Deferred tax assets (DTAs)

http://www.ft.com/cms/s/1/46206a22-5663-11de-9a1c-00144feabdc0.html

We now know all sorts of nasties lurk on balance sheets. Hitachi shines a light on how some of the more mundane acronyms have become big-ticket writedowns. The Japanese electrical conglomerate last month wrote off $1bn of deferred tax assets, or DTAs, in effect admitting it could not see itself earning enough to be able to cash them in.

DTAs, created by taxable losses and used against future earnings, are familiar territory in Japan. Banks accumulated DTAs in spades after the bubble burst in 1990. They recognised $66bn worth in 1998, or almost a third of shareholders’ equity, which they could count as tier one capital. Like subsequent accounting gerrymandering, such as easing mark-to-market accounting, this concealed damage to capital bases. Since banks appeared relatively healthy, they were eligible recipients of taxpayers’ funds.

Regulators have become more stringent, however, and DTAs now account for a maximum 20 per cent of tier one capital. Last March, banks had $26bn of DTAs, or 13 per cent of tier one capital, although they are now reckoned to be nudging closer to the 20 per cent ceiling.

Banks are not the only DTA hoarders. Manufacturers are close behind. Nomura Securities estimates that non-financials hold a combined $250bn worth, equivalent to 10 per cent of net assets. That is a pretty big chunk, especially as many manufacturers expect more losses this year.

Accounting for DTAs is complex, with different rules depending on expected future profitability, but generally they expire within five years.

Exceptions are those companies posting large losses: do so for three years continuously and DTAs are toast.

Tussles between management and auditors are inevitable. That the latter are claiming more victories for accounting transparency is good, although it does provide another reason to worry about the health of corporate balance sheets.

S'pore becoming more expensive for expatriates

http://www.businesstimes.com.sg/sub/news/story/0,4574,337106,00.html?

SINGAPORE is now the 10th most expensive city in Asia for expatriates, despite its weakened currency, a survey shows.

Having moved up three notches from its previous ranking of 13th place in ECA International's survey on cost of living a year ago, Singapore is however still ranked below Japanese and Chinese cities, which dominate the top ten.

'Price rises have not slowed down as much in Singapore as in other parts of Asia,' said ECA's regional director for Asia, Lee Quane.

Prices of goods and services in China and Malaysia have increased at half of last year's pace, while in Singapore, they have increased by three-quarters, Mr Quane added.

Also, currencies of locations previously more expensive than Singapore (such as London, Stockholm and Istanbul) have depreciated at an even faster rate than the Sing dollar.

Meanwhile, the survey showed that due to the strong yen, Tokyo maintained its position as the most expensive city for expats. Its lead was followed by three other Japanese cities: Nagoya, Yokohama and Kobe.

Chinese cities and territories - Beijing, Shanghai, Hong Kong, Shenzhen and Guangzhou - stayed ahead of Singapore, due to the strengthening yuan.

'The yuan has continued to strengthen while the yen has appreciated by almost 8 per cent against the US dollar,' Mr Quane said.

'Many Western currencies, including sterling, the euro and the Swiss franc, have weakened. As a result, people coming from these economies into Asia will notice a considerable difference in costs compared with 12 months ago.'

Globally, Singapore jumped to the 72nd most expensive city worldwide from 114th year-on-year.

However, not all Asian cities remained expensive for expats. Due to the weakened won, Seoul has fallen to the 17th most expensive city in Asia, from its top position as the most expensive Asian city two years ago.

Similarly, the depreciating currencies of Malaysia, Thailand, Indonesia and Taiwan have lowered expatriate living costs in those countries.

Among the top 10 cheapest places for expats are Indian cities, as the weakened rupee coupled with lower inflation has made the cost of living for those locations fall.

The biannual survey by ECA compares a basket of 125 consumer goods and services commonly purchased by international assignees in over 370 locations worldwide.

To live a creative life, we must lose our fear of being wrong

I think this quote is a great reminder for us all: from birth to adulthood we are conditioned to think and behave in certain ways...the argument goes that it's "easier" being in the middle of the bell curve. But that's just it, we reduce the chance of something extraordinary happening. 

For that long-tail event, we do need to experiment a bit more, and lose our fear... I see it in my baby girl: she has no fear to try: she's my mentor.

Count us in, maths experts tell UK regulator

Count us in, maths experts tell UK regulator

By Clive Cookson, Science Editor

Published: June 10 2009 02:42 | Last updated: June 10 2009 02:42

Mathematicians have urged the financial regulator not to leave them out of the equation when it calculates how to rebuild confidence in the banking system.

“Quants” and other financial geeks might have fallen from favour but maths has an essential role to play in the City, they say.

Sir David Wallace, who chairs the Council for the Mathematical Sciences, has written to Lord Turner, chairman of the Financial Services Authority, asking for a meeting so that he can explain why maths is part of the solution to the banking crisis – and not part of the problem.

Leading financial mathematicians have signed Sir David’s letter, upset by Lord Turner’s review in March, which appeared to blame “misplaced reliance on sophisticated maths” for the crisis.

Lord Turner told the Financial Times on Tuesday that he wished he had used the phrase “misplaced reliance on apparently sophisticated maths” instead. He said the possible interpretation mentioned in Sir David’s letter – that he thought “mathematics per se has a negative effect on the City” – was wrong.

Lord Turner said he looked forward to meeting the mathematicians and hearing how their research could help the FSA’s work.

The problem, he said, was that banks’ mathematical models assumed a “normal” or “Gaussian” distribution of events, represented by the bell curve, which dangerously underestimated the risk of something going seriously wrong.

“The really interesting issue is how much is fixable by using better maths, and how much is inherently uncertain and beyond the scope of mathematical modelling,” Lord Turner said. “I will be keen to engage with the mathematicians on this issue.”

The letter says: “Mathematics is surely the only medium capable of describing quantitatively the complex nature of the products that traders, risk managers, etc are handling, and the economic environment which they are operating in and influencing.”

The letter was signed by 15 university professors specialising in financial maths, including David Hand of Imperial College, Andrew Cairns of Heriot-Watt University and Xunyu Zhou of Oxford. It was endorsed by Britain’s main mathematical bodies, including the Royal Statistical Society and the Institute of Mathematics.

The mathematicians also see a role for themselves “in engaging the public in how mathematics is used in the financial services industry. This will support the objectives of the FSA in creating more informed investors, and will strengthen market discipline”, they wrote.

http://www.ft.com/cms/s/0/f29248c6-554a-11de-b5d4-00144feabdc0.html

Should he stay or should he go?

FDIC looks to defuse Citigroup tension

By Joanna Chung in New York

Published: June 10 2009 01:36 | Last updated: June 10 2009 01:36

Sheila Bair, the chairman of the Federal Deposit Insurance Corporation, on Tuesday addressed Citigroup’s board in an effort to defuse tensions sparked by the regulator’s push to replace Vikram Pandit as chief executive.

People close to the situation said Ms Bair called for an end to squabbling between the two sides, reminding the bank that the FDIC is carrying out its normal regulatory duties. Ms Bair did not address Mr Pandit’s position, in spite of her widely reported desire to see him replaced by someone with greater commercial banking experience. Citi and the FDIC declined to comment.

People with knowledge of the meeting said Richard Parsons, Citi’s chairman, also struck a conciliatory tone.

http://www.ft.com/cms/s/0/095b0e52-5556-11de-b5d4-00144feabdc0.html

It is in Beijing’s interests to lend Geithner a hand

http://www.ft.com/cms/s/0/ae533fa6-551f-11de-b5d4-00144feabdc0.html

Creditor countries are worrying about the safety of their money. That is what links two of the big economic stories of last week: Chancellor Angela Merkel’s attack on the monetary policies pursued by central banks, including her own, the European Central Bank; and the pressure on Tim Geithner, US Treasury secretary, to persuade his hosts in Beijing that their claims on his government are safe. But are they? The answer is: only if the creditor countries facilitate adjustment in the global balance of payments. Debtor countries will either export their way out of this crisis or be driven towards some sort of default. Creditors have to choose which.

Germany and China have much in common: they have the world’s two biggest current account surpluses, at $235bn and $440bn, respectively, in 2008; and both are also powerhouses of manufactured exports. They have, as a result, suffered from the collapse in demand of overindebted purchasers of their exports. So both feel badly done by. Why, they ask themselves, should their virtuous people suffer because their customers have let themselves go so broke?

Germany and China are also very different: Germany is a highly competitive global producer of manufactures. But it is also a regional power that has shared its money with its neighbours since 1999. Its problem is that its surpluses were offset by its neighbours’ largely private excess spending. Now that the borrowers are bankrupt, their countries’ domestic demand is collapsing. This is leading to a huge expansion in fiscal deficits and pressure for easier monetary policies from the ECB. So Ms Merkel is driven towards undermining the independence of Germany’s central bank, in order to protect the still more vital goal of monetary stability.

Germany may be Europe’s pivotal economy. But China is a nascent superpower. Without intending to do so, it has already shaken the world economy. Incorporating this dynamic colossus into the world economy involves huge adjustments. This is already evident in any discussion of a sustained exit from the crisis.

A recent paper from Goldman Sachs – unfortunately, not publicly available – sheds fascinating light on the impact of China’s rise on the world economy.* In particular, it broadens the analysis of the role of the “global imbalances”, on which I (and many others) have written.

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