WSJ : Obama to Propose Tax Increases on Investments, Inherited Property

Obama to Propose Tax Increases on Investments, Inherited Property
President Expected to Outline Tax Measures in State of the Union Address

WASHINGTON—President Barack Obama will call on the new Republican-led Congress to raise taxes on investments and inherited property and to create or expand a range of tax breaks for middle-income families, laying out an opening position in a debate over taxation that both parties see as a potential area of compromise.

Mr. Obama will outline the measures in his State of the Union address Tuesday night. He will propose using revenue generated from the tax increases—which would fall mainly on high-income households—to pay for a raft of new breaks aimed at boosting stagnant incomes for low- and middle-income households.

Those initiatives include tripling the child-care tax credit and creating a new credit for families in which both spouses work, senior administration officials said on Saturday.

The administration plans to consolidate and expand education tax breaks. It would also make retirement savings programs available to many more people, for example by requiring many employers that don’t currently offer workers a retirement plan to enroll them automatically in an individual retirement account. The administration says its proposals would make retirement saving programs available to 30 million additional people at the workplace.

Mr. Obama’s address Tuesday will start the process of determining where he might find common ground with the new Republican Congress. Both the president and GOP leaders have said that a tax overhaul, along with trade, might yield compromises.

The president’s proposals go well beyond overhauling business taxes, which the White House has previously expressed a willingness to undertake, to include changes to the individual tax code. Republican lawmakers have argued that a tax overhaul should be aimed at both businesses and individuals.

At the same time, the new White House position could complicate the debate, by underscoring deep philosophical differences between the parties. In particular, Mr. Obama’s tax increases are likely to draw opposition from Republicans.

The White House plan would make broad changes to the tax bills of wealthier taxpayers, mainly by raising the taxes they pay on investments. The top capital gains rate would rise to 28% from 23.8%. The plan also would impose capital-gains tax on more inherited assets.

It also would create or expand several significant tax breaks for low- and middle-income households, for instance by establishing a new $500 credit for families in which both spouses work, and by tripling the value of the child care credit to $3,000 per child. The changes also would significantly expand the availability of the child-care credit to more middle-income households.

‘This proposal is probably the most impactful way that we could address the manifest unfairness in our tax system.’
—A senior administration official
Republican lawmakers generally have opposed raising taxes on higher-income earners, as Mr. Obama proposes. They also have bridled at some recent Democratic legislative proposals for new tax breaks to expand incomes for moderate-income families. Democrats “are just out buying [people’s] votes” with such plans, Finance Committee Chairman Orrin Hatch (R., Utah) said in a recent interview. Mr. Obama’s capital gains rate increase is likely to come in for particular criticism, although administration officials argue the 28% rate is still lower than the ordinary income rate for high earners.

The administration said the tax increases would raise revenue by about $320 billion over the next decade, while the new tax breaks and other initiatives would cost about $235 billion. The administration didn’t detail its plans for the additional revenue.

The tax proposals represent a part of the administration’s broader strategy to raise stagnant middle-class incomes, a prominent topic in Washington lately.

The plan could further complicate an already difficult debate in Washington over rewriting the much-maligned U.S. tax code, although administration officials emphasized they remain hopeful an overhaul can come to fruition in the new Congress.

Preisdent Obama and U.K. Prime Minister David Cameron pledged to aid Europe in wake of recent terror attacks. Truman National Security Project fellow Bob Stasio joins Sara Murray with analysis. Photo: AP.
The two sides already are far apart over several issues, including whether an overhaul should raise new revenues. The administration previously has signaled it wants $150 billion for infrastructure investments from rewriting the business tax code. The new request represents another big ask, this time in the name of raising incomes for moderate-income households in the course of rewriting the individual tax code.

The plan appears unlikely to draw much Republican backing, although elements of it are similar to proposals advanced by some GOP lawmakers. For instance, it would impose a fee on large, highly-leveraged financial institutions that echoes a bank tax proposed by former Rep. Dave Camp (R., Mich.), the recently retired Ways and Means chairman, as part of his overall plan to lower individual and business rates. The second-earner credit and a plan to consolidate and improve education breaks also mirror GOP proposals, administration officials said.

For high-income taxpayers, the Obama proposal would represent another significant increase in taxes on investment. It would boost the top rate to 28%, from the current 23.8%, for married couples with incomes over about $500,000.

The basic top tax rate on dividends and capital gains was lowered to 15% under the Bush administration. The Obama administration already has pushed the top rate to 20%, and added a special 3.8% tax rate for many types of investments. Along with other changes under Mr. Obama, the current top rate on investment income amounts to almost 25%, according to the Congressional Budget Office.

The administration said its proposed 28% capital gains rate would set the rate at the same level as under President Ronald Reagan ’s 1986 tax overhaul. But the Reagan-era overhaul also taxed earned income at a top rate of 28%; the top rate on earned income now is 39.6%.

The new proposal also would take away a long-standing feature of the tax code that allows people to pass along appreciated assets to their heirs while limiting any tax bill.

Currently, for example, a parent who dies can pass along a valuable asset to a child, with no capital gains tax being due. The law also limits the eventual tax bill when the child sells the asset, by figuring the taxable gain only since the parent’s death, a feature known as stepped-up basis.

The administration argues that all the gain that occurred before the parent’s death unfairly escapes tax. In a fact sheet distributed on Saturday, the administration said the current treatment of inherited assets—which it refers to as the “trust fund loophole”—is “perhaps the largest single loophole in the entire individual income tax code.”

“This proposal is probably the most impactful way that we could address the manifest unfairness in our tax system while also supporting greater middle-class opportunity,” a senior administration official said Saturday of the proposed changes to inherited asset taxes.

Among other things, the current policy reduces disputes over prices paid for assets long ago. But critics of the current rule say it is outdated. The administration argues it would unlock capital by removing an incentive for holding valuable assets for generations.

The administration’s proposal would treat bequests and gifts—other than those to charitable organizations—as taxable events, requiring tax to be paid. It doesn’t propose changes to the estate tax.

It would include several protections for middle-class families and small businesses, the White House said. For instance, capital gains of up to $200,000 per couple still could be bequeathed free of tax, and couples would have an additional $500,000 exemption for personal residences. Personal goods other than expensive art and collectibles also would be tax-exempt. A closely held business would have the option to pay the tax over 15 years.

The administration said that 99% of the impact of its capital-gains changes would fall on households in the top 1% of incomes.

The revenue raised would be used to offset the cost of the initiatives to benefit working families, the administration said. Those include Mr. Obama’s previously announced initiative to make two years of community college free.

(BN) Abu Dhabi’s Shares Lead Gulf Market Rally After Oil Price Jump

Abu Dhabi’s Shares Lead Gulf Market Rally After Oil Price Jump
2015-01-18 14:59:06.596 GMT


By Sarmad Khan
(Bloomberg) -- Shares in Abu Dhabi rose to the highest
level in three weeks, leading gains in Gulf Arab markets, after
crude oil surged the most in more than two years. Dubai’s stocks
also advanced.
The ADX General Index added 1.7 percent to close at
4,555.27, the strongest since Dec. 28. First Gulf Bank PJSC led
the increase with a 2.4 percent jump. Dubai’s DFM General Index
rose 1.5 percent to the highest level in almost three weeks and
Qatar’s QE Index climbed 0.5 percent.
Brent, the benchmark for more than half the world’s oil,
surged 5.2 percent, the most since June 2012, to $50.17 a barrel
on Jan. 16. The International Energy Agency lowered its forecast
for supply from non-OPEC oil producers this year. Four out of
six Gulf Cooperation Council states are part of the 12-member
Organization of the Petroleum Exporting Countries.
“The oil price pulled up quite nicely over the weekend,
which is helping investor confidence in the regional markets,”
Saleem Khokhar, who helps oversee about $3 billion at NBAD Asset
Management Group, said by telephone from Abu Dhabi. “The move
today is purely sentiment driven.”
Oil fell almost 50 percent last year, the most since the
2008 financial crisis, after the highest pace of U.S. production
in more than three decades swelled supplies and OPEC resisted
calls to cut output. The decline in crude prices sent at least
six stock indexes in the GCC, home to about a third of the
world’s proven oil reserves, into bear markets since November.

Sabic Climbs

The valuation of Abu Dhabi’s shares rose to 11.2 times
estimated 12-month earnings, compared with 10.6 for MSCI Inc.’s
emerging markets index. The ADX’s 14-day relative strength index
rose to 53, the highest since November.
FGB rose to 17.15 dirhams. National Bank of Abu Dhabi PJSC,
the United Arab Emirates’ biggest bank by assets, jumped 4.2
percent, the sharpest increase since Jan. 13.
Shares in Saudi Arabia, the world’s biggest oil exporter,
climbed 0.9 percent. Saudi Basic Industries Corp., the
petrochemicals maker with the second-highest weighting on the
index, rose 1.5 percent even after a slide in profitability. The
company reported a 29 percent drop in fourth-quarter profit to
4.36 billion riyals ($1.16 billion) as lower oil prices reduced
returns.
The mean estimate of seven analysts was for 5.39 billion
riyals, according to data compiled by Bloomberg.
The weaker profit numbers were “widely expected by the
market,” Sebastien Henin, who oversees $100 million as head of
asset management at The National Investor in Abu Dhabi, said by
phone. “The increase in oil prices over the weekend has lent
good support to Sabic today.”

Israel Gains

Dubai Islamic Bank PJSC, the largest Shariah-compliant
lender in the U.A.E., led advancers in Dubai with a 1.4 percent
increase. Arabtec Holding Co., the biggest listed construction
company in the country, added 2.6 percent to 3.20 dirhams, the
strongest level since Dec. 28.
Elsewhere in the region, Kuwait’s SE Price Index climbed
0.8 percent and Oman’s MSM 30 Index added 1.1 percent. Bahrain’s
BB All Share Index advanced 0.4 percent. Egypt’s EGX 30 Index
declined 0.3 percent, the first drop in five days.
Israel’s TA-25 Index increased 0.3 percent to 1,466.94. The
yield on the country’s March 2024 bonds dropped one basis point
to 1.91 percent.

For Related News and Information:
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To contact the reporter on this story:
Sarmad Khan in Dubai at +971-4-3641045 or
skhan170@bloomberg.net
To contact the editors responsible for this story:
Samuel Potter at +971-4-3641050 or
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Dana El Baltaji

(BN) Obama Proposes Tax Increases on Wealthy to Aid Middle Class (2)

Obama Proposes Tax Increases on Wealthy to Aid Middle Class (2)
2015-01-18 03:39:53.826 GMT


(Updates with comments from Hatch in fifth paragraph,
Boehner, McConnell spokesmen in 11th paragraph.)

By Richard Rubin and Margaret Talev
(Bloomberg) -- President Barack Obama is proposing new
taxes on the wealthiest Americans that would limit their profits
from investments and make it harder for them to pass assets to
heirs.
Obama, who will promote the plan during his Jan. 20 State
of the Union Address, will use much of the proceeds -- $320
billion over 10 years -- to expand tax credits for higher
education and child care and create a new break for two-earner
couples. The White House released details of the plan Saturday.
“What you’re seeing here is really dedicated middle-class
tax relief to really get at that problem of middle-class wage
stagnation,” said Harry Stein, director of fiscal policy at the
Center for American Progress, a Washington group aligned with
Democrats.
Obama’s tax plan faces opposition in the Republican-
controlled Congress, where lawmakers want to cut tax rates and
curtail targeted breaks. The two parties agree more on business
tax changes, though an accord on that isn’t close.
“Slapping American small businesses, savers and investors
with more tax hikes only negates the benefits of the tax
policies that have been successful in helping to expand the
economy, promote savings, and create jobs,” Republican Orrin
Hatch, the chairman of the Senate Finance Committee, said in a
statement Saturday. “The president needs to stop listening to
his liberal allies who want to raise taxes at all costs and
start working with Congress to fix our broken tax code.”

2-Year Agenda

The president’s address is intended to lay out an agenda
for his final two years in office and help the Democratic Party
retain the White House in the 2016 election with a legacy of
policies that appeal to middle- and lower-income voters, who
continued to lose ground as the economy rebounded from the
recession.
He would increase the top tax rate on capital gains and
dividends to 28 percent from 23.8 percent. The rate was 15
percent when Obama took office in 2009, meaning that he’s
proposing to almost double it over his two terms in office.
He would also impose capital-gains taxes on asset transfers
at death, ending what the White House calls “the largest
capital gains loophole.” Under current law, assets held until
death aren’t subject to those levies, creating an incentive for
wealthy people to hold onto them. Heirs only have to pay
capital-gains taxes when they sell and only on the value above
what the assets were worth at death.

Speech Preview

Obama has been previewing his proposals over the past 10
days in speeches around the country. In addition to the tax
plan, he said he will push Congress for legislation allowing
workers to earn seven days of paid sick leave per year and make
community college free for millions of students, at a cost of
$60 billion over 10 years.
Obama, who has consistently advocated for tax increases on
the wealthy and tax cuts for middle-income families, is offering
more of both in the tax plan released Saturday. He is layering
new proposals on top of others that Congress has ignored or
rejected.
Spokesmen for House Speaker John Boehner and Senate
Majority Leader Mitch McConnell both criticized the plan.

‘Outdated Code’

“Republicans believe we should simplify America’s outdated
tax code,” said Don Stewart, deputy chief of staff for
McConnell. “Tax reform should create jobs for families, not the
IRS.”
The administration’s proposal on capital gains at death
would exempt the first $200,000 in capital gains per couple plus
$500,000 for a home, along with all personal property except for
valuable art and collectibles. The rest would be treated for
income-tax purposes as if it had been sold.
The plan would also delay taxes on “inherited small,
family-owned and operated businesses” until the business is
sold and let any closely held businesses spread the taxes over
15 years.
According to the White House, 99 percent of the tax burden
from the capital-gains proposals would be paid by the top 1
percent of households, and more than 80 percent would be paid by
the top 0.1 percent.
People with significant amounts of unrealized gains include
founders of successful businesses and others who inherited
businesses decades ago.

More Owed

Even with the limits, the changes would create new tax
burdens for some families that are exempt from the estate tax
under laws Obama signed, which limited the tax to couples worth
more than $10.86 million.
As a simplified example, consider a couple who died with $5
million in assets, including $2.5 million in stock with a basis
of $500,000. Under current law, they could pass that to their
children with no taxes. Under Obama’s plan, they could owe about
$500,000.
The White House dubbed the break the “trust fund
loophole,” though it is used by people without trust funds.
“That’s an extremely powerful planning tool,” Stein said.
And you can still access income from unrealized capital gains’’
with loans.
Obama is also renewing and expanding an earlier proposal
for a fee on the liabilities of about 100 financial institutions
with assets exceeding $50 billion.

Expanded Breaks

This year’s version is a seven-basis-point fee on their
total liabilities and would raise an estimated $110 billion over
a decade. The new version of the tax has a lower rate, a broader
base and would raise about twice as much money as before.
It would apply not just to bank holding companies and the
narrower set of financial institutions included in last year’s
plan. Instead, it would now affect asset managers and insurance
companies, said a senior administration official, who spoke on
condition of anonymity to describe the plans before the speech.
Obama would use the proceeds from the tax increases to
expand breaks for lower-income and middle-income families.
In 2007, when Obama started running for president, the
middle 20 percent of households had an effective federal tax
rate of 14.4 percent and the top 1 percent paid 27.4 percent,
according to the Tax Policy Center. By 2014, the middle-class
rate had declined to 13.7 percent -- it was lower during the
recession -- while the wealthiest were paying 33.4 percent.

Child Care

The newest part of that plan is a $500 tax credit for
married couples when both spouses work, an attempt to combat the
reluctance of lower-earning spouses to work because their income
is taxed at marginal rates for the combined couple.
The full tax credit would be available for couples with
incomes up to $120,000 and those earning up to $210,000 would
get a partial credit.
Obama would also triple the maximum tax credit for child
care to up to $3,000 for children under 5. The government would
effectively pay half of the first $6,000 of child care per child
for some families. The maximum credit could be claimed by
families making as much as $120,000.
Neither the second-earner credit nor the child-care credit
would be refundable, the official said, meaning that they would
only benefit families with income-tax liability.
As part of those changes, Obama would repeal flexible
spending accounts for child care, which let people set aside up
to $5,000 a year before taxes. Because those function like
deductions, the accounts are more valuable to families with
higher incomes and marginal rates.

Retirement Plans

Obama would also consolidate several education tax breaks
into a single tax credit worth up to $2,500. Part-time students
would be eligible for a partial credit.
He is also proposing to end taxation of some student loan
debt forgiven under income-based repayment plans. To help pay
for that, Obama would repeal the deductibility of student loan
interest for new borrowers.
The plan announced Saturday also continues two past Obama
ideas on retirement policy. He wants to require companies to
automatically enroll workers in individual retirement accounts.
And he wants to limit contributions to tax-advantaged retirement
accounts for people who have about $3.4 million in them.
Some of those ideas -- the bank fee, consolidating
education credits and breaks for two-income households -- have
had bipartisan support, with differences on the details.
Even so, most of them are unlikely to advance in a
Republican-controlled Congress.

Push, Shove

Representative Paul Ryan of Wisconsin, who is chairman of
the House Ways and Means Committee, told reporters Jan. 15 that
Republicans wouldn’t be able to undertake the “full-throttle
tax reform” they wanted to pursue because of Obama’s opposition
to cutting marginal tax rates for individuals.
Senator John Thune, a South Dakota Republican, said
Republicans were interested in making the biggest tax code
changes since 1986 and are looking to Obama to work with them.
“So far what we’ve seen is the White House and the
president have expressed interest rhetorically in the issue of
tax reform,” he said at the party’s retreat Jan. 15 in Hershey,
Pennsylvania. “But when push comes to shove, really engaging
the Congress -- we’ve not seen that.”
Following his State of the Union speech, Obama plans to
promote the initiatives in two Republican-dominated states,
Idaho and Kansas. He’ll speak at Boise State University on Jan.
21 and at the University of Kansas in Lawrence the next day.

For Related News and Information:
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Ryan Rules Out Gas Tax Increase, Major Individual Tax Changes
Top Stories:TOP<GO>
U.S. Federal Budget: BUDG <GO>
Tax News: NI TAX <GO>

--With assistance from Billy House in Hershey, Pennsylvania.

To contact the reporters on this story:
Richard Rubin in Washington at +1-202-654-7307 or
rrubin12@bloomberg.net;
Margaret Talev in Washington at +1-202-624-1923 or
mtalev@bloomberg.net
To contact the editors responsible for this story:
Jodi Schneider at +1-202-654-7362 or
jschneider50@bloomberg.net
Bernard Kohn, Jim McDonald

(ZH) The ECB Will Fail Given The "History Lessons Of US And Japan", Warns De

The ECB Will Fail Given The "History Lessons Of US And Japan", Warns Deutsche BanK
 
Recall that the stated purpose behind the reason why Mario Draghi's ECB is about to launch a European government debt monetization program ranging between EUR500 and 1000 billion is to halt deflation, spark credit creation and rekindle inflation. Alas, if that is indeed the case, then as Deutsche Bank said has already determined apriori, it will be a failure. Here's why from the biggest German bank.
First, a broad strokes preview of what the world's most confused Central bank will do this week:
[The ECB] is trapped down a dark alley and they will bite. For all the pros and cons of public QE as well as the hows and whens, at the end of the day the market has pushed the ECB into that corner. Within the context of the practical limitations of QE, we have no doubt that Draghi once again will leave a warm fuzzy feeling that they are prepared to do all that it takes. Of course, like OMT, it probably doesn’t mean they are buying BTPs come February 1st, but that doesn’t matter for BTPs. It also doesn’t matter for the Euro zone outlook given the dubitancy of QE efficacy.
And here is why the ECB too will follow its peers, the Fed and BOJ, in failing to boost inflation expectations which at last check were below the Lehman collapse levels and sliding fast (see "The Chart That Terrifies The Fed")
We suspect whatever the ECB “under delivers on” in substance, it will “over deliver” in terms of perceived commitment and Draghi rhetoric. So net it is hard to be very bearish on peripherals nor core markets. Core markets ultimately benefit from the perception that there just aren’t enough assets out there even for a small program of Euro 500 billion. As the table below shows the free float as defined by other investors is expected to be a paltry 26 percent this year (after Euro 300 billion in purchases for CY 2015). This compares with almost 50 percent in the US. 

 

More importantly we doubt inflation expectations will spike sustainably higher on any announcement given the “failed” history lessons of US and Japan as well as doubts about QE making a difference quickly in the Euro zone. This really centers on the issues of the Euro zone’s different financial model (bank not security based) as well as the still ongoing deleveraging of the banks for regulatory purposes.
Ironic, because Zero Hedge pointed out precisely this distinction nearly three years ago in "A Few Quick Reminders Why NOTHING Has Been Fixed In Europe":
And we are also finally glad that with every passing day more and more banks, pundits and "straight to CNBC" experts wearing business suits realize what we said 6 years ago, namely that QE will never work as one can't fix a failed financial system due to record debt problem with more debt and even more props to support an even more failed financial system. And that QE has, is, and will continue failing... for everyone but the 1% of course, who with every passing day continue to tempt not only fate but the guillotines as well. Reference? See the French Revolution, because it is never different this time.

FT : Why the ECB should not water down a QE programme

Why the ECB should not water down a QE programme

If the asset-buying plan does not succeed, it may be judged to have failed
By committing to the increase, the ECB has in effect agreed to QE (Photo by Thomas Lohnes/Getty Images)©Getty
The ECB's purchases of covered bonds and asset-backed securities could send yields even lower
Quantitative easing is, they say, “priced in by the markets”. The European Central Bank will almost certainly announce a decision to buy sovereign bonds on Thursday. Priced in it may be, but such a move would nevertheless constitute a momentous event in modern European economic and monetary history. Something is happening that was not supposed to have ever happened. It is a big step for the ECB, given the ideological corner it started from some 16 years ago. But it is also a marker of how desperate things have become. This is not going to be the pre-emptive version of QE, but the post-traumatic one. Inflation expectations cut loose from the target some time ago. Headline inflation is negative. The eurozone economy is sick.
My understanding is various critical parts of a QE programme were still under discussion by the end of last week though a consensus seems to be emerging on some. The programme will have a nominal figure attached — some say €500bn, but it could be more. It will not be open-ended. Mario Draghi, ECB president, will probably not say he will do “whatever it takes” to get inflation back to target. It will be more a matter of: we will do it; this is what we will spend; and when this is over, we will decide again.

Optimists say the number does not matter. Once you start, the floodgates open, and you will not be able to close them until you have reached your inflation target. The initial size of the programme is thus irrelevant. I fear the floodgate theory is wrong because it misjudges the policy dynamics. If the programme does not succeed, it may be judged to have failed.In that case, it may be abandoned rather than renewed. My plea would therefore be to start with a big programme now. Size matters.
The other important issue under discussion is about what happens if a country defaults. Who will have to pay for the losses? The issue is hideously complex.
What I expect to happen this week is an agreement that will leave the risk of asset purchases in the hands of the governments that have issued the bonds. In other words, the risk will not be shared. That would constitute a huge concession to the opponents of QE, especially Germany. In response, the German government would tacitly accept such a watered-down programme, or at least refrain from a ballistic response. Berlin would almost certainly sue the ECB if that were not the case.
What the German government cares about is not having to pay up if another member state defaults. Keeping the risk on the books of each government would solve the German problem. But in doing so, the ECB might create a potentially bigger one. If Germany wanted to protect itself against, say, an Italian default, would rational investors not try to do the same? Would they thereby offset the gains from a QE programme? Moreover, would the Italian bonds they own be treated in the same way as the bonds the Bank of Italy buys in a QE programme? In the jargon of markets, do they risk becoming “junior” creditors? And finally, would this not lead to more financial fragmentation when the eurozone desperately needs to do the very opposite and create a single financial market?
If you want to understand what risk separation really means, you have to go through the various scenarios under which a country could default — inside or outside the eurozone, unilaterally or agreed, total or partial default, and several combinations of those. Enjoy!
Let us take the example of a hypothetical Italian default inside the eurozone. What would happen? The Bank of Italy would take a loss on the bonds it has purchased. Its capital would presumably become negative. But this is a central bank after all, not an ordinary company. It might just go with negative capital. It might claim some of the ECB’s future profits as part of its own capital. It is, after all, a shareholder in the ECB.It might use some of its gold reserves to prop up its capital. What will happen will therefore depend on the size of the default, the size of the shareholding
in the ECB and the size of any reserves.
It gets even more complicated when a country decides to default and leave the eurozone at the same time.
I will withhold judgment on a QE programme until I see the details. I would opt for a large programme with risk sharing, and accept German litigation. After last week’s ECB-friendly opinion by the European Court of Justice’s advocate general on another case, I would consider such legal action factually irrelevant. And the risk of a German revolt, let alone eurozone exit, as much smaller than the risk of a potentially dysfunctional QE programme.
If the ECB, as I expect, opts to keep the risk on national balance sheets, then the overall impact of the programme will not be known until we have all the details and the legal small print. The effort may still be worthwhile. But a bazooka it is not.

(TheDailyBeast) US Spies Expected Airline Bombs–And Got The Paris Attacks Instea

US Spies Expected Airline Bombs–And Got The Paris Attacks Instead
Everyone worried that al Qaeda’s deadliest affiliate would try to take down a plane. Then came the slaughter at Charlie Hebdo.
For more than five years, U.S. intelligence agencies, counterterrorism operators, and the military have been intensely focused on trying to stop al Qaeda in the Arabian Peninsula (AQAP), the Yemen branch of the global terrorist network, from sneaking hard-to-detect bombs onto airplanes and slaughtering hundreds of people.

What they got last week was Paris—a completely different kind of attack.

In claiming credit for last week’s decidedly lower-tech shooting spree at the offices of Charlie Hebdo, AQAP seems to have flipped its playbook, leading to inevitable questions about whether U.S. officials misjudged the terror group’s capabilities or were too focused on the wrong threat: bombs instead of bullets.

All this, despite a slick AQAP magazine that called specifically for shooters—and for Charlie Hebdo to be put in the crosshairs.

“In some quarters there’s skepticism that [the Paris attack] was AQAP because analysts expected that AQAP would launch an attack against aviation, rather than this kind of tactic,” said Daveed Gartenstein-Ross, an experienced terrorism analyst and a senior fellow at the Foundation for Defense of Democracies. “We get into trouble when we think we know a clandestine foe better than we actually do.”

In interviews with half a dozen current and former U.S. officials with frontline experience fighting al Qaeda, a clearer picture is emerging about the years leading up to the rampage in Paris. While intelligence and security agencies never ruled out the possibility that the terror group could employ mass shootings as a way to “create havoc in the West,” as one former top counterterrorism official put it, the U.S. security bureaucracy was more focused on AQAP’s repeated attempts to launch more spectacular attacks against civilian aviation, particularly after the group tried to blow up a commercial airliner over Detroit in 2009.

“Analysts expected that AQAP would launch an attack against aviation, rather than this kind of tactic. We get into trouble when we think we know a clandestine foe better than we actually do.”
Now, as investigators scrutinize the more than three years that the Paris shooters spent between a visit to Yemen in 2011 and last week’s attack, they’re looking for clues that might have alerted Western security services to the plot but apparently went undetected. Current and former officials insisted that they had not taken their eyes off al Qaeda in Yemen in the time before the Charlie Hebdo attack. “The U.S. intelligence community has been beating the drum about the threat from AQAP for years,” a U.S. counterterrorism official told The Daily Beast.

Of all of Al Qaeda’s regional groups, AQAP is the one that American intelligence and homeland security officials have worried about the most. A domestic attack by AQAP was “top of the list. Absolutely top of the list” of concerns for U.S. intelligence, said Michael Morell, a former deputy director of the CIA. Morell left the agency in 2013, but he said that the CIA’s focus on AQAP hasn’t abated.

In recent months, senior U.S. intelligence officials have said they’re intent on locating AQAP’s chief bombmaker, Ibrahim Al Asiri. He has survived American drone strikes and is believed to be teaching fellow terrorists how to build explosive devices without metal parts that can evade airport security systems. The anxieties about Asiri reached a fever pitch last fall when U.S. intelligence concluded that an Al Qaeda unit in Syria, known as the Khorasan Group, was close to launching an airliner attack. President Obama ordered airstrikes against the group’s bases in Syria to knock the plot off course, according to senior administration officials.

“Our biggest concern has continued to be the non-metallic bomb on airplanes,” another former U.S. official told The Daily Beast, and intelligence agencies were focused on “anything we could do to get intelligence on the bomb-making, and on Ibrahim al Asiri, in addition to anything that he could be sharing with the Khorasan Group.”

The focus on AQAP’s bomb-making menace began in August 2009, when al Asiri designed an explosive package that was inserted into his younger brother’s rectum. The brother then met face-to-face with Muhammad bin Nayef, Saudi Arabia’s then-deputy interior minister, and blew himself up. The attack failed, killing the younger al Asiri, but American officials were alarmed.

“After the attempted assassination, there was a realization that these guys were good. They had a good engineer and bombmaker,” said Andrew Liepman, who retired in August 2012 as the second-in-command of the National Counterterrorism Center and worked more than 30 years at the CIA.

AQAP didn’t wait long to put al Asiri’s handiwork to use again. On Christmas Day, 2009, it sent a young Nigerian man, Umar Farouk Abdulmutallab, aboard a commercial airliner bound for Detroit with an improvised bomb sewn into his underwear. The bomb failed to detonate and succeeded only in wounding Abdulmutallab, but it made clear that AQAP had the intention, and nearly the capability, to attack inside the United States.

“After the attempted assassination, there was a realization that these guys were good. They had a good engineer and bombmaker.”
“The benchmark for how we viewed AQAP was established in late 2009,” after the bin Nayef and Christmas Day plots, said Liepman, who’s now a senior policy analyst at the Rand Corp.

The terror group didn’t relent. Less than a year later, AQAP tried twice to get bombs hidden inside printer cartridges onto cargo airplanes. The group even claimed responsibility for the downing of a UPS jet in September 2010, though officially that crash was attributed to a fire in the plane’s cargo hold causd by lithium batteries, and not a deliberate act.

Then in 2012, the U.S. foiled another plot by AQAP to detonate an underwear bomb, this one using a more sophisticated design. Not long before the plot was revealed by the Associated Press, CIA Director John Brennan gave a speech in New York in which he singled out AQAP as “the most active operational franchise,” with some 1,000 members in Yemen and ties to the terrorist network’s central operations base in the tribal regions of Pakistan. “We are very concerned about AQAP,” Brennan said, calling the outfit “very, very dangerous.”

***

Behind the scenes, however, a debate over just how big a threat al Qaeda still posed was dividing intelligence officials into rival factions. As The Daily Beast previously reported, a draft National Intelligence Estimate, a consensus document crafted by all the spy agencies, planned to say that Al Qaeda no longer posed a direct threat to the United States. Some senior U.S. officials, including Gen. Michael Flynn, then the director of the Defense Intelligence Agency, bucked against that assessment and successfully fought to have it struck from the document.


Former U.S. officials said this week that while there was a debate over whether al Qaeda’s central operations in the tribal regions of Pakistan still posed a direct threat to the American homeland, there was never a question about whether AQAP was still a danger.

Still, the rift over how to assess al Qaeda central reflected concerns within some quarters of the intelligence community that the White House in particular was trying to minimize the overall threat from Al Qaeda. And those concerns have risen up again in the wake of the Paris shootings.

One prominent terrorism analyst said there’s a “reflexive tendency” among many in the intelligence community and political elite to downplay Al Qaeda’s resiliency and its reach.

“There’s this immediate urge to say something isn’t Al Qaeda when there’s evidence that it is,” said Thomas Joscelyn, the editor of the influential Long War Journal, which chronicles the workings of AQAP and U.S. drone strikes against the group. Joscelyn pointed out, for example, that President Obama initially described Abdulmutallab, the Christmas Day bomber, as an “isolated extremist” even though he had already told authorities that he was sent by al Qaeda in Yemen.

The Kaouachi brothers also claimed to be working with AQAP. And while U.S. officials told The Daily Beast that they are confident at least one of the brothers met in Yemen in 2011 with AQAP recruiter Anwar Awlaki, those officials still aren’t sure that the group planned and directed the Charlie Hebdo shooting, despite its public claims.

In that hesitation to definitively pin the Paris attacks on the Yemeni terror group, some terrorism analysts see a blind spot. The intelligence community primarily viewed AQAP as a collection of bombers. Attacks like Paris seemed both far-fetched—and maybe unstoppable.

One former official, for example, that the Paris attack looked “exactly” like the kind of attack that analysts worried AQAP might inspire or direct others to carry out. But it was also the kind of plot that U.S. security agencies would “have little opportunity to stop,” because it’s much simpler to buy guns than get a bomb onto an airplane. The threat of mass shootings was like a nagging worry, whereas bomb plots were cause for immediate panic.

U.S. officials didn’t have to look far to see what AQAP had in mind. Its English language magazine called Inspire has for years been encouraging readers to launch small-scale attacks, including shootings, against Western targets deemed offensive to Islam. The editors and cartoonists of Charlie Hebdo were on the Inspire hit list.

Two former senior counterterrorism officials described some of the Inspire ideas as “wacky”—such as a ramming cars into crowds. But they also said that the magazine was taken seriously by U.S. analysts. What’s more, they feared that a lone terrorist could be motivated by the magazine to launch a small-scale attack, like a shooting, and that this would be something U.S. security agencies were essentially powerless to stop.

The idea that AQAP might turn to shooting attacks also had a precedent: the November 2008 attacks by gunman in India’s capital that killed 164 people. “Mumbai absolutely got our attention,” said Liepman, the former No. 2 at the National Counterterrorism Center. “It’s sensible and responsible to model your threat against what they’d done already,” and for AQAP, that was using hard-to-detect bombs.

The big lesson of the Paris attacks may be that focusing on a terrorist’s weapon is less important than the terrorist himself.

“It’s more the profile of a person they’re looking for as opposed to the method of attack,” the U.S. counterterrorism official told The Daily Beast. Who has the ability to travel freely between the Middle East and Western countries? Who can lay low and be depended upon to patiently carry out the plan? Who can avoid detection?

***

It’s still not clear why the Kouachi brothers, who seem to fit that profile, didn’t set off alarms for U.S. or French counterterrorism officials. Investigators are zeroing in on the more than three years that passed between the meeting with Awlaki and the Charlie Hebdo attacks, and are looking for any indications that the brothers, and their shooting plot, should have been scrutinized more closely.

The bulk of those questions will fall to French officials. The Kaouachi brothers were well known to French security authorities for their terrorist activities. The investigation into why the French failed to apprehend the suspects is exposing longstanding grievances among U.S. officials over who bears the weight of counterterrorism operations.

For years, Pentagon officials have publicly and privately griped that the military campaign against terrorist groups in the Middle East has fallen largely to them. When officials ask for more help from NATO allies, the response is often that members cannot afford to spend more on defense, leaving the U.S. to lead.

The war against AQAP was no different. The majority of drone and strikes against the group in Yemen were conducted by the U.S. military, with more assistance coming from Yemeni intelligence officials than from Europe.

“It is always on us. We have been a leader on counterterrorism in the region. Those are just the facts,” one defense official told The Daily Beast.

Almost immediately after the attack on Charlie Hebdo offices, U.S. officials adamantly defended their ongoing campaign against AQAP, stressing the war against ISIS, which has consumed far more public attention, had not derailed them.

But privately, they concede there were other distractions. As the drone strike campaign continued, AQAP adapted, making it harder to spot targets. In addition, there were simply fewer targets still around as previous strikes took out so many.

And at times, the U.S. government itself decided to reduce the strikes it conducted in Yemen, particularly as concerns rose over civilian casualties. By 2014, when at least one of the Kouachi brothers received militant training in Yemen, U.S. strikes dropped by nearly half from their 2012 peak, according to statistics compiled by the Long War Journal.

Navy Rear Adm. John Kirby, a Pentagon spokesman, told reporters Friday that the number of strikes is not the only measure of the US commitment to the war on AQAP. “I think we have had a pretty strong record,” Kirby said. And though there are fewer drone strikes, they’re also more lethal. In 2014, 138 militants died, compared to 99 the year before, according to the Long War Journal.

One senior U.S. official credited the drone campaign with reducing the overall threat of terror attacks on American soil. It’s not a coincidence, this official said, that after the killing of Awlaki and a concerted effort to kill other AQAP operational leaders, there have been fewer attempts by the group to put bombs on airplanes, and none documented since 2012. And stopping those attacks has always been the United States’ top concern.

FT : Pimco takes $200bn hit in outflows

Pimco takes $200bn hit in outflows

Pimco’s assets under management fell 16 per cent in the fourth quarter of 2014, as the company dealt with the fallout of the departure of its founder Bill Gross.
The company was managing $1.27tn of client money at the end of December, compared to $1.47tn at the end of September.

The drop of $200bn is more than the entire assets at Janus Capital, the fund management group where Mr Gross now runs a small bond fund.
Customer outflows, which peaked in the days after Mr Gross’s departure on September 26, picked up speed again in December, even as Pimco worked to reassure clients that it was moving on from a year of management turmoil, under the leadership of new chief investment officer Dan Ivascyn.
The company is also hoping to capitalise on a strong start to 2015 for its flagship fund, the $143bn Total Return Bond fund, which used to be run by Mr Gross and which has halved in size since its peak in 2013.
The fund had been betting against the euro and proved to be a winner from this week’s move by the Swiss central bank, which decided on Thursday to let the franc rise against the European single currency. As a result, Total Return is beating 97 out of 100 funds in its category over the past month, according to Morningstar.
While retail investors and financial advisers were quick to react to Mr Gross’s exit, large institutional investors such as pension funds take longer to make allocation decisions. Rival firms such as TCW, BlackRock and Goldman Sachs have already snatched significant business from Pimco, and believe that money will continue to move throughout this year.
As well as customer defections, the quarter-on-quarter change in assets under management also reflects currency effects and performance gains. The year-end total of $1.27tn excludes around $400bn managed on behalf of Allianz, the German insurer which owns Pimco.
A Pimco spokesman declined to comment.

WSJ : ECB Can No Longer Duck the QE Question

ECB Can No Longer Duck the QE Question
Expectations High That ECB Will Start Buying Eurozone Government Bonds
The European Central Bank’s date with destiny is fast approaching.

With headline eurozone inflation running at negative 0.2% and expectations of future inflation sliding, the market’s belief that ECB President Mario Draghi will announce on Jan. 22 a program of sovereign bond purchases is now almost universal. The risk is that this ultimately proves disappointing.

So far, Mr. Draghi has worked wonders with words alone. But investors now expect him to write a check to match. Certainly, the Swiss National Bank ’s shock decision to scrap its currency cap is seen by many as a sign that the ECB is about to open its wallet in an effort to push its balance sheet—currently at €2.17 trillion ($2.54 trillion)--back toward €3 trillion.

If Mr. Draghi doesn’t announce government bond purchases, markets are likely to take it badly. Even if he does, investors might not get all the details they want on Thursday.

It isn’t clear that the ECB has yet solved the thorny practical problems involved with buying government bonds in the eurozone, or even how well quantitative easing works. Some argue that the U.S. and U.K. recoveries have been helped by QE. Both have averaged nominal economic growth of 3% a year since embarking on bond purchases, while the eurozone has managed 1.1%, Berenberg Bank points out.

Yet conditions in the eurozone today are quite different from when those two countries ventured into QE. Government yields were higher back then, and the U.S. and U.K. fiscal deficits were much wider than in the eurozone, implying that budgetary stimulus was being provided along with monetary firepower.

The eurozone financial system relies much more on banks than capital markets, making the efficacy of a market-based approach questionable. And the eurozone still suffers from structural barriers to higher growth.

In the eurozone, the mystery of QE is complicated by questions around its design. What does the ECB buy and in what quantities? How should credit risk be managed? One suggestion is that national central banks will buy bonds at their own risk. That might be acceptable to markets now but could cause problems in the longer term if a fiscal crisis re-emerges. Another option is to buy only triple-A-rated bonds, but that might hand unwarranted power to credit-rating firms and cause distortions. The risk remains of a compromise program that falls short of market expectations.

There could yet be political ructions too. The ECB will say that sovereign QE is a pure monetary-policy operation. But skeptics can argue it represents pooling of fiscal risk, something that the eurozone isn’t ready for politically.

At least one thing appears certain. In August 2011, when the ECB reactivated its now-mothballed Securities Markets Program, a crisis-era bond-buying facility, then-President Jean-Claude Trichet only alluded to purchases obliquely. This time, if the ECB is going to buy government bonds, the message should be delivered loud and clear.

WSJ : Everest Capital to Close $830 Million Global Fund After Losses on Swiss Fr

Everest Capital to Close $830 Million Global Fund After Losses on Swiss Franc
Firm to Keep Running More Than $2 Billion of Other Funds Not Exposed to Switzerland’s Currency

A hedge-fund veteran known for his aggressive gambles on emerging markets is shuttering his flagship fund, a victim of the tumult triggered by the sudden jump in the value of Swiss franc.

Marko Dimitrijevic decided to close Everest Capital LLC’s Global fund because of losses sustained after the Swiss National Bank SNBN.EB -0.94% ’s decision to restore the free float of its currency after a three-year trading cap, a person familiar with the firm said.

The fund had $830 million in assets under management as of December 31, according to a recent investor update viewed by The Wall Street Journal.

The unexpected Central Bank move triggered a surge in the Swiss currency’s value against the euro and the dollar. Mr. Dimitrijevic, who grew up in Switzerland, had a bet in place that the franc would fall, according to the investor update.

Everest, based in Miami, will stay open and continue to run more than $2 billion in other of the firm’s funds that don’t have exposure to the Swiss franc, a person familiar said.

From its founding in 1991 through last month, the Global fund earned an average annualized return of 12.3%, after fees, the investor update shows.

Bloomberg News earlier reported Everest Capital’s plans to close its Global fund.

Other hedge funds that have suffered amid the Swiss turmoil, according to people familiar with the situation, are Discovery Capital Management LLC, a South Norwalk, Conn. firm that manages $14.7 billion, and Comac Capital LLP, which oversees $1.2 billion in London.

Mr. Dimitrijevic has experienced dramatic swings before on emerging markets bets. In 1998 his funds took losses from investments in Russian bonds and Latin American American stocks, according to a past report in The Wall Street Journal.

But in 2013, Mr. Dimitrijevic’s Global fund gained 41%, as he pivoted toward stocks in the U.S. and Japan, where Tokyo shares ended the year at a six-year high. The firm also bought up sectors such as Japanese real estate and U.S. bank stocks, while betting against the yen and some retailers.

“We still think the U.S., Japan and the Middle East are the places to be,” Mr. Dimitrijevic in an earlier interview with The Wall Street Journal about his 2013 performance, noting that economies with strong trade ties to the U.S. should continue to benefit from low interest rates.