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Tories squeeze non-doms

• Robert Peston
• 1 Oct 07, 11:00 AM

Most interest in the will focus on their promise to cut taxes paid by the dead - a constituency which, according to most of the polls, may have a significant influence on the outcome of the next election.

But I am much more interested in their identification of the non-dom class of super-rich as the most deserving victims of a hefty tax increase.

Once upon a time, the Conservative party revered those wealthy individuals who live in the UK but claim non-domicile status and pay precious little tax here. In fact, the party raised more than a bob or three in donations from these jet-setting plutocrats, a few of whom - by sheer chance - ended up with honours.

But now that the shadow chancellor George Osborne needs to raise money to fund promised cuts in stamp duty and inheritance tax, he has decided that the non-doms are the group whose squeals about a tax rise are least likely to resonate.

In little over a year or two, due to all that noise about how little tax is paid by the super-rich, the non-doms have gone from de facto owners of the old Tory party to tax victims of the new Cameroon one.

Osborne will this morning announce that all non-doms would pay a steep, once-a-year charge of 拢25,000 for the privilege of belonging to the non-dom club. That would be on top of any tax they already pay to the Exchequer on that portion of their global income classified as UK earnings.

How much additional revenue for the Exchequer would that raise? Well official figures show that in 2005 there were 112,000 non-doms. And accountants believe that, thanks to the City boom, this may have risen to 200,000. If some non-doms become doms or flee these shores rather than pay the 25 grand membership fee, the take from the new levy could be about 拢3bn (and to reiterate, that's additional to the 拢3bn or so they already pay).

As it happens, the Tories' own estimate of the yield from the plutocratic poll tax is a bit higher, at 拢3.5bn.

It's a mini Nixon-goes-to-China moment: Tories soak super-rich; Labour nervous about asking them for the price of a cup of tea, for fear they take their putative wealth-generating skills to a competitor economy. It's a topsy-turvy world.

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Humiliation of UBS

• Robert Peston
• 1 Oct 07, 08:00 AM

is famed for being one of the world鈥檚 most conservative financial institutions. So it is both humiliating for it and troubling for us that it is the first of the world鈥檚 top-flight banks to disclose a substantial loss from this summer鈥檚 turmoil in credit markets.

Take it as a warning that the relatively strong performance disclosed last week by some of the leading Wall Street investment banks does not mean all banks will emerge almost unscathed from the debacle triggered by the collapse of the market in US sub-prime residential loans.

The mess is doubly embarrassing for UBS since it took a substantial hit in the dry-run for this summer鈥檚 market mayhem, the crisis afflicting the giant hedge fund, , in 1998.

The statement that UBS put out this morning is a little opaque, but the headlines are:

1) It will make a pre-tax loss for the quarter of just under $700m, its first quarterly loss for nine years;

2) The main culprit is the fixed-income, rates and currencies division of its investment bank, which made 鈥渘egative revenues鈥� of around $3.4bn;

3) The source of the losses are the 鈥渓egacy positions鈥� of its now-closed hedge-fund and proprietary trading business, , together with holdings in its mortgage-backed securities trading business;

4) It has taken significant though unspecified write-downs on positions in 鈥渟uper senior AAA-rated tranches鈥� of collateralised debt obligations.

The losses on CDOs are particularly piquant and are further proof that these manufactured securities do not always do what they say on the label: triple-A rated bonds are not supposed to incur 鈥渟ignificant鈥� losses.

Here鈥檚 UBS鈥檚 predictable explanation. It says that the underlying cause of most of this mess is 鈥渢he deterioration in the US sub-prime residential mortgage-backed securities market鈥� which was 鈥渕ore sudden and more severe than in recent history鈥� 鈥� and the ensuing illiquidity that led to 鈥渟ubstantial valuation losses鈥�.

To its credit, UBS is doing less of the 鈥渘ot our fault, guv鈥� routine than you might expect of a famously stuffy global bank. The chairman and chief executive of the investment bank, Huw Jenkins, is stepping down, to be replaced 鈥渇or the foreseeable future鈥� by the chief executive of the whole bank, Marcel Rohner. Jenkins will however be retained as 鈥渟enior advisor鈥� to Rohner. And there are various other senior management changes, all designed to improve the bank鈥檚 control of risk.

Also, it has begun that process of shedding staff which I warned about a few weeks ago (see Scything the City). UBS鈥檚 employee numbers will be cut by 1,500 before the end of the year.

And there is an ill-augury for its competitors. It has taken a loss on its relatively small exposure of loans to private-equity buyouts. With somewhere between $300bn and $400bn of these loans sitting on other banks鈥� books, that implies its rivals may be sitting on losses of between $20bn and $40bn just on the private-equity or leveraged buyout debt they have been unable since July to place in the market.

UBS is big enough to more than weather this storm. For the year as a whole, it will make a substantial pre tax profit of somewhere around $8.5bn. But other banks likely to be damaged by the sub-prime fallout are not quite as big and robust.

UPDATE 12.50: Citigroup has now joined UBS in the roll-call of sub-prime shame. It has announced that it expects third quarter post-tax profits to slump by 60 per cent. Why? Well there is $1.3bn of losses on sub-prime mortgage backed securities and $600m of losses on fixed-income trading.

But the big story, which I hinted at above, is $1.4bn of pre-tax writedowns on private equity loans. This is cringe-making for Citi鈥檚 chief executive, Chuck Prince, who in July told the FT 鈥� using notoriously hubristic language 鈥� that his bank was 鈥渟till dancing鈥� in the private equity market, long after it was obvious that the private-equity bubble had been pricked and was deflating at an alarming rate.

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