NEWS/BLOG

Belize: Benefits Running Out?

Belize is a tiny Caribbean nation where English is the official language since it once British Honduras. Living costs are low and there are many good reasons expats choose to live there. One reason is the QRP (Qualified Retired Persons) program, which you can take advantage of if you are at least 45 years of age and if you spend a minimum of two weeks a year in Belize.

That two week vacation could have a significant payoff. The advantages of the Belize QRP program include exemption from any Belize taxes, including income tax, capital gains tax, estate tax as well as import tax on household goods, automobiles, boats and even airplanes.

To be eligible, you must consider yourself retired. What this means is that you are not permitted to apply for a work permit or accept employment in Belize. However, you could operate an international business, an internet business or even start a business in Belize and still consider yourself retired.

There is an income requirement. You must show that you have a minimum of US$2,000 a month in income to support yourself in Belize. Or, you could just deposit US$24,000 into a Belizean bank account.

The bad news is that the program has exceeded its quota of 20,000 QRP retirees, and in a tiny country of about 275,000, this adds up to a lot of expats and a lot of lost taxes. The newly elected UPD government is threatening to end the program. No one know what’s going to happen but the issue will most likely be addressed at the first of the year by the National Assembly. Very likely, anyone admitted to Belize under the present program can keep their benefits. A new program, however, would be far less generous.

Many people will remember that when Costa Rica altered its pensionado program, retirees there weren’t “grandfathered in.” Costa Rica is still a terrific place to live, but it doesn’t offer the tax benefits for retirees that it once did.

For more information and resources for Belize, see our Belize page. 

Behind the AIG Bailout

Founded in China in 1919 by a young San Franciscan named C. V. Starr, AIG grew from a small insurance company to the 18th largest company in the world, offering many types of financial services in 130 countries with a total of 116,000 employees. Most of the phenomenal growth happened under the leadership of Maurice R. “Hank” Greenberg, who joined the company in the early 60s and became successor to C.V. Starr. For more on the history of the company, see Fallen Giant, the Amazing Story of Hank Greenberg.

Insurance companies are largely unaffected by the current crisis because they are required by law to hold reserves against policy payouts, but AIG was also dealing in another type of insurance: credit derivatives which insure debt holders against default. These complex instruments exist beyond the power of regulators and aren’t well understood, even by Wall Street execs. Designed to lessen risk, they ended up having the opposite effect.

With AIG the problem wasn’t on Wall Street, it was in London at A.I.G. Financial Products, or A.I.G.F.P.  At the helm was one of its founders, Joseph J. Cassano, who just happened to be an alumnus of Drexel Burnham Lambert, the junk bond outfit that went under in the 1980s.

Cassano, who resigned from AIG in February of this year, first began trading a form of derivatives known as interest rate swaps, which allow participants to bet on interest rates and thus, in theory, insulate themselves from unforeseen financial events.

About 10 years ago, some J.P. Morgan execs proposed to Cassano that AIG write insurance on packages of debt known as “collateralized debt obligations.” CDOs, as they came to be called, were collections of loans divided into “tranches” and sold to investors based on the credit quality of the underlying securities. Cassano’s unit would offer insurance to financial institutions holding CDOs (and some other products such as bonds) in case of default. These insurance products were known as “credit default swaps” or CDSs. European banks bought similar insurance on bonds they held.

The new business was profitable, almost beyond belief. The London unit’s revenue rose from $737 million in 1999 to $3.26 billion in 2005. Operating income at the unit also grew from 4.2% of AIG’s overall operating income in 1999 to 17.5% of AIG.’s overall operating income in 2005. The profit margin was a whopping 83% in 2005. For the last several years, the average income at the London unit was over $1 million per year.

All this was possible because AIG’s stellar reputation meant that no collateral was required, but this meant, too, obligations that the London unit could not pay would be met by its corporate parent. The staff in London and execs in New York most likely shared an assumption common in the insurance industry, namely that policies bring in premiums and only rarely payout claims. But while other insurance must hold extensive reserves against claims, this type of insurance had none.

Who was buying this new type of insurance? Cassano boasted of having customers from all over the world, including banks, investment banks such as Goldman Sachs, endowments, foundations, municipalities, sovereign wealth funds and, of course, high net worth individuals. These customers were connected to each other in ways too complex to trace, and all stood to lose if payouts were required and could not be met.

By last year, AIG. Financial Products’ portfolio of CDSs was at roughly $500 billion. Cassano boasted that it was generating as much as $250 million a year in income on insurance premiums. In August of last year, Cassano was still calling credit default swaps almost a sure thing. But in the quarter ending September 30, 2007, AIG recognized a $352 million unrealized loss on the credit default swap portfolio.

Was there no supervision? The London unit was exempt from insurance regulation, however, its transactions were reviewed routinely by the U.S. Office of Thrift Supervision. This leaves some questions remaining to be answered.

AIG was on the verge of bankruptcy when the $85 billion federal bailout came through in September 2008. Such a bankruptcy would have been the largest ever with aftershocks throughout the entire world. Many experts believed a worldwide economic disaster had been averted. The next two weeks would prove otherwise.