Risk? What Risk?

J.P. Morgan Chase has hardly helped itself or other major banks in convincing a skeptical public or regulatory-inclined politicians of the argument that too much regulation is being imposed on them. J.P. Morgan has shot itself in the foot with its spectacular after-hours announcement on Thursday that a trader had lost the bank more than $2 billion with bets on complex investments.

The bank’s CEO, Jamie Dimon, has been highly outspoken recently in condemning the increasingly intrusive regulations politicians have imposed on the banks in the wake of the 2007/8 financial crash. He, along with Barclays chief executive Bob Diamond, are furious over new financial rules being drawn up to curb the reckless risk-taking that spawned the crisis, claiming they are expensive and smothering the banks in red tape.

In a 38-page letter recently to shareholders, Dimon lambasted the regulations for slowing lending at ‘the wrong time’ and saying they were ‘not intelligent design’. (See my April 10 Daily Mail article)

He argued that new regulations are causing staggering compliance costs. On top of that, he and other bankers have warned that a looming fall-off in bank profits is likely when regulators implement a ban on proprietary trading by the banks under new regulations.

Some analysts have estimated compliance costs for the U.S. banking sector could cost about $4bn a year.

And some academics have agreed with the bankers, arguing that the Dodd-Frank Act – named after its two main authors, Congressman Barney Frank and Senator Chris Dodd – has moved too far from its original objective to prevent another financial crash. At 848 pages, Dodd-Frank affects almost every aspect of America’s financial services industry – from fair access to credit for consumers to the trading of complex derivatives and reporting executive pay.

For example, John Cochrane, a professor of finance at the University of Chicago, maintains that the legislation has become too heavy-handed. “Everything under the sun gets regulated, with no attempt to measure benefits or costs,” he has maintained.

But the revelation of the $2billion loss is going to make it much harder for the bankers to beat back the regulators.

Noting that Dimon had claimed that compliance costs were going to cost J.P. Morgan upward of $400 million, Frank said in a statement “J.P. Morgan Chase, entirely without any help from the government, has lost, in this one set of transactions, five times the amount they claim financial regulation is costing them.”

He added: “The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today.”

What is astonishing is that the bank – arguably one of the best run in the U.S. – did not pick up the risky bets until way too late. But also it is disturbing that regulators didn’t notice either.

No doubt U.S. lawmakers are going to probe what failed at the bank and why as well as to question regulators about what went wrong on their side. Any hopes the banks may have harbored of reducing the regulatory burden and of convincing the public that they can be trusted would seem now to misplaced.

P.S. Bob

My concern about Bob Diamond’s financial plight is growing. As you know, the CEO of Barclays needed the bank to cover his tax liability incurred when he was forced to relocate to London to take up his duties as chief executive.

Well, that’s not quite the spin the bank is using to explain why it paid the U.K. tax authorities £5.7m on Bob’s behalf. As I explained in the previous post, I am really worried about the tax advice Bob has been getting. That is, if we can trust everything we are being told by Barclays.

Pondering more on Bob’s remuneration package and how he’s being employed by Barclays, it has now dawned on me that Bob is alarmed also about how he’s going to make do when he’s retired and no longer a master of the universe.

How do I arrive at that assumption? According to Barclays they don’t actually employ Bob; he’s just assigned to the bank and is, in fact, employed by a Delaware-based company called Gracechurch Services Corporation, admittedly a subsidiary of the bank. Gracechurch is just lending Bob to Barclays, which is awfully good of them.

The Guardian noted that this assignment agreement “appears overly complicated” but Barclays told the newspaper that it employs a number of its bankers this way to allow them to keep continuity of U.S. benefits, particularly for healthcare.

And that’s when it became clear to me. Bob is concerned about his old age. Well, aren’t we all with the ending of final salary pensions and the financial crash ruining our stock portfolios.

So, as I read it, being employed by a U.S.-based company allows Bob to do a couple of things: 1. Continue paying into U.S. social security and securing a waiver in the U.K. on paying national insurance contributions; and 2. Maintaining his Medicare contributions so that it will be there for him when he retires.

It is nice to know that a master of the universe is hedging his bets, so to speak. No doubt the outcry over the pension given to disgraced banker Fred Goodwin, formerly a “Sir” and top dog at the Royal Bank of Scotland, gave Bob pause for thought and convinced him that he might not have the wherewithal to afford great private health insurance when he’s retired. Yes, better to make sure you will definitely get a full pension from the Feds, about $22,000 at the moment, and be eligible for Medicare.

But even here I am not sure Bob is getting good advice, that is, if Barclays is telling the truth. You see, Bob is almost certainly vested in Medicare already – you only have to work for about ten years in the U.S. to reach that status. And, any payments into the U.K. national insurance program could be counted in as U.S. social security contributions, if he were short of the necessary when it comes to his Fed pension.

Barclays mentioning of health care benefits could mean also that Bob was worried about breaking continuity when it comes to private medical cover. Here an explanation is needed for the Brits. In the U.S. you don’t want any break in private health coverage. If there is a break of more than 60 days, when you come to apply to a new insurer for coverage, then they can write out pre-exisiting conditions.

One key aspect of the Obama health care reform would, of course, change that by stopping health care insurers from rejecting an applicant because of pre-existing conditions or refusing to cover those conditions. That will come into effect in January 2014, if the Supreme Court doesn’t strike down the health care reform.

But again the advice to Bob was wrong. Barclays could have gone to a U.S. insurer to secure international coverage for Bob that wouldn’t have broken continuity of coverage. Cigna offers such a policy. Also, Barclays could have gone to BUPA or PPP in the U.K.. Several of their policies are recognized by U.S. insurers and would not have jeopardized coverage continuity in the U.S..

Now, of course, I am basing all of this on taking Barclays at face value. Maybe there is more here than meets the eye – as with Bob’s tax situation.

That aside, Bob has managed to get from me lots of counsel for nothing. And I am not going to ask Bob for a salary or a bonus. But I was wondering if he could pay my taxes for me. They will just be a tiny fraction of what Bob got from Barclays

Bob Diamond Should Phone My Tax Accountant

I am very worried for Barclays’ CEO Bob Diamond. I don’t think he’s securing the best tax advice that’s out there, and would like to recommend my own excellent tax adviser, the Alexandria, Virginia-based Braxton Moncure of Ross & Moncure, the accountant of choice of many journalists, foreign and otherwise, plying their trade in Washington DC.

From what I can see in the current brouhaha that’s erupted in London over Barclays helping Bob out by paying his U.S. taxes, he appears to be oblivious, as does Barclays for that matter, to the double tax agreement between the U.S. and the U.K. that protects anyone – peon like me to a master of the universe like Bob – from having to pay tax on both sides of the Atlantic on the same income.

For those of you who have not followed Diamondgate, let me briefly recap. This week, Barclays revealed that Bob had to make do in 2011 on a mere £17m in pay, shares and perks.

Of course, his compensation package underlined for many the scale of multimillion-pound pay deals still being handed out to top bankers.

But what has triggered even more fury is that Barclays paid £5.7m to cover Diamond’s U.S. tax bill. That disclosure came hot foot on the recent news that Barclays has been mired in a row with HM Revenue and Customs over a couple of tax avoidance schemes that were designed to save the bank about £500m.

The news of Bob’s nice tax perk prompted Liberal Democrat peer Lord Oakeshott to remark: “The only tax Barclays pays seems to be for Bob on his bonus.”

And some institutional shareholders – including Standard Life, Aviva and Scottish Widows – are threatening to vote against Diamond’s remuneration package at the bank’s annual general meeting later this month.

Their disapproval has mounted since the Association of British Insurers announced that the package possibly breaches corporate governance codes. The ABI is concerned about the scale of the remuneration package given that Diamond himself acknowledges the bank’s performance last year was “unacceptable”. In February, Barclays reported a three percent fall in profits. The Daily Mail has a nice little graph here showing how Bob has profited while the bank’s share price has tumbled.

And the association suspects that the decision by Barclays to pay UK tax authorities £5.7m on behalf of Diamond may fall foul of their guidelines that companies “should not seek to make changes to any element of executive remuneration to compensate participants for changes in their personal status.” Whether anything comes from shareholder ire, who knows. Last year, the ABI and some institutional shareholders protested at the remuneration packages of top Barclays executives but nothing much came of it.

Bob’s UK tax bill was incurred when he relocated from New York to London on his promotion to CEO in January 2011. The bank has an agreement with Bob to compensate him, if he has to pay tax on the same income twice — in the UK and US.

And this is where it gets all very odd. Why did Bob have to pay tax to both the US and UK on the same income? Since 1975 there has been a double tax agreement between the US and UK to prevent double taxation on income and capital gains. That agreement has been added to over the years and with big changes in 2001.

Presumably, using this treaty Bob did not have to pay any US federal income tax. And that may well have happened. But state taxes are not covered by the double-tax treaty.

Barclays has not been clear about what taxes Bob incurred that required him to pay tax twice on the same income, but it is likely that they were New York state and city taxes. The top New York state tax rate is 8.97% and the New York City rate is 12.62%. Capital gains and dividends are taxed as ordinary income. But long-term capital gains may be taxed differently.

But why was Bob paying these taxes? He relocated in January 2011 – U.S. tax years run in calendar years, unlike the UK, which runs April to April.

Under New York state regulations: An individual is a New York resident if one (1) of two (2) conditions is met: 1) If an individual is ‘domiciled’  in New York, such individual is a New York resident. And domicile is defined thus: “Domicile in general, is the place an individual intends to be his permanent home – the place to which he intends to return whenever he may be absent NYCRR 105.20(d).”

2) “If an individual is not ‘domiciled’ in New York, such individual is a New York resident if s/he both ‘maintains a permanent place of abode for substantially all of the taxable year’ and spends in the aggregate more than 183 days of the taxable year in New York. New York Tax Law § 605(b)(1)(B), New York City Admin Code Section 11-705(b)(1).”

So the questions start to multiply. Did Bob spend more than 183 days in 2011 in New York when he had officially relocated to London?

Why has Bob not made a declaration via an efficient accountant to the New York tax authorities that while he maintains a home in New York he doesn’t consider this to be his permanent home? Hence my urging that Bob speaks with my accountant, Braxton Moncure.

As Bob – a dual UK-US citizen – has not apparently, according to Barclays, claimed non-dom status in the UK, which he could easily do, it would be simple, as long as he is not spending more than 183 days a tax year in New York, to prove that he is no longer domiciled in the Big Apple.

So why hasn’t he done so? And whatever the reason, why should Barclays be paying up when Bob could easily get out of the tax liability? And should a man who can’t seem to navigate efficiently an easy international tax thicket be the CEO of Barclays anyway? Or is there more than meets the eye here?

Phone Braxton, Bob!