Trading Tax Stiffs the Little Guy

By Eric Jackson, Senior Contributor

11/27/09 - 11:15 AM EST

Jim Cramer came out earlier this week with the view that he could live with a trading tax that imposed a 0.25% surcharge on any trade made in America. The main reason he cited for being willing to go along with the tax was that he thought it would help the government create jobs.

He said,

"If we do not create jobs in this country we will fall horribly behind all others in the world. I think we will be doomed to permanently low growth, if no growth at all. I believe that it is incumbent upon everyone to sacrifice at this time."

Cramer also said that if sacrifice is needed, people trading stocks can afford to pay such a tax.

While I support Cramer's interest in seeing job creation flourish in America, I completely disagree that the "trader tax" will accomplish this aim. To the contrary, I think allowing such a tax to take root here would accomplish just the opposite. In my view, such a tax would encourage large amounts of capital to relocate outside of America, jobs would be lost (not gained) and total government tax revenue would likely go down.

For a preview of what could happen in the U.S. if this trader tax was imposed, look at Britain. At the moment, the U.K. is in even worse fiscal shape than the United States. Because of that, its Labour government recently introduced additional taxes that specifically target hedge funds' trading profits. Government bureaucrats assumed this was an easy way of generating tax revenue. What they failed to appreciate is that capital has never been more fungible than in today's global market.

London-based hedge funds immediately announced they were relocating to Switzerland in droves, where they would face none of the new taxes levied in the U.K. With those funds go certain administrative and back-office jobs. But more important, ask London bankers how they feel about losing the many profitable revenue streams attributable to doing business with hedge funds that will now be sent to Swiss banks.

The U.K. banks also will likely lose jobs tied to serving those hedge funds. And the U.K. government, in one fell swoop, just lost a host of capital gains, personal income and payroll taxes. Congratulations. An article in a London hedge fund industry newsletter from earlier this week had the headline: "Will the last hedge fund manager leaving to leave London please turn out the lights?"

Should the U.S. impose a trader tax, we'll see a similar exodus of U.S.-based investment firms and hedge funds to locales that don't require such a tax. And, believe me, many jurisdictions will be competing for the tax revenue those firms bring with them.

But this trader tax also will weigh heavily on smaller traders, as well as the big hedge funds. It's not fair that this tax will stick it to the little guy while the big banks got to run themselves like badly managed hedge funds, taking in mom-and-pop deposits and then leveraging up those assets 32-to-1 so they could trade and then lose billions of dollars on bad bets. If these big banks had actually been hedge funds, or smaller traders trading their personal accounts, they'd be gone right now. They wouldn't have been shown any sympathy. They'd be toast. Instead, they get bailed out, made whole, lent money at zero interest indefinitely, and now they get to report record profits for the year. Their taxes aren't raised, but small-time traders have to pay for their mistakes? Come on. The fairness of that escapes me.

Can you imagine if someone like Rupert Murdoch, chairman of News Corp.(NWS Quote), had been running the Federal Reserve or acting as Treasury secretary when the financial meltdown occurred last year? When the banks came running for a bailout, Murdoch (or any business executive) overseeing the taxpayers' money would have said, "Sure, we can arrange for a loan, but I want equity and warrants, I want control over management, and before you guys pay any bonuses to yourselves for the next 10 years, you're going to pay out a special dividend to me first. If you don't like my offer, try to find another U.S. federal government to help you."

I saw a story the other day that FDIC chief Sheila Bair was urging banks to start lending to create jobs. Urging. I thought of Murdoch again. Do you think if he had control of any bank he would "urge" management to take certain actions? No, he'd tell them what he wanted. And at the moment, he'd be telling the banks to lend money instead of stockpiling cash.

Finally, as much as I want to see job creation (as Cramer does), I don't see how paying any more taxes to the government is going to directly lead to creating more jobs. Look at the track record so far. After Congress approved $800 billion in stimulus last year, only 24% of that amount has been spent to date. We have no new jobs -- just slowing job losses. The administration keeps telling us about jobs saved. I can't recall ever hearing that statistic quoted before this year. Wouldn't it be quicker and more immediate if the Fed told the banks -- which they control -- to start lending out money to small businesses again, instead of stockpiling cash and cutting their credit lines?

There is a problem looming on the horizon for the U.S. and all Western countries. Debt as a percentage of gross domestic product is on the rise, big time. The current spending trends, combined with expected lower tax revenue, cannot continue indefinitely. The time to pay the piper will come. As a society, we are going to need to sacrifice in the years ahead. This sacrifice will come through lower benefits due to lower government spending on programs, or it will come from higher taxes.

Personally, I'd rather see less government spending, which would allow taxes to stay lower to spur business investment. This will require politically unpopular decisions, however, and it's not clear that short-term-thinking politicians will have the stomach for that.

If higher taxes are needed, we should all pay up -- not just traders. But the banks who got us in this mess -- and who are still on the government dole while paying themselves record bonuses -- should pay more.

At the time of publication, Jackson had no positions in any stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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Benmosche Bests Pandit

08/26/09 - 09:07 AM EDT

C , AIG , MET , WFC

By Eric Jackson

NEW YORK (TheStreet) -- The federal government is running some of America's largest and formerly most influential companies, including Citigroup, AIG(AIG Quote), Bank of America(BAC Quote) and GM.

The track record of government managing -- let alone turning companies around -- businesses is poor. Still, it's calling the tune at the moment, sitting in on internal meetings, pushing out CEOs (like GM's Rick Wagoner), CFOs (like Citigroup's Ned Kelly) and directors (see the reconstitution of the Bank of America board since its April shareholders meeting), and determining whether prearranged pay packages should still be treated as valid contracts.

Yet, the government, with all the best intentions, will never turn around these companies. It's the companies themselves and their employees who must turn things around. AIG and its new CEO Robert Benmosche get that, while Citigroup and its CEO Vikram Pandit don't. Both companies are extreme corporate basket-cases now controlled by the government on behalf of taxpayers. Yet, the styles of Benmosche and Pandit couldn't be more different.

Pandit's been the quintessential invisible CEO: quiet, passive, and immediately forgettable when he does speak. Benmosche is on the other end of the spectrum: straight-talking, aggressive, asking challenging questions, and lots of slaps on the back. Benmosche doesn't suffer fools gladly; Pandit appears to suffer fools for years without saying boo.

As horrible as AIG has been as an investment since last fall, Citigroup has been worse. AIG's stock price is 15% higher than Citigroup's since the government took over the company. When the market learned of Benmosche's hiring and digested some of his positive comments on the company, it responded positively, sending up AIG's stock by 35% last week (and still higher this week).

Although I've yet to meet with a Pandit apologist (maybe the only ones are Citigroup's directors who hired him), if I did, they'd likely say he is just one man and certainly didn't cause Citigroup to be the unmitigated disaster it is today. They'd also say one person -- even the CEO -- isn't responsible for a company's stock price.

Certainly there are many people who also deserve blame for Citigroup's current state of affairs: John Reed, Sandy Weill, the entire board, including Dick Parsons and Bob Rubin and Chuck Prince. Yet, Pandit's been in the corner office for almost two years during the crisis. Citigroup's stock price fell in lockstep with Bank of America's from the fall through the March lows. Yet, since then, Bank of America is up 90% more than Citigroup. Yes, assets and past underperforming loans matter, but so does leadership. Pandit's been a dud as CEO, and that affects investors' interest in the company.

Recall that back in early October last year Citigroup was trading at $23.50 after the Federal Deposit Insurance Corp. backed it to buy Wachovia over a competing offer from Wells Fargo(WFC Quote). Five months later, Citigroup's shares touched 97 cents. It's been a breathtaking evisceration of the former king of the American financial world. Pandit has done little to inspire investor confidence.

Pandit's response to being owned by the government since taking TARP money has been to shrink back even further from public scrutiny and contact with staff. The introverted, bookish professor has become even more bookish.

When he has spoken up, it's irked regulators and peers alike. Jamie Dimon of JPMorgan Chase(JPM Quote) called Pandit a "jerk" under his breath on a conference call with Treasury last fall. Lloyd Blankfein has joked that Citigroup was crazy. One business journalist summed it up to me this way: "I've never seen a Wall Street CEO who gets punked that often."

Where is the leadership going to come from? Sheila Bair is not going to turn this company around. Neither is Tim Geithner or Ben Bernanke. Did Citigroup also sign an addendum to receiving its TARP funding that it had to manage its affairs as if no one were really in charge?

Contrast Pandit's style with Benmosche's, the former head of MetLife(MET Quote) and new head of AIG. If any company is a ward of the state more than Citigroup, it's AIG -- it's actually a $182.5 billion ward.

Yet, here was Benmosche coming out swinging last week. He said in an internal town hall meeting that he sees the government as only one of several critical stakeholders -- the others being clients in the U.S., Asia, and Europe; employees, and then "the people we owe money to" (otherwise known as the government).

Benmosche said undoubtedly AIG would have to sell some of its businesses to pay back the government but ruled out an imminent sale for its investment advisory business and said other asset sales could wait until the company received full value. "I don't liquidate things; I build things," he said. "If the government wanted this money back quick, they shouldn't have come in in the first place."

Benmosche even had the nerve to suggest his management team should have the flexibility to pay its employees more if they've just "shot the lights out" in a given year.

Financial blogger Barry Ritholtz called him "totally absurd" to think he's going to pay back the government "in our lifetime." Maybe. But, if you worked for AIG (or were a stockholder), you cheered last week. It's clear who's in charge at this company. It's not the regulators but actually the AIG and its employees. This is quite a contrast in styles from his caretaker predecessor, Ed Liddy, and of course Pandit.

Benmosche finished an employee town hall meeting recently, warning: "My fear is that you'll say, 'I don't know if Treasury wants it, I don't know if the Fed wants it, I don't know if the lawyers want it, I don't know whatever.' If you sit there every day not making the right decisions to take us to the next level, we'll miss an opportunity."

And, he's exactly right. I'm for leaders who see the facts clearly and don't lead their organizations off a cliff. Both Citigroup and AIG went over the cliff a long time ago. They're down in the valley -- but they're still going concerns and they still need leaders. They're not going to be shut down and shouldn't be led by CEOs who would be suited for winding down companies -- like Pandit.

Ask yourself, if you were working in the bowels of one of these companies, who would your dig deeper for: Benmosche or Pandit? That hidden effort will start to show itself in the operating results and stock price in the coming quarters.

The government would be wise to get out of the way of these companies as quick as it can -- assuming there are competent management and directors. The government and taxpayers deserve the best long-term return on their investment, but they aren't suited to micromanage the businesses. They should get the right managers, get the right risk management and get out of the way.

The CEOs of Citigroup and AIG should push back on government requests when they are unreasonable or at odds with the long-term interests of the business. Benmosche appears well-suited to do that; Pandit doesn't.

We got into the current mess by too many people at AIG, Citigroup, and other firms playing fast and loose with other people's money with poor or no risk management. To fix that, we've needed government intervention.

We've got to get back to a true free market system. To heal these firms and our economy, leaders and employees at AIG and Citigroup need to treat assets they oversee as if it's their own money and -- with proper risk oversight -- start making free choices again on how to grow those assets.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson had no positions in stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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