Long weekend's Top 10 at 10 with NZ Mint: Targeting 4% current account deficits; The curious Duncan Saville; Google's 'Double Irish' tax dodge; Dilbert

Here are my Top 10 links from around the Internet at 10 to 10pm for the Long Weekend, brought to you in association with New Zealand Mint for your reading pleasure. 

I welcome your additions and comments below, or please send suggestions for Tuesday's Top 10 at 10 via email to bernard.hickey@interest.co.nz.

I'll pop any surplus suggestions I get into the comment stream

1. The curious Duncan Saville - Brian Gaynor has a look at Duncan Saville's track record in his NZHerald column.

It's not altogether successful in New Zealand.

Gaynor also thinks the government was right not to put South Canterbury Finance's assets into his hands.

There are clearly big differences between receivers and deal-making businessmen, as the former have specific skills and stay the distance whereas the latter have limited experience and often depart before finishing the job. Saville quickly moved on from Utilico International and FinMedia and Resimac didn't contribute to Allied Farmers although a NZX announcement said the company had a signed agreement to do so.

As far as Allied Farmers is concerned, Loughlin resigned in August and managing director Rob Alloway is quitting his position in December. The company still has major problems and the Hanover assets have not been dealt with fully.

The Government would be extremely stupid to give control of SCF to an outside party that contributes little capital. This is the unfortunate situation facing Hanover Finance investors, who have been handed a huge timebomb covered in beautiful gift wrapping.  

2. Current account deficit targets - G20 Finance Ministers are meeting in Seoul this weekend to try to hammer out some sort of solution to the Currency Wars. The Americans are proposing targets for current account imbalances, with 4% being the key level, Bloomberg reported.

New Zealand would have breached that target from 2004 to 2008 inclusive. We also breached it in 1995, 1996, 1997, 1999 and 2000.

Bankers are meeting in Gyeongju, South Korea, after weeks of accusations that countries from the U.S. to China risk sparking a trade war by relying on weaker exchange rates to spur economic growth. Seeking a solution, U.S. Treasury Secretary Timothy F. Geithner proposed in a letter that G-20 members pursue policies to reduce trade surpluses and deficits “below a specified share” of their economies. That suggestion yesterday split the forum of emerging and industrial economies.

 By turning the focus to current accounts away from currencies, Geithner is hoping China will be more agreeable to accelerating the yuan’s appreciation after limiting its gain to about 2 percent against the dollar since June.

Without naming any country, he said governments should not use exchange rates to seek “competitive advantage” and urged those with “significantly undervalued currencies” to allow an adjustment.

Chinese officials have countered by promising a gradual increase of the yuan, saying that a sudden rise would cause social and economic disruption. The U.S. recommended deficits or surpluses of no more than 4 percent of gross domestic product. The International Monetary Fund this month estimated China’s surplus will swell to 7.8 percent of GDP in 2015 from 4.7 percent this year.  

3. Don't be evil (but it's OK to dodge taxes) - Google uses a 'Dutch sandwich' and a 'Double Irish' to reduce its tax bill in various countries, Bloomberg reports.

I wonder what our IRD thinks of this. Should New Zealand companies buy advertising via Google? Are they aiding and abetting tax avoidance in New Zealand?

The heart of Google's international operations is a silvery glass office building in central Dublin, a block from the city's Grand Canal. In 2009 the office, which houses roughly 2,000 Google employees, was credited with 88 percent of the search juggernaut's $12.5 billion in sales outside the U.S. Most of the profits, however, went to the tax haven of Bermuda. To reduce its overseas tax bill, Google uses a complicated legal structure that has saved it $3.1 billion since 2007 and boosted last year's overall earnings by 26 percent.

While many multinationals use similar structures, Google has managed to lower its overseas tax rate more than its peers in the technology sector. Its rate since 2007 has been 2.4 percent. In Bermuda there's no corporate income tax at all. Google's profits travel to the island's white sands via a convoluted route known to tax lawyers as the "Double Irish" and the "Dutch Sandwich." In Google's case, it generally works like this: When a company in Europe, the Middle East or Africa purchases a search ad through Google, it sends the money to Google Ireland.

The Irish government taxes corporate profits at 12.5 percent, but Google mostly escapes that tax because its earnings don't stay in the Dublin office, which reported a pretax profit of less than 1 percent of revenues in 2008. Irish law makes it difficult for Google to send the money directly to Bermuda without incurring a large tax hit, so the payment makes a brief detour through the Netherlands, since Ireland doesn't tax certain payments to companies in other European Union states. Once the money is in the Netherlands, Google can take advantage of generous Dutch tax laws. Its subsidiary there, Google Netherlands Holdings, is just a shell (it has no employees) and passes on about 99.8 percent of what it collects to Bermuda. (The subsidiary managed in Bermuda is technically an Irish company, hence the "Double Irish" nickname.)  

4. Even Time has noticed - The debate about the coming second round of quantitative easing is raging in America. Here's Time magazine. HT Darryl via email.

Lower rates do tend to favor borrowers over savers. And the largest borrowers in the country are banks, speculators and large corporations. The largest spenders in our country though tend to be individuals. Consumer spending makes up 70% of the economy. And the vast majority of consumers are on the low-end of the income scale.

So I think it is a valid question to ask whether the Fed's desire to drive down interest rates at all costs policy is working. Companies are already borrowing at low rates. They are just not spending. 

5. Devaluing America's currency - Dr Housing Bubble has a definite idea about why America is devaluing its currency. HT Darryl via email.

The banks have an effective way of laundering money. First, they proclaim that they are turning a “profit” with TARP funds but fail to mention the trillions of dollars of leverage they garner through the Federal Reserve. The cost is indirect through inflation and the debasing of the U.S. dollar.

Next, Fannie Mae and Freddie Mac just announced that they might cost U.S. taxpayers $368 billion. Maybe I learned finance incorrectly, but a $368 billion loss is not a profit in my book. Fannie Mae and Freddie Mac don’t make loans directly to the public but allow banks, the same robo-signing variety, to issue loans on their behalf. These losses are merely a reflection of their horrible lending practices and a sophisticated method of laundering money into the economy by debasing the value of the U.S. dollar.

That is why today, when people ask me what is at the root of the housing problem I tell them that home prices are simply too expensive because incomes are weak.  

6. The currency wars widen - Now even South Africa is trying to work out how to protect its export sector from the wave of cash flooding its way out of America  and China as investors get ready to spend all their freshly minted new money on something solid in a currency that is not being printed out of existence. HT Kevyn via email. Here's the AllAfrica.com story.

Countries such as South Africa have a range of policy choices, but none of them is likely to be effective. The first is to try to impose controls or taxes on hot money entering the country, as Brazil has already done - without much success. So far this year, the only emerging-market currency to have risen higher than the rand is the Brazilian real.

SA's financial authorities seem at odds about whether to go the same route. The second option is for the Reserve Bank to buy up dollars in the market. This, too, is more attractive in theory than in practice. The bank has resisted this, even as it has increased reserves. The result has been a gradual increase in the losses racked up as the bank earns less in interest on foreign currency reserves than it pays on the bonds it sells to soak up excess liquidity.

The third option is to provide direct support to exporters, an option supported by Reserve Bank governor Gill Marcus recently.

7. Foreclosure crisis must read - BusinessWeek has an indepth look at the foreclosure crisis. It's packed full of disturbing detail. Here's a sample. HT Hugh via email.

Even if the documentation problems turn out to be manageable—as Bank of America (BAC) and others insist they will be—the economy will still suffer long-term consequences from the loose underwriting that caused the subprime housing bubble. According to an Oct. 15 report by J.P. Morgan (JPM) Securities, some $2 trillion of the $6 trillion in U.S. mortgages and home-equity loans that were securitized during the height of the bubble, from 2005 through 2007, are likely to go into default.

The report says the housing bust will ultimately cause losses of $1.1 trillion on those bonds. Laurie Goodman, a mortgage analyst at Amherst Securities Group, said in an Oct. 1 report that if government doesn't step up its intervention, over 11 million borrowers are in danger of losing their homes. That's one in five people with a mortgage. "Politically," she wrote, "this cannot happen. The government will attempt successive modification plans until something works." Wall Street's unspoken strategy has been to kick mortgage losses down the road until an economic recovery reinflates the housing market.

The faulty-foreclosure crisis has forced the issue back into the present tense, triggering a fight over who will bear the brunt of those losses. The combatants—all of whom are trying to minimize their share of the damage—include homeowners, lenders and mortgage brokers, loan servicers and the underwriters of mortgage-backed securities, the buyers of those securities, title insurers, rating firms, and the federally controlled mortgage buyers Fannie Mae (FNM) and Freddie Mac (FRD). J.P. Morgan predicts that bondholders will absorb most of the estimated $1.1 trillion loss—but may succeed in foisting about $55 billion on banks.

If the bank losses turn out to be steeper than J.P. Morgan and most other analysts expect, taxpayers may be asked to inject more capital into the financial institutions. Fannie Mae and Freddie Mac, already wards of the state, might require more capital as well.  

8. Holders of securitised mortgage bonds are calling their lawyers to start suing the banks - Here's the Bloomberg report below. HT Gertraud via email

9. 'Savage austerity required' - Citigroup's Chief Economist Willem Buiter thinks America will eventually need to copy Britain's savage budget cuts, Bloomberg reports.

“The only question was really the timing and the composition,” given the finite willingness of financial markets to endure budget shortfalls, New York-based Buiter said in a roundtable interview today on “Bloomberg Surveillance Midday” with Tom Keene.

“This is very savage, but no more savage than what the U.S. will have to endure when it gets going.”

The U.S. will still be able to borrow for a while at “risk-free rates” because its markets remain bolstered by the dollar’s role as the world’s reserve currency, Buiter said. “It won’t last forever, that buffer of protection,” Buiter said. “Market discipline is being eroded by the burden of unsustainable deficits.”

10. Totally irrelevant video - Stephen Colbert talks about taxing rich people.