Beware of the New Congress

Wednesday, December 13, 2006
Vol. 8 No. 247

In Today's Letter:
Comment: Beware of the New Congress
Wealth: California Drops a Load on the Housing Market
Privacy: New Governmental Spies: Your Tax Dollars at Work

The New Congress: Offshore Storm Warnings

Dear A-Letter Reader,

I haven't had much to say about the takeover of the U.S. Congress by the Democrats. But as a former Republican member of the U.S. House of Representatives myself, I think the GOP got what it deserved.

The congressional Republican Party of today -- deficit spenders, big government advocates, destroyers of civil liberties, pork barrel experts -- bears no relationship to the principled conservative party I knew 25 years ago. What the late presidential candidate George Corley Wallace said years ago, is now confirmed: "There's not a dime's worth of difference between the Democrat and Republican parties."

But mark my words. The control of the 110th Congress by the Democrats could expose one of the remaining major differences between the parties: their attitudes towards free trade and unrestricted offshore financial activity.

Get ready for major assaults on offshore finances from the likes of Senator Carl Levin (D-MI), Senator John Kerry (D-MA), and Rep. Charles Wrangle (D-NY), the new chairman of the tax writing House Ways and Means Committee. Republican mavericks such as Iowa's Sen. Charles Grassley (R-IO) probably will join in the offshore bashing.

The leftists Democrats will have the power to write radical new laws tempered only by the hapless President George Bush's shaky veto pen. The Democrats now have free reign to create all kinds of anti-offshore legislation. If they have their way, you can expect restrictions on offshore investments, banking, and even more massive reporting of all offshore financial activity.

Whatever complaints one may have about the six years of the Bush administration, (and we have had many), in the area of offshore financial activity by Americans, the government has supported relatively free movement of global capital. With the major exception of the horrendously unconstitutional, so-called PATRIOT Act (which both Levin and Kerry had a major hand in drafting), Bush and his executive branch appointees squashed the worst of the harebrained proposals that would have restricted foreign investment, cash transfers and other offshore business.

Congressman Wrangle has long advocated a radical Nazi-like "exit tax" on Americans who move abroad and want to end their citizenship. Relinquishing citizenship is a constitutional right that has been upheld by the U.S. Supreme Court repeatedly. Wrangle and his ilk assume anyone who acquires a new citizenship and leaves the U.S. behind is motivated by tax dodging. Several times he has introduced bills that would impose a 50% tax on all assets of a U.S. person as of the date the person ends his citizenship by expatriation. Look for this confiscatory proposal to resurface in 2007.

Another proposal floating around leftist political circles would repeal centuries of financial privacy accorded domestic and foreign trusts. This proposal could strip the financial privacy from modern corporations and other entities, such a limited liability companies and family foundations. Using the boogeyman of "terrorism money," these anti-privacy worthies argue that secret beneficial ownership of all legal entities and financial accounts should be abolished completely.

All this means you should plan now for your own offshore investing, banking, and other activity - while you still can.

Don't get me wrong. I have been around Capitol Hill long enough (25 years, man and boy), to know that what I have outlined here is a worst-case scenario. Even George Bush, the champion tax cutter, is smart enough to block some of these proposed legislative atrocities.

But 2008 is a presidential election year - and what happens if Hillary or Barrack Obama moves into what's left of the White House?

Better get an offshore move on now.

That's the way that it looks from here,
BOB BAUMAN, Editor

P.S. You can read my top seven ways to weather this offshore storm in the January special edition of The Sovereign Individual, The Sovereign Society's members-only newsletter. Click here for information about how to subscribe.

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Wealth

California Drops a Load on the Housing Market

The real estate bear market gained momentum last week after the announcement of a major subprime lending failure in California.

California is a major trendsetter, usually for bad news. In the late 1990s, real estate in California began to fall apart, an indication to what lied ahead with the 1990-1991 S&L crisis. The same warning signals emerged in 1999 when Silicon Valley in northern California started to bust, preceding the tech-wreck in 2000.

Although segments of the U.S. real estate market look like they've bottomed (including building stocks), others are still experiencing a major contraction. I'm carefully following real estate trends in the United States because this asset class will determine whether the world's largest economy tips into recession or not in 2007. So far, I think we'll escape a recession. The stock market has been strong, employment growth remains steady and the Fed is likely to keep interest rates on pause and possibly, cut them, to alleviate financing stress for highly indebted consumers.

Ownit Mortgage Solutions, a California-based company that specialized in subprime loans to weak borrowers, collapsed on December 7. Subprime loans are issued to high-risk lenders, many harboring weak personal balance sheets and high debt loads. Subprime lenders actually lend to weak credits that most banks turn down for mortgage applications. It's a high-risk business to be sure. But until this year, it's been extremely lucrative for aggressive lenders. Now the walls are coming undone.

Recently, the subprime industry has been extremely volatile. Credit spreads for investors holding subprime loans are widening rapidly, an indication that the market is getting very nervous.

Bottom line: the real estate bear market is not over. If more subprime lenders go under, I'm sure the market will suffer a major shock as many hedge funds hold high-risk mortgage-backed paper. Stay tuned...

ERIC ROSEMAN, Investment Director

Privacy

Your Tax Dollars At Work: New Governmental Finance Spies

Those hard-working and devoted bureaucrats at the Treasury Department's Financial Crimes Enforcement Network (FinCEN) now have new target in their sights: the nation's mutual funds.

Convinced that Al Qaeda and other terror groups are using U.S. mutual funds to finance terror activities, Congress in 2001 included a provision in the USA PATRIOT Act that requires mutual funds begin reporting "suspicious activities" by their customers. The regulations became effective last month.

The mutual fund industry joins banks, casinos, brokers, money transmitters and insurance companies as industries whose primary loyalty is no longer to their customers, but to the government.

Nearly 1 million suspicious activities reports, or SARs, were filed in 2005 and 2006 is on track to be the first year that more than 1 million forms are filed in a single year.

I've pointed out before that activities as innocuous as paying off a loan or making a cash deposit with musty-smelling bills can trigger a SAR. Similar triggers mechanisms seem to be in place at major mutual fund companies, and if one is pulled, your account may be frozen. When that happens, you can't trade and you have no access to your funds until you can convince the company-and perhaps FinCEN-that the suspicious transaction you engaged in was legitimate.

Does that mean you should avoid domestic mutual funds? Absolutely not. Some can be quite profitable.

Instead, I recommend you avoid such problems with the same actions you take to avoid problems at domestic banks. If you envision making an unusual transaction of any type in your mutual fund account, talk it over with a representative from the fund. If you notify the fund, in advance, what you plan to do, when you finally do it, it's less likely to set off an alarm.

MARK NESTMANN, Privacy Expert & President of The Nestmann Group
www.nestmann.com

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