The Law Is an Ass

Today’s comment is by Bob Bauman, our Legal Counsel and offshore expert.

Dear A-Letter Reader,

No doubt you've heard the ancient adage: "What you don't know won't hurt you."

It means that if you don't know about a fact or a problem, you don't need to worry about it. It might be okay for your spouse to say this when you ask how much those new clothes ran up your credit card. But this is definitely not good advice when it comes to knowledge about the law. In fact, there is another old adage that warns against this: "Ignorance of the law is no excuse."

And for good measure, I'll throw in a familiar saying to keep in mind as you read what follows: "The law is an ass." It originated in Charles Dickens' Oliver Twist, when the character, Mr. Bumble, is informed that "the law supposes that your wife acts under your direction." Mr. Bumble replies: "If the law supposes that, the law is a ass – a idiot".

There are two people I know who would agree the law really is an ass. One is a Cypriot-American restaurateur named Hosep Krikor Bajakajian. The other is an illegal alien dishwasher from Guatemala named Pedro Zapeta. And may I suggest that the mindless politicians who make such cruel laws certainly deserve to be called asses?

Baggage Beware

Cruel and Now Usual

For 11 years, Pedro Zapeta, an illegal immigrant from Guatemala, lived his version of the American dream in Stuart, Florida. He washed dishes and lived frugally to bring money back to his home country. Somehow, he managed to sock away US$59,000 over 11 years of minimum wage jobs. And he has the pay stubs to prove it.

Two years ago, Zapeta was ready to return to Guatemala. He carried a duffel bag filled with US$59,000 – all the cash he had scrimped and saved over the years – to the Fort Lauderdale-Hollywood International Airport. But when he tried to go through airport security, a TSA/Homeland Security officer spotted the money in the bag and called U.S. customs officials.

U.S. customs seized his money, setting off a two-year struggle by Zapeta to get it back. Zapeta, who speaks no English, said he didn't know he was violating U.S. law by failing to declare he had more than US$10,000 with him. The money police initially accused Zapeta of being a drug courier. But they dropped that once he produced pay stubs from restaurants where he had worked. Zapeta earned at the most US$5.75 an hour.

Zapeta said, "No." He wanted all his money. He'd earned it, he said. Now another arm of the money police, the Internal Revenue Service, wants access to cash donated to him to cover taxes on the donations and on the money Zapeta made as a dishwasher. Zapeta admits he never paid taxes. The U.S. Attorneys office in Miami, U.S. Customs and the IRS about Zapeta's all declined to comment. (Ashamed, perhaps?)

Welcome to America: Good-bye

Last week Zapeta went to immigration court and got more bad news. The judge gave the dishwasher until the end of January to leave the country on his own. He's unlikely to see a penny of his money. "I am desperate," Zapeta said. "I no longer feel good about this country."

Zapeta said his goal in coming to the United States was to make enough money to buy land in his mountain village. He wanted to build a home there for his mother and sisters. He sent no money back to Guatemala over the years, he said, and planned to bring it all home at once.

At Wednesday's hearing, Zapeta was given official status in the United States – voluntary departure – and a signed order from a judge. For the first time, he can work legally in the United States.

By the end of January, Zapeta may be able to earn enough money to pay for a one-way ticket home. But the U.S. government, which seized his US$59,000, doesn't have to do so.

America! What a country!

BOB BAUMAN, Legal Counsel

EDITOR’S NOTE: The law really is an ass. And as you can see, you can’t afford to be ignorant of these small legal provisions that can steal thousands of your dollars in civil forfeitures and legal fees. But there is something you can do to fight back. Join us on Paradise Island, The Bahamas for our Offshore Advantage Academy event November 7- 10. In less than four days, you’ll get the empowering knowledge you need to protect your assets from such injustice. Click here to learn more.

Japanese Buybacks Hit Highest Levels in 2007

Japan – one of the worst-performing markets in the world over the last 24 months – just got a much-needed boost.

The Japanese stock market received a shot in the arm last week after corporate share buybacks increased. While global equity markets were unsettled throughout most of August, Japanese companies were busy buying back shares.

According to Nomura Securities in Tokyo, August was the highest monthly total for corporate share buybacks in 2007. Corporate buybacks represent 0.2% of the entire value of the Tokyo Stock Exchange.

As buybacks accelerate in Japan, the trend is now slowing in the United States following a buyback boom since 2005. September is now on course to be the worst month in four years for U.S. share buybacks with just US$3.7 billion dollars’ worth of company stock repurchased in September, according to Thomson Financial.

Based on purchase value in August, the largest stock buybacks were Canon, Mitsubishi Corporation and JFE Holdings, a steel company. Many large-cap Japanese stocks continue to trade at book-value or less. That’s a measurement of a company’s net asset value after deducting for a company’s liabilities. Smaller stocks are even cheaper, trading at an average 10% discount to book-value.

Buybacks are likely to increase for the next six months leading up to Japan’s corporate year-end in March. I suspect many CEOs will remain under pressure to deliver results, especially the heavily-owned large-cap companies. Over 50% of daily trading volume in Tokyo comes from international investors. Many of these institutions, including shareholder activists, are pressuring Japanese bosses to increase shareholder value.

Investing in Japan is like pulling teeth. But at some point over the next several months, possibly sooner, I expect the Japanese market to blast through 20,000 on the Nikkei. For U.S. dollar and euro-based investors, the yen is dirt cheap while stocks in Tokyo remain extremely attractive compared to other market economies.

ERIC ROSEMAN, Investment Director

Bonus Wealth

Is Wall Street’s Buyout Boom Going Bust?

The Titans of Wall Street were in full-spin mode last week as big banks and brokerage houses fessed-up to bleak third-quarter financial results. Here’s just a sample of the dismal details...

• UBS, the big Swiss banking revealed it will write off as much as 4 billion Swiss francs (US$3.4 billion) in assets, including securities tied to…you guessed it, U.S. sub-prime mortgages.
  
  
• Citigroup said third-quarter profits will plunge 60% from a year ago due to “dislocations in the mortgage-backed securities and credit markets.” Citigroup suffered a US$3.3 billion loss on leveraged buyout loans it committed to, but can’t sell to investors in this environment.
  
  
• Deutsche Bank disclosed a US$3.1 billion write off “related to the U.S. mortgage morass.” About two-thirds of the loss, or US$2 billion, is the result of mortgage-backed securities gone bust. Another US$1 billion went down the drain on its leveraged loan portfolio. Like Citigroup, this billion dollar charge-off is due to the freeze up in M&A activity.
  
  
• Just Friday, Merrill Lynch topped them all with a US$5 billion write-off of sub-prime mortgage securities and similar collateralized debt obligations, which have plunged in value due to the credit crunch. As a result of these charges, Merrill Lynch expects to report a bottom-line loss of 50-cents per share, rather than the US$1.24 in profits that analysts had forecast. Oops!

As I have said before, it’s clear that the global credit crunch is having a bigger impact on these firms than many investors thought possible. And these low-lights are just from the past few days – third-quarter earnings season is just getting underway!

The funny thing is that these financial titans all have stocks that rallied amid the bad news. These stocks rallied because of the misguided belief that the worst of the credit crunch is over. But I’m not buying into the Pollyanna view...not for one second.

As I explained in greater detail in Friday’s A-Letter, the housing bubble has burst in a big way. This mess is going to get a lot worse before it gets better. There are record numbers of adjustable rate loans lurking out there with resets coming soon.

So I see very strong evidence of more market shocks to come. This is only the first of a growing wave of Wall Street write-offs that will most likely intensify in 2008… 

Check out my blog right now to find out why Wall Street is waiting for the other shoe to drop.

MIKE BURNICK, Senior Editor & Global Markets Analyst