A Soft Landing?

A Soft Landing?

With his predecessor noisily predicting a recession and a stock market correction, Fed Chairman Ben Bernanke must have felt a bit vindicated with the economic and market news last week. His strategy for taming inflation without triggering a recession seems to have done the trick.

The latest data suggest that growth fell to an annual rate of 0.6 percent in the first quarter but has rebounded nicely since, with core inflation falling to an acceptable 2 percent. Unemployment remains at a boast-worthy 4.5 percent, which is low enough to generate some real wage gains for workers, even with $3-a-gallon gasoline.

But while Bernanke may have succeeded in cooling the real economy, financial markets are still cooking at a high boil. It's not just that the S&P 500 finally closed above its record high of March 2000. It's that the rally is largely a debt-driven phenomenon fueled by stock buybacks, hedge fund speculation, and a frenzy of dealmaking by investment banks and private-equity funds. And when that bubble bursts, as it surely will, the landing won't be so soft.

IBM's Tax-Free Buyback

Congratulations to IBM, which has found an ingenious way to boost its share price and dodge taxes all at the same time. Here's how it works:

First, IBM creates a wholly owned subsidiary in the Netherlands and transfers all of its overseas operations to it. Then the new unit borrows $11.5 billion, which it uses, along with an additional $1 billion in cash, to buy $12.5 billion of its own shares from three investment banks that borrowed them from large institutional investors. The buyback has the immediate effect of boosting earnings per share by 2 or 3 percent. And when it's time to return the shares, the banks buy them on the open market, with IBM responsible for any price difference.

But the real genius of this plan is that because it's done through an overseas subsidiary, IBM can use its overseas profit to finance the share buyback -- profit that has never been brought back into the United States and therefore has never been subject to U.S. taxes. The extent of the tax saving -- the difference between the foreign tax rate and the U.S. rate -- is never disclosed, but you can bet it's in the hundreds of millions of dollars.

And it's all perfectly legal.

When in Russia . . .

Most oil companies are not shy about letting everyone know when they find a new oil reserve or strike a production agreement with a foreign country. But they become surprisingly mum when it comes to leveling with shareholders about their operations in Russia.

The latest example is BP, which faces the possibility of losing its license to operate a gas-drilling joint venture in Siberia unless it agrees to hand ownership and control of the project to Gazprom, the state-owned gas monopoly. This has been an active issue since at least December and follows on similar nationalization schemes involving Shell, ConocoPhillips and Yukos. But you won't find a word about it in BP's news releases or annual or quarterly reports to shareholders.

The situation was important enough that BP's chief executive flew to Moscow last week for talks with Gazprom executives. They apparently made enough progress to forestall the scheduled revocation of the Kovykta gas field. But it wasn't important enough for the company to tell investors what's going on or give them an honest assessment about the risks to a project in which they've invested several hundred million dollars.

Strange, isn't it, how executives can be so outspoken about the problems of doing business in the United States and then behave like corporate lapdogs in a country where regulatory shakedown and expropriation are accepted business practices.