Wealth International, Limited (trustprofessionals.com) : Where There’s W.I.L., There’s A Way

W.I.L. Offshore News Digest for Week of August 25, 2008

This Week’s Entries : This week’s W.I.L. Finance Digest is here.


Tax Justice Network notes that the recent news from and pressure on Liechtenstein and Switzerland has hardly caused a dent in the aggregate business of the world's "tax havens." TJN is a rabidly leftist organization that lives inside the paradigm of the benign, munificent state, and thus sees the depriving of governments of tax revenues as a bad thing. Naturally, in that view the more business the tax havens get, the worse off things are.

The thing is, the TJN points to symtom which derives from a legitimate issue: The increasing concentration of wealth among the haves and the widespread poverty among the have-nots. But they are blissfully unaware of -- or stubbornly resistant to -- an alternative theory of the state that has it being the source of these issues. E.g., if the U.S. government was not so busy killing people, stealing money and then wasting it on war-making labor and machines, supporting oppressive governments who steal from their own people and sell their country's output on the cheap to multinationals, and so on, the just maybe a lot of poverty would be alleviated. (Never mind all the governments that steal and oppress on their own initiative.) In short, the state is the primary oppressive tool of the ruling class, not the offshore tax havens which allegedly help them escape their obligations. The anti-offshore initiative is to keep the "Little People," as Leona Helmsley called them, on the plantation -- not their overlords.

The TJN is an organization of ideologs who would turn over Zimbabwean tax evaders to Mugabe, so buried are they in their world view. Admittedly, state-as-oppressor is a theory about how things work rather than a cold hard fact, but the purveyors of the alternative have had the run of things for a good long time and how yet to provide any evidence that their perspective and management generates anything but misery and wealth destruction.

Recent news from Liechtenstein and Switzerland, where bank secrecy has been coming under serious fire and seems to be prompting some changes, have led some to wonder whether the world of tax havens is shrinking. It is a problem, some would love to conclude, that no longer needs tackling.

If you think that, think again. Look at this recent report from a tax haven website, lowtax.net (no friend of TJN's; see the longer version of their report here.) Here are a couple of excerpts:

"According to the 12th annual World Wealth Report, released in June 2008 by Merrill Lynch and Capgemini, the wealth of the world's high-net-worth individuals (HNWIs) increased 9.4% to US$40.7 trillion in 2007. The number of HNWIs in the world increased 6% in 2007 to 10.1 million, the number of ultra-high-net-worth individuals (Ultra-HNWIs) increased by 8.8%, and for the first time in the history of the Report, the average assets held by HNWIs exceeded US$4 million."

Since civil society campaigners like the Tax Justice Network began using data from McKinsey's, Boston Consulting Group, and others estimating the scale of global offshore assets, and the resulting tax losses, this kind of information appears to have rather dried up. Perhaps they are embarrassed about it. Perhaps there are other reasons for not disclosing. But we, like Raymond Baker (who canvassed thousands of top people for his book Capitalism's Achilles Heel) think the trend remains firmly upwards. The report continues:

"There are no consolidated figures for the growth in offshore assets -- many jurisdictions simply don't release figures. But for those that do, it is clear that the rate of increase in banking, trust and fund assets dramatically outpaces McKinsey's global figure. In Jersey, for instance, banking and investment fund assets were approaching £500 billion at mid-year, up 40% in the last two years. In Guernsey, bank deposits rose 14% last year to £92 billion, and fund assets rose 45% to £210 billion in the year to June, 2008."

Lowtax.net says this too:

"So where does it all come from? From rich people, stupid! They are the new kids on the block, the new rulers of our world. They are going to get richer, and there are going to be more of them. There are already more than 10 million dollar millionaires in the world, and that number has seen more than 10% annual growth in the last few years. It is estimated that the assets of these 10 million rich people top US$50 trillion. And beneath them are tens of millions of 'mass affluent' people with free, investible assets in excess of US$100,000. And beneath them ..."

The report then dives off into a celebratory romp through the strategies that wealthy people can use to deprive governments of their tax revenues. We prefer other analyses which express concern about this phenomenon, such as from David Rothkopf, whose recent book Superclass was written very much from an insiders' perspective.

"The combined net worth of the world's richest thousand or so people -- the world's billionaires -- is almost twice that of the poorest 2.5 billion ... setting aside both the fanciful and the insidious theories of puppet masters and their cabals, we must recognize that there is something new afoot, a huge imbalance in the global distribution of power."

TJN is one of the first civil society groups to address these challenges head-on. Slowly, people are starting to wake up.


Following the fall of the Berlin Wall in 1989 and the collapse of the Soviet Union, the U.S. had a chance to lead the way towards a more peaceful world while restructuring its wartime economy. Instead it pissed its time and resources away, as author and social critic James Howard Kunstler puts it, in pointless and ludicrous initiatives that befit an arrogant and deluded empire. This was a bipartisan, public/private effort, led by two Baby Boomer presidents and supported by a credit-fattened and happy public.

Now it is whirlwind reaping time. The wasted opportunity of the past 20 years is symbolized by the bombastic confrontation with a now reinvigorated Russia over its invasion of a disputed territory in "democratic" Georgia. Logistically the U.S. is at a huge disadvantage, which would be decisive even if the military had not already been drained by the Afghanistan and Iraq debacles. The whole thing takes on an even more absurd edge when one realizes that Russia holds a vast quantity of U.S. dollar assets, from investing part of its trade surpluses in U.S. Treasuries and the like. Is the U.S. going to borrow more from Russia in order to finance weapons to confront it?

In Pulitzer Prize-winning author Barbara Tuchman's 1984 book The March of Folly from Troy to Vietnam -- which could be retitled "... from Troy to Iraq" if it were written today -- she contributes these contemporary quotes from the time of the conflict between England and its American colonies, which of course culminated in the later gaining their independence:

The more things change ... These quotes adequately encapsulate America is its "indispensable nation" hypnosis.

James Kunstler wrote for Rolling Stone in the 1970s before becoming a full-time book author. His The Long Emergency describes the socioeconomic crisis he thinks that American society faces in the 21st century: "Kunstler foresees the progressive dilapidation of subdivisions and strip malls, the depopulation of the American Southwest, and, amid a world at war over oil, military invasions of the West Coast; when the convulsion subsides, Americans will live in smaller places and eat locally grown food."

Kunstler may seem apocalyptic but he is no dour survivalist. And unlike most once idealistic Baby Boomers, he has clearly not been co-opted by the powers that be. The article below and other writings accessible from his blog reveal a gift for trenchant black humor. Take this description of last week's Jackson Hole monetary conference:

At the moment, two of the biggest elephants in the room, so to speak, are going tits-up with X's where their eyes used to be. These would be the "affordable housing" enablers Fannie and Freddie, who managed during the past decade to make housing virtually unaffordable for any normal, responsible person unwilling to game the system -- with the additional consequence that not only the housing market but the general credit-and-lending apparatus of the U.S. has entered a state of morbid failure. These two corporations are now dead, incurring a legacy of obligation that will add $5 trillion to the national debt at one stroke. Nobody knows what the exact results of this debacle may be -- and the current silence about it is deafening -- but odds are the effect will range somewhere between destroying the currency and bankrupting the United States altogether.

Returning to Kunstler's essay which inspired this posting: Whether or not one buys into his dire warnings that the U.S. faces an extended period of social upheaval as it adjusts to a new era of expensive energy, his view the the U.S. political class and society are out of touch with reality is valid. Waking up is long overdue.

The U.S. had taken advantage of temporary confusion in Russia, during the 10-year-long post-Soviet collapse interval, and set up a client government in Georgia, complete with military advisors, sales of weapons, and even the promise of club membership in the Western alliance known as NATO. These blandishments were all in the service of the Baku-to-Ceyhan oil pipeline, which was designed specifically to drain the oil region around the Caspian Basin with an outlet on the Mediterranean, avoiding unfriendly nations all along the way.

At the time this gambit was first set up, in the early 1990s, there was some notion (or wish, really) among the so-called western powers that the Caspian would provide an end-run around OPEC and the Arabs, as well as the Persians, and deliver all the oil that the U.S. and Europe would ever need -- a foolish wish and a dumb gambit, as things have turned out.

For one thing, the latterly explorations of this very old oil region -- first opened to drilling in the 19th century -- proved somewhat disappointing. U.S. officials had been touting it as like unto "another Saudi Arabia" but the oil actually produced from the new drilling areas of Kazakhstan, Turkmenistan, and the other Stans turned out to be preponderantly heavy and sour crudes, in smaller quantities than previously dreamed of, and harder to transport across the extremely challenging terrain to even get to the pipeline head in Baku.

Meanwhile, Russia got its house in order under the non-senile, non-alcoholic Vladimir Putin, and woke up along about 2007 to find itself the leading oil and natural gas producer in the world. Among the various consequences of this was Russia's reemergence as a new kind of world power -- an energy resource power, with the energy destiny of Europe pretty much in its hands. Also, meanwhile, the USA had set up other client states in the ring of former Soviet republics along Russia's southern underbelly, complete with U.S. military bases, while fighting active engagements in Iraq and Afghanistan. Now, if this was not the dumbest, vainest move in modern geopolitical history!

It is one thing that U.S. foreign policy wonks imagined that Russia would remain in a coma forever, but the idea that we could encircle Russia strategically with defensible bases in landlocked mountainous countries halfway around the world ...? You have to ask what were they smoking over at the Pentagon and the CIA and the NSC?

So, this asinine policy has now come to grief. Not only does Russia stand to gain control over the Baku-to-Ceyhan pipeline, but we now have every indication that they will bring the states on its southern flank back into an active sphere of influence, and there is really not a damn thing that the U.S. can pretend to do about it.

We could have spent the past 10 years getting our own house in order -- waking up to the obsolescence of our suburban life-style, scaling back on the Happy Motoring, reconnecting our cities with world-class passenger rail, creating wealth by producing things of value (instead of resorting to financial racketeering), protecting our borders, and taking the necessary measures to defend and update our own industries. Instead, we pissed our time and resources away. Nations do make tragic errors of the collective will. The cluelessness of George Bush is nothing less than a perfect metaphor for the failure of a whole generation. The Boomers will be identified as the generation that wrecked America.

So, as the vacation season winds down, this country greets a new reality. We miscalculated in Western and Central Asia. Russia still "owns" that part of the world. Are we going to extend our current land wars there into the even more distant and landlocked Stan-nations? At some point, as we face financial and military exhaustion, we have to ask ourselves if we can even successfully evacuate our personnel from the far-flung bases in Uzbekistan and Kyrgyzstan.

This must be an equally sobering moment for Europe, and an additional reason for the recent plunge in the relative value of the euro, for Europe is now at the mercy of Russia in terms of staying warm in the winter, running their kitchen stoves, and keeping the lights on. Russia also exerts substantial financial leverage over the U.S. in all the dollars and securitized U.S. debt paper it holds. In effect, Russia can shake the U.S. banking system at will now by threatening to dump its dollar holdings.

The American banking system may not need a shove from Russia to fall on its face. It is effectively dead now, just lurching around zombie-like from one loan "window" to the next pretending to "borrow" capital -- while handing over shreds of its moldy clothing as "collateral" to the Federal Reserve. The entire U.S., beyond the banks, is becoming a land of the walking dead. Business is dying, home-ownership has become a death dance, whole regions are turning into wastelands of "for sale" signs, empty parking lots, vacant buildings, and dashed hopes. And all this beats a path directly to a failure of collective national imagination. We really do not know what is going on.

The fantasy that we can sustain our influence 9,000 miles away, when we cannot even get our act together in Ohio is just a dark joke. One might state categorically that it would be a salubrious thing for America to knock off all its vaunted "dreaming" and just wake up.

The Risk Economy

This Kunstler piece from this past May is a great instance of his take-no-prisoners style combined with a cutting-through-the-nonsense content delivery.

As the West's industrial regime sputters toward a cheap-energy-crackup conclusion, there have been attempts to recast what our economy is actually about, how to account for whatever wealth we manage to produce, and project what our society will actually be organized to do in the years ahead.

For a while in the 1990s, the idea was a "service economy," kind of like the old fable of the town whose inhabitants made a living by taking in each other's laundry -- only in our case it was selling hamburgers to tourists on vacation from their jobs making hamburgers elsewhere, or something like that.

Then came the idea of the "information economy" in which making things of value would no longer matter, only the processing and deployment of information (sometimes misidentified as "knowledge"). This model seemed to suggest a yin-yang of software engineers who made up games like "Grand Theft Auto" serving the opposite cohort of people who bought and played the game. If nothing else, it certainly explained how lifetimes could be frittered away on stupid activities.

That illusion yielded to the housing bubble economy, which actually did produce a lot of things, but not necessarily of value -- for instance, houses made of particle board and vinyl 38 miles outside of Sacramento. It was a tragic and manifold waste of resources, as well as an insult to the landscape. But the darker side of the housing bubble lay in the world of finance, where a vast empire of swindles was constructed to support the Potemkin facade of production homebuilding.

Now we are in a strange period when those swindles are unwinding. The people who run the finance sector -- the Wall Street investment banks, hedge funds and ratings agencies, the Federal Reserve, and the U.S. Dept of the Treasury -- in desperately trying to prevent the unwind, have rapidly ramped up another new economy based entirely on the buying and selling of risk. Risk, as a pure abstraction unconnected to any real capital activity, is all that is left to buy and sell after all other plausibly practical vehicles for finance have failed.

While a lack of transparency in the individual risk vehicles has been an object of complaint over the past year, the system as whole is transparently absurd. The system is also abstruse enough to prevent most mortals (including many employed in the system) from understanding its operations. But the general public and the news media are virtually helpless to intervene in this last gasp racket, so the probability increases that it will do tremendous damage to whatever remains of the U.S. economy.

One feature of the risk economy is the Federal Reserve's new willingness to absorb any sort of crap collateral in exchange for massive cheap loans to insolvent companies and institutions. ... It has already taken in a few hundred billion in securities based on non-performing real estate loans, and has now opened the window to securities based on non-performing credit card debt, car loans, and other miscellaneous IOUs still drifting un-hedged in the banking ether.

It is a mark of our collective desperation to avoid the consequences of so much reckless behavior that no credible authorities have stepped up to denounce this racket -- no Fed governor, no politician of standing (including the candidates for president), no newspaper-of-record. The Attorney-general of New York, Andrew Cuomo, may be quietly cooking up some cases in the deep background, but the SEC and the federal banking regulators hung up their "out-to-lunch" signs on this long ago

Meanwhile, the basic situation is this: the world is awash with bad investment paper. The standard of living in the U.S. cannot be supported on debt anymore. The people of the U.S. do not produce enough real value to service their debts. Institutions can no longer be supported on debt gone bad. Something's got to give -- meaning something has to bring the U.S. standard of living down to a level consistent with our declining actual wealth.

Everything else going on right now is a dodge. The Fed maneuvers, the "coordinated actions" of the western central banks, the postponements of default, the non-disclosure of contents in bank portfolios ... all this f**king nonsense will only make the eventual unwinding much worse.


Back in the 1980s, or perhaps the early '90s, we recall a Forbes article that featured a family whose homestead ended up, due to the vagaries of fate, just north of the U.S./Mexico border following the War with Mexico in 1848. (A war which was a transparent territory grab by the expanding U.S. empire, but that is a subject for another day.) Recollection is a little hazy here, but it seems the border divided the property between the two countries. The northern property owners' fortunes took a significantly more prosperous path than those who ended up to the south. That was of course because for a long time the U.S. government took a relatively laissez faire approach to the economy, while Mexico was at the effect of the toxic Latin American brew driven by class privilege and envy.

The diverging economic paths were reflected in the exchange rates between the peso and the dollar, as well as by the long-standing and ongoing attempts by Mexican workers to find work in the U.S. The peso has been so chronically weak that it has gone beyond being a trend to being a virtual state of nature, as a hydrogen atom is lighter than an oxygen atom. ... Except that the peso recently set a 6-year high vs. the dollar -- an astonishing statistic to anyone over, say, 35. This article explains that the peso's performance derives from a central bank chief whose philosophy contrasts markedly with that of Greenspan and Bernanke.

Imagine a country whose central bank responded to growing inflation by raising interest rates, strengthening the currency and trying to win investor confidence. This may be shocking to some U.S. investors, but proper monetary policy is still being practiced. Just not here in the United States. I would give the award for Best Central Banker in the world today to Mexico's Guillermo Ortiz.

This is a story that truly ought to be better known. Mr. Ortiz has now been at the helm of the Mexican central bank for over 10 years, and despite many obstacles (consider that 70% of Mexicans do not even use banks), he has emerged as the anti-Greenspan. Mr. Ortiz previously served Finance Minister where he helped clean up the mess surrounding the peso devaluation in 1994.

What impresses me about Ortiz, who earned has a Ph.D. from Stanford, is that he has made it unequivocally clear that the Banco de Mexico (or Banxico) intends to fight inflation until it wins. In the last three months, the bank has raised rates three times. Interest rates now stand at 8.25%, an amazing 625 basis points higher than in the U.S. even though inflation rates are roughly similar.

Make no mistake; the Mexican economy has its shares of problems. Growth is slowing and inflation is on the rise. Of course, much of this is understandable considering their raucous hung-over neighbors to the north -- nearly 80% of Mexico's exports go to the U.S. Still, my money is on Ortiz. He has even had the chutzpah to criticize our monetary policy as being "very lax." Don't expect to hear anything like that from Senators McCain or Obama.

And what about that hopeless currency, the peso? Well, it is on a roll this year. The peso is already up 7.5% for the year, and earlier this month, it reached a6-year high. In my opinion, the rate gap between the U.S. and Mexico will only grow. The futures market seems certain that the Fed will hold steady for the rest of the year, but I think Banxico could very well raise rates again. Their next meeting is on September 19.

The most recent report for Mexican GDP showed that Q2 growth came in at 2.8%, which is not bad but it was below expectations. The economy is not so fragile as to ward off monetary tightening. Retail sales are weak and the stock market is still hurting -- the Bolsa is at a 7-month low. Of course, that comes on the heels of an enormous rally, so some consolidation can be expected. Consider that shares of the Mexican ETF (EWW) more than quadrupled in five years [see chart].

What is really hurting the economy is that less money is being sent home from workers living abroad. And by abroad, you can probably guess what country I mean. Speaking of which, Ortiz also favors, sit down for this one, stricter immigration controls in the U.S. so Mexico can hold on to its workers. Ortiz said, "I think Mexico needs its people. It would be best to keep its people in Mexico, and it would give incentives for Mexico to create the jobs that are needed."

I am guessing Ortiz has some sympathy for Hank Paulson. When the Mexican financial system imploded, Ortiz was called in to clean up the mess. Paulson certainly has a tough task, but look at what Ortiz was facing -- inflation reached 52% and investment fell by one-fourth. Things got so bad that the former president basically cannot show his face Mexico and he has been exiled to Ireland. Greenspan now works at PIMCO! Thanks to Ortiz, Mexico righted itself and paid back its bailout money to the United States.

The thing about public finance is that it is really an issue of establishing confidence. If investors think you are serious, then they will invest with you. So far, Ortiz seems to winning the battle of establishing credibility. The yield on Mexico's long-term benchmark bond recently fell to its lowest level since June 6.

Mexico is a country with many deep rooted economic problems, however, the country has taken many steps in the right direction. For example, the election of the pro-market government of Felipe Calderon (cue Larry Kudlow) is helping to bring long-overdue reforms. Unlike the United States, the Mexican government seems to be serious about fiscal discipline. The legislature, not so much. One issue in particular that Ortiz wants addressed is reducing the government's fuel subsidies. Good luck with that one, but at least he is trying. (Incidentally, Ortiz wants to reduce the subsidies even though he thinks that will increase inflation in the near-term.)


Dominant Caribbean telecommunications services provider Cable & Wireless, prodded by the piecemeal crumbling of its regional monopoly, plans to invest $400 million in the region in the next three years -- a large investment for a company that had been prone to using its Caribbean operations as a cash cow. By contrast, "Babble Rouser" Denis O'Brien, whose story is covered here, has not hestitated to invest heavily in dicier markets such as Jamaica, which is named in C & W's investment plans. Ah, the wonders of competition.

The Chief Executive Officer of Cable & Wireless in the Caribbean, Richard Dodd, has announced this week that his firm intends to invest over $400 million in Caribbean telecommunications development over the next three years. Mr. Dodd's announcement follows positive company results published back in May, which revealed that revenues for C&W International had increased by 6% year on year to £1.2 billion, as strong performance in the growth areas of mobile and broadband more than offset declines in fixed line revenues.

Cable & Wireless International is leader in 18 out of the 22 markets in which it provides mobile services, and in the past year, despite increasing competition, has increased its total mobile customer base by 22%, the results further revealed.

According to a report from CarribbeanNetNews this week, Dodd revealed that Cable & Wireless is repositioning itself for an era of competition, stating that:

"Cable & Wireless has been a staple in the Caribbean for more than 100 years and the company intends to be around long into the future to bring our customers the superior brand of telecommunications products and services that has helped to put the Caribbean ahead of many countries in telecommunications infrastructure.

"It also gives us a sense of pride that we have contributed to building superior, resilient networks that keep the people of this region in touch with the world," he added, according to the regional news service, continuing:

"Our sense of pride also extends to the areas which we have supported throughout the region as part of our social responsibility, including education and culture, sport and community activities."

One key development area, Dodd revealed, will be the introduction of 3G platforms, which will first be introduced in Jamaica. "This is only one area of our new investment and commitment to the region. But as we progress with our transformation program, our customers will see further tangible benefits from doing business with us," he concluded.


If you are looking for good deals on housing, check out China. The country may be entering a period depressingly familiar to Americans.

China's real estate market is going the way of the American real estate market (and the real estate markets of many other countries) and its own stock market. As usual with emerging markets, the fall looks like it has been more dramatic than in mature markets. Price declines of over 40% are cited in some parts of southern China. Home sales are down 50% year-over-year in previously booming cities. The cause, however, is the same: When credit inflation turns to credit contraction, those assets that previously benefited from lender group-think get hit the worst.

The sales hall at the Oasis housing development welcomes customers with multicolored streamers, water fountains and marble floors. Sales agents announce that only a few units are available from the first two phases of the project and that 70 of the 130 or more buildings are almost completed. But a few hundred feet behind the sales hall some of the "almost completed" buildings look like neglected, hulking shells. Construction workers idling nearby say they have not been paid in five months. Prices have been slashed from $95 per square foot to $55. Market experts estimate that as few as 300 units have been sold out of the first 2,000 put up for sale.

Sounds like another sad-sack Florida condo development, yet this scene is in the northern Chinese industrial city of Shenyang. Over the last five years real estate prices in China, in dollar terms, doubled on average to $50 per square foot and the country added 20 billion square feet of new residential property. But the once seemingly limitless real estate boom is going into reverse.

Home sales dropped by half in June from a year earlier in Shanghai, Shenzhen, Guangzhou, Chongqing and Chengdu, according to data compiled by jpmorgan. Conditions are worst in southern China, where undeveloped parcels are going unsold and home prices are expected to continue falling despite a drop of 40% from last autumn in some neighborhoods. Now the market malaise appears to be spreading northward. If not for an Olympic boost, Beijing's market would be weak, too. "We are entering a bust now," insists Andy Xie, an Asia economist and bear on Chinese property.

The chief causes: credit tightening because of inflation (now at 7%) and government efforts to cool off the real estate market after years of rampant speculation on hyped-up luxury properties. Last year the People's Bank of China toughened the requirements for non-first-home mortgages, punishing speculators and the builders who were selling to them. (First-home mortgages became easy to get this decade and have stayed that way, and until recently rising prices shielded borrowers from the unfamiliar nightmare of negative equity.) The government also has begun imposing penalties for holding land undeveloped, further squeezing cash-poor developers.

Many publicly traded property companies have lost more than 2/3 of their market value since their fall 2007 peaks, initial public offerings have been put off, and companies that indulged in fevered land-buying sprees now find themselves overextended and thirsting for cash. The developer of that 23-million-square-foot Oasis project, Hengda Real Estate Group, known in English as Evergrande, aborted a $2.1 billion IPO at the last minute earlier this year. Saddled with a reported $1.5 billion in debt to banks, Hengda instead had to drum up $500 million in financing in June from Merrill Lynch, Deutsche Bank and other investors. The company insists that its operations are normal but declines to provide numbers.

Housing is not the only problem. In Beijing at least 60 million square feet of office space has become available recently or will be open by the end of next year, estimates Jack R. Rodman, president of Global Distressed Solutions. That dwarfs the 40 million square feet on the market at the end of 2006. "For office space I would now contend we are grossly overbuilt," Rodman says. "It is another one of these 'If you build it, they will come' -- except they built too much."

It is always perilous to predict a bust for any industry in modern China. Just look at those books gathering dust on store shelves with titles like The Coming Collapse of China. The property market remains one of the few convenient places for Chinese to park their cash, and it should continue to benefit in the long run from urbanization and export surpluses. Also, the cash-rich government routinely steps in to prop up flailing sectors with new gushers of credit or directed investment. But for now Chinese property owners are feeling pangs of anxiety just like Americans.


The Chinese government is among those who have been suckered into buying huge quantities of Freddie Mac or Fannie Mae "insured" mortage-backed securities. Of course they think it would be a "catastrophe" if there should be a major default on that backing. They seem to be less concerned that the U.S. might inflate the value of the dollar holdings held by China, thus accomplishing the default by other means.

If you follow the money, the bottom line is that China has been loaning money to U.S. consumers to buy their export goods for years. Now they have a gargantuan pile of loans. These loans are not going to be repaid at their current real face value. The only question is what form the default will take. China probably is the world power of the future, but they have a few things to learn in the meantime.

A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank.

"If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic," Yu said in emailed answers to questions [last Wednesday]. "If it is not the end of the world, it is the end of the current international financial system."

Freddie and Fannie shares touched 20-year lows [last Wednesday] on speculation that a government bailout will leave the stocks worthless. Treasury Secretary Henry Paulson won approval from the U.S. Congress last month to pump unlimited amounts of capital into the companies in an emergency.

China's $376 billion of long-term U.S. agency debt is mostly in Fannie and Freddie assets, according to James McCormack, head of Asian sovereign ratings at Fitch Ratings Ltd. in Hong Kong. The Chinese government probably holds the bulk of that amount, according to McCormack. ... CLSA Ltd., the Hong Kong-based investment banking arm of France's Credit Agricole SA ... puts the exposure of the six biggest Chinese banks at $30 billion.

"The seriousness of such failures could be beyond the stretch of people's imagination," said Yu, a professor at the Institute of World Economics & Politics at the Chinese Academy of Social Sciences in Beijing. He did not explain why he held that view. China's government has not commented on Fannie and Freddie.

Yu is "influential" among government officials and investors and has discussed economic issues with Premier Wen Jiabao this year, said Shen Minggao, a former Citigroup Inc. economist in Beijing, now an economist at business magazine Caijing.

Investor confidence in Fannie and Freddie has dwindled on speculation that government intervention is inevitable. Washington-based Fannie has fallen 88% this year, while Freddie of McLean, Virginia, has slumped 91%.

Paulson got the power to make purchases of the two companies' debt or equity in legislation enacted July 30 that was aimed at shoring up confidence in the businesses. He has said the Treasury does not expect to use that authority. The two companies combined account for more than half of the $12 trillion U.S. mortgage market.


Labuan, reasonably described below as "a rela," is gearing up for a publicity campaign to promote its virtues to the world. Notwithstanding its relative obscurity, it has a achieved a fairly robust growth. However, it has a number of innovative features in its offshore company fiscal regime that could attract still more growth.

The Labuan International Business and Financial Center Inc (IBFC), the offshore jurisdiction's marketing and promotion arm, has announced the launch of a promotional drive to attract more business from Asia and the Middle East to the low tax finance centre, which lies off the coast of Malaysia.

Announcing the initiative at a recent press conference, Martin Crawford, the chief executive officer of the Labuan IBFC, revealed that offices would be set up in Hong Kong and either Abu Dhabi or Dubai within the next 12 months. But firstly, the IBFC would attempt to spread Labuan's message through roadshows in India, North Asia, Australia and Indonesia, he disclosed.

Crawford explained that the IBFC was keen to tap into newer emerging markets for offshore investment flows such as India, China and the Gulf Cooperation Council (GCC) region, which have traditionally routed their offshore investments through Mauritius or Singapore.

According to Crawford, the marketing campaign would focus on attracting business in five key areas, including international holding companies, private and public investment banks, captive insurance, Islamic finance and wealth management products.

Labuan is a relatively unknown offshore jurisdiction, having been created by the Malaysian government in 1990. However, it offers a highly attractive tax regime to offshore companies, and the IBFC will no doubt emphasise this point in its campaign.

The Labuan Offshore Business Activity Tax Act 1990 (as amended 2004) provides for the reduction or complete exemption of income tax in respect of certain business activities carried on by offshore companies in Labuan. Chargeable profits derived by an offshore company from an offshore trading activity are subject to tax at a rate of 3%. An offshore company which carries on an offshore non-trading activity is exempt from income tax altogether.

Last year, Prime Minister, Datuk Seri Abdullah Ahmad Badawi stated in his budget speech that in future, companies registering in the Labuan offshore sector would have the option of having their offshore business income taxed under the Income Tax Act 1967, in addition to under the Labuan Offshore Business Activity Tax Act 1990. The Income Tax Act 1967 applies to any activity other than offshore business activity carried on by an offshore company, meaning that they pay normal taxes.

The Prime Minister explained at the time that: "In the light of greater global competition, we need to ensure that Labuan remains competitive as an international offshore financial center. Given that investors in Labuan undertake a wide range of financial services, a flexible tax regime is necessary."

Despite is hitherto low profile however, growth in the Labuan offshore sector has been strong. As of March this year, there were more than 6,500 companies operating in Labuan, including 58 offshore banks with total assets of $26.6 billion, 132 offshore insurers with more than $600 million in capitalization, 106 leasing companies with $16 billion in leases and 22 fund management and 46 listed instruments worth $16.1 billion.

By the year 2012, the Labuan Offshore Financial Services Authority (Lofsa) is aiming to have 50,000 companies registered in the financial centre.

"Labuan is an unpolished gem that can be sold to the world," Crawford observed. "I am sure it has the potential to be a leading business and financial center in the region once we have polished it."


Pressure from foreign banks cited.

Money laundering charges against the Belize branch of FirstCaribbean International Bank, reported last week, have been abruptly dropped. Belize's Prime Minister and Minister of Finance, Dean Barrow, said he acted in response to concerns raised by corresponding banks abroad. Exactly what is truly behind the action is unclear, but it is a good guess that there is more to it than we are being told. Concerns expressed by foreign banks, and the potential besmirching of the whole Belize banking sector, are cited. But the move definitely has the hallmarks of political pressure.

The Belize Bank and First Caribbean will not stand trial for a string of charges under the Money Laundering (Prevention) Act, following a Government-sanctioned decision by the Financial Intelligence Unit (FIU) for the charges to be abruptly dropped, allegedly under pressure from banks abroad.

Moves by the FIU over the last three months to lay unprecedented charges against two of Belize's prominent financial institutions attracted much public attention, and so likewise, there is public debate as to why the charges are so unexpectedly being dropped, even before the FIU makes disclosure of evidence in the Belize Magistrate's Court, where the banks had been arraigned on the charges.

Prime Minister and Minister of Finance, Dean Barrow, told Amandala ... that he is sure there are a fair amount of people who will not agree with the decision, but he said he acted in "absolute good faith" in response to concerns raised by corresponding banks abroad. "I have owned up to the fact that it leaves me squarely on the horns of a dilemma," Barrow told Amandala.

According to Barrow, Bank of America in the USA was "discussing" severing ties with the Belize Bank in light of the money laundering related charges.

Bernard Adolphus, president of Citizens Organized for Liberty through Action (COLA), shared his personal views on the developments, saying that the Government is "too soft", and should not have buckled to pressure from abroad.

"I believe they should have gone much more in depth and keep the pressure up," said Adolphus. "It's Belizean people losing again. Everyone comes and takes advantage of our people. ... That is holding us at ransom, because we are a poor country. They [the foreign banks] are pressuring this government [and] ... government now needs to take a stand." ...

The main reason for dropping the charges is that "... protracted court proceedings could have severe implications for the banking industry, internationally, and how it is perceived, and create difficulties for local banks with corresponding banks abroad," said Mrs. Geraldine Davis-Young, FIU director. She claimed they acted "... in the best interest of the entire economy of Belize ... the country as a whole."

There appears to be a quid pro quo for the FIU's dropping the charges against the banks: The banks agreed to fund the implementation of an electronic reporting system for suspicious transactions, said Davis-Young. Prime Minister Barrow also said that the banks would be funding rehabilitation projects for Battlefield and Memorial Parks. ...

"If we take things to their normal conclusion, and they are convicted of being negligent, it would also bring other banks in Belize under suspicion," claimed Davis-Young.

We asked her why this was just now coming to light -- months after the FIU initiated charges. She replied that a United States bank, which has dealings with several banks in Belize, had recently raised the concern. When we probed further, she declined to say exactly when the bank approached the FIU.

We note that even though the FIU has agreed to drop charges, there is still no final, formal agreement with the bank, according to the FIU.

Davis-Young added that even though the negotiations to establish an electronic reporting system are ongoing only with First Caribbean and the Belize Bank, it is a system that would benefit the wider banking sector in Belize.

We asked Davis-Young about unofficial reports that the banks had threatened to pull their investments and funds from Belize, because of the charges against them under the Money Laundering (Prevention) Act, but Davis said she knew of no such threat.

Barrow told us that at the time the charges were levied against the banks, he did not consider the serious repercussions to the banking system.

So what will happen in the event that FIU attempts to levy new charges under the Act? Barrow said that a plan would have to be in place to secure customers' deposits, and alternate arrangements would have to be considered for corresponding bank relations in the event that existing banking partners try to sever ties with banks in Belize and destabilize the banking sector.

According to Barrow, local banks have increased their reporting of suspicious transactions, because while last year the FIU only received 37 suspicious transaction reports, the frequency of reports this year has increased sharply since First Caribbean and Belize Bank had been charged for failure to report.

The Prime Minister also denies allegations that the withdrawal of charges comes as a consequence of pressure from Belize Bank's premier shareholder, Michael Ashcroft, with whom the P.M. met the day before he made the public announcement in the House. ...

Barrow furthermore told our newspaper that he is in "discussions" with Ashcroft over the disputed accommodation agreement signed by former Prime Minister Said Musa for Belize Telemedia Limited -- a source of drawn-out legal warfare between the Government and Ashcroft. The agreement purports to guarantee Ashcroft's BTL a 15% rate of return, even if it means that the company has to withhold taxes to realize those returns. BTL is a sister company of the Belize Bank.

Initially, in May of this year, 79 charges were drawn up by the FIU for the Belize Bank and its president, Phil Johnson, of "failure to report suspicious transactions," surrounding multi-million-dollar transactions with BTL. Without providing an explanation, the FIU soon afterwards dropped the charges against Johnson, but had maintained them against the bank.

In July, First Caribbean was formally arraigned on 113 charges for the same alleged violation -- failure to report suspicious transactions. The charges stemmed from a series of parallel market U.S. dollar transactions made by BTL, in which the company reportedly acquired about US$100 million outside the formal banking sector, as far back as 2001, with Belize dollar funds obtained from one bank and U.S. dollars deposited in the other.


The alleged paradox of the headline may be due to a couple of factors not discussed:

  1. The huge U.S. trade deficit is mirrored by a huge increase in dollar-based claims held by foreigners. They have to put them somewhere. If they are filled up to the gills with debt perhaps channeling at least some of their funds into business assets is an attractive option.
  2. The nominal U.S. corporate tax rate is high, but actual taxes paid are quite low, as discussed here. As mentioned in that posting, it appears most domestic and foreign owned corporations operating in the U.S. pay no taxes in the end. Even though taxes paid might appear as an expense in the accounting income statements, most are deferred and thus are a non-cash expense. It is claimed here that foreign controlled U.S. corporations actually do pay taxes, but in fact the amount cited is less than 2% of gross receipts, i.e., very little.

A Grant Thornton LLP analysis of new IRS data has found that U.S. corporations controlled by foreigners are now responsible for a larger share of total U.S. corporate assets and earnings than ever before, despite a U.S. corporate tax rate that is among the highest in the world.

The most recently released IRS Statistics of Income bulletin reveals that the total receipts of foreign-controlled domestic corporations (FCDCs) in 2005 reached $3.5 trillion, which is $450 billion more than in 2004, twice the 1996 level and almost 90 times the level reported in 1971.

These FCDC receipts in 2005 represented 13.7% of all U.S. corporate receipts, also an all-time high. Just 10.7% of all corporate receipts came from FCDCs in 1996, while just 2.1% came from FCDCs in 1971. IRS researchers define an FCDC as any domestic corporation in which over 50% of the stock is owned by a foreign individual, corporation, partnership, estate or trust.

The asset growth of FCDCs has been even more staggering. FCDCs reported assets of over $9.2 trillion in 2005, up 15.7% from 2004 and more than three times the 1996 level. FCDC assets represented 13.9% of all U.S. corporate assets in 2005, another all-time high. FCDC assets made up just 10.6% of all corporate assets in 1996 and an even smaller 1.3% of total assets in 1971.

Grant Thornton noted in its analysis that this explosion in foreign investment "defies the deterrent effect" of high U.S. corporate tax rates, which have become less and less competitive over the last two decades.

"Despite the high corporate tax rates, many foreign multinationals recognize the importance of the US market from a global standpoint," said Joseph Calianno, a partner in Grant Thornton LLP's National Tax Office. "They understand that the business and profit opportunities in the United States often outweigh the tax costs of doing business in the United States."

However, Grant Thornton believes that there is some evidence in the IRS data of a reluctance to enter the U.S. market, and that FCDC assets and earnings may have grown even more robustly if the U.S. had more competitive rates.

The number of FCDCs operating and filing returns in the U.S. has remained largely stagnant for over 10 years, even as total assets and receipts have gone up. With total corporate filings continuing to increase every year, FCDCs now represent a smaller percentage of total domestic corporations than they did in 1996.

The U.S. corporate tax rate has changed little since the late 1980s while countries all over the world have been cutting rates to compete for investment and spur economic growth. The U.S. now has an average combined state and federal corporate rate of almost 40%, the second highest to Japan among OECD countries. There is a growing consensus across the ideological spectrum that the U.S. needs to cut its corporate rate to remain competitive in a global economy. The idea has been long championed by conservatives, but many Democrats have recently supported lowering rates. ...

While a rate reduction would also help U.S.-based multinational groups (a multinational group with a U.S. parent at the top of the chain), it would be an ineffectual measure if there was a corresponding tax cost that essentially wipes out the benefit, Grant Thornton said, noting that many proposals to cut corporate tax rates impose other restrictions that limit the benefits of the proposed rate cut.

"U.S.-based multinational groups often feel they are at a disadvantage compared to certain foreign-based multinational groups because of high U.S. corporate tax rates, a U.S. tax system that taxes U.S. corporations on their worldwide income, and the application of certain anti-deferral regimes, such as the subpart F regime," Calianno said.

Anti-deferral rules such as subpart F often require U.S. companies to include certain types of income earned by their foreign subsidiaries into income even though such income has not been repatriated.

The IRS data also show that FCDCs are paying taxes. The income tax paid by FCDCs after tax credits jumped to $42.4 billion in 2005, an increase of over 40% from 2004.

Most FCDC receipts come from corporations with owners in just a few countries. FCDCs with foreign owners from the United Kingdom, Japan, Germany, Netherlands, Canada and France were responsible for over three- quarters of all FCDC receipts in 2005. Most of the FCDC receipts are also earned in just a few industries. Over 80% of FCDC receipts came from the manufacturing, wholesale trade, and the finance and insurance industries.


The U.K. government has threatened to implement changes in its corporate tax regime that will have the effect of taxing non-UK earnings more heavily. Several companies have already relocated their headquarters to other countries with friendlier tax codes, to Ireland in particular. Now the parent of investment management group Henderson Global is considering a similar move, as has Lloyds of London (!). City of London sources say that up to 15 of Britain's largest companies are considering leaving the U.K.

It would seem that any company without substantial fixed assets in Britain is considering leaving -- voting with their feet as it were. A major change in corporate mindsets appears to be taking hold as "globalization" enters middle age, where high taxes are not just meekly accepted. Thus the OECD's obsession with reducing "tax competition." Everyone should adopt that mindset, whether they act on it by relocating or not.

In response to a press article published in the UK on Wednesday, Henderson Group plc has confirmed that it is considering a potential change in its tax domicile from the UK to the Republic of Ireland.

The asset management firm issued the statement confirming that it is reviewing its tax position following an online report published by the Daily Telegraph, which suggested that an agreement sealing its new tax residence has already been struck. The company stated that further details of the tax review will be given in its interim results, which are due to be released [this week].

Henderson Group plc is the holding company of the investment management group Henderson Global Investors. Henderson Group is headquartered in London and since December 2003 has been dual-listed on the London Stock Exchange and Australian Securities Exchange.

The announcement comes on the back of recent speculation that Brit Insurance, the Lloyds of London firm, is examining the possibility of redomiciling overseas for tax purposes.

Despite a recent cut in the rate of UK corporation tax by 2% to 28%, a number of other firms in the FTSE 250 have also announced plans, or are said to be reviewing plans, to leave the UK in the light of growing uncertainty about its corporate tax regime, particularly with respect to tax on international profits.

According to the Telegraph, City lawyers and accountants are privately warning that as many as 15 of Britain's biggest companies are working on plans to relocate for tax purposes in foreign jurisdictions.

In its 2007 Budget, the government put forward proposals for eliminating the foreign dividend tax in order to reduce the administrative burden for international businesses, while at the same time putting in place tough measures on the permitted overseas activities of such firms, in order to prevent them from using the dividend exemption to avoid paying tax in the UK altogether.

However, the UK Treasury made moves last month which appeared to indicate that it has stood down its proposals to change the way that the foreign profits of UK-based multinationals are taxed.

Tax experts have warned that this continuing uncertainty is damaging UK competitiveness.

"Overall, the Treasury announcement is a sensible response to a constructive period of consultation, but it is disappointing that progress has been so slow," Heather Self, an international tax partner at Grant Thornton, commented following the government's update on the proposals in July. "It is now unlikely that we will get any concrete policy on the taxation of foreign profits before 2010 at the earliest and at that point we may well be in the middle of an election."


Long ago Congress and the IRS got rid of individual tax shelters that created tax deductions in excess of the real economic risk incurred by the individual. For example, an individual cannot buy a piece of equipment funded with a 95% nonrecourse loan and then take the gross depreciation as a deduction. The individual's risk is only 5% of the equipment's purchase price, and that is all he or she can deduct in total over time, generally speaking.

Large companies have a far greater capacity to hide similar transactions behind a smokescreen of paper, but the IRS has made some progress in clamping down on deduction-creating transactions that have no true economic substance behind them. The IRS has won recent court decisions against companies -- prominently featuring banks -- that have engaged in what the IRS considers abusive transactions.

Many companies have used tax shelters known as Lease In Lease Out (LILO) and Sale In Lease Out (SILO) to claim deductions. A string of recent court decisions are being seen as a major victory for the IRS in its fight to outlaw the use of such tax shelter. The IRS designated LILOs as "listed transactions" back in 2000 and SILOs in 2005.

In BB&T v. United States of America, the Court held that to have a tax deduction for lease or interest expense, you must actually incur them. And to incur them, you must have a genuine lease and genuine indebtedness.

In AWG Leasing Trust v. United States of America, a federal district court denied tax benefits to a U.S. partnership related to its alleged purchase of a German waste-to-energy facility as an abusive SILO transaction.

In Fifth Third Bancorp of W. Ohio v. United States of America, a federal district court jury, applying the economic substance doctrine, denied tax benefits related to a bank's leasing arrangement for passenger rail cars as an abusive LILO transaction.

LILO involved corporate leasing of infrastructure on paper only, while SILO involved corporate sale on paper only. In both tax shelters, the infrastructure is leased back to the owners. LILO and SILO as tax shelters have been under scrutiny from lawmakers. In 2003, the Treasury and Senate Finance Committee held an investigation on these tax shelters.

The IRS has over the years been using various incentives to entice users of tax shelters to come forward. With the tax shelters becoming more sophisticated, the IRS had to spend time to figure out who is buying what and leasing what.

According to the IRS many companies including large banks had bought more than thousands of tax shelter to improperly defer taxes and bolster their balance sheets. Bolstered by this recent ruling, the IRS is now offering a chance to such companies a chance to settle. ... Companies that do not accept this offer could end up fighting a loosing battle. With three court decisions in its favor, the IRS is having a strong hand.

“Son of BOSS” tax shelter scheme overruled.

Another IRS win in a case where the economic substance was highly dubious. The opinion letters the losers relied upon were not judged a reasonable defense because, the court ruled, any idiot could see that the reasoning was specious, and the opinion letter was written by those selling the shelter and thus was automatically tainted.

We are hardly applauding the IRS win or the court's reasoning here. Nor are we criticizing the shelter participants for trying to reduce their taxes. But there are certain common sense rule violations in the case that people would do well to avoid in dealing with the government, and in dealing with life in general.

The U.S. Court of Federal Claims ruled against a family's attempt to avoid taxes on $204 million in gain realized on the sale of their business by using a tax shelter. Members of the Welles family sold stock in Toledo, Ohio-based Therma Tru Corp. in 2000, and paid $8 million to three tax shelter promoters for a "Son of BOSS" tax shelter involving digital foreign currency options, according to the Justice Department.

The court ruled that the taxpayers owe not only the taxes, but also a 40% penalty. In a 128-page opinion in the case, Stobie Creek Investments and JFW Enterprises v. the United States, Judge Christine Odell Cook Miller found that the underlying transactions lacked economic substance.

The court concluded that no reasonable chance existed for the Welles family members to earn a profit on the underlying "investments" in foreign currency options. Instead, Judge Miller ruled that the transactions were designed solely to generate tax benefits. As such, they could not be recognized for tax purposes.

In finding the taxpayers liable for substantial penalties, Judge Miller stated that it was unreasonable to rely upon tax opinion letters written by the same attorneys who had designed and carried out the tax shelter. These attorneys, the court noted, also charged the Welleses for the opinions as a percentage of the taxes that they were trying to save through the tax shelter.

The court added that it was not reasonable to rely on the opinion letters because the factual representations on which the legal opinions were based were "demonstrably false, a fact that could not have been doubted by any sentient person involved." The court refused to sanction what it called a "bury your head in the sand" approach.


No-fly lists and photo IDs are supposed to help protect the flying public from terrorists. Except that they do not work.

Security specialist Bruce Schneier explains why the Transportation Security Administration's no-fly list is totally useless: (1) It is a relatively simple procedure for any terrorist to bypass the screen. (2) The no-fly list is too large to be useful. (3) Even if the list were totally accurate, many terrorist acts are committed by people with no history of such crimes and thus would never be on the list.

We suspect the government is aware that the whole airport security routine is useless -- at least for preventing terrorist acts on airliners. But that is not to say it serves no useful purpose. For one, if something bad does happen at least it can be claimed that, gosh, the government was trying ... now stop criticizing them or you will hurt their feelings. Typical bureaucratic thinking: forget results, the point is to have a good CYA story for when you fail. For two, it acclimatizes the sheeple to following orders and producing their papers on demand. By that criteria, the TSA photo identification rules are a remarkable success.

The TSA is tightening its photo ID rules at airport security. Previously, people with expired IDs or who claimed to have lost their IDs were subjected to secondary screening. Then the Transportation Security Administration realized that meant someone on the government's no-fly list -- the list that is supposed to keep our planes safe from terrorists -- could just fly with no ID.

Now, people without ID must also answer personal questions from their credit history to ascertain their identity. The TSA will keep records of who those ID-less people are, too, in case they are trying to probe the system.

This may seem like an improvement, except that the photo ID requirement is a joke. Anyone on the no-fly list can easily fly whenever he wants. Even worse, the whole concept of matching passenger names against a list of bad guys has negligible security value.

How to fly, even if you are on the no-fly list: Buy a ticket in some innocent person's name. At home, before your flight, check in online and print out your boarding pass. Then, save that web page as a PDF and use Adobe Acrobat to change the name on the boarding pass to your own. Print it again. At the airport, use the fake boarding pass and your valid ID to get through security. At the gate, use the real boarding pass in the fake name to board your flight.

The problem is that it is unverified passenger names that get checked against the no-fly list. At security checkpoints, the TSA just matches IDs to whatever is printed on the boarding passes. The airline checks boarding passes against tickets when people board the plane. But because no one checks ticketed names against IDs, the security breaks down.

This vulnerability is not new. It is not even subtle. I first wrote about it in 2006. I asked Kip Hawley, who runs the TSA, about it in 2007. Today, any terrorist smart enough to Google "print your own boarding pass" can bypass the no-fly list.

This gaping security hole would bother me more if the very idea of a no-fly list were not so ineffective. The system is based on the faulty notion that the feds have this master list of terrorists, and all we have to do is keep the people on the list off the planes.

That is just not true. The no-fly list -- a list of people so dangerous they are not allowed to fly yet so innocent we cannot arrest them -- and the less dangerous "watch list" contain a combined 1 million names representing the identities and aliases of an estimated 400,000 people. There are not that many terrorists out there. If there were, we would be feeling their effects.

Almost all of the people stopped by the no-fly list are false positives. It catches innocents such as Ted Kennedy, whose name is similar to someone's on the list, and Islam Yusuf (formerly Cat Stevens), who was on the list but no one knew why.

The no-fly list is a Kafkaesque nightmare for the thousands of innocent Americans who are harassed and detained every time they fly. Put on the list by unidentified government officials, they cannot get off. They cannot challenge the TSA about their status or prove their innocence. (The U.S. 9th Circuit Court of Appeals decided this month that no-fly passengers can sue the FBI, but that strategy has not been tried yet.)

But even if these lists were complete and accurate, they would not work. Timothy McVeigh, the Unabomber, the D.C. snipers, the London subway bombers and most of the 9/11 terrorists were not on any list before they committed their terrorist acts. And if a terrorist wants to know if he is on a list, the TSA has approved a convenient, $100 service that allows him to figure it out: the Clear program, which issues IDs to "trusted travelers" to speed them through security lines. Just apply for a Clear card. If you get one, you are not on the list.

In the end, the photo ID requirement is based on the myth that we can somehow correlate identity with intent. We cannot. And instead of wasting money trying, we would be far safer as a nation if we invested in intelligence, investigation and emergency response -- security measures that are not based on a guess about a terrorist target or tactic.

That is the TSA: Not doing the right things. Not even doing right the things it does.


Do not rely on your bank to keep your identity safe.

No one needs to be told that indentity theft is a significant problem these days. And it is not going away soon. A University of Michigan study found that 76% of 214 U.S. financial websites sampled had fundamental design flaws which might lead the unwary customer astray. This article has a lot of helpful pointers on how to recognize, at each step of the signup/logon process, security holes in the system as they show up.

Willie Sutton once famously explained that he robbed banks "because that's where the money is." Today, Willie would probably be working the Web. Not only are e-thieves less likely to get shot, but banks and investment firms do not seem to be doing enough to protect customers' funds, according to a study just released by the University of Michigan.

The researchers found design flaws in 76% of the 214 U.S. financial websites they reviewed. These are not programming errors, says the study director, Prof. Atul Prakash. They are ill-advised designs and security practices such as the use of Social Security numbers or email addresses for client IDs, sometimes on insecure or third-party log-in pages.

"We found a number of flaws that may lead users to make bad security decisions, even if they are knowledgeable about security and exhibit proper browser use consistent with the site's security policies," explains Prakash.

The fear is that inattentive customers might fall prey to phishing or pharming scams designed to harvest Social Security numbers and other sensitive information. Phishing is luring email recipients to a fake website, while pharming involves hijacking a server that trafficks a legitimate website's address requests. They are forms of identity theft, America's fastest-growing crime. Both are often launched during evenings or weekends, when bank information-technology staffing is light -- hours when bank customers should be extra vigilant, says Prakash.

Principal among his recommendations, online banking customers should enter personal information only on secured Web pages that begin with “https://” and include the institution's name in the address. Do not allow yourself to be redirected to a third-party site outside your bank's encrypted chain of security.

Users of Mozilla's new Firefox 3 browser can click on the favicon (the icon displayed next to the URL in the address bar) to see the current page's ownership, encryption status and the cookies and passwords it stores. Should you accidentally land on an attack site, you will receive a full-screen browser warning from Mozilla, which continuously updates its list of attack sites. The new Opera 9.51 browser also will pop up a full-page warning when a dangerous site is encountered.

But every page on a financial institution's website really should be encrypted, says Prakash, since consumers may be confused by the conflicting security messages being sent by different pages on a single site. For example, on the one hand, Fidelity Investments' website (fidelity.com) advises against the use of Social Security numbers for identification: "We strongly recommend that you establish your own customer ID, too." But Fidelity's log-in page (which is a secure, encrypted page) prompts customers to log in with a Social Security number. Fidelity's privacy instructions are delivered on an unencrypted page that, theoretically, could be hijacked (pharmed) and rewritten to mislead customers, says Prakash.

While loss of a single piece of personal information might not compromise your identity, criminals are building dossiers en masse and are victimizing more than eight million Americans a year, says Todd Davis, CEO of LifeLock. Every bank account and credit-card number, birth date, email address or other identity tidbit is saleable in thousands of online chat rooms, says Davis. None is more valuable than your Social Security number, the master key to your identity. For $110 a year, his company "locks" your identity to prevent unauthorized access and promises to spend up to $1 million to reinstate a stolen identity -- a process, the Federal Trade Commission says, can take up to 130 man-hours.

Because of evolving methodology, the FTC estimates vary widely, but the agency believes that $15 billion to $50 billion is lost each year to identity thieves. Besides being a wellspring of anti-fraud information, the FTC and several other governmental agencies co-sponsor OnGuard Online, a one-stop shop for consumer security information and identity repair.

As a demonstration of LifeLock's effectiveness, Davis advertises his personal Social Security number and has had about 100 hackers try to use it -- mostly unsuccessfully. (One hacker did use it to get a $500 loan from an agency that failed to check the ownership.) While the FTC reports that 3.7% of Americans are victimized by identity theft annually, only 153 of LifeLock's million-plus subscribers have needed its guarantee (Davis was one of the 153).

Since identity theft is often a multi-fronted attack and since phone numbers can be easily faked, Davis and Prakash also warn against punching sensitive information into a telephone keypad as a prelude to customer service. Although Fidelity asks callers for Social Security numbers, it will accept a customer ID instead.

Not so Washington Mutual. WAMU acknowledges the sensitivity of Social Security numbers on its Website: "We encourage you to select a TAC [Telephone Access Code] rather than using your Social Security number." But there is no practical way for a customer to reach bank personnel or acquire a TAC without punching his last four Social Security digits into a phone keypad.

Those are the most important digits, says Prakash. Hackers can fill in the other five blanks using widely available dictionary software tools. That number will then be used to assemble your other personal information, and it can be used or sold an unlimited number of times over decades.

"It's like an incurable disease you have for life," says Davis. "They'll wait until you repair your credit and then attack again."

There have been incremental improvements in some security practices since the study was completed, says Prakash, but the problem remains largely intact.

He does not foresee the arrival of a technical solution that will guarantee online safety, or expect consumers to be able to rely on institutions to protect them anytime soon. There is no substitute for constant personal vigilance to keep today's Willie Suttons away from your cash.


The most sophisticated security measures still depend on people.

Security, of a website or database, e.g., can be usefully viewed as analogous to a chain, and, as the old aphorism goes, a chain is only as strong as its weakest link. While lots of effort is devoted to detecting and fixing programming code errors and strengthening encryption algorithms, those are not necessarily the weakest links that deserve the most attention. A general candidate for weakest link turns out to be the human beings that oversee and a part and parcel to the whole system. They can be tricked into disclosing important information, or into granting access to critical facilities.

The interesting pair of articles below feature a man who is paid by customers to detect holes in their security systems, in effect by adopting the mindset of the "black-hat" hackers who are trying to break in an steal valuable information. The first emphasizes the use of "no-tech hacks" which exploit the fallibility of humans discussed above. The second discusses how surprisingly sensitive security information can be found using Google, including information that could be used to obtain access to information the holder had no intention of granting access to.

The general concept applies to areas outside those discussed. This year's notorious news concerning client data stolen from a major Liechtenstein bank is a good example. Liechtenstein has all kinds of legal protections for its financial services clients' information, which defend it against government and private investigators' inquiries. But those protections were rendered moot when an employee with a less than illustrious past was granted access to the a bank database with that information -- an employee who proceeded to steal it and then sell it to various national tax authorities. No "hacking" of Liechtenstein's legal system was needed. The equivalent of the "no-tech hack" was far more effective.

Hackers have a lot of fancy names for the technical exploits they use to gain access to a company's networks: cross-site scripting, buffer overflows or the particularly evil-sounding SQL injection, to name a few. But Johnny Long prefers a simpler entry point for data theft: the emergency exit door.

"By law, employees have to be able to leave a building without showing credentials," Long says. "So the way out is often the easiest way in."

Case in point: Tasked with stealing data from an ultra-secure building outfitted with proximity card readers, Long opted for an old-fashioned approach. Instead of looking for vulnerabilities in the company's networks or trying to hack the card readers at the building's entrances, he and another hacker shimmied a wet washcloth on a hanger through a thin gap in one of its exits. Flopping the washcloth around, they triggered a touch-sensitive metal plate that opened the door and gave them free roam of the building. "We defeated millions of dollars of security with a piece of wire and a washcloth," Long recalls, gleefully.

In other instances, Long has joined employees on a smoke break, chatted with them casually, and then followed them into the building. Sometimes stealing data is as simple as wearing a convincing hard hat or walking onto a loading dock, before accessing an unsecured computer or photocopying a few sensitive documents and strolling out the front door.

Fortunately for his victims, the companies that Long invades are also his customers. As a penetration tester for Computer Sciences Corporation security team, Long is paid to probe weak points in a company's information security. His job as a "white-hat" hacker is to think like the bad guys -- the more evil genius he can summon up, the better.

And if tactics like tailgating an employee through a backdoor or picking a lock with a washcloth do not seem like real hacking, Long would suggest fine-tuning the word's definition. To bring that other side of hacking to the public's attention, he wrote a manual cum manifesto titled No Tech Hacking ... The book's goal, aside from pumping Long's already significant notoriety in the world of cyberpunks and script kiddies, is to show that hacking is not always the realm of high technology.

Instead, he argues, it is still rooted in old-fashioned observation and resourcefulness. To obtain a corporate password, for instance, a hacker can pose as an employee and call a company's help desk or simply look over an employee's shoulder while is on his laptop at a local cafe. To access a network, Long will photograph an employee, fake his badge or even his uniform, and slip past the front door security to find an unguarded terminal.

That kind of no-tech hacking is not a new idea, but it is one worth remembering, says Jeff Moss, the organizer of cyber-security conferences Black Hat and Defcon. "There is a tendency in our industry to focus on the latest and most interesting attack," he says. "But Johnny is trying to show that the simple security problems that were spotted a long time ago have not gone away, and the bad guys will use whatever is available."

That is a lesson that the security industry should heed: The average cost of a data breach rose to more than $6.3 million last year, up from $4.8 million in 2006, according to research by the Ponemon Institute. And physical security played a growing role: Lost or stolen equipment accounted for about half of those breaches last year

With those kinds of costs at stake, hiring hackers like Long is not cheap: For basic vulnerability assessment, CSC ... charges a minimum of $35,000. For complete penetration testing, which often involves obtaining specific files to demonstrate a firm's security flaws, the team can charge as much as $90,000.

But for the most in-depth hacking missions against well-protected companies, Long and the rest of CSC's security team are also rewarded with the illicit thrill of intrusion. "When you get that James Bond feeling of espionage, it's a huge adrenaline rush," he says. Long admits that the night before a major case, his team often watches the geek thriller Sneakers. "Penetration tests that involve a human element are so much more exciting than sitting in front of a computer screen, poking through a company's firewall."

As a kid in suburban Maryland during the 1980s, Long's hacking career began under less sensational circumstances. Surfing the pre-Web Internet, he browsed bulletin boards looking for pirated copies of video games. To pay for the growing long distance bills from his modem, he started charging his Web surfing to calling card numbers that he found on semi-legal sites. And when those phone-card sites started forcing users to pay for access, he found ways to circumvent the sites' security measures.

Soon, the challenge of bypassing firewalls and accessing distant networks was more interesting than any video game. "I would be on my Commodore 64, talking to a Unix system somewhere far away," Long says. "It was like traveling -- the fascination of being in a place with a different culture and speaking a different language."

When he graduated from high school, Long skipped college and got a job at a local university as a systems administrator. Before he was 20, he moved on to a major health insurance provider that was in the midst of bringing its systems onto the Internet. Long wrote up a report detailing all the company's security vulnerabilities. It was ignored by his superiors. Feeling demoralized, he eventually left the company and landed at CSC's offices in Falls Church, Virgina.

At CSC, Long found his niche. In 1998, for instance, he suggested a simple social engineering method to gain access to a company's server that was not attached to the Internet. Long tracked down the name of the company's technical contact person on the Web, and made a phone call to its help desk pretending to be that person. The help desk's staff switched on the server's modem, and CSC's team was inside. "Once I connected with the security team, I brought some of the perspective that the security community was just starting to get then, a street-level hacker mentality," Long says.

From there, CSC began to experiment with the physical security hacks it now uses today, and Long began developing a set of techniques he calls "Google Hacking": using simple search engine queries to find hackable vulnerabilities in Web sites. [See immediately below.] Today CSC has one of the security industry's better-known penetration testing teams, and Long is a celebrity in hacker circles.

Since he first became a professional penetration tester, cyber-security has evolved dramatically, Long says. No Tech Hacking is partly about the latest social engineering methods used by a new generation of cyber-criminals. Instead of searching for holes in companies' increasingly tight security perimeters, their attacks are about drawing the target out, bringing employees to a compromised Web site that infects their network, or convincing an administrator to give up his or her password in an e-mail.

But the other lesson of the book , Long says, is that some things have not changed. "No matter how savvy we think we are, the oldest attacks are still possible, and they are still prevalent," he says. "The smartest systems are still falling for simple tricks, and that is what keeps us in business."

Google: A Hacker’s Best Friend?

When Johnny Long wants information online, he turns to the same tool as most people: Google. But unlike the average Web user, Long is not usually looking for Paris Hilton news and movie reviews. He is digging for credit card information, Social Security numbers and other private data stashed on corporate servers.

Long is not a cyber-criminal -- he just plays one in his day job, as a researcher for the information technology services company Computer Sciences. But he is a hacker, one with a talent for innovating new ways to penetrate corporate servers, albeit for testing purposes only. He is also the author of Google Hacking for Penetration Testers, a best-selling book that shows how to use seemingly harmless Google searches to uncover surprisingly sensitive information.

Long spoke with Forbes.com about his forthcoming book, a more general kind of "Hacking for Dummies" guide to hacking without technical knowledge, and the tricky question of whether to publicize hacking techniques that require little more than a search engine and two hands.

Forbes: What is "Google hacking"?

Long: Google hacking is really just a subset of something I call "no-tech hacking." You use un-technological methods to break technology. After 10 years of trying, I have discovered a whole pile of ways to do that. Dumpster diving (looking in office trash for security information); tailgating someone into a secured facility; pretending to be a UPS guy or a repair guy or a delivery guy ... these things work almost all the time and require very little technical knowledge.

So where does Google come in?

In the beginning, we would use Google to case the companies we would be trying to penetrate. But we discovered that the Google searches we were running were returning more information about the company than they might realize. Just by doing a search on a Web site, we would find a password or usernames that would grant us access.

Google hacking grew out of that. You perform a Google search looking for sensitive information that either gives direct access to a network, or something subtle that could be used in conjunction with other finds.

What kinds of vulnerabilities in Web sites have you found through Google hacking?

We have examples where you can put in a Google query and immediately get access to part of a site that already has you logged in as an administrator. We discovered that just by searching for certain terms, you could find personal information like credit card numbers, Social Security numbers, anything an attacker would need for identify theft. On some education institution sites, we would find entire Excel spreadsheets with students' names, Social Security numbers and even grades. But that is low-hanging fruit.

Without getting too technical, what is an example of a more subtle case, where you combine Google hacking with more advanced hacking?

For example, Google can help you find where an SQL server is vulnerable. SQL is basically the language of databases. Just by putting the right terms into a form on the Web, like a registration form on a site, you can do something called "SQL injection." Basically, your input into the form is confused with SQL code, and that can allow you to read data directly from a database, simply by typing into a Web login form.

Google allows you to find those vulnerabilities. If you type "MySQL error with query" into Google, some of the results will tell you which Web sites have had this error message, and that is the first step to an SQL injection. It is a nice way to do reconnaissance. It probes the Web very broadly without interacting directly with any target site, so it is difficult to detect.

Is Google becoming a more powerful tool for hackers?

Search engine popularity in general has been growing. But more importantly, the Web 2.0 movement means that everything is moving out to the Web. There is an absolute explosion of corporate and personal information out there.

Do you worry about the ethics of publicly discussing these tricks?

It is a huge debate in our industry. There are two camps: One camp says that when you talk about vulnerabilities you give bad guys ideas, but another camp says that you are helping good guys protect against bad guys. In the case of Google hacking, certain queries, like credit card queries, are very deadly stuff. So I have never talked about how to do a credit card query, though I have talked about the risk. It is a very fine line. I have to leave out enough information to avoid getting someone into trouble, but give the audience an idea of what is going on. So I always try to think about what it would mean to be on the other side of getting hacked, and I keep my professional clients in mind.


Legendary Barron's lead columnist Alan Abelson has some helpful advice for those facing home foreclosure: Just do what one or the other of the two leading U.S. presidential candidates have done. All you need is a long line of credit, or to strike up an acquaintance with a canny operator who knows a few of the people you need to know to get around the rules just a bit.

As the parties primp for their made-for-television extravaganzas -- the Democrats this week, the Republicans next -- we feel obliged to point out that after dillying and dallying lo! these many months, trading the usual down-and-dirty barbs and serving up the usual bromides, the presumptive candidates finally have come to grips with the salient issue of our times -- housing.

Just about all the severe ills afflicting our woebegone economy and wreaking all manner of havoc on the citizenry -- the credit drought, the inexorable rise in joblessness, the swoon of the stock market, the drastically shrinking value of their biggest asset and with it the now-lost alchemy known as refinancing that turned even the most humble abode into a seemingly inexhaustible fount of cash -- are rooted in the sad demise of the American dream.

Happily, both camps are blessed with a few unsung canny aides who deserve our heartfelt thanks. For it was they, we can authoritatively report, who brought the plight of housing to the attention of the respective candidates and supplied them with the facts and figures attesting to the devastation of shelter, which had somehow eluded the ken of Messrs. McCain and Obama. And no wonder: Those worthy gents were preoccupied with more important matters like choosing a vice president and trying to remember the name of the president of Georgia.

Gently, those dedicated, anonymous aides informed each of their boss of bosses that a great tsunami of foreclosures was sweeping the land; that delinquency rates on mortgages have reached heights never before attained in all of recorded history; that inventories of unsold houses remain frighteningly swollen; that mortgage applications have hit a new low since the turn of this century, with the index that keeps tabs on them falling from a peak 1,857 in the week of May 30, 2003, to 419 in the week ended August 15, 2008.

This nation is extraordinarily fortunate that McCain and Obama are just the men to tackle this critical -- make that vital -- issue and render advice not concocted in some smoke-filled back room in Washington or ivory tower on a bucolic college campus at some significant remove from reality. Rather, both of those putative leaders can speak to the grave condition of housing from a wealth of personal experience.

McCain owns perhaps as many as seven houses (he himself cheerfully admits to losing track of the exact number), and Obama lives in a fine dwelling that he shrewdly bought with the help of a friend. All of us simple and beset homeowners might do worse in these parlous times than adopting the approach of either candidate.

Now, granted, seven houses may seem too many (such a pain to mow all those lawns), but consider the advantages. Most particularly, if, on the house he happens to be occupying at the moment he falls a little behind (say, six months or so) on the mortgage payments, he can always thumb his nose at his relentlessly bothersome lenders, toss the keys to them and traipse off to one of his other houses. We realize your average strapped homeowner may not be up to seven houses. But no problem: Four, or even three, would do quite nicely.

Obama had the smarts when he still was not rich and famous to get a bit thick with a chap in Chicago who was well-heeled and, if not famous, at least infamous as a dubious operator who made a career of swapping favors for influence with local pols. That Good if shady Samaritan helped him gain possession of a house that he might not otherwise have had the scratch to buy.

Unfortunately, if you are of a mind to seek out the fellow, back in June he was convicted of a couple of felonies and so, we can assume, for the while he is out of action. But that need not discourage you: The woods are filled with sleazy types eager to extend a helping hand, especially if you are an up-and-coming politician.

In any case, our point is: No need to be unduly stressed by mortgage worries and the threat of foreclosure. Just follow our leaders.