Here’s a math problem: what does this sentence, from John McCain, tell you?
“Apple claims to be the largest U.S. corporate taxpayer, but by sheer size and scale, it is also among America’s largest tax avoiders,” he said in Monday’s pre-hearing comments.
The answer, of course, is that Apple is among the most profitable companies in America.1 If you have a lot of profits, you can not pay taxes on a lot of them, and still pay lots of taxes on a different lot of them. There is much focus on the exceptions, but for the most part I’d guess that “biggest taxpayers” and “biggest tax avoiders” are both highly correlated to “biggest profits.” Warren Buffett pays more taxes than his secretary, but at a lower rate.
The Senate, not being known for its quickness with math, is holding hearings today on the avoiding part; here you can read (pdf) the committee’s report. Apple does two main things to avoid taxes that the committee doesn’t like:
- It incorporated two of its main foreign subsidiaries, Apple Operations International (AOI) and Apple Sales International (ASI), in Ireland. Those subsidiaries are, however, managed and controlled in the U.S. by their California-based directors. The U.S. taxes corporate income based on place of incorporation; Ireland taxes corporate income based on place of management and control. So if you’re incorporated in Ireland and managed and controlled in the U.S. you pay taxes nowhere, as AOI does and ASI more or less does. This is … honestly isn’t the surprise that everyone doesn’t do this?2 I’m incorporating myself in Ireland as we speak.
- It entered a cost sharing agreement that gave ASI the economic rights to Apple intellectual property outside of America, in exchange for ASI funding a share of Apple’s California-based R&D proportional to its share of Apple’s total sales. Apple is in the business of manufacturing cheap electronic components in China, slapping expensive cool on them in California, and selling the package for $500. ASI effectively got the California cool at cost, rather than paying retail, which means that the international share (some 60%) of the profits of that cool are, for tax purposes, “earned” abroad (in a zero-tax subsidiary!) rather than in California.
That’s the main stuff; there’s some stupid stuff too.3 Apple’s response is a lot of blather that boils down to: Read more »
There’s nothing surprising, exactly, about this chart that Fitch sent out today, but it’s still sort of stark:
Once there was a land where bank debt was AA, AAA if it was particularly good or A if it was particularly dicey. Now AA is the new AAA and BBB is commonplace. The idea of risk-free unsecured lending to banks, implicit in things like Libor discounting, is over.
Right? I don’t entirely understand this proposal by House Republican John Campbell to require banks to “hold substantially more capital,” though the gist is basically that there’s a move to require banks to do more of their funding via long-term holdco debt. Here is a puzzling summary: Read more »
Once upon a time, the United States Postal Service was a big deal. It was sort of founded by Benjamin Franklin. The Postmaster General was a Cabinet-level post. Now, like so many arms of our government, it’s a financial albatross that hemorrhages money as a statutory requirement.
Since Congress doesn’t appear to be in any hurry to do anything about it, USPS is taking what it thinks is a dramatic step and holding on to your first-class mail for an extra day. This will save $2 billion a year, the Post Office says, or roughly 13% of the $15.9 billion it lost last year. And it’s drummed up a nifty if specious legal argument for the move.
Under a Congressional mandate that has been in place since 1981, the Postal Service is required to deliver mail six days a week. But post office officials argue that since the government is operating under a stopgap budget measure, known as a continuing resolution, that mandate does not apply, giving them the authority to make the changes without Congressional approval.
The whole thing doesn’t seem likely to evince much opposition from those who are not employed by the USPS. Or our elected representatives, defending, on the one, less important hand, what they think is important to their constituents, and on the other, more important, hand, their own dignity in interminably delaying a solution to the problem. Read more »
It wasn’t pretty or timely and didn’t seem to make anyone happy, but the fiscal cliff is no more… for another two months. Read more »
It’s official: “Wall Street’s worst nightmare” is now among the few with some kind of power over it.
Not much of a surprise at this point, but Massachusetts Senator-elect and former Republican Elizabeth Warren was formally nominated for a seat on the Senate Banking Committee. That appointment still requires a vote of the Democratic caucus, but it’s all but a foregone conclusion that the woman who calls herself the intellectual godmother of the Occupy Wall Street movement and who has pushed for tougher rules for banks will now be among those writing the rules. At the very least, she has won a hell of a bully pulpit. Read more »
Tim Geithner had a nice chat with Congress about Libor in a theoretically unrelated hearing today, and since Congressional hearings are mostly about restating everyone’s pre-existing prejudices I figured I’d lay out my Libor hobbyhorses:
- Nobody really has ever been all that troubled by the fact that banks manipulated Libor to make themselves look like they could borrow in 2007-2008, while everyone is at least acting all shocked shocked that banks manipulated Libor to juice derivatives profits, but that contrast is awkward because in a certain light those are the same activity, so everyone has to look all horrified by stuff they were obviously cool with four years ago.
- Everybody knew that banks understated Libor in 2007-2008. Like, you could compare Libor to market borrowing rates and CDS and stuff, and people did, and noticed it was wrong. Also remember that Barclays, while they were manipulating Libor, were also emailing all their clients every day to remind them that Libor was being manipulated.
- The effect/harm/liability of Libor manipulation has to be determined in expectation and if everyone knew it was being manipulated then they were presumably charging a higher spread to Libor when dealing with banks.
Geithner’s testimony won’t change my mind: now he has to look all grim about Libor manipulation, while back in the day he “treated it as a curiosity, or something akin to jaywalking, as opposed to highway robbery.”
But Tim Geithner wasn’t just a regulator when he ran the New York Fed; he was also a Libor user. So he gets to answer questions like this: Read more »
The House’s ping-ponging alternation of smacking and caressing Jamie Dimon today got pretty boring but I was struck by one number that Dimon mentioned, perhaps because it was about the only number that he mentioned. One Republican, with somewhat unclear intent,* suggested that the biggest risk to JPMorgan is that interest rates go up and asked Dimon how JPMorgan hedges that risk. And Dimon pointed out that actually JPMorgan is well set up for that, since it will make money if rates go up, and said “It probably cost us over $1 billion a year to benefit from rising rates.” You can’t as far as I can tell find that number in JPMorgan’s disclosures, but here is a potentially related thing: Read more »
If we’re being totally honest, while it had its moments, last week’s Jamie Dimon Congressional hearing to discuss Whale Boy was a bit of a letdown, theatrically-speaking. This was probably due in large part to the fact that it was conducted by the Senate Banking Committee, and the Senate typically comes off intelligent and reasonable compared to the House,* and proceeded accordingly. As we surely don’t have to tell you, this is not the kind of hearing we are interested in. Read more »
Today is a good day for Congress passing laws with sunny punny names, so after the JOBS Act on we go to the STOCK Act, for Stop Trading On Congressional Knowledge, which, who wouldn’t want JOBS and STOCKS and also much less Congressional insider trading. Anyway it passed, so now Congressional inside information is like corporate inside information in that if you trade on it you go to jail, maybe, sometimes. There was however some controversy as Reuters explains:
House Republican leaders argued that the political intelligence provision, which targeted former Capitol Hill insiders who use their contacts to gather information on pending legislation and sell it to Wall Street investors, could tread on First Amendment free speech rights. The final version orders a study of what to do about that increasingly widespread practice.
Coincidentally, earlier in this deadly deadly week we talked a little about the First Amendment and securities regulation, but that was in the context of people being able to say true non-confidential things about their investment prowess or prowesslessness. Even there, for non-Congress-related people, the First Amendment doesn’t seem to do much for them, though maybe the Supreme Court will change that but don’t count on it. Read more »
Christine Serwinski, come on down. [BusinessWeek, earlier]
Here’s a sort of touching monologue from David Einhorn’s call with Punch:
If you’ve done the analysis, and come to the conclusion that on it’s own, the company is not going to make it, it makes all of the sense in the world to raise equity at whatever the price is, so that you can know that the company, you know, is – is going to make it. Now, what that brings to my mind though is, you know, obviously we haven’t done your analysis, we haven’t done — signed an NDA; I don’t know that we’re going to sign an NDA, because we prefer to just remain investors, but from my perspective, and I’ll be just straight up with you, is that gives a lot of signalling value. And the signalling value that comes from figuring out the company has figured out that it’s not going to make it on it’s own is that we’ve just grossly misassessed the — you know what’s going on here. And — and that, that will cause us to have to just reconsider what we’re doing, which is not the end of the world to you. You will continue on even if we don’t continue on with you.
You could sort of see why the FSA read that to mean that he was insider trading. Like …
(1) You have told me something with signalling value. Sorry – “a lot of signalling value.”
(2) I will now act on that signal.
(3) Don’t be mad.
“Signalling value” sure sounds like it means “material nonpublic information,” doesn’t it? Read more »