May the Cayman Islands be so overloaded with rats it sinks

It's not enough to run a financial institution into the ground, but when a nation tries to limit executive pay, bankers scurry like rats to the Cayman Islands:

A group of 45 bankers at Barclays yesterday bypassed potential curbs on pay and bonuses by jumping ship to set up a Cayman Islands company and manage $12.3 billion of Barclays’ most toxic debt. They will be paid at least $400 million over ten years (see Commentary, facing page).

In an exotic piece of financial engineering, the bank will lend $12.6 billion to Protium, a newly created Cayman Islands-registered hedge fund, to buy the toxic assets.

The bankers, led by Stephen King and Michael Keeley, both British, are setting up C12 Capital Management, a management company that will be paid management fees of $40 million a year for a decade by Protium and could make much more if the impaired assets recover in value.

While staff at large investment banks such as Barclays could be crimped by new curbs on bankers’ pay being considered by the G20 nations, C12, a small asset management boutique based in New York, almost certainly would not.

Below is a video on how corporations already use the Cayman Islands as a tax haven.

It's obvious we need limits on executive pay but without plugging up the ability of corporations and individuals to simply move offshore yet reap all of the benefits of being a U.S. corporation in all other respects, odds are we would get the thing happening in Great Britain and France.

Another issue made obvious by the Barclays story is limits on executive compensation must be done in concert with other nations.

Guess who doesn't believe in limits on executive pay? President Barack Obama:

US President Barack Obama does not believe G20 states should slap limits on executive pay, an official said Wednesday, as Europe readied a call for "sanctions" against banks that shell out billions on bonuses.

A week before Obama hosts the next G20 summit of top economic powers and developing nations in Pittsburgh, a senior administration official said the talks would likely produce a compromise "set of principles" on the issue.

The summit will take place a week after Obama lashed out at executives of finance firms during a speech on Wall Street, warning them not to further squander public trust by awarding themselves huge 2009 bonus payments.

But despite his tough stance, Obama still does not favor a hard cap on bonuses, Mike Froman, deputy national security advisor for international economic affairs, told reporters.

"The president feels very strongly about executive compensation and shares the concerns about executive compensation practices.

"We've done a lot here... and my sense is that the G20 is likely to discuss (it) given the interest of its members in it and come up with an agreement on a set of principles around that going forward," Froman said.

So, with leadership like this, does anyone expect anything to really happen?

My suggestion is in the title of this post, run all of them to the Caymans, let them pay no taxes and extract even more bonuses, fees for running banks and funds into the ground along with national economies. Then, close the global financial gates, seal off the waterways and declare the Cayman Islands a terrorist state. Isn't this absurd extortion, to the point these financial institutions brought down the entire global economy a national threat at least?



Regulatory arbitrage

We have a new phrase, plus a new dimension to the move by some Barclay's executives to move toxic assets plus re-incorporate plus pay themselves gobs of money by overting U.K. regulation and moving to the Cayman Islands.

James Kwak is titling this regulatory Arbitrage 2.0, which is a fantastic titling for this "let's re-incorporate in another nation" to avoid everything from taxes to corporate governance laws to now this...and esp. to take write downs on toxic assets from the books or have them categorized so we must acknowledge them and abide by traditional capital leveraging rules.

well, that is what is it, regulatory arbitrage.

Now I kind of screwed up and didn't catch this overview paper on the practice of "repacking" toxic investments to avoid regulation as well as "Island hopping" to avoid regulations but more to the point does one stop this entire playing of nation-states against each other to avoid playing by the rules?

It's a great read, great titling on how investments were "repackaged" to go into the "shadow banking system" to avoid regulatory oversight (dumped into structured investment vehicles, or SIVs).

Check it out, regulatory arbitrage which we can add to our terminology of labor arbitrage, wage arbitrage.