The FT has noted:

Accounting rules probably understated, not overstated, the losses embedded in the financial system, according to a report on Tuesday from an influential group of policymakers. The report concludes, controversially, that the rules did not add to the pro-cyclical nature of the financial system.

It is widely assumed that the practice of marking assets to market prices and not reserving for expected losses on loan portfolios added to the woes of the financial system by deepening losses at a point when banks and other institutions could least afford it.

However, the report by the Financial Crisis Advisory Group concludes that because in most countries the majority of bank assets are not marked to market, but kept at their historic value, those values probably underestimated the losses now being exposed by the crisis.

I am going to be generous for a moment and assume the person who wrote this report was not an accountant. But if they were they’d realise what complete rubbish this is.

First, it follows that if losses were understated then profits were overstated. The result is obvious: the accounts were misstated. The exuberance of the reported profit did not match the underlying reality. In that case drastic revision in expectation gave rise to the crash in the market. Is that to be sold to us as a success?

Second, to say historic cost gave rise to this overstatement is absurd. The bank accounting SORP (Statement of Recommended Practice) does not allow for that in most cases. When assets are held for resale in a portfolio mark to market is encouraged under that SORP if I recall it correctly i.e. losses must be anticipated (but profits are not). This need not be applied (again if I recall correctly) if the holding is material to the market as a whole and therefore likely to distort market price if sold. Of course this would be true of some bank assets – but not all, by any means, and even then there is in historic cost accounting the true and fair over-ride that losses are anticipated. The whole model is built on the premise that losses are taken when anticipated and profits are deferred until realised. By design profit is therefore understated.

The exact reverse is true of International Financial Reporting Standards. These are designed to anticipate profit my marking to market but to defer anticipation of any loss not currently priced by the market. as such they are always inclined to overstate profit. that is the inherent design flaw in the system – and  it is precisely this requirement that losses not be anticipated that has brought down Bradford and Bingley, Cattles plc and others. They did not anticipate vey obvious losses because IFRS said they did not need to as they had not been  realised – which is the only time IFRS recognises losses as arising – and so their balance sheets were , to put it bluntly, misstated, but were true and fair within IFRS rules – which is absurd.

In other words – this report is a complete whitewash and argues the very reverse of what is true – whilst dressing up over-statement of profit giving rise to systematic mis-statement of bank accounts as a virtue. Hardly a matter to shout about, I’d have thought.

What is a big salary?

 Economics  Comments Off
Jul 282009
 

This is from the BBC, and I’m quoting a big chunk as I think it illuminating:

Rarely a day seems to pass these days when there is not soul-searching over how much people are paid, whether it’s bankers’ bonuses or public sector salaries.

But are we clear about the levels of earnings that we are worried about?

WHAT’S AN AVERAGE SALARY?

Before you even get into what constitutes a "big" salary in the UK, you must first tackle the question of what an "average" salary is. Boris Johnson [recently] referred to £250,000 as ‘chicken feed’

The Office for National Statistics’ Annual Survey of Hours and Earnings (ASHE) provides some of the most reliable figures.

According to ASHE, "mean" gross annual earnings across all employee jobs in 2008 came to £26,020. You may think that’s rather a high "average" salary. And if you look just at the figures for full-time employees, that figure rises to £31,323.

Another way of measuring it is "median" gross annual earnings. According to ASHE, this was the more modest figure of £20,801, across all employee jobs. If you are earning that sum a year, you are "Mr or Mrs [or Ms] Mid-Point" – precisely half the surveyed working population earns less than you and half more. For just full-time employees, the median rises to £25,123.

SO WHAT IS A BIG SALARY?

It’s safe to assume that for many people, mere entry into the top half of the earnings pyramid does not mean you are earning a "big" salary.

How about the top 25%? A gross annual salary of £31,759 – measured across all jobs – gets you into that club.

How about if you make the top 10%? The ASHE figures reveal that a salary of £44,881 is enough to just edge into that top bracket.

A gross annual salary of £58,917 gets you into the top 5%.

But the standard that has cropped up in newsprint over the years is "the top 1%". It takes £118,027 to get into this bracket. And if you are earning £150,000 – the amount that triggers 50% income tax – you are in the top 0.6% of salaried people, according to the ASHE.

Now there are problems with this data. For example:

The ASHE is a sample of 1% of people who pay tax via PAYE. It doesn’t include the self-employed – businessmen, contractors etc – who make up the ranks of the really wealthy.

But it’s incredibly important to remember what is ‚Äònormal’. The City, Tory politicians and those who advocate big cuts in government spending have no clue. That’s very clear. And worrying, because it horribly distorts their decision criteria. When you’re on £100,000 there is slack in a household budget. But most are on vastly less than £45,000 – and at that level things get a lot tighter.

This is the reality against which the debate on cuts should be considered.

 

Tim Worstall – in his usual contemptuous style – had a go at Caroline Lucas’ promotion of a steady state, carbon neutral economy. Caroline, leader of the Green Party and a fellow author with me of the Green New Deal said in the Guardian:

But we must replace this with targeted investment in the energy efficiency and renewable energy infrastructure we so urgently need to enable us to make a swift transition to a steady-state, zero carbon economy.

I happen to agree with this.

Worstall (a climate change denier, or so it would appear – like so many of his type) said:

You might .. say that such a steady state economy is the only possible sustainable outcome in which case I would point out that you are sadly misinformed. For the scientific consensus is that the economy will grow between 5 and 11 times in this coming century. That scientific consensus telling us that as long as we can reduce CO2 output (which we clearly and obviously can, as the scientific consensus also tells us) everything is going to be just hunky dory.

What is it about Greens that they refuse to read or understand the scientific consensus? The IPCC reports themselves?

In response I said on his blog:

Where’s the evidence of consensus we can grow 11 times, contain CO2 and do this whilst running out of oil?

There is none – it’s your fantasy

Caroline is actually stating what is true – growth does not make people happier when they have achieved a certain standard of living (which 20% have) so we need to redistribute from those who have done that to those who have not and even you basic grasp of economics will then tell you this results in a net addition to welfare

Your version is just contributing to disaster

Which opened the floodgates (I seriously wonder if Worstall has a life) and he demanded an apology from me in a blog (which is interesting behaviour from a libertarian, but we’ll leave that aside).

But for all his “references”, the emails he has sent and the further emails from his friends setting timescales for my response after which I would be deemed an idiot (which is an interesting debating method) Worstall does have a real problem. The fact is that his work is based on the work of the Intergovernmental Panel on Climate Change (a UN body) which last reported in 2007. there’s a good summary of its work here.

Now I’m not claiming to be an expert on its work, because I’m not. But I can say that its analysis is based on four economic scenarios. These were published in 2000 – the dark ages in these terms – and have not been updated since. These do indeed suggest growth of the scale Worstall quotes. The scenarios look like this:

ipcc

(Source: Wikipedia)

Now note that this is not the last word on the subject, although Worstall and his colleagues seem to think it is. There was a conference in Copenhagen in April this year that reviewed this data and produced a pretty comprehensive and authoritative update on the reports Wortsall likes. This is here. The home page is here. This is what the executive summary says:

Past societies have reacted when they understood that their own activities were causing deleterious environmental change by controlling or modifying the offending activities. The scientific evidence has now become overwhelming that human activities, especially the combustion of fossil fuels, are influencing the climate in ways that threaten the well-being and continued development of human society. If humanity is to learn from history and to limit these threats, the time has come for stronger control of the human activities that are changing the fundamental conditions for life on Earth.

To decide on effective control measures, an understanding of how human activities are changing the climate, and of the implications of unchecked climate change, needs to be widespread among world and national leaders, as well as in the public.

The purpose of this report is to provide, for a broad range of audiences, an update of the newest understanding of climate change caused by human activities, the social and environmental implications of this change, and the options available for society to respond to the challenges posed by climate change.

This understanding is communicated through six key messages:

Key Mesage 1: Climatic Trends

Recent observations show that greenhouse gas emissions and many aspects of the climate are changing near the upper boundary of the IPCC range of projections. Many key climate indicators are already moving beyond the patterns of natural variability within which contemporary society and economy have developed and thrived. These indicators include global mean surface temperature, sea-level rise, global ocean temperature, Arctic sea ice extent, ocean acidification, and extreme climatic events. With unabated emissions, many trends in climate will likely accelerate, leading to an increasing risk of abrupt or irreversible climatic shifts.

Key Mesage 2: Social and environmental disruption

The research community provides much information to support discussions on “dangerous climate change”. Recent observations show that societies and ecosystems are highly vulnerable to even modest levels of climate change, with poor nations and communities, ecosystem services and biodiversity particularly at risk. Temperature rises above 2oC will be difficult for contemporary societies to cope with, and are likely to cause major societal and environmental disruptions through the rest of the century and beyond.

Key Mesage 3: Long-term strategy : Global Targets and Timetables

Rapid, sustained, and effective mitigation based on coordinated global and regional action is required to avoid “dangerous climate change” regardless of how it is defined. Weaker targets for 2020 increase the risk of serious impacts, including the crossing of tipping points, and make the task of meeting 2050 targets more difficult and costly. Setting a credible long-term price for carbon and the adoption of policies that promote energy efficiency and low-carbon technologies are central to effective mitigation.

Key Mesage 4: Equity Dimensions

Climate change is having, and will have, strongly differential effects on people within and between countries and regions, on this generation and future generations, and on human societies and the natural world. An effective, well-funded adaptation safety net is required for those people least capable of coping with climate change impacts, and equitable mitigation strategies are needed to protect the poor and most vulnerable. Tackling climate change should be seen as integral to the broader goals of enhancing socioeconomic development and equity throughout the world.

Key Mesage 5: Inaction is inexcusable

Society already has many tools and approaches – economic, technological, behavioural, and managerial – to deal effectively with the climate change challenge. If these tools are not vigorously and widely implemented, adaptation to the unavoidable climate change and the societal transformation required to decarbonise economies will not be achieved. A wide range of benefits will flow from a concerted effort to achieve effective and rapid adaptation and mitigation. These include job growth in the sustainable energy sector; reductions in the health, social, economic and environmental costs of climate change; and the repair of ecosystems and revitalisation of ecosystem services.

Key Mesage 6: Meting the Challenge

If the societal transformation required to meet the climate change challenge is to be achieved, then a number of significant constraints must be overcome and critical opportunities seized. These include reducing inertia in social and economic systems; building on a growing public desire for governments to act on climate change; reducing activities that increase greenhouse gas emissions and reduce resilience (e.g. subsidies); and enabling the shifts from ineffective governance and weak institutions to innovative leadership in government, the private sector and civil society. Linking climate change with broader sustainable consumption and production concerns, human rights issues and democratic values is crucial for shifting societies towards more sustainable development pathways.

I added the highlights but they show:

a) That in all Worstall’s apparently feasible options the likely temperature rise is now above 2 degrees – which is unsustainable. This means that the option he promotes is not achievable – so justifying my comment that it is a fantasy to think that it is.

b) Appropriate targets for reduction have not been set – and the feasibility of meeting them has not been proven – so again his glib comments on this being possible are simply not appropriate – and the evidence of consensus is clearly not present, contrary to what Worstall says.

c) Changes in consumption are desirable – although, I agree, this is not the same as steady state.

The point of this is though that:

1) Worstall is wrong – his claim cannot be justified

2) The associated threats and demands for apologies are therefore misplaced – but are designed to intimidate – as is the language used

3) Most worryingly – many Conservatives agree with people like Worstall on this issue – indeed it is expected that many of the new Tory intake will be climate change deniers.

The consequence is that if they cannot kill the economy by spending cuts they’ll do it by over-heating the environment.

That’s why I’m worried.

Worstall says of me:

he does, sadly, have some influence and exposing his near lunacy is a way of attempting to reduce that influence. As PG Wodehouse made clear with Roderick Spode the English way to deal with fanatics is to mock them.

I won’t mock Worstall. I won’t demand an apology either – despite the fact that the evidence is clear that he’s plain wrong. But I do, unfortunately, also think he has some influence through peddling misinformation. Which is why it’s worth tackling it. he and those like him have no prospect of power – but they influence the Tories – and that’s very worrying indeed.

 

Tax Justice Network: England and Wales: a sedition law for millionaires.

UK libel laws need massive reform in the name of democracy.

Please support those trying to achieve that.

Hat tip to TJN

 

It’s probably not going to win any musical awards, but the sentiment is sound, and wholly justified:

 

My guess is she’s one of at least 10,000 who have lost out by doing so. That’s what comes from relying on ‚Äòwell regulated’ jurisdictions made of straw.  

Ugland House explained

 Cayman  Comments Off
Jul 272009
 

Ugland House in Cayman has become notorious, so much so that its occupiers (Maples & Calder – lawyers) have put up a web site defending their trade.

The trouble is they claim:

The importance of Cayman and other offshore financial centres in facilitating global liquidity and capital flows cannot be over-emphasized, particularly in today’s difficult economic environment. Businesses and governments in both developed and emerging economies benefit significantly from them.

Trouble is guys, you list a wide range of things Ugland House companies do – but not once do you say why Ugland House need be involved.

It’s not a compelling argument.

And because Cayman is an secrecy jurisdiction – a place that intentionally creates regulation for the primary benefit and use of those not resident in their geographical domain where that regulation is designed to undermine the legislation or regulation of another jurisdiction all supported by a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so – there is no evidence to support the case.

And the rebuttal of the claim that Cayman is secretive is pure fantasy land stuff. So as an explanation it gets about 2/10. Which, as we all know, means it would be best if you tried again.

 

The Jersey Evening Post reports:

Jersey’s finance industry has a new international product to sell.

The Jersey Foundations Law was approved last week by the UK Privy Council and will come into force in the middle of July.

Specialists say it has the potential to bring in ‚Äòa flood’ of work for the Island’s trust firms, legal firms and the Island’s company registry.

Foundations have long been used in other parts of the world – such as Panama, and Liechtenstein – but this is the first time that they have been available to Channel Islands practitioners.

The structure is expected to be used an alternative to trusts, particularly for people from parts of the world where the concept of trusts is not well-understood. Potential customers include families wanting to preserve their private wealth, successful entrepreneurs, and also charities.

Robert Kirkby, technical director at Jersey Finance, said: ‚ÄòThe approval of foundations is a hugely important development for Jersey’s finance industry. There has been extensive consultation between industry, legislator and regulator throughout the development of the Jersey foundation.’

Note who Jersey competes with: Panama and Liechtenstein. What company they want to keep!

And note as well how this article precisely confirms Jersey’s status as a secrecy jurisdiction, which are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

The reality is that whilst Jersey is, quite absurdly, given ‚Äòwhite’ approved status by the OECD on one hand it is at the same time blatantly promoting new abuse.

And please don’t tell me that foundations are not abused, because abuse is known to to be rampant in Liechtenstein and Panama has just about the poorest reputation on cooperation of any secrecy  jurisdiction in the world.  Of course foundations are about abuse. Why else have one?

 

As I have mentioned here a number of times, Oxford University’s Centre for Business Taxation faced a number of conflicts of interest which should have ruled it out of undertaking a recent review of the literature on offshore illicit flows for the UK’s Department for International Development. That Centre has shown a remarkable lack of awareness of the importance of such conflicts in undertaking its work.

Now I have found that another conflict exists.

The Small Countries Financial Management Centre is based in the Isle of Man. One of its sponsors is the Said Business School, of which the Centre for Business Taxation is a part. Another is the Isle of man government. Together, and with others, they are sponsoring a free 2 week seminar this autumn. The introduction by the Isle of Man government says:

Small countries face special challenges. Studies have shown that they can be disproportionately challenged when it comes to the effective management of their financial sector, and in their ability to engage and negotiate with both larger countries and international institutions.

These factors prompted the establishment of The Small States Network for Economic Development, which works to promote the sustainable development of small state economies, and their more effective integration into the rapidly evolving global economy. It also has an increasingly powerful voice in ensuring that the concerns and interests of small countries are more adequately reflected in the policies and programs of the international community. Nevertheless, until now, there has been little in the way of customised support in the area of people development in the financial sector that would address the unique challenges and, therefore the needs, of small countries.

This is not an objective organisation. This is not an objective course. Oxford is supplying the special expertise needed to ensure that these places can lobby for their own best interest.

Hardly surprisingly the work the Centre for Business Taxation did for DfID did just that, by wholly erroneously dismissing concerns on the scale of illicit financial flows.

Is this a coincidence? Personally, I doubt it. Is there any chance that the authors of the paper I object to did not know of the work with the Isle of Man? personally I doubt it.

These are scandalous conflicts of interest. You cannot blatantly align yourself with secrecy jurisdiction interests and then claim to be objective. Worse, you cannot do so and not disclose the fact.

Perhaps a serious course on ethics would not go amiss. But I can’t see it happening somehow.

 

A new l;aw was created last Friday. Called the Political Parties and Elections Act 2009 it bans non-domiciled people from making significant donations to UK political parties.

I am delighted to have played a small part in the intense lobbying by Labour MPs to enact this change.

Unfortunately the new law does not go as far as I wanted with regard to companies.

But it is another step in the right direction, and another win for the long tem campaign I have been involved in ion the influence of non-doms on UK politics.

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