A Taxing Grinch

The fun never stops in these markets. Rather than a slow-down as we enter the Christmas period and face the New Year, economic developments mingled with socio-political announcements are flying at us from every corner, wreaking equal amounts of havoc and anxiety to ensure the last couple of weeks of the year prove as eventful as the preceding fifty. From more hawkish outlooks in the US – Bernanke himself sounding incredibly cautious, incredibly suddenly - to Greek downgrades sparking a “who’s next in the firing line” scenario, Dubai floundering as it seemingly attempts to baffle investors to such a degree that they no longer even know what the difference between a “dessert” and “desert” is - ultimately providing no alternative but to re-structure or risk their sanity - and a revenge-seeking population in the UK stirring the cauldron enough to implement a super-tax-shotgun-sized hole in their foot. Did we mention that the US public now place Wall Street firms even lower in their esteem than not only Congress (always unpopular) but even lawyers and insurance sales men? Come on! Lower than insurance sales men? Have mercy.

Christmas time..it’s about the giving
Not so much ho-ho-ho as woaahhh-ho-ho-where-are-you-taking-my-bonus? That’s right, piling under populist public pressure, those investment bankers and “I’ve-been-a-good-boy-this-year” financial executives have seen Santa fly right by their chimneys as the Grinch (UK Treasury) steals away 50% of their (further 40% taxed) bonuses in the back of his sleigh. Just as some festive joy was beginning to fill the hearts of dazed and frazzled traders across the City of London, ecstatic just to see 2009’s finishing line within touching distance, the pressure of anger mounting from the masses against the banks potential bonus payouts became too powerful a political leveraging tool for the embattled incumbent socialist UK government to ignore.

Fair enough many will say, the only reason many of the banks enjoying London’s hospitality have even remained on their feet let alone be in a position to pay bonuses close to record levels is thanks to governmental intervention and the printing of unprecedented amounts of new money. Others will profess that many of the institutions in London are not benefactors of UK governmental intervention and indeed international banks that have been bailed-out by their own respective governments – so why should they share the pain in the 70% effective bonus tax?

Bit of a tough-one there – it could be argued that the international banks prompted more than their fair share of the UK property bubble, and did very little to stem the rise in easy credit that became as popular as a pint-after-work-down-the-local throughout middle-class Britain. International banks also (albeit indirectly) benefited immensely from the aversion of a total UK banking crisis, also taking explicit advantage of the aforementioned liquidity, borrowing money for practically nothing and parking it in safe yielding assets to make a decent spread rather than passing the quantitative easing on to the final customer. All rather valid reasons to treat them equally under the super-tax the masses would yell.

London’s Loss…
The UK has been touted as one of the most significant problem areas over the next 2 years It was singled out by many at the start of the crisis as having the most to lose. A city (and country you could surmise) so dependent on the financial industry (accounting for 75% est. of GDP growth from 1997-2007) was always going to suffer. Everything from restaurants, schools and even the postal system benefited from the wealth being generated and spent via the City and Canary Wharf. Endless cries of anguish can be heard as the sheer self-defeating effects of this decision and its impact on the wonderful city of London sinks in.

Will this super-tax go down in history as the beginning of the end of London’s status as a mighty financial-centre? You know those moments when you are watching a TV series you really enjoy and then all of a sudden some strange plot-line or character comes in and it suddenly doesn’t quite feel so right anymore? Those moments normally presage the final episode.

The last two weeks saw endless articles written about Dubai’s financial dreams going down the Nakheel drains. London’s own period of financial-superpowerdom will find those same pens turned against it as the liberal and business minded lament the possible plot-line twist that will play into the hands of rival financial centres - New York here we come again, Dubai handed a life-line?

What interesting reading the international press, ex-UK, will make over the next few days. A key differentiating factor in freedom of press and the “democratic voice” though, will be the lack of pulling entire inventories of certain broadsheets from newsstand shelves and blacking-out any pictorials depicting sovereign leaders wallowing in the credit-crunch.