This week’s blog entries: iron-clad investment

As the [US] Treasury prepares to inject a $250bn vitamin shot into 10 large
banks, investors should ask themselves about how such an investment will appear
on the balance sheets of the investees.

Take a look at the term sheet for the injection. The government plans to buy
preferred stock, which is now in vogue. It’ll carry a 5% dividend, rising to 9%
after five years; it can’t be redeemed for at least three years; restricts
dividends on junior preferred stock or common stock; has no voting rights; and
restricts executive compensation to be in accordance with the Emergency Economic
Stability Act’s requirements.

One other thing: it has a ‘perpetual life’, apparently because the term sheet
says so. Realistically, the Treasury is not going to be a longer-term player in
these preferreds any longer than it has to be – and there are no restrictions on
the transferability of its investment.

Sounds a lot like debt? That’s because it is. It’s debt with an equity skin
around it. Under that equity wrapper, it’s still debt. For regulatory purposes,
it’s considered Tier 1 capital. That’s just fine – if the regulators want to
consider it to be part of the lending capital base, that’s their playground.
They can change those capital requirements as they see fit. It’s part of the joy
of being the regulator.

When it comes to financial reporting and public investors, it would be more
realistic to see it classified as a liability. Think of it. How much risk is
there to Treasury compared to common equity holders? None. The Treasury is
playing the role of a lender, with all the protections a lender requires.

Jack Ciesielski

In one of the OECD’s latest newsletters it provides information on both total
and corporate taxes as a percentage of GDP. In OECD terms, the UK appears not to
fair too badly – of 25 countries for which information on total tax takes is
available in 2007, our rate was 14th highest but, on corporate taxes, we were
9th of 29 nations.

Interestingly, there hasn’t been a great change in our position over time. In
1975 we ranked 9th of 25 on total taxes, and 9th of 24 on corporate taxes. And
as one might expect the increased number of reporting countries over the past 32
years comprise former eastern bloc nations that encourage inward investment by
offering low corporate tax rates.

Maybe we’re not quite so far out of line with our competitors as some might
have us believe.

Peter Rogol

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