Leave Facebook's Eduardo Saverin alone
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Bill Bonner Guest blogger
The Maryland House of Delegates just voted to raise taxes. Should we move to Florida鈥r Delaware?
If we move to Palm Beach, will we ever be able to visit our beloved Maryland homeland again?
The Financial Times reports that thousands of wealthy French people are now moving to London. Their motive? They want to escape the taxes proposed by France鈥檚 new president, Francois Hollande.
Should the French impose an exit tax on these 鈥渆x-patriots鈥�? Should it then bar them from visiting France?
Of course not.
In England in 1215, the right to travel was enshrined in Article 42 of the :
It shall be lawful to any person, for the future, to go out of our kingdom, and to return, safely and securely, by land or by water, saving his allegiance to us, unless it be in time of war, for some short space, for the common good of the kingdom: excepting prisoners and outlaws, according to the laws of the land, and of the people of the nation at war against us, and Merchants who shall be treated as it is said above.
Here鈥檚 the United Nations Universal Declaration of Human Rights. Article 13:
(1) Everyone has the right to freedom of movement and residence within the borders of each State.
聽(2) Everyone has the right to leave any country, including his own, and to return to his country.
Article 12 of the International Covenant on Civil and Political Rights incorporates this right into treaty law:
(1) Everyone lawfully within the territory of a State shall, within that territory, have the right to liberty of movement and freedom to choose his residence.
聽(2) Everyone shall be free to leave any country, including his own.
聽(3) The above-mentioned rights shall not be subject to any restrictions except those provided by law, are necessary to protect national security, public order (ordre public), public health or morals or the rights and freedoms of others, and are consistent with the other rights recognized in the present Covenant.
People should be able to move where they want, no? They should be able to look for lower tax places to live, shouldn鈥檛 they? After all, we鈥檙e Americans, aren鈥檛 we? Aren鈥檛 we all descendants of people who tried to improve their lives by moving to a new place?
Apparently, a lot of Americans don鈥檛 think so. Facebook is going public. And one of Facebook鈥檚 founders has moved to Singapore. He will save, by one estimate, $67 million in taxes by giving up his US citizenship. He says that鈥檚 not the reason he gave it up. But you can believe what you want.
And now the politicos are up in arms. Mr. Saverin has helped to give them an asset worth about $100 billion. Are they grateful? Do they bend down and kiss his derriere?
No! They want to tax him even more heavily鈥nd prevent him from ever setting foot in the US again.
Yes, dear reader, there is no thought so dumb鈥o short-sighted鈥o low鈥hat it won鈥檛 become the law of the land. Bloomberg reports:
Chuck Schumer, D-N.Y., has a status update for Facebook co-founder Eduardo Saverin: Stop attempting to dodge your taxes by renouncing your US citizenship or never come to back to the US again.
In September 2011, Saverin relinquished his US citizenship before the company announced its planned initial public offering of stock, which will debut this week. The move was likely a financial one, as he owns an estimated 4 percent of Facebook and stands to make $4 billion when the company goes public. Saverin would reap the benefit of tax savings by becoming a permanent resident of Singapore, which levies no capital gains taxes.
At a news conference this morning, Sens. Schumer and Bob Casey, D-Pa., will unveil the 鈥淓x-PATRIOT鈥� 鈥� 鈥淓xpatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy鈥� 鈥� Act to respond directly to Saverin鈥檚 move, which they dub a 鈥渟cheme鈥� that would 鈥渉elp him duck up to $67 million in taxes.鈥�
The senators will call Saverin鈥檚 move an 鈥渙utrage鈥� and will outline their plan to re-impose taxes on expatriates like Saverin even after they flee the United States and take up residence in a foreign country. Their proposal would also impose a mandatory 30 percent tax on the capital gains of anybody who renounces their US citizenship.
The plan would bar individuals like Saverin from ever reentering the United States again.
If Chuck Schumer has his way, entrepreneurs like Eduardo Saverin will think twice before setting up shop in America!
[Editor鈥檚 Note: After yesterday鈥檚 column, Run, Saverin! Run!r, we were delighted to discover that a brave Fellow Reckoner had actually linked to The Daily Reckoning...on Chuck Schumer鈥檚 Facebook page. Ha! Feel free to 鈥渓ike鈥� our bitty missive and to 鈥渟hare鈥� it on Facebook. Call it non-violent protest. And of course, you can always 鈥渂e our friend鈥�.]
Down, down, down鈥ay after day鈥� Stocks down. Yields down.
But what鈥檚 this? Gold rose nearly $40 Friday
Our 鈥淎lert Flag鈥� went up yesterday morning. The Dow fell 156 points during the day. Not that there鈥檚 any connection. Most likely, after so many down days, stocks will bounce. But watch out鈥�
We have a hunch.
Facebook is the biggest deal in the stock market鈥erhaps ever. It鈥檚 a company that didn鈥檛 even exist 10 years ago. We know all about the company鈥檚 founding; we saw the movie. Twice. Because our daughter has a role in the movie. She鈥檚 the waitress in the scene where Zuckerberg means Sean Parker.
Not a bad flick. But from an investment standpoint, Facebook is probably one of the worst moves you can make. Most likely, it will be gone 10 years from now. $100 billion of market capitalization will disappear. Poof! It鈥檚 just a website, after all. We looked at a Facebook page, once鈥� We couldn鈥檛 figure out why anyone would waste his time.
The trouble with new technology is that in a few years it鈥檚 old technology.
Here鈥檚 our hunch: The Facebook IPO may mark a major peak鈥nd the beginning of a major bear market on Wall Street.
It happens every time. There鈥檚 a big, big deal. And then, it鈥檚 over. We鈥檇 give you some examples, if we could think of them. But we can鈥檛. You鈥檒l just have to trust us on this.
We don鈥檛 really have any evidence or logic to back this up. It鈥檚 just a hunch.
But our intuition tells us that when investors finally get the full Facebook treatment, they are going to be turned off by the stock market and Wall Street. Not only will the company turn out to be not worth a fraction of the IPO price鈥nvestors will also get a clearer picture of how Wall Street really works.
About that IPO鈥� The idea is to generate a lot of excitement鈥 frenzy鈥o that people are eager to get the shares. And with all these Facebook users, who like鈥ike鈥acebook鈥nd think they can tell a good investment when they see one鈥t ought to be easy to create a buying frenzy. Besides, everyone knows shares are intentionally priced below what their backers believe they can get for them. This causes the share-price to 鈥減op鈥� right after the IPO.
Of course, the distribution is tightly controlled. You have to be an insider to get IPO shares. Say鈥ou鈥檒l get them at about $40鈥nd then, you expect them to go to $50 on the 鈥減op.鈥� If it works out as planned, you make $10 per share. This is a lot of money. Easy money. So, the insiders all want a piece of the action.
How do you get to be an 鈥渋nsider鈥�? You have to be a friend of Morgan Stanley. Which is to say, you help Morgan Stanley make money. How? For example, if you are a pension fund or hedge fund you put through a lot of trades. Morgan Stanley makes money on the churn. You make money on the churn, too. Customers don鈥檛 make any money on the churn. They pay for every transaction. But who cares about them?
Everyone is convinced that buying鈥elling鈥nd trading investments makes money. As long as the illusion lasts, Wall Street is happy. The customers are happy too鈥ore or less. They鈥檙e participating in the Great Illusion 鈥� all trying to make money without actually doing anything.
So everyone churns. And the more you churn with Morgan Stanley the more likely you are to get an allocation of IPO stock. There could be about 50 million shares handed to insiders in this manner. Let鈥檚 say they go up $10 in the 鈥減op.鈥� That鈥檚 half a billion in gains 鈥n only a few hours.
Dan Ariely explains:
Morgan Stanley and the rest of the investment banks involved will 鈥� make sure that their favorite fund manager client 鈥渇riends鈥� are given lots of free money. Assuming that these 鈥渇riends鈥� are given 75% of the total number of IPO shares, or a total of 291 million shares, and assuming that the stock does rise from $40 to $50, then these fund managers will collectively, in one day, make $2.9 billion dollars in realized or unrealized profits. That鈥檚 right, 2.9 BILLION DOLLARS.
鈥here and out of whose pocket does this money come from?
Well, just think of it this way鈥� Let鈥檚 assume you own a very expensive piece of waterfront real estate, and you hire a broker to sell it for you. After exploring the market and after getting indications of interest, your broker advises you that $10 million would be a great price for your home. You meet with the potential buyers and decide to sell it for $10 million. After the $1 million commission you have to pay your broker, your net proceeds are $9 million. An hour later, you drive by the house and see your broker in the driveway shaking hands with some different people. You pull over to see what鈥檚 going on, and you find that the people you just sold the house to for $10 million are very close friends of your broker. To your dismay, you also find out that those friends just sold your (former) house to somebody else for $15 million.
The same exact game is going on here鈥� By the time you drive around the block, these folks will have sold their shares at $50 per share.
I am not sure about you, but I find all of this very depressing.
Regards,
Bill Bonner,
听蹿辞谤 The Daily Reckoning
