Two Easy Fixes

As I mentioned in yesterday's note, one of the things I think we need is to cut the corporate tax rate. Even Charlie Rangel has advocated such a move. Financial Times reports that Vladimir Putin is proposing a lower corporate tax rate in Russia. I think if Putin proposes something, it's a good bet it'll happen. The U.S. has the second-highest tax rate in the world (Japan is No. 1), and the easiest counter to the idea of a lower rate is that most don't pay the stated tax rate. That, in part, is because a lot of operations have been moved to lower tax areas. Lower taxes will yield more revenue and create more jobs.

Another remedy to our current mess is to suspend mark-to-market accounting. The papers today have an excellent example of why this is so needed. Compiling data from The Wall Street Journal, The New York Times and Financial Times yields an interesting story on the commercial mortgage-backed securities marketplace.

AAA-rated CMBSs were quoted yesterday at 70 cents on the dollar, says the Journal. The article quotes an official at Deutsche Bank who says this price would imply a loss of 40% on the AAA tranche, but also a loss of 70% on the tranches below AAA. Anything can happen, but that seems to be extreme and unlikely.

The default rate on commercial mortgages is still near its historic low. The Journal notes that defaults on mortgages packaged into securities that are 30 days past due is 0.64%. That's up from 0.39%. This will worsen, and by a lot. But there was a real estate collapse in the 1990s; the mortgages made in 1986 (and, I believe, just that year) had a 36% default rate, which is the worst ever. The CMBS market is being priced, or more accurately, being quoted at a far worse level.

Financial institutions that own this paper will have to write it down to the new level. Citi (c - commentary - Cramer's Take) owns almost $17 billion of CMBS paper and Financial Times says they have it priced at 86 cents on the dollar. If Citi has to mark to 70 cents, a decline of 20%, that would mean a "write-off" of $3.4 billion. Maybe it will be worth that at the end of the day, but if this paper is being held for its cash flow, to cause writedowns and massive capital shifts is wrong. We are doing this to ourselves with an accounting rule that is virtually brand-new.

Switzerland cut its interest rates by a full percentage point. I expect the European Central Bank to lower its benchmark rate from 3.25%, and it can't happen soon enough.

---

Vincent Farrell Jr. is chief investment officer for Soleil Securities Group and a regular guest on CNBC and other national print and broadcast media.

Prior to joining Soleil in August 2008, Farrell was a principal of Scotsman Capital Management. Before that, he was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.