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Here are my top 10 links from around the Internet at 10am. I welcome your additions and comments in the comments below or please send me your suggestions for Wednesday’s Top 10 at 10 to bernard.hickey@interest.co.nz We are plenty dumb enough to work here…

1. Gamekeeper turned poacher - Fran O’Sullivan has useful column in the NZHerald that looks at the IRD’s tax case wins against the banks. She finds the judge in Auckland case involving Westpac, Justice Rhys Harrison, is very knowledgeable about tax. He surprised quite a few bankers with the strength of his judgment. Some had expected the Auckland High Court to let Westpac off in the wake of Wellington’s judgment against BNZ. Fran thinks the judgment is beautiful. Methinks she needs to get out more….;)

His 204-page judgment is a work of art.

In essence, Harrison has opted to strip away all the fancy legal arguments that Westpac’s counsel made to justify the complex arrangements that the bank claimed were based on commercial substance, to rule they in fact crossed the line into the tax-avoidance camp.

Yet Justice Harrison was not always a Justice…

Harrison appeared for Fay Richwhite and Co, Sir Michael Fay and David Richwhite’s flagship, which was a prime shareholder in tax-dodge designer European Pacific, along with Bank of New Zealand and Brierley Investments. He was merciless in his own counter-pursuit of NZ First’s Winston Peters who had spearheaded the parliamentary allegations that gave rise to the commission of inquiry.

2. We’re waiting… – Kapiti Coast financial advisor and broker Chris Lee tells Alan Wood at The Press he thinks South Canterbury Finance will pay back its US bond holders the US$100 million they are owed and will announce a restructure package within weeks. South Canterbury Finance has previously said a restructure would be announced in mid-October. It’s October 14th today. Chris Lee remains confident…

“Everybody’s impatient but one imagines by Christmas that [SCF's] business will be back to normal, that the company will be recapitalised, and hopefully its credit rating will have been stabilised.”

The capital raising – for between $150-$200m – would probably be through the float of part of the Southbury Group, and the introduction of new cornerstone investors to SCF, he said.

Lee said he also imagined SCF would extend its coverage under the Government’s deposit guarantee scheme, from October 2010 to December 2011.

3. False dawn – Fitch Ratings (which downgraded Hanover Finance’s BB+ rating after its collapse) is predicting that British house prices have a further 17% to fall despite recent positive signs, the Telegraph reported.

Rising unemployment, which will peak next year and remain at that level into 2011, as well as a low wage inflation and poor credit availability, will drag on house prices, the report said.

“Despite the fact that a global economic recovery is under way, the economic fundamentals do not augur well for a sustained strong recovery in the UK housing market,” said Alastair Bigley at Fitch.

Both Halifax and Nationwide have reported house price rises in recent months but Mr Bigley said they were being driven by a lack of supply in the market and cash-rich buyers, which was not sustainable.

Fitch says the UK’s average house price-to-income ratio is likely to come down to below the long-term average, as it did during the early 1990s’ recession. The ratio is currently “significantly higher” than the long-term average.

“A 30pc fall from the peak of October 2007 would bring this ratio back in line with the long term average,” said Brian Coulton, head of global economics at Fitch.

The report also warned that recent signs of easing in credit availability were only likely to be temporary. It said that as unemployment continued to rise, the rates of mortgage arrears and repossessions could rise, which would in turn prompt mortgage lenders to tighten lending criteria.

Sound familiar?

4. A love story – Here’s the review of Michael Moore’s ‘Capitalism: A love story’ movie by Yves Smith at Naked Capitalism. I’m a conflicted fan of Michael Moore. I admire the polemics but wonder about the facts.

Even after allowing for my movie-deprived state, I was impressed with Michael Moore’s “Capitalism: A Love Story.” He argues the Simon Johnson “Silent Coup” thesis, of a takeover by the financial classes, in a way that is accessible and credible, which is no mean feat for a subject matter like finance.

Admittedly, Moore has crafted his own genre of picaresque-shambolic docu-polemic, so if you object to his sthick, you are going to be mundo unhappy. The ritual of Moore shuffling up to shiny corporate headquarters seeking confessions from corporate chieftans, camera crew in tow, only to be rebuffed by security guards, is a tad overdone.

But some of his staples have become more effective over time. For instance, his Flint/auto industry fixation as the poster child for what happened to what was once middle class America has become more powerful over time as once-proud Detroit has collapsed into third world squalor.

Here’s the trailer. Looks good. “US$10 billion probably won’t fit in here,” Moore says while brandishing a cloth bag outside AIG’s headquarters when asking for taxpayers’ money back.

5. London’s Cocaine Culture – Bloomberg has a detailed piece on the cocaine culture that existed in London’s financial district before (and after?) the global financial crisis. It seems people are stopping using cocaine because they can’t afford it anymore and are also questioning whether the job is worth it when they’re not getting paid so much. Poor dears.

Professionals in the detox business say bankers have swamped them with calls since the financial crisis widened a year ago. The Causeway Retreat, an addiction and mental health hospital for professionals on a secluded island 40 miles (64 kilometers) east of London, has 15 people on the waiting list for its 18-bed facility.

While few walk away from addiction as dramatically as Junor, some bankers are questioning whether the diminished rewards of the City are worth sacrificing their health, says Philip Hopley, a psychiatrist who runs a clinic at the Lloyd’s of London insurance building to be in the neighborhood where his patients work.

“Doing cocaine or drinking heavily is part of the City culture; you work hard and you play hard and you get rewarded because your bonus is fantastic,” says Hopley, a consultant at The Priory, a group that runs several mental health centers. When the bonuses are cut and many of your friends lose their livelihoods, things no longer look so good.

“A number of people now tell me: ‘I finally realize what a shit job I have got,’” Hopley says. “‘If it wasn’t for the bonus, I wouldn’t be working these hours and I wouldn’t be working with these people.’” The number of people in the finance industry coming to see him has jumped by about 15 percent this year, he says.

6. Underemployment - The official unemployment rate in the United States is running just below 10%, but actual unemployment that includes underemployment and people who have given up work is closer to 20%. Here’s a great chart that Felix Salmon at Reuters has picked up on.

The Atlanta Fed charts how the number of people who work part-time but would like to work full time has doubled since the beginning of the recession. That’s not normal, even by the standards of previous harsh recessions.

7. Swings and roundabouts – Bloomberg reports on fears that America’s big four banks will have to book US$55 billion of losses in the current reporting season to account for higher mortgage servicing costs linked to lower interest rates. The previous quarter the banks booked US$11 billion of profits on these mortgage servicing contracts.

Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. wrote up the value of the contracts, known as mortgage-servicing rights or MSRs, by 26 percent in the quarter asmortgage rates climbed by about 0.35 percentage point. Net gains on the contracts added more than $1 billion to Wells Fargo’s record earnings in the quarter and $1 billion to JPMorgan’s first-quarter profit.

Mortgage rates fell about 0.26 percentage point in the third quarter, according to Freddie Mac, and servicing costs are rising, meaning the four banks, which handle collections on more than $5.9 trillion of U.S. mortgages, may face writedowns.

“We’re very bearish on MSR valuations,” said Paul Miller, a banking analyst at FBR Capital Markets in Arlington, Virginia. “They are overvalued. There are higher costs associated with the servicing, and we’re very concerned about it.”

The four banks control 56 percent of the market for the contracts, according toInside Mortgage Finance, a Bethesda, Maryland-based newsletter that has covered the industry since 1984. Servicers collect payments from borrowers and pass them on to mortgage lenders or investors, less fees. They also keep records, manage escrow accounts and contact delinquent debtors.

The value of the rights depends largely on the expected life of the mortgage, which ends when a borrower pays off the loan, refinances or defaults. When rates drop and more borrowers refinance, MSR values decline. Banks typically hedge those movements using interest-rate swaps and other derivatives.

Under U.S. accounting rules in place since 1995, banks are supposed to report the value of their mortgage-servicing rights on a fair-market basis, or roughly what they would fetch in a sale. A bank must record a loss whenever it sells MSRs for a price below where they’re marked on the books.

8. More money printing – Zero Hedge has a curious little (or maybe not so little) story on how America vastly increased its holdings of Special Drawing rights at the IMF in the last couple of weeks.

By purchasing $40 billion in SDRs virtually overnight, what the Fed has done is to increase the value of the entire basket pro-rata, while in the process reducing the actual value of the dollar (which is a weighted constituent of the SDR basket). This was an operation to reduce the dollar’s value: pure and simple. In many ways it explains why the DXY has continued its straight one way decline since the beginning of September, when many pundits assumed the market was finally going to tank on profit taking after Labor day. By performing this dollar adverse transaction, the Fed sent a loud and clear signal what the Fed was going to do going forward vis-a-vis the i) dollar and ii) its derivative, the stock market.

And what is worse, this is not a roundabout or circuitous way of devaluing the dollar: this is head on intervention. It is one thing to print trillions of MBS and Agencies and to monetize Treasuries, where one could say Tim Geithner’s claim that the U.S. is for a strong dollar, and the dollar is only weak as a function of supporting housing prices. That could potentially fly as an explanation. However, when the Fed is actively and purposefully destroying the dollar’s worth via transactions such as material SDR purchases, then it truly demonstrates Geithner’s statement as a bold faced lie to the American public. When will Mr. Geithner be finally taken to task for his repeated fabrications of reality and intent?

9. A bit too micro – The Boston Globe has a detailed piece on why ‘micro-lending’, which has been lauded by the Nobel Institute and others, doesn’t actually do much to reduce poverty.

Two new research papers suggest that microcredit is not nearly the powerful tool it has been made out to be. The papers, by leading development economists affiliated with MIT’s Jameel Poverty Action Lab, have not yet been published, but they are already being called the most thorough, careful studies yet done on the topic. What they find is that, by most measures, microcredit does not offer a way out of poverty.

It helps a few of the more entrepreneurial poor to start up businesses, and at the margins it may boost the profits of existing microenterprises, but that doesn’t translate into gains for the borrowers, as measured by indicators like income, spending, health, or education. In fact, most microcredit clients actually spend their borrowed money not on a business, but on household expenses, on paying off other debts or on a relatively big-ticket item like a TV or a daughter’s wedding. And while microcredit champions point to microloans as a tool for empowering women, the studies see no impact on gender roles, and find evidence that if any one group benefits more, it’s male entrepreneurs with existing businesses.

10. Some humour – Here is a spoof powerpoint slide from an investment bank bragging about one of its analysts. HT Kevin via email.

Case Study

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