[p2p-research] Fwd: [OxAn] Prudence drives 'retreat' of finance / 'Incentive pay' remains key to growth / Crisis hits offshore financial services

[Michel Bauwens]

as you can see below, the crisis is not destroying neoliberal orthodoxies
...

the 'experts' are still defending their old practices and promising us more
of the same,

this is one of the reasons this crisis will take a long time to unravel, as
they are seeking to solve the r
problems with the same mechanisms that created them,

Michel

---------- Forwarded message ----------
From: Maurice Nsabimana <mutabazi at cybergnosis.net>
Date: Feb 27, 2009 11:55 PM
Subject: [OxAn] Prudence drives 'retreat' of finance / 'Incentive pay'
remains  key to growth / Crisis hits offshore financial services
To:



INTERNATIONAL: Prudence drives 'retreat' of finance

Thursday, February 26 2009

Relevant Country Data: United Kingdom |
<http://www.oxan.com/oxweb/countrydata.aspx?country=United+Kingdom>United
States
| <http://www.oxan.com/oxweb/countrydata.aspx?country=United+States>

SUBJECT: Financial protectionism.

SIGNIFICANCE: The global financial crisis and subsequent economic downturn
has engendered much discussion over the threat of financial protectionism.Go
to conclusion<http://www.oxan.com/display.aspx?StoryDate=20090226&ProductCode=OADB&StoryNumber=5&StoryType=DB#conclusion>

ANALYSIS: Political leaders and various commentators have been sounding the
alarm of financial protectionism, warning that such policies would prevent
recovery in the financial sector and thus the real economy. For instance, UK
Prime Minster Gordon Brown -- while speaking at the World Economic Forum in
Davos, Switzerland at the end of January -- suggested that banks retreating
to their home territories to satisfy government bailout conditions was
activity tantamount to financial protectionism.

Cross-border flows. Brown's remarks had great effect because they were made
just days after the Institute of International Finance (IIF) released
figures showing that net private capital flows to emerging markets declined
massively from a record 929 billion dollars in 2007, to an estimated 488
billion dollars in 2008. The IIF projects these capital flows to decline
further to 165 billion dollars in 2009.

Prudence and practice? Although the collapse in cross-border lending may
seem to indicate the presence of financial protectionism, such a view tends
to overlook important causal factors behind the strong contraction in
cross-border capital flows, which are temporary in nature: mainly severe
economic contraction; subsequent decline in credit demand (refinancing
operations excluded); and investors fleeing to quality. More importantly,
such suggestions overlook important regulatory considerations and problems
with financial services practice that have come to light during the
financial crisis.

Regulatory oversight. There is a concern that governments -- through
financial market and banking regulators -- will place pressure on banks to
lend almost exclusively in the local economy, thus to the detriment of
international borrowing. For instance, in December, the Swiss Federal
Banking Commission (SFBC) announced new capital adequacy ratios for
Switzerland's two largest banks, Credit Suisse and UBS. The new leverage
ratio requires UBS and Credit Suisse to hold between 50% and 100% above the
international minimum requirements of the Basel II international banking
standards (see INTERNATIONAL: Basel II faces credibility crisis - December
16, 2008<http://www.oxan.com/display.aspx?StoryDate=20081216&ProductCode=OADB&StoryType=DB&StoryNumber=4>).
However, both banks' domestic lending operations are exempted from the new
leverage ratio.

The exemption of domestic lending operations appears to be a case of
financial protectionism, in which the Swiss government appears to be
favouring local economic activity to the detriment of cross-border lending.
However, the rationale behind the SFBC's actions is not necessarily
financial protectionism and not without reason:

   - As major pillars of the local Swiss financial economy, it is in the
   interest of the Swiss government that the long-term financial health of UBS
   and Credit Suisse is assured (ie limiting operations both at home and abroad
   that risk bankrupting the institutions).
   - Given banks everywhere generally receive some sort of implicit
   guarantee (as current bank bailouts clearly demonstrate (see
   INTERNATIONAL: Past bailouts serve as helpful guide - February 2,
2009<http://www.oxan.com/display.aspx?StoryDate=20090202&ProductCode=OADB&StoryType=DB&StoryNumber=1>)),
   it is in the interest of the national government, and by extension of the
   financial regulator, to ensure that these banks are not going beyond the
   means that a government bailout can reasonably meet.
   - Furthermore, as the case of Iceland demonstrates (see ICELAND: Deep
   recession will follow financial collapse - October 10,
2008<http://www.oxan.com/display.aspx?StoryDate=20081010&ProductCode=OADB&StoryType=DB&StoryNumber=2>),
   countries with their own currencies can experience significant currency
   crises engendered by an over-leveraged and internationally-engaged banking
   sector, which puts all local economic activity and growth in jeopardy.

In effect, the new Swiss regulations appear to be inline with sound
prudential oversight when the new Swiss regulations are looked at through
the lens of:

   - a concern for stability of the local financial system;
   - the stability of the currency; and
   - the available bailout resources of the Swiss government in the event of
   a major collapse.

Moreover, though domestic lending and other local banks are not included in
the new regulations, the fact is that, given proximity and greater
understanding of local economic conditions for both lenders and borrowers,
the regulator can better supervise local leverage ratios, thus preventing
local banks and local lending from exceeding sound prudential levels.
Indeed, a stated reason for not including other local banks in the
regulation was that local banks already voluntarily maintain capital levels
that are almost on average twice the required minimum.

Return of proximity. A major contributing factor to the financial crisis was
ignorance of the importance of proximity in lending. The sub-prime problem
arose because banks and by extension global investors loaned large amounts
of capital to borrowers without truly understanding the risks of individual
borrowers and the risks posed by certain over-inflated local housing
markets, which then collapsed. Banks increasingly relied on credit scoring,
which judged investors by models and pre-determined criteria. As such,
lenders came to know their borrowers less and less. This type of behaviour
became replicated across various asset classes and trading relationships --
buttressed by third-party ratings agencies -- where economic actors
'trusted' their counterparties, assuming that the market revealed all
available information and economic models were sound:

   - As uncertainty continues to reign in markets and lenders have lost
   trust in their potential counter-parties, the willingness has diminsished
   markedly to lend across borders, or across any distances, both virtual and
   real, where knowledge of the counter-party is limited or subject to even
   minor concerns over credit quality.
   - With banks themselves under significant financial distress from bad
   loans and 'toxic assets' -- which is actually the greater cause of
   diminished loan capacity -- any lending is likely to be based on
   considerable knowledge of the borrower and under conditions of longstanding
   relationships.

This implies a return to more proximate lending relationships both at home
and abroad, where due diligence is taken very seriously (see INTERNATIONAL:
Investment requires due diligence - December 31,
2008<http://www.oxan.com/display.aspx?StoryDate=20081231&ProductCode=OADB&StoryType=DB&StoryNumber=2>),
as banks attempt to limit their exposure to potentially non-commercial
foreign lending.

Outlook. Despite these considerations, the spectre of financial
protectionism is still real. It seems likely that, whether explicitly or
implicitly, national governments will pressure banks to lend to particular
firms and sectors. However, this does not mean that such pressure to lend
will be under completely non-commercial circumstances, which is implicitly
implied by those fearful of financial protectionism.

The difficulty is that uncertainty makes it difficult to model future
economic conditions and thus the credit quality of borrowers, even for
low-risk borrowers. Yet ensuring an open credit channel for firms is
essential to returning to growth. As such, if banks alone are unwilling to
extend credit, especially when credit quality is sound, there is a rationale
for some form of government intervention. Where such financial protectionism
becomes problematic is when it becomes overly mercantilist in nature. It is
still uncertain whether a return to blatant mercantilism will occur.

CONCLUSION: Fears over financial protectionism are currently based on an
overly broad definition of the phenomenon. Distinguishing between stronger
oversight and the appearance of sounder and more proximate lending versus
actual mercantilist policies is key to understanding the potential of
financial protectionism. Absent such distinctions, and the appearance of
mercantilist policies, fears over financial protectionism will remain
largely a matter of political rhetoric.

Return to top of
article<http://www.oxan.com/display.aspx?StoryDate=20090226&ProductCode=OADB&StoryNumber=5&StoryType=DB#articletop>

Keywords: INT, Iceland, International, Switzerland, United Kingdom, United
States, economy, banking, finance, government, policy, regulation

Word Count (approx): 1158
---
US/INTERNATIONAL:'Incentive pay' remains key to growth

Tuesday, February 24 2009
 [image: Idea in Action]An Oxford Analytica Idea in Action

SUBJECT: Performance 'incentives' in capitalism -- what they are and why
they matter.

SIGNIFICANCE: The controversy over financial sector bonus awards in the
United States and elsewhere has generated debate about the value of
incentive-based pay systems. Most justifications for these remuneration
schemes turn on assumptions that performance is largely a function of
engineered incentives schemes (both positive and negative) -- but these now
appear faulty or incomplete. Go to
conclusion<http://www.oxan.com/display.aspx?ItemID=DB149297#conclusion>

ANALYSIS: 'Incentives' are fundamental to modern Western societies,
affecting all aspects of political, social and economic life. Free market
economies embed the concept of monetary gains as the key motives driving
household, corporate and individual behaviour. Equally significantly, the
rule of law, government and corporate institutions provide incentives
(either in the form of rewards, or penalties) to citizens to encourage, or
deter, certain forms of behaviour. Incentive-based pay systems were meant to
embed this ethos in corporate structures: rewarding leadership that
benefited the company as a whole, and deterring purely self-serving
behaviour. Instead, they recently seem to have done the opposite.

 Key insights

   - Monetary incentives are essential to capitalism and economic growth.
   - It is clear that flawed incentive-based pay systems played a
   significant role in exacerbating financial sector systemic risk, the bubble
   in US housing and associated derivative products, and the current economic
   crisis.
   - However, incentives are a key factor in promoting innovation and
   entrepreneurial behaviour -- which help drive long-term growth.
   - New incentive structures, such as 'nudge incentives' may offer a better
   means of encouraging behaviours that benefit individuals, corporations and
   society at large.


Super-productive CEOs? Incentive-based remuneration for executives of public
companies was designed to align the interests of managers and shareholders,
by rewarding executives who presided over long-term value creation. Former
Treasury Secretary John Snow justified the huge growth of executive
compensation over the past two decades as a simple validation of such
incentive-pay systems: in the aggregate, he claimed, "it reflects the
marginal productivity of CEOs". However, given the sluggish responses of
board-level compensation committees to the massive shareholder-value
destruction over the past year, such justifications of the increasingly huge
pay disparity between executives and line workers appear increasingly
questionable.

'Performance government'. While financial industry executives' bonuses have
attracted the most media attention, schemes designed to incentivise public
sector employees have been widespread in government agencies since the
1980s. In the United States, United Kingdom and many other developed
economies (including Canada and Australia) senior level bureaucrats work
with specific annual performance targets; exceeding them produces bonuses.

Such schemes can also apply to the rank and file within government
bureaucracies. UK National Health Service reforms enacted since former Prime
Minister Margaret Thatcher's era have been based on encouraging efficiencies
by hitting performance targets in exchange for rewards. For example, if
local doctors' practices (ie clinics) can cut the number of patients they
refer to hospitals, they receive a financial bonus.

Bonus culture. The current economic crisis has revealed that the objectives
of bonus schemes have become seriously misaligned from their outcomes:
indeed, incentives may have fuelled the leverage-based implosion of the
financial sector. For example, before finalising its merger with Bank of
America in December, approximately 700 Merrill Lynch managers and employees
were awarded bonuses of over 1 million dollars each, despite the fact that
that last year Merrill posted one of the largest losses in US corporate
history (27 billion dollars).

Types of incentives. While such anecdotes have stimulated public outrage, it
is worth remembering that incentive-pay was specifically designed to serve
public or shareholder interests better than ordinary forms of remuneration.
Incentives are judged the most efficient means to produce desired collective
and individual goods (both products and behaviours) in society. There are
several common types:

   - Financial incentives. In capitalist societies, economists and other
   social scientists believe individuals respond most to direct monetary
   rewards. The profit motive produces efficient market institutions governed
   by supply and demand, which in turn rest on calculations about the human
   desire for monetary gain. The simplest of these incentives is salaried pay
   based on experience, expertise and training (or education); more complex
   schemes involve pay directly linked to various measures of performance.
   Without adequate monetary incentives and penalties, neo-liberal economists
   argue, no society can attain efficient allocation of resources.
   - Targeted ('goal based') incentives. To achieve particular objectives,
   employers and governments design incentives to ensure that people act
   towards these ends. For example, US auto sector worker buyout schemes offer
   employees vouchers for new cars, in exchange for accepting voluntary
   redundancy. Both individual and corporate taxes also involve targeted
   incentives. For example, in order to attract corporate investment, US states
   actively compete to offer the most attractive tax incentives -- often in
   exchange for commitments to create a particular number of new jobs.
   - Moral incentives. Societies can provide intangible, but still
   significant, rewards in the form of 'social capital' to individuals and
   corporations that engage in certain ostensibly altruistic activities. Such
   incentives are non-monetised, but confer benefits that can reduce
   significantly the cost of doing business (see US/INTERNATIONAL: 'Social
   capital' helps create wealth - July 31,
2008<http://www.oxan.com/display.aspx?StoryDate=20080731&ProductCode=OADB&StoryType=DB&StoryNumber=3>).

   - Coercive incentives. Centralised state planning systems, such as those
   in many Communist and authoritarian countries, also created incentives --
   but failure to meet these targets resulted in such severe punishment. Such
   coercive incentives exist, in much milder forms, in developed capitalist
   economies.

Did incentives promote risk? The story of recent problems with incentive pay
systems is interwoven with the effects of rule changes in US and
international financial markets since the late 1990s. They helped facilitate
the growth of a massive, leverage-fuelled financial market:

   - Financial markets bubble. These changes, coupled with a period of
   exceptionally low interest rates following the 2001-02 recession, encouraged
   the growth of a massive property market bubble -- abetted by an even larger
   expansion in the market for mortgage-backed securities and associated
   derivative products (eg collateralised debt obligations, CDOs) (see
   UNITED STATES: Housing plunge may require federal aid - January 9,
2009<http://www.oxan.com/display.aspx?StoryDate=20090109&ProductCode=OADB&StoryType=DB&StoryNumber=1>).

   - Bumper profits. The bubble, in turn, produced several years of record
   profits at financial services companies, which were reflected in
   increasingly large executive bonuses collected through incentives packages.
   Subsequent incentives packages provided even greater incentives to increase
   profits -- largely through using cheap, plentiful credit to gear up and
   further expand lending via dis-intermediated, structured products.
   - Illusory gains. Many of the leverage-driven gains of the bubble years
   turned out to be illusory. For example, Merrill Lynch lost a total of
   approximately 35.8 billion dollars in 2007 and 2008 -- a figure equal to the
   total earnings of the firm over the past eleven years.
   - Incentives and moral hazard. The great danger in creating any system of
   incentives is that it may unwittingly encourage behaviour subject to 'moral
   hazard' -- that is, circumstances under which individuals or firms engage in
   increasingly risky actions because they perceive that the costs or adverse
   consequences of such behaviour may be borne by others. In the case of the
   interplay between incentive pay at financial firms and the housing market
   bubble, this appears to have occurred: massive profits reflected in
   executive pay encouraged further leverage, without enquiring too closely
   about the risks involved. Executives were rewarded like successful
   entrepreneurs, rather than managers -- even though most of the risks
   involved were borne by their firms and shareholders.

Can incentives mitigate risk? Yet it is also clear that properly structured
incentives can mitigate, rather than promote, risky behaviour in several key
respects:

   1.

   Subtle 'nudge incentives'. Two prominent University of Chicago economists
   long have argued that giving individuals a gentle nudge towards more
   sensible behaviour can produce outsized dividends. Under this 'libertarian
   paternalism' relatively small changes in environment or policy -- for
   instance, a small compulsory saving scheme for workers (eg forcing workers
   to 'opt-out' of pension savings schemes, instead of requiring them to
   'opt-in') or placing healthy food in more visible places in supermarkets --
   can result in very positive behavioural changes.

   Their scheme essentially involves a mild form of social engineering,
   whereby small changes in choice options -- what they term 'choice
   architecture' -- can have significant outcomes for society and individuals.
   Under 'nudge initiative' plans, incentives are regularly modified to guide
   citizens towards more sensible lifestyle, economic and social choices.
   Intellectually, this thesis builds on the important findings of behavioural
   economists about how individual market decisions are sometimes irrational or
   self-defeating; therefore, fostering good decision-making sometimes requires
   structuring choices.

   Nudge incentives also represent an attempt to forge a middle way between
   neo-liberal market incentives (which are premised on individual and
   corporate rationality) and the coercive incentives practice by state-planned
   economies. The framework aims to find a balance between cumbersome social
   democratic planning and market fundamentalism.
   2. Growth incentives. Economic growth and development depend to some
   extent upon incentives institutionalised in public policy. For example, a
   significant factor in the rapid economic growth enjoyed by Ireland in the 15
   years before 2008 was a generous corporate taxation regime, which gave
   incentives to large international corporations to locate there. Tax breaks
   also play a key role in persuading firms to invest in research and
   technology -- essential for future development and economic growth.
   3.

   Innovation incentives. Successful entrepreneurial economies make an
   effort to encourage both established firms and start-ups to innovate. Policy
   can create incentives to sustain and foster entrepreneurial behaviour. For
   example, regulation can be minimised for new start up firms. Guaranteed
   lines of credit are also important. Property, patent and copyright rights
   need to be enforced effectively to affirm the incentive to engage in
   innovative work (see INTERNATIONAL: An 'entrepreneurial society' has
   costs - August 29,
2008<http://www.oxan.com/display.aspx?StoryDate=20080829&ProductCode=OADB&StoryType=DB&StoryNumber=3>).


   The importance of innovation to economic growth was a lasting insight of
   the Austrian economist, Joseph Schumpeter, who argued that institutional
   arrangements could create the incentives appropriate to innovative activity
   at the firm level. Significantly, investing in ideas is distinct from fixed
   capital investments (such as a generic new factory) since an idea can be
   used by anyone once it has been formulated. Idea generation rests, in part,
   upon incentives to ensure that firms recovers the costs of investment in
   research and technology. Patents achieve this effect by giving temporary
   monopoly rights to innovators.

The incentives crisis. The scale of financial sector bonuses in the period
from 2003-07, and the single-mindedness with which executives continue to
pursue these -- despite record losses and continuing financial and economic
meltdown -- suggests that the system of incentive pay was flawed in several
fundamental respects:

   - It focused almost entirely on providing incentives for boosting
   quarterly or annual corporate profits, without accounting for increasing
   product-based, counterparty, and systemic risk.
   - The role of leverage in these returns, and their associated risks, were
   similarly discounted.
   - There were rarely efforts to measure individual and corporate
   performance in context: profits produced by rises in broader markets, or an
   environment of cheap credit and low volatility, were often attributed
   entirely to the individual genius of executives.
   - The time horizons of corporate managers and investors were obviously
   misaligned.
   - 'Financial innovations', such as structured products, that actually
   served merely to increase the speculative housing bubble, were mistaken for
   real, long-term value generating innovations.

Therefore, the most current corporate performance-based pay systems appear
flawed, principally because they encourage the aggressive pursuit of profits
without accounting for risk -- which is not in the long-term interest of
most shareholders.

Beyond the regulatory backlash. These failures have already produced a
regulatory backlash, which risks going too far by eliminating the positive
aspects of incentive pay systems. For example, US President Barack Obama's
789-billion-dollar economic stimulus bill, enacted earlier this month,
heavily restricts the size of top executive bonuses at financial
institutions receiving federal aid.

Yet well-designed incentive systems can clearly foster better individual and
corporate performance, and innovation. Indeed, the administration is aware
of this, which is why the stimulus bill also contained major new incentives
for companies pursuing 'green' technologies. It would stand to reason that
incentives could also be leveraged to assist the US economy's most
distressed sector -- perhaps by better aligning financial executives'
interests with those of their shareholders and society at large. For
example, nudge incentives could be used to foster the extension of sound
forms of consumer credit, and facilitate the restoration of strong bank
capital adequacy ratios.

CONCLUSION: Economic and monetary incentives are the lifeblood of capitalist
market systems. However, effective incentive pay systems are built around
distinguishing between long-term profits streams and gains produced in the
context of a rising market, adequately costing leverage and other forms of
high-risk behaviour, and rewarding 'good risks' such as investing in
innovation.

Return to top of
article<http://www.oxan.com/display.aspx?ItemID=DB149297#articletop>

Keywords: NA, International, United States, Australia, Canada, United
Kingdom, economy, social, corporate, finance, government, private
sector, public
sector, technology, regulation

Word Count (approx): 2054
---
CARIBBEAN: Crisis hits offshore financial services

Thursday, February 26 2009

EVENT: The Eastern Caribbean Central Bank took control of the Bank of
Antigua on February 20, after owner Robert Allen Stanford was accused of
fraud in the United States.

SIGNIFICANCE: The financial services industry is under growing pressure all
over the region. Offshore jurisdictions were already suffering a loss of
confidence even before the Stanford scandal broke.Go to
conclusion<http://www.oxan.com/display.aspx?StoryDate=20090226&ProductCode=LADB&StoryNumber=1&StoryType=DB#conclusion>

ANALYSIS: The international financial and business services sector is in
turmoil all over the Caribbean. The troubles of Robert Allen Stanford, which
led on February 20 to the Eastern Caribbean Central Bank taking over his
Bank of Antigua to prevent its collapse, is only the latest in a series of
setbacks faced by an industry that many islands had hoped would offer them a
more promising long-term future than tourism and agriculture.

Pressure for transparency. A few weeks earlier, the global economic crisis
had precipitated the near-collapse of the CL Financial Group in Trinidad (see
TRINIDAD AND TOBAGO: Financial turmoil expands - February 20,
2009<http://www.oxan.com/display.aspx?StoryDate=20090220&ProductCode=LADB&StoryType=DB&StoryNumber=1>),
with reverberations throughout the Caribbean. Growing international pressure
for greater transparency and tighter regulation of offshore jurisdictions
had already helped to initiate an exodus of international corporations from
Bermuda and the Cayman Islands (see INTERNATIONAL: Tax havens face growing
pressure - February 17,
2009<http://www.oxan.com/display.aspx?StoryDate=20090217&ProductCode=OADB&StoryType=DB&StoryNumber=3>
).

Regulatory failures. The chain reaction of banking emergencies has
highlighted calamitous regulatory failures, both in the developed countries
and the offshore centres, and one consequence will be that the
industrialised countries will try to crack down where they can -- which
tends to be in weaker, poorer parts of the world. The EU resolved on
February 22 to take punitive actions against tax havens, assembling a
'toolbox of sanctions' against 'uncooperative jurisdictions', and Washington
will take a similarly tough line:

   - The US Government Accountability Office (GAO) believes that tax havens
   deprive it of up to 100 billion dollars a year in revenues from some of the
   country's biggest corporations. The new administration gave an indication of
   what to expect on February 19, when it opened legal proceedings against UBS
   to try to obtain the names of the Swiss bank's 52,000-odd rich US clients.
   - The lawsuit alleged that UBS helped many US taxpayers to set up
   offshore companies, to enable them to avoid their reporting obligations to
   the US revenue authorities.

Seeking scapegoats. The Stanford crisis could not have come at a worse
moment for the region's financial services sector. Antigua has been under
suspicion in the past for alleged involvement in laundering drug money and
harbouring suspected Russian "shell" banks, and Stanford's activities have
once again drawn attention to the role of small island jurisdictions in
international fraud cases, thereby further damaging the region's reputation.
Antigua and Barbuda had 17 offshore banks, three offshore trusts, two
offshore insurance companies and 3,255 international business corporations
domiciled there in 2007.

Stanford scandal. After the US Securities and Exchange Commission (SEC)
filed a civil fraud suit against Stanford on February 17, and a federal
judge froze his various companies' assets, estimated at some 50 billion
dollars, it emerged that Stanford had been using an Antigua-registered
offshore bank, Stanford International Bank (SIB), to sell billions of
dollars' worth of 'certificates of deposit' with unrealistically high rates
of return to investors all over the world.

Antigua's Financial Services Regulatory Commission (FSRC) does not appear to
have kept a close watch on SIB's activities -- which is perhaps not
surprising, as Stanford was an adviser to the previous government on reform
of the regulatory regime. Instead, the bank's investment portfolio appears
to have been audited by a small accountancy firm with offices in Antigua and
Enfield, north London. When the FSRC appointed two executives of a UK
company, Vantis Business Recovery Services, as receivers of SIB and Stanford
Trust Company, they quickly concluded that the 8 billion dollars reputedly
deposited in SIB were simply not there. Parliament has been recalled today,
in mid-election campaign, to debate seizure of Stanford's assets in order to
pay off debts.

International exodus. Before the Stanford scandal broke, Bermuda had been
the main regional focus of the international financial turmoil. The island
is home to thousands of offshore businesses, particularly in the insurance
and reinsurance sectors, and they have been hard hit by the economic
downturn in developed countries. The latest to feel the pinch is XL Capital,
a property and casualty underwriter, which made losses totalling 2.6 billion
dollars last year. Its reaction was to announce that it was downsizing its
Bermuda operations this year, with the loss of up to 40 jobs, or about 15%
of the headquarters staff.

XL was founded in Bermuda in the 1980s to provide coverage for corporate
liability risks, and it helped to establish Bermuda as the world's foremost
insurance and reinsurance centre. It was not the first big insurance company
to move away from the island:

   - Ace, which also arrived in the 1980s, transferred its corporate
   headquarters to Switzerland earlier this year; and
   - Hiscox, a UK-listed insurer specialising in fine art and kidnap risks,
   announced that it was refocusing its reinsurance portfolio by closing its
   Bermuda-based specialist insurance team and expanding its business in the
   United States.

Other US companies leaving Bermuda for Switzerland include diversified
manufacturing group Tyco International and Tyco Electronics (pending
shareholder agreement), oilfield services company Weatherford International
and engineering and construction company Foster Wheeler. A Tyco subsidiary,
healthcare products manufacturer Covidien, managed from Massachusetts, is
moving its registration from Bermuda to Ireland, which has similar
attractions to Switzerland.

Trend-setting? Despite these developments, the Bermuda government is
insisting that there is no cause for panic and that XL's move is not part of
a trend. This may be true: Washington's apparent determination to take on
Switzerland's banking laws could discourage other US companies from
relocating there, although it will probably be two or three years before
Washington brings in legislation to tax US companies registered in low-tax
jurisdictions on their worldwide income. A bill co-sponsored by President
Barack Obama while he was in the Senate listed 34 "secrecy" jurisdictions --
among them all the British Overseas Territories in the Caribbean, all the
members of the Organisation of Eastern Caribbean States, the Bahamas and
Barbados.

However, there are differences between the various offshore jurisdictions,
which means they may not all be treated in the same way:

   - The Cayman Islands are on an OECD list of countries that have not yet
   fully implemented transparency and information-sharing standards that they
   have agreed to in principle, along with the Bahamas, and the Caymans have
   also been criticised for harbouring unregulated hedge funds.
   - However, Bermuda is one of seven countries -- along with Aruba, the
   Netherlands Antilles and the British Virgin Islands (BVI) -- that are fully
   compliant with the OECD transparency rules.

Nevertheless, in January the BVI government reported a slowdown in the
growth of new incorporations in the financial services sector. Premier and
Finance Minister Ralph O'Neal said that 2007 had been a year of
unprecedented growth, with some 75,000 new companies formed, but in 2008 new
incorporations were down 20%, and overall there had been little or no growth
in the financial services sector. He added that captive insurance and mutual
funds were likely to be most affected by the global economic downturn.

CONCLUSION: Caribbean offshore jurisdictions are unwilling to be treated as
scapegoats for the problems of the international financial system, but they
are nevertheless likely to be hard hit by the reforms that developed
countries are determined to push through.

Return to top of
article<http://www.oxan.com/display.aspx?StoryDate=20090226&ProductCode=LADB&StoryNumber=1&StoryType=DB#articletop>

Keywords: LA/C, Antigua and Barbuda, Bermuda, Caribbean, Cayman Islands,
Bahamas, Barbados, Netherlands Antilles, Switzerland, Trinidad and Tobago,
United States, economy, industry, international relations, banking,
corporate, finance, international law, regional, regulation

Word Count (approx): 1237



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http://www.asianforesightinstitute.org/index.php/eng/The-AFI

Volunteering at the P2P Foundation:
http://p2pfoundation.net  - http://blog.p2pfoundation.net -
http://p2pfoundation.ning.com

Monitor updates at http://del.icio.us/mbauwens

The work of the P2P Foundation is supported by SHIFTN,
http://www.shiftn.com/
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