Cum/ex

@
”Unsurprisingly the huge financial boom has been accompanied by miserable productivity growth, repeated business collapses and massive growth in inequality”.

Mainly in the two countries -(UK and US) which went ”all in” for ”Finance”.
Countries which still prefer the production of stuff – compared to the production of money – are doing a lot better.
(to say it all very simplistically)

But on some other -(and very ironic) hand – didn’t the financial boom and industry create such amazing and wonderful ”Molochs” like London and NYC?
I mean – sarcastically – if we pull the plugs on the Gamblers and the Casinos these cities are going down, down, down – and I post that from Karlsbad – where once not only the Financial Elite of this world used to relax the intestinal muscles in order to support regular bowel movements – and thusly improved the quality of life among lot and lots of constipation.

Or in other words:
Just look at the amazing Hotel Poop – I mean Pupp -(and the attached Casino) – to make you understand that rich gamblers are very necessary to further ”rich culture” and a pleasant environment – and what better way to tax -(and not regulate) – them – by
having them finance fancy Indian Restaurants and a Hotel like the Poop?

And only perhaps – joking?

But John, I have it on good authority from one “Dan Cooper” that any attempt at regulating the financial sector would result in the immediate deaths of up to half of humanity!

I’m no economist, but I had a similar reaction to the Guardian article. 60 Billion Euros? And according to Google the American press barely mentioned it in the past several years beyond a few Bloomberg paragraphs? WTF?

If you or I claimed reimbursement for taxes that were never paid in the first place we’d be in jail. (The WAPO may not have reported the Cum-Ex scandal, but they did have an article about an American couple who spent most of the $100,000 deposited erroneously into their bank account: they’re being charged with theft and receiving stolen property.)

This story may not even be on the radar of U.S. business news, but it’s all over Germany’s. This Deutsche Welle article has one interesting comment:

Frederik Richter from the German research network Correctiv told DW that the German Finance Ministry got wind of dubious cum-ex deals as early as 2002, but didn’t act right away.
“There are people who said that following the global financial crisis, cum-ex deals were the only lucrative business left for the ailing banks,” Richter said. “That may have prompted the regulators to turn a blind eye to those kind of transactions so as not to harm the banking sector.”

(This is also a pretty good overview.)

What is the basis for the statement that these activities are sufficient to account for the growth of the financial sector? That is a strong claim. I find it plausible, but would like to be able to cite evidence when I repeat it.

“What matters is that crooked deals of this scale suffice for a complete explanation of the growth of the global financial sector since the 1970s. The point of the financial sector is not to allocate capital more efficiently, but to undermine the regulatory and tax systems that are supposed to make the economy work properly. Unsurprisingly the huge financial boom has been accompanied by miserable productivity growth, repeated business collapses and massive growth in inequality.”

Putting aside the moral/legal aspect of tax evasion, this money isn’t just disappearing, it is being diverted from state toward (rich) individuals. From what I can see, this period of massive tax evasion (sic) coincides with a period of unprecedented global growth with significant uplift in most indices of well being across the world. The GFC was caused by western governments inflating a housing boom to generate growth when their underlying economies were stalling, and the period after the GFC when governments have constrained banking and fined banks billions of billions has ‘coincided’ with a period of flatlining productivity and growth. An observer might conclude that free markets and competition create economic growth and monolithic state regulation destroys it.

Dipper @ 8

It is interesting that you assume that “free markets” inherently lead to “competition” and “economic growth”.

In fact, what we seem to see is that without regulations companies become giant monolithic enterprises, engage in price fixing, etc., because having a monopoly is inherently more profitable for a company. Very often the driving force behind any competition at all is having regulations to prevent them from doing that.

So, in fact, an observer who actually pays even the slightest attention to the world around them would not conclude “that free markets and competition create economic growth and monolithic state regulation destroys it.”

I’m having some trouble making sense of this from the Wikipedia article.

If it was made illegal in 2012, does that mean it was legal (and not legally fraud) until 2012? Is this “tax fraud” like most claims for asylum are “immigration fraud”, or is it “tax fraud” in the “clearly illegal” sense?

Because tax law is odd–it often has unexpected consequences that don’t make logical sense, but that’s how it works. (For example, in the American case, the parent who counts a child as a dependent for tax purposes doesn’t necessarily have custody for other purposes.) And because a delay is as good as a win (another parallel with immigration law) most countries have standards intended to reduce delay, even at the cost of somewhat limited legal protections and somewhat arbitrary outcomes.

(Note that I agree that finance is over-focused on exploiting loopholes and if it focused only on useful activities would be much smaller.)

but, but, but Dipper voted Brexit in order to punish the Finance Industry in London – and to destroy it – in order that he soon will be able to afford a flat in Mayfair?

In any area of human activity, when results matter people will cheat. This isn’t unique to finance. Evidence of cheating is not evidence that the entire system is built round cheating. I wouldn’t, for instance, maintain that Australian success in cricket is because Australian cricket is systemically riddled with cheats despite the fact that several prominent cricketers have been caught cheating. I suspect it is more a result of Australia having a strong tradition and culture of sporting excellence.

Similarly, just because there were crooks in banking and there was a Global Financial Crisis it doesn’t follow that the Global Financial Crisis was due to crooks. The best book I’ve found on this is All The Devils Are Here. It lays bare the relentless boom in the housing market which politicians used as a means of stimulating economic growth in the absence of underlying performance, a boom which carried on until there was no-one left to lend to at which point it came crashing down. This is a clear explanation, it has the evidence in that it has the size of activity to create the observed bust. People complaining about bankers bonuses and bankers cheating seem to have lost a few zeros in their trail of blame as whatever you think of the money they took it wasn’t sufficient to bring the worlds major economy crashing down and it is dwarfed by the size of the housing bubble. As a causative explanation, it is not sufficient to show there were greedy and crooked bankers, you have to show there was an increase in the scale of greed and crime sufficient to cause the crash and there is no evidence that there was an increase of the size required to create the boom.

People get highly paid in all sorts of competitive industries- sport, films, music. That doesn’t mean all these people are corrupt. I don’t hear too much complaining about greedy footballers, greedy musicians, greedy film stars.

Bank failings can happen to the best of people. Take The City of Glasgow Bank. An institution run by devout presbyterians with not a derivative in sight. It still went bust for the reason most failed banks fail; making loans to people who don’t pay them back.

Like Tim Worstall, I don’t find the explanations of how this worked clear at all. The wikipedia article says:

The participants in the network would lend each other shares in large companies, so that to tax authorities there would appear to be two owners of the shares, when there was only one. The bank that was used in stock trading would then issue a “confirmation” to the investor that tax on the dividend payment had been paid, without it being done.

That may be helpful to John Quiggin, but it’s not at all helpful to me. It just sounds like fraudulent reporting by the bank. Who needs a lot of stock transactions to do that? Don’t the tax collectors bother to check the totals actually paid against those “confirmed?”

What exactly is the relevance of the ex-dividend date?

Wikipedia links to a description of “dividend-stripping,” which can be used to convert dividends to capital gains. Is that what the scheme is all about?

Tim Worstall,

Yes, I understand the dividend-stripping game. What I don’t understand is the set of transactions that created the fraudulent refunds, or how the ex-dividend date plays a role.

Further, I agree with you that, at least as described, it seems incredible that this was not caught immediately.

@19 Dipper
”The growth in international finance is often portrayed by the left as a spree of looting by a small but powerful section of society, but the data tells a very different story”

My God?

I made a mistake Dipper didn’t vot for Brexit in order to punish the Finance Industry in London – and to destroy it – in order that he soon will be able to afford a flat in Mayfair.

He must have voted for Brexit in order to support his countries Financial Industry?

But how will that work – with so many of them already moving to Frankfurt and Paris?

And I thin we need to solve this whole contradiction with this ”Financial Industry” as everybody is so happy in Frankfurt – that all of these London Bankers are coming – and everybody in Frankfurt is hoping that ”all of these great international Financiers” will turn Frankfurt into a London mini-ME!

“What I don’t understand is the set of transactions that created the fraudulent refunds, or how the ex-dividend date plays a role.”

As I understand it – and this is incomplete as I’ve not really understood the journalists’ explanations, possibly on the grounds that they don’t quite understand the process themselves – during the settlement period the tax authorities are registering the two parties, seller and buyer, both as beneficial owners of the shares.

So, at T-1 there’s the seller as such beneficial owner, at T + 5 (in a T+4 settlement system) there’s the buyer registered. But in T to T+4 both are so registered. Sounds very weird to me, very weird indeed, but that’s the only way I can see the allegation working. I am working backwards I admit, from what must be happening for the allegation itself to make sense.

If the ex-div date is in the T to T +4 period then the tax authorities have two people listed as having received said dividend. The markets, or the company perhaps, do better than this, in that they only pay the dividend the once.

But if the tax authorities have two registered owners over that ex-div date then they’ve got two people who are eligible (assuming, in the German system at least, that they are corporations who shouldn’t be paying dividend tax at source) for a refund of the dividend tax paid at source. Both claim said tax refund.

It might be that this only works on short sales of borrowed stock. Possibly even only on naked shorts but that seems unlikely as I’m not sure stock markets allow that these days.

But if there’s that dual “ownership” during the settlement period then schemes can be constructed to gain the dual tax refund over that ex-div date. One rough description from the original reporting seems to be fund lends stock to short seller, who sells to third party. Ex-div third party delivers back to first. At the end of the tripartite process all three share any change in capital value of the stock plus the extra tax refund on the dividend.

Three parties involved because to use just the two would be straight dividend washing. Or perhaps wouldn’t create that dual ownership during the settlement period.

What does seem must be true is that in order to work the tax authority’s allocation of ownership must be different from the company registrar’s. For that’s the only way a dividend paid once could possibly lead to two tax refunds on a dividend.

If this is what was happening then I am astonished that the hole exists in the ownership registration at the tax authorities. But if so, well, it’s so.

My initial prejudice was to assume that the journos had simply misunderstood simple dividend washing but that seems to be what is referred to as the “cum/cum” idea, rather than the “cum/ex”.

I, for one, would greatly welcome an explanation from someone who really understands this. D2 would be great if he still frequents here.