Friday, February 16, 2007

Three Cave-Ins, From White House Station to New Delhi

Merck & Co. will pay the federal government $2.3 billion to resolve roughly a decade of disputed back taxes, in one of the largest publicly disclosed settlements between a U.S. corporation and the Internal Revenue Service.
—The Wall Street Journal

It’s not every day you see a big U.S. company cave in to the I.R.S. with a multi-billion dollar settlement, but White House Station, New Jersey-based Merck did just that.

In “Where’s Sammy Antar When You Need Him?” last September 28, 2006, we looked into a Wall Street Journal report on how Merck had transferred patents for certain blockbuster drugs to offshore entities in low-tax jurisdictions, shielding itself from $1.5 billion in federal taxes.

I pointed out at the time that such tax-avoiding asset-shuffling is quite common among all companies with good tax departments; now it seems the folks at Merck are admitting as much.

After all, when was the last time you saw a company fork over $2.3 billion to the I.R.S. without a real fight? ExxonMobil is still fighting a multi-billion punitive damage suit from the Exxon Valdez oil disaster—which happened eighteen years ago.

Speaking of ExxonMobil, that’s another company which also caved recently…on global warming.

After years of fighting the rather common-sense notion that the presence of 600 million gas-guzzling cars, not to mention millions of diesel-guzzling trucks and hundreds of thousands of coal-guzzling factories, might have something to do with the melting ice cap, ExxonMobil has taken full page ads stating its new, if highly nuanced, position on global warming:

Much has been said recently about ExxonMobil and our views on climate change. So we’d like to take this opportunity to set out, clearly and concisely, our position on this important issue.

* The earth’s climate has warmed about 0.7C in the last century
* Many global ecosystems are showing signs of warming

* CO2 emissions have increased

However grudging the ExxonMobil Bigs’ admission that there just might be some link between the stuff they make and the suddenly-receding glaciers in Switzerland, Greenland and Bolivia, corporations don’t usually cave like that.

Governments, on the other hand, cave every day, and India is a case in point. See if you can detect the flaw in the logic of the latest attempt by that government to both ameliorate inflation and stay popular:

NEW DELHI -- The Indian government Thursday cut the price of gasoline and diesel, the latest in a string of measures aimed at containing inflation, and said more steps will be taken to ease the pressure on supplies of key commodities.

—The Wall Street Journal

Correct me if I'm wrong, but I can't recall a single instance when “pressure on supplies of key commodities” has ever been “eased” by decreasing the price of those commodities. Still, the lack of historical examples is not stopping the pols in New Delhi from trying:

The announcement came after the government released data that showed the wholesale inflation rate rose to 6.73% for the week ended Feb. 3, the highest in more than two years and well above the central bank's comfort zone of 5.0% to 5.5% for the fiscal year ending March 31.

Reacting to the price cuts and latest inflation data, Finance Minister P. Chidambaram said the price cuts will moderate inflation.

It may take longer than Merck took to give in to the I.R.S. for the Indian government to realize the errors of artificially cutting prices in the face of rising demand, and it may even take as long as it’s taken ExxonMobil to pay up for the Valdez verdict—which is to say a long long time.

But I suspect at the end of the day, the Indian Government will figure it out.

Jeff Matthews
I Am Not Making This Up

© 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


Sam E. Antar said...


Re: Where’s Sammy Antar When You Need Him?”

I am waiting for Patrick Byrne (CEO of and Judd Bagley (Director of Social Media at and their cohorts to take their best shot.


Sam E. Antar (former Crazy Eddie CFO & convicted felon)

PS: Jeff, I am not making this up.

Guru said...

The commodities price cuts are purely political, and terming them as "inflation fighting" measures is just an attempt to appease a few. But don't be fooled by it. In parallel, the Reserve Bank (India's central bank) has raised interest rates a few times, including some surprise hikes, and also recently raised reserve ratios, despite strong opposition, to curb credit expansion. If anything ,the current Indian govt is the most qualified ever to manage India's economy. Chidambaram is a Harvard-educated economist, and a true believer in reforms and low taxation. Manmohan Singh himself is an economist by training, and is a capitalist at heart, though appeasing some of the socialist elite requires him to put on a bit of a balancing act. There is another Hardvard graduate in this govt I think (can't recall who).

The rate hikes and reserve ratio changes are likely to cause a sharp pullback in equities and real-estate in India soon, and that would be very welcome.

I personally think that Chidambaram and Manmohan Singh are the smartest people ever to be part of an Indian govt.

Kaushik said...

You are right on target about the Indian government's attempt to "help" the Reserve Bank of India (RBI) bring down inflation. In fact, it was only a few months ago that the government was resisting interest rate tightening moves by the RBI - based on the possibility that the economy might slow. But now that inflation has jumped up too much too fast, they have changed tack and showing "concern" for the common man - via price controls, disallowing futures trading on some commodities, etc. Keep an eye on the outcome of state elections and the federal budget to be announced on Feb 28th.

Kaushik (

KG said...

Guru, Jeff -
While the current government might have well qualified folks, it's not been acting that much more nicely when it comes to giving the RBI a free rein. It's only when inflation has hit food prices (and the voter base) that there's talk of the need to reduce it. Worse, I'm not sure how putting in artificial price controls helps us move further towards liberalisation.

Kaushik (