dwy000

They would treat an IRA account as a "Foreign Investment Fund" and tax the increase in balance as income. So, for example, if you had an IRA (or Roth IRA) with a $3m balance and the account balance increased by 10%, then you would have $300k in taxable income to report to Australia. This happens even if you do not withdraw any funds from the account! They are paranoid about abusive offshore tax shelters and don't distinguish an IRA from an offshore tax sheltering scheme. Eric - I might be reading this differently but my impression was that they treat income from the IRA as ordinary income for taxation purposes. Therefore it's not necessarily tied to the account balance but is instead based upon realized capital gains, dividends, interest etc. - just as if the account was not a retirement account. Therefore from your example, the $300K would only be taxed if that was actual realized income and not if it was unrealized capital gains. It's still a massive tax implication. As an Australian citizen can you roll your IRA into a Superannuation Fund (the Aussie equivalent)?

Forget the intrinsic value and fundamentals - for the corporate governance alone I would never buy aapl stock.

http://www.marketwatch.com/story/apple-ceo-cook-gets-1-mln-share-retention-award-2012-01-09 I'm sorry but there is no excuse for paying somebody $400mn+ as a retention award. Apple may be a great company with great products but their corporate governance is a joke.

Sharper - Sears sold its US credit card business to Citibank in 2003 and its Canadian credit card business to JP Morgan in 2005. They get a small fee from the banks for origination but they don't provide the financing.

Merry Christmas and Happy Holidays to everyone.

Sorry OEC, I forgot your second comment. Surprisingly no - I don't think they are necessarily more in tune with what's going on in Asia (ie China) than elsewhere in the world. I find the coverage on CNN and the BBC to be far superior than the local coverage. Most of that is likely due to the overwhelming quantity of news in the US. As an example, everybody here immediately turned to CNN and BBC to get their coverage of Kim Jung Il's death. I think there is a reluctant acknowlegement that as China goes so goes Australia given the importance of the mining industry to the economy but I almost never hear about bubbles or major downturns in China.

You're right OEC, the coffee is fantastic. You can't get a cup of regular (filtered) coffee but if you're a fan of espresso based drinks it probably compares with the best in the world. Racemize - I'm mid-forties with a young child and it was supposed to be a quasi-retirement thing - ie move there for a couple of years, possibly permanently, and live off investments while figuring out what we wanted to do next. The ideal would be to live 6 months in the US and 6 months in Australia/NZ but that's tough with kids and even more expensive. Note the taxes are a pain in the butt. Australia year ends June 30th and you have to file both US and Australia. It's a nice lifestyle here. I don't mean to be overly negative.

Out of curiosity, what are some of the reasons? I guess besides real estate? Turar - I'm conscious this is a bit off topic for this thread and I don't want to offend any Aussie's since we really have enjoyed it for the most part but..... a) it's OUTRAGEOUSLY expensive. Not just housing, everything. Food. Clothing. Furniture. Services. I find myself buying a lot of things from Amazon or similar online sites and even having them shipped here it is still less than 2/3's the local price. My running shoes I normally pay $120 for in the US are $270 here. That is pretty typical. It was cheaper to buy New Zealand apples in NY than in Sydney. Huh? When we were looking to move the A$ was about $0.66 US and everything seemed a little expensive but you figure "what the heck". Now the A$ is above $1 US which make is offensively expensive. b) the distance and time difference really gets to you. There are very small windows to call family and I feel like I'm a bit behind the times on world/US news. I can't really explain it but you just feel removed and remote. To go on vacation out of the country, unless you're doing NZ or Fiji, you're looking at a minimum 7 hr flight each way (10 hrs to Hawaii). It hits home when we spent $500 in shipping charges to send $400 worth of presents back to the US/Canada. Now, I must admit it's improved my value investing because I go to bed before the market opens and wake up just as it closes so I have to leave open orders and can't watch every tick. c) Taxes are very high and climbing. Top tax rates are about 45%. There's a 10% value-added-tax (which adds to the expensive comment above). The new carbon tax will add significantly to electricity and gas prices. d) The shopping is disappointing. We struggled with our Christmas shopping. It's getting better and this is after living in NY so take it with a grain of salt. You don't quite appreciate the quality, price and selection we take for granted in the US but it's starkly apparent when you compare here. Imagine living in a mid sized city in the US and then moving to a fairly small town. You can get everything but it's just less selection, less competition and a little more effort. e) The weather wasn't quite the utopia we had built up in our minds. Don't get me wrong - it gets very hot and the sun shines a lot, but it's not the year round shorts and t-shirt weather you tend to hear about or expect. I might be tainted by the fact that we've had a crappy summer so far. f) If you don't like rugby, you're out of luck as a sports fan. I really, really miss baseball and football. They actually have 3 types of rugby here plus Australian rules football. In summer it's cricket. A little bit of soccer. That's it. g) We miss the American "enthusiasm" for everything. I put up a bunch of Halloween decorations that would have been considered tame in the US and I got people stopping and taking pictures and in awe. They would ask me about it and as soon as they heard my accent would say "ohhhhhh, you're American" - like suddenly that explained everything. It's little but it's funny. It's a great place to live and we've had a wonderful time. We are soooooo glad we did it. But it's a bigger transition than we were expecting and we just miss a lot of things that are taken for granted in the US/Canada.

Eric - I currently live in Sydney after moving here 2 years ago from NY. It was supposed to be a permanent decision but in all likelihood we will be moving back to the US in a year or two. It's not everything we thought it would be. We rent. The housing market here, while maybe not a bubble, is still unreasonably expensive - especially in comparision to incomes. The rental yield is about 4% (!!!!) which is even more shocking when you consider that you can easily get 6-6.5% interest on a 6 month term deposit at any bank. Note that this does not include the stamp duty in the purchase price which is paid by the buyer (5-6% of purchase price). Mortgage interest is NOT tax deductive on primary residence but is deductible for investment property. What amazes me most is the completely ingrained mentality here that housing is a great investment, always has been and always will be. I have a number of friends who have purchased "income" properties here based on that mentality. The rent obviously doesn't cover the mortgage let alone operating costs and taxes so they have to pay out of pocket each month to top up. In my view that's not an investment. Just between the stamp duty and broker fees the price has to rise about 10% just to break even on the purchase and that's with the income completely covering the investment. When I try to walk them through the math and why it doesn't make sense they simply dismiss it and say that house prices will always go up and that over a 10 year period real estate is always a good investment. One of them just kept repeating that real estate prices had doubled on average every 9 years over the past century (like this meant it was destined to continue forever). I simply don't get it. I think some of this mentality comes from the fact that Australia largely avoided the financial crisis and there seems to be a prevailing belief that they are immune to a serious downturn. I know I'll get lambasted for saying that but it really reminds me of US house flippers in 2006 and 2007 when it was believed the good times would go on forever (yes there are differences but when you hear them talk about it, it's the same mentality).

Sharper - agree on most of your point. For hedge funds, I'm not sure it would change much (they already are charged higher capital as they need to be internally rated just like the banks - although depends on what they're rated). Virtually all derivative trading with hedge funds (and interbank) is done on a fully or over-collateralized basis and Basel II capital weightings net out cash/treasury collateral so the risk and capital there is much reduced. Interestingly the bank losses on hedge funds have been minimal since the lessons learned from Long Term Capital (LTCP refused to post upfront collateral) and held up very well during the market meltdown. My personal concern on the trading side is more due to the rehypothecation of the collateral as proven out by MF Global. I still contend that investing in banks is a black box and you should focus on management not assets. You'll never know what youre getting so better to bet on the jockey than the horse.

Not to harp on about it too much but the other issues that get my goat are: a) under Basel - most developed countries sovereign debt gets a zero capital weighting. Zero. So those Italy bonds? Same capital requirement as US gov't bonds - none. If you're going to credit weight capital for other assets, why not credit weight them all. b) the accounting provision under which you to mark-to-market your own debt obligations (liabilities) - and then take the markdown as a gain!!!! I get the argument that if you're marking to market the assets why not the liabilities as well but come on. To be able to show a strong equity cushion because your own bonds have dropped from 100 to 70 is ridiculous.

Sharper - Basel II and III both require capital for operational risk as well as credit risk so I'm not sure a Basel IV would add anything there. Maybe refine it a bit but it's not something new. It's really a case of apples vs. oranges to compare the capital levels under the old Basel I to the newer Basel II and III. The whole purpose of Basel II and III was to introduce increased capital for increased credit risk. Under the old Basel I capital requirements a loan to MSFT or JNJ (AAA rated entities) required the same capital as a loan to a CCC rated entity - which is obviously nuts. It incentivized banks to move way down the credit curve. Basel II/III helps but it's certainly not a cure all. I think the biggest problem is that it puts the fox in charge of the henhouse. Higher capital is required for lower rated assets but it's based upon the bank's internal ratings for the asset. So if you want to keep your capital down you just put a higher internal rating on the loan. The other thing I think it will do is re-incentivize and grow the securitization market. Because of the high capital cost of asset (and especially lower rated assets) banks will want to underwrite for the fees and then get it off the balance sheet to reuse that capital again. Holding loans will be quite expensive. For retail banking it means higher fees since the capital requirements are higher and therefore spread income lower. Just my opinion of course.

Clouldn't happen to 2 nicer, more trustworthy people.

Txlaw - I initiated a LUK position recently too so the recovery in JEF is nice to see even from a 2nd tier position (finally!). I'm not exactly sure what they're seeing in JEF to give it that much of the portfolio - or what I'm missing - but now having Berkowitz on board helps reiterate it. I wonder how much discussion goes on between Bruce and guys at LUK.

I thought it was interesting that not only did he add to his LUK position but initiated a position in JEF - which is LUK's largest holding (by far).

I can't wait to see how the CDS aspect plays out on the bank P&L. Most of the banks in reporting their Greek exposures give a "net" number after hedging. If they're taking a 50% haircut on the debt but can't get that 50% back on their so-called-hedges it could be a massive loss. Or a massive gain for anyone who'd been selling the CDS and shorting the bonds.

You said it JSA. I love this stock. Not only do they generate $1bn in free cash flow per year, they use it almost exclusively to return cash to shareholders. The dividend keeps going up and the share count goes down in giant steps. Last year they took on over $2.5bn of debt and will use that cash to do more share buybacks (it's the only debt on the company). Despite the negative same-store-sales headlines, ROE has gone up every year for the past 5 from 15% to almost 30%. Now that's good capital allocation.

Paulson was always an average manager at best. He had one good call (give him credit - it was the mother of all calls) which he will milk for all its worth - but I think you're now seeing a reversion back to the mean. Give me Berkowitz, even after this disasterous year, any day over Paulson.

Kiwing - good catch!! My mistake entirely. In my haste I put "sell CDS protection" instead of "buy CDS protection". You are right, that would double the exposure instead of negate the exposure. I meant they would buy protection to offset the loan risk Looking again, with the prices I used in the example I should have changed the bond to a sell instead of the CDS position to a buy. They would sell the bond (pay 200bps) and sell credit protection (income of 220 bps). Collect net 20bps. In a default, they would gain on the bond short position but pay out on the CDS they sold - in theory, in exactly the same amount.

I have attached the bankruptcy proceeding documents between Lehman and BoA. They are pretty interesting reads. Thanks for the tip dwy000. One is a summary by the individual managing the derivatives settlement for the debtors and the other is the settlement details with BoA and Merrill. The haircuts on their claims are quite large and with three years passed hopefully all the other counter parties agree to the framework settlements. One question, the documents refers to primary and guarantee derivative claims. What's the distinction between the two? The attachments were found here: http://chapter11.epiqsystems.com/LBH/docket/Default.aspx?rc=1 Thanks Grenville! I'd only seen the summary and not the documents themselves. Makes me glad I didn't go to law school. Re primary vs. guarantee - the guarantee claims would be ones where the trade was done out of a legal entity that wasn't the primary trading vehicle (i.e. where the primary claims are) but for which the primary entity had provided a full guarantee. It would just collapse the legal structure to aggregate to a single claim.

Kiwing - good catch!! My mistake entirely. In my haste I put "sell CDS protection" instead of "buy CDS protection". You are right, that would double the exposure instead of negate the exposure. I meant they would buy protection to offset the loan risk

You are correct. If the position moved back to flat before Lehman filed and FFH was just waiting to get the $10m collateral back from Lehman when they filed, FFH would have an unsecured claim against the bankruptcy estate. As timely as the day's headlines, note that BoA just settled this exact issue with Lehman this week!

By the way, Michael Lewis's book The Big Short gives great insight into how this works in a much more lucid and humorous manner than I can. I was almost laughing through the section where Mike Burry was trying to get accurate collateral marks on his positions from BofA. They were claiming it was worth 95 (because that's where they were marking their own positions) but wouldn't buy it off him at 65.

Hi oec2000, That's a good question, it's exactly what happend with Lehman (and AIG) and it's something that drives much of the risk management. The interesting part is that if counterparty B can't pay you back, technically you don't lose any cash but your loss is the cash that you still have to pay out on the hedge you have on the other side. As a result, if you really think A won't pay you, the best thing to do is take off the hedge and go naked on the underlying risk. By the way, I say "position" and "hedge" but these are interchangable because if they're offsetting it's just two positions in opposite directions so it doesn't really matter which one goes bad and which one stays good. Also, while it's simpler to think of directly offsetting trades, the bank actually runs a "book" of trades and they just try to keep a matched/hedged book as opposed to specific matching trades. Regarding collateral. As a backdrop, because the positions are all marked to market and collateral is adjusted each day, your risk is really only a 7-10 day move in the underlying position (rates, gold, FX, equity, whatever). That's because if you make a collateral call on day 1, the hedge fund will dispute the marks on the positions to try and buy time (marks are legitimately disputed all the time so this is not a big red flag). Then 2-3 days later the bank will say "enough" just pay the collateral we will settle the dispute as we go. Long story, but by the time you actually declare a default and close out the trade 7-10 working days have gone by and the position can continue to move against you. That's why the real risk management comes in taking off the hedge (or other side of the trade) so you don't keep paying out on the other side. But it's a fine line because now you're unhedged so if the fund comes thru you could have lost money on the position. With that in mind, the Master Agreement will stipulate whether you can "rehypothocate" collateral. This means that if I post US Treasuries to you as collateral, you can use those treasuries to post to another party as collateral of your own even though technically it's not your money. You wouldn't normally do that with a small hedge fund but it's necessary between the big banks because the amount of collateral is in the billions and it just wouldn't work to have separate collateral. So, to longwindedly answer your question, if B goes into liquidation, party A would declare a default, offset the amount it owed to B with the collateral posted to B and basically walk away even. Now in reality that rarely happens because as per above there will be a mismatch and if there's too much collateral A will claim it back and if there's not enough, A will pay out the extra owed to close out the trade. In addition, bankruptcy courts cause problems because they can "freeze" the situation and will not permit A to cancel the trades (this is A's worst nightmare but happens all the time). A will generally put on another hedge/position with another counterparty to replicate the lost hedge it had with B to keep the book flat. Hope this made sense. I never thought a value board would care about this level of detail. It goes to show the quality of investors here.

Still trying to get used to posting here. How do I incorporate your post in my reply for reference? Thanks. "Do the banks like WFC and BAC organize the derivative related business to reside in a subsidiary that is isolated from the rest of the subsidiaries and the retail side of the bank? Ie, if things did go bad, they could put the whole thing in runoff? Or do they treat the derivative side of their business as something like their regular operations and want to avoid hurting their reputation (reputation risk)? Fairfax has a non stated policy of standing behind their subs even though they are isolated in terms of risk. " No, they generally do derivatives out of the main banking entity. This is primarily for capital reasons since you can't count the derivative as a hedge if it's in a different legal vehicle than the underlying asset being hedged. In the late 90's a couple of lower rated banks and insurers set up derivative vehicles that were AAA rated seperate vehicles for the exact purposes you were suggesting (the most famous of which was CSFP, Credit Suisse Financial Products) but these went by the wayside largely due to the capital/hedging issue. Funny the comment on Fairfax. As a risk manager I used to insist upon a written guarantee from the parent for us to deal with a subsidiary. The marketers used to whine "do you really thing they'd let their subsidiary go under?" But the resounding answer is yes. That's exactly why they wouldn't give a written guarantee. When I hear things like BofA contemplating whether to file Countrywide for bankruptcy it makes me want to send the headline to the sales guys who called us crazy. Unfortunately not all the financials out there have the integrity of a Fairfax.