If you own any financial institutional stock, now may be a good idea to revisit the investment risk it represents.
The U.S. Treasury announced that it will go forward with its revival of proposed regulation requiring the reporting of interest on foreign deposits.
It then becomes a likely reality that U.S financial institutions face a possible collapse.
If that happens, do you want to be holding worthless securities as part of your investment portfolio?
What is the proposed regulation? Why are the U.S. banks and other financial institutions at risk? How would reporting foreign depositors information be such an enormous problem for the United States.
The overriding answer is quite simple.
The United States is the largest tax haven in the world with the best secrecy laws. As a result, global capital flows into the U.S.
Absent this money pouring in, the United States internal markets cannot sustain the American way of life. The U.S. would cease to be a functioning free-market capitalist economy.
Without capital, there is no capitalism.
Under the proposed Treasury regulation, interest on deposits for non-resident aliens would have to be reported to the Treasury. In turn, the Treasury would provide that information to the depositors home country.
No matter what argument the Treasury makes to support its position, foreign depositors are realists. And certainly do not trust anything said or done by any government.
The moment the proposed regulation becomes final, the United States ceases to be a safe tax haven.
Foreign depositors and investors have real concerns.
Some governments may confiscate the deposits or others will prosecute the depositors for various violations of tax or exchange control rules.
Then there is a real possibility that disclosure of these financial accounts would expose the depositor's families to kidnapping.
With that level of risk, the only action for non-U.S. persons and companies to take is close all their U.S. financial accounts, sell off investments, and cease having anything to do with the United States.
The consequence of that happening is easy to identify. The U.S. financial system will collapse and, with it, the end of America as we know it.
This reality highlighted when these proposed regulations were first introduced a decade ago and then narrowed somewhat in 2002. They have been collecting dust since then.
That is, until the current Treasury revived this attack on foreign depositors and investors.
In context, this revival of what was considered a dead proposed regulation is the result of the Foreign Account Compliance Act which was passed as an Obamacare revenue producer.
A House subcommittee held hearings on this proposed regulation, but if history serves as any guide, that doesn't mean much.
Requiring reporting by banks and other financial institutions on foreign depositors impacts a lot more parts of the American economy than just a bunch of banks in Miami, Texas, New York, and California.
When non-U.S. people pull out their deposits, they can be expected to close out their other fund and managed financial accounts as well as their investments. Maybe even their businesses.
When the money pulls out, the solvency of all the financial institutions and related dependent businesses in the United States will be impacted.
It's like inhaling second or third hand smoke only immediately devastating.
Worse yet, no money will come in from foreign investors.
How each of you will evaluate this risk to your portfolio of financial or investment holdings is a decision you will have to make?
Ignoring the risk does not make it go away.
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