, then, rather than 2008.

Thanks for making posts that actually inform somebody, a rarity on most forums. A few small points:

10K filings are only required for publicly traded corporations, if that wasn't already included in a post after the OP. They are indeed pretty useless; try examining General Electric's or any other multi-national's 10K's if there is somebody who doesn't believe me. Why they and most prospectuses have become useless as information for investors are the numerous GAAP changes since the late 1970's to the present, which alters how assets and liabilities are valued, something else you probably already know; the accounting standards are so loose now it's inevitable criminal activity has made a lot of the financial system unstable, and worsens the effects of both bubbles and their inevitable collapses.

I will also point out it wasn't the sub-prime mortgages that caused the collapse of the housing bubble; the first companies to crash didn't have any of those in their portfolios. USB in Europe kicked off the panic within the big players' operations by their write down of their mortgage portfolios, setting off a wave of write-downs required by the mark-to-market regulations, don't recall the year that law was implemented, but it was fairly late, 2006 maybe. This in turn dried up the overnight lending market for firms like Thornburg here in the U.S., the first domino to fall here. Thornburg only held the top-rated mortgages, AAA+, and had a default rate of less than 1%. What they did have was a massive over-leverage of their assets, a ratio of some 50 to 1, and this over-leveraging was rife over the entire industry; the mark to market rule almost instantly dried up their collateral, as it did most of those who failed, and made the monthly bridge loans necessary to maintain the ridiculous leverage ratios impossible to obtain or at interest rates that would have ruined them anyway. Thornburg had some $2.7 billion in equity, and had bought some $28 billion in ARMs and other mortgages through borrowing and CDO's; not a single sub-prime in their portfolio.

The simple fact is it was insane over-leveraging of assets by bankers and traders who supposedly knew what they were doing, common in all bubbles, that caused the crisis, not sub-primes; they did contribute to the domino effect via later fallouts, exposing the criminal frauds at outfits like Countrywide, AIG, and the like.

I have actually looked at the major corporations filings, and they are insanely difficult to grasp. What's funny is if you compare the government filings, with the investor reports.... the investor reports are a walk in the park. I downloaded Walmarts investor report, (I own stock in Walmart), and read through it, and I could understand nearly everything.

I assume you meant UBS in Sweden, not USB, which would be US Bank in the US? OR worse a USB drive, or USB printer, or who knows what else. (that's what I got when I googled USB Bank).


My argument to you, would be that the question of "Who kicked off the panic" is irrelevant, and not what I said. I said the problem started in the US. Which it did. Who kicked off the panic, is a question of the effect, not the cause.

Yes, it's possible that UBS was the first bank to write down mortgage backed securities. I have not looked at which bank was the very first to write down their MBSs, but again, that is an effect, not a cause.

What caused UBS to write down those Securities backed by Mortgages?

Well.... the price bubble popped.

As you can see on the graph, clearly the housing prices topped out in July of 2006. So what caused the housing prices to start crashing in 2006?

As you can see by the graph, mortgage default rates were hovering at about 1%, until mid-2006, when defaults started drastically increasing to almost 6% by 2009. Apparently increasing the minimum wage, didn't help people to pay their mortgages.

So now that we understand what caused UBS Bank, and other banks to start writing down their MBS portfolios, the question then becomes, what caused that Housing Price Bubble in the first graph, that started in 1997?

Answer......

Subprime loans prior to 1997 were a tiny niche market. In 1997, they drastically increased by hundreds of billions worth, in just a few years. Went from being 1% of the market to being 25% of the market.

That's what caused the price bubble, which caused the price crash, which caused the MBS mark downs, which caused the panic.

That leaves us with one last questions. What the heck happened in 1997, that caused banks that refused to make sub-prime loans for 50 years prior, to start making them?

http://www.prnewswire.com/news-rele...-backed-by-affordable-mortgages-77650017.html

Press release from 1997.

First Union Capital Markets Corp. and Bear, Stearns & Co. Inc. have priced a $384.6 million offering of securities backed by Community Reinvestment Act (CRA) loans - marking the industry's first public securitization of CRA loans. The affordable mortgages were originated or acquired by First Union Corporation and subsidiaries. Customers will experience no impact - they will continue to make payments to and be serviced by First Union Mortgage Corp. CRA loans are loans targeted to low and moderate income borrowers and neighborhoods under the Community Reinvestment Act of 1977. "The securitization of these affordable mortgages allows us to redeploy capital back into our communities and to expand our ability to provide credit to low and moderate income individuals," said Jane Henderson, managing director of First Union's Community Reinvestment and Fair Lending Programs. "First Union is committed to promoting home ownership in traditionally underserved markets through a comprehensive line of competitive and flexible affordable mortgage products. This transaction enables us to continue to aggressively serve those markets." The $384.6 million in senior certificates are guaranteed by Freddie Mac and have an implied "AAA" rating. First Union Capital Markets Corp. is the investment banking subsidiary of First Union Corporation (NYSE: FTU).
​

Ok, so what happened? Freddie Mac, under the direction of HUD, following the Community Reinvestment Act, in 1997, started to guarantee Mortgage Backed Securities, that contained sub-prime loans, and gave them a "AAA" rating.

So what about Thornburg....

First of all, Adjustable Rate Mortgages suck. A Prime ARM, is just as bad as a fixed rate Sub-prime loan.

So while you may be technically correct, that Thornburg didn't have sub-prime loans specifically, they did have Adjustable Rate Mortgages, which are horrifically bad, and likely required a write down.

As you can see in this graph (crappy as it may be), what is shows is that the delinquency rate for a Sub-prime fixed rate loan, was just as bad as a Prime ARM loan.

Lastly, I want to tackle your idea that the banks were way over leveraged. This is simply not true. It simply not accurate.

The key aspect that you are missing, is that the value of the asset isn't static. The asset changes in value. Say that you buy a house for $200,000, and pay 20% down, so you borrow $160,000. Now say the market shifts, and the value of the home falls by 1/4th. Now you owe $160K, on a $150K home. Then everyone starts screaming that you are a horribly irresponsible person who borrowed more money on your home than it is even worth.

Now the underlining asset that Thornburg had.... was property. Homes. And back up at the first graph, as you can see, the homes lost value. The price bubble popped. It popped for ALL the homes, not just sub-prime homes, or adjustable rate homes. But ALL of them.

Point being, almost none of the banks in question over leveraged. None. Thornburg did not borrow 50 to 1. You are looking at the asset values after they fell. Before the asset values fell, they were not over leveraged. Just like you didn't over borrow at $160K, when the house was worth $200K. It was only after the value of the asset fell, that magically you were guilty over over borrowing.

But more than that.... The US has some of the most restrictive leverage requirements in the world. Even to this very day, Europe does not have the requirements that the US has.

The leverage ratios required by governments around the world, is way more lax than the US. Our leverage ratios are way lower than the rest of the world. And yet again, the problem started here. Showing you just how ineffective regulations are at stopping anything.

Canada is particularly less regulated than the US in this matter.

Now this is specific to oil and gas, because it was from an oil and gas publication. But the point is still valid. The amount of reserve capital required by the government, is a tiny fraction of what the US Banks are required to hold. Yet Canada didn't suffer any major bank crashes. And interestingly, Canada didn't suffer any bank crashes during the Great Depression either. Their greatly less regulated banking system, is far less crash prone than ours.